Company Quick10K Filing
Quick10K
Estre Ambiental
20-F 2017-12-31 Annual: 2017-12-31
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EST 2017-12-31
Item 17 ☐ Item 18 ☐
Item 4. Information on The Company 53
Item 4A. Unresolved Staff Comments 81 Item 5. Operating and Financial Review and Prospects 82
Item 6. Directors, Senior Management and Employees 124
Item 7. Major Shareholders and Related Party Transactions 135
Item 8. Financial Information 142
Item 9. The Offer and Listing 152
Item 10. Additional Information 154
Item 11. Quantitative and Qualitative Disclosures About Market Risk 168 Item 12. Description of Securities Other Than Equity Securities 170
Part II 171
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-8 ex8.htm
EX-11.1 ex11_1.htm
EX-12.1 ex12_1.htm
EX-12.2 ex12_2.htm
EX-13.1 ex13_1.htm
EX-13.2 ex13_2.htm

Estre Ambiental Earnings 2017-12-31

EST 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 form20f.htm 20-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2017

Commission file number:  001-38333

ESTRE AMBIENTAL, INC.
(Exact name of Registrant as specified in its charter)

Cayman Islands
(Jurisdiction of incorporation or organization)

1830, Presidente Juscelino Kubitschek Avenue, Tower I, 3rd Floor
04543-900 São Paulo, SP, Brazil
(Address of principal executive offices)
 
Fabio D’Avila Carvalho, Chief Financial Officer
1830, Presidente Juscelino Kubitschek Avenue, Tower I, 3rd Floor
04543-900, São Paulo, SP, Brazil
Telephone No.: +55 11 3709-2358
e-mail: ir@estre.com.br
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Ordinary shares, par value $0.0001 per share
 
NASDAQ Capital Market
Warrants
 
NASDAQ Capital Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2017, the Registrant had:
45,636,732 ordinary shares issued and outstanding, par value $0.0001 per share.
5,550,000 Class B Shares issued and outstanding, par value $0.0001 per share.
28,249,999 outstanding warrants exercisable on a one-for-one basis for ordinary shares.
 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*

Yes No ☐

* This requirement does not apply to the registrant in respect of this filing.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.  See definition of “accelerated filer,” “large accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer☐
Non-accelerated filer
Emerging growth company
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  ☐
International Financial Reporting Standards as issued by the International Accounting Standards Board 
 
Other  
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. N/A

Item 17 ☐  Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No
 

TABLE OF CONTENTS

Page
 
A.
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B.
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C.
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D.
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E.
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ITEM 8.
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i

 
D.
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E.
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F.
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G.
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H.
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I.
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ITEM 11.
168
 
ITEM 12.
170
A.
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B.
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C.
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D.
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171
ITEM 13.
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ITEM 14.
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ITEM 15.
173
A.
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B.
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C.
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D.
175
 
CERTAIN DEFINED TERMS

In this annual report, except as otherwise indicated or as the context otherwise requires, “Estre,” “we,” “us” and “our” refers to Estre Ambiental, Inc. and its subsidiaries on a consolidated basis, including Estre Ambiental S.A., Estre’s main operating subsidiary, and, unless the context otherwise requires, the predecessor companies that have been merged out of existence with and into it. Except as otherwise indicated or as the context otherwise requires, the “Company” refers to Estre Ambiental S.A. and the “Registrant” refers to Estre Ambiental, Inc. All references to “Brazil” are to the Federative Republic of Brazil. All references to percent ownership interests in the Registrant do not take into account treasury shares.

In addition, in this document, unless otherwise specified or the context otherwise requires:

“$,” “US$” and “U.S. dollar” each refer to the United States dollar.

“R$” and “reais” each refer to the Brazilian real.

“ABRELPE” means the Brazilian Association of Public Cleaning and Waste Management (Associação Brasileira de Empresas de Limpeza Pública e Resíduos Especiais).

“audited financial statements” means our audited consolidated financial statements as of December 31, 2017 and 2016 and January 1, 2016 and for the years ended December 31, 2017, 2016 and 2015 included elsewhere in this annual report reflecting the restated financial statements of the Company as of December 31, 2016 and January 1, 2016 and for the years ended December 31, 2016 and 2015, and the related notes thereto.

“Angra” means Angra Infra Multiestratégia Fundo de Investimento em Participações.

“BFRS” means the Brazilian Federal Revenue Service.

“BNDES” means the Brazilian National Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social).

“C&I” means commercial and industrial, generally referring to our operations and customers not part of the public sector or affiliated with governmental agencies.

“Central Bank” means the Banco Central do Brasil, or Brazilian Central Bank.

“Class B Shares” means the Class B shares, par value US$0.0001 per share, of the Registrant.

“Code” means the Internal Revenue Code of 1986, as amended.

“Companies Law” means the Companies Law of the Cayman Islands (2018 Revision)

“Debt Restructuring” means our debt restructuring carried out on December 26, 2017, pursuant to which we applied US$110.6 million from the total cash investments received by us in the context of the Transaction to partially prepay certain of our existing debentures and related debt acknowledgment instrument, each denominated in Brazilian reais, coupled with a partial debt write-down and the refinancing of the balance of our existing debentures and related debt acknowledgment instrument through the amendment and restatement of the terms of such debt instruments with new terms.

“Designated Stock Exchange” means any national securities exchange including NASDAQ Capital Market or NASDAQ.

“Employee Compensation Entity” means Estre Ambiental Employee SPV, Inc., a Cayman Islands exempted company.

“Estre USA” refers to Estre USA Inc., a Delaware corporation, formerly known as Boulevard Acquisition Corp. II, which name was changed to Estre USA Inc. on December 21, 2017 in connection with the Transaction. References to Estre USA prior to December 21, 2017 shall be deemed references to its predecessor entity, Boulevard Acquisition Corp. II.
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“IASB” means the International Accounting Standards Board.

“IBGE” means the Governmental Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística).

“IFRS” means International Financial Reporting Standards, as issued by the IASB.

“Incentive Plan” means our 2017 Incentive Compensation Plan.

“Internal Evaluation Process” means the internal evaluation that we conducted at the direction of a Special Committee comprised of independent members of our board of directors in the aftermath of the Brazilian Federal Police’s execution of search warrants at our corporate offices and the premises of Soma on March 1, 2018, which was designed for the specific purpose of evaluating our supply relationships and related matters at the Company, including Soma and our other joint ventures and which was conducted by external legal counsel working together with external forensic service providers.

“IRS” means the U.S. Internal Revenue Service.

“JOBS Act” means the Jumpstart Our Business Startups Act of 2012, as amended.

“Memorandum and Articles” means the amended and restated memorandum and articles of association of the Registrant.

“Merger” means the merger of Merger Sub with and into Estre USA, with Estre USA surviving such merger as a partially-owned subsidiary of the Registrant.

“Merger Sub” means BII Merger Sub Corp., which entity was merged into Estre USA, with Estre USA surviving such merger as a partially-owned subsidiary of the Registrant.

“MSW” means municipal solid waste.

“NASDAQ” means The NASDAQ Stock Market LLC.

“ordinary shares” means the ordinary shares, par value US$0.0001 per share, of the Registrant.

“PCAOB” means the Public Company Accounting Oversight Board.

“PFIC” means passive foreign investment company.

“PIPE Investment” means the private investment in public equity pursuant to which we issued 15,438,000 of our ordinary shares and 3,748,600 warrants to purchase ordinary shares at US$11.50 per share to certain institutional investors unaffiliated with us.

“PIPE Investors” means the institutional investors unaffiliated with us that purchased our ordinary shares and warrants as part of the PIPE Investment.

“public warrants” means the warrants included in the units sold in Estre USA’s initial public offering, as converted in the Merger such that they represent the right to acquire ordinary shares of the Registrant, with each public warrant being exercisable for one of our ordinary shares, in accordance with its terms.

“Pre-Closing Restructuring” means the restructuring that the Company and the Registrant have completed immediately prior to effecting the Merger, pursuant to which, the holders of Company shares (other than Angra) contributed their shares of the Company to the Registrant in exchange for an aggregate of up to 27,001,886 ordinary shares, and the Company became a subsidiary of the Registrant. In addition, 1,983,000 of our ordinary shares were issued to the Employee Compensation Entity immediately prior to the closing of the Merger.
 
“private placement warrants” means the warrants to purchase Estre USA Class A Common Stock that were outstanding immediately prior to the closing of the Transaction that were purchased in a private placement in connection with Estre USA’s initial public offering, as converted in the Merger such that they represent the right to acquire ordinary shares of the Registrant, with each public warrant being exercisable for one of the Registrant’s ordinary shares, in accordance with its terms.

“Registration Rights and Lock-Up Agreement” means the Registration Rights and Lock-Up Agreement to be entered into by and among the Registrant, the Sponsor and certain other persons and entities which will hold ordinary shares upon the Closing pursuant to the terms of the Transaction Agreement in connection with, and as a condition to the consummation of, the Transaction.

“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

“Sponsor” means Boulevard Acquisition Sponsor II, LLC, a Delaware limited liability company.

“SEC” means the U.S. Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“Soma” means (i) after September 11, 2017, “SPE Soma – Soluções em Meio Ambiente Ltda.,” our consolidated, majority-owned subsidiary, of which we hold 82.0% as of December 31, 2017, that we operate together with Corpus Saneamento e Obras Ltda. (“Corpus”), our third party partner and (ii) prior to September 11, 2017, Consórcio Soma – Soluções em Meio Ambiente, a joint operation with Corpus, in each case, through which we provide urban cleaning and street sweeping services to the municipality of São Paulo.

“Transaction” refers, collectively, to the Pre-Closing Restructuring, the Merger, the PIPE Investment and the Debt Restructuring, together with the other transactions ancillary thereto.

“warrants” means the public warrants, the private placement warrants and the warrants issued in a private placement to an investor that purchased ordinary shares in the PIPE Investment that have the same terms as the private placement warrants.
 
EXPLANATORY NOTE

The Transaction

On December 21, 2017, we consummated a series of transactions resulting in our current status as a public company in the United States, as described below:

·
On December 21, 2017, we completed our (i) Pre-Closing Restructuring, pursuant to which the holders of the Company’s common shares contributed these common shares to the Registrant in exchange for an aggregate of 27,001,886 ordinary shares of the Registrant, and as a result of such contribution became our indirectly-owned subsidiary, and (ii) merger with Estre USA, pursuant to which BII Merger Sub Corp. merged with and into Estre USA Inc., with Estre USA as the surviving entity, and Estre USA became our partially-owned subsidiary, which is referred to herein as the Merger (in addition, 1,983,000 of the Registrant’s ordinary shares were issued to the Employee Compensation Entity immediately prior to the closing of the Merger).

·
Also on December 21, 2017, the Registrant issued 15,438,000 of the Registrant’s ordinary shares and 3,748,600 warrants to purchase the Registrant’s ordinary shares at US$11.50 per share to certain institutional investors unaffiliated with us pursuant to a private investment in public equity, which we refer to as the PIPE Investment. For more information on the PIPE Investment, see “Item 10.C. Additional Information—Material Contracts—PIPE Subscription Agreements.”

·
As a result of the Merger and the PIPE Investment, we received a total US$139.9 million cash investment (comprising US$11.2 million from existing shareholders of Estre USA that did not redeem their public shares in connection with the Merger, and US$128.7 million from the proceeds of the sale of our ordinary shares to PIPE Investors), of which US$110.6 million was used to reduce certain of our indebtedness pursuant to a simultaneous Debt Restructuring, coupled with a partial debt write-down and the refinancing of the balance of the debentures and related debt acknowledgment instrument through the amendment and restatement of the terms of such instruments with new terms.

We refer to the events described above as the “Transaction” in this annual report. For more information, see “Item 10.C. Additional Information—Material Contracts—the Transaction.”

Our ordinary shares and warrants began trading on the NASDAQ on December 22, 2017, under the symbols “ESTR” and “ESTRW,” respectively.

Internal Evaluation Process and Restatement of Prior Years Financial Statements

Financial Statement Adjustments

Overview

On March 1, 2018, the Brazilian Federal Police executed search warrants at a number of companies in the cities of São Paulo, Santos, Paulínia, Belo Horizonte and Lamim, including the premises of Soma, as well as our corporate offices.  This action formed part of the so-called Operation Descarte effort of the Brazilian Federal Police working in conjunction with the Brazilian tax authorities within the ambit of the broader Lava Jato task force. The stated objective of Operation  Descarte is dismantling a criminal money laundering scheme focused on payments made by companies operating in the Brazilian waste management industry.

In the aftermath of the events of March 1, 2018, we instituted a Special Committee comprised of independent members of our board of directors for the specific purpose of evaluating our supply relationships and related matters at the Company, including Soma and our other joint ventures, which we refer to herein as the “Internal Evaluation Process.” This Internal Evaluation Process was conducted by external legal counsel working together with external forensic service providers with a focus on the integrity of our supply relationships. For additional information, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”
 
In response to the findings of the Internal Evaluation Process, the Company’s audited financial statements included in this annual report as of December 31, 2016 and January 1, 2016 and for the years ended December 31, 2016 and 2015 have been restated to reflect the following adjustments:

1.
the write-off of capitalized expenses in relation to our landfills in connection with payments made for certain goods and services with insufficient evidence that such goods and services were provided;

2.
corresponding adjustments to amortization expenses as a result of the write-off of capitalized expenses described above;

3.
the recalculation of our income tax returns adjusted for expenses recorded during the fiscal years 2013 through 2017 that were previously deducted and for which there was insufficient evidence that goods or services were actually provided, corresponding to increased expenses recorded in our income statement under “Other Operating Expenses” in relation to unpaid principal, “Finance Costs” in relation to payments of penalties and interest and, in 2017, “General and Administrative Expenses” in relation to loss carryforward principal; and

4.
the additional tax effects of the adjustments described above.

The adjustments above had the following impacts, which are further described in detail in Note 1.5 to our audited financial statements included herein:

·
In relation to our consolidated statement of financial position as of January 1, 2015, the adjustments resulted in a decrease of total assets of R$11.8 million, an increase of total liabilities of R$46.9 million and a decrease of equity of R$58.7 million;

·
In relation to the year ended December 31, 2015, the adjustments resulted in a decrease of total assets of R$7.0 million, an increase in total liabilities of R$72.1 million, a decrease of equity of R$79.1 million and a net loss adjustment of R$20.3 million for the year; and

·
In relation to the year ended December 31, 2016, the adjustments resulted in a decrease of total assets of R$3.5 million, an increase in total liabilities of R$98.0 million, a decrease of equity of R$101.5 million and a net loss adjustment of R$22.5 million for the year.

In addition, as a result of the Internal Evaluation Process, we recorded a R$34.0 million loss in 2017 corresponding mainly our management’s assessment of the probable risk of loss emanating from future tax assessments based on the advice of our independent Brazilian legal counsel and reflecting insufficient tax loss carryforwards to reduce our potential liability.

