UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20152019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                      .

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report

Date of event requiring this shell company report

For the transition period from to .

 

Commission file number: 001-33356

 

GAFISA S.A.

(Exact name of Registrant as specified in its charter)

 

GAFISA S.A.
(Translation of Registrant’s name into English)

 

The Federative Republic of Brazil
(Jurisdiction of incorporation or organization)

 

Av. Nações UnidasPres. Juscelino Kubitschek, No. 8,501, 19th1830, Block 2, 3rd Floor
05425-07004543-900 – São Paulo, SP – Brazil|Brazil
phone: + 55 (11) 3025-9000
fax: + 55 (11) 3025-9348
e mail: ri@gafisa.com
Attn: Andre BergsteinIan Andrade – Chief Financial Officer and Investor Relations Officer
(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

None

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:

Title of each class

Name of each exchange on which registered

Common Shares, without par value*New York Stock ExchangeN/A

 

* Traded only in the form of American Depositary Shares (as evidenced by American Depositary Receipts), each representing two common shares which are registered under the Securities Act of 1933.

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.

 

The number of outstanding shares as of December 31, 20152019 was:

 

Title of Class

Number of Shares Outstanding

Common Stock378,066,162*120,000,000*

 

*Includes 10,584,7562,981,052 common shares that are held in treasury.

 

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

 

Yes No

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

Yes ☐ No ☒

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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

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

Yes ☐ No ☐

 

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

 

Large Accelerated Filer  Accelerated Filer  Non-accelerated Filer  

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 whether an internal control over financial reporting auditor attestation is included in the filing:

Yes No ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:annual report:

 

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.

 

Item 17 Item 18

☐ 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

Yes ☐    No ☒

 

table(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of contentsthe Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes   No

 

 

Table of Contents

TABLE OF CONTENTS

Page

 

INTRODUCTION1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS3
PART I4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE4
ITEM 3. KEY INFORMATION4
ITEM 4. INFORMATION ON THE COMPANY2322
ITEM 4A. UNRESOLVED STAFF COMMENTS5754
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS5754
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES9480
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS11091
ITEM 8. FINANCIAL INFORMATION11192
ITEM 9. THE OFFER AND LISTING11899
ITEM 10. ADDITIONAL INFORMATION122103
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK144126
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES146127
PART II147129
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES147129
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS147129
ITEM 15. CONTROLS AND PROCEDURES147129
ITEM 16. RESERVED148131
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT148131
ITEM 16B. CODE OF BUSINESS CONDUCT AND ETHICS148132
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES149132
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES150133
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS150133
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT150133
ITEM 16G. CORPORATE GOVERNANCE150133
ITEM 16H. MINE SAFETY DISCLOSURE150133
PART III151133
ITEM 17. FINANCIAL STATEMENTS151133
ITEM 18. FINANCIAL STATEMENTS151133
ITEM 19. EXHIBITS151133

Table of Contents

Table of Contents

INTRODUCTION

 

In this annual report, references to “Gafisa,” “we,” “our,” “us,” “our company” and “the Company” are to Gafisa S.A. and its consolidated subsidiaries (unless the context otherwise requires). In addition, the term “Brazil” refers to the Federative Republic of Brazil, and the phrase “Brazilian government” refers to the federal government of Brazil. All references to “real,” “reais” or “R$” are to the Brazilianreal, the official currency of Brazil, and all references to “U.S. dollar,” “U.S. dollars” or “US$” are to U.S. dollars, the official currency of the United States. References to “Brazilian GAAP” or “BR GAAP” are to accounting practices adopted in Brazil and references to “U.S. GAAP” are to generally accepted accounting principles in the United States. Any reference to “financial statement” is related to our consolidated financial statements.

 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

Financial Information

 

We maintain our books and records inreais. Our audited financial statements were prepared in accordance with Brazilian GAAP and are presented in thousands of reais, which are based on:

 

·Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97, Brazilian Law No. 10,303/01, Brazilian Law No. 11,638/07, Brazilian Law No. 12,431/11 and Brazilian Law No. 12,973/14, which we refer to hereinafter as “Brazilian corporate law;”

 

·the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the “CVM;” and

 

·the accounting standards issued by the Brazilian Federal Accounting Council (Conselho Federal de Contabilidade), or the “CFC”, and the Accounting Standards Committee (Comitê de Pronunciamentos Contábeis), or the “CPC.”

 

Brazilian corporate law was amended by Law No. 11,638, dated December 28, 2007, in order to facilitate the convergence of Brazilian GAAP with International Financial Reporting Standards, or “IFRS,” and thereafter, the CPC issued new accounting standards that generally converged Brazilian GAAP with IFRS.IFRS, except for revenue recognition related to real estate transactions.

 

In preparing our financial statements, we have applied: (1) Guideline OCPC 04Circular Letter/CVM/SNC/SEP 02/2018 regarding the application of Technical Pronouncement CPC 47Application of the Technical Interpretation of ICPC 02 to the Brazilian Real Estate Development Entities – regarding revenue recognition, and the respective costs and expenses arisingRevenue from real estate development operations over the course of the construction period (percentage of completion method)contracts with customers (IFRS 15), and (2) CPC 37 (R1), which requires that an entity develops accounting policies based on the standards and interpretations of the CPC. We have adopted all pronouncements, guidelines and interpretations of the CPC issued through December 31, 2015.2018. As a result, our financial statements are prepared in accordance with Brazilian GAAP, which allows revenue recognition on a percentage of completion basis for construction companies (i.e., revenue is recorded in accordance with the percentage of financial evolution of the construction project), and are therefore not compliant with IFRS as issued by the International Accounting Standards Board (“IASB”), which require revenue recognition on a delivery basis (i.e., revenue is recorded upon transferring the ownership risks and benefits to the purchaser of real estate, usually after the construction is completed and the unit is delivered).control.

 

Brazilian GAAP differs in significant respects from U.S. GAAP. The notes to our financial statements included elsewhere in this annual report contain a reconciliation of equity and net income (loss) from Brazilian GAAP to U.S. GAAP. Unless otherwise indicated, all financial information of our company included in this annual report is derived from our Brazilian GAAP financial statements.

 

Our consolidated financial statements reflect statement of operations and balance sheet information for all of our subsidiaries, and also separately disclose the interest of non-controlling shareholders.

 

As set forthexplained in “Item 4. Information onNote 8.2 to our consolidated financial statements for the Company—A.History and Developmentyear ended December 31, 2019, the results of the Company”, on December 9, 2013, we completed the saleoperations of a controlling stake in Alphaville Urbanismo S.A., or “Alphaville”, the leading residential community development company in Brazil. The transaction involved the sale of 50% interest by Gafisa and 20% interest by our subsidiary Construtora Tenda S.A., or “Tenda”, with Gafisa retaining“Tenda,” have been presented as discontinued operations under Brazilian GAAP in the remaining 30%Company’s 2018, 2017, 2016 and 2015 consolidated statements of Alphaville capital stock. As a result, since November 30, 2013, Alphavilleoperations. Under Brazilian GAAP, previous period balance sheet information is no longer consolidated innot retrospectively adjusted. Additionally, earnings per share amounts have been adjusted retroactively to reflect the reverse split of our common shares at the ratio of 13.483023074 to 1, which was consummated on March 23, 2017.

 

1 

Table of Contents 

financial statementsAdditionally, as of December 31, 2018, for comparability purposes, our statement of profit or loss for the Company. In this annual report, while financial information relatedyear ended December 31, 2017 and 2016 has been adjusted to Alphaville is treated as discontinued operations, all operating information related to our business includes full operating information for Alphaville through December 9, 2013.

Effective January 1, 2013,consider changes in accounting practice derived from the adoption of CPC 48 – Financial Instruments (IFRS 9) and applicable retrospectively toCPC 47 – Revenue from Contracts with Customers (IFRS 15). As required by CPC 23 – Accounting Policies, Changes in Accounting Estimates and Errors, the comparative periodsretrospective effects of 2012 and 2011, with the adoption of CPCs 19 (R2) (or IFRS 11)47 and 36 (R3) (or IFRS 10), the proportional consolidation method for investments in jointly-controlled investees, which was previously applied by the Company, is no longer allowed under Brazilian GAAP. Consequently, our jointly controlled investments48 are now accounted for by the equity method.  In accordance with the transition provisions provided by these new accounting standards, we were not required to retrospectively restate our 2010 and 2009 Brazilian GAAP consolidated financial statements. While our financial statements and the financial information presented in this annual report have been restated to apply this change retrospectively to the comparative periods of December 31, 2012 and 2011, the operating information presented in this annual report has not been restated and reflects our percentage interest in such jointly-controlled investeesdemonstrated as management believes it provides a better view of our operating performance.follows:

 

For the Year ended December 31, 

For the Year ended December 31, 

 

2017 

2016 

 

Balances originally reported as of 12/31/2017 

Impact from applying CPCs 47 and 48 

Balances restated after reclassification 

Balances originally reported as of 12/31/2016 

Impact from applying CPCs 47 and 48 

Balances restated after reclassification 

Statement of profit or loss      
Net operating revenue608,823177,351786,174915,6987,483923,181
Operating costs(818,751)(87,735)(906,486)(1,029,213)15,403(1,013,810)
Operating (expenses) income(654,216)(654,216)(362,747)-(362,747)
Financial income (expenses)(107,268)(107,268)(25,679)-(25,679)
Income tax and social contribution23,10023,100(100,080)-(100,080)
Non-controlling interests(281)(281)1,871-1,871
Profit or loss of discontinued operations

98,175 

— 

98,175 

(559,704) 

(559,704) 

Net income (loss) for the year

(849,856) 

89,616 

(760,240) 

(1,163,596) 

22,886 

(1,140,710) 

 

Market Information

 

Certain industry, demographic, market and competitive data, including market forecasts, used in this annual report were obtained from internal surveys, market research, publicly available information and industry publications. We have made these statements on the basis of information from third-party sources that we believe are reliable, such as the Brazilian Property Studies Company (Empresa Brasileira de Estudos de Patrimônio), or “EMBRAESP,” the Association of Managers of Real Estate Companies (Associação de Dirigentes de Empresas do Mercado Imobiliário), or “ADEMI,” the Getulio Vargas Foundation (Fundaçao Getulio Vargas), or “FGV,” the National Bank of Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social), or “BNDES,” the Real Estate Companies’ Union (Sindicato das Empresas de Compra, Venda, Locação e Administração de Imóveis Residenciais e Comerciais), or “SECOVI,” the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or “IBGE”“IBGE,” and the Brazilian Central Bank (Banco Central do Brasil), or the “Central Bank,” among others. Industry and government publications, including those referenced here, generally state that the information presented therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Although we have no reason to believe that any of this information or these reports are inaccurate in any material respect, such information has not been independently verified by us. Accordingly, we do not make any representation as to the accuracy of such information.

 

Rounding and Other Information

 

Some percentages and certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables in this annual report may not be an arithmetic aggregation of the figures that precede them.

 

In this annual report, all references to “contracted sales” are to the aggregate amount of sales resulting from all agreements for the sale of units (including residential communities and land subdivisions) entered into during a certain period, including new units and units in inventory. Further, in this annual report we use the term “value of launches” as a measure of our performance. Value of launches is not a GAAP measurement. Value of launches, as used in this annual report, is calculated by multiplying the total numbers of units in a real estate development by the average unit sales price.

 

All references to “potential sales value” are to our estimates of the total amount obtained or that can be obtained from the sale of all launched units of a certain real estate development, calculated by multiplying the number of units in a development by the sale price of the unit. Investors should be aware that our potential sales value may not be realized or may significantly differ from the amount of contracted sales, since the total number of units actually sold may be lower than the number of units launched and/or the contracted sales price of each unit may be lower than the launching price.

 

In addition, we present information in square meters in this annual report. One square meter is equal to approximately 10.76 square feet.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this annual report in relation to our plans, forecasts, expectations regarding future events, strategies, and projections, are forward-looking statements which involve risks and uncertainties and which are therefore not guarantees of future results.results, including as a result of any impact from the COVID-19 pandemic. Our estimates and forward-looking statements are mainly based on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:

 

·changes in overall economic conditions, including employment levels, population growth and consumer confidence;

 

·changes in real estate market prices and demand, estimated budgeted costs and the preferences and financial condition of our customers;

 

·demographic factors and available income;

 

·any impacts from the COVID-19 pandemic;

·our ability to repay our indebtedness and comply with our financial obligations;

 

·our ability to arrange financing and implement our expansion plan;

 

·our ability to compete and conduct our businesses in the future;

 

·changes in our business;

 

·inflation and interest rate fluctuations;

 

·changes in the laws and regulations applicable to the real estate market;

 

·government interventions, resulting in changes in the economy, taxes, rates or regulatory environment;

 

·other factors that may affect our business, market share, financial condition, liquidity and results of our operations; and

 

·other risk factors discussed under “Item 3. Key Information—D. Risk Factors.”

 

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive of, but not limited to, the factors mentioned above.

 

PART I

 

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 data for 2015, 2014, 2013, 20122019, 2018, 2017, 2016 and 20112015 has been derived from our audited consolidated financial statements presented herein. The consolidated financial statements presented herein for the years ended 2017 and 2016 have been retrospectively adjusted to reflect the adoption of the new accounting pronouncements CPCs 47 (IFRS 15), CPC 48 (IFRS 9) and ASC 606, as explained in Notes 3 and 33 to our consolidated financial statements for the year ended December 31, 2018. The aforementioned retrospective adjustments (2017 and 2016) were audited by BDO and, therefore, KPMG audit report makes reference to the consolidated financial statements before those adjustments. The following selected financial data for 2019, 2018, 2017, 2016 and 2015 are derived from these audited consolidated financial statements presented herein.

Our financial statements are prepared in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. For a discussion of the significant differences relating to these consolidated financial statements and a reconciliation of net income (loss) and equity from Brazilian GAAP to U.S. GAAP, see the notes to our consolidated financial statements included elsewhere in this annual report. See also “Presentation of Financial and Other Information.”

 

This financial information should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report.

 

As explained in Note 8.2 to our consolidated financial statements for the years ended December 31, 2019 and December 31, 2018, Notes 1 and 8.2 to our consolidated financial statements for the year ended December 31, 2017 and Notes 2.3 and 8.2 to our consolidated financial statements for the year ended December 31, 2016, the results of operations of Tenda have been presented as discontinued operations under Brazilian GAAP in the Company’s 2017, 2016 and 2015 consolidated statements of operations. Additionally, earnings per share amounts have been adjusted retroactively to reflect the reverse split of our common shares at the ratio of 13.483023074 to 1, which was consummated on March 23, 2017.

The following table sets forth financial information as of and for the years ended December 31, 2015, 2014, 2013, 20122019, 2018, 2017, 2016 and 2011,2015, which has been prepared in accordance with Brazilian GAAP in effect as of December 31, 2015.2019. Certain information below is presented in accordance with U.S. GAAP.

 

  As of and for the year ended December 31,
  2015 2014 2013 2012 2011
           
  (in thousands, except per share, per ADS and operating data)
Consolidated Statement of Operations Data:          
Brazilian GAAP:          
Net operating revenue  2,294,319   2,150,998   2,481,211   2,805,086   1,846,902 
Operating costs  (1,667,505)  (1,609,246)  (1,863,766   (2,276,804)  (1,927,874)
Gross profit (loss)  626,814   541,752   617,445   528,282   (80,972)
Operating expenses, net  (510,528)  (561,284)  (215,574)  (609,604)  (719,232)
Financial expenses, net  (38,127)  (8,918)  (162,503)  (180,263)  (166,728)
Income (loss) before income tax and social contribution  78,159   (28,450)  239,368   (261,585)  (966,932)
Income tax and social contribution  (7,180)  (15,275)  (2,812)  (20,222)  (105,850)
Net income (loss) from continuing operations  70,979   (43,725)  236,556   (281,807)  (1,072,782)
Net income from discontinued operations .        631,122   204,128   167,759 
Net income (loss) for the year attributable to non-controlling interest  (3,470)  (1,176)  235   49,364   39,845 
Net income (loss) for the year attributable to owners of Gafisa  

R$ 74,449

   

R$ (42,549)

   

R$ 867,443

   

R$ (127,043)

   

R$ (944,868)

 
Share and ADS data:                    
Per common share data—R$ per share:                    
Earnings (loss) per weighted average number of shares—Basic  0.2025   (0.1059)  2.0348   (0.2939)  (2.1893)
     From continuing operations  0.2025   (0.1059)  0.7358   (0.6717)  (2.5003)
     From discontinued operations .        1.2990   0.3778   0.3110 
Earnings (loss) per weighted average number of shares —Diluted  0.2012   (0.1059)  2.0226   (0.2939)  (2.1893)
     From continuing operations  0.2012   (0.1059)  0.7315   (0.6717)  (2.5003)
     From discontinued operations        1.2911   0.3778   0.3110 
Weighted average number of shares outstanding—in thousands  367,572   401,905   426,300   432,246   431,586 
Dividends and interest on shareholders’ equity declared—in thousands of reais  17,682      163,112       
Earnings (loss) per share—R$ per share  0.2026   (0.1125)  2.0829   (0.2937)  (2.1867)
Number of common shares outstanding as at end of period—in thousands*  367,481   378,185   416,460   432,630   432,099 
Earnings (loss) per ADS—R$ per ADS(1)  0.4052   (0.2250)  4.1658   (0.5873)  (4.3734)

  As of and for the year ended December 31,
  2019(4)(5) 2018(4)(5) 2017(4)(5) 2016(4)(5) 2015(4)
  (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Consolidated Statement of Operations Data:          
Brazilian GAAP:          
Net operating revenue  400,465   960,891   786,174   923,181   1,443,357 
Operating costs  (282,684)  (846,169)  (906,486)  (1,013,810)  (1,061,921)
Gross profit (loss)  117,781   114,722   (120,312)  (90,629)  381,436 
Operating expenses, net  (119,833)  (477,228)  (654,216)  (362,747)  (295,595)
Financial expenses, net  (59,624)  (80,521)  (107,268)  (25,679)  (50,422)
Income (loss) before income tax and social contribution  (61,676)  (443,027)  (881,796)  (479,055)  35,419 
Income tax and social contribution  35,275   21,751   23,100   (100,080)  (658)
Net income (loss) from continuing operations  (26,401)  (421,276)  (858,696)  (579,135)  34,761 
Net income (loss) from discontinued operations .  —     —     98,175   (559,704)  36,218 
Net income (loss) for the year attributable to non-controlling interest  (361)  (1,750)  (281)  1,871   (3,470)
Net income (loss) for the year attributable to owners of Gafisa R$

(26,040

) R$

(419,526) 

  R$

(760,240) 

  R$

(1,140,710) 

  R$

74,449 

 
Share and ADS data(1):                    

 

  As of and for the year ended December 31,
  2015 2014 2013 2012 2011
           
  (in thousands, except per share, per ADS and operating data)
U.S. GAAP:          
Net operating revenue  2,351,528   2,446,548   2,565,988   3,930,729   3,250,227 
Operating costs  (1,732,113)  (1,819,612)  (1,955,158)  (3,008,345)  (2,743,144)
Gross profit  619,411   626,936   570,830   922,384   507,083 
Operating expenses, net  (552,606)  (551,800)  (202,025)  (859,657)  (862,975)
Financial expenses, net  (40,702)  (31,924)  (187,298)  (191,414)  (97,370)
Income from disposal on controlling interests        1,228,429       
Income (loss) before income tax and social contribution and income from equity method investments  26,103   43,212   1,409,936   (128,687)  (453,262)
Income tax and social contribution  (32,408)  (20,339)  (52,211)  (68,733)  (334,410)
Equity pick-up  (6,871)  17,361   (21,795)  108,265   59,687 
Net income (loss) for the year  (13,176)  40,234   1,335,930   (89,155)  (727,985)
Net income (loss) attributable to non-controlling interests  (3,092)  (2,071)  13,462   32,048   27,784 
Net income (loss) attributable to owners of Gafisa  (10,084)  42,305   1,322,468   (121,203)  (755,769)
Per share and ADS data:                    
Per common share data—R$ per weighted average number of shares:                    
Earnings (loss) per weighted average number of shares—Basic  (0.0274)  0.1053   3.1022   (0.2804)  (1.7511)
Earnings (loss) per weighted average number of shares—Diluted  (0.0274)  0.1053   3.0835   (0.2804)  (1.7511)
Weighted average number of shares outstanding — in thousands  367,572   401,905   426,300   432,246   431,586 
Dividends declared and interest on equity  17,682      163,112       
Per ADS data—R$ per ADS(1):                    
Profit (loss) per ADS —Basic(1)  (0.0548)  0.2106   6.2044   (0.5608)  (3.5023)
Profit (loss) per ADS —Diluted(1)  (0.0548)  0.2106   6.1670   (0.5608)  (3.5023)
Weighted average number of ADSs outstanding—in thousands  183,786   200,548   213,150   216,123   215,793 
Dividends and interest on equity declared  17,682      163,112       
Consolidated Balance Sheet Data:                    
Brazilian GAAP:                    
Cash, cash equivalents and short-term investments  712,311   1,157,254   2,024,163   1,567,755   858,351 
Current and non-current properties for sale  2,630,617   2,512,342   2,094,414   2,166,424   2,463,374 
Working capital(2)  2,267,795   2,420,342   2,996,884   3,764,756   1,848,311 
Total assets  6,760,332   7,205,852   8,183,030   8,712,569   9,164,783 
Total debt(3)  2,150,793   2,586,524   3,059,528   3,640,437   3,437,929 
Total equity  3,097,236   3,058,403   3,214,483   2,685,829   2,743,576 
U.S. GAAP:                    
Cash and cash equivalents, short-term investments and restricted short-term investments  712,311   1,157,254   2,024,163   1,566,042   858,351 
Current and non-current properties for sale  3,130,051   3,023,765   2,816,204   3,260,711   3,847,858 
Working capital(2)  2,143,641   2,295,951   2,755,836   3,419,171   3,353,108 
Total assets  6,693,116   7,233,212   8,477,587   8,694,612   8,861,145 
Total debt(3)  2,155,061   2,594,624   3,067,703   3,642,920   3,444,478 
Total Gafisa equity  2,702,234   2,747,532   2,799,171   1,619,276   1,719,948 
Equity of non-controlling interests  2,648   3,339   23,074   53,222   21,174 
Total equity  2,704,882   2,750,871   2,822,245   1,672,498   1,741,122 
Consolidated cash flow provided by (used in):                    
Brazilian GAAP                    
Operating activities  91,748   41,891   297,652   644,288   (790,145)
Investing activities  361,466   751,953   53,464   (287,960)  (31,641)
Financing activities  (480,469)  (899,143)  (568,124)  162,080   634,952 
Operating data (7)(8):                    
Number of new developments  41   23   37   35   49 
Potential sales value(4)  2,085,257   1,636,311   2,886,204   2,951,961   3,526,298 
Number of units launched(5)  10,089   6,104   11,072   8,947   12,224 
Launched usable area (m2)(6)  428,257   326,421   2,893,541   3,153,251   2,250,725 
Units sold  8,892   4,294   10,187   7,157   9,844 

  As of and for the year ended December 31,
  2019(4)(5) 2018(4)(5) 2017(4)(5) 2016(4)(5) 2015(4)
  (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Per common share data—R$ per share:          
Earnings (loss) per weighted average number of shares—Basic  (0.3800)  (10.1960)  (28.2710)  (42.3720)  2.7309 
From continuing operations  (0.3800)  (10.1960)  (31.9220)  (21.5124)  1.6187 
From discontinued operations .  —     —     3.6509   (20.7906)  1.1122 
Earnings (loss) per weighted average number of shares —Diluted  (0.3800)  (10.1960)  (28.2710)  (42.3720)  2.7123 
From continuing operations  (0.3800)  (10.1960)  (31.9220)  (21.5124)  1.6077 
From discontinued operations  —     —     3.6509   (20.7906)  1.1046 
Weighted average number of shares outstanding—in thousands  68,584   41,147   26,891   26,921   27,262 
Dividends and interest on shareholders’ equity declared—in thousands of reais  —     —     —     —     17,682 
Earnings (loss) per share—R$ per share  (0.3800)  (10.1960)  (28.2710)  (42.3720)  2.7316 
Number of common shares outstanding as at end of period—in thousands*  117,019   39,784   27,102   26,779   27,255 
Earnings (loss) per ADS—R$ per ADS(1)  (0.7590)  (20.3920)  (56.5420)  (84.7440)  5.4631 
U.S. GAAP:                    
Net operating revenue  386,209   818,064   1,103,212   1,880,564   1,464,591 
Operating costs  (302,772)  (736,614)  (1,109,322)  (1,544,794)  (1,072,817)
Gross profit (loss)  83,437   81,450   (6,110)  335,770   391,774 
Operating expenses, net  (114,827)  (461,746)  (449,353)  (309,443)  (335,369)
Financial expenses, net  (56,828)  (80,568)  (107,023)  (25,679)  (52,923)
Income from disposal on controlling interests  —     —     —     —     —   
Income (loss) before income tax and social contribution and income from equity method investments  (88,218)  (460,864)  (562,486)  648   3,482 
Income tax and social contribution  35,305   20,343   52,493   49,041   (27,242)
Equity pick-up  (8,137)  (13,847)  (176,917)  (55,407)  (14,430)
Net income (loss) from continuing operations  (61,050)  (454,368)  (686,910)  (5,718)  (38,190)
Net income (loss) from discontinued operations  —     —     64,796   (506,185)  25,014 
Net income (loss) for the year  (61,050)  (454,368)  (622,114)  (511,903)  (13,176)
Net income (loss) attributable to non-controlling interests  (361)  (1,750)  (281)  2,214   (3,092)
Net income (loss) attributable to owners of Gafisa  (60,689)  (452,618)  (621,833)  (514,117)  (10,084)
Per share and ADS data(1):                    
Per common share data—R$ per weighted average number of shares:                    
Earnings (loss) per weighted average number of shares—Basic  (0.8849)  (11.0000)  (23.1242)  (19.0972)  (0.3699)
Earnings (loss) per weighted average number of shares—Diluted  (0.8849)  (11.0000)  (23.1242)  (19.0972)  (0.3699)
Weighted average number of shares outstanding — in thousands  52,299   41,147   26,891   26,921   27,262 
Dividends declared and interest on equity  —     —     —     —     17,682 
Per ADS data—R$ per ADS(1):                    
Profit (loss) per ADS —Basic(1)  (1,7698)  (22.0000)  (46.2484)  (38.1945)  (0.7398)
Profit (loss) per ADS —Diluted(1)  (1,7698)  (22.0000)  (46.2484)  (38.1945)  (0.7398)
Weighted average number of ADSs outstanding—in thousands  26,149   20,574   13,446   13,461   13,631 
Dividends and interest on equity declared  —     —     —     —     17,682 
Consolidated Balance Sheet Data:
                    
Brazilian GAAP:                    

 

  As of and for the year ended December 31,
  2019(4)(5) 2018(4)(5) 2017(4)(5) 2016(4)(5) 2015(4)
  (in thousands of reais, except per share, per American Depositary Shares (“ADS”) and operating data)
Cash, cash equivalents and short-term investments  414,330   137,160   147,462   253,180   712,311 
Current and non-current properties for sale  1,078,306   1,089,401   1,330,083   1,911,530   2,630,617 
Working capital(2)  556,984   656,796   474,904   990,699   2,267,795 
Total assets  2,540,049   2,526,280   2,876,360   5,095,118   6,760,332 
Total debt(3)  730,687   889,413   1,104,898   1,637,568   2,150,793 
Total Gafisa equity  881,410   491,317   711,222   1,794,374   3,095,491 
Equity of non-controlling interests  1,435   1,874   3,847   2,128   1,745 
Total equity  882,845   493,191   715,069   1,796,502   3,097,236 
U.S. GAAP:                    
Cash and cash equivalents, short-term investments and restricted short-term investments  414,330   137,160   147,462   253,180   478,037 
Current and non-current properties for sale  1,937,601   1,989,044   2,056,430   2,892,690   2,219,226 
Working capital(2)  371,297   538,971   438,467   989,868   2,389,212 
Total assets  2,921,727   2,907,168   3,193,196   5,469,243   6,688,848 
Total debt(3)  730,678   889,413   1,104,898   1,637,568   1,902,463 
Total Gafisa equity  593,988   238,544   491,538   1,436,283   2,702,234 
Equity of non-controlling interests  1,435   1,874   3,847   1,710   2,648 
Total equity  595,423   240,418   495,395   1,437,993   2,704,882 
Consolidated cash flow provided by (used in):                    
Brazilian GAAP                    
Operating activities  44,019   31,450   206,865   269,666   104,563 
Investing activities  (300,620)  (3,061)  445,448   162,455   384,664 
Financing activities  236,732   (24,612)  (528,609)  (456,813)  (516,842)

_______________________________________

* Common shares held in Treasury are not included.