Tax Adjustments

As per the above, following our Internal Evaluation Process, we recalculated our taxes to reflect probable amounts due, including fines and interest, applying an income tax rate of 34% (principal), plus application of a 150% fine and an average 14.9% interest payment (fines and penalties). On this basis, we recorded provisions for Corporate Income Tax (Imposto de Renda de Pessoa Jurídica – “IRPJ”) and Social Contribution of Net Profits (Contribuição Social sobre o Lucro Líquido – “CSLL”) in an aggregate amount of R$25.6 million, R$26.0 million and R$25.1 million in 2017, 2016 and 2015, respectively, corresponding to impermissible deductions in the past in relation to the alleged unsupported payments made to specific suppliers and alleged impermissible amortization (as applicable) recorded from these transactions that may be challenged by the BFRS. In the case of taxes payable arising from unsupported payments made through Soma, our recalculated income taxes reflect only our proportional interest in this entity.

Based on the advice of our external legal counsel, who assessed the risk of a potential loss as possible (and not probable), we did not establish provisions in the aggregate amount of R$212.4 million corresponding to IRPJ, CSLL and IRRF taxes levied by the BFRS in relation to the tax assessments received by the Company and Cavo at the conclusion of 2017 alleging impermissible deductions with respect to certain allegedly unsupported payments made to specific suppliers and alleged impermissible deductions with respect to amortization derived from these transactions. For additional information, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”
 
Other Adjustments

In addition to the above adjustments, we identified certain accounts receivables for which collection is unlikely and, accordingly, should have been written-off in prior years. As a result, we retroactively recorded a corresponding allowance for doubtful accounts at the beginning of fiscal year ended December 31, 2015 against retained earnings. This correction had an immaterial impact on retained earnings at the beginning of fiscal year ended December 31, 2015 and the statement of financial position as of December 31, 2016 and 2015.

We have also amended management’s discussion and analysis of financial condition and results of operation and other disclosures for the years ended December 31, 2015 and 2016 presented in this annual report for the purpose of reflecting the above.

In connection with the above, our audited financial statements included in this annual report now reflect the identification of material weaknesses in our internal controls.

Internal Control Weaknesses

Although we are as a new registrant not required to perform an audit of our internal control over financial reporting, in our ongoing effort to establish effective internal controls and in connection with preparing the audited financial statements as of and for the year ended December 31, 2017, we identified evidence of internal control weaknesses, as follows:

·
failure to detect payments to certain suppliers with insufficient evidence of goods and services being provided, as per the findings of the Internal Evaluation Process, due, in part, to our inability to maintain effective controls over the review of accounting entries across our organization, particularly at Soma, where our compliance program and policies had not been properly implemented and enforced;

·
the actions and inactions of the former management at Soma, who either directed and/or did not take action to prevent or stop certain practices contrary to our compliance policies and other misconduct when they became aware of them and that were subsequently identified by the Internal Evaluation Process, and also concealed the existence of such practices or directed other former employees to do so;

·
continued use of manual processes as a result of the delayed implementation of our enterprise resource planning (ERP) system;

·
defective communication processes and procedures hampering the efficient exchange of information within our organization, particularly among our legal, financial and accounting departments;

·
ineffective centralization and implementation of policies and criteria with respect to accounting for certain revenue and related accounts receivables, including in relation to (i) establishing clear criteria for recording adjustments to net present value and related income associated with trade accounts receivables, (ii) maintaining effective controls to prevent or detect errors related to the recording and reversing provisions for doubtful accounts for overdue customers; and (iii) application of depreciation rates, including at our landfills;

·
lack of adequate controls and procedures to identify, assess and gather information to adequately and timely determine our related party transactions in all cases; and

·
shortcomings in the implementation and maintenance of effective IT general controls.

Remediation Efforts

We are in the process of improving and implementing controls to address and remediate the weaknesses identified above and other potential shortcomings that we may identify as we transition to being a public company.
 
We have been undergoing a comprehensive financial and corporate restructuring over the past several years pursuant to which we have reviewed and rationalized our cost structure, pricing, compliance and controls, planning processes, information technology and use of data. This restructuring effort has yielded several tangible benefits through focus on the following initiatives, among others: (i) the comprehensive redesign of our management information systems, including migration to SAP and implementation of CRM Oracle solutions and pricing systems, with the effect of improving efficiency of pricing and internal controls; (ii) the sale of certain assets that negatively impacted our margins and did not align with our strategic vision, (iii) collection of overdue accounts and successful implementation of price adjustments on certain large contracts with our municipal customers and (iv) the reorganization of our senior management team. Notwithstanding our substantial progress, we have identified significant areas for further improvement, as evidenced by the weaknesses identified above, as we continue to implement our restructuring initiatives with a continued focus on improved internal controls.

In particular, we are in the process of identifying and developing a plan to address the material weaknesses in internal controls over financial reporting described above. In particular, we have already taken several concrete steps, and intend to further pursue, the following:

·
hiring of a new, seasoned CFO at the end of 2017 who will further strengthen the tone at the top that overriding of internal controls will not be tolerated;

·
the replacement of the senior management team at Soma;

·
the establishment of an almost entirely independent board of directors consisting of leading executives and other professionals that are experts in their respective fields as well as the establishment of an independent audit committee and corporate governance committee with expanded oversight functions;

·
appointment of an independent chairman of our board of directors with significant industry experience bringing international best practices to our business and, in so doing, effectively ushering in an era of enhanced corporate governance standards by replacing Mr. Wilson Quintella Filho as chairman of the board of directors;

·
making certain adjustments to our compliance infrastructure to strengthen the independence of our compliance function and eliminate opportunities to override controls across our organization, including at Soma and all our subsidiaries and joint ventures;

·
making certain adjustments to our internal audit team, including an increase in the number of employees in the team to strengthen the Company’s ability to continuously evaluate its internal procedures and identify any weaknesses or misconduct in its early stages;

·
implementation of a new policy on related party transactions that will better enable us to trace and identify related party transactions in a more systematic way;

·
enhancing policies and procedures to verify that our comprehensive compliance policies and procedures are fully implemented at all of our subsidiaries and joint ventures;

·
further upgrading our ERP business process management software, which we first implemented in 2016, in order to better manage our business and automate many back office functions with the goal of improving our internal controls over financial reporting and streamlining monthly, quarterly and year-end closings. The full system migration is expected to be completed by the end of 2018;

·
enhancing and continuing to improve the vendor master data, due diligence, know your client procedures, procurement and payment procedures and associated controls;

·
implementing a workflow tool, under the direction of our new CFO, allowing the controlled exchange of information to facilitate timely and effective communication amongst the legal, financial and accounting departments and prompt registration of all transactions; and
 
·
making certain adjustments to improve the security in some of our IT procedures such as the periodic review of login profiles and their access to certain information on the system and the closer management of users with privileged profiles.

We are committed to monitoring the effectiveness of these measures and making any changes that are necessary and appropriate in our ongoing effort of evaluating our internal controls and analyzing the findings of our Internal Evaluation Process. Under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer, together with our independent board of directors, we are in the process of conducting further evaluation of our internal control over financial reporting and plan to design enhanced processes and controls to address our internal control weaknesses and any other issues that might be identified through our further review.

For additional information, see “Item 15—Controls and Procedures.”
 
PRESENTATION OF FINANCIAL AND OTHER INFORMATION

On December 21, 2017, we completed the Transaction, pursuant to which the holders of the Company’s common shares (other than Angra) contributed their common shares in the Company to the Registrant in exchange for an aggregate of 27,001,886 of the Registrant’s ordinary shares. In addition, the Company and Estre USA became the Registrant’s partially-owned subsidiaries, and the former public security holders of Estre USA became the Registrant’s shareholders.

Prior to the Transaction, the Registrant had limited or no assets, operations or activities. The Registrant was incorporated to become the holding entity of the Company to effect the Transaction. Considering that substantially all of the shareholders of the Company exchanged their shares of the Company for shares of the Registrant, the Transaction was accounted for as a reverse recapitalization transaction.  The historical operations of the Registrant are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of the Company prior to the Transaction, as restated as of and for the years ended December 31, 2016 and 2015, as described under “Explanatory Note”; (ii) the consolidated results of the Registrant and the Company following the Transaction; (iii) the assets and liabilities of the Company at their historical cost; and (iv) the Registrant’s equity and earnings per share for all periods presented. The number of ordinary shares issued by Estre Ambiental, Inc. as a result of the Transaction are reflected retroactively to January 1, 2015 for purposes of calculating earnings per share in all prior periods presented.

The audited financial statements in this annual report have been prepared in accordance with IFRS as issued by IASB.

MARKET DATA

In this annual report, we rely on and refer to information and statistics regarding the waste management services industry and our competitors from market research reports and other publicly available sources, including from ABRELPE, the International Solid Waste Association, Eurostat, Biocycle, the Central Bank and IBGE. We have supplemented such information where necessary with our own internal estimates and information obtained from discussions with our customers, taking into account publicly available information about other industry. Although we have no reason to believe that these sources are not reliable or that any of this information is not accurate or complete in all material respects, we have not independently verified any such information and, therefore, cannot guarantee its accuracy or completeness.

CURRENCY TRANSLATION

We maintain our books and records in reais.  However, solely for the convenience of the reader, we have translated certain amounts included in this annual report from reais into U.S. dollars using the selling rate as reported by the Central Bank, as of December 31, 2017 of R$3.3080 to US$1.00 or, where expressly indicated, at an average selling exchange rate prevailing during a certain period.  All such currency translations should not be considered representations that any such amounts represent, or could have been, or could be, converted into, U.S. dollars or reais at that or at any other exchange rate.  See “Item 3.A. Key Information—Selected Financial Data—Exchange Rate Information” for more detailed information regarding the translation of reais into U.S. dollars.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This annual report contains a number of forward-looking statements, including statements about our financial conditions, results of operations, earnings outlook and prospects and may include statements for the period following the date of this annual report. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements are based on the current expectations of our management, as applicable, and are inherently subject to uncertainties and changes in circumstance and their potential effects and speak only as of the date of such statement. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in “Risk Factors,” those discussed and identified in public filings made with the SEC by us and the following:

·
changes in market prices, customer demand and preferences and competitive conditions;

·
general economic, political and business conditions in Brazil, particularly in the geographic markets we serve and others in which we intend to serve;

·
fluctuations in inflation and interest rates to which our debt is indexed;

·
the risk that the recently completed Merger may disrupt our plans and operations;

·
our significant level of indebtedness and fixed obligations;

·
the risk that we may lose contracts through competitive bidding, including our São Paulo urban cleaning contract thorough Soma, or be required to substantially lower prices in order to retain certain contracts, which could negatively impact our revenues;

·
the outcome of investigations by government authorities under the applicable anti-corruption laws or otherwise, including the currently ongoing Operation Descarte and other actions in relation to our former controlling shareholder;

·
the outcome of alleged tax infringement charges by the Brazilian tax authorities and the possibility of further tax infringement charges relating to other facts and periods, including in relation to ongoing investigations and inquiries of the tax authorities;

·
the recruitment, compensation and retention of key personnel;

·
our ability to successfully defend ourselves in connection with various ongoing and future judicial, administrative or other third-party proceedings that could interrupt or materially limit our operations, divert our management’s attention and result in adverse judgments, settlements or fines and create negative publicity;

·
the strength and security of our information technology infrastructure and internal controls and our ability to successfully implement our remediation plan to address certain weaknesses in our internal controls;

·
our ability to retain our customers given that a significant portion of our revenue is derived from a small number of customers;

·
our ability to collect for the services we provide, which is dependent on the financial condition of our customers, especially that of our public sector customers;
 
·
our ability to successful obtain or renew the necessary licenses to operate new landfills or expand existing ones;

·
our ability to adequately establish reserves and provisions for landfill site closure and post-closure costs and contamination-related costs;

·
existing and future governmental regulation, including in relation to environmental liabilities;

·
our ability to detect and prevent money laundering, improper payments and other illegal activities;

·
labor disputes, employee strikes and other labor-related disruptions, including in connection with negotiations with unions;

·
our ability to successfully implement our strategy, including those initiatives designed to improve our results of operations; and

·
other factors or trends affecting our financial condition or results of operations, including those factors identified or discussed under “Item 3.D.—Key Information—Risk Factors.”

Should one or more of these risks or uncertainties materialize, or should any of the assumptions made by our management prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

All subsequent written and oral forward-looking statements contained in this annual report and attributable to us or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this annual report. Except to the extent required by applicable law or regulation, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.
 
PART I
INTRODUCTION

ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.
 
ITEM 3.
KEY INFORMATION

A.
Selected Financial Data

The following selected financial information should be read in conjunction with “Explanatory Note,” “Presentation of Financial and Other Information,” “Item 5. Operating and Financial Review and Prospects” and our audited financial statements, which are included in this annual report.

The selected financial data as of and for the years ended December 31, 2017 and 2016 and for the three years ended December 31, 2017 have been derived from our audited financial statements, prepared in accordance with IFRS, and included in this annual report.

The Company’s financial statements as of and for the years ended December 31, 2016 and 2015 have been restated to reflect the findings of the Internal Evaluation Process, as more fully described in “Explanatory Note.”

We present unaudited 2014 financial data in the tables below because such information was included in Estre USA’s F-4 registration statement that became effective under the Exchange Act. Based on the assessment of our management, this 2014 financial data has been restated to reflect the findings of the Internal Evaluation Process applying the same methodology as described in “Explanatory Note.”  However, these 2014 restated numbers have not been audited or reviewed by our independent auditors.

Selected financial data as of and for the year ended December 31, 2013 has not been included in this annual report because of our status as an emerging growth company under the JOBS Act, and as per related guidance provided by the SEC.

Statement of Profit and Loss

   
For the year ended December 31,
 
   
2017
   
2017
   
2016
(restated)(2)
   
2015
(restated)(2)
   
2014
(unaudited)
(restated)(2)
 
   
(in millions
of US$)(1)
   
(in millions of R$)
 
Revenue from services rendered
   
412.7
     
1,365.3
     
1,393.0
     
1,338.9
     
1,293.6
 
Costs of services
   
(288.3
)
   
(953.8
)
   
(1,012.3
)
   
(977.5
)
   
(942.4
)
Gross profit
   
124.4
     
411.6
     
380.7
     
361.4
     
351.2
 
Operating income (expenses)
                                       
General and administrative expenses
   
(78.0
)
   
(258.1
)
   
(231.9
)
   
(223.3
)
   
(248.9
)
Selling expenses
   
(2.0
)
   
(6.6
)
   
10.5
     
13.3
     
(56.3
)
Equity pickup
   
(0.3
)
   
(1.0
)
   
10.2
     
11.1
     
40.6
 
Other operating income (expenses), net
   
(9.0
)
   
(29.9
)
   
(77.9
)
   
(24.7
)
   
138.8
 
     
(89.4
)
   
(295.6
)
   
(289.2
)
   
(223.6
)
   
(125.8
)
Profit before finance income and costs
   
35.1
     
116.0
     
91.5
     
137.8
     
225.4
 
Finance costs
   
(161.5
)
   
(534.3
)
   
(400.9
)
   
(385.2
)
   
(416.4
)
Finance income (costs)
   
33.2
     
109.7
     
53.6
     
30.2
     
27.4
 
Loss before income and social contribution taxes
   
(93.3
)
   
(308.6
)
   
(255.8
)
   
(217.3
)
   
(163.6
)
Current income tax and social contribution
   
(5.5
)
   
(18.3
)
   
(55.4
)
   
(5.8
)
   
(49.0
)
Deferred income tax and social contribution
   
112.2
     
371.1
     
(49.8
)
   
12.6
     
41.6
 
Profit (loss) from continuing operations
   
13.4
     
44.2
     
(361.0
)
   
(210.5
)
   
(171.0
)
Profit (loss) after income and social contribution tax from discontinued operations
   
2.4
     
8.1
     
     
(4.5
)
   
(44.2
)
Net income (loss) for the period/year
   
15.8
     
52.3
     
(360.9
)
   
(215.0
)
   
(215.2
)
Attributable to non-controlling interests
           
8.5
     
(0.1
)
   
     
(19.4
)
Attributable to equity holders of the parent
           
43.8
     
(360.8
)
   
(215.0
)
   
(195.8
)
Earnings (loss) per share(3)
                                       
- Basic for the year attributable to equity holders of the parent (in Reais or Dollars)
 
US$ 0.2901
   
 
R$0.9596
   
 
R$(7.9057
)
 
 
R$(4.7101
)
 
 
R$(4.2905
)
- Diluted for the year attributable to equity holders of the parent (in Reais or Dollars)
 
US$ 0.2898
   
 
R$0.9585
   
 
R$(7.9057
)
 
 
R$(4.7101
)
 
 
R$(4.2905
)
Earnings (loss) per for continuing operations(4)
                                       
- Basic attributable to equity holders of the parent (in Reais or Dollars)
 
US$ 0.2631
   
 
R$0.8702
   
 
R$(7.9066
)
 
 
R$(4.6110
)
 
 
R$(3.7469
)
- Diluted attributable to equity holders of the parent (in Reais or Dollars)
 
US$ 0.2628
   
 
R$0.8692
   
 
R$(7.9066
)
 
 
R$(4.6110
)
 
 
R$(3.7469
)
Weighted average number of shares (thousands shares)(5)
   
45,637
     
45,637
     
45,637
     
45,637
     
45,637
 

(1)
Solely for the convenience of the reader, the amounts in reais for the year ended December 31, 2017 has been translated into U.S. dollars using the rate of R$3.3080 per U.S. dollar, which was the commercial selling rate for U.S. dollars as of December 31, 2017, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate. See “—Exchange Rate Information” below.
 
(2)
For an explanation of our restatement as a result of our Internal Evaluation Process, please see “Explanatory Note” and Note 1.5 of our audited financial statements included herein.
 
(3)
The calculation of basic earnings (loss) per share is based on the net income attributable to controlling equity holders of the Registrant and the proportional weighted average number of shares outstanding during the year. Diluted earnings per share is based on the net income attributable to controlling equity holders, as adjusted by the weighted average number of shares outstanding  during the year to assume conversion of all potentially dilutive shares. For additional information, see note 35 to our audited financial statements.

(4)
The calculation of basic earnings (loss) per share from continuing operation is based on the net income from continuing operations attributable to controlling equity holders of the Registrant and the proportional weighted average number of shares outstanding during the year. Diluted earnings per share is based on the net income attributable to controlling equity holders and by adjusting the weighted average number of shares outstanding  during the year to assume conversion of all potentially dilutive shares.  For additional information, see note 35 to our audited financial statements.

(5)
Given that the Registrant is a new parent entity established to effect a share for share exchange in connection with the Transaction, and its audited financial statements have been presented as a continuation of the existing group, the number of shares taken as being issued for both the current and preceding periods was the number of shares issued by the new parent entity (Estre Ambiental, Inc.). In the calculation of earnings per share for the years ended December 31, 2016 and 2015 presented in the audited financial statements, there were no changes in the number of outstanding ordinary shares of Estre Ambiental S.A. for the periods that should be reflected in the calculation. Therefore, the weighted average number of shares was the same for all periods.
 
Balance Sheet
   
As of December 31,
      
As of January
1, 2016
 
   
2017
   
2017
   
2016
 (restated)(2)
   
(restated)(2)
 
   
(in millions
of US$)(1)
   
(in millions of R$)
 
Assets
                       
Current Assets
                       
Cash and cash equivalents
   
25.6
     
84.7
     
31.1
     
47.8
 
Marketable securities
   
     
     
     
12.1
 
Trade accounts receivable
   
202.3
     
669.2
     
716.8
     
512.7
 
Inventories
   
3.4
     
11.4
     
8.7
     
8.1
 
Taxes recoverable
   
30.8
     
101.9
     
117.8
     
92.1
 
Receivables from divestiture
   
     
     
     
41.3
 
Other receivables
   
10.6
     
34.9
     
38.8
     
34.6
 
     
272.7
     
902.1
     
913.2
     
748.7
 
Assets held for sale
   
2.0
     
6.6
     
-
     
-
 
Total current assets
   
274.7
     
908.7
     
913.2
     
748.7
 
Noncurrent Assets
                               
Marketable securities
   
     
     
     
24.2
 
Related Parties
   
4.4
     
14.5
     
9.8
     
21.3
 
Trade accounts receivable
   
32.9
     
108.9
     
5.7
     
4.8
 
Taxes recoverable
   
15.8
     
52.1
     
4.5
     
22.2
 
Prepaid expenses
   
0.1
     
0.2
     
3.3
     
4.5
 
Deferred taxes
   
     
     
41.1
     
25.9
 
Other receivables
   
4.4
     
14.5
     
7.7
     
12.7
 
Fair value of call option
   
     
     
     
20.9
 
Investments
   
2.2
     
7.2
     
114.7
     
104.3
 
Property, plant and equipment
   
208.4
     
689.5
     
694.5
     
691.8
 
Intangible assets
   
177.8
     
588.2
     
553.8
     
607.1
 
Total noncurrent assets
   
445.9
     
1,475.1
     
1,434.9
     
1,539.6
 
Total assets
   
720.6
     
2,383.8
     
2,348.0
     
2,288.3
 
Liabilities and Equity
                               
Current liabilities
                               
Loans and financings
   
4.3
     
14.1
     
16.7
     
64.1
 
Debentures
   
     
     
1,665.6
     
1,417.1
 
Provision for landfill closure
   
6.2
     
20.7
     
15.5
     
 
Trade accounts payable
   
38.7
     
128.1
     
108.4
     
96.5
 
Labor payable
   
35.6
     
117.9
     
106.9
     
97.6
 
Tax liabilities
   
51.2
     
169.5
     
295.3
     
214.8
 
Accounts payable from acquisition of investments
   
     
     
4.9
     
47.0
 
Related parties
   
25.0
     
82.8
     
2.6
     
23.1
 
Advances from customers
   
5.0
     
16.5
     
0.6
     
3.5
 
Accounts payable from land and intangible asset acquisition
   
2.7
     
9.0
     
9.1
     
10.6
 
Other liabilities
   
10.0
     
33.0
     
29.5
     
6.5
 
 
   
178.8
     
591.6
     
2,255.1
     
1,980.9
 
Liabilities directly associated with the assets held for sale
   
7.2
     
23.8
     
24.2
     
17.9
 
Total current liabilities
   
186.0
     
615.4
     
2,279.4
     
1,998.8
 
Noncurrent liabilities
                               
Loans and financing
   
112.3
     
371.4
     
10,0
     
20.2
 
Debentures
   
323.2
     
1,069.0
     
     
—-
 
Provision for landfill closure
   
28.1
     
92.9
     
86.1
     
83.1
 
Provision for legal proceedings
   
44.7
     
147.8
     
245.5
     
185.6
 
Accounts payable from acquisition of investments
   
     
     
4.9
     
26.7
 
Tax liabilities
   
119.6
     
395.8
     
236.1
     
213.1
 
Deferred taxes
   
41.4
     
137.0
     
175.6
     
110.6
 
Accounts payable from land acquisition
   
3.1
     
10.4
     
7.6
     
13.1
 
Other liabilities
   
-
     
0.2
     
39.9
     
18.3
 
Total noncurrent liabilities
   
672.4
     
2,224.4
     
805.7
     
670.6
 
Equity
                               
Capital
   
     
     
108.1
     
108.1
 
Capital reserve
   
322.9
     
1,068.2
     
748.5
     
743.7
 
Other comprehensive income
   
0.5
     
1.8
     
1.7
     
1.5
 
Treasury shares
   
     
     
(37.4
)
   
(37.4
)
Accumulated losses
   
(459.7
)
   
(1,520.8
)
   
(1,564.5
)
   
(1,203.8
)
 
   
(136.3
)
   
(450.8
)
   
(743.6
)
   
(387.9
)
Non-controlling interest
   
(1.6)
     
(5.1
)
   
6.6
     
6.7
 
Total equity (capital deficiency)
   
(137.8
)
   
(455.9
)
   
(737.1
)
   
(381.1
)
Total liabilities and equity
   
720.6
     
2,383.8
     
2,348.0
     
2,288.3
 

(1)
Solely for the convenience of the reader, the amounts in reais for the year ended December 31, 2017 has been translated into U.S. dollars using the rate of R$3.3080 per U.S. dollar, which was the commercial selling rate for U.S. dollars as of December 31, 2017, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate. See “—Exchange Rate Information” below.
 
(2)
For an explanation of our restatement as a result of our Internal Evaluation Process, please see “Explanatory Note” and Note 1.5 of our audited financial statements included herein.
 
Consolidated Statement of Cash Flow

   
For the year ended December 31,
 
   
2017
   
2017
   
2016
(restated)(2)
   
2015
(restated)(2)
   
2014
(restated
unaudited)(2)
 
   
(in millions
 of US$)(1)
   
(in millions of R$)
 
Net cash (used in) provided by
                             
Operating activities
   
73.5
     
243.3
     
213.5
     
235.2
     
88.5
 
Investing activities
   
(60.6
)
   
(200.3
)
   
(166.7
)
   
(90.1
)
   
618.7
 
Financing activities
   
3.2
     
10.6
     
(63.5
)
   
(210.4
)
   
(666.9
)
 

(1)
Solely for the convenience of the reader, the amounts in reais for the year ended December 31, 2017 has been translated into U.S. dollars using the rate of R$3.3080 per U.S. dollar, which was the commercial selling rate for U.S. dollars as of December 31, 2017, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate. See “—Exchange Rate Information” below.
 
(2)
For an explanation of our restatement as a result of our Internal Evaluation Process, please see “Explanatory Note” and Note 1.5 of our audited financial statements included herein.
 
Segment Data

The tables below sets forth our statement of profit or loss by business segment for the periods indicated:

For the year ended December 31, 2017:
 
   
Collections
and
Cleaning
Services
   
Oil & Gas
   
Landfills
   
Value
Recovery
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in millions of R$)
 
Domestic customers
   
910.7
     
25.9
     
372.4
     
56.4
     
     
     
1,365.3
 
Inter‑segment
   
18.1
     
     
83.0
     
0.9
     
     
(102.0
)
   
 
Total revenue from services
   
928.8
     
25.9
     
455.4
     
57.2
     
     
(102.0
)
   
1,365.3
 
Cost of services
   
(730.4
)
   
(21.2
)
   
(259.0
)
   
(35.9
)
   
(9.3
)
   
102.0
     
(953.8
)
Gross profit
   
198.4
     
4.7
     
196.5
     
(21.3
)
   
(9.3
)
   
     
411.6
 
Operating income/(expenses)
                                                       
General and administrative expenses
   
(38.3
)
   
(0.0
)
   
1.3
     
(2.4
)
   
(218.6
)
   
     
(258.1
)
Selling Expenses
   
(16.3
)
   
     
37.5
     
0.3
     
(28.1
)
   
     
(6.6
)
Share of profit of an associate
   
     
     
     
     
83.4
     
(84.4
)
   
(1.0
)
Other operating (expenses) income
   
(15.3
)
   
(4.5
)
   
(41.7
)
   
77.6
     
(45.9
)
   
     
(29.9
)
   
(69.9
)
   
(4.6
)
   
(3.0
)
   
75.5
     
(209.3
)
   
(84.4
)
   
(295.6
)
Earnings before finance income and costs
   
128.5
     
0.2
     
193.5
     
96.8
     
(218.6
)
   
(84.4
)
   
116.0
 
Finance costs
   
(132.2
)
   
0.9
     
(37.8
)
   
(2.1
)
   
(363.0
)
   
     
(534.3
)
Finance income (costs)
   
8.3
     
0.0
     
0.9
     
1.5
     
98.9
     
     
109.7
 
Profit (loss) before income and social contribution taxes
   
4.5
     
1.1
     
156.7
     
96.2
     
(482.7
)
   
(84.4
)
   
(308.6
)
(−) Current income and social contribution taxes
   
(8.6
)
   
     
(4.0
)
   
(0.8
)
   
(4.8
)
   
     
(18.3
)
(−) Deferred income and social contribution taxes
   
22.6
     
     
16.9
     
     
331.6
     
     
371.1
 
Profit or loss for the year
   
18.4
     
1.1
     
169.6
     
95.4
     
(155.9
)
   
(84.4
)
   
44.2
 
Discontinued Operations                                                        
Loss after tax for the year resulting from continuing operations
   
6.5
     
     
0.8
     
0.7
     
     
     
8.1
 
Net income (loss) for the year
   
24.9
     
1.1
     
170.4
     
96.1
     
(155.9
)
   
(84.4
)
   
52.3
 
 
For the year ended December 31, 2016, as restated:
 
   
Collections
and
Cleaning
Services
   
Oil & Gas
   
Landfills
   
Value
Recovery
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in millions of R$)
 
Domestic customers
   
869.3
     
62.8
     
420.3
     
40.6
     
     
     
1,393.0
 
Inter‑segment
   
52.7
     
0.1
     
29.5
     
1.6
     
     
(83.9
)
   
 
Total revenue from services
   
922.0
     
62.9
     
449.8
     
42.2
     
     
(83.9
)
   
1,393.0
 
Cost of services
   
(678.1
)
   
(41.6
)
   
(337.3
)
   
(30.6
)
   
(8.7
)
   
83.9
     
(1,012.3
)
Gross profit
   
244.0
     
21.3
     
112.5
     
11.7
     
(8.7
)
   
     
380.7
 
Operating income/(expenses)
                                                       
General and administrative expenses
   
(38.1
)
   
(0.8
)
   
(10.2
)
   
(1.2
)
   
(163.7
)
   
(17.9
)
   
(231.9
)
Selling Expenses
   
0.3
     
0.9
     
26.3
     
8.5
     
(25.5
)
   
     
10.5
 
Share of profit of an associate
   
     
     
     
     
139.7
     
(129.6
)
   
10.2
 
Other operating (expenses) income
   
(12.4
)
   
0.2
     
1.0
     
2.6
     
(69.3
)
   
     
(77.9
)
     
(50.2
)
   
0.3
     
17.0
     
9.9
     
(118.8
)
   
(147.5
)
   
(289.2
)
Earnings before finance income and costs
   
193.7
     
21.6
     
129.5
     
21.6
     
(127.5
)
   
(147.5
)
   
91.5
 
Finance costs
   
(27.1
)
   
(1.3
)
   
(0.7
)
   
(3.8
)
   
(367.9
)
   
     
(400.8
)
Finance income (costs)
   