 

(1)Earnings (loss) per ADS is calculated based on each ADS representing two common shares. On March 23, 2017, we consummated a reverse split of our common shares at the ratio of 13.483023074 to 1, decreasing the number of our total common shares from 378,066,162 common shares to 28,040,162 common shares. All Brazilian GAAP and U.S. GAAP information relating to the number of shares and ADSs has been adjusted retroactively for the periods ended December 31, 2016 and 2015 to reflect the reverse split of our common shares.

 

(2)Working capital equals current assets less current liabilities.

 

(3)Total debt comprises current and non-current portion of loans and financings and debentures.

 

(4)Potential sales value is calculated by multiplying the number of units in a development by the sales price of the unit.

(5)The units delivered in exchange for land pursuant to swap agreements are not included.

(6)One square meter is equal to approximately 10.76 square feet.

(7)As explained in Note 8.2 to our consolidated financial statements for the years ended December 31, 2013,2019 and December 31, 2018, Notes 1 and 8.2 to our consolidated financial statements for the year ended December 31, 2017 and Notes 2.3 and 8.2 to our consolidated financial statements for the year ended December 31, 2016, the results of operations of AlphavilleTenda have been presented as discontinued operations under Brazilian GAAP and U.S. GAAP in the Company’s 2013 and 2012 consolidated statements of operations given its disposal during 2013.operations. Under Brazilian GAAP, previous period balance sheet information is not retrospectively adjusted. Brazilian GAAP selectedreclassified.

(5)As explained in Note 3 to our consolidated statement of operations financial datastatements for the year ended December 31, 2011 has also been2018, under Brazilian GAAP, we have adopted CPC 48 – Financial Instruments (IFRS 9) and CPC 47 – Revenue from Contracts with Customers (IFRS 15) retrospectively adjusted to also reflect discontinued operations for comparability purposes. Previously reportedfrom January 1, 2016. Under U.S. GAAP, selectedwe have adopted ASUs Topic 606 – Revenue from Contracts with Customers retrospectively from January 1, 2016. The consolidated financial information is not impacted by this matter as Alphaville is reflected as a component of continuing operationsand for all periods presented, given the Company’s significant continuing involvement in those operations via its 30% retained ownership interest.

(8)Whileyears ended December 31, 2015 has been derived from our historical financial statements but was not restated for the retrospective application of IFRS 9 and the financial information presented in this annual report have been restatedIFRS 15, for Brazilian GAAP purposes, and Topic 606 for U.S. GAAP purposes, due to apply this change retrospectively to the comparative periods of December 31, 2012 and 2011, the operating information presented in this annual report has not been restated and reflects our percentage interest in such jointly-controlled investees as management believes it provides a better view of our operating performance.unreasonable effort or expense.

 

Exchange Rates

 

All transactions involving foreign currency in the Brazilian market, whether carried out by investors resident or domiciled in Brazil or investors resident or domiciled abroad, must now be conducted on the consolidated exchange market through institutions authorized by the Central Bank and subject to the rules of the Central Bank.

 

The Central Bank has allowed thereal to float freely against the U.S. dollar since January 15, 1999. Since the beginning of 2001, the Brazilian exchange market has been increasingly volatile, and, until early 2003, the value of thereal declined relative to the U.S. dollar, primarily due to financial and political instability in Brazil and Argentina. According to the Central Bank, in 2005, 2006 and 2007, however, the period-end value of thereal appreciated in relation to the U.S. dollar 13.4%, 9.5% and 20.7%, respectively. In 2008, the period-end value of thereal depreciated in relation to the U.S. dollar by 24.2%. In 2009 and 2010, the period-end value of thereal appreciated in relation to the U.S. dollar by 34.2% and 4.3%. In 2011, thereal depreciated against the U.S. dollar by 11.2%. In 2013 and 2012, thereal depreciated by 13.2% and 8.9% against the U.S. dollar, respectively. On December 31, 2012, the period-endreal/U.S. dollar exchange rate was R$2.0435 per U.S. $1.00, and on December 31, 2013 it was R$2.3420 per U.S.$1.00. In 2014, the period-end value of thereal depreciated in relation to the U.S. dollar by 13.4%. On December 31, 2014, the period-end

real/U.S. dollar exchange rate was R$2.6562 per U.S. $1.00.$1.00. In 2015, the period-end value of thereal depreciated in relation to the U.S. dollar by 47.0%. On December 31, 2015, the period-endreal/U.S. dollar exchange rate was R$3.9048 per U.S. $1.00.$1.00. On December 31, 2016, the period-endreal/U.S. dollar exchange rate was R$3.2591 per U.S.$1.00. On December 31, 2017, the period-endreal/U.S. dollar exchange rate was R$3.308 per U.S.$1.00. On December 31, 2018, the period-endreal/U.S. dollar exchange rate was R$3.875 per U.S.$1.00. On December 31, 2019, the period-endreal/U.S. dollar exchange rate was R$4.031 per U.S.$1.00. Although the Central Bank has intervened occasionally to control unstable movements in the foreign exchange rates, the exchange market may continue to be volatile as a result of this instability or other factors, and, therefore, thereal may substantially decline or appreciate in value in relation to the U.S. dollar in the future.

 

The following table shows the selling rate, expressed inreais per U.S. dollar (R$/US$), for the periods and dates indicated.

 

  Period-end Average for period(1) Low High
  (per U.S. dollar)
Year Ended:        
December 31, 2011   1.876   1.718   1.535   1.902 
December 31, 2012   2.044   1.907   1.702   2.112 
December 31, 2013   2.342   2.199   1.925   2.445 
December 31, 2014   2.656   2.469   2.197   2.740 
December 31, 2015   3.905   3.385   2.575   4.195 
Month Ended:                 
October 2015   3.859   3.870   3.739   4.001 
November 2015   3.851   3.776   3.701   3.851 
December 2015   3.905   3.865   3.748   3.983 
January 2016   4.043   4.071   3.986   4.156 
February 2016   3.980   3.957   3.865   4.049 
March 2016   3.559   3.775   3.559   3.991 
April 2016 (through April 26, 2016)   3.530   3.602   3.513   3.692 
    

Year 

Period-end 

Average(1) 

Low 

High 

20153.9053.3392.5754.195
20163.2593.4833.1194.156
20173.3083.1933.0513.381
20183.8753.6563.1394.188
20194.0313.9463.6524.260

Month 

Period-end 

Average(2) 

Low 

High 

December 20194.0314.1104.0314.226
January 20204.2704.1494.0214.270
February 20204.4994.3414.2384.499
March 20205.1994.8844.4885.199
April 20205.4275.3265.0785.651
May 20205.4265.6435.2995.937
June 2020 (through June 19, 2020)5.3475.1274.8895.364

_________________

Source: Central Bank.

(1)AverageRepresents the average of the lowest and highestexchange rates inon the periods presented.closing of each day during the year.

(2)Represents the average of the exchange rates on the closing of each day during the month.

 

Source: Central Bank.

On April 26, 2016,June 19, 2020, the selling rate was R$3.5305.347 to US$1.00. Thereal/dollar exchange rate fluctuates and, therefore, the selling rate at April 26, 2016June 19, 2020, may not be indicative of future exchange rates.

 

Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989, and early 1990, for example, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Federal Government directives. There can be no assurance that similar measures will not be taken by the Federal Government in the future.

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

This section is intended to be a summary of the more detailed discussion included elsewhere in this annual report. Our business, results of operations, financial condition or prospects could be adversely affected if any of these risks occurs, and as a result, the trading price of our common shares and ADSs could decline. The risks described below are those known to us and those that we currently believe may materially affect us.

 

Risks Relating to Our Business and to the Brazilian Real Estate Industry

 

Our business, results of operations, financial condition and the market price of our common shares or the ADSs may be adversely affected by weaknesses in general economic, real estate and other conditions.

 

The residential homebuilding and land development industry is cyclical and is significantly affected by changes in general and local economic conditions, such as:

 

·employment levels;

 

·population growth;

 

·consumer demand, confidence, stability of income levels and interest rates;

 

·availability of financing for land home site acquisitions and the availability of construction and permanent mortgages;

 

·inventory levels of both new and existing homes;

 

·supply of rental properties; and

 

·conditions in the housing resale market.

 

Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by us can fluctuate significantly as a result of changing economic and real estate market conditions. If there are significant adverse changes in economic or real estate market conditions, we will have to sell homes at a loss or hold land in inventory longer than planned.

 

For example, in 2008, the global financial crisis adversely impacted Brazil’s gross domestic product, or “GDP,” resulting in a decrease in both the number of developments launched and the rate of sales of our units. DuringSince 2014, and 2015, weakening economic conditions and political instability in Brazil, leading to an increasefluctuations in interest rates higherand inflation and an increase in levels of unemployment, among other factors, had an adverse impact on the real estate market, including a decrease in the levelvolume of launches in the Gafisa segmentlaunches and a sharp decrease in the overall volume of real estate launches in Brazil. Worldwide financial market volatility may also adversely impact government plans for the Brazilian real estate industry, which may have a material adverse effect on our business, our financial condition and results of operations.

Our business may be adversely affected by the recent coronavirus outbreak.

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. In January 2020, COVID-19 spread to other countries, including Brazil, and on March 11, 2020, the World Health Organization declared that the spread of COVID-19 had become a global pandemic. The spread of COVID-19 has resulted in a global and regional economic slowdown, and efforts to contain the spread of COVID-19 have intensified, including shutdowns mandated by governmental authorities. The outbreak and the preventative and protective actions that governments have taken in respect of COVID-19 has resulted in a period of business disruption and reduced operations, including in the real estate sector. In addition, the pandemic has caused levels of equity and other financial markets to decline sharply and to become volatile, including the price of our common shares.

In response to the pandemic, we created a crisis management committee which meets daily to discuss developments and disease prevention measures. In addition, we have preventatively determined that back-office personnel work remotely, providing all employees with the required tools and infrastructure to enable them to work from home. We have also implemented a series of educative and preventative measures targeted at our construction site employees, and have reduced staff considered to be in the risk group. Moreover, our sales teams have focused on online interactions with prospective customers.

The COVID-19 pandemic may continue to affect our industry and cause temporary suspension of projects and shortage of labour and raw materials, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. 

Our operations could also be disrupted if any of our employees or the employees of our subcontractors contracted or are thought to have contracted COVID-19 or another disease that could cause an epidemic, since this could require us and our subcontractors to quarantine some or all of these employees and temporarily close our work sites and other facilities used for our operations. In addition, our revenue and profitability could also be reduced to the extent COVID-19 or any other epidemic harms the overall economy in Brazil. These adverse impacts, particularly if they materialize and persist for a substantial period, may significantly and adversely affect our business operation and financial performance. Additionally, the city of São Paulo where we develop our main projects is highly affected by COVID-19. A recurrence of this epidemic or any epidemic in the city of São Paulo could result in material disruptions to our property developments, which in turn could materially and adversely affect our financial condition and results of operations.

The impact from the outbreak of COVID-19 on our operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. While it is too early for us to predict the impacts on our business or our financial targets that the expanding pandemic, and the governmental responses to it, may have, we would be materially adversely affected by a protracted downturn in local, regional or global economic conditions.

 

We operate in a highly competitive industry and our failure to compete effectively could adversely affect our business.

 

The Brazilian real estate industry is highly competitive and fragmented. We compete with several developers on the basis of land availability and location, price, funding, design, quality, and reputation as well as for partnerships with other developers. Because our industry does not have high barriers to entry, new competitors, including international companies working in partnership with Brazilian developers, may enter into the industry, further intensifying this competition. Some of our current potential competitors may have greater financial and other resources than we do. Furthermore, a significant portion of our real estate development and construction activity is conducted in the statesstate of São Paulo, Rio de Janeiro, Minas Gerais, Pernambuco, Rio Grande do Sul and Bahia, areasan area where the real estate market is highly competitive due to a scarcity of properties in desirable locations and the relatively large number of local competitors. If we are not able to compete effectively, our business, our financial condition and the results of our operations could be adversely affected.

 

Problems with the construction and timely completion of our real estate projects, as well as third party projects for which we have been hired as a contractor, may damage our reputation, expose us to civil liability and decrease our profitability.

 

The quality of work in the construction of our real estate projects and the timely completion of these projects are major factors that affect our reputation, and therefore our sales and growth. We may experience delays in the construction of our projects or there may be defects in materials and/or workmanship. Any defects could delay the completion of our real estate projects, or, if such defects are discovered after completion, expose us to civil lawsuits by purchasers or tenants. These factors may also adversely affect our reputation as a contractor for third party projects, since we are responsible for our construction services and the building itself for five years. Construction projects often involve delays in obtaining, or the inability to obtain, permits or approvals from the relevant authorities. In addition, construction projects may also encounter delays due to adverse weather conditions, natural disasters, fires, delays in the provision of materials or labor, accidents, labor disputes, unforeseen engineering, environmental or geological problems, disputes with contractors and subcontractors, unforeseen conditions at construction sites, disputes with surrounding landowners, or other events. In addition, we may encounter previously unknown conditions at or near our construction sites that may delay or prevent construction of a particular project. If we encounter a previously unknown condition at or near a site, we may be required to correct the condition prior to continuing construction and there may be a delay in the construction of a particular project. The occurrence of any one or more of these problems in our real estate projects could adversely affect our reputation and our future sales.

 

We may incur construction and other development costs for a project that exceeds our original estimates due to increases over time in interest rates, real estate taxes or costs associated with materials and labor, among others. We may not be able to pass these increased costs on to purchasers. Construction delays, scarcity of skilled workers, default and or bankruptcy of third party contractors, cost overruns and adverse conditions may also increase project development costs. In addition, delays in the completion of a project may result in a delay in the commencement of cash flow, which would increase our capital needs.

 

89 

Our inability to acquire adequate capital to finance our projects could delay the launch of new projects and adversely affect our business.

 

We expect that the continued expansion and development of our business will require significant capital, including working capital, which we may be unable to obtain on acceptable terms, or at all, to fund our capital expenditures and operating expenses, including working capital needs. We may fail to generate sufficient cash flow from our operations to meet our cash requirements. Furthermore, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated, or we may have to delay some of our new development and expansion plans or otherwise forgo market opportunities. Future borrowing instruments such as credit facilities are likely to contain restrictive covenants, particularly in light of the recent economic downturn and unavailability of credit, and/or may require us to pledge assets as security for borrowings under those facilities. Our inability to obtain additional capital on satisfactory terms may delay or prevent the expansion of our business, which would have an adverse effect on our business. As of December 31, 2015,2019, our net debt plus payable to venture partners (indebtedness from debentures, loans and financing, and project financing and payables to venture partners balance, net of our cash and short term investments position) was R$1,443.4316.4 million, our cash and cash equivalents and short-term investments were R$712.3414.3 million and our total debt was R$2,155.7 million including obligations to venture partners of R$4.9730.7 million.

 

Changing market conditions may adversely affect our ability to sell our property inventories at expected prices, which could reduce our margins and adversely affect the market price of our common shares or the ADSs.

 

We must constantly locate and acquire new tracts of land for development and development home sites to support our homebuilding operations. There is a lag between the time we acquire land for development or development home sites and the time that we can bring the properties to market and sell homes. As a result, we face the risk that demand for housing may decline, costs of labor or materials may increase, interest rates may increase, currencies may fluctuate and political uncertainties may occur during this period and that we will not be able to dispose of developed properties at expected prices or profit margins or within anticipated time frames or at all. Significant expenditures associated with investments in real estate, such as maintenance costs, construction costs and debt payments, cannot generally be reduced if changes in the economy cause a decrease in revenues from our properties. The market value of property inventories, undeveloped tracts of land and desirable locations can fluctuate significantly because of changing market conditions. In addition, inventory carrying costs (including interest on funds unused to acquire land or build homes) can be significant and can adversely affect our performance. Because of these factors, we may be forced to sell homes and other real properties at a loss or for prices that generate lower profit margins than we anticipate. We may also be required to make material write-downs of the book value of our real estate assets in accordance with Brazilian and U.S. GAAP if values decline. The occurrence of any of these factors may adversely affect our business and results of operations.

 

We are subject to risks normally associated with permitting our purchasers to make payments in installments; if there are higher than anticipated defaults or if our costs of providing such financing increase, then our profitability could be adversely affected.

 

As is common in our industry, we and the special purpose entities (sociedade de propósito específico), or “SPEs,” in which we participate permit some purchasers of the units in our projects to make payments in installments. As a result, we are subject to the risks associated with this financing, including the risk of default in the payment of principal or interest on the loans we make as well as the risk of increased costs for the funds raised by us. In addition, our term sales agreements usually bear interest and provide for an inflation adjustment. If the rate of inflation increases, the loan payments under these term sales agreements may increase, which may lead to a higher rate of payment default. If the default rate among our purchasers increases, our cash generation and, therefore, our profitability could be adversely affected.

 

In the case of a payment default after the delivery of financed units, Brazilian law provides for the filing of a collection claim to recover the amount owed or to repossess the unit following specified procedures. The collection of overdue amounts or the repossession of the property is a lengthy process and involves additional costs. It is uncertain that we can recover the full amount owed to us or that if we repossess a unit, we can re-sell the unit at favorable terms or at all.

 

The affordable entry-level segment is strongly dependent on the availability of financing, including from theMinha Casa, Minha Vida program and fromCaixa Econômica Federal, or the “CEF.” The scarcity of financing, the increase in interest rates, the reduction in financing terms, share of financing per unit and subsidies or any other modification in other financing terms and conditions may adversely affect the performance of the affordable entry-level segment.

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If we or the SPEs in which we participate fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.

 

We and the SPEs in which we participate are subject to various federal, state and municipal laws and regulations, including those relating to construction, zoning, soil use, urban regulations, environmental protection, historical sites, consumer protection and antitrust. We are required to obtain, maintain and renew on a regular basis permits, licenses and authorizations from various governmental authorities in order to carry out our projects. We strive to maintain compliance with these laws and regulations, as well as with conditions of permits, licenses and authorizations. If we are unable to achieve or maintain compliance with these laws, regulations and conditions, we could be subject to fines, project shutdowns, cancellation of licenses and revocation of authorizations or other restrictions on our ability to develop our projects, which could have an adverse impact on our business, financial condition and results of operations. In addition, our contractors and subcontractors are required to comply with various labor and environmental regulations and tax and other regulatory obligations. Because we are secondary obligors to these contractors and subcontractors, if they fail to comply with these regulations or obligations, we may be subject to penalties by the relevant regulatory bodies, and to indemnification claims from affected third parties.

 

Regulations governing the Brazilian real estate industry as well as environmental laws have tended to become more restrictive over time. We cannot assure that new and stricter standards will not be passed or become applicable to us, or that stricter interpretations of existing laws and regulations will not be adopted. Furthermore, we cannot assure that any such more onerous regulations would not cause delays in our projects or that we would be able to secure the relevant permits and licenses. Any such event may require us to spend additional funds to achieve compliance with such new rules and therefore make the development of our projects more costly, which cancould adversely affect our business and the market price of our common shares or the ADSs.

 

Scarcity of financing and/or increased interest rates could cause a decrease in the demand for real estate properties, which could negatively affect our results of operations, financial condition and the market price of our common shares or the ADSs.

 

The scarcity of financing and/or an increase in interest rates or in other indirect financing costs may adversely affect the ability or willingness of prospective buyers to purchase our products and services, especially prospective low income buyers. A majority of the bank financing obtained by prospective buyers comes from the Housing Financial System (Sistema Financeiro de Habitação), or the “SFH,” which is financed by funds raised from savings account deposits. The Brazilian Monetary Council (Conselho Monetário Nacional), or the “CMN,” often changes the amount of such funds that banks are required to make available for real estate financing. If the CMN restricts the amount of available funds that can be used to finance the purchase of real estate properties, or if there is an increase in interest rates, there may be a decrease in the demand for our residential and commercial properties and for the development of lots of land, which may adversely affect our business, financial condition and results of operations.

 

We and other companies in the real estate industry frequently extend credit to our clients. As a result, we are subject to risks associated with providing financing, including the risk of default on amounts owed to us, as well as the risk of increased costs of funding our operations. An increase in inflation would raise the nominal amounts due from our clients, pursuant to their sales agreements, which may increase their rates of default. If this were to occur, our cash generation and, therefore, our operating results may be adversely affected. In addition, we obtain financings from financial institutions at different rates and subject to different indexes and may be unable to match our debt service requirements with the terms of the financings we grant to our clients. The mismatch of rates and terms between the funds we obtain and the financings we grant may adversely affect us.

 

Some of our subsidiaries use significant funding from the home financing programs of the CEF and Banco do Brasil, or “BB”, including the Minha Casa, Minha Vida program, and, as a result, are subject to institutional and operating changes in the CEF and BB and enhanced customer risk profiles associated with clients eligible for these programs.

The CEF and BB, have several home financing programs for the low-income segment, which are used by Construtora Tenda S.A., or “Tenda,” to fund its activities. The CEF and BB are state-owned and mixed capital financial institutions and are subject to political influence, which may change the availability or the terms of the home financing programs. The cancelation, suspension, interruption or a significant change in such programs may affect our growth estimates and our business. Furthermore, the suspension, interruption or slowdown in the activities of the CEF or BB to approve projects, grant financing to our clients and evaluate construction process, among other activities, may adversely impact our business, financial position, results of operations and the market price of our common shares and ADSs.

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Also, in March 2009, the Brazilian government announced the creation of a public housing program called “Minha Casa, Minha Vida.” The second phase of the program, which was implemented from 2011 to 2014, financed and built approximately 2.3 million houses, with approximately 1.4 million additional houses under construction. In 2015, the Brazilian government announced the third phase of the program. The program aims to reduce the housing deficit in Brazil, which as of 2014 was estimated to be 5.2 million houses. The program’s “MCMV I” and “MCMV II” phases call for total government investment of up to R$230 billion, to be made available through financing from the CEF and BB, and aim to build approximately 4.1 million houses for families with monthly incomes of up to ten times the minimum wage. This program offers, among other things, long-term financing, lower interest rates, greater share of the property financed to the client, subsidies based on income level, lower insurance costs and the creation of a guarantor fund to refinance debt in case of unemployment. Financing to the affordable entry-level segment is primarily made available through the CEF and BB. On March 30, 2016, the Brazilian government launched “MCMVIII”, the third phase of the program, which aims to build approximately 2 million houses in the next three years, with a total investment of approximately R$210.6 billion. As of the date of this annual report, the Brazilian government has not released any further details regarding the implementation of “MCMVIII”.

Any changes in such financing would force us to seek new sources of financing and the availability of funds under similar conditions is limited, which would have an adverse effect on our results of operations.

We may sell portions of our landbank located in nonstrategic regions, which is in line with our future strategies. As a result, we will prepare an annual analysis for impairment of our landbank.

 

As part of our strategy to focus our future operations on regions where our developments have historically been successful, and where we believe there is homebuilding potential based on market opportunities, we may sell portions of our landbank located outside of these regions. As a result, we will prepare an annual impairment analysis of our landbank based on the acquisition cost of the land in our portfolio. In 2011, we made a decision to sell a portion of our landbank given our narrowed geographic focus and, our evaluation of impairment resulted insince then, we have been recording a provision for impairment on landbank and properties for sale in the amount of R$92.1 million. In December 2012, we had R$53.8 million recorded as a provision for impairment on landbank and properties for sale. As of December 31, 2013, we had R$68.5 million recorded as a provision for impairment on landbank and properties for sale. As of December 31, 2014, we had R$63.5 million recorded as a provisionprovisions for impairment on landbank and properties for sale. As of December 31, 2015, we had R$50.3 million recorded as a provision for impairment on landbank and properties for sale. Since 2016, our impairment analysis has been negatively impacted by the challenging macroeconomics conditions in the real estate sector and in Brazil as a whole, which has led to a decrease in sales

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prices for our commercial and residential units. As of December 31, 2016, 2017 and 2018, we had R$174.4 million, R$310.6 million and R$235.9 million recorded as a provision for impairment on landbank and properties for sale, respectively. As of December 31, 2019, we had R$198.5 million recorded as a provision for impairment on landbank and properties for sale.