1.5
     
0.0
     
0.0
     
2.0
     
50.1
     
     
53.6
 
Profit (loss) before income and social contribution taxes
   
168.1
     
20.3
     
128.8
     
20.0
     
(445.2
)
   
(147.5
)
   
(255.7
)
(−) Current income and social contribution taxes
   
     
     
     
(1.1
)
   
(54.3
)
   
     
(55.4
)
(−) Deferred income and social contribution taxes
   
     
     
     
     
(49.8
)
   
     
(49.8
)
Profit or loss for the year
   
168.1
     
20.3
     
128.8
     
18.7
     
(549.3
)
   
(147.5
)
   
(360.9
)
Discontinued Operations                                                        
Loss after tax for the year resulting from continuing operations
   
     
     
0.0
     
     
     
     
0.0
 
Net income (loss) for the year
   
168.1
     
20.3
     
128.8
     
18.7
     
(549.3
)
   
(147.5
)
   
(360.9
)

For the year ended December 31, 2015, as restated:
 
   
Collections
and
Cleaning
Services
   
Oil & Gas
   
Landfills
   
Value
Recovery
   
Corporate
   
Eliminations
   
Consolidated
 
   
(in millions of R$)
 
Foreign customers
   
     
     
34.5
     
     
     
     
34.5
 
Domestic customers
   
807.0
     
99.1
     
355.6
     
42.7
     
     
     
1,304.4
 
Inter‑segment
   
27.6
     
4.6
     
23.7
     
2.1
     
     
(57.9
)
   
 
Total revenue from services
   
834.5
     
103.7
     
413.8
     
44.8
     
     
(57.9
)
   
1,338.9
 
Cost of services
   
(646.2
)
   
(64.6
)
   
(278.1
)
   
(33.9
)
   
(15.1
)
   
60.4
     
(977.5
)
Gross profit
   
188.3
     
39.1
     
135.8
     
10.9
     
(15.1
)
   
2.5
     
361.4
 
Operating income/(expenses)
                                                       
General and administrative expenses
   
(59.6
)
   
(5.6
)
   
8.3
     
(2.3
)
   
(164.1
)
   
     
(223.3
)
Selling Expenses
   
20.0
     
2.1
     
45.9
     
(52.9
)
   
(1.9
)
   
     
13.3
 
Share of profit of an associate
   
(0.1
)
   
     
     
     
117.1
     
(105.9
)
   
11.1
 
Other operating (expenses) income
   
(4.0
)
   
(0.4
)
   
(9.3
)
   
     
(8.9
)
   
(2.5
)
   
(24.7
)
     
(43.7
)
   
(3.9
)
   
44.9
     
(55.1
)
   
(57.4
)
   
(108.4
)
   
(223.6
)
Earnings before finance income and costs
   
144.6
     
35.2
     
180.7
     
(44.2
)
   
(72.6
)
   
(105.9
)
   
137.7
 
Finance costs
   
(26.1
)
   
(1.3
)
   
(14.5
)
   
(1.2
)
   
(342.0
)
   
     
(385.2
)
Finance income (costs)
   
4.0
     
     
0.5
     
0.5
     
25.2
     
     
30.2
 
Profit (loss) before income and social contribution taxes
   
122.5
     
33.8
     
166.8
     
(44.9
)
   
(389.4
)
   
(105.9
)
   
(217.3
)
(−) Current income and social contribution taxes
   
     
     
(4.2
)
   
(0.4
)
   
(1.2
)
   
     
(5.8
)
(−) Deferred income and social contribution taxes
   
     
     
     
     
12.6
     
     
12.6
 
Profit or loss for the year
   
122.5
     
33.8
     
162.6
     
(45.3
)
   
(378.0
)
   
(105.9
)
   
(210.4
)
Loss after tax for the year resulting from continuing operations
   
     
     
(4.5
)
   
     
     
     
(4.5
)
                                                         
Net income (loss) for the year
   
122.5
     
33.8
     
158.1
     
(45.3
)
   
(378.0
)
   
(105.9
)
   
(215.0
)
 
Exchange Rate Information

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

Since 1999, the Central Bank has allowed the U.S. dollar-real exchange rate to float freely. Since then, the U.S. dollar-real exchange rate has fluctuated considerably.

The Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to permit the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. See “—D. Risk Factors—The Brazilian economy and we may be negatively impacted by exchange rate instability.”

The real may depreciate or appreciate against the U.S. dollar substantially. See “—D. Risk Factors—Risks Related to Brazil—The Brazilian economy and we may be negatively impacted by exchange rate instability.”

Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are substantial reasons to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittances of foreign capital abroad and on the conversion of Brazilian currency into foreign currencies. We cannot assure you that such measures will not be taken by the Brazilian government in the future. See “—D. Risk Factors—Risks Related to Brazil—The Brazilian economy and we may be negatively impacted by exchange rate instability.”

For convenience purposes only, the amounts in reais for the year ended December 31, 2017 presented throughout this annual report have been translated to U.S. dollars using the rate R$3.3080 per U.S. dollar, which was the commercial selling rate for U.S. dollars as of December 31, 2017, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or any other exchange rate. The real has fluctuated significantly over the course of 2018 due in part to the general strengthening of the U.S. dollar worldwide and reflecting lower Brazilian interest rates and a high degree of political uncertainty.
 
The following table shows the period end, average, high and low commercial selling real/U.S. dollar exchange rate reported by the Central Bank on its website for the periods and dates indicated.
 
 
R$ per US$1.00
 
Year Ended December 31,
 
Low
   
High
   
Average(1)
   
Period End
 
2013
   
1.95
     
2.45
     
2.16
     
2.34
 
2014
   
2.20
     
2.74
     
2.35
     
2.66
 
2015
   
2.58
     
4.19
     
3.34
     
3.90
 
2016
   
3.12
     
4.16
     
3.48
     
3.26
 
2017
   
3.05
     
3.44
     
3.19
     
3.31
 
2018 (through June 19, 2018)
 
3.14
   
3.90
   
3.40
   
3.76
 
Month Ended
 
Low
   
High
   
Average(2)
   
Period End
 
October 2017
   
3.28
     
3.18
     
3.13
     
3.28
 
November 2017
   
3.21
     
3.29
     
3.26
     
3.26
 
December 2017
   
3.22
     
3.34
     
3.29
     
3.31
 
January 2018
   
3.19
     
3.27
     
3.23
     
3.22
 
February 2018
   
3.17
     
3.28
     
3.25
     
3.24
 
March 2018
   
3.21
     
3.33
     
3.28
     
3.06
 
April 2018
   
3.31
     
3.50
     
3.41
     
3.48
 
May 2018
   
3.53
     
3.75
     
3.64
     
3.74
 
June 2018 (through June 19, 2018)
 
3.69
   
3.90
   
3.76
   
3.76
 


(1)
Represents the average of exchange rates on each day of each month during the periods indicated.

(2)
Represents the average of the daily exchange rates during each day of the respective month indicated.

B.
Capitalization and Indebtedness

Not applicable.

C.
Reasons for the Offer and Use of Proceeds

Not applicable.

D.
Risk Factors

An investment in our ordinary shares carries a significant degree of risk. You should carefully consider the following risks and other information in this annual report, including our audited financial statements included elsewhere in this annual report, before you decide to purchase our ordinary shares. Additional risks and uncertainties of which we are not presently aware or that we currently deem immaterial could also affect our business operations and financial condition. If any of these risks actually occur, our business, financial condition, results of operations or prospects could be materially affected. As a result, the trading price of our ordinary shares could decline and you could lose part or all of your investment.

Risks Related to Our Business

We may lose contracts through competitive bidding or be required to substantially lower prices in order to retain certain contracts, which could negatively impact our revenues.

We derive a significant portion of our revenues from markets in which we have exclusive arrangements pursuant to municipal contracts. Our municipal contracts are for a specified term and are, or will be, subject to competitive bidding in the future. Although we intend to bid on additional municipal contracts in our target markets, we may not always, or ever, be the successful bidder. In addition, municipalities may unilaterally terminate any agreements on grounds of serving the public interest. If we are unable to replace revenue from contracts lost through competitive bidding or early termination or from lowering prices pursuant to the competitive bidding process for existing contracts, our revenues could decline.

Governmental action may also affect our exclusive arrangements. Municipalities may decide to develop their own landfills, on an optional or mandatory basis, which may cause us to lose customers. If we are not able to replace lost revenues within a reasonable time period, our business results of operations and financial condition could be adversely affected. Additionally, the loss of municipal contracts through competitive bidding, early termination or governmental action could cause long lived tangible and intangible assets to be impaired and require a charge against earnings.
 
A significant portion of our revenue is derived from a small number of customers, and partial or full loss of revenues from any such customer may adversely affect our revenues and results of operations. In particular, both the municipalities of São Paulo and Curitiba are currently serviced based on short-term temporary contracts and we cannot assure you that we will be successful in securing long-term extensions of either of these contracts on favorable terms or at all. Any significant loss of business from the São Paulo or Curitiba contracts may have a material adverse impact on us.

Our customer base includes a mix of customers operating in both the private and public sectors. As of December 31, 2017, we had 141 municipal customers and approximately 4,000 private sector customers, serving over 31 million individual customers daily. Although we have a diversified customer base across our four business segments, our top ten customers accounted for 74.0% of our total net revenues in 2017.

In addition, we rely significantly on certain municipal customers within our Collection & Cleaning segment as a source of revenues, namely the municipalities of São Paulo and Curitiba. Together, our contracts with the municipalities of São Paulo and Curitiba represented 61.2% of the net revenues from services rendered for the Collection & Cleaning segment for the year ended December 31, 2017, and 41.7% of our total net revenues from services during the same period. Competitive bidding processes are inherently subject to a high degree of uncertainty, and there can be no guarantee that past practices will be indicative of future success. Accordingly, we cannot predict with certainty when the competitive bidding processes for these contracts will occur and, likewise, there can be no assurances that we will prevail in securing the Curitiba and São Paulo bids on favorable terms or at all.

Moreover, we cannot assure you that we will be the successful bidder in bidding processes for any other competitive bidding process we participate in. In addition, even if we are successful in the bidding process and enter into new contracts with our most significant customers, the terms of the contracts might differ and might not be as favorable to us as those contracts currently in place, resulting in less revenue from these customers. This may be especially likely in the case of São Paulo given the municipalities intentions to divide the contract. The loss or adverse modification of any material customer contract, particularly our São Paulo or Curitiba municipal contracts, could have material adverse effect on our business, results of operations and financial condition.

While Brazilian law does not allow the term extension of government contracts already expired, public administrators may exercise their right to hire the same contractor on a provisional basis for a temporary period based on a waiver of the bidding process. Provisional service pursuant to a temporary contract may be with any service provider, not just the last serving contractor. These temporary contracts must be limited to a 180-day term, counted as of the occurrence of the exceptional circumstances giving rise to the auction delay, and may be terminated by the municipality at its discretion at any time, including as a result of the conclusion of the formal bidding process .  As a general rule, temporary contracts entered into on an emergency basis may not be extended. However, as the collection of MSW is considered an essential service under Brazilian law, once the initial 180-day period expires on a temporary contract, municipalities may continue to extend for subsequent 180-day periods.

Our contract with the municipality of São Paulo

We have been servicing the São Paulo contract through Soma since 2011. Our contract with the municipality of São Paulo for urban cleaning and street sweeping services comprised approximately 29.1% of our revenues in 2017. This contract expired, and we are currently providing urban cleaning services to the city of São Paulo pursuant to a temporary contract. The temporary contract was first entered into on December 15, 2017 and was set to expire at the end of June 2018. On June 12, 2018 we further extended the temporary contract until the end of 2018, subject to earlier termination by the municipality.  However, the extended temporary contract introduces certain significant changes to the contractual arrangement,. Most significantly, under the extended temporary contract, the city of Sao Paulo is divided into six separate parcels for urban cleaning, whereas under the previous contract the city was divided into two parcels only. We, through Soma, were awarded only two parcels under the extended temporary contract, which reflects a significant decrease of our service area, since we previously serviced one of the only two parcels.  In addition, the extended temporary contract contemplates a 7% price reduction. As a result of these changes, we expect our monthly revenues from the Soma contract to be reduced by 37.7%.
 
After a series of delays, there is still no definitive date for a new auction due to ongoing discussions among interested parties. In the meantime, São Paulo has announced its intention to divide the urban cleaning contract into six separate parcels, in line with the extended temporary contracts entered into in June 2018. Accordingly, it seems possible that the revenue loss we expect in the second half of 2018 as a result of the contractual changes introduced in connection with the extended temporary contract will be permanent or that we may lose all or a portion of our business with the city of São Paulo when the extended temporary contract expires at the end of 2018. Any significant loss of business emanating from these developments will have a material adverse impact on us.

Our contract with the municipality of Curitiba

Cavo, which we acquired in 2011, has been servicing the Curitiba contract since 1995. Our contract with the municipality of Curitiba for collections, urban cleaning and street cleaning comprised approximately 12.5% of our revenues in 2017. We are currently providing collections and cleaning services to Curitiba pursuant to a temporary contract set to expire in October 2018 or sooner at the discretion of the municipality. The competitive bidding process to procure the Curitiba collections and cleaning contract has also been subject to a series of delays, and is now suspended as a result of a review by the Paraná Court of Auditors (Tribunal de Contas) pursuant to which certain adjustments to the bidding process may be made. It is likely that we will continue to provide services to the municipality on a temporary basis; however, there is no guarantee that we will do so. There is currently no visibility as to when the competitive bidding process in Curitiba will occur.

Potential impact of contract loss on results of operations

Considering the significance of the São Paulo and Curitiba contracts in terms of revenues, it can be expected that our revenues would materially decrease in the event that one or both of these contracts is lost. According to the estimates of our management, based on revenue expectations for 2018, the impact of losing both of these contracts on an annualized basis would correspond to a 37.4% decrease in revenues, while the loss of just the São Paulo contract would correspond to an estimated 26.7% decrease and just the Curitiba contract to a 10.7% decrease.

Our operational structure is designed to serve these two important contracts and, in the event that one or both of the contracts were lost, we would likely be required to significantly reallocate resources, including the potential early termination of employees currently servicing these contracts and/or closure of certain facilities and projects solely related to our current operations in these municipalities, all of which could have the effect of increasing costs in the short-term. Furthermore, given the medium and long term nature of the majority of our contracts, we would not have the flexibility to immediately offset a decrease in revenues by increasing prices. Given the staggered timing of attractive competitive bidding opportunities occurring only on an intermittent basis as existing contracts come due, we would likely face challenges to quickly replace the lost revenues with new collections business. Given the size of the cities of São Paulo and Curitiba, respectively being the largest and eighth largest cities in Brazil in terms of population according to 2017 IBGE data, we would likely have to secure several smaller contracts to replace the revenues lost under these two contracts. A significant loss of revenues could, in turn, impact our ability to comply with the covenants under any of our indebtedness or make payments as they come due.

Our auditors have issued a “going concern” audit opinion, and our ability to continue as a going concern is dependent on our improved liquidity position

We incurred net losses from continuing operations of R$360.9 million and R$212.0 million in 2016 and 2015, respectively, and while we recorded profits from continuing operation of R$59.0 million in 2017, such result was primarily driven by the gains recorded under deferred income and social contribution taxes as a result of our recognition of tax loss carryforwards in connection with our participation in the Brazilian Tax Regularization Program. As of December 31, 2017, we recorded a capital deficiency (corresponding to total assets minus total liabilities) of R$455.9 million, and as of December 31, 2016, we recorded negative working capital of R$1,366.2 million and a capital deficiency of R$737.1 million. As a result of these factors, our independent auditors have indicated, in their report on our audited financial statements that there exists significant uncertainty that could raise doubt about our ability to continue as a going concern. The audited financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
These doubts regarding our ability to continue as a going concern relate to a history of recurring losses from operations and our net capital deficiency.

In connection with the Transaction, we applied a significant portion of the proceeds to restructure our indebtedness in connection with the parallel Debt Restructuring. For further information, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowings.” While the Debt Restructuring carried out in connection with the Transaction resulted in a substantial reduction of our outstanding indebtedness at a discount to our outstanding principal amount and an increase in cash on hand on our balance sheet, it was not fully effective in reducing our vulnerability going forward.

In addition, on March 6, 2018, Angra confirmed the exercise of its put option to sell all of its shares of the Company, and we are required to pay the exercise price of approximately R$37.6 million by September 6, 2018. This payment will further negatively impact our cash position and, thereby, adversely affect us. See “Item 10.C. Additional Information—Material Contracts—Share Put Option Agreement.”

Our liquidity and our ability to continue as a going concern is dependent on various factors, and there are no assurances that we will be successful in our efforts to maintain a sufficient cash balance, or report profitable operations in the future, any of which could impact our ability to continue as a going concern. Any such inability to continue as a going concern may result in our shareholders losing their entire investment.

Our ability to collect for the services we provide is dependent on the financial condition of our customers, especially that of our public sector customers. The inability of our customers to pay in a timely manner or at all could result in increased working capital requirements and could have a material adverse effect on our business, results of operations and financial condition.

Our ability to collect amounts due pursuant to the terms of the contracts that we have entered into with our customers is largely dependent upon the financial condition of these customers. A significant portion of our customers are municipal entities, which are particularly sensitive to the impact of the macroeconomic and political environment, including election cycles, and, as a result, have historically demonstrated high rates of payment delinquency. As of December 31, 2017, our accounts receivables from customers totaled an aggregate R$797.9 million, 85.8% of which corresponded to accounts receivable from public sector customers, while our provisions for doubtful accounts from customers totaled R$157.2 million as of the same date, 82.9% of which corresponded to provisions for doubtful accounts from public sector customers.

Brazil entered into a recession in 2014 and continues to suffer from a general economic downturn (see “—Risks Related to Brazil” below), which we have observed has generally impacted and posed challenges for many of our customers, particularly our municipal customers. Due to negative macroeconomic conditions, many municipalities in Brazil have suffered significant financial difficulties, reduced tax revenues, decreased federal funding and increased cost structures, all of which have imposed material budgetary constraints and cash shortfalls. Governmental entities and municipalities allocate significant portions of their budgets to waste management services costs, according to the Brazilian Ministry of Cities, so their likelihood of material delays in the payment of account receivable under existing contracts are exacerbated in an adverse macroeconomic scenario with increased budgetary pressures. As a result of these factors, we have recently experienced a corresponding increase in the payment delays of our public sector customers in line with that which has been experienced by the industry as a whole. Overall, the balance of accounts payable by Brazilian municipalities with waste management companies in Brazil has reached approximately R$11.6 billion as of December 31, 2017 according to Selur-SP (Sindicato das Empresas de Limpeza Urbana do Estado de São Paulo).

Pursuant to Brazilian law, public services may be suspended in the event the payment for past services is past due for more than 90 days, unless the suspension could result in severe disturbances of the public order. Certain of our public entity customers might argue that the suspension of our services thereunder might result in a severe disturbance of the public order, forcing us to provide such services even in the event of contractual breaches, including failure to honor payment obligations. In addition, although Brazilian law does not permit public entities to declare bankruptcy and forfeit on their obligations, it nevertheless provides them with certain extraordinary rights under distressed circumstances that provides public entities with flexibility in honoring their contractual commitments. Although such rights are subject to certain limitations, some of our public entity customers have in the past resorted to such mechanisms, resulting in payment delays and/or the renegotiation of the schedule of payments of our accounts receivable, and we expect such practices to continue in the future under certain circumstances. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Summary of Our Trade Accounts Receivable Policy.”
 
Our private sector C&I customers are also negatively affected by market forces and adverse financial and economic conditions beyond our or their control, which may result in increased delinquency or cause customers to terminate or not to renew their contracts with us. In particular, our operations serve clients in the Brazilian oil and gas, civil construction and industrial sectors, and these sectors have been acutely impacted by the ongoing Lava Jato corruption investigations in Brazil (see “—Risks Related to Brazil” below).

The inability of our customers, both public and private, to pay us in a timely manner or, in the case of C&I customers, to pay the contracted rates, could have a material adverse effect on our business, results of operations, liquidity and financial condition. In addition, we may incur increased litigation expenses in our attempt to recover past-due amounts due to us from our customers, which may materially adversely affect our margins and results of operations.

We may not be successful in obtaining or renewing the necessary licenses to operate new landfills or expand existing ones. Further, the cost of operation and/or future construction of our existing landfills may become economically unfeasible, causing us to abandon or cease such operations.

As of December 31, 2017, we operated 13 active landfills and are in the process of developing another four greenfield projects in Brazil. In Brazil, the operation of landfills is subject to various licensing requirements at the municipal, state and federal level, which specific requirements vary from location to location as well as across the regulatory spectrum, depending in part on the particular characteristics, size, location, and potential environmental impacts of each landfill. The licensing process generally comprises three phases: (i) preliminary licensing, whereby initial discussions with the pertinent environmental agencies are held, the basic conditions and milestones for the project are demonstrated and analyzed, such as its location, concept and environmental feasibility, and the basic requirements to be met during subsequent implementation phases are established; (ii) installation licensing, whereby we demonstrate our compliance with all technical specifications, terms and conditions established for the project during the preliminary licensing phase based on the approved project plans, programs and designs, including environmental control measures, and thus authorizes the implementation of the project and commencement of construction which culminates in a final review by the relevant environmental agency before the project becomes operational, and (iii) operating licensing, whereby, after implementing the project in accordance with all previously established requirements and undergoing a final review, which the operation of the project is authorized in compliance with the technical conditions set forth therein, including any environmental control measures and operating conditions. For more information, see “Item 4.B. Information on the Company—Business Overview—Licensing Regulations for Landfills.” Any delays or denials by the environmental licensing authority in issuing or renewing licenses, as well as the inability to meet the requirements established by the environmental authorities during the environmental licensing process, may delay or even prevent the construction, development and regular maintenance of our landfills, transfer stations and greenfield projects.

Our current strategic focus involves the expansion of our landfill business and, therefore, our ability to meet our business objectives depends significantly on our ability to acquire or renew landfill licenses to expand existing landfills and develop new landfill sites. The process of obtaining or renewing the required licensing to build, operate and expand solid waste management facilities, including landfills and transfer stations, can involve substantial costs over a multi-year period and is subject to a high degree of uncertainty, frequently involving factors outside of our control. Licenses to operate a landfill must be renewed numerous times during the useful life of a landfill (typically, every two to five years) pursuant to a process that requires compliance with zoning, environmental and other requirements, and may be challenged by the Public Prosecutor’s Office, special interest groups and other stakeholders. Such challenges may result in the denial of a license’s issuance or renewal, or its suspension for a shorter duration than we may have originally anticipated, or the imposition of burdensome terms and conditions that may not be favorable to us, each of which could adversely affect our business, results of operations and financial condition. Moreover, the difficulty, time and expense in obtaining and complying with licensing requirements may prevent us from taking advantage of profitable opportunities or reacting to changing market dynamics, which could adversely affect us.
 
After we acquire the land on which we intend to build a landfill, the process of obtaining an operating license is generally expected to take between three and five years, and, in case we are unable to secure the necessary licensing to operate the landfill in accordance with our expectations, we may elect to abandon our development plans and incur a loss in connection with a particular landfill, as has happened in the past in the case of our previous Arapiraca and Cabrália landfill projects. Such occurrence would be highly disruptive to our business plan and, due in part to the upfront costs involved in developing a landfill, could cause a material and adverse effect on our business, results of operations and financial condition.

In addition, our operating licenses must be renewed periodically. Accordingly, as a result of this renewal process, it is possible that the operation or expansion of existing landfills may become economically unfeasible based on management’s assessment of licensing issues, acceptable waste streams, available volumes and operating costs, in which case we may abandon expansion plans or abandon or cease operations entirely at a particular landfill. Any such decision could result in impairment charges as well as ongoing costs for closure and site remediation, which would adversely impact us.

Our reserves and provisions for our landfill site closure and post-closure costs and contamination-related costs may be inadequate.

We are required to pay capping, closure and post-closure maintenance costs for all of our landfill sites. Our obligations to pay closure or post-closure costs or other contamination-related costs may exceed the amount we have accrued and reserved and other amounts available from funds or reserves established to pay such costs. We estimate capping, closure and post-closure maintenance costs and establishes reserves considering the type of landfill, volumetric capacity and the density of the waste to be disposed at a particular site. Any defect or failure in judgment in connection with such assumptions could lead to substantially higher costs than anticipated.

In addition, according to Brazilian regulations, subsequent to the closure of a landfill site, we must continue to monitor and maintain the underground and surface water, leachate treatment, gas collection system, drainages and capping of closed landfills for so long as the closed site is no longer potentially harmful to the environment or the community. In order to satisfy such obligation, we are required to, among other measures, calculate and provision the expected costs associated with such activities, taking into account the particular conditions, the characteristics of each landfill site and the planned future uses of the site, as well as the expected costs of securing the perimeter of such landfill sites and maintaining the necessary on-site structures. We cannot assure you that we will have established sufficient reserves for all potential liabilities in connection with our landfill closure activities, and we may become liable for unforeseen environmental issues that could result in payment of substantial costs that may not have been fully provisioned, such as remediation costs, that could adversely affect our financial condition or operating results. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies—Landfill accounting and provision for landfill closure.”

The Brazilian waste management industry is fragmented and characterized by a high degree of competition.

The Brazilian waste management industry is highly fragmented, with no single player accounting for more than 10.0% of market share, and the top five largest players collectively accounting for 28.0% in 2016, according to the most recent ABRELPE data in conjunction with our internal studies. This high degree of fragmentation corresponds to an exceedingly competitive environment requiring substantial labor and capital resources to maintain and capture business. Some of the markets in which we compete or plan to compete are served by one or more large companies, as well as by regional and local companies of varying sizes and resources, some of which may have accumulated substantial goodwill in their markets.

Some of our competitors may be better capitalized in comparison, benefitting, in some cases, from the infrastructure and financial backing of international platforms, while other competitors may have greater name recognition than us, or be able to provide or be willing to bid their services at a lower price than we may be willing or able to offer. We may also face competition from companies that possess more specialized, technical expertise in certain niche services or markets.

We also compete with counties, municipalities and solid waste districts that maintain or could in the future choose to carry out and maintain their own waste collection and disposal operations. These operators may have financial advantages over us because of their access to user fees and similar charges, tax revenues, tax-exempt financing or government subsidies.
 
An increase in these or other competitive pressures, or our inability to compete effectively, could hinder our growth or adversely impact our business, results of operations and financial condition.

Our business requires a high level of capital expenditures.

Our business is capital-intensive. We must use a substantial portion of our cash flows from operating activities toward capital expenditures, which reduces our flexibility to use such cash flows for other purposes, such as reducing indebtedness. For example, we are required to devote significant capital amounts to invest in the renewal of our vehicle fleet, the failure of which could result in the breach of certain obligations under our services contract and potentially lead to a suspension, or early termination, of such contracts. We are also required to invest significant capital in the opening and development of new landfill cells, the failure of which could result in damage to our landfill operations and ability to continue to receive hazardous and nonhazardous waste. Our capital expenditures could increase if we make acquisitions or further expands our operations or as a result of factors beyond our control, such as changes in federal, state, local or international requirements. The amount that we spend on capital expenditures may exceed current expectations, which may require us to obtain additional funding for our operations or impair our ability to grow our business, and could thus adversely affect our operating results.

We continue having a significant level of indebtedness following the Transaction, and such indebtedness levels may materially adversely affect our ability to successfully implement our strategic plan, react to competition and/or changes in our industry and continue our operations.

We have substantial indebtedness. As of December 31, 2017, our total financial indebtedness, consisting primarily of outstanding balances on our debentures and working capital loans and, to a lesser extent, BNDES loans and financings and finance leases, was R$1,455.0 million, as compared to R$1,692.3 million and R$1,501.4 million as of December 31, 2016 and 2015, respectively. Of these total amounts, 98.7% of our total indebtedness was linked to floating rates as of December 31, 2017 compared to 99.1% and 96.2% as of December 31, 2016 and 2015, respectively.

Prior to the Transaction, we were in noncompliance with certain of our obligations under the instruments governing our existing debentures, which noncompliance included failure to pay principal and interest as required as well as failure to meet the financial covenant ratios set forth therein, which may have constituted events of default under such instruments. In July 2017, we successfully obtained waivers with respect to such noncompliance.

On December 26, 2017, we paid US$110.6 million to the Creditors. In addition, the debenture holders granted us a reduction corresponding to 25% of the prepaid amount, as more fully described in “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowings—Debt Restructuring and Refinanced Debt.” These actions have resulted in the discharge of any potential defaults or events of defaults existing under our current financing instruments.

Nevertheless, we still continue to have a significant level of indebtedness following the Debt Restructuring. In addition, a significant part of our assets have been pledged as collateral to secure repayment of the Refinanced Debt. The Refinanced Debt is secured by collateral consisting of (i) a lien on all real estate relating to the operational landfills; (ii) a lien on all material subsidiaries controlled, directly or indirectly, by us; (iii) a fiduciary assignment of the remaining balance originated from the foreclosure of liens described in this paragraph; and (iv) corporate guarantees of all material subsidiaries controlled, directly or indirectly, by us. The debt admission instrument related to our first issuance of debentures is also secured by a fiduciary assignment of certain real estate assets owned by us. In addition, the Refinanced Debt is secured by a fiduciary lien on all (except for 4.38% secured for the benefit of Angra) of the Company’s common shares as security for the payment of all obligations related to the Refinanced Debt.
 
For further information, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowings.” This amount of indebtedness and related collateral could:
 
·
maintain our vulnerability to general adverse economic and industry conditions or increases in interest rates;

·
limit our ability to obtain additional financing or refinancing at attractive rates or at all;

·
require the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures, dividends, share repurchases and other general corporate purposes;

·
limit our flexibility in planning for, or reacting to, changes in our business and the industry; and

·
place us at a competitive disadvantage relative to our competitors with less debt.

Further, our post-Transaction indebtedness contains financial and other covenants, which may be affected by changes in economic or business conditions or other events that are beyond our control. We cannot assure you that we will be in compliance with our financial ratios in the future and, should we fail to comply with these financial ratios, we cannot assure you that our creditors would grant the necessary waivers.