 

The real estate industry is dependent on the availability of credit, especially in the affordable entry-level segment.

 

One of our main strategies is to expand our operations to the affordable entry-level segment in which clients are strongly dependent on bank financing to purchase homes. This financing may not be available on favorable terms to our clients, or at all. Changes in the Real Estate Financing System (Sistema de Financiamento Imobiliário), or the “SFI,” and in the SFH rules, the scarcity of available resources or an increase in interest rates may affect the ability or desire of such clients to purchase homes, consequently affecting the demand for homes. These factors would have a material adverse effect on our business, financial condition and results of operations.

 

Because we recognize sales revenue from our real estate properties under the percentage of completion method of accounting under Brazilian GAAP as generally adopted by construction companies and under U.S. GAAP, when we meet the conditions specified by the respective accounting standards,transferring control, an adjustment in the cost of a development project may reduce or eliminate previously reported revenue and income.

 

We recognize revenue from the sale of units in our properties based on the percentage of completion method of accounting, which requires us to recognize revenue as we incur the cost of construction. Total cost estimates are revised on a regular basis as the work progresses, and adjustments based upon such revisions are reflected in our results of operations in accordance with the method of accounting used. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported income, we will recognize a credit to or a charge against income, which could have an adverse effect on our previously reported revenue and income.

 

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Our participation in SPEs creates additional risks, including potential problems in our financial and business relationships with our partners.

 

We invest in special purpose entities (Sociedade de Propósito EspecíficoSPEs with or “SPEs”) withwithout other real estate developers and construction companies in Brazil. The risks involved with SPEs include the potential bankruptcy of our SPE partners and the possibility of diverging or inconsistent economic or business interests between us and our partners. If an SPE partner fails to perform or is financially unable to bear its portion of the required capital contributions, we could be required to make additional investments and provide additional services in order to make up for our partner’s shortfall. In addition, under Brazilian law, the partners of an SPE may be liable for certain obligations of an SPE, including with respect to tax, labor, environmental and consumer protection laws and regulations. These risks could adversely affect us.

 

We may experience difficulties in finding desirable land tracts, and increases in the price of land may increase our cost of sales and decrease our earnings.

 

Our continued growth depends in large part on our ability to continue to acquire land and to do so at a reasonable cost. As more developers enter or expand their operations in the Brazilian home building industry, land prices could rise significantly and suitable land could become scarce due to increased demand, decreased supply or both. A resulting rise in land prices may increase our cost of sales and decrease our earnings.earnings on future developments. We may not be able to continue to acquire suitable land at reasonable prices in the future, which could adversely affect our business.

 

The market value of our inventory of undeveloped land may decrease, thus adversely affecting our results of operations.

 

We own tracts of undeveloped land that are part of our inventory for future developments. We also intend to increase our inventory and acquire larger tracts of land. The market value of these properties may significantly decrease from the acquisition date to the development of the project as a result of economic downturns or market conditions, which would have an adverse effect on our results of operations.

 

Increases in the price of raw materials and fixtures may increase our cost of sales and reduce our earnings.

 

The basic raw materials and fixtures used in the construction of our homes include concrete, concrete block, steel, aluminum, bricks, windows, doors, roof tiles and plumbing fixtures. Increases in the price of these and other raw

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materials, including increases that may occur as a result of shortages, duties, restrictions, or fluctuations in exchange rates, could increase our cost of sales. Any such cost increases could reduce our earnings and adversely affect our business.

 

If we are not able to implement our growth strategy as planned, or at all, our business, financial condition and results of operations could be adversely affected.

 

We plan to grow our business by selectively expanding to meet the growth potential of the Brazilian residential market. We believe that there is increasing competition for suitable real estate development sites. We may not find suitable additional sites for development of new projects or other suitable expansion opportunities.

We anticipate that we will need additional financing to implement our expansion strategy and we may not have access to the funding required for the expansion of our business or such funding may not be available to us on acceptable terms. We may finance the expansion of our business with additional indebtedness or by issuing additional debt or equity securities. For example, in 2012, we issued R$360.0 million in subordinated indebtedness, including: (1) R$150 million in bank credit certificates, or CCBs, on September 5, 2012, (2) R$80 million in our third restricted public issuance of commercial paper in a single series in December 2012 and (3) R$130 million in CCBs issued by Alphaville secured by a pledge of sales receivables and certain ventures. In addition, on October 31, 2012, we amended the terms of certain CCBs in the amount of R$100 million to provide additional security, including a first-priority mortgage of certain real estate ventures, a pledge of sales receivables and to adjust the payment terms of the CCBs.

On October 7, 2013, we entered into a Real Estate Finance System (SFI) loan in the amount of R$300 million. The loan is scheduled to mature in July 2017. The loan is secured by (i) first-priority mortgages over select real estate ventures of the Company and (ii) fiduciary assignments of real estate receivables generated by such select real estate ventures. The purpose of the loan is to provide funding for housing projects only. The loan agreement contains restrictive covenants which trigger early redemption upon the occurrence of certain events of default.

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In July 2014, we issued R$130 million in non-convertible debentures on a private placement basis. The debentures are secured by (i) first-priority mortgages over select real estate ventures of the Company and (ii) fiduciary assignments of real estate receivables generated by such select real estate ventures. The proceeds of the debentures will be used to fund the development of such real estate ventures only. The debentures holders assigned their fiduciary rights in the real estate receivables in favor of a real estate securitization SPE, which issued Certificates of Real Estate Receivables (Certificados de Recebíveis Imobiliários) or “CRIs”, backed by such real estate receivables.

In September 2014, the Company entered into a Real Estate Finance System (SFI) loan in the amount of R$194 million. The loan is scheduled to mature in October 2018. The loan is secured by (i) first-priority mortgages over select real estate ventures of the Company and (ii) fiduciary assignments of real estate receivables generated by such select real estate ventures. The purpose of the loan is to provide funding for housing projects only.

In January 2015, we issued R$55 million in non-convertible debentures on a private placement basis. The debentures are secured by (i) first-priority mortgages over select real estate ventures of the Company and (ii) fiduciary assignments of real estate receivables generated by such select real estate ventures. The debentures are scheduled to mature on January 20, 2020. The proceeds of the debentures will be used to fund the development of such real estate ventures only.

In December 2015, we entered into a real estate sales receivables (Cédula de Crédito Imobiliário, or “CCI”) transaction related to a portfolio comprising selected residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$32.2 million in exchange for cash at the transfer date, discounted to present value, for R$24.5 million.

 

We could face financial risks, covenant restrictions and restrictions on our ability to employ assets associated with incurring additional indebtedness, such as reducing our liquidity and access to financial markets and increasing the amount of cash flow required to service such indebtedness, or associated with issuing additional stock, such as dilution of ownership and earnings.

 

There are risks for which we do not have insurance coverage or the insurance coverage we have in place may not be sufficient to cover damages that we may suffer.

 

We maintain insurance policies with coverage for certain risks, including damages arising from engineering defects, fire, landslides, storms, gas explosions and civil liabilities stemming from construction errors. We believe that the level of insurance we have contracted for accidents is consistent with market practice. However, there can be no assurance that such policies will always be available or provide sufficient coverage for certain damages. In addition, there are certain risks that may not be covered by such policies, such as damages resulting from war, force majeure or the interruption of certain activities and, therefore any requirement to pay amounts not covered by our insurance may have a negative impact on our business and our results of operations. Furthermore, we are required to pay penalties and other fines whenever there is delay in the delivery of our units, and such penalties and fines are not covered by our insurance policies.

 

Moreover, we cannot guarantee that we will be able to renew our current insurance policies under favorable terms, or at all. As a result, insufficient insurance coverage or our inability to renew existing insurance policies could have an adverse effect on our financial condition and results of operations.

 

Our level of indebtedness could have an adverse effect on our financial health, diminish our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or the real estate industry.

 

As of December 31, 2015,2019, our total debt (loans, financing and debentures) and payables to venture partners was approximately R$2,155.7730.7 million and our short-term debt and payables to venture partners was R$1,065.7584.3 million. In addition, as of December 31, 20152019 our cash and cash equivalents and short-term investments available was R$712.3414.3 million and our net debt represented 46.6%35.3% of our shareholders’ equity including the non-controlling interest. Our indebtedness has variable interest rates. Our level of indebtedness could have important negative consequences for us. For example, it could:

 

·require us to dedicate a large portion of our cash flow from operations to fund payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

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·increase our vulnerability to adverse general economic or industry conditions;

 

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

 

·limit our ability to raise additional debt or equity capital in the future or increase the cost of such funding;

 

·restrict us from making strategic acquisitions or exploring business opportunities; and

 

·place us at a competitive disadvantage compared to our competitors that have less debt.

 

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Certain of our debt agreements contain financial and other covenants and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

 

Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios, ratings and tests.tests, cash generation, capitalization, debt coverage, maintenance of shareholding position, and others. Our ability to meet these financial ratios, ratings and tests can be affected by events beyond our control and we cannot assure that we will meet those tests, especially given the lower yield environment in which the industry currently operates. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these and other agreements, as a result of cross-default provisions. If we are unable to comply with our debt covenants, we could be forced to seek waivers.

 

If we are unable to obtain waivers, a large portion of our debt could be subject to acceleration. We do not believe such occurrence to be likely; however, if it were to happen, we could be required to renegotiate, restructure or refinance our indebtedness, seek additional equity capital or sell assets, which could materially and adversely affect us.

 

We cannot guarantee that we will be successful in obtaining any waivers. As of December 31, 2015,2019, the Company and its subsidiaries were in compliance with the contractual covenants provided for in our debentures and otherour credit instruments.

 

Failures or delays by our third party contractors may adversely affect our reputation and business and exposeexposes us to civil liability.

 

We engage third party contractors to provide services for our projects. Therefore, the quality of work in the construction of our real estate projects and the timely completion of these projects may depend on factors that are beyond our control, including the quality and timely delivery of building materials and the technical skills of the outsourced professionals. Such outsourcing may delay the identification of construction problems and, as a result, the correction of such problems. Any failures, delays or defects in the services provided by our third party contractors may adversely affect our reputation and relationship with our clients, which would adversely affect our business and results of operations.

 

We may be unable to successfully implement our strategy of reorganizing our operational organization and performance.

We intend to carry out a strategy seeking to reorganize our operational organization and promote performance. This strategy includes the implementation of a new management structure that, among other things, assigns each brand manager direct responsibility for the operating performance of each brand, and implementing a corporate culture shift within our Tenda brand focused on aligning incentives to improve project execution. As a result, we established a new operating structure organized by brand (Gafisa and Tenda) and appointed divisional executive officers responsible for the profit and loss of each business unit. This strategy is intended to pursue the goal of helping to produce more stable cash flow and contributing toward a return to sustainable growth. However, there can be no assurance that we will be able to successfully implement such strategy, and therefore we may also be unsuccessful in achieving such goals behind such strategy, which could result in a material adverse effect with respect to our business, financial condition or results of operations.

Unfavorable judicial, administrative or arbitration decisions may adversely affect us.

 

We currently are, and may be in the future, defendants in several judicial, administrative proceedings related to civil, labor and tax matters. We cannot assure you that we will obtain favorable decisions in such proceedings, that such proceedings will be dismissed, or that our provisions for such proceedings are sufficient in the event of an unfavorable decision. Unfavorable decisions that impede our operations, as initially planned, or that result in a claim

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amount that is not adequately covered by provisions in our balance sheet, may adversely affect our business and financial condition.

 

We may be held responsible for labor liabilities of our third party contractors.

 

We may be held responsible for the labor liabilities of our third party contractors and obligated to pay for fines imposed by the relevant authorities in the event that our third party contractors do not comply with applicable legislation. As of December 31, 2015,2019, R$49.316.9 million of our R$93.034.7 million of total labor liabilities and provisions were for such liabilities. Approximately 68.3%90% of the labor claims were commenced by employees of our third party contractors. An adverse result in such claims would cause an adverse effect on our business.

 

Failure to keep members of our senior management and/or our ability to recruit and retain qualified professionals may have a material adverse effect on our business, financial condition and results of operations.

 

Our future success depends on the continued service and performance of our senior management and our ability to recruit and retain qualified professionals. None of the members of our senior management are bound to long-term labor contracts or non-compete agreements and there can be no assurance that we will successfully recruit and retain qualified professionals to our management as our business grows. The loss of any key professionals or our inability to recruit or retain qualified professionals may have an adverse effect on our business, financial condition and results of operations.

 

Changes in Brazilian GAAP due to its migration towards IFRS may adversely affect our results.

Brazilian corporate law was amended by Law No. 11,638 dated December 28, 2007 in order to facilitate the convergence of Brazilian GAAP with IFRS, and thereafter, the CPC issued new accounting standards that generally converged Brazilian GAAP to IFRS.

Through December 31, 2009, our financial statements were prepared in accordance with Brazilian GAAP in effect at the time. We elected January 1, 2009 as a transition date for full adoption of the new Brazilian GAAP as generally adopted by construction companies in Brazil, and amended certain accounting practices in the Brazilian GAAP financial statements. Our financial statements as of and for the year ended December 31, 2009 have been restated to reflect these adjustments.

With the adoption of CPCs 19 (R2) (or IFRS 11) and 36 (R3) (or IFRS 10), since January 1, 2013 and applicable retrospectively to the comparative periods of December 31, 2012 and 2011, the proportional consolidation method for investments in jointly-controlled investees, which was previously applied by the Company, is no longer allowed under Brazilian GAAP. Consequently these jointly-controlled investments are now accounted for through the equity method.

Under U.S. GAAP, because such investments provide substantive voting rights granted to minority shareholders, they preclude the Company from consolidating these entities. Accordingly, for purposes of U.S. GAAP these investments are also accounted for based on the equity method of accounting.

On May 28, 2014, the IASB published IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which establishes principles that will apply to the recognition of revenue under IFRS. IFRS 15 will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When adopted, IFRS 15 will supersede most of the detailed guidance on the recognition of revenue that currently applies under IFRS. IFRS 15 will be effective for annual periods beginning on or after January 1, 2018, and earlier application of IFRS 15 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 15 will be subject to the implementation of IFRS 15 in Brazil and the prior approval of the CPC and the CVM.

In July 2014, the IASB published IFRS 9 – Financial Instruments (“IFRS 9”), which establishes, among other principles, principles that will apply to the classification, measurement and recognition of financial assets and liabilities. IFRS 9 will replace (i) earlier versions of IFRS 9 and (ii) IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 is comprised of three phases:

Phase 1 - Classification and measurement of financial assets and liabilities: Phase 1 introduces an approach for the classification of financial assets driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach will replace existing rule-based requirements. The new model will also result in a single impairment model being applied to all financial instruments.

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Phase 2 - Impairment: Phase 2 introduces a new, expected loss impairment model that will require more timely recognition of expected credit losses. It will require entities to account for expected credit losses (as opposed to incurred credit losses) from when financial instruments are first recognized. It will also lower the threshold for recognition of full lifetime expected losses.

Phase 3 - Hedge Accounting: Phase 3 replaces the rule-based hedge accounting requirements in IAS 39. It will introduce a reformed model for hedge accounting with enhanced disclosures about risk management activity. The new model will align the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements. In addition, as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements.

IFRS 9 will be effective for annual periods beginning on or after January 1, 2018. Earlier application of IFRS 9 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 9 will be subject to the implementation of IFRS 9 in Brazil and the prior approval of the CPC and the CVM.

On January 13, 2016, the IASB published IFRS 16 – Leases (“IFRS 16”), which establishes principles that will apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessors and lessees. IFRS 16 will require lessors to recognize a lease liability reflecting future lease payments and a “right-of-use assets” for all lease contracts, except certain short-term leases and leases for low-value assets. The principles that apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessees will remain substantially the same. IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, and earlier application of IFRS 16 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 16 will be subject to the implementation of IFRS 16 in Brazil and the prior approval of the CPC and the CVM.

We are in the process of evaluating the impact of IFRS 9, IFRS 15 and IFRS 16 on our financial statements. As of the date of this annual report, we have not completed our analysis of IFRS 9, IFRS 15 and IFRS 16 and we have not determined the extent to which IFRS 9, IFRS 15 and IFRS 16 will impact our financial statements once they are adopted.

Risks Relating to Brazil

 

Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and results of operations and the market price of our common shares or the ADSs.

 

The Brazilian economy has been characterized by unstable economic cycles and frequent and occasionally extensive intervention by the Brazilian government. The Brazilian government has often changed monetary, fiscal, credit, tariff and other policies to influence the course of the Brazilian economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports into Brazil. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future.

 

Our business, results of operations, financial condition and prospects, as well as the market prices of our common shares or the ADSs, may be adversely affected by, among others, the following factors:

 

·exchange rate movements;

 

·exchange control policies;

 

·expansion or contraction of the Brazilian economy, as measured by rates of GDP;

 

·inflation;

 

·tax policies;

 

·other economic, political, diplomatic and social developments in or affecting Brazil;

 

·interest rates;

 

·energy shortages;

 

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·liquidity of domestic capital and lending markets; and

 

·social and political instability.

 

Uncertainty over whether the Brazilian federal government maywill implement reforms or changes in policy or regulationsregulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and to heightened volatility in the Brazilian securities markets as well as securities issued abroad by Brazilian issuers. As a result, these uncertaintiesconsequently our operating results, and other future developments in the Brazilian economy may also adversely affect us and our business and results of operations and the markettrading price of our common shares and the ADSs.

Furthermore, Dilma Roussef, the current President of Brazil, who was re-elected for a second term in 2015, has the power to determine and influence governmental policies and measures that relate to the Brazilian economy, which affects the operations and financial performance of businesses such as ours. Recently, political coalitions have arisen and have challenged certain actions and the authority of the President of Brazil, and some have filed legal proceedings to initiate impeachment proceedings to have the President of Brazil removed from office. In March 2016, Brazil’s former president, Luiz Inácio Lula da Silva, was detained by the Brazilian authorities for questioning in connection with certain allegations of corruption and money-laundering made against him. Following Mr. da Silva’s detention, attempts were made by the Brazilian government to appoint Mr. da Silva as a government minister. Such attempts were blocked by the Brazilian courts following allegations that such attempted appointment may have been intended to shield Mr. da Silva from prosecution by the Brazilian courts (government ministers can only be tried by the Brazilian Supreme Federal Court (“STF”) and not by any other courts within Brazil). It has been alleged that any such attempts by the President of Brazil to appoint Mr. da Silva to a ministerial position for him to avoid prosecution would strengthen the impeachment proceedings against the President of Brazil and possibly accelerate such impeachment proceedings. In addition, the Federal Court of Accounts (Tribunal de Contas da União) recently recommended not to approve Brazil’s fiscal accounts for the fiscal year 2014. These recent events have contributed to an increase in the economic and political instability in Brazil.

 

Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations and the market prices of our common shares or the ADSs.

 

At times in the past, Brazil has experienced high rates of inflation. According to the General Market Price Index (Índice Geral de Preços—Mercado), or “IGP-M”, inflation rates in Brazil were 3.8%2017, 7.5% in 2006, 7.8%2018 and 7.3% in 2007, 9.8% in 2008, (1.7)% in 2009, 11.3% in 2010, 5.1% in 2011, 7.8% in 2012, 5.5% in 2013, 3.7% in 2014, 10.5% in 2015 and 2.4% in the two month period ended February 2016.2019. In addition, according to the Expanded Consumer Price Index (Índice de Preços ao Consumidor Ampliado), or “IPCA,” Brazilian consumer price inflation rates were 3.1%2017, 3.7% in 2006, 4.5% in 2007, 5.9% in 2008,2018 and 4.3% in 2009, 5.9% in 2010, 6.5% in 2011, 5.8% in 2012, 5.9% in 2013, 6.4% in 2014, 10.7% in 2015 and 1.3% in the one month period ended January, 2016.2019. Our term sales agreements usually provide for an inflation adjustment linked to the National Construction Cost Index (Índice Nacional de Custo de Construção), or “INCC”. The INCC increased by 6.2%rates were 2017, 3.8% in 2007, 11.9%2018 and 4.1% in 2008, 3.14% in 2009, 7.77% in 2010, 7.49% in 2011, 7.12% in 2012, 8.1% in 2013, 6.9% in 2014 and 7.5% in 2015.2019. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.

 

Brazil may experience high levels of inflation in future periods. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation is also likely to increase some of our costs and expenses, which we may not be able to pass on to our

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customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing ourreais-denominated debt may increase, resulting in lower net income. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets. In addition, increases in inflation rates would increase the outstanding debt of our customers, which could increase default levels and affect our cash flows. Any decline in our net operating revenue or net income and any deterioration in our financial condition would also likely lead to a decline in the market price of our common shares and the ADSs.

 

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Social, political and economic eventsDevelopments and the perceptionperceptions of risks especially in other countries, including other emerging economies,markets, the United States and Europe, may adversely affectharm the Brazilian economy and consequently, our business, financial condition, results of operations and the market price of our securities.common shares and the ADSs.

 

The Brazilian capital markets aremarket for securities offered by companies with significant operations in Brazil is influenced by the Brazilianeconomic and market and economic conditions in Brazil and, to a certain extent, by thevarying degrees, market conditions in other Latin American countries and other emerging market countries. Investors’ reactions to developments in certain countries may have an adverse effect on the market value of the securities of Brazilian issuers. Crises in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions in other emerging market countries normally trigger ahave at times significantly affected the availability of credit to companies with significant outflowoperations in Brazil and resulted in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.

Crises and political instability in other emerging market countries, the United States, Europe or other countries could decrease investor demand for securities offered by companies with significant operations in Brazil, such as our common shares or the ADSs. In June 2016, the United Kingdom had a referendum in which the majority voted to leave the European Union (so-called “Brexit”). The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The United Kingdom formally ceased to be a member state of the European Union on January 31, 2020, at which point a transition period began. The United Kingdom is expected to continue to follow certain European Union rules during the transition period which will end on December 31, 2020; however, the ongoing process of negotiations between the United Kingdom and the reductionEuropean Union will determine the future terms of foreign investmentthe United Kingdom’s relationship with the European Union, including access to European Union markets, either during the transitional period or more permanently. We have no control over and cannot predict the effect of the United Kingdom’s exit from the European Union nor over whether and to which effect any other member state will decide to exit the European Union in Brazil. For example, in 2001 Argentina announced a moratorium on its public debt after a recessionthe future. These developments, as well as potential crises and a periodforms of political instability which affected investor perceptions towardsarising therefrom or any other as of yet unforeseen development, may harm our business and the Brazilian capital markets for many years. Crises in other Latin American and emerging market countries may diminish investor interest in the securities of Brazilian issuers, including ours, which could negatively affect the market price of our common shares.shares and the ADSs.

 

The market for securities issued by Brazilian companies is influenced,Political instability and economic uncertainty in Brazil, including in relation to a varying degree, by international economic and market conditions generally, especially in the United States. The prices of shares traded on the São Paulo Stock Exchange (BM&F Bovespa S.A. — Bolsa de Valores Mercadorias e Futuros), or the “BM&FBOVESPA,” have been historically affected by the fluctuation of interest rates and stock exchange indexes in the United States. Events in other countries or capital markets could have an adverse effect oncountry-wide corruption probes, may adversely affect the price of our shares,ADSs and our business, operations and financial condition.

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which could make it more difficult for us to access the capital marketshave historically resulted in economic deceleration and obtain financing on acceptable termsheightened volatility in the future, or at all.securities offered by companies with significant operations in Brazil.

 

The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing “Lava Jato”investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, regarding corruption at and with Petróleo Brasileiro S.A.known as “Operação Lava Jato, or Petrobras, may hinder the growth of” have negatively impacted the Brazilian economy and could have an adverse effect on our business.

Petrobras and certain other Brazilian companies active in the energy and infrastructure sectors are facing investigations by the CVM, the U.S. Securities and Exchange Commission, the Brazilian Federal Police and the Brazilian Federal Prosecutor’s Office, in connection with corruption allegations, or the “Lava Jato” investigations. Depending on the duration and outcome of such investigations, the companies involved may face downgrades from rating agencies, funding restrictions and a reduction in their revenues. Currently, elected officials and other public officials in Brazil are also being investigated for allegations of unethical and illegal conduct identified during the new major phase of the Lava Jato investigations, which began in July 2015.political environment. The potential outcome of these investigations is unknown,uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, involved, and on the general market perception of the Brazilian economy. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future.

A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s

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sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s economy, and growth prospectslead to further depreciation of thereal and an increase in the near to medium term.inflation and interest rates, which could adversely affect our business, operations and financial condition.

 

The allegations underAny of the “Lava Jato” investigations along with the economic downturn resulted in Brazil being downgraded to non-investment grade status by S&P in September 2015, by Fitch Ratings in December 2015, and by Moody’s in February 2016, as well as in the downgrade of various major Brazilian companies. Such downgrades have further worsened the conditions ofabove factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, and could adversely affect our business, operations, financial condition and the conditionprice of Brazilian companies, especially those relying on foreign investments

Persistently poor macroeconomic conditions resulting from, among other things,our common shares and the Lava Jato investigations and their consequences, could have an adverse effect on our business.ADSs.

 

Fluctuations in interest rates may have an adverse effect on our business and the market prices of our common shares and the ADSs.

 

The Central Bank, through the Monetary Policy Committee (Comitê de Política Monetária), or the “COPOM,” establishes the Special Clearance and Escrow System rate (Sistema Especial de Liquidação e Custodia), or the “SELIC rate,” which is the basic interest rate for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. The SELIC rate is also an important policy instrument used by the Brazilian government to achieve inflation targets it established on June 21, 1999 (Decree No. 3,088).

 

As of December 31, 2011,2015, the SELIC rate was 11%14.25%. As of December 31, 2012,2016, the Central Bank reduced the SELIC rate to 13.75%. As of December 31, 2017, the Central Bank had significantly reduced the SELIC to 7.0% and, as of December 31, 2018, the SELIC rate to 7.25%was 6.5%. As of December 31, 2013, the Central Bank had increased the SELIC rate to 10%. As of December 31, 2014,2019, the Central Bank had further increaseddecreased the SELIC rate to 11.75%. As of December 31, 2015, the SELIC rate was 14.25%4.50%. As of the date of this annual report, the SELIC rate is 14.25%, its highest level since August 2006.3.75%. Debts of companies in the real estate industry, including ours, are subject to the fluctuation of the SELIC rate. Should the SELIC rate continue to increase, the costs relating to the service of our debt obligations may also increase.

 

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As of December 31, 2015,2019, our indebtedness was denominated inreais and subject to Brazilian floating interest rates, such as the Reference Interest Rate (Taxa Referencial), or “TR,” and the Interbank Deposit Certificate Rate (Certificado de Depósito Interbancário), or “CDI rate.” Any increase in the TR rate or the CDI rate may have an adverse impact on our financial expenses, our results of operations and on the market price of our common shares or the ADSs. We are not a party to any hedging instruments with respect to our indebtedness.

 

Restrictions on the movement of capital out of Brazil may adversely affect your ability to receive dividends and distributions on the ADSs and on our common shares, or the proceeds of any sale of our common shares.

 

Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. The Brazilian government last imposed remittance restrictions for approximately six months in 1989 and early 1990. The Brazilian government may take similar measures in the future. Any imposition of restrictions on conversions and remittances could hinder or prevent holders of our common shares or the ADSs from converting into U.S. dollars or other foreign currencies and remitting abroad dividends, distributions or the proceeds from any sale in Brazil of our common shares. Exchange controls could also prevent us from making payments on our U.S. dollar-denominated debt obligations and hinder our ability to access the international capital markets. As a result, exchange controls restrictions could reduce the market prices of our common shares and the ADSs.

 

Changes in tax laws may increase our tax burden and, as a result, adversely affect our profitability.

 

The Brazilian government regularly implements changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. Since April 2003, the Brazilian government has presented several tax reform proposals, which were mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposals provided for changes in the rules governing the federal Social Integration Program (Programa de Integração Social), or “PIS,” the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social), or “COFINS,” the state Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS,” and other taxes. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and

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cannot be, quantified. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance.

 

Risks Relating to Our Common Shares and the ADSs

 

International economic and market conditions, especially in the United States, may adversely affect the market price of the ADSs.

 

The market for securities issued by Brazilian companies is influenced, to a varying degree, by international economic and market conditions generally. BecauseAs our ADSs are listed ontraded Over the New York Stock Exchange,Counter, or the “NYSE,”“OTC”, adverse market conditions and economic and/or political crises, especially in the United States, such as the subprime mortgage lending crisis in 2007 and 2008 and the financial and credit crises in 2008, have at times resulted in significant negative impacts on the market price of our ADSs. Despite the fact that our clients, whether financed by us or by Brazilian banks through resources obtained in the local market, arewere not directly exposed to the mortgage lending crisis in the United States, there arewere still uncertainties as to whether such crisis may indirectly affect homebuilders worldwide. The uncertainties generated by the subprimesuch a crisis may affect the market prices of our ADSs in future and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

 

Developments and the perception of risks in other countries, especially emerging market countries, may adversely affect the market prices of our common shares and the ADSs.

 

The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging market countries, especially other Latin American countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or adverse economic conditions in other emerging market countries have at times resulted in significant outflows of funds from, and declines in the amount of foreign currency invested in, Brazil. For example, in 2001, after a prolonged recession, followed by political instability, Argentina announced that it would no longer continue to service its public debt. The economic crisis in

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Argentina negatively affected investors’ perceptions of Brazilian securities for several years. Economic or political crises in Latin America or other emerging markets may significantly affect perceptions of the risk inherent in investing in the region, including Brazil.

 

The Brazilian economy is also affected by international economic and general market conditions, especially economic and market conditions in the United States. Share prices on the BM&FBOVESPA,B3, for example, have historically been sensitive to fluctuations in U.S. interest rates as well as movements of the major U.S. stock indexes, particularly in the current worldwide economic downturn. Developments in other countries and securities markets could adversely affect the market prices of our common shares and the ADSs and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

 

The relative volatility and the lack of liquidity of the Brazilian securities market may adversely affect you.

 

The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may limit your ability to sell our common shares and the common shares underlying your ADSs at the price and time at which you wish to do so. The BM&FBOVESPA,As of December 31, 2019, the average daily trading for all companies listed on the B3, the only Brazilian stock exchange, had a market capitalization of US$489.7was approximately R$4.3 billion, as of December 31, 2015 and an average daily trading volume of US$2.1 billion for 2015. In comparison, the NYSE had a domestic market capitalization of US$18.4 trillion (excluding funds and non-U.S. companies) as of December 31, 2015 and an average daily trading volume of approximately US$44.1 billion for 2015.

There is also a large concentration in the Brazilian securities market. The ten largest companies in terms of market capitalization represented 51.5% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2015. The top ten stocks in terms of trading volume accounted for 44.4% of all shares traded on the BM&FBOVESPA in 2015. Gafisa’s average daily trading volume on the BM&FBOVESPA and in the NYSE in 2015 was US$2.7 million and US$0.7 million, respectively.according to B3 data.

 

Shares eligible for future sale may adversely affect the market value of our common shares and the ADSs.

 

Certain of our shareholders have the ability, subject to applicable Brazilian laws and regulations and applicable securities laws in the relevant jurisdictions, to sell our shares and the ADSs. We cannot predict what effect future sales of our shares or ADSs may have on the market price of our shares or the ADSs. Future sales of substantial amounts of such shares or the ADSs, or the perception that such sales could occur, could adversely affect the market prices of our shares or the ADSs.

 

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The economic value of your investment in our company may be diluted.

 

We may need additional funds in the future, in order to expand more rapidly, develop new markets, respond to competitive pressures or make acquisitions. Any necessary additional financing may not be available on terms favorable to us. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If additional funds are raised by our issuing new equity securities existing shareholders may be diluted. See “Item 4. Information on the Company—A. History and Development of the Company.”

 

We may be subject to takeover by other companies or investors.

Since we do not have a controlling shareholder, we may be subject to takeover by other companies or investors. Pursuant to article 46 of the Company’s Bylaws, any shareholder that holds a participation equal to or greater than 50% of the Company’s share capital is required to make a tender offer for the remaining shares, for consideration equal to at least the fair value as determined by an appraisal report and subject to the regulation provided for in Law No. 6,404/76 of the Brazilian corporate law and applicable CVM regulations on takeovers. In addition, in accordance with Brazilian corporate law, a shareholder that holds a participation equal to or greater than 10% of the Company’s share capital may convene a shareholder meeting to dismiss the management of the Company, and to the extent the other shareholders at such meeting do not vote against a proposal to dismiss or approve such proposal, our management would be dismissed, which would disrupt the day to day operations of the Company and would have an adverse impact on our business and result of operations.

Holders of our common shares or the ADSs may not receive any dividends or interest on shareholders’ equity.

 

According to our bylaws, we must generally pay our shareholders at least 25% of our annual net profit as dividends or interest on shareholders’ equity, as calculated and adjusted under the Brazilian corporate law method. This adjusted net profit may be used to absorb losses or for the payment of statutory participation on profits to debenture holders, employees or members of our management, which would ultimately reduce the amount available to be paid as dividends or interest on shareholders’ equity. Additionally, the Brazilian corporate law allows a publicly traded company like us to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. For 2003, 2004 and 2005, we did not distribute dividends. We distributed dividends in each of 2007, 2008, 2009 and 2010 with respect to the prior respective fiscal year. Based on the negative results of the fiscal year 2012, on April 19, 2013, our shareholders did not approve any distribution of dividends. On December 20, 2013, with the completion of the sale of the Alphaville interest, as fully detailed in item “4. Information on the Company—A. History and Development of the Company”, our board of directors approved the payment of interest on equity in the amount of R$130.2 million, representing R$0.3111 per share. Such payment was effective February 12, 2014. On April 25, 2014, our shareholders approved a distribution of dividends in the amount of R$32.9 million, representing R$0.0825 per share. Based on the negative results of the fiscal year 2014, on April 16, 2015, our shareholders did not approve any distribution of dividends.

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dividends in the amount of R$17.7 million, representing R$0.0481 per share. Based on the negative results of the fiscal year 2016, at our annual shareholders’ meeting held on April 28, 2017, our shareholders did not approve any distribution of dividends. Based on the negative results of the fiscal year 2017, our shareholders did not approve any distribution of dividends at our annual shareholders’ meeting held on April 27, 2018. Based on the negative results of the fiscal year 2018, our shareholders did not approve any distribution of dividends at our annual shareholders’ meeting held on April 24, 2019. Based on the negative results of the fiscal year 2019, at our annual shareholders’ meeting held on April 30, 2020, our shareholders did not approve any distribution of dividends.

 

For further information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”

 

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

 

Holders of ADSs may exercise voting rights with respect to our common shares represented by ADSs only in accordance with the terms of the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil. Holders of our common shares will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting from the ADR depositary following our notice to the depositary requesting the depositary to do so. To exercise their voting rights, holders of ADSs must instruct the ADR depositary on a timely basis. This voting process necessarily will take longer for holders of ADSs than for holders of our common shares. Common shares represented by ADSs for which no timely voting instructions are received by the ADR depositary from the holders of ADSs shall not be voted.

 

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Holders of ADSs also may not receive the voting materials in time to instruct the depositary to vote the common shares underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common shares underlying their ADSs are not voted as requested.

 

No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders as well as conflicts between them.

 

No single shareholder or group of shareholders holds more than 50% of our capital stock. There is no guidance in Brazilian corporate law for publicly-held companies without an identified controlling shareholder. Due to the absence of a controlling shareholder, we may be subject to future alliances or agreements between our shareholders, which may result in the exercise of a controlling power over our company by them. In the event a controlling group is formed and decides to exercise its controlling power over our company, we may be subject to unexpected changes in our corporate governance and strategies, including the replacement of key executive officers. Additionally, we may be more vulnerable to a hostile takeover bid. The absence of a controlling group may also jeopardize our decision-making process as the minimum quorum required by law for certain decisions by shareholders may not be reached and, as a result, we cannot guarantee that our business plan will be affected. Any unexpected change in our management team, business policy or strategy, any dispute between our shareholders, or any attempt to acquire control of our company may have an adverse impact on our business and result of operations.

 

Holders of ADSs will not be able to enforce the rights of shareholders under our bylaws and Brazilian corporate law and may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company.

 

Holders of ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and Brazilian corporate law.

 

Our corporate affairs are governed by our bylaws and Brazilian corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.

 

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Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are a corporation organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of the assets of our company and of these other persons are located in Brazil. As a result, it may not be possible for holders of ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may be enforced in Brazil only if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.

 

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of the ADSs.

 

According to Law No. 10,833 of December 29, 2003, the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. Thus, gains arising from a disposition of our common shares by a non-resident of Brazil to another non-resident of Brazil are subject to income tax.

 

Our interpretationAlthough the matter is not entirely clear, we believe it is reasonable to take the position that ADSs do not constitute assets located in Brazil for the purposes of Law No. 10,833 is that ADSs should not be regarded as assets located in Brazil.10,833/03. Accordingly, the disposition of our ADSs by a non-resident to either a Brazilian resident or a non-resident should not be subject to taxation in Brazil. However, inWe cannot assure

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you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. In the event that a disposition of our ADSs is considered a disposition of assets located in Brazil, this tax law could result in the imposition of withholding taxesgains on thea disposition of our ADSs by a non-resident of Brazil. We are not aware of precedents on the application of Law No. 10,833Brazil may be subject to ADSs and, accordingly, we are unable to predict whether Brazilian courts would apply it to a disposition of our ADSs by a non-resident ofincome tax in Brazil. See “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Gains.”

 

Any gain or loss recognized by a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Considerations”) would generally be treated as U.S. source gain or loss for all foreign tax credit purposes. Consequently, U.S. Holders will not be able to credit any Brazilian income tax imposed on such gains against their U.S. federal income tax liability unless they have other creditable taxable income from foreign sources in the appropriate foreign tax credit basket. U.S. Holders should consult their tax advisers as to whether the Brazilian tax on gain would be creditable against thesuch holder’s U.S. federal income tax on foreign-source income from other sources.

There can be no assurance that we will not be a passive foreign investment company, or “PFIC,” for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our common shares or ADSs.

In general, a non-U.S. corporation is a PFIC for any taxable year if: (1) 75% or more of its gross income consists of passive income (the “income test”) or (2) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income (including cash and cash equivalents). Generally, “passive income” includes interest, dividends, rents, royalties and certain gains. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. The Company believes that it was not a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for its 2019 taxable year. However, because the Company’s PFIC status is an annual determination that can be made only after the end of each taxable year and will depend on the composition of its income and assets and the value of its assets for each such year, there can be no assurance that the Company will not be a PFIC for the current or any other taxable year.

If the Company were a PFIC for any taxable year during which a U.S. holder owned its common shares or ADSs, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. See “Item 10. Additional Information—E. Taxation——Certain U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

Judgments of Brazilian courts with respect to our common shares will be payable only in reais.

 

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other thanreais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other thanreais may be satisfied in Brazilian currency only at the exchange rate, as determined by the Central Bank, in effect on the date of payment. The exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under our common shares or the ADSs.

 

Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares underlying the ADSs.

 

Holders of ADSs will be unable to exercise the preemptive rights relating to our common shares underlying ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the “Securities Act,” is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights or to take any other action to make preemptive rights available to holders of ADSs. We may decide, in our discretion, not to file any such registration statement. If we do not file a registration statement or if we, after consultation with the ADR depositary, decide not to make preemptive rights available to holders of ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will be allowed to lapse.

 

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An exchange of ADSs for common shares risks loss of certain foreign currency remittance and Brazilian tax advantages.

 

The ADSs benefit from the certificate of foreign capital registration, which permits Citibank N.A., as depositary, to convert dividends and other distributions with respect to our common shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for common shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of

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exchange. Thereafter, they will not be able to remit the proceeds abroad unless they obtain their own certificate of foreign capital registration under the terms of Law No. 4,131/62, or unless they qualify under Resolution CMN 4,373, which superseded Resolution CMN No. 2,689, which entitles certain investors to buy and sell shares on Brazilian stock exchanges or organized over-the-counter market and benefit from the certificate of foreign capital registration managed by their authorized representatives in Brazil. See “Item 9. The Offering and Listing—C. Markets—Investment in Our Common Shares by Non-Residents of Brazil.”

 

If holders of ADSs do not qualify under Resolution CMN 4,373, they will generally be subject to less favorable tax treatment on distributions with respect to our common shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.

 

A portion of the compensation of our officers and members of the senior management is paid in the form of stock options, which could tie their interest to the market price of our shares and ADSs.

 

We have established stock option plans for our officers and members of our senior management. Potential benefits under the stock option plans are tied to the appreciation of the market price of our shares and ADSs.

 

As a result, our compensation policy may influence our officers and members of the senior management and their interest to the market price of our shares and ADSs, which may conflict with the interests of our shareholders. Our officers and members of the senior management may be influenced to focus on short-term rather than long-term results because a significant portion of their compensation is tied to our results and the market price of our shares and ADSs. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Stock Option Plans” in this annual report.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

General

 

Gafisa S.A. is a corporation organized under the laws of Brazil. We were incorporated on November 12, 1996 for an indefinite term. Our registered and principal executive offices are located at Av. Nações UnidasPres. Juscelino Kubitschek, No. 8.501, 19th floor, 05425-070,1830, Block 2, 3rd Floor, 04543-900, São Paulo, SP, Brazil, and our general telephone and fax numbers are + 55 (11) 3025-9000 and + 55 (11) 3025-9242, respectively.

 

We are a leading diversified national homebuilder serving all demographic segments of the Brazilian market. Established over 60 years ago, we have completed and sold more than 1,100 developments and constructed over 1216 million square meters of housing under the Gafisa brand, which we believe is more than any other homebuilder in Brazil. Recognized as one of the foremost professionally-managed homebuilders, we are also one of the best-known brands in the real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners, and competitors for quality, consistency and professionalism. Our brands include Tenda, which serves the affordable entry-level housing segments, Gafisa, which offersprofessionalism, offering a variety of residential options to the mid to higher income segments and Alphaville (equity method investment), which focuses on the identification, development and sale of high quality residential communities. In addition, we provide construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest.segments.

 

Our core business is the development of high-quality residential units in attractive locations. For theThe year ended December 31, 2015, 48% of the value of2019 was a milestone year for Gafisa, as we underwent a comprehensive restructuring process. As a result and to focus on our launches was derived from high and mid high-level residential developments under the Gafisa brand. For the year ended December 31, 2015, approximately 52% of the value of our launches was derived from Tenda, our affordable entry-level housing brand.

restructuring, we decided not to launch new projects. We currently operate mainly in several cities, including São Paulo, Rio de Janeiro, Salvador, Recife, Belo Horizonte, and Porto Alegre. Many of these developments are located in markets where few large competitors currently operate. For the year ended December 31, 2015, approximately 24% of the valuebut we still have a small portion of our launches was derived from our operations outside the states of São Paulo andinventory in Rio de Janeiro and from developments related to the “Minha Casa Minha Vida” program under the Tenda brand.

In the fourth quarter of 2011, we conducted an extensive review of our operations and the operations of our subsidiaries, and our combined business strategy. As a result of this review, the following changes were made:other cities.

 

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temporary reductions of the activities of the Tenda segment, increase in investments in the Alphaville segment and focus theIn 2006 Gafisa segment on the markets of Sao Paulo and Rio de Janeiro.

The closing of 2013 marked the completion of Gafisa’s strategic repositioning, which commenced in early 2012. Our goal at the time was clear: we needed to reduce the level of debt and restrict the Company's exposure to unprofitable businesses and markets. This process evolved positively throughout the last two years in several fronts - including improvement in margins and cash generation, and culminated with the sale of a 70% interest in Alphaville, which unlocked significant value and contributed to a reduction in the Company's leverage, adjusting its capital structure. At the end of 2013 we finalized the development of our five-year business plan for the period from 2014 to 2018. During the planning process, we set guidelines for the development of our business for the upcoming years, including the expected size of Gafisa and Tenda operations, appropriate leverage, profitability guidelines, and more importantly, our commitment to capital discipline and shareholder value generation, which are reflected in the guidance released to the market at the end of 2013. Gafisa S.A. completed the sale of a majority interest inacquired Alphaville Urbanismo S.A. (“Alphaville”), theor “Alphaville,” leading residential community development company in Brazil, to Private Equity AE Investimentos e Participações (“Fundo AE”), which has as shareholders Pátria InvestimentosBrazil. In 2008 Gafisa acquired Tenda, focusing on the low income segment. In 2013 Gafisa sold a 70% interest in Alphaville, and Blackstone Real Estate Advisor, which was announced on June 7, 2013. The transaction values Alphaville at an equity value of R$2.0 billion. The cash sale to Pátria and Blackstone resultedsold our remaining stake in Fundo AE owning 70% of Alphaville, with Gafisa retaining the remaining 30%. All precedent conditions were met including governmental approval, to the completion of the transaction. The transaction was concluded on December 9, 2013, with a sale of a 50% interest by Gafisa and a 20% interest by Construtora Tenda S.A. (“Tenda”), with Gafisa retaining the remaining 30% of Alphaville capital stock. Following this transaction and since December 2013, Alphaville is no longer consolidated in the financial statements of the Company.

The Company’s results of operations reflect the results of operations of Alphaville for the period January 1 to November, 30 2013 which are presented in the line item “Results from discontinued operations”.

For the year ended December 31, 2013, the Company held two business combination transactions, as follows:2019.

 

On February 27, 2013,August 16, 2016, we announced to the Company implemented a business combination through an asset swap in which the Company swapped its 50% interest in the jointly-controlled entity SPE Reserva Ecoville in exchange for a 50% controlling interest in SPE Parque Ecoville at a R$59.9 million fair value. As a result, we recorded an adjustment to inventory of R$22.6 million.

On September 12, 2013, the company implemented a business combination through which it obtained control of Manhattan Square Empreendimentos Imobiliarios Comercial 02 (“MC 02”) and Manhattan Square Empreendimentos Imobiliarios Residencial 02 (“MR 02”). These two entities were previously jointly controlled and the Company held a 50% interest in both entities. As a result of this acquisition, the company now holds a 100% interest. The combined purchase price was R$64.7 million and was paid on September 12, 2013. As a result of this transaction, the Company allocated the amount of R$62.3 million recorded as fair value adjustment to inventory.

On February 2, 2014, Gafisa’s board of directors authorized management to initiate studies for a potential spin-off of Gafisa and Tenda business units into two independent publicly traded companies. Our management initiated the studies in the first quarter of 2014.

During 2014, we revised our 2014 launch guidance for the Gafisa segment as a result of weakening economic conditions in Brazil. This revision in the projected volume of launches affected guidance for the Administrative Expenses to Launch Volumes ratio for the Gafisa segment, as well as projected consolidated launches.

During 2015, as part ofmarket that the spin-off studies were ongoing and that we (i) separated several joint departments of Gafisa and Tenda, including, among others, the services, personnel and management department and the legal department, (ii) converted Tenda’s issuer registration with the CVM from category B to category A, (iii) entered into negotiations with several banks and insurance companies to open lines of credit for Tenda that are independent of Gafisa, and (iv) reviewed our contracts with our third party counterparties and evaluated the potential impact of a spin-off on those contracts. As of the date of this annual report, we are alsowere evaluating other potential capital structure options for each of the Gafisa and Tenda business units should we conclude the potential spin-off, taking into account the business cycle of each business unit. In parallel, we continue to assess separation alternatives for the Gafisa and Tenda business units. As communicatedunits, including a potential offer of securities and/or a sale of equity interests, in the material fact dated April 29, 2015,addition to the spin-off studies are ongoingitself.

In December 2016, following the conclusion of our analysis of certain strategic options, our management at the time decided to sell 50% of Tenda’s total capital stock, and will take longertransfer the remaining 50% of Tenda’s total capital stock to be concluded than had been initially expected.our shareholders in connection with a reduction in our total capital stock. Accordingly, ason December 14, 2016, we entered into the SPA with Jaguar pursuant to which we would sell Tenda shares representing up to 30% of the datetotal capital stock of this annual report, we cannot estimate when the potential spin-off of the Gafisa and Tenda, business units may be concluded.at a price equal to R$8.13 per share.

 

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During 2015,2017, we did not issue a launch guidance for the Tenda segment or the Gafisa segment as a result of the continuing weakening economic conditions and political instability in Brazil. High interest rates, high rates of inflation and an increase in levels of unemployment, among other factors, had an adverse impact on the real estate market, including the Gafisa segment, resulting in a sharp decrease in the overall volume of real estate launches in Brazil. Consequently,Accordingly, we adopted a conservative approach to launches, seekingfocusing on the sale of inventory.

The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to balancewhich Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the levelSELIC); (ii) a reduction of launchesthe capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.

During 2018, we did not issue a launch guidance for Gafisa as a result of the economic conditions and political instability in Brazil.

On September 25, 2018, at an extraordinary shareholders’ meeting held at the request of GWI Asset Management S.A., the shareholders resolved to (i) remove by majority vote all of the members of the Board of Directors and (ii) elect new Board members by means of a multiple-vote process. Accordingly, at a Board of Directors’ meeting on September 28, 2018, the following resolutions were passed as part of the turnaround process and the optimization of the Company’s structure: (i) the withdrawals of chief executive officer, chief financial and investor relations officer and chief operating officer and the election of new productsstatutory officers; (ii) the adoption of measures to approve the Company’s headquarters relocation; (iii) the closure of our branch located in the marketcity of Rio de Janeiro and (iv) the approval of the Company’s share buyback program.

An auction of 14,600,000 shares held by prioritizing ventures with more liquidity, with the aimCompany’s shareholder, GWI Asset Management S.A. took place on February 14, 2019, corresponding to reach stable salesan interest of 33.67% in the Company’s ownership structure. As a result of this auction, Planner Corretora de Valores S.A., through investment funds managed by it, acquired 8,000,000 common shares corresponding to 18.45% of the total common shares issued by the Company. Mr. Mu Hak You and profitability levels. In contrast, and despiteMr. Thiago Hi Joon You resigned from the continuing weakening economic conditions in Brazil, we were able to expand the Tenda segmentboard of our business, which focusesdirectors on the low-income market.February 17, 2019.

 

Our common shares are listed on the BM&FBOVESPAB3 under the symbol “GFSA3” and the ADSs are listed ontraded OTC in the NYSEUnited States under the symbol “GFA.”“GFASY”.

 

Our agent for service of process in the United States is National Corporate Research, Ltd. located at 10 East 40th Street, 10th floor, New York, NY 10016.

 

Historical Background and Recent Developments

 

Gomes de Almeida Fernandes Ltda., or “GAF,” was established in 1954 in the city of Rio de Janeiro with operations in the real estate markets in the cities of Rio de Janeiro and São Paulo. In December 1997, GP Investimentos S.A. and its affiliates, or “GP,” entered into a partnership with the shareholders of GAF to create Gafisa S.A. In 2004, as a result of a corporate restructuring, GP assumed a controlling position in our company. In 2005, an affiliate of Equity International Management, LLC, or “Equity International,” acquired approximately 32% of our company

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through a capital contribution. In February 2006, we concluded our initial public offering in Brazil, resulting in a public float of approximately 47% of our total share capital at the conclusion of the offering.

 

In September 2006, we created Gafisa Vendas Intermediação Imobiliária Ltda., or “Gafisa Vendas,” to function as our internal sales division in the state of São Paulo and in February 2007, we created a branch of Gafisa Vendas in Rio de Janeiro, or “Gafisa Vendas Rio,” to function as our internal sales division in the metropolitan region of Rio de Janeiro.