If we fail to comply with the covenants under any of our indebtedness, we may be in default under the documents governing such indebtedness, which may entitle the lenders thereunder to accelerate the debt obligations. A default under any of our indebtedness could result in cross-defaults under our other indebtedness, which in turn could result in the acceleration of our other indebtedness and in the execution against any collateral securing such indebtedness. In order to avoid defaulting on our indebtedness, we may be required to take actions such as reducing or delaying capital expenditures, reducing or eliminating dividends or share repurchases, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital, any of which may not be available on terms that are favorable to us or to our shareholders, if at all.

We rely on diesel fuel to operate our collection and transfer fleet and, therefore, substantial fluctuations in fuel costs or the unavailability of fuel, would have an adverse effect on us. On May 21, 2018, Brazilian truck drivers announced a nationwide strike demanding a reduction in tariffs imposed on diesel and changes to the fuel pricing policy currently adopted by Petrobras. Due to the nationwide strike, all sectors of the Brazilian economy, including the supply and distribution of diesel, has been adversely affected and negotiations between the Brazilian Federal Government and the representatives of the truck drivers is currently ongoing. The outcome of these negotiations could impact the price and distribution of diesel which in turn could adversely affect our results.

The price and supply of fuel in Brazil can fluctuate significantly based on national, international, political and economic circumstances, as well as other factors outside our control, such as actions by Petrobras and the Organization of the Petroleum Exporting Countries and other gas producers, regional production patterns, political instability in oil and gas producing regions and environmental concerns. We rely on diesel fuel to run our collection and transfer trucks and our equipment used in our transfer stations and landfill operations. Supply shortages could substantially increase fuel expenses or lead to our inability to obtain sufficient fuel to conduct operations. Additionally, as fuel prices increase, our direct and indirect operating expenses increase and many of our vendors raise their prices as a means to offset their own rising costs. These risks are compounded by the fact that we do not engage in the ordinary course of business in fuel hedging through entering into derivative contracts to manage our exposure to volatility in fuel prices.

We purchase fuel from a number of distributors in Brazil, principally from Ipiranga Produtos de Petróleo S.A., which provides us with generally better price conditions than ordinarily found in the market. Nevertheless, fuel prices can fluctuate significantly in a relatively short amount of time, and our contracts with our suppliers do not insulate us from adverse price variations (for more information on our fuel supply contracts, including their pricing mechanisms, see “Item 4.B. Information on the Company—Business Overview—Raw Materials and Suppliers”). Accordingly, we must continually monitor and adjust our risk management strategies to address not only fuel price increases, but also fuel price volatility, pursuant to which we may decide to engage in a defined fuel hedging policy in the future. The cost of any risk management tools generally increases with sustained high potential for volatility in the fuel market.
 
The waste management industry is characterized by increasing technological innovation, and our success depends on our capacity to enhance and maximize our existing services and develop new services.

We and others in the industry are increasingly focusing on new technologies that provide alternatives to traditional disposal and maximize the resource value of waste. If we fail to develop or adapt our services on a timely and cost-efficient basis to address customer needs in an evolving technological environment or to respond to regulatory or legislative changes, our competitiveness will be negatively impacted and our customer retention may suffer. We may experience difficulties or delays in the research, development, production or marketing of new services, which may negatively impact or operating results and prevent us from recouping or realizing a return on the investments required to bring new services to market. In particular, if a competitor develops or obtains exclusive rights to a breakthrough technology that provides a revolutionary change in traditional waste management, our financial results may suffer.

The renegotiation of collective bargaining agreements with the labor unions representing our employees may result in increased costs and other disruptions to our business.

Our employees are represented by labor unions with a strong presence in the waste management market. We have entered into collective bargaining and other agreements with each of these unions through a special committee, which agreements define, among other matters, the length of the work day, minimum compensation, vacations and other ancillary benefits for our employees. We renegotiate these agreements on an annual basis and, historically, have significantly adjusted the terms of these agreements upon renegotiation. When we renegotiate wage and salary adjustments, including the establishment of minimum wage thresholds, we typically use the inflation rate as a reference. Our personnel costs may increase significantly as a result of our renegotiation of collective bargaining agreements, which represents a major part of our cost of services. Our business and results of operations may be materially adversely affected if we are not able to pass the increased costs arising from the renegotiation of collective bargaining agreements onto our customers through inflation-based price increases. In addition, we may be negatively impacted if we otherwise fail to maintain harmonious relationships with the labor unions representing our employees, which could lead to strikes, work stoppages or other labor disruptions by its employees. For example, we recently experienced two short-term strikes in Curitiba in 2015 and 2016 related to our collective bargaining negotiations and to certain salary payment delays. Depending on the type and duration of any labor disruptions, our operating expenses could increase significantly, which could adversely affect our financial condition, results of operations and cash flows.

Increases in labor costs could impact our financial results.

Labor is one of our highest costs and relatively small increases in labor costs per employee could materially affect our cost structure. Our continued success will depend on our ability to attract and retain qualified personnel. A shortage of qualified employees, such as truck drivers or mechanics, would require us to enhance our wage and benefits packages to compete more effectively for employees, to hire more expensive temporary employees or to contract for services with more expensive third-party vendors. If we fail to attract and retain qualified employees, control our labor costs during periods of declining volumes or recover any increased labor costs through increased prices we charge for our services or otherwise offset such increases with cost savings in other areas, our operating margins could suffer.

We depend significantly on the services of the members of our senior, regional and local management teams, including our current CEO and the departure of any of those persons could cause our operating results to suffer.

Our success depends significantly on the continued individual and collective contributions of our senior, regional and local management teams including our current CEO. The loss of the services of any member of our senior, regional or local management, in particular our CEO, Mr. Pedreiro, or the inability to hire and retain experienced management personnel could have a material adverse effect on us.

We may be held legally responsible for the acts and omissions of outsourced personnel.

We rely on outsourced personnel to carry out certain of our non-strategic functions (such as landfill security and gatekeepers) and to ensure the proper functioning of our operations in satisfaction of client needs at a lower cost. If the outsourcing companies engaged by us fail to comply with applicable labor laws in relation to their employees sent to provide services on our behalf, we, as a matter of Brazilian labor law, may be held severally liable for such violations over which we have little to no authority to monitor or prevent. As a result, we may be subject to fines and other penalties imposed by the relevant labor authorities or courts. If we are held liable for labor claims in connection with our outsourced personnel, our business and results of operations may be negatively impacted.
 
Increases in insurance costs and the amount that we self-insure for various risks could reduce our operating margins and reported earnings.

Our business exposes us to the risk of liabilities arising out of our operations, including environmental and labor-related claims as well as claims for personal injury, death and property damage resulting from the use of the trucks, machinery and equipment used in our operations. We maintain insurance policies at amounts considered by our management to be sufficient to cover possible losses, considering the nature of our activities and our size and operations. Our insurance policies cover: (i) environmental damage, (ii) civil liability, (iii) damage to property, including fleet and equipment, (iv) pain and suffering, (v) fire, lightning and explosion and (vi) directors’ and officers’ insurance. Our coverage limits might not be sufficient to cover all potential losses. We cannot assure you that we will not be exposed to uninsured liability at levels in excess of our historical levels resulting from multiple payouts or otherwise or that liabilities in respect of existing or future claims will not exceed the level of our insurance. Losses that exceed the insured amount or that are not covered by our insurance could result in material additional and unexpected costs. These could affect our results of operations and financial condition. For additional information regarding our insurance coverage, see “Item 4.B. Information on the Company—Business Overview—Insurance.”

We are party to various judicial, administrative, tax or other third-party proceedings that could interrupt or materially limit our operations, result in adverse judgments, settlements or fines and create negative publicity.

We are, and in the future may be, a defendant in various judicial, arbitral and administrative proceedings arising in the ordinary course of our business and also, on an exceptional basis. Such disputes may relate to civil, tax, labor or environmental matters and involve our suppliers, customers, management or environmental and tax authorities, among others. In addition, particularly in relation to our landfill operations, the Public Prosecutor’s Office, as well as individuals, citizens groups, trade associations, community groups or environmental activists, may bring actions against us in connection with our operations that could interrupt or limit the scope of our business. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is uncertain. Additionally, the possible outcomes or resolutions to these matters could include materially adverse judgments or settlements, either of which could require substantial payments or other significant financial obligations. We cannot assure you that the outcomes of these proceedings will be favorable to us, or that we will have established sufficient reserves for all potential liabilities in connection with these proceedings.

Unfavorable decisions or settlements in relation to these proceedings that prevent us from conducting our business as initially planned, or that involve substantial amounts that have not been adequately provisioned, may materially adversely affect our business, financial condition and results of operations. For example, based on advice of our external legal counsel, who assessed the risk of a potential loss as possible (and not probable), we have not recorded provisions in the aggregate amount of R$212.4 million in relation to recent tax assessments that we received from BFRS at the end of 2017. Therefore, in the event that such possible loss materializes, our provisions would not be sufficient to cover our contingencies in relation to this liability. For more information on the material proceedings to which we are a party, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”

Brazilian tax authorities may challenge the tax treatment given to certain of our transactions, potentially resulting in significant tax liabilities that could adversely affect us.

Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid, which requires a significant degree of judgment and estimates. We cannot assure you that Brazilian tax authorities will agree with the assessments made with respect to our tax liability. Under Brazilian law, the tax authorities may challenge the amount of taxes we have paid for a period of up to five years counted from the taxable event or the first day of the following year, based on a variety of factors, including the nature of the tax payable and whether it involves self-reporting by the taxpayer or pre-payment as well as the existence of fraud. Any such challenges may require us to devote additional resources to defend the tax treatment we have ascribed to such transactions and, if adjudicated and decided against us, may result in the incurrence of significant tax liabilities, including fines and other capital commitments, and may have a negative impact on our public image, each of which could adversely affect us.
 
Moreover, the tax treatment for certain categories of transactions are more vulnerable to challenges by the Brazilian tax authorities. For example, we regularly perform intercompany transactions (such as loans and other financial or operational transactions), the tax treatment of which is especially uncertain under Brazil’s regulatory framework, and is more likely to be questioned by Brazilian tax authorities, particularly with respect to their compliance with IOF or IRRF tax rules.

In addition, our non-compliance with any ancillary obligations could also result in further questioning by the tax authorities and result in additional tax liabilities, including fines and other capital commitments, which could adversely affect us.

We may be liable in connection with discontinued operations over which we currently have no control.

As part of our restructuring effort and with the objective of streamlining our operations and increasing our margins, we have divested of several assets in recent years, including our operations outside of Brazil and a significant portion of our oil and gas activities. For additional information, see “Item 4.A. Information on the Company—History and Development of the Company—Recent Divestments and Acquisitions.” Under Brazilian law, we may be subject to liability, financial losses, and adverse impacts on our image and reputation resulting from past divestitures, particularly in the event that the new owner of our divested assets is found to have insufficient funds to perform on our obligations with respect to those assets.

For example, in January 2016, we entered into an agreement with USA Global MKT (“USA Global”), for the sale of our 51% interest in Doña Juana S.A. ESP (“Doña Juana”), based in Colombia. Pursuant to the terms of the agreement, USA Global, our partner and co-investor in Doña Juana, agreed to seek out a compatible buyer for our interest in Doña Juana and, in the meantime, advance payments to us for the sale. Following the execution of the agency agreement with USA Global, our results of operations from Doña Juana were recorded as discontinued in 2016, and we ceased to have any participation in the management and affairs of Doña Juana. Nevertheless, until such time as a buyer is found, and even potentially after a buyer is found, we may continue to be liable for the activities at Doña Juana over which we have no authority or control. Doña Juana recorded legal provisions of US$70.1 thousand in 2016 in connection with lawsuits where, based on the assessment of Doña Juana’s counsel, the risk of loss is probable. We could be responsible for all or a portion of such contingencies. As a landfill, Doña Juana’s operations are inherently susceptible to various risks, including, among others, in connection with landfill site closure and post-closure costs as well as contamination-related costs. Our potential liability could be significant to the extent these risks materialize, particularly in relation to activities occurring during the period when we still had control. Another example relates to our sale of Estre Óleo e Gás Holding S.A. (“Estre O&G”) in 2014, following which we continued to have contractual obligations to provide certain services to Estre O&G’s business partners through 2017. In addition, we are the subject of, or mentioned in the context of, certain allegations and investigations of misconduct in connection with our discontinued operations. For further information, see “−Risks Related to Compliance and Control” below and “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Discontinued Operations.” Given the current stage of the investigations, we cannot predict whether any such investigations will proceed and, if so, the duration or ultimate outcome of the investigation. In the event we are charged with any violations on the basis of the investigations or other investigations related to discontinued operations or otherwise held responsible in relation thereto, we may be subject to substantial monetary fines and potential ineligibility from contracting with state owned or government entities, which could also have significant impact on our results of operations.

We could also be liable for latent civil, tax, environmental, criminal and labor claims arising out of causes or circumstances existing during the time which we owned the assets we have since divested, the occurrence of which could have an adverse effect on us. For example, in the event that we are deemed responsible for causing an environment damage on a divested asset (irrespective of whether the former operations were supported by environmental licenses or not), we will nevertheless be held liable for the full extent of the damages, including the responsibility for repairing such damage in accordance with applicable legislation, to which statutes of limitations may not apply. Environmental liability may be also be attributed by administrative and criminal courts by imposing administrative and criminal sanctions upon non-compliance with law. Administrative sanction can only be imposed within five years from the violation of the applicable violation and the statute of limitations of criminal liability varies according to the penalty imposed for the committed misconduct. Under Brazilian environmental laws and regulations, companies are subject to strict liability for damages caused to the environment, and no statute of limitations applies.
 
Any adverse outcome resulting from such risks or liabilities could harm our business, results of operations and financial condition and could create negative publicity that may be damaging to our reputation and competitive position.

Current and future accounting pronouncements and other financial reporting standards, including, but not limited to, those concerning revenue recognition, will impact our financial results.

The IASB, or other regulatory bodies, periodically introduce modifications to financial accounting and reporting standards under which we prepare our audited financial statements. A number of new accounting standards and amendments and interpretations to existing standards have recently been issued, including IFRS 15 regarding revenues from contracts with customers, IFRS 9 regarding financial instruments, and IFRS 16 regarding leases. We have adopted these new accounting standards on the effective date required, which was January 1, 2018 and, therefore, the audited financial statements included in this annual report do not yet reflect the application of these new accounting standards. Our management has determined that IFRS 9 and IFRS 15 will impact our results to a limited extent.  However, we performed an assessment of the potential impacts of the application of these new accounting standards on our audited financial statements based on available information at that time and may be subject to changes based on new information arising in 2018. Our reported revenues and results of operations in the future could be negatively impacted by the adoption of these new standards or any additional new accounting pronouncements which may in the future impact our accounting.

For further information regarding the new accounting requirements, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—New Accounting Standards Issued But Not Implemented” and notes 2.22. and 2.23. to our audited financial statements included elsewhere in this annual report.

We rely on a limited number of suppliers for our heavy vehicles, which may materially adversely affect our ability to acquire a waste collection fleet on favorable terms.