 

In October 2006, we entered into an agreement with Alphaville Participações S.A. to acquire 100% of Alphaville, one of the largest residential community development companies in Brazil in terms of units and square meters, focused on the identification, development and sale of high quality residential communities in the metropolitan regions throughout Brazil targeted at upper and upper-middle income families. On January 8, 2007, we successfully completed the acquisition of 60% of Alphaville’s shares for R$198.4 million, of which R$20 million was paid in cash and the remaining R$178.4 million was paid in exchange for 6.4 million common shares of Gafisa. On May 27, 2010, the shareholders of Gafisa approved the acquisition of 20% of Alphaville’s shares for the total amount of R$126.5 million, through the merger of Shertis Empreendimentos e Participações S.A. or “Shertis”, which main asset were 20% of Alphaville’s shares. As a consequence of such merger, Gafisa issued 9,797,792 common shares, paid to the former shareholders of Shertis.

 

On March 17, 2007, we concluded our initial public offering of common shares in the United States, resulting in a public float of 78.6% of our total share capital at the conclusion of the offering. Upon completion of the offering, entities related to Equity International and GP controlled 14.2% and 7.3% of our total capital stock, respectively. In June 2007, Brazil Development Equity Investments, LLC, a company affiliated with GP, sold its remaining interest in our company (7.1% of our capital stock at the time).

 

On March 15, 2007, we created a new wholly-owned subsidiary, Fit Residencial Empreendimentos Imobiliários Ltda., or “FIT,” for the development, construction and management of lower and lower-middle income residential projects. On October 21, 2008, Gafisa and Tenda concluded a business combination in which FIT was merged into Tenda. The purpose of the merger was to consolidate the activities of FIT and Tenda in the lower-income segment in Brazil focused on developing real estate units with an average price of less than R$200.0 thousand. As a result of the business combination, Gafisa became the owner of 60.0% of the total and voting capital stock of Tenda. On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s non-controlling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares. As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa. On October 26, 2007, Gafisa acquired 70% of Cipesa Empreendimentos Imobiliários S.A., a leading homebuilder in the State of Alagoas at the time.

 

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On October 1, 2010, Equity International sold its remaining interest in our company. As of December 31, 2013, Fundação dos Economiarios Federais (“FUNCEF”), Polo and Skagen, were the shareholders holding more than 5.0% of our shares.

On June 8, 2012, according to the material fact then disclosed, the third phase of the Investment Agreement and Other Covenants entered into on October 2, 2006 (“Investment Agreement”), established the rules and conditions for Gafisa related to the acquisition of the remaining 20% interest in the capital stock of Alphaville not held by the Company. While the valuation of the capital stock has been agreed by both parties, the number of shares that shall be issued by the Company to settle this transaction is being decided in arbitration proceedings initiated by the minority shareholders of Alphaville, according to the material fact we released on July 3, 2012. There is an embedded derivative component to the Investment Agreement, relating to the Company’s obligation to purchase the Alphaville shares held by the non-controlling interest. As the fair value of this embedded derivative for all reporting periods has no significant value, since the future settlement of the derivative will be based on the fair value of Alphaville’s capital stock, no derivative asset or liability has been recorded. The future settlement to be made in cash or shares represented an amount of R$359.0 million as at December 31, 2012 and 2011. If 70,251,551 common shares of Gafisa are issued to the other shareholders of Alphaville, these shareholders will receive 13.96% of Gafisa’s total capital stock. On June 7, 2013, according to the material fact then disclosed, Gafisa entered into an agreement to sell a 70% interest in Alphaville to Blackstone and Patria and also agreed to complete the purchase of the outstanding 20% interest in Alphaville, finalizing the arbitration process.

On July 3, 2013, Gafisa completed the purchase of the outstanding 20% interest in Alphaville, belonging to Alphapar, resulting in the Company holding 100% of Alphaville’s capital stock. This transaction resulted in a temporary increase in the Company’s leverage to 126% (Net Debt/Equity) and it was financed partially through Company’ cash in addition to funding of R$250 million in June. The total disbursement was made in July in the amount of R$366.6 million.

 

On December 9, 2013, Gafisa announced the completion of the agreement to sell a 70% interest in Alphaville to private equity firms Blackstone and Pátria. Gafisa retained a 30% interest. The sale valued Alphaville at R$2.0 billion. The proceeds from the transaction totaled R$1.54 billion, of which R$1.25 billion was received through the sale of shares, and R$290 million was received as a dividend distributed by Alphaville.

 

On February 2, 2014, Gafisa’s board of directors authorized management to initiate studies for a potential spin-off of Gafisa and Tenda business units into two independent publicly traded companies. Our management initiated the studies in the first quarter of 2014.

During 2015 and 2016, we implemented several initiatives in connection with the potential spin-offspin-off. During 2016, our management decided to sell 50% of Tenda’s total capital stock, and we are currently evaluating potentialtransfer the remaining 50% of Tenda’s total capital structure options for eachstock to our shareholders in connection with a reduction in our total capital stock, and implement the spin-off. The spin-off of the Gafisa and Tenda business units should we conclude the potential spin-off. During 2014, we also revised our 2014 launch guidance for the Gafisa segment as a result of weakening economic conditions in Brazil. We did not issue a launch guidance for the Gafisa segment or the Tenda segment during 2015 due to the continuing weakening economic conditions and political instability in Brazil.unit was consummated on May 4, 2017. See “Item 4. Information on the Company—“—A. History and Development of the Company—General” for further information.

 

On March 23, 2017, the Company conducted a reverse split of common shares issued by the Company, at the ratio of 13.483023074 to 1, and proportional adjustment to the limit of authorized capital. As of the date of this annual report, the share capital is comprised of 28,040,162 common, registered and non-par value shares.

On December 20, 2017, the Company’s shareholders approved at an extraordinary shareholders’ meeting a capital increase of up to R$300.0 million, with the option to approve a partial capital increase of up to R$200.0 million to be subscribed for through the issuance of a minimum of 13,333,333 new common shares and a maximum of 20,000,000 new common shares in the Company, all in registered, book-entry form, and with no par value, at a price per share equal to R$15.00, of which R$0.01 per share would be allocated to capital, and R$14.99 per share would be allocated to capital reserves. This capital increase is part of the Company’s strategy to reinforce its liquidity, strengthen its capital structure and solidify the Company’s strategic and operational positioning for a new cycle of the real estate

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market. Following the preemptive rights exercise period, which expired on January 19, 2018, and the subsequent subscription periods that expired on February 2, 2018 and February 21, 2018, respectively, we issued and sold 16,717,752 new common shares of the Company for a total amount of R$250.8 million, all in registered, book-entry form, and with no par value, at a price per share equal to R$15.00, of which R$0.01 per share was allocated to capital, and R$14.99 per share was allocated to capital reserves. Accordingly, on February 28, 2018, our board of directors approved a capital and capital reserve increase in the amount of R$250.8 million.

At the end of 2017 and in the beginning of 2018, GWI Group, a private property investment company and asset management fund founded by South Korean national Mu Hak You, began to acquire a large number of shares in the Company. On January 31, 2018, following several purchases of Company shares, the GWI Group had a 30.45% interest in the Company’s share capital.

On September 21, 2018, GWI Group acquired an additional number of shares, increasing its interest to 37.32% in the Company’s share capital. GWI informed us that this share acquisition was made for investment purposes and in order to restructure part of the Company’s Board. On September 25, 2018, GWI convened an Extraordinary Shareholders’ Meeting for the purpose of dismissing members of the Board of Directors and electing new members through a multiple-vote process. GWI approved the dismissal of the entire Board of Directors and elected directors for five of the seven vacant seats. See “Item 6. Directors, Senior Management and Employees—C. Board Practices”, for further information about our Board of Directors. Within three days of the dismissal and election of the new Board of Directors, the Company’s executive board was removed from office.

On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the New York Stock Exchange (the “NYSE”) and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On December 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the ADSs, and sent a copy to the NYSE on the same day. The last day of trading on NYSE for our ADSs was December 14, 2018, and our ADSs were delisted from the NYSE on December 17, 2018. Our ADSs remain eligible for trading in the over-the-counter markets in the United States, and our common shares will continue to be listed and admitted to trading in the Novo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the Exchange Act. In the Extraordinary shareholders meeting held in April 2019, the measures taken for the voluntary delisting of Gafisa’s shares from the New York Stock Exchange (NYSE) and the change of the American Depositary Shares program from a Level 3 to a Level 1 program were not ratified.

On December 19, 2018, the Board of Directors approved the cancellation of 1,030,325 of the Company’s common shares, without reduction in our capital stock.

On January 22, 2019, the Board of Directors approved the cancellation of 370,000 of the Company’s common shares, without reduction in our capital stock. The Company also disclosed to the market a Material Fact stating that the GWI Group had acquired Company shares representing more than 50% in the Company’s share capital. Pursuant to article 46 of the Company’s Bylaws, any shareholder that holds a participation equal to or greater than 50% of the Company’s share capital is required to make a Tender Offer for the remaining shares. Accordingly, shortly thereafter, GWI Group, without making a Tender Offer, sold a small portion of its shares in order to maintain a participation of less than 50% in the Company’s share capital. Following queries for clarification by the Company, CVM and B3 about these transactions involving the Company’s share capital, GWI Group confirmed that the GWI acquisition of more than 50% of the Company’s share capital was not intentional and, therefore, did not trigger the Tender Offer requirement provided for in the Company Bylaws.

By February 14, 2019, GWI Group had sold, through auction in the capital markets, a 33.67% interest it held in the Company’s share capital. As a result, GWI Group ceased to control the Company and reduced its interest in the Company’s share capital to 7.70%. Furthermore, Planner Corretora de Valores S.A. in the same date, through investment funds managed by it, purchased shares corresponding to 18.45% of the total share capital of the Company.

The GWI Group traded in our shares in early 2019, giving rise to several requests for information by CVM and B3 with respect to compliance with the Tender Offer requirement provided for in the Company’s Bylaws. The Company responded to such requests on March 21, 2019 and, as of the date of this annual report, has no knowledge of any further action to be taken by CVM regarding this issue. The Company understands that, as the GWI Group is no longer a relevant shareholder and their representatives are no longer part of the Company’s management, the

25 

Company should not be subject to any further sanctions and will keep its shareholders and the market informed of any developments in that regard.

During February, March and April 2019, the members of the Company’s Board of Directors elected in late 2018 resigned, with the exception of Pedro Carvalho de Mello, and new members were elected to replace them. As of the date of this annual report, following the Annual General Meetings held on April 15, 2019 and April 30, 2020, Gafisa’s Board of Directors is composed of the following members: (i) Leo Julian Simpson (nominated as chairman of the Board of Directors on April 15, 2019), (ii) Antonio Carlos Romanoski, (iii) Denise dos Passos Ramos, (iv) Eduardo Larangeira Jácome, (v) Nelson Sequeiros Rodriguez Tanure, (vi) João Antônio Lopes Filho, (vii) Thomas Cornelius Azevedo Reichenheim, and (viii) Gilberto Benevides.

On April 15, 2019, at the Annual General Meeting, the shareholders resolved to suspend the shareholder rights of GWI Asset Management S.A. and the other members of the GWI Group due to GWI Group’s non-compliance with the Company’s Bylaws as they relate to the Tender Offer request. In addition, it was resolved to increase the limit of authorized capital of the Company from 71,031,876 ordinary shares to 120,000,000 ordinary shares. This increase in the Company’s authorized capital enables us to issue new shares in a sufficient amount to accommodate the financial restructuring of the Company.

On April 15, 2019, following the General Meeting, in order to raise funds for investments, the newly appointed Board of Directors approved a capital increase of 26,273,962 new common shares. These newly issued common shares were offered privately to the Company’s shareholders at the B3, and were issued at the reference price of R$6.02 per common share (which was determined following an audit conducted by a specialized firm). The Board of Directors also appointed Roberto Luz Portella as Chief Executive Officer, Chief Financial Officer and Investor Relations Officer and Eduardo Larangeira Jácome as Operational Executive Officer. Following the preemptive rights exercise period, and the subsequent subscription periods, we issued and sold 12,170,035 and 14,103,927 new common shares of the Company for a total amount of R$62.3 million and R$70.0 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to R$5.12 and R$4.96, respectively. Accordingly, on June 24, 2019, our board of directors approved a capital increase in the amount of R$132.3 million.

In June 2019, we concluded a capital increase of 26,273,962 shares, raising approximately R$132 million.

On August 15, 2019, the Board of Directors approved a capital increase of 48,968,124 new common shares. These newly issued common shares were offered privately to the Company’s shareholders at the B3, and were issued at the reference price of R$6.57 per common share (which was determined following an audit conducted by a specialized firm). Following the preemptive rights exercise period and subsequent subscriptions periods, we issued and sold 45.554.148 and 3,413,976 new common shares of the Company for a total amount of R$254.2 million and R$18.5 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to R$5.58 and R$5.42, respectively. Accordingly, on October 23, 2019, our board of directors approved a capital increase in the amount of R$272.7 million. As of the date of this annual report, the share capital of the Company totaled R$2,926.3 million, represented by 120,000,000 common shares, all in registered, book-entry form, and with no par value.

On August 29, 2019 the Board of Directors appointed André Luis Ackermann as Chief Financial Officer, and Eduardo Larangeira Jácome tendered his resignation as Management Officer, effective as of September 30, 2019. Eduardo Larangeira Jácome will remain as a member of the Restructuring Committee until December 31, 2019 and a member of the Company’s Board of Directors.

In addition, on September 20, 2019, Roberto Luz Portella resigned from his position as Chief Executive Officer and Investor Relations Officer. Following his resignation, on September 23, 2019, the Board of Directors appointed André Luis Ackermann as Investor Relations Officer.

In October 2019, we concluded a capital increase of 48,986,124 shares and raised approximately R$272 million.

On October 21, 2019, we informed our shareholders and the market that we entered into a Purchase and Sale, Stock Redemption, Corporate Restructuring Agreement with Alphaville Urbanismo S.A., Private Equity AE Investimentos e Participações S.A. and affiliates of PEAE, setting forth the terms and conditions for the divestment of our shares in Alphaville. On December 27, 2019, we concluded the divestment sale of our remaining 21.20% stake in Alphaville for R$100 million, which was settled by offsetting certain credits and the receipt of the investee shares

26 

against assets, measured at fair value. This transaction is in line with the Company’s strategy to optimize and improve the Company’s portfolio and capital allocation, aiming at creating value for our shareholders.

On December 16, 2019, we announced that we had entered into a non-binding letter of intent with UPCON Incorporadora S.A. (“UPCON”), pursuant to which we indicated our intent to acquire the entire share capital of UPCON. On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. Once all required approvals are obtained, UPCON will become a wholly-owned subsidiary of Gafisa.

On December 16, 2019, we entered into an Additional Investment Agreement with UPCON, which was discussed at an Extraordinary Shareholders’ Meeting on April 30, 2020. Accordingly and with the aim to strengthen our executive team, our Board of Directors approved a new organizational structure and elected the following three new Executive Officers: (i) Guilherme Augusto Soares Benevides as Chief Operations Officer and Vice-president of Operations; (ii) Fábio Freitas Romano as Assistant Vice-president of Operations; and (iii) Ian Masini Monteiro de Andrade as Chief Financial Officer and Investor Relations Officer and Vice-president of Management and Finance.

On April 30, 2020, at our Annual and Extraordinary Shareholders’ Meeting, the following matters were approved in relation to the purchase and sale of UPCON Incorporadora S.A.’s shares: (i) the acquisition by Gafisa of the entire share capital of UPCON; (ii) an increase in the Company’s share capital of R$310.0 million; (iii) the issuance of two series of debentures convertible into common shares to cover the transaction with UPCON, in the total amount of R$150.0 million; (iv) changes in the composition of the Board of Directors, which will have seven to nine members; (v) the election of members to the Board of Directors; and (vi) approval of a plan to repurchase the Company’s shares, up to a limit of 10,327,558 shares to be acquired by the Company.

On January 28, 2020, the Board of Directors elected new statutory officers: (i) Cauê Castello Cardoso, (ii) Guilherme Luis Pesenti, and (iii) Luiz Fernando Ortiz.

At a Board of Directors meeting held on February 7, 2020, Mr. Roberto Luz Portella tendered his resignation as a member of the Company’s Board of Directors. At the same meeting, Mr. João Antônio Lopes Filho was elected as the new member of the Company’s Board of Directors.

On March 27, 2020, our Board of Directors approved the establishment of the Company’s share buyback program with the objective of generating value for the Company’s shareholders, that was confirmed by the General Shareholders Meeting held on April 30, 2020. Shares purchased by the Company as part of the buyback program will be held in treasury, and may subsequently be canceled, sold and/or used in connection with the exercise of stock options granted by the Company. The maximum number of shares the Company may acquire under this program is 10,327,558 common shares, pursuant to Article 8 of CVM Instruction No. 567/15. This buyback program ends on May 4, 2021. Under our current shares repurchase program, any acquisition by us of our own shares must be made on a stock exchange and cannot be made by means of a private transaction. See “Item 10. Additional Information—B. Memorandum and Bylaws—Purchases by us of our own Shares,” for further information.

On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. On April 30, 2020 all required approvals were obtained, and UPCON became a wholly-owned subsidiary of Gafisa.

Capital Expenditures

 

In 2015,2019, under the Gafisa brand, we invested R$54.63.6 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to approximately R$1 million.

In 2018, under the Gafisa brand, we invested R$12.5 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands, which amounted to R$9.7 million.

In 2017, under the Gafisa brand, we invested R$20.5 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands and software acquisitions, which amounted to R$9.47.3 million and R$22.76.4 million, respectively.

 

In 2014, we invested R$88.5 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to sales stands and software acquisitions, which amounted to R$19.3 million and R$10.9 million, respectively.27 

Table of Contents 

In 2013, we invested R$81.0 million in machinery and equipment, information technology equipment, software, project planning and information technology projects. Our main investments during the period were related to software and hardware acquisitions, which amounted to R$34.1 million and R$9.8 million, respectively.

Our capital expenditures are all made in Brazil and are usually funded by financings through local debt capital markets. We currently do not have any significant capital expenditures in progress.

 

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B. Business Overview

 

General Overview

 

We believe we are one of Brazil’s leading homebuilders. For over more than 5060 years, Gafisa has been recognized as one of the foremost professionally-managed homebuilders, having completed and sold more than 1,100 developments and constructed over 1216 million square meters of housing, which we believe is more than any other residential development company in Brazil. We believe our brands “Gafisa,” “and “Tenda” arebrand “Gafisa” is a well-known brandsbrand in the Brazilian real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners and competitors for quality, consistency and professionalism.

 

Our core business is the development of high-quality residential units in attractive locations. For the year ended December 31, 2015, 48% of the value of2019, we did not launch new projects as we focused on our launches was derived from high and mid high-level residential developments under the Gafisa brand.corporate restructuring. In addition, we also provide construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest. For the year ended December 31, 2015, approximately 52% of the value of our consolidated launches was derived from the Tenda brand, our affordable entry-level housing brand. We are currently operating mainly in several cities, including São Paulo Rio de Janeiro, Salvador, Recife Belo Horizonte and Porto Alegre which representsits metropolitan area. The city of São Paulo represented approximately 13%6% of the national population and approximately 21%over 10% of the gross domestic product as of December 31, 2015. Many of these developments are located in markets where few large competitors currently operate. For the year ended December 31, 2015, approximately 24% of our launches were derived from our operations outside the states of São Paulo and Rio de Janeiro and from developments related to the “Minha Casa Minha Vida” program under the Tenda brand.2017 (latest available information).

 

Our Markets

 

We are presenthave developed real estate projects in 11540 municipalities throughout Brazil, including Abatia, Águas Lindas de Goias, Ananindeua, Anápolis, Aparecida de Goiânia, Aracajú, Barbacena, Barra dos Coqueiros, Barreiro, Barueri, Belém, Belford Roxo, Belo Horizonte, Betim, Brasília, Cabo Frio, Cachoeirinha, Cajamar, Camaçari, Campinas, Campo Grande, Campos dos Goytacazes, Canoas, Caruaru, Caxias, Contagem, Cotia, Cuiabá, Curitiba, Diadema, Duque de Caxias, Eusébio, Estrada do Coco, Feira de Santana, Ferraz de Vasconcelos, Fortaleza, Foz do Iguaçu, Goiânia, Governador Valadares, Gramado, Gravataí, Guarujá, Guarulhos, Iguaraçu, Itaboraí, Itanhaém, Itapevi, Itaquaquecetuba, Itu, Jaboatão dos Guararapes, Jandira, Jardim Primavera, João Pessoa, Juiz de Fora, Jundiaí, Lauro de Freitas, Londrina, Macaé, Maceió, Manaus, Maricá, Mauá, Mirante Campina Grande, Mogi das Cruzes, Montes Claros, Mossoró, Natal, Niterói, Nova Iguaçu, Nova Lima, Novo Gama, Novo Hamburgo, Osasco, Paço do Lumiar, Parnamirim, Petrolina, Pinhais, Piracicaba, Poá, Porto Alegre, Porto Velho, Recife, Resende, Ribeirão das Neves, Ribeirão Preto, Rio das Ostras, Rio de Janeiro, Salvador, Samambaia, Santa Luzia, Santana de Parnaiba, Santo André, Santos, São Bernardo do Campo, São Caetano do Sul, São Gonçalo, São JoséJose dos Campos, São Leopoldo,Luís, São Luis, São Paulo São Vicente, Sapucaia do Sul, Serra, Sete Lagoas, Sorocaba, Suzano, Taboão da Serra, Teresina, Valência, Valparaíso, Vespasiano, Vitória da Conquista, Camaragibe, Paulista and Volta Redonda.

 

Our Real Estate Activities

 

Our real estate business includes the following activities:

 

·developments for sale of:

 

·residential units;

·land subdivisions (also known as residential communities);

 

·commercial buildings;

 

·construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest; and

 

·sale of units through our brokerage subsidiaries, Gafisa Vendas and Gafisa Vendas Rio, jointly referred to as “Gafisa Vendas.”

 

The table below sets forth our potential sales value, generated from new developments for each of our real estate activities and as a percentage of total real estate amount generated during the periods presented:

 

  For the year ended December 31,
  2019 2018 2017
  

(in thousands ofreais

 (% of total) 

(in thousands ofreais

 (% of total) 

(in thousands ofreais

 (% of total)
             
Residential buildings  —     —     655,974   100.0   553,954   100.0 
Commercial  —     —     —     —     —     —   
Potential sales (1)  —     —     655,974   100.0   553,954   100.0 

_________________

(1)The spin-off of the Tenda business unit was concluded on May 4, 2017.

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  For year ended December 31,
  2015 2014 2013
  (in thousands ofreais) (% of total) (in thousands ofreais) (% of total) (in thousands ofreais) (% of total)
             
Residential buildings  2,060,984   98.8   1,636,311   100.0   1,292,271   44.8 
Land subdivisions(1)     N/A      N/A   1,462,087   50.6 
Commercial  24,272   1.2      N/A   131,846   4.6 
Potential sales  2,085,257   100.0   1,636,311   100.0   2,886,204   100.0 
(1)This information is presented for comparison purposes and for the year ended December 31, 2013 only, as we sold our controlling interest in Alphaville on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.

The table below sets forth our actual sales value from new developments generated for each of our real estate activities and as a percentage of total real estate amount generated during the periods presented:

 

  For year ended December 31,
  2015 2014 2013
  (in thousands ofreais) (% of total) (in thousands ofreais) (% of total) (in thousands ofreais) (% of total)
             
Residential buildings  770,960   97.6   519,210   100.0   603,809   40.2 
Land subdivisions(1)  N/A   N/A   N/A   N/A   857,330   57.0 
Commercial  18,679   2.4   N/A   N/A   41,728   2.8 
Actual sales  789,639   100.0   519,210   100.0   1,502,867   100.0 

(1)This information is presented for comparison purposes and for the year ended December 31, 2013 only, as we sold our controlling interest in Alphaville on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.

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  For the year ended December 31,
  2019 2018 2017
  (in thousands of reais) (% of total) (in thousands of reais) (% of total) (in thousands of reais) (% of total)
             
Residential buildings  —     —     401,836   100.0   277,029   100.0 
Commercial  —     —     —     —     —     —   
Sales (1)  —     —     401,836   100.0   277,029   100.0 

_________________

(1)The spin-off of the Tenda business unit was concluded on May 4, 2017.

 

Developments for Sale

 

The table below provides information on our developments for sale activities during the periods presented:

 

 As of and for the year ended December 31, As of and for the year ended December 31,
 2015 2014 2013 2019 2018 2017
 (in thousands ofreais, unless otherwise stated) (in thousands ofreais, unless otherwise stated)
São Paulo            
Potential sales value of units launched(1)  884,269   770,269   1,054,359   —     655,974   496,785 
Developments launched(2)  10   7   10   —     5   4 
Usable area (m2)(3)  104,678   107,156   154,959   —     77,658   72,406 
Units launched(4)  2,224   1,474   1,935   —     948   1,467 
Average sales price (R$/m2)(3) (5)  8,448   7,188   6,804   —     9,840   6,861 
Rio de Janeiro                        
Potential sales value of units launched(1)  112,047   252,742   30,982   —     —     —   
Developments launched(2)  2   2   1   —     —     —   
Usable area (m2)(3)  9,427   27,827   4,101   —     —     —   
Units launched(4)  206   315   63   —     —     —   
Average sales price (R$/m2)(3)(5)  11,886   9,083   7,554   —     —     —   
Other States (6)            
Other Markets  —           
Potential sales value of units launched(1)           —     —     57,168 
Developments launched(2)           —     —     1 
Usable area (m2)(3)           —     —     10,534 
Units launched(4)           —     —     134 
Average sales price (R$/m2)(3)(5)           —     —     5,427 
Total Gafisa                        
Potential sales value of units launched(1)  996,315   1,023,012   1,085,341   —     655,974   553,954 
Developments launched(2)  12   9   11   —     5   5 
Usable area (m2)(3)  114,105   134,983   159,060   —     77,658   82,940 
Units launched(4)  2,378   1,789   1,998   —     948   1,601 
Average sales price (R$/m2)(3)(5)  8,732   7,579   6,820   —     9,840   6,679 
Alphaville (7)            
Potential sales value of units launched(1)        1,462,087 
Developments launched(2)        18 
Usable area (m2)(3)        2,620,224 
Units launched(4)        6,414 
Average sales price (R$/m2)(3)(5)        558 
Tenda            
Potential sales value of units launched(1)  1,088,941   613,299   338,776 
Developments launched(2)  29   14   8 
Usable area (m2)(3)  314,152   191,438   114,197 
Units launched(4)  7,711   4,315   2,660 
Average sales price (R$/m2)(3)(5)  3,466   3,203   2,996 

_________________

(1)Potential sales value is calculated by multiplying the number of units in a development by the expected sales price of the unit.

 

(2)Does not consider acquisitions of additional ownership interests in projects or cancelled projects.

 

(3)One square meter is equal to approximately 10.76 square feet. The unit’s usable area in exchange for land pursuant to barter transactions is not included.

 

(4)The units delivered in exchange for land pursuant to barter transactions are not included.

 

29 

(5)Average sales price per square meter was R$8,732,6,400, R$7,5798,661 and R$6,8206,679 in 2015, 20142019, 2018 and 2013,2017, respectively, for Gafisa’s ventures only, and R$558 in 2013 for Alphaville ventures. Average sales price per square meter was R$916 in 2013 for the combined ventures of Gafisa and Alphaville.

(6)In 2011, Gafisa launched one project outside São Paulo and Rio de Janeiro and cancelled another which had higher potential sales value, usable area and number of units than the new launch.

(7)This information is presented for comparison purposes and for the year ended December 31, 2013 only, as we sold our controlling interest in Alphaville on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.only.

 

Our developments for sale are divided into threetwo broad categories: (1) residential buildings (2) land subdivisions, and (3)(2) commercial buildings.

 

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Overview of Residential Buildings

 

In the residential buildings category, we develop three main types of products: (1) luxury buildings targeted at upper-income customers; (2)higher-income customers and buildings targeted at middle-income customers; and (3) affordable entry-level housing(2) entry level buildings targeted at lower-incomemiddle-low income customers. Quality residential buildings for middle- and upper-income customers are our core products and we have developed them since our inception. A significant portion of our residential developments is located in São Paulo and Rio de Janeiro where we have held a leading position over the past five years based upon area of total construction.Janeiro. In 2006, we began our national expansion to pursue opportunities in residential buildings outside these cities. However in 2012, as a result of the difficulties to manage these projects and to achieve reasonable profits, we focusedshifted our effortsfocus back to São Paulo and Rio de JaneiroJaneiro.

 

Luxury and Middle-Income Buildings

 

Luxury buildings are a high margin niche. Units usually have over 180150 square meters of private area, at least four bedrooms and more than three parking spaces. Typically, this product is fitted with modern, top-quality materials designed by brand-name manufacturers. The development usually includes swimming pools, gyms, visitor parking, and other amenities. Average price per square meter generally is higher than approximately R$8,000.15,000. Luxury building developments are targeted to families with monthly household incomes in excess of approximately R$30,000.40,000.

Buildings targeted at middle-income customers have accounted for the majority of our sales since our inception. Units usually have between 60 and 150 square meters of private area, between one and three bedrooms and up to three parking spaces. Buildings are usually developed in large tracts of land as part of multi-building developments and, to a lesser extent, in smaller lots in attractive neighborhoods. Average price per square meter ranges from approximately R$9,000 to R$15,000. Middle-income building developments are tailored to customers with monthly household incomes between approximately R$15,000 and R$40,000.

 

The table below sets forth our luxury and middle-income building developments launched between January 1, 20132017 and December 31, 2015:2019:

 

Project Description Year Launched Gafisa Participation (%) Usable Area (m2) (1) (2) Completion Year Number of Units (2) Units Sold (%) (As of December 31, 2015)
067 Hermann Junior  2015   100   6,563   2018   22   25%
Scena Alto da Lapa  2015   100   5,229   2018   42   21%
Delux  2013   100   9,751   2016   44   82%
Follow  2013   100   15,800   2016   240   77%

Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Upside Pinheiros2018100%11,26120217699%
Upside Paraíso2018100%10,881202110979%
J330 Jardins2017100%3,89620212846%
Parque Ecoville2017100%10,534202013478%
 

_________________

(1)One square meter is equal to approximately 10.76 square feet.

 

(2)Values for 100% of the building development, except on projects with partial interest.

 

Middle Income BuildingsEntry Level Developments

 

Buildings targeted at middle-income customers have accounted for the majorityEntry level housing consists of our sales since our inception.building and house units. Units usually have between 90 and 18040 to 60 square meters of private area, one to three or four bedrooms, and two to three underground parking spaces. Buildings are usually developed in large tractstypically located outside the vehicle restriction area of land as part of multi-building developmentsSão Paulo and to a lesser extent, in smaller lots in attractive neighborhoods. Averagenear public transportation points. The average price per square meter ranges from approximately R$4,5006,000 to R$8,000. Developments in Rio de Janeiro tend to be larger due to the large tracts of land available in Barra da Tijuca. Middle-income building9,000. Entry level housing developments are tailored to customers with monthly household incomes between approximately R$10,0007,000 and R$30,000.10,000.

 

The table below sets forth our entry level developments launched between January 1, 2017 and December 31, 2019:

Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Belvedere Lorian Boulevard2018100%24,975202222337%
Moov Belém2018100%14,512202139294%
Scena Tatuapé2018100%16,028202114724%
Moov Estação Brás2017100%12,866202154350%

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The table below sets forth our middle-income building developments launched between January 1, 2013 and December 31, 2015:

Project Description 

Year Launched 

Gafisa Participation (%) 

Usable Area (m2) (1) (2) 

Completion Year 

Number of Units (2) 

Units Sold (%) (As of December 31, 2019) 

Moov Espaco Cerâmica2017100%24,396202139699%
Moov Parque Maia2017100%31,248202150059%

Project Description Year Launched Gafisa Participation (%) Usable Area (m2) (1) (2) Completion Year Number of Units (2) Units Sold (%) (As of December 31, 2015)
Go Maraville  2015   100   16,383   2017   296   43%
Vision Paulista  2015   100   7,168   2017   200   23%
Bosque Marajoara  2015   100   23,833   2018   339   42%
Mood Lapa  2015   100   7,085   2017   153   40%
Alphamall  2015   100   2,342   2018   53   75%
Smart Santa Cecilia  2015   100   8,836   2018   261   15%
Smart Vila Madalena  2015   100   7,321   2018   230   31%
Vision Capote Valente  2015   100   7,149   2018   151   13%
Barra Vista Fase 1  2015   50   5,468   2019   216   24%
Hi Centro  2014   100   15,343   2016   271   46%
Alphagreen  2014   100   18,170   2016   207   45%
D.O.C. Quatá  2014   100   4,437   2016   78   37%
Lorian Qd3B  2014   100   27,276   2017   271   70%
Itaboraí  2014   100   7,725   2016   80   100%
Today Modern Residences  2014   100   9,657   2017   108   47%
Guacá  2014   100   9,702   2017   182   57%
SCS Cerâmica QI Fase 1 (Home)  2014   100   28,794   2017   256   57%
Eiras Garcia  2014   100   23,878   2017   336   78%
Today Santana  2013   100   11,290   2015   165   100%
Go Maracá  2013   100   11,274   2016   129   97%
Axis  2013   100   12,616   2016   215   31%
Easy Tatuapé  2013   100   9,142   2017   144   76%
Laguna Mall  2013   100   4,161   2015   63   75%
Square Santo Amaro  2013   100   27,330   2016   362   90%
Wide Cambuí  2013   100   19,833   2016   244   38%
EQ Jardim Prudência  2013   100   10,525   2016   97   84%
Square Osasco  2013   100   27,397   2017   295   93%

_________________

(1)One square meter is equal to approximately 10.76 square feet.

 

(2)Values for 100% of the building development, except on projects with partial interest.

 

Affordable Entry-Level Developments

Affordable entry-level housing consistsCompleted developments with percentage of building and house units. Units usually have between 42 to 60 square meters of indoor private area and two to three bedrooms. Average price per square meter ranges from approximately R$3,000 to 4,800. Affordable entry-level housing developments are tailored to families with monthly household incomes between approximately R$1,600 and R$5,000.

As part of our strategy of expanding our foothold in the affordable entry-level residential market, on March 15, 2007 we incorporated a wholly-owned subsidiary, FIT, to focus exclusively on this market. The principal emphasis of FIT was on five standardized residential developments in the peripheries of large metropolitan regions. Financing for FIT’s developments primarily came from the CEF, and such financing was structured so that customers paid low monthly installments without increasing our credit risk.

On October 21, 2008, Gafisa and Tenda concluded a business combination in which Gafisa’s wholly-owned subsidiary FIT was merged into Tenda. The purpose of the merger was to consolidate the activities of FIT and Tenda in the lower-income sector in Brazil and to develop real estate units with an average value ofsold less than R$200,000. As a result of the business combination, Gafisa received 60.0% of the total and voting capital stock of Tenda and FIT was merged into Tenda. Because Tenda launched very few units in 2008, we believe the full impact of the merger was not reflected in Gafisa’s results of operations until 2009.

On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s non-controlling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares. As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa.

As a result of Tenda’s and Gafisa’s underperformance in 2011 due to high cost overruns and customer dissolutions, our management and the board of directors have undertaken widespread structural and operational changes to avert future losses and strains on the business. Tenda is now operating under a new strategy whereby pre-sales recognition and the remuneration of the sales force is based on the ability to immediately pass mortgages on to financial institutions and the number of third party construction partners has been reduced to a group that has been thoroughly vetted for quality and sustainability. The strategy also consists of a reduction in the number of launches, and in 2012, we suspended the launch of additional Tenda units. Moreover, our management has decided to focus its low- to middle-income businesses in São Paulo, Rio de Janeiro, Minas Gerais and Bahia, where it has historically, had a better supply chain structure and stronger customer demand. As part of our new organizational strategy to manage further risks, our management has assigned a chief executive for each segment pursuant to which, our

31 

former CFO, Rodrigo Osmo assumed the position as Tenda CEO during the second half of 2011. In 2013, Tenda implemented a new business model and resumed its launches.90%

 

The table below sets forth our affordable entry-level housingcompleted developments launched by us between January 1, 2013 and December 31, 2015:

Project Description Year Launched Gafisa Participation (%) Usable Area (m2) (1) (2) Completion Year Number of Units (2) Units Sold (%) (As of December 31, 2015)
Residencial Orquídeas  2015   100   10,842   2016   280   97%
Residencial Vera Cruz  2015   100   9,618   2016   220   74%
Campo de Aviação F1  2015   100   12,668   2016   304   77%
Residencial Viena F1  2015   100   17,173   2017   440   39%
Jardins Itaquera  2015   100   7,744   2016   200   95%
Residencial das Laranjeiras  2015   100   8,518   2015   220   100%
Vida Alegre Sarandi F1  2015   100   12,865   2016   320   93%
Residencial Flor de Liz  2015   100   6,970   2016   180   97%
Mar de Abrantes  2015   100   14,051   2016   360   37%
Residencial Vila Atlântica F2  2015   100   7,876   2016   200   100%
Praia de Jangada F1  2015   100   14,631   2016   352   31%
Parque Rio Maravilha F2  2015   100   12,242   2017   280   36%
Bela Vida F1  2015   100   10,443   2016   239   28%
Engenho Camaras - F1  2015   100   12,001   2017   288   34%
Vila Florida  F2  2015   100   8,275   2017   192   49%
Vila Imperial F1  2015   100   11,214   2017   280   52%
Vida Alegre Sarandi F2  2015   100   11,270   2016   280   30%
Palácio Imperial - F2  2015   100   10,493   2016   240   12%
Recanto do Sol  2015   100   12,235   2017   280   14%
Nova Zelândia  2015   100   15,488   2017   400   48%
Viver Bem São Gabriel  2015   100   7,736   2017   180   22%
Res Parque Real Garden  2015   100   6,814   2017   156   6%
Residencial Vida Leve  2015   100   14,682   2017   336   5%
Res Provincia Do Porto I  2015   100   11,281   2017   280   20%
Res Morada Das Gaivotas  2015   100   8,518   2017   220   5%
Res Bellas Aguas  2015   100   12,175   2017   304   6%
Barra Viva  2015   50   15,415   2017   546   20%
Res Mirante Guaianazes  2015   100   9,293   2017   240   24%
Residencial Tulipas  2015   100   9,293   2016   240   55%
Res. Nova Itaquera  2015   100   7,744   2016   200   51%
Parque Das Flores Guaianazes  2014   100   4,437   2015   100   100%
Parque Rio Maravilha  2014   100   19,521   2015   440   100%
Verde Vida - F2  2014 �� 100   15,084   2015   340   100%
Renascença Candeias  2014   100   19,166   2015   432   98%
Vila Florida - F1  2014   100   19,166   2016   432   96%
Palácio Imperial - F1  2014   100   11,491   2016   259   89%
Rio Da Prata  2014   100   13,842   2015   312   100%
Recanto De Abrantes - F1  2014   100   15,084   2015   340   98%
Monte Alegre  2014   100   8,873   2015   200   100%
Parque Santo André  2014   100   7,098   2015   160   99%
Residencial Das Palmeiras  2014   100   11,535   2016   260   100%
Terra Brasilis - F1  2014   100   13,310   2016   300   90%
Vila Atlântica - F1  2014   100   10,648   2017   240   97%
Reserva Das Árvores - F1  2014   100   22,183   2015   500   68%
Novo Horizonte  2013   100   25,732   2014   580   100%
Vila Cantuária  2013   100   19,521   2014   440   99%
Itaim Paulista  2013   100   10,648   2014   240   100%
Verde Vida - F1  2013   100   15,084   2015   340   100%
Germania - F2 1  2013   100   8,873   2014   200   100%
Jaraguá  2013   100   11,535   2014   260   100%
Viva Mais Campo Grande  2013   100   13,310   2014   300   98%
Chacara Campo Limpo  2013   100   13,310   2015   300   100%

(1)One square meter is equal to approximately 10.76 square feet.

(2)Values for 100% of the building development, except on projects with partial interest acquisition.

32 

Land Subdivisions under our Gafisa Brand

In 2001, we started developing residential land subdivisions for sale upon which residential buildings can be developed. Land subdivisions under our Gafisa brand are usually smaller than Alphaville residential communities and do not include some of the facilities available in Alphaville residential communities, such as various amenities, shopping centers and schools. We usually provide the infrastructure for a given land subdivision planning such as the electric, water and sewage systems, paved streets, and common recreational areas. Our land subdivisions are typically located in affluent suburban areas close to major highways leading to the states of São Paulo and Rio de Janeiro. A typical lot has between 250 and 1,500 square meters. Average price per square meter ranges from approximately R$150 to R$800. We target clients with monthly household incomes in excess of approximately R$5,000 for these land subdivisions. Since 2011, our only land subdivisions project was the development project of Barra da Tijuca, in partnership with Alphaville, for which our share is 65%.

The table below sets forth our luxury and middle income housing and commercial developments under Gafisa’s Brand as of December 31, 2015,2019, with percentage of units sold less than 90%:

 

 

As of December 31, 20152019 

Project Description

Units Sold (%)
Alpha LandSmart Vila Madalena (1)7289.81%
Alpha GreenVarandas Grand Park F2 (2)6888.80%
Alta VistaSmart Santa Cecília (3)8988.49%
Américas Avenue Business SquareVarandas Grand Park F4 (4)5888.03%
Gran Park Árvores F2Mood Lapa (5)8985.90%
GranVarandas Grand Park Árvores F4F3 (6)8780.57%
Gran Park Árvores F6Sao Way (7)7279.73%
Gran Park Varandas F1Today Modern Residences (8)8778.79%
Gran Park Varandas F2Bambu (9)8678.70%
GranVarandas Grand Park Varandas F3F6 (10)7378.02%
Gran Park Varandas F4067 Hermann Junior (11)5877.40%
Gran Park Varandas F5Laguna Mall (12)5676.77%
Gran Park Varandas F6Barra Vista (13)6276.17%
ICONAlphamall (14)8770.61%
Manhattan Square - Wall StreetVarandas Grand Park F5 (15)8368.12%
O BosqueAmericas Avenue (16)7264.70%
Target Offices & Mall (17)63.87%
Sao Gate (18)51.02%

 
(1)Alpha Land.Smart Vila Madalena. This development was 100% completed at December 31, 20152019 at which time 72% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(2)Alpha Green. This development was 100% completed at December 31, 2015 at which time 68% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(3)Alta Vista. This development was 100% completed at December 31, 2015 at which time 89% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(4)Américas Avenue Business Square. This development was 100% completed at December 31, 2015 at which time only 58%89.81% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next two years.12 months.

 

(5)(2)Varandas Grand Park Árvores F2. This development was 100% completedcomplete at December 31, 20152019 at which time 89%88.80% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 12-24 months.

 

(6)(3)Grand Park Árvores F4.Smart Santa Cecília. This development was 100% completed at December 31, 20152019 at which time 87%88.49% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24–36 months.

 

33 

(7)(4)Varandas Grand Park Árvores F6.F4. This development was 100% completed at December 31, 20152019 at which time 72%88.03% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 12-24 months.

 

(8)(5)Grand Park Varandas F1.Mood Lapa. This development was 100% completed at December 31, 20152019 at which time 87%85.90% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 12 months.

 

(9)(6)Varandas Grand Park Varandas F2.F3. This development was 100% completed at December 31, 20152019 at which time 86%80.57% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24-36 months.

 

32 

(10)(7)Grand Park Varandas F3.Sao Way. This development was 100% completed at December 31, 20152019 at which time 73%79.73% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24-36 months.

 

(11)(8)Grand Park Varandas F4.Today Modern Residence. This development was 100% completed at December 31, 20152019 at which time 58%78.79% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 12-24 months

 

(12)(9)Grand Park Varandas F5.Bambu. This development was 100% completed at December 31, 20152019 at which time 56%78.70% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 12-24 months .

 

(13)(10)Varandas Grand Park Varandas F6. This development was 100% completed at December 31, 20152019 at which time 62%78.02% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24-36 months.

 

(14)(11)ICON.067 Hermann Júnior. This development was 100% completed at December 31, 20152019 at which time 87%77.40% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time periodthe next 12 months.

 

(15)(12)Manhattan Square - Wall Street.Laguna Mall. This development was 100% completed at December 31, 20152019 at which time 83%76.77% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24-36 months.

 

(16)(13)O Bosque.Barra Vista. This development was 100% completed at December 31, 20152019 at which time 72%76.17% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

We have evaluated all of our Gafisa brand developments for impairment and we identified cases of impairment, and impairment provisions have been recorded for the following projects: Espaço Alpha, AltaVista, Canto dos Passaros, Reserva do Bosque, Jatiuca Trade Residence, Americas Avenue, Icon Business e Mall, Target Offices e Mall, Vision Capote Valente, Smart Vila Madalena and Barra Viva.

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The table below sets forth our finished affordable entry-level housing developments under Tenda’s Brand as of December 31, 2015, with less than 90% of units sold:

Project Description

As of December 31, 2015

Units Sold (%)

Residencial Cordoba (1) 59
Residencial Morada de Ferraz (2) 89
Fit 16 SPE Emp. Imob./Mirante do Lago F2 (3) 82
Res Napoli I (4) 80
Fit 31 SPE Emp. Imob./Fit Giardino (5) 82
Residencial Michelangelo (6) 88
Positano Garden II (7) 75
Positano Garden IV (8) 50
Boulevard Das Palmeiras (9) 90
Res Vila Coimbra (10) 75
Residencial Da Vinci – Allegro (11) 89
Duo Valverde (12) 85
Residencial Vitale Tower (13) 77
Residencial Da Vinci – Giardino (14) 58

(1)Residencial Cordoba. This development was previously completed and has 59% of its units sold. Due to certain issues related to the legal documentation for the unsold units, there is no selling forecast as of the date of this annual report relating to the time period within which the remaining units will be sold. However, it is expected that, once these issues are resolved, the remaining units will be sold within a short time period, based on the Company’s internal assessments.next 12 months.

 

(2)(14)Residencial Morada de Ferraz.Alphamall. This development was previously100% completed and has 89%at December 31, 2019 at which time 70.61% of itsthe units had been sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 36-48 months.

 

(3)(15)Fit 16 SPE Emp. Imob./Mirante do Lago F2.Varandas Grand Park F5. This development was previously100% completed and has 82%at December 31, 2019 at which time 68.12% of itsthe units sold. The sales speed for inventory outside of core markets remains lower than that of sales within core markets. The sale of this inventory and the run-off of legacy projects are on schedule and this development’s selling forecast indicates the remaining units will be sold within a short time period.

(4)Res Napoli I. This development was previously completed and has 80% of its unitshad been sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.the next 24-36 months.

(16)Americas Avenue. This development was 100% completed at December 31, 2019 at which time 64.70% of the units had been sold. According to the Company’s business plan, this development’s selling forecast indicates the remaining units will be sold within the next 48-60 months. The relatively low speed at which the units of this development have been sold is mainly due to the challenging macroeconomic conditions in the city of Rio de Janeiro and its negative impact on the real estate market.

 

(5)(17)Fit 31 SPE Emp. Imob./Fit Giardino.Target Offices e Mall. This development was previously100% completed and has 82%at December 31, 2019 at which time 63.87% of itsthe units had been sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold withinover a shortlong time period.horizon. The relatively low speed at which the units of this development have been sold is mainly due to the challenging macroeconomic conditions in the city of Rio de Janeiro and its negative impact on the real estate market.

 

(6)(18)Residencial Michelangelo.Sao Gate. This development was previously100% completed and has 88%at December 31, 2018 at which time 51.02% of itsthe units had been sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold withinover a shortlong time period.

(7)Positano Garden II. This development was previously completed and has 75% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(8)Positano Garden IV. This development was previously completed and has 50% (or two) of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining 50% (or two) units will be sold within a short time period.

(9)Boulevard Das Palmeiras. This development was previously completed and has 90% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(10)Res Vila Coimbra. This development was previously completed and has 75% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(11)Residencial Da Vinci – Allegro. This development was previously completed and has 89% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(12)Duo Valverde. This development was previously completed and has 85% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(13)Residencial Vitale Tower. This development was previously completed and has 77% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.

(14)Residencial Da Vinci – Giardino. This development was previously completed and has 58% of its units sold. According to the Company’s existing business plan, this development’s selling forecast indicates the remaining units will be sold within a short time period.horizon.

 

We have evaluated all of our Tenda brand developments for impairment and we identified cases of impairment for these projectshave recorded reduction to net realizable value and impairment provisions have been recorded:

35 

·     Bairro Novo Cotia I and II

·     Club Cheverny Tower F2

·     Res. Fit Giardino

·     Res. Parque Maceio F1

·     Res. Santa Luzia Life

·     Res. Assunção Life

·     Res Curuca F1

·     Res. Vila Coimbra

·     Res. Villa Verde

·     Res. Da Vinci

·     Res. Flor do Anani

·     Res. Pedra Bela

·     Res. Jardim Girassol II F1

·     Res. Green Park Life

Land Subdivisions under Alphaville Brand

As set forth in item “4. Information on the Company—A History and Development of the Company”, we completed the sale of a controlling interest in Alphaville, on December 9, 2013. As a result, Alphaville was no longer consolidated in the financial statements of the Company since then. In this annual report, while financial information relatedwrite-offs to Alphaville is treated as discontinued operations, all operating information related to our business includes full operating information for Alphaville through December 9, 2013.

The Alphaville brand was created in the 1970s when the first Alphaville community was developed in the cities of Barueri and Santana do Paranaíba in the metropolitan region of São Paulo. Beginning in the 1990s, Alphaville developed residential communities in several other cities in Brazil, such as Campinas, Goiânia, Curitiba, Londrina, Maringá, Salvador, Fortaleza, Belo Horizonte, Natal, Gramado, Manaus, Cuiabá, Campo Grande, São Luis and Rio de Janeiro.

Whenever Alphaville develops a new community, it is provided all the basic civil works for supporting the construction on the lots, such as electrical, telephone and data communications cabling, hydraulic (water and sewer) mains and treatment facilities, landscaping and gardening, lighting and paving of the streets and driveways and security fencing. In most Alphaville communities, there is also the building of a social and sports clubnet realizable value for the residents, with soccer, golffollowing projects: Alpha Green, Alpha Land, Alphamall, Americas Avenue, Espaço Alpha, Global Offices, Golden Office, Icon Business & Mall, Laguna Mall, Sao Gate, Sao Way, Scena Alto da Lapa, Target Offices & Mall, Today Modern Residences, Smart Vila Madalena, Smart Santa Cecília, Moov Parque Maia, Moov Belém, Vision Capote Valente, single units of Olavo Bilac and tennis fields, jogging and bicycle tracks, saunas, swimming pools, ballrooms, restaurants and bars, and other facilities. In addition, most Alphaville projects have a shopping center where residents can shop for clothes and groceries. Additionally, whenever Alphaville develops a new community far from large urban centers, it seeks to assist in establishing schools near the community by forming partnerships with renowned educational institutions. Throughout Alphaville communities, it also seeks to stimulate the local economy by drawing new businesses to that area.

Alphaville believes that the maintenancesingle units of a development’s quality is essential. For this reason, it is imposed on every Alphaville community a series of building and occupancy standards that are more rigorous than those required by applicable local legislation. Every Alphaville community has an Alphaville association formed by us before delivery of the community starts, and is funded by maintenance fees paid by the residents. The purpose of the association is to allow community involvement in the management and maintenance of the premises and to ensure orderly and harmonious relationships among the residents.Reserva das Ruínas.

Upon completion of a sale, a purchaser of an Alphaville property will receive, along with the purchase and sale contract, documentation that sets out the regulations on land use and occupancy, and these will serve as private zoning regulations that are binding on the resident. These regulations set forth, among other things, the maximum number of floors allowed in an Alphaville building, the minimum number of meters between buildings and land coverage limits, thereby maintaining the uniformity and quality of the Alphaville properties.