In Brazil, the collection and transfer trucks that comprise our fleet are manufactured and sold by only a few suppliers, with Volkswagen, MAN, Mercedes Benz and Ford dominating the market. Accordingly, in the event our suppliers decide to unfavorably modify the purchasing terms for these vehicles, our flexibility to acquire these vehicles elsewhere is limited. As a result, our ability to renew and expand our fleet may be negatively affected and, consequently, our ability to effectively serve customers could suffer.

Risks Related to Compliance and Control

We have been charged, and remain under investigation by, the Brazilian tax authorities, alleging unpaid taxes over the course of several years arising from understated income due to alleged improper payments to certain suppliers. These charges, as well as potential future tax infringement charges, could result in substantial fines, penalties and criminal and regulatory sanctions, among other adverse effects.

From 2015 to 2017, the BFRS has periodically filed Notices of Tax Enforcement  addressed to us, requiring that we produce information concerning transactions with a number of specified suppliers in relation to payments made from 2010 to 2015. In the majority of cases, these requests for information have resulted in official tax infringement notices charging our failure to pay the full amount of federal taxes due for a specified period on the assumption that we understated our taxable income for such periods due to costs recorded from alleged improper payments to certain suppliers. These tax infringement notices subject us to significant tax liabilities, including fines established by the BFRS and payments of interest. The statute of limitations for these claims is five years.
 
In 2017, we were able to settle certain tax liabilities resulting from these tax infringement charges on attractive terms through tax amnesty programs offered for a limited time in Brazil. However, after these amnesty programs were closed, on December 15, 2017, Cavo Serviços e Saneamento S.A. (“Cavo”), the entity through which we hold an equity stake in the Soma, received an official tax infringement notice from the BFRS in the amount of R$90.6 million concerning transactions with a number of specified suppliers in relation to payments made in 2012. On December 22 and 27, 2017, the Company received two additional official tax infringement notices from the Brazilian federal tax authorities in the aggregate amount of R$121.8 million concerning transactions with a number of specified suppliers in relation to payments made from 2011 to 2015.  There is no guarantee that additional tax amnesty programs will be offered by the Brazilian government on favorable terms, or at all. We have not established provisions related to these matters based on the advice of our independent Brazilian counsel. For further information regarding our tax proceedings, see “Item 8.A.  Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”

For those reasons detailed above, the current tax charges against us, as well as potential additional tax charges that we may receive in the future, may expose us to significant fines, penalties, judgments, damages and/or settlements in connection with regulatory assessment as a result of non-compliance with applicable legal and regulatory requirements in amounts that exceed currently the provisions we have established in relation to these tax contingencies (see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations”).

Furthermore, we have reason to believe that the tax authorities have shared their findings with other Brazilian authorities, including the Lava Jato investigators. For example, the Brazilian federal police’s search of our corporate offices and the premises of Soma on March 1, 2018 as part of the so-called Operation Descarte was a collective effort in cooperation with the Brazilian tax authorities within the ambit of the broader Lava Jato task force. Accordingly, any tax charge from the BFRS could potentially result in additional regulatory and criminal inquiries, charges and, eventually, sanctions. Any such consequences emanating from these tax charges could significantly impact our results of operations, cash flows, ability to execute our growth strategy and overall financial health.

Based on our historical experience, we may receive additional tax infringement charges in the future in relation to other suppliers, facts or periods, particularly as the statute of limitations related to such matters approaches expiration. Any of these tax infringement charges may involve additional criminal and regulatory actions and governmental inquiries that could have a material adverse effect on us and otherwise severely limit our business.

Investigations by governmental authorities under the applicable anti-corruption and money laundering laws, including the currently ongoing Operation Descarte, may result in substantial fines, ineligibility from contracting with state-owned or government entities, criminal action against our management team and other adverse effects.

We, the former chairman of the Company’s board of directors as well as businesses formerly owned by us are currently the subject of, or otherwise implicated in, certain allegations and investigations of misconduct in relation to alleged improper payments. For further information regarding the related facts, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”

Most recently, on March 1, 2018, the Brazilian Federal Police, executed search warrants at a number of companies in the cities of São Paulo, Santos, Paulínia, Belo Horizonte and Lamim, including at the premises of Soma as well as the Company’s corporate offices and Paulínia landfill. This action was part of the so-called Operation Descarte effort of the Brazilian Federal Police working in conjunction with the Brazilian tax authorities within the ambit of the broader Lava Jato task force, with the stated objective of dismantling a criminal money-laundering network. As part of their search of our corporate offices, the Brazilian Federal Police confiscated numerous hard copy and electronic files related to specified suppliers, among other materials.

We cannot predict whether these investigations will move forward and, if so, the duration, scope or ultimate outcome of these investigations. In the event we are charged with any violations on the basis of the investigations, these charges may seek to impose various sanctions, including monetary fines, potential ineligibility from contracting with state-owned or government entities, injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could have a material adverse effect on our business, financial condition, results of operations or liquidity. An announcement of a negative outcome of an investigation, or the bringing of any charges against us (or persons or entities affiliated or previously affiliated with us), could also expose us to civil suits or regulatory action, and/or damage our reputation. The materialization of any of these events could have a material adverse effect on us.
 
Our governance, risk management, compliance, audit and internal controls processes might be unable to prevent, detect or remedy behaviors that are incompatible with relevant legal requirements or our own ethical or compliance standards, which could in turn expose us to sanctions, regulatory penalties, civil claims, tax claims, damage to our reputation, accounting adjustments or other adverse effects.

In 2015, under the leadership and guidance of our new CEO, Mr. Sergio Pedreiro, and in response to Brazil’s new anticorruption law adopted in 2014 and an intensified focus in Brazil on the prevention of corrupt practices, we implemented a new compliance program focused on transparency and ethical conduct. Since 2015, we have invested significantly in our internal controls mechanisms with the objective of auditing, detecting and reporting irregularities, imposing disciplinary measures and taking remedial or punitive measures in the case of violations. We have a focused commitment to continuing to strengthen our compliance policies and internal control systems.

Nevertheless, despite these substantial efforts, we have identified certain shortcomings and defects of our compliance infrastructure as a result of the Internal Evaluation Process (see “Item 15—Controls and Procedures”), particularly in relation to the implementation of our compliance program at Soma. Accordingly, we cannot assure you that our governance, risk management, compliance, audit and internal controls processes will be able to prevent, detect or remedy all behaviors that are incompatible with the applicable legal requirements or our own ethical or compliance standards, and any weakness or breach could expose us to sanctions, regulatory penalties, civil claims, tax claims, monetary losses, accounting errors or adjustments, reputational damages, or other adverse effects.

We are subject to the risk that our employees, counterparties or any person doing business with us may engage in fraudulent activity, corruption or bribery, circumvent or override our internal controls and procedures or misappropriate or manipulate our assets for their personal or business advantage. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”), the Brazilian Anti-Corruption Law and similar anti-corruption laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management.

It is difficult for us to ensure that all of our employees and contractors will comply with and uphold our ethical principles, a risk that we believe we are highly susceptible to given the nature of our business in Brazil and substantial commercial dealings with municipal entities. Any weakness or breach in our governance, risk management, compliance, audit and internal controls processes could expose us to sanctions, regulatory penalties, civil claims, tax claims, monetary losses, accounting errors or adjustments, reputational damages, or other adverse effects. The perception or allegations that we, our employees, our affiliates or other persons or entities associated with us have engaged in any such improper conduct, even if unsubstantiated, may cause significant reputational harm and other adverse effects.

We have conducted several internal reviews related to our supply relationships, and additional facts and circumstances could arise requiring further evaluation.

As part of our response to ongoing investigations by the Brazilian authorities into potential misconduct, we have periodically engaged external consultants to review documentation concerning transactions with our suppliers.

Following a review of our transactions with specified suppliers in 2017, forensic consultants determined that certain disbursements made by us to contractors, suppliers and other service providers could not be properly supported by the documentary evidence. As a result of these findings, we terminated our commercial arrangements with a number of suppliers and wrote-off certain items of property, plant and equipment on our balance sheets for which proper support for payments was not available and their existence could not be properly verified. See “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Write-off of Property, Plant and Equipment.”
 
Following the receipt of tax infringement notices at the conclusion of 2017 (see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations”), we engaged a forensic services firm to review Soma’s relationships with certain suppliers. This investigation was only in the preliminary stages when the Brazilian federal police searched our corporate offices and the premises of Soma on March 1, 2018. In the aftermath of the events of March 1, 2018, we broadened the scope of the internal review process at the direction of a newly constituted Special Committee comprised of independent members of our board of directors. This expanded internal evaluation process sought to ascertain the nature of the goods and services provided to us for payments made to certain suppliers during the period from 2012 to 2017, including via Soma and our other joint ventures. As a result, we identified payments to certain suppliers, particularly through Soma, for which there was insufficient evidence that goods and services were provided. Considering these findings, we restated our financial statements as of January 1 and December 31, 2016 and for the years ended December 31, 2015 and 2016 included in this annual report and recalculated our income tax payable corresponding to our management’s assessment of probable tax losses emanating from these payments, as further described under “Explanatory Note.” For additional information regarding the Internal Evaluation Process, see “Explanatory Note” and “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations” and Note 1.5 of our audited financial statements included herein.”

Internal evaluation processes are costly and disruptive and require significant time, resources and management attention. They are also subject to inherent shortcomings, namely involving (i) the absence of subpoena power to compel production of relevant documents from third parties, and (ii) the inability to compel interviews with important witnesses, such as certain former members of our management team. Accordingly, it is possible that improper conduct may have occurred within the Company that was not captured or considered in the Internal Evaluation Process and other historical investigations. As result, it is possible that facts and circumstances could arise in the future related to alleged improper conduct that we have not considered or adequately prepared for but could nevertheless expose us to significant liability, warrant further investigation, or involve further restatement of our audited financial statements.

Allegations and investigations of impropriety involving Wilson Quintella Filho, our founder, a shareholder and former Chairman of our board of directors, have surfaced as part of Brazil’s ongoing Lava Jato and Operation Descarte investigations, which have, and may continue to, adversely affect us, principally by harm to our reputation. Any negative developments in or relating to such allegations and investigations involving Mr. Quintella could further adversely affect us.

There are several allegations of improper payments and other improper conduct against Mr. Quintella, who is our founder, a minority shareholder and former chairman of our board of directors, and certain entities affiliated with him, in connection with the ongoing Lava Jato investigation, including entities that were previously under our control. Most recently, Mr. Quintella’s personal apartment was subject to a police search as part of Operation Descarte. For further information regarding the related facts, see “Item 8.A.  Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”

Although Mr. Quintella no longer has management control over us and his share ownership in us has been significantly reduced to 5.9% (through Cygnus Asset Holding Ltd) as a result of the Transaction, we nonetheless believe that, because of Mr. Quintella’s connections with us as our founder, shareholder and former Chairman, these allegations could have adverse impacts on us, principally by way of harm to our reputation and, potentially, as a result of his ongoing influence on our employees resulting from his historical role at the Company. We cannot predict the outcome of the ongoing investigations involving Mr. Quintella or whether the authorities will ultimately file charges against him or prosecute us in administrative and civil court, as applicable. Should Mr. Quintella ultimately be charged with misconduct, this may further negatively impact our reputation or otherwise adversely affect us.

Our commercial relationship with Petrobras has been the subject of inquiry.

We have a commercial relationship with Petrobras and certain of its affiliates and in 2015, 2016 and 2017 generated total revenues of R$92.9 million, R$52.5 million and R$18.5 million, respectively, from such relationship, all of which was allocated to our Oil & Gas (O&G) segment. Petrobras is the primary customer in our Oil & Gas segment, representing 83.6% of the net revenues from services rendered for this segment in 2016 and 71.4% in 2017. We engaged independent consultants to review our commercial relationships with Petrobras mainly in response to ongoing investigations by the Brazilian authorities and other allegations related to our historical relationship with Petrobras (see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations.”). This review of our dealings with Petrobras was concluded in January 2018 and the consultants identified a number of suppliers that provided goods and services in connection with our Petrobras engagements. These suppliers were then included in the Internal Evaluation Process described above and the respective supply relationships were evaluated across our organization, including Soma and our other joint ventures.
 
We could be materially affected by violations of the FCPA, the Brazilian Anti-Corruption Law and similar anti-corruption laws.

We, our subsidiaries and our joint venture partners are subject to a number of anti-corruption laws, including Law No. 12,846/2013, or the Brazilian Anti-Corruption Law, which became effective on January 28, 2014, the FCPA and various other anti-corruption and anti-bribery laws of other jurisdictions.

The FCPA, the Brazilian Anti-Corruption Law and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. If our policies and procedures designed to prevent bribery and other corrupt practices were not in the past or are not in the future capable of preventing voluntary or inadvertent action by our administrators, employees or third parties acting on our behalf that constitutes corruption, applicable regulatory agencies, to which we respond, have the power and authority to impose fines and other penalties.

Violations of these laws may result in criminal or civil sanctions, inability to do business with existing or future business partners, injunctions against future conduct, profit disgorgements, disqualifications from directly or indirectly engaging in certain types of businesses, the loss of business permits or other restrictions which could have a material adverse effect on our business, financial condition, results of operations or liquidity.

Personnel from BTG Pactual are the subject of investigations in Brazil, which because of the relationships between BTG Pactual and us may have an adverse impact on our reputation or otherwise.

We have various significant relationships with BTG Pactual, which remains our largest shareholder after the Transaction. Furthermore, certain members of our senior management, including the CEO, are affiliated with BTG Pactual. BTG Pactual is also the holder of 54.4% of our debentures related to debt, encompassing the outstanding existing debentures and other obligations arising out of the related debt acknowledgment instrument, as amended and restated pursuant to the Debt Restructuring. In 2015, André Esteves, then the CEO and chairman of BTG Pactual, was temporarily taken into custody in Brazil in connection with allegations of obstruction of justice, which allegations were unrelated to us or BTG Pactual’s and Mr. Esteves’s relationship to us. On September 1, 2017, the Brazilian Federal Prosecutor’s Office filed its closing arguments requesting the dismissal of all charges against Mr. Esteves, which request is awaiting court approval. However, as a result of certain statements included in the plea bargain of Delcídio do Amaral Gomez, a former Brazilian senator, Mr. Esteves became subject to additional corruption-related investigations. Should Mr. Esteves be found liable for any misconduct or should BTG Pactual or any of its affiliates be accused of or found responsible for any wrongdoing, there may be negative impact on our reputation or otherwise, such as administrative or civil liability, as a result of our relationship with BTG Pactual.

We have identified weaknesses in our internal control over financial reporting and our disclosure controls and procedures.

In connection with the audit of our audited financial statements included in this annual report, we and our independent registered public accounting firm identified weaknesses in our internal control over financial reporting. In addition, our management has concluded that our disclosure controls and procedures as of December 31, 2017 were not effective due to such weaknesses in internal control over financial reporting.

The weaknesses in our internal control over financial reporting are set forth in detail under “Explanatory Note” and “Item 15—Controls and Procedures.” These weaknesses contributed to a misstatement of the previously issued financial statements of the Company and the audited financial statements included in this annual report have been accordingly restated.