36 

The table below sets forth our residential communities launched by us under the Alphaville brand between January 1, 2013 and December 31, 2013. As a result of the sale of the 70% interest in Alphaville on December 9, 2013, we were not involved in the launch of any residential communities under the Alphaville brand in 2014 and 2015:

Project Description 

Year

Launched

 

Gafisa

Participation

(%)

 

Usable

Area (m2)

(1)(2)

 Completion Year Number of Units(2)
Alphaville Castello  2013   69   80,475   2015   222 
Terras Alphaville Maricá 2  2013   47   107,594   2014   596 
Terras Alphaville Ponta Grossa  2013   77   183,413   2014   742 
Terras Alphaville Vitória da Conquista F2  2013   75   158,001   2014   565 
Terras Alphaville Sergipe F2  2013   88   168,129   2014   614 
Alphaville Feira de Santana F2  2013   72   172,713   2015   545 
Alphaville Ribeirão Preto F3  2013   60   193,058   2015   584 
Terras Alphaville Camaçari F2  2013   74   141,955   2015   616 
Alphaville Volta Redonda  2013   72   133,286   2015   427 
Terras Alphaville Dourados  2013   74   152,007   2015   604 
Alphaville Anápolis  2013   67   106,165   2015   336 
Terras Alphaville Linhares  2013   46   111,547   2015   576 
Terras Alphaville Belém 3  2013   71   251,819   2015   976 
Alphaville Dias Branco  2013   59   293,897   2015   1,020 
Alphaville Litoral Norte 3  2013   68   145,443   2015   434 
Alphaville Nova Esplanada F4  2013   30   68,216   2015   473 
Alphaville D. Pedro 2  2013   58   75,803   2015   265 
Alphaville D. Pedro 3  2013   58   76,704   2015   233 

(1)One square meter is equal to approximately 10.76 square feet.

(2)Values for 100% of the building development.

 

Commercial Buildings

 

In 2013, we launched two commercial buildings: Axis Business Tower2017, 2018 and Laguna Mall.

In 2014,2019, we did not launch any commercial buildings.

 

In 2015, we launched one commercial building: Alphamall.33 

Construction Services

 

We provide construction services to third parties on certain developments where we retain an equity interest. This practice allows us to benchmark our construction costs, facilitates our access to new constructions materials, techniques and service providers such as architects and sub-contractors, and provides larger economies of scale.

 

The table below sets forth the real estate developments for third parties currently under construction, in which we also have an equity interest, between January 1, 20132017 and December 31, 2015:2019:

 

Project

First Year of Construction

Gafisa Participation
(%)

Partner

Type of Project

First Year of Construction 

Gafisa Participation
(%) 

Partner 

Type of Project 

Adamas201350GTIS PartnersResidential
Marques 2900201650%Bueno NettoResidential
044 Vila Rica201750%Atins EmpreendimentosResidential

 

Sale of Units Through Our Brokerage Subsidiaries

 

In September 2006, we created a new subsidiary, Gafisa Vendas, to function as our internal sales division in the state of São Paulo. In February 2007, we created another newThis subsidiary Gafisa Vendas Rio, to function as our internal sales divisioncompany is responsible for efforts in the metropolitan region of Rio de Janeiro. These wholly-owned subsidiaries promote sales of our projects in the states of São Paulo and Rio de Janeiro and focus their efforts on:connection with: (1) launches — our internal sales force focuses on promoting launches of our developments; however, we also use outside brokers (mainly in Rio de Janeiro), thus creating

37 

what we believe to be a healthy competition between our sales force and outside brokers; (2) inventory — Gafisa Vendas and Gafisa Vendas Rio eachwe have a team focused on selling units launched in prior years; and (3) web sales — Gafisa Vendas and Gafisa Vendas Rio eachwe have a sales team dedicated to internet sales as an alternative source of revenues with lower costs.

 

Our Clients

 

Our clients mainly consist of development clients. Development clients are clients who purchase units in our developments. As of December 31, 2015,2019, our development-client database was comprised of more than 141,30060,000 individuals. We currently have approximately 74,20018,000 active clients.

 

We also provide construction services to certain construction-services clients in connection with developments in which we retain an equity interest. As of December 31, 2015,2019, our main construction services client was GTIS Partners,Atins Empreendimentos, with whom we retain an equity interest in the Adamas044 Vila Rica development.

 

No individual client represents more than 5% of our revenues from residential developments or construction services.

 

Our Operations

 

The stages of our development process are summarized in the diagrams below:

 

 

34 

Land Acquisition

 

We use results from our extensive market research to guide our land reserves strategy and process. Our marketing and development teams monitor market fundamentals and trends. We have developed a sophisticated database to support our search for and analysis of new investment opportunities. Key decision factors used by our management for land acquisition and new developments include location, type of product to be developed, expected demand for the new developments, current inventory of units in the region and acquisition cost of the land.

 

Whenever we identify an attractive tract of land, we first conduct a study of the project to define the most appropriate use of the space. Afterwards, the basic design of the project enters the economic feasibility study stage, where we consider preliminary revenues and expenses associated with the project. This study will determine project profitability. We collect and analyze information on demand, competition, construction budget, sales policy and funding structure to ensure economic viability of the new development. We then initiate a legal due diligence of the property to identify liens, encumbrances and restrictions, potential solutions to such issues and the relevant costs. Before acquiring the land, we conduct a thorough due diligence process including an environmental review. Each decision to acquire land is analyzed and approved by our investment committee. See “Item 6. Directors, Senior Management and Employees—C. Board Practices” elsewhere in this annual report for further information on the activities of our committees and boards.

 

We seek to finance land acquisition through barter transactions, in which we grant the seller a certain number of units to be built on the land or a percentage of the proceeds from the sale of units in such development. As a result, we reduce our cash requirements and increase our returns. In the event we cannot do so or in order to obtain better terms or prices, we acquire land for cash, alone or in partnership with other developers. We purchase land both for immediate development and for inventory.

 

38 

As a new strategy defined by the end of 2011, the Company is selling landbank located in cities and places where there is no intention to run operations with new developments.

 

As of December 31, 2015,2019, we had a combinedan inventory of 16032 land parcels under both Gafisa, and Tenda, in which we estimate we could develop a combined total of 45,131 residential7,315 units (residential and commercial) with a combined sales value of R$10.7 4.0 billion, of which 38.9%8.1% represents land acquired through barter transactions. The table below sets forth the breakdown of our land reservesholdings by location and by the type of development:segment:

 

  Gafisa Tenda
  Future Sales (% Gafisa) (1) % Bartered Future Sales (% Gafisa) % Bartered
  (in millions
ofreais)
   (in millions
 ofreais)
  
São Paulo  4,286.6   48,3%  1,088.3   0%
Rio de Janeiro  1,666.2   75,2%  1,043.2   18,3%
Other states        2,601.5   18.6%
Total  5,952.8   58,5%  4,732.9   14,2%

35 

  Gafisa
  Future Sales (% Gafisa) (1) % Bartered
  (in millions ofreais)  
São Paulo  2,145   6.6%
Rio de Janeiro  1,254   13.4%
Other states  608   2.3%
Total  4,008   8.1%

 _________________

(1)Information reflects our interest.

 

Project Design

 

In order to meet evolving preferences of our customers, we invest considerable resources in creating an appropriate design and marketing strategy for each new development, which includes determining the size, style and price range of units. Our staff, including engineers and marketing and sales professionals, works with recognized independent architects on the planning and design of our developments. Their activities include designing the interior and exterior, drafting plans for the execution of the project, and choosing the finishing construction materials. A team responsible for preparing the business plan and budget and assessing the financial viability for each of our projects is also involved. Simultaneously with the planning and design of our developments, we seek to obtain all the necessary licenses and regulatory approvals from local authorities, which usually take three to twelve months in the case of our residential buildings and three years in the case of our residential communities.

 

Marketing and Sales

 

Our marketing efforts are coordinated by our internal staff of approximately 16 professionals.staff. Our specialized team generally coordinates with several outsourced brokerage companies, with a combined sales force of more than 80 representatives, monitoring such sales representatives in order to promote loyalty and ensure performance. Our marketing intelligence team is also responsible for gathering information on the needs and preferences of potential customers to provide guidance on our land acquisition and project design activities.

 

Gafisa Vendas was created as our internal sales division and it currently consists of approximately 600130 independent Gafisa Vendas brokers, 384 sales consultantscoordinators and 63 sales managers.

 

The creation of Gafisa Vendas was intended to establish a strategic channel for us to access our clients and to reduce our dependence on outside brokers for marketing. Because the sales force at Gafisa Vendas is trained to sell our products exclusively, we believe that it is able to focus on the sale of our developments, articulate the unique features of our development, manage our current customers and capture new customers more effectively. Gafisa Vendas was initially established in São Paulo in 2006 and opened a branch in Rio de Janeiro in 2007.

In 20082019, 2018, 2017, 2016 and 2009, Gafisa Vendas was our most successful sales team, responsible for approximately 34% and 40% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2010, Gafisa Vendas was responsible for approximately 37% and 53% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2011, Gafisa Vendas was responsible for approximately 34% and 52% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2012, Gafisa Vendas was responsible for approximately 47% and 52% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2013, Gafisa Vendas was responsible for approximately 51% and 45% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2014, Gafisa Vendas was responsible for approximately 61% and 23.4% of our sales in the states of São Paulo and Rio de Janeiro, respectively. In 2015, Gafisa Vendas was responsible for approximately 60.9%(i) 74%, 73.7%, 68.0%, 61.1% and 60.6%60.9%, respectively, of our sales in the statesstate of São Paulo, and (ii) 60%, 64.9%, 63%, 48.8% and 60.6%, respectively, of our sales in the state of Rio de Janeiro, respectively.Janeiro.

 

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We will continue to utilize independent real estate brokerage firms as we believe this provides a healthy competition between our internal sales force and outside brokers. Independent brokers provide us with a broad reach, access to a specialized and rich database of prospective customers, and flexibility to accommodate the needs of our diverse offering and clientele. In line with our results-oriented culture, we compensate brokers based on their profit contribution rather than on sales. Brokers are required to attend periodic specialized training sessions where they are updated on customer service and marketing techniques, competing developments, construction schedules, and marketing and advertising plans. We emphasize a highly transparent sales approach, as opposed to the traditional high-pressure techniques, in order to build customer loyalty and to develop a sense of trust between customers and us. At our showrooms, brokers explain the project and financing plans, answer questions and encourage customers to purchase or sign on to receive a visit or additional information.

 

Under our Gafisa brand, we typically initiate our marketing efforts 60 days before the launch of a development. We typically have a showroom on or near the construction site, which includes a model unit furnished with appliances and furniture. We leverage our reputation for quality, consistency, on-time delivery and professionalism to increase sales velocity. We have been successful with this strategy, usually selling approximately 30% of the units before construction starts.

 

Alphaville has also been successful in its sales and marketing efforts. For example, in Campinas, Alphaville D. Pedro II & III development sold all the 498 lots in just a few hours on the first day; in Volta Redonda, Rio de Janeiro, the sales team needed only three hours to sell all36 

We market our developments through online platforms, newspapers, radio, television, direct mail advertising and by distributing leaflets in neighboring areas, as well as through telemarketing and websites. In addition, on a quarterly basis, we publish the magazine “Gafisa Way” which is distributed to our customers and offers news on our most recent developments and progress updates on buildings under construction. The Alphaville developments also publish special magazines geared to their specific communities.

Tenda’s sales and marketing efforts are coordinated through 36 store fronts located across the principal metropolitan areas of the country. A direct sales force is trained to offer advice to first-time home buyers and to assist these buyers in finding the best financing solution. In addition, this sales force provides information on the benefits under the public housing program “Minha Casa, Minha Vida”, including the process of obtaining a mortgage through the CEF and BB. Because the Tenda sales force is specially trained to provide information on the affordable entry-level segment, we believe that they are uniquely positioned to provide us with an advantage in this segment.

In addition to direct sales, Tenda markets its developments through telemarketing, which generates more than 54,000 calls and 31,000 chats per month and results in over 7,000 visits per month to its store fronts. Tenda also gathers information on its customers’ preferences to better tailor its marketing efforts and has implemented a customer relationship management department in order to improve its client satisfaction. Finally, Tenda focuses on improving its sales during the launch of a development using a specific strategy for each type of development. For example, with large developments, Tenda has successfully combined its direct sales force with independent real estate brokerage firms, and the increase in cost associated with such combined efforts was offset by the significant increase in sales during the initial months after launch.

 

Under Brazilian law, we may establish a term within and the conditions under which we are entitled to cancel the development. According to our regular purchase contracts, if we are not able to sell at least 60% of the units within 180 days of launching, we can cancel the development. In the low income segment we need to have the project with at least 60% of the units sold (sales includes customers who are eligible for mortgages and that can be immediately transferred to financial institutions) and the project needs to be contracted with financial institutions prior to the launching phase, or we can cancel the development. Under those circumstances, we usually consider changing the project or selling the land, but, in any of those cases, we have to return the cash payment made by our customers adjusted for inflation but with no interest. Customers, however, are not entitled to other remedies. Over the last five years, we have only cancelled two developments.

 

Construction

 

Gafisa has been engaged in the construction business for over 50 years. Our experience spans across the entire construction chain. Before engaging in each new project, we develop sketches and research and develop projects and plans to create the most appropriate product possible. Our standardized construction techniques and unique control system are designed to optimize productivity and minimize raw material losses. Our monitoring tools are available

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on our intranet where all employees regularly review costs and key performance indicators of each development such as actual versus budget comparisons, volume consumption for each raw material, and construction schedule.

 

We use strict quality control methods. We have developed proprietary procedure manuals that describe in significant detail each task of each stage of the construction project. These manuals are also used for the training sessions that we require all of our workers to attend. In addition, we keep quarterly records of projects delivered.

 

The reviews focus on identifying problems in order to take corrective and preventive actions in projects underway and thus avoid costly repetition. We have adopted a quality management system that was certified for ISO 9002 byFundação Bureau Veritas, from Universidade de São Paulo. In 2007, we received a certification fromPrograma Brasileiro de Qualidade e Produtividade do Habitat (PBQP-H), which is part of the Ministry of Cities. In addition, the Eldorado Business Tower building was certified as a Green Building, category Platinum, by the U.S. Green Building Council, which attests that it is environmentally sustainable, through the rational use of energy, natural lighting and pollution control and recycling. Eldorado Business Tower was the first building in Latin America to achieve this category.

 

We invest in technology. Our research and development costs amounted to R$1.0 million in 2015, R$1.2 million in 2014, and R$1.0 million in 2013. We believe that we have pioneered the adoption of advanced construction techniques in Brazil such as dry wall and plane pre-stressed slabs, which present numerous advantages over traditional techniques. We also optimize costs by synchronizing our projects’ progress so as to coordinate the purchase of raw material and benefit from economies of scale. We have long-term arrangements with a number of suppliers which allow us to build our developments with quality, using brand name construction materials and equipment, and advanced technology. Moreover, our centralized procurement center enables us to achieve significant economies of scale in the purchase of materials and retention of services.

 

We do not own heavy construction equipment and we employ directly only a small fraction of the labor working on our sites. We generally act as a contractor, supervising construction while subcontracting more labor-intensive activities. Substantially all on-site construction is performed for a fixed price by independent subcontractors. We have policies in place in order to hire reputable, cost-oriented and reliable service providers that are in compliance with labor laws and have performed their work diligently and on time in the past. Hiring subcontractors instead of employing workers directly has some financial and logistical advantages. For instance, we do not need to incur fixed costs to maintain a specialized labor force even when they are not actively working at a construction site and we do not need to pay for frequent transfers of labor to different construction locations.

 

Our construction engineering group coordinates the activities of service providers and suppliers, monitors compliance with safety and zoning codes, and monitors completion of the project on a timely basis. We provide a five-year limited warranty covering structural defects in all our developments.

 

Risk ControlManagement

 

Our risk controlmanagement procedures require that all of our projects be approved by our investment committee, which meets on a monthly basis, or more frequently on an as-needed basis, and consists of our chief executive officer and two members of our board of directors. Our investment committee carefully reviews the various studies conducted by us and described above. In addition, we have a board of officers, which meets monthly, and is in charge of overseeing

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and approving major decisions. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership” in this annual report.

 

Customer Financing

 

The table below sets forth the percentage of each type of customer financing we typically provide for each type of development as of December 31, 2015:2019:

 

Sales Term Luxury Middle Income Affordable Entry—Level(1) Luxury and Middle Income (average) Entry-Level (average)
Mortgage lending (delivery)  90%  90%  0.8%  90.15%  99.64%
Caixa Econômica Federal and Banco do Brasil        99.2%
Gafisa 36 months  10%  10%     5.47%  0.18%
Gafisa 60 months           0.36%  0%
Gafisa 120 months           4.02%  0.18%

 

(1)Includes Tenda developments. We do not provide any customer financing for these developments.

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Mortgages. In 2015, 85%2019, approximately 96.51% of our sales value was financed by bank mortgages, where the customer paid us approximately 25% to 60% of the sales price of the property during the period of construction, and upon delivery of the property paid the balance of the sales price through a bank mortgage. We analyze the credit history of each customer at the time of sale to see if the customer would qualify for a bank mortgage based on banks’ standard credit rating policies. Although there is no assurance that the customer will qualify for a mortgage at the time of delivery, our analyses have been fairly successful in predicting whether the customer would qualify for a mortgage. The following table sets forth the credit limits established by mortgage sources available in Brazil in 2015:2019:

 

Credit Lines

Typical Interest rate

Maximum Home Value

Maximum Loan Value

Mortgage portfolio (Carteira Hipotecária) or CH%up to 7.99% annually + TR(1)No limitNo limit
Housing Finance System (Sistema Financeiro da Habitação) or SFH%up to 7.99% annually + TRR$750,0001,500,000.00R$600,0001,500,000.00
Government Severance Indemnity Fund for Employees (Fundo de Garantia do Tempo de Serviços) or FGTS forMinha Casa Minha Vida6%up to 9.16% annually + TRR$190,000240,000.00R$190,000240,000.00

 

_________________

(1)TR refers to the daily reference rate.

Mortgage financing for Tenda’s developments primarily comes from CEF and BB. The financing is structured so that customers with monthly income of up to ten times the Brazilian minimum wage pay low monthly installments without increasing our credit risk because CEF and BB assume the credit risk of each customer.

 

Financing by Gafisa during construction. We finance some of our own sales during the construction period, with a down payment of 20-30% and financing of the balance through monthly installments up to the delivery of the unit.

 

Financing by Gafisa after delivery. In addition, we offer financing plans to prospective customers using our own capital, where we finance purchases for up to 120 months after the completion of the construction. For completed units we require a down payment of 30% and financing of the remaining balance with up to 120 monthly installments. For units under construction we require a down payment of 10% and provide financing for the remaining balance of 25-35% with up to 30 monthly installments until the delivery of the unit and financing of the remaining 75-65%, respectively, with up to 120 additional monthly installments. All of our financing plans are guaranteed by a conditional sale of the unit, with the transfer of the full property rights of the unit to the customer upon the full payment of the outstanding installments.

 

We have developed a strict credit policy in order to minimize risks. We take the following steps whenever we conduct a credit review process:

 

·trained independent brokers interview each potential customer to collect personal and financial information and fill out a registration form;

 

·registration forms are delivered, along with a copy of the property deed, to us and, if the bank providing the financing requests, to an independent company specialized in real estate credit scoring;

 

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·credit is automatically extended by us to the customer if his or her credit analysis is favorable. However, if the credit analysis report raises concerns, we will carefully review the issues and accept or reject the customer’s application depending on the degree of risk. To the extent financing is provided by a bank, such financial institution will follow their own credit review procedures; and

 

·after approving the application, our staff accepts the down payment which is given as a deposit on the purchase of the unit.

 

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Sales contracts. Our sales contracts generally provide for adjustment of the sales price according to the INCC during construction and at an annual interest rate of 12% plus IGP-M over the receivables balance after a stated date in our sales contracts. We have historically experienced a low rate of customer delinquencydefault on our sales. On February 29, 2016,December 31, 2019, our clients’ delinquencydefault level, related to amounts overdue for over 30 days, was 11.99%15.1% of our accounts receivable for Gafisa and 12.16% for Tenda.Gafisa.

 

In order to maintain low rates of customer delinquency,default, we have adopted a conservative and robust credit and receivables management policy, pursuant to which: (1) we conduct database research on the socio-economic background of our prospective customers; (2) our agreements discourage delinquencydefault and cancellation of the purchase by imposing immediate penalty fees, interest and liquidated damages which are adjusted for inflation, and we retain approximately 40-45%25-50% (Gafisa), 20% (Tenda) and 20% (Alphaville) of the total amount paid to us plus expenses incurred by us, which in general represents all or a substantial portion of the amount that the defaulted clients have already paid us; and (3) we offer several options to our customers if they experience financial difficulties, such as offering them a greater number of installment payments or exchanging the unit bought for a less expensive one. When a delinquencydefault occurs, we endeavor to renegotiate the outstanding loan with our customers before taking any legal action.

 

We will only transfer title of the unit to a buyer after the release of the certificate of acceptance of occupancy by local authority and the full payment of all outstanding installments. We have increased the percentage of mortgages that our customers obtain from commercial banks from approximately 33% in 2006 to 56% in March 2016. This increase reflects the growing interest of commercial banks in financing the Brazilian housing industry.installments.. See “Item 5”.

5. Operating and Financial Review and Prospects—A. “OperatingOperating Results—Launches and Contracted Sales—Contracted Sales” for a discussion of the sales value of contracts cancelled by our customers and penalties paid in connection with such cancellations.

 

The table below sets forth the client’s delinquency level breakdown by segment:client default levels:

 

  As of and for the year ended December 31,
Delinquency level by segment 2015 2014 2013
Gafisa  11.40%  6.19%  5.13%
Tenda  12.85%  7.43%  15.57%
Alphaville(1)  -   -   2.24%
             
(1)This information is presented for comparison purposes only, as we sold our controlling interest on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.

 

As of and for the year ended December 31, 

Customer default level 

2019 

2018 

2017 

Gafisa15.1%14.3%14.1%

 

The increase in our delinquencydefault levels is mainly due to the weakening economic conditions and political instability in Brazil in 2014 and 2015.since 2018.

 

Cancelation of sales contracts. Gafisa and Tendacontracts.

Until December 2018, sales contracts areinvolving real estate development activities were irrevocable under Brazilian law. That means that a customer doesThe buyer did not have the unilateral ability to terminate a contract once it iswas executed, nor doesdid the customerbuyer have anthe ability to require a refund of amounts previously paid unless we agree.Gafisa agreed. To the extent that athe customer iswas not in compliance with its obligations under a contract, we mayGafisa could, at our optionits sole discretion, either force compliance through the Brazilian courts, or agree to a “default” by the customer. Should we agreeIn this case, if Gafisa agreed at ourits sole discretion to refund part of the amounts paid to the defaulting party, we will normally apply the penalty set forth in the contract.contract would be normally applied.

 

In recent years, however, the event either we orBrazilian real estate market has seen an unprecedented level of noncompliance by customers, many of which went to court to ask for the customer do not agreeunilateral judicial termination of sales contracts. This was triggered by a number of factors, including a national economic crisis, high levels of unemployment and a crisis in the real estate market, leading to enter into a commercial negotiation following a customer default there are two courses of action available:distorted fluctuation in real estate prices.

 

(1) the first option is that we may seek to enforce the agreement in Court to collect the amount outstanding and effectively transfer ownershipIn view of the unitexcessive number of judicial proceedings filed to redeem consumer rights, Law No. 4,591 of December 16, 1964 was amended by Law No. 13,786 on December 12, 2018, to regulate the unilateral termination of real estate contracts and clarified the parameters of the commercial relationship between customer and contractor.

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Pursuant to Law No. 13,786, upon termination of a real estate sale contract due to the buyer;default of a buyer’s obligation, the buyer is entitled to a partial restitution of the amounts already paid to the developer. The penalty due by the buyer in these cases must not exceed:

(i) 25% of the amounts paid, if the development is not being constructed legally segregated from the developer’s assets, as per Law No. 10,931 of August 2, 2004 (“Detached Assets”); or

 

(2) as(ii) 50% of the amounts paid, if the development is subject to Detached Assets.

In case the buyer finds a new buyer for the returned unit, the penalty fees can be avoided, provided the requirements defined by law are satisfied.

The real estate developer must refund the referred amounts in a single installment no later than (i) 30 days from the contract and contemplated inissuance of the occupancy permit by the relevant Municipality, if subject to Detached Assets; (ii) 180 days from the termination of the relevant agreement, if not subject to Detached Assets; or (iii) 30 days from the resale of the returned unit, if prior to the other terms.

In addition, Brazilian law we havealso grants the developer the right to force the unit to be auctioned. Whenauctioned in case the unit is purchased in auction by a third party thebuyer’s proceeds from the auction are used in part to settle in full (including interest and penaltiesreimburse the buyer for late payments) the amount owed by the customer to Gafisa and the remaining balance isamounts already paid to the customer.developer, deducting the amounts stipulated by the relevant legislation. When no third party is willing to acquire the unit in the auction, the title toownership of the unit returns to Gafisa or Tenda without any disbursement, except for the auctioneers fees. Provisions indeveloper, which shall reimburse the Gafisa contract indicate that when such auction occurs it is without prejudicebuyer portion of the penalties set forthamounts already paid, also in this contract (meaning thataccordance with the penalty provisions survive). Upon consultation, our legal counsel advised us that the

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customer has a right to request that amounts paid by him be returned after the contractual “penalty” has been deducted.law.

 

The table below provides the number and sales value of contracts terminatedcanceled by customers for the periods presented:

 

  As of December 31, 2015 As of December 31, 2014 As of December 31, 2013
Year Segment Number of contracts Sales value (in thousands of reais) Number of contracts Sales value (in thousands of reais) Number of contracts Sales value (in thousands of reais)
Gafisa            
Contracted sales  3,305   1,427,733   2,836   1,246,996   3,671   1,416,939 
Volume/Sales value of terminations  (972)  (512,937)  (1,014)  (435,964)  (1,292)  (455,738)
Percentage  29.4%  35.9%  35.8%  35.0%  35.2%  32.1%
Sales value, net of termination  2,333   914,796  ��1,822   811,032   2,379   961,201 
Tenda                        
Contracted sales  8,108   1,208,135   6,248   919,381   8.292   1,089,301 
Volume/Sales value of terminations(1)  (1,293)  (192,004)  (3,561)  (523,400)  (4,278)  (598,897)
Percentage(1)  16.0%  15.9%  57.0%  56.9%  51.6%  55.0%
Sales value net of terminations  6,815   1,016,131   2,687   395,981   4,014   490,403 
Alphaville (2)                        
Contracted sales              7,955   1,295,260 
Volume/Sales value of terminations              (1,307)  (233,005)
Percentage              16.4%  18.0%
Sales value net of termination              6,648   1,062,260 
Total sales value net of termination  9,148   1,930,927   4,509   1,207,013   13,041   2,513,860 

(1)After a detailed analysis of Tenda receivables portfolio, we identified clients who no longer qualified for the mortgage because their contracts had terminated. In 2015, we had R$192.0 million in sales value of termination, R$523.4 million in 2014 and R$598.9 million in 2013. As of the fourth quarter of 2011, we adopted a new sales policy for Tenda units to avoid contract terminations. The new terms of the contracts increased security in the client’s transfer of their contracts to financial agents. This change led to a longer time period for new sales and for resale of units under contracts entered into during that period.