We cannot at this time estimate how long it will take to remediate the weaknesses identified in this annual report and our efforts may not be successful in remediating these weaknesses. In addition, we will incur additional costs in improving our internal control over financial reporting and our disclosure controls and procedures. If we are unable to remediate these weaknesses, or if we experience additional weaknesses in the future or otherwise fail to maintain an effective system of internal controls or disclosure controls and procedures, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our securities.
 
Neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness or significant deficiency in our internal control over financial reporting, as our independent registered public accounting firm will be required to do once we cease to be an emerging growth company. Had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control weaknesses may have been identified.

We have recently implemented new process management software and are increasingly dependent on technology in our operations and, if our technology fails, our business could be adversely affected.

We may experience problems with the operation of our current information technology systems or the technology systems of third parties on which we rely, as well as the development and deployment of new information technology systems, any of which could adversely affect, or temporarily disrupt, all or a portion of our operations until resolved. For example, in 2016, we began implementing new enterprise resource planning (“ERP”), business process management software in order to better manage our business and automate many back office functions with the goal of improving our internal controls over financial reporting on a consolidated basis. The full system migration is expected to be completed by the end of 2018, however, until the system reaches full implementation, distortions may occur. Prior to the adoption of these new systems, certain control functions were managed manually, without the use of technology, including the provisioning for landfill closures and judicial deposits, thus subjecting these processes to a high degree of human error. Accordingly, the process of automating these processes will require constant monitoring and potentially adjustments during the phase-in period. We cannot assure you that technological failures will not occur as a result of the ongoing implementation of this new system that could result in distortions and other problems. Inabilities and delays in implementing new systems, as well as the possibility of human failure when dealing with new systems, could affect our ability to realize projected or expected cost savings and improve our controls as anticipated. Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws.

We rely on computer systems to run our business, and face risks from security breaches that could disrupt or damage our internal operations, information technology systems or reputation, and expose us to litigation risk.

We use computers in substantially all aspects of our business operations. We also uses mobile devices, social networking and other online activities to connect with employees and customers. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, hacking, cyber-attack, theft and inadvertent release of information. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ personal information, private information about employees, and our financial and strategic information. Further, as we pursue our strategy to grow through strategic acquisitions in addition to internal growth, our technological presence and corresponding exposure to cybersecurity risk will increase. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks.

Despite the constant monitoring of our technology systems and hiring of specialized third parties to identify and address any vulnerabilities through implementation of multi-tiered network security measures, computer programmers and hackers, or even internal users, may be able to penetrate, create systems disruptions or cause shutdowns of our network security or that of third-party companies with which we have contracted. As a result, we could experience significant disruptions of our operations and incur significant expenses addressing problems created by these breaches. Such unauthorized access could disrupt our business and could result in a loss of revenue or assets and any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth.
 
We may face difficulty consummating future acquisitions and we may become liable for unknown obligations of acquired companies, which may pose significant risks and could have an adverse effect on our operations.

In the past, we have grown through strategic acquisitions in addition to internal growth and may, in the future, engage in acquisitions in order to acquire or develop additional disposal capacity or businesses that are complementary to our core business strategy. We expect that increased consolidation in the solid waste services industry will continue and may reduce the number of attractive acquisition candidates. Even if we identify suitable acquisition candidates, we may nevertheless be unable to negotiate successfully the acquisition at a price or on acceptable terms and conditions, due to limitations imposed by our debt obligations, amongst others. We may have to borrow money or incur liabilities in order to finance any future obligations and may not be able to do so on favorable terms or at all. In addition, we may be unable to obtain the necessary regulatory approvals to complete potential acquisitions. The integration of acquired businesses and other assets may require significant management time and resources that would otherwise be available for the ongoing management of our existing operations.

In addition, it is possible that the operations or sites we have acquired in the past or that we may acquire in the future, have liabilities or risks with respect to former or existing operations or properties, or otherwise, which we have not been able to identify and assess through our due diligence investigations. For example, employee misconduct or a history of improper payments are not always easy to detect as part of the diligence process pre-acquisition and are frequently concealed by counterparties. Accordingly, it is possible that we could later discover that assets acquired by us have conducted business or engaged in activities that are not aligned with our ethical standards and for which we could be responsible. As a successor owner, we may be generally legally responsible for liabilities that arise from the businesses that we acquire. Even if we obtain legally enforceable representations, warranties and indemnities from the sellers of such businesses, we may not cover the liabilities fully or the sellers may not have sufficient funds to perform their obligations, as was the case in some of our past acquisitions. Some environmental liabilities, even if we do not expressly assume them, may be imposed on us under various regulatory schemes and other applicable laws regardless of whether we caused or contributed to any conditions that resulted in such liabilities. In addition, our insurance program may not cover such sites and will not cover liabilities associated with some environmental issues that may have existed prior to attachment of coverage. A successful uninsured claim against us could harm our financial condition or operating results. Furthermore, risks or liabilities of which we are unaware or judges to be not material or remote at the time of acquisition may develop into more serious risks to our business. Any adverse outcome resulting from such risks or liabilities could harm our business, results of operations and financial condition and create negative publicity, which could damage our reputation and competitive position.

We will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on our business, financial condition and results of operations.

We have been recently listed as a public company, which will result in increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur until recently as a private company. The Sarbanes-Oxley Act as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the PCAOB and the securities exchanges, impose additional reporting and other obligations on public companies. Compliance with public company requirements will increase costs and make certain activities more time-consuming. A number of those requirements require us to carry out activities we have not done previously. For example, we have created new board committees and are continuing to adopt new internal controls and disclosure controls and procedures. In addition, additional expenses associated with SEC reporting requirements will be incurred. Furthermore, if any issues in complying with those requirements are identified (for example, if we have material weaknesses or significant deficiencies in our internal control over financial reporting or our disclosure controls and procedures), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our reputation or investor perceptions of us. See also “—We have identified weaknesses in our internal control over financial reporting and our disclosure controls and procedures.” If we are unable to remediate these weaknesses, or if we experience additional weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our securities. It may also be more expensive to obtain director and officer liability insurance. Risks associated with our status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of directors or as executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased costs will require us to divert a significant amount of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by shareholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase costs.
 
Our management has limited experience in operating a public company.

Our executive officers and directors have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage our transition to a public company as a result of the Transaction, which subjects us to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to our management and growth. It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company which will increase our operating costs in future periods.

We may lose certain benefits afforded under Brazilian tax repayment programs if we are unable to comply with the program’s terms, and the program may not fully cover our tax liability in connection with past activities.

In 2017, we elected to participate in certain tax amnesty programs which allowed us to settle certain of our tax debts under administrative or judicial discussion. While these programs did not provide amnesty for penalties or interest, it did allow us to resolve certain of our federal tax debts in installment payments. The program also allowed the partial settlement of tax debts with the use of tax credits and/or the use of tax loss carryforwards. In order to benefit from this program, we were required to waive in advance any defense or rights in relation to administrative disputes involving the tax indebtedness. For additional information regarding our participation in tax amnesty programs, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings and Pending Investigations” and note 17 to our audited financial statements included elsewhere in this annual report.

Despite our participation in these programs, we could be subject to tax audits for subsequent periods, which may lead to additional tax challenges by the relevant authorities on similar claims. In addition, if we are delinquent in our payments under these programs or are otherwise unable to pay as scheduled, we may be barred from participation in these programs.

Risks Related to the Waste Management Regulatory Environment

We are subject to substantial governmental regulation, and failure to comply with these requirements, as well as enforcement actions, could subject us to a shut-down of facilities, fines, penalties and judgments.

We are subject to comprehensive federal, state and, in some cases, municipal laws and regulations in connection with our operations, including environmental and other laws and regulations pertaining to (i) the management (collection, transportation, recycling, storage and disposal) of waste, (ii) atmospheric emissions of pollutants, (iii) water usage and the discharge of effluents into waterways, (iv) licensing requirements, especially relating to our landfill activities, (v) land use requirements, including the protection and preservation of forests, coastlines, caves, watersheds and other features of the ecosystem, (vi) interference into specially protected areas, such as areas of cultural and historical relevance, conservation, preservation and legal reserve areas and their surrounding regions, and (vii) a broad range of occupational health and safety regulations. In addition, under certain circumstances, Brazil’s environmental laws may impose additional costs on licenses for significant impact activities, such as landfills, with proceeds to be destined toward conservation areas.

The Brazilian Constitution grants federal, state and municipal governments the authority to issue environmental protection laws and to publish regulations based on those laws. While the Brazilian federal government has authority to issue environmental regulations setting general standards for environmental protection, state governments have the authority to issue stricter environmental regulations. Municipal governments may only issue regulations regarding matters of local interest or as a supplement to federal or state laws.
 
With respect to environmental licensing, pursuant to Brazilian law, the projects must be licensed by a single entity, at the federal, state or municipal level. There are certain factors that must be taken into consideration to establish the licensing jurisdiction. Nevertheless, as a general rule, IBAMA (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis) is the competent authority for the environmental licensing of undertakings and activities of national interest or capable of causing significant environmental impact in a regionally or internationally, or for activities located in certain protected areas such as indigenous lands or territorial waters, among others. The local environmental entities, are responsible for the licensing of enterprises with a local impact. The state environmental authorities have jurisdiction to conduct the licensing process of for activities whose impacts are restricted to their territory and whose licensing jurisdiction is not assigned to federal or local agencies.

On the federal level, we are subject to IBAMA, which is part of the Brazilian Ministry for the Environment. In the state of São Paulo, the environmental agency is CETESB (Companhia Ambiental do Estado de São Paulo) and in the state of Paraná, the environmental agency is IAP (Instituto Ambiental do Paraná). In addition, in some of the larger municipalities in which we operate there are local regulators that enforce their own rules and licensing procedures. For example, in the city of São Paulo, we are subject to regulation by the Secretary for the Environment (Secretaria do Verde e Meio Ambiente).

Environmental liability may be attributed under civil, administrative and criminal spheres, with the imposition of administrative civil and criminal sanctions, despite the obligation to readdress all the damages caused. As a result, it is important to bear in mind that lack of conviction in one of these spheres does not necessarily exempt the infractor from liability arising from the remaining other matters.

The civil liability for environmental damage can subject us to environmental remediation or payment of indemnification when the environment cannot be restored. Under Federal Law No. 6,938/1981, companies are subject to strict liability for damages caused to the environment, and no statute of limitations applies. Brazilian law also imposes joint and several liability for anyone who, by virtue of a given activity, regardless of fault (intentional or negligent failure to maintain some standard of conduct, when such failure results in harm to something or someone), facilitates or contributes to environmental damage.

Therefore, we could be civilly liable if our operations cause negative impacts on human health or environmental damage to our properties or to the property of third parties, for example, as a result of the contamination of soil, groundwater or surface water, or drinking water. We may be held liable for any environmental damage that our current or former facilities cause. As part of our restructuring activities, we have recently spun-off or sold various assets (for additional information, see “Item 4.A. Information on the Company—History and Development of the Company—Recent Divestments and Acquisitions”), and our liability exposure would extend to these assets as well despite the fact that they are no longer under our control.

Under current Brazilian law, the owners of real property are jointly and severally liable with the party that has caused damage to the environment for the restoration of the environment and/or the payment of indemnification, i.e. we may be responsible for repairing an asset that was environmentally degraded before our acquisition. We may also be liable for any on-site environmental contamination caused by pollutants or hazardous substances related to our or our predecessors’ activities.

In the event any of the risks described above, or any unforeseen risks in relation to our compliance with applicable regulation, materialize, we may need to shut down or reduce operation of our facilities while expensive and time-consuming remedial actions are undertaken. We may be required to spend substantial capital to bring an operation or an asset into compliance, to temporarily or permanently discontinue activities and/or take corrective actions, possibly including the removal of landfilled materials.

In addition, we may also be subject to administrative and criminal sanctions or penalties, pursuant to Federal Law No. 9,605/98 (Environmental Crimes Law), which regulates certain conduct that is considered criminal conduct. According to such law, both corporations and individuals may be subject to criminal liability. Thus, corporations found to be wrongdoers may be subject to (i) partial or total interruption of operations, (ii) temporary suspension of construction work or activity, and (iii) prohibition of contracting with governmental authorities, and obtaining governmental subsidies, incentives or donations. Executive officers, directors, managers and other individuals from companies found to be polluting may be subject to fines, required to render community service or may be imprisoned for up to five years.
 
Moreover, administrative penalties may also be imposed whenever there is a breach of environmental laws, according to Federal Decree No. 6,514/2008, and such penalties include: (i) warnings; (ii) restriction of rights; (iii) suspension or prohibition of installation or development of activities; (iv) prohibition to contract with the government; (v) license suspension; (vi) suspension of financing or tax benefits; and (vii) fines. The fines applicable to polluters or those that do not comply with the legal provisions on waste management range from R$50 to R$50,000,000.

In any of these cases, we may experience negative publicity in addition to liability for environmental remediation. Associated costs with any of these outcomes could be significant to us and impact our results of operations, cash flows and available capital. We may not have sufficient insurance coverage for our environmental liabilities, such coverage may not cover all of the potential liabilities to which we may be subject and we may not be able to obtain insurance coverage in the future at reasonable expense or at all. While we seek to minimize our exposure to such risks through comprehensive training and compliance programs, as well as vehicle and equipment maintenance programs, if we were to incur substantial liabilities in excess of any applicable insurance, our business, results of operations and financial condition could be adversely affected.

In the ordinary course of business, we have in the past, are currently, and may in the future, become involved in legal and administrative proceedings relating to land use and environmental laws and regulations. These include proceedings relating to environmental claims, with noteworthy reference to certain rules established by Brazil’s labor public ministry. The provisions established for the proceedings to which we are party to may be insufficient to cover the total cost resulting from such proceedings, and an adverse outcome of one or more of these proceedings could result in, among other things, material increases in our costs or liabilities as well as material charges for asset impairments.

Future changes in regulations, particularly in relation to our landfill operations, may result in increased liabilities and impose additional compliance costs, which could adversely affect us.

Our operations, particularly our disposal activities, may be adversely affected by changes in governmental laws or regulations, including measures seeking to address global warming or reducing the environmental impact of our operations generally. In particular, legislative changes may result in new or more stringent environmental standards imposed on us which could require additional capital commitments from us, including as a result of the need to modify or replace equipment or facilities. In addition, legislative changes may affect our ability to operate our landfills at full capacity by reclassifying items in the waste stream as hazardous, prohibiting the disposal of certain wastes, impacting the demand for landfill space, or decreasing the tipping fees and prices that we can charge for utilization of landfill space, each of which could increase the costs and decrease the profitability levels associated with the services we provide. Regulatory changes affecting the siting, design and closure of landfills could require us to undertake investigatory or remedial activities, curtail operations or close landfills temporarily or permanently.

With respect to landfill operations, we have significant financial obligations relating to final capping, closure, post-closure and environmental remediation at our existing landfills. We established accruals for these estimated costs, but could underestimate such accruals. Environmental regulatory changes could accelerate or increase capping, closure, post-closure and remediation costs, requiring expenditures to materially exceed our current accruals.

Moreover, our landfill operations produce methane as well as other biogases, which we process at our facilities to emit the greenhouse gases carbon dioxide and carbon monoxide. There are a number of legislative and