(2)This information is presented for comparison purposes and for the year ended December 31, 2013 only, as we sold our controlling interest in Alphaville on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.
  As of December 31, 2019 As of December 31, 2018 As of December 31, 2017
Year Segment Number of contracts 

Sales value (in thousands ofreais 

 Number of contracts 

Sales value (in thousands ofreais 

 Number of contracts 

Sales value (in thousands ofreais 

Gafisa            
Contracted sales  832   292,087   2,332   1,040,848   2,908   1,131,823 
Volume/Sales value of cancelations  (193)  (97,531)  (520)  (227,677)  (801)  (411,658)
Percentage  23.2%  33.0%  22.3%  21.9%  27.5%  36.4%
Volume/Sales value, net of cancelations  639   194,556   1,813   813,172   2,107   720,164 
Total sales value net of cancelation  639   194,556   1,813   813,172   2,107   720,164 

 

Receivables securitization

 

We release capital for new projects by seeking not to maintain receivables after our projects are completed. The securitization (mortgage-backed securities) market in Brazil is expanding. This expansion is helped significantly by recent development in Brazilian foreclosure laws.

 

With the growing availability of mortgages from commercial banks and the increasing liquidity of CRIs, we expect to further reduce our role as a financing provider to our customers. Our goal is to optimize our working capital by transferring the financing activities to securitization companies and banks.

 

Main Raw Materials and Suppliers

 

We purchase a wide variety of raw materials for our operations. Even though these raw materials have represented on average, over the last three years, approximately 35%45% of our total costs of development, aside from land, the only raw materials that represent more than approximately 5% of our total costs are steel and concrete. Prices of some raw materials have increased over the last three years at a rate higher than inflation. The index that

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measures the fluctuation of construction costs, the INCC, increased 24.26%12.75% during the three year period ended December 31, 2015,2019, resulting in a 24.3%an increase in the construction costs of Gafisa and Tenda over that period. During the three year period ended December 31, 2015,2019 the IGP-M increased 20.93%, resulting in a 20.9% increase in unit prices for Gafisa and a 19.8% increase in unit prices for Tenda over that period.15.41%. We have been working on the development of new construction techniques and the utilization of alternative materials in order to reduce costs and improve our construction process with advanced technology.

 

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We contract with major suppliers for the materials used in the construction of the buildings. We receive general pricing proposals from various suppliers of raw materials and select the proposal with the best terms and conditions for each development. In addition to pricing, we select our suppliers by the quality of their materials. We set forth specific minimum quality requirements for each construction project, and the chosen supplier must meet this quality requirement. The materials for our developments are readily available from multiple sources and, accordingly, we do not rely on any one supplier for our raw materials.

 

Our ninefive largest suppliers in terms of volume are Gerdau Aços Longos S.A., Votorantim Cimentos Brasil Ltda., Elevadores Atlas Shindler S.A., Portobello S.A., Thyssen Krupp Elevadores S.A., Alumni Esquadrias and IBRAP Industria Brasileira de Aluminio Ltda., RCI Esquadrias de Aluminio S/C Ltda., InterCement Brasil SA, Cortesia Serviços de Concretagem Ltda, and Mare Cimento Ltda.e Plastico S.A. In general terms, we purchase products for our construction based on the scheduled requirements, and we are given approximately 2830 days to pay. The products we purchase generally come with a five-year warranty. We do not have any exclusive arrangements with our suppliers. We work closely with suppliers, enabling them to schedule their production in order to meet our demand or notify us in advance in the event they anticipate delays. We have good relationships with our suppliers and have experienced no significant construction delays due to shortages of materials in recent years. We do not maintain inventories of construction materials.

 

We achieve significant economies of scale in our purchases because we:

 

·use standard construction techniques,

 

·engage in a large number of projects simultaneously, and

 

·have long-term relationships with our suppliers. We periodically evaluate our suppliers. In the event of problems, we generally replace the supplier or work closely with them to solve the problems.

 

Customer Service

 

In our industry, customer satisfaction is based in large part on our ability to respond promptly and courteously to buyers before, during and after the sale of our properties, including providing an owner’s guide. We use innovative and personalized customer service techniques beginning with the initial encounter with a potential customer. We believe we were one of the first homebuilders in Brazil to introduce services such as breakfast for customers at construction sites and providing monthly photos to customers on the progress of the construction. These services are provided with the objective of educating customers on the progress of the construction and improving customers’ experience with the purchase of our units. Other customer service efforts include:

 

·a dedicated outsourced call center with consultants and specialists trained to answer our customers’ inquiries;

 

·the development of the “Gafisa Viver Bem” web portal, through which our customers can, for example, follow the project’s progress, alter their registration information, simulate unit designs and check their outstanding balances;

·relationship events to engage the customer with the “Gafisa Viver Bem” program, like the “Open House” (inauguration party in the unit) and the “House UP” (refurbish one room of the unit);

·the development of the “ Alphaville Viver a Vida” web portal, through which our customers have easy and fast and easy access to all financial services related to Alphaville; and

 

·the development of the “Gafisa Personal Line,House Up Store,” through which buyers of certain units are able to customize their units in accordance with plans and finishing touches offered by Gafisa. Such options vary by development.

 

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As part of our customer service program in our residential developments, we conduct pre-delivery inspections to promptly address any outstanding construction issues. Prior to the delivery of each unit, we maintain regular contact with the customer by sending the customer our magazine “Gafisa Way.” We also conduct monitored inspections of our developments to allow buyers to gather more information from our technical personnel. In addition, we send a monthly status report on the construction of the unit. We conduct another evaluation of the customer’s satisfaction with his or her unit, as well as the customer’s experience with our sales personnel and our various departments (customer services, construction and title services) 18 months after the release of the certificate of acceptance of occupancy by the relevant local authority. We also provide a five-year limited warranty covering structural defects, which is required by Brazilian law.

 

Competition

 

The real estate market in Brazil is highly fragmented and competitive with low barriers to entry. The main competitive factors include price, financing, design, quality, reputation, reliability, meeting delivery expectations, partnerships with developers and the availability and location of land. Certain of our competitors have greater financial resources than we do, which could provide them an advantage over us in the acquisition of land using cash. In addition, some of our competitors have better brand recognition in certain regions, which could give them a competitive advantage in increasing the velocity of their sales. Because of our geographic diversification, we believe that we have access to different markets within Brazil that have different demand drivers.

 

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Because of the high fragmentation of the markets in which we operate, no single developer or construction company is likely to obtain a significant market share. With the exception of São Paulo and Rio de Janeiro, where we face competition from major publicly-traded competitors, in other regions we generally face competition from small and medium-sized local competitors that are not as well-capitalized. We expect additional entrants, including foreign companies in partnership with Brazilian entities, into the real estate industry in Brazil, particularly the São Paulo and Rio de Janeiro markets.

 

The table below sets forth the most recent data available on our market share in the São Paulo and Rio de Janeiro markets:market:

 

São Paulo (1) — Gafisa’s Market Share
  Year ended December 31,
Year 2015 2014 2013
  (Launches in R$ million)
Local market  14,410   26,359   32,367 
Gafisa(2)  1,223   770   1,125 
Gafisa’s market share  8.5%  2.9%  3.5%

 

  Year ended December 31,
Year 2019 2018 2017
  (Launches in R$ million)
Local market  31,442   19,514   16,582 
Gafisa(2)  —     728   497 
Gafisa’s market share  —     3.7%  3.0%
             
 

_________________

Source: EMBRAESP and SECOVI.

Rio de Janeiro (1) — Gafisa’s Market Share
  Year ended December 31,
Year 2015 2014 2013
  (Launches in R$ million)
Local market  2,119   11,796   12,590 
Gafisa(2)  365   253   51 
Gafisa’s market share  17.2%  2.1%  0.4%

Source: ADEMI.

 

(1)Metropolitan region.

 

(2)Gafisa interest.

In 2019, 2018 and 2017, we did not launch any development in Rio de Janeiro.

 

Seasonality

 

Although the Brazilian real estate market is not generally seasonal, there are a few months of the year when the market slows down (January, February and July) each year. These months coincide with school vacations and result in the postponement of investment decisions. We are impacted similarly as the rest of the market during such periods.

 

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Subsidiaries

 

We carry out our real estate developments directly or through our subsidiaries or our jointly-controlled entities in partnership with third parties. Many of Gafisa’s subsidiaries and joint-ventures are SPEs, many of which have been incorporated by us as joint ventures together with other real estate and construction companies in Brazil.

As of December 31, 2015,2019, Gafisa had 99138 direct and indirect subsidiaries, 1722 jointly-controlled entities under operations and 34 entities in which it had minority stakes. The majority of such subsidiaries, jointly-controlled entities and entities in which Gafisa has a minority stake are incorporated as special purpose entities, are headquartered in Brazil and operate exclusively in the real estate sector. Gafisa also holds a 30% interest in the capital stock of Alphaville.

 

Many of Gafisa’s subsidiaries and joint-ventures are SPEs, many of which have been incorporated by us as joint ventures together with other real estate and construction companies in Brazil. Of our 119138 SPEs 75.63 %or invested companies, 112 are wholly-owned by us and 7.57 % are majority-owned by us, and we hold an interest of 50% or less in the remaining 16.80 %.26.

 

Tenda is a wholly-owned subsidiary of Gafisa. As of December 31, 2015, Tenda had 84 subsidiaries, 11 jointly-controlled entities under operations and 5 entities in which it had minority stakes. The majority of such subsidiaries, jointly-controlled entities and entities in which Tenda has a minority stake are incorporated as special purpose entities, are headquartered in Brazil and operate exclusively in the real estate sector.

Many of Tenda’s subsidiaries and joint-ventures are SPEs, many of which have been incorporated by us as joint ventures together with other real estate and construction companies in Brazil. Of Tenda’s 84 SPEs, 81% are wholly-owned by us and 14% are majority-owned by us, and we hold an interest of 50% or less in the remaining 5%.

Intellectual Property

 

Trademarks

 

Our trademarks are filed or registered in Brazil with the Brazilian Institute of Industrial Property (Instituto Nacional de Propriedade Industrial), or the “INPI,” which is the competent body for, among others, trademarks’ and patents’ registries in Brazil. Besides,Additionally, the trademark “Gafisa” is also registered before the competent agency for registering trademarks in the United States.

 

Currently, the registration process of a trademark takes approximately 30 to 3624 months from the date of filing of the application until the definitive registration. From the date of filing of the application to the date of the definitive registration, the applicant has an expectation of right for the use of the trademark in connection with the products and services for which the trademark was applied for.applied.

 

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Each trademark registration is effective for a 10-year period and is renewable for equal and successive periods. The renewal of a trademark registration is granted upon request accompanied by payment of renewal fees during the final year of the trademark’s registration period or within the 6-month waiting period after its expiration. In case of non-payment, the registration is cancelleddefinitively archived by INPI.INPI, requiring the filing of a new application.

 

A trademark registration may be terminatedcancelled in the case of (1) ofthe expiration of its renewable 10-year validity term; (2) the trademark ownerowner’s or holder waivesholder’s waiver, in whole or in part, of the rights granted by registration; (3) ofthe forfeiture, or the applicant’s or the holder’s failure to use a registered trademark in connection with related goods or services for a period longer than five years; or (4) the failure to appoint a Brazilian resident with powersthe power to represent the applicant or holder in administrative or judicial proceedings, in cases where the applicant or the holder resides abroad.

 

As of the date of this annual report, we had approximately 15550 pending trademark applications and 133136 trademarks registered in Brazil with the INPI of which approximately (a) 139 pending applications and 123 registered trademarks refer to Gafisa, and (b) 16 pending applications and 10 registered trademarks refer to Tenda.INPI.

 

Our most significant trademark is “Gafisa,” which is duly registered with the INPI in the relevant market segment. Other relevant trademark we own, such as “Tenda,” are also registered with the INPI in several classes in connection with our daily activities.

 

Domain Name

 

As of the date of this annual report, we, together with our subsidiaries, were the owners of approximately 8359 domain names including our and our subsidiaries’ principal websites. The term of each domain name registration is

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usually one year and is renewable for equal and successive periods. An annual fee payment is necessary for the maintenance of the domain name registrations. Other than non-payment of the annual fee, domain name registration may be cancelled by: (1) express waiver of the owner; (2) irregularities in the data form as requested by the respective agency; (3) non-compliance with applicable regulations; (4) judicial order; or (5) in the case of foreign companies, non-compliance with the obligation to initiate the company’s activities in Brazil. Our domain names will, unless renewed, expire between May 2016April 2020 and February 2021.April 2023. We will seek to renew our domain names expiring in 2016,April 2020, after evaluating their continuing applicability.

 

Patents

 

We have no patents registered in our name.

 

Software Licenses

 

Most of the software we use in our daily business refers to common computer programs, such as Windows, SAP and AutoCAD. Additionally, we own all required licenses of use in connection with such software. The use of computer software without the acquisition of proper licenses is considered a felony subject to both criminal and civil liabilities, including the payment of fines and restrictions of future use of the applicable software.

 

Licenses

 

Under Brazilian laws, we are required to obtain a variety of licenses for each of our new developments. As of the date of this annual report, we have obtained all necessary licenses and permits to operate our business.

 

Insurance

 

We maintain insurance policies with leading Brazilian insurance companies, such as Allianz Seguros S.A., ACE SeguradoraChubb do Brasil Companhia de Seguro, AXA Seguros S.A., Porto Seguro Cia de Seguros Gerais, Royal & SunnalianceSwiss RE, Fator Seguradora, Ace Seguradora, Berkley Seguros, Tokio Marine Seguradora S.A., J Malucelli Seguradora S.A., Zurich Brasil S.A.Seguros and J. Malluceli Seguros S.A.,Pottencial Seguradora with coverage for, among others, (1) potential risks arising from the commencement of construction, including property damages, business interruption, engineering risks, fire, falls, collapse, lightning, and gas explosion; (2) construction errors; (3) performance bonds; and (4) losses arising from damages or defense costs associated with litigation resulting from misconduct of directors and officer. Such insurance policies contain customary specifications, limits and deductibles. Additionally, we do not maintain any insurance policy for our properties after construction is completed.

 

According to Brazilian Federal Law, it is mandatory that homebuilders have insurance policies in force with coverage for, among others, damages and losses related to civil liabilities and performance bonds. Failure or default in contracting any compulsory insurance required by applicable legislation is subject to a penalty amounting to the

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higher amount between (1) twice the premium price of the insurance that should have been contracted; and (2) ten percent of the insured property value. Additionally, no operating authorization or license (or the renewal of any existing license) shall be granted to companies subject to compulsory insurance in default of the aforementioned obligations.

 

Our management believes that the insurance coverage for our properties is adequate and that our insurance policies are customary for our industry in Brazil and adequate for applicable regulations.

 

Regulatory Framework

 

Brazilian Government and Real Estate Sector Regulations.

 

The real estate sector is directly regulated by the Brazilian government and is indirectly impacted by the government’s regulations on the availability of credit. Regulations include development policies, zoning restrictions and environmental laws which can determine the availability of different products offered in the market. For example, city master plans and zoning laws restrict the types of real estate developments that can be constructed in a given area.

 

As a general rule, the NBCC requires that the transfer of title of real estate properties, as well as the assignment, transfer, change or waiver of rights on real estate properties, be carried out by means of a public deed, except in certain cases, such as when the Real Estate Finance System (Sistema Financeiro Imobiliario), or SFI, or the SFH, are involved. The intent of this rule is to increase the security of real estate property transfers.

 

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According to applicable law, transfer of real estate title is only deemed effective upon the registration of the transfer with the relevant Real Estate Registry Office. The procedure for the execution of public deeds and also the respective registration with the Real Estate Registry Office (Registro Imobiliário) is regulated by the Brazilian Law of Public Registers (Lei de Registros Públicos), in particular Law No. 6,015 of December 13, 1973.

 

Real estate development

 

Real estate development activities are regulated by Federal Law No. 4,591 of December 16, 1964, as amended, or Law No. 4,591. The main duties of a developer are to: (1) obtain all required construction approvals and authorizations from the proper authorities; (2) register the development with the Real Estate Registry Office (without registration, the developed units cannot be sold); (3) indicate in the preliminary documents the deadline for the developer to withdraw from the development; (4) indicate in all advertisements and sales contracts the registration number of the development with the Real Estate Registry Office; (5) oversee the construction of the project established by the contract which must be in accordance with the approval granted by the authorities; (6) deliver to the final owner the completed units, in accordance with the contractual specifications, and transfer to the final owner the title of the unit by signing the final sale deed; (7) assume sole responsibility for the delivery of the developed units to the respective purchasers; (8) assume sole responsibility in the event the construction of the unit is not in accordance with the advertisements and sale contracts; and (9) provide construction blueprints and specifications along with the joint ownership agreement to the proper Real Estate Registry Office. The final owner is obligated, in turn, to pay the price related to the cost of the land and the construction.

 

The construction of the real estate units may be contracted and paid for by the developer or by the final owners of the units. Brazilian law provides for two pricing methods in real estate development: (1) construction under contract and (2) construction under a system of management. In construction under contract, the contracting parties will either set a fixed price, stipulated before the construction begins, or agree on an adjustable price pegged to an index determined by the contracting parties. In construction under a system of management, an estimated price is agreed upon by the contracting parties, but no fixed final price is provided at the beginning of the construction process. The actual amount that purchasers of the units pay depends on the monthly costs of the developer or contractor.

 

In addition, in order to increase the legal and economic confidence in the real estate development sector, Law No. 4,591 was recently amended by Law No. 13,786, enacted on December 12, 2018, providing for and regulating the possibility of unilateral dissolution or termination of purchase and sale agreements involving real estate development activities.

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Urban land subdivisions

 

Urban land subdivisions consist of subdivisions of urban land parcels into building lots and the construction of new roads and other infrastructure, and are regulated by Law No. 6,766 of December 19, 1979 - the Brazilian Law of Urban Land Subdivision (Lei de Parcelamento do Solo), as amended, or Law No. 6,766. Law No. 6,766 governs urban land subdivisions and establishes, among other things, the planning and technical requirements for this form of land parceling and the obligations of the developers, and also provides for fines and sanctions in the event of violation of its provisions.

 

Under Law No. 6,766, land subdivisions are intended for the creation of lots in urban areas or urban expansion zones, as defined by the planning director or approved by municipal law, and must comply with Law No. 6,766.

 

For the construction of land subdivisions, the developer must proceed through the following steps: (1) prior to developing the land subdivision plan, it must request the municipality in which the development will be located to issue directives on use policies specifically to the land, such as the delineation of lots, road and street systems and areas reserved for municipal or community properties; (2) pursuant to the directives issued by the municipality, it must develop a plan for the proposed land subdivision and present it to the municipality for approval, including the plans, designs, descriptions, and schedule for performance of the work, among other documents; and (3) after approval for the land subdivision project is obtained, it must be submitted for recording in the property registry of the appropriate Real Estate Registry Office within 180 days. The approval may be revoked and treated as expired if it is not submitted for recording within the 180-day period.

 

In addition to the approval of the project by the municipality in which the development will be located, the approval of other governmental bodies may be necessary in cases where the land subdivision: (1) is located in an area of special interest, such as a protected cultural, historical, landscape and archeological heritages site as defined by state or federal legislation; (2) is located in the boundary area of a city, belongs to more than one municipality, or is in a metropolitan region or urban agglomeration as defined in state or federal law; or (3) has an area greater than 1 million square meters. In the case of land subdivisions located in a municipality area that is within a metropolitan area, the examination and prior consent to the approval of such project will be subject to the metropolitan authority.

 

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The legal requirements for the approval of the land subdivision by a municipality include: (1) the developer must preserve a percentage of the land used for residential communities as open spaces for public use and for municipal or community properties with the percentage determined by each municipal zoning code; (2) each lot must have a minimum area of 125 square meters and the distance between the building and the street must be at least five meters; (3) the developer must reserve 15 meters of land on either side of running or still water and of strips of public domain land for roads and highways; and (4) the allotment procedures must be coordinated with the official adjacent tracks, exisitingexisting or projected, and harmonized with the local topography.

 

Law No. 6,766 also sets forth locations where subdivisions are not permitted, such as: (1) on wetlands and lands subject to flooding, until measures have been taken to assure water drainage; (2) on land that has been filled with material that is a public health hazard, unless previously cleaned up; (3) on land that has a slope equal to or greater than 30 degrees, unless the requirements of the appropriate authorities have been met; (4) on lands where geological conditions make buildings inadvisable; and (5) in ecological preserves or areas where pollution creates unacceptable sanitary conditions, until corrected.

 

In order to offer greater security to the property market, Law No. 6,766 prohibits the sale or promise of sale of any lot that is the result of a subdivision where the developer has not previously obtained approval by the appropriate municipality and the development has not been recorded with the respective Real Estate Registry Office. If any such lot is sold or contracted to be sold, the developer and any person or legal entity benefiting from such sale or promise of sale shall be jointly liable for the resulting damages to the purchaser and the public authorities.

 

Law No. 6,766 was recently amended by Law No. 13,786, enacted on December 12, 2018, which granted the buyer the right to restitution of the amounts already paid to a developer when the agreement is terminated due to the breach of the buyer’s obligations as provided therein, increasing and/or deducting, whichever is applicable, the amounts originally stipulated thereby. The penalty due by the buyer must not exceed 10% of the value of the agreement adjusted for inflation, and the amounts must be reimbursed by the developer, who can make the payments in up to 12 installments, the first one being due no later than (i) 180 days from the date expected for the conclusion of the construction, or (ii) 12 months from the termination of the relevant agreement, if the construction has been concluded.

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Assets for Appropriation

 

Law No. 10,931 of August 2, 2004, as amended, provides for certain protection of real estate assets. Accordingly, such protected assets are segregated from other properties, rights and obligations of the developer, including other assets previously appropriated, and such appropriated assets can only be used to guarantee debts and obligations related to the respective development. The appropriated assets are considered bankruptcy free and will not be affected in the event of bankruptcy or insolvency of the developer. In the event of a bankruptcy or insolvency of the developer, joint ownership of the construction may be instituted by a resolution of the purchasers of the units or by judicial decision. The joint owners of the construction will decide whether the project will proceed or the assets appropriated will be liquidated. Developers may also opt to submit a project to appropriation in order to benefit from a special tax system. Under this system, land and objects built on the land, financial investments in the land, and any other assets and rights with respect to the land are considered to be protected for the benefit of the construction of that development and the delivery of the units to the final owners, and are thus separate from the remaining assets of the developer.

 

In addition, in order to encourage the use of the appropriation system, Laws No. 11,977 of July 7, 2009 (amended by Law No. 12,249 enacted on June 11, 2010, Law No. 12,424 enacted on June 16, 2011, Law No. 12,693 enacted on July 24, 2012, Law No. 12,722 enacted on October 3, 2012, Law No. 13,043 enacted on November 13, 2014, and Law No. 13,097 enacted on January 19, 2015)2015, Law No. 13,274 enacted on April 26, 2016, Law No. 13,465 enacted on July 11, 2017 and Law No. 13,590 enacted on January 4, 2018) and No. 12,844 of July 13, 2013, which granted tax benefits for the adoption of the system by reducing tax rates on appropriated assets from 7% to 4% and, in the case of the appropriated assets under the public housing program “Minha Casa, Minha Vida,” the rates were reduced from 7% to 1%, until December 31, 2018, by Law No. 13,097, enacted January 19, 2015.

We have not yet utilized the appropriation system for any of our real estate developments. We prefer to use our subsidiaries and our jointly-controlled entities for each specific real estate development. Our subsidiaries and jointly-controlled entities allow us to borrow funds by segregating the credit risk taken on by the financial institutions.

 

Credit Policy Regulations

 

The real estate sector is highly dependent on the availability of credit in the market, and the Brazilian government’s credit policy significantly affects the availability of funds for real estate financing, thus influencing the supply of and demand for properties.

 

Housing Finance System, or “SFH”

 

Law No. 4,380 of August 21, 1964, as amended, created the SFH to promote the construction and ownership of private homes, especially for low income earners. Financing resources under the SFH’s control are provided by the Government Severance Indemnity Fund for Employees (Fundo de Garantia do Tempo de Serviço), or “FGTS,” and from savings account deposits. The FGTS, created by Law No. 5,107 of September 13, 1966 and regulated by Law

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No. 8,036 of May 11, 1990, imposes a mandatory 8% employee payroll deduction on all employees in Brazil. Employees maintain FGTS accounts, which are similar to pension funds, and are allowed, among other things, to use the funds deposited in the accounts for the acquisition of real estate property under certain circumstances, as set forth by applicable law. The CEF is the agency responsible for managing the funds deposited in the FGTS. In order to be eligible for the financing, the beneficiary must purchase a completed unit or unit under construction priced at up to R$750,000950,000 (price applicable to the States of Rio de Janeiro, São Paulo, Minas Gerais and Distrito Federal) or R$650,000800,000 (price applicable to other Brazilian States). In addition, the beneficiary shall (1) not own or be the committed purchaser of any residential real estate financed by the SFH within Brazil; (2) not own or be the committed purchaser of, any real estate property built or under construction in both his or her current city of residence and the city where the beneficiary conducts his or her main activities; (3) reside for at least one year in the city where the property is located; (4) pay the FGTS; and (5) be registered for at least three years with the FGTS regime. The unemployed also have access to the FGTS to purchase real estate property provided that he still has funds on the FGTS account (where the 8% payroll deduction was deposited while employed).

 

Financings that originate from savings account deposits in the entities comprising the Brazilian Saving and Loan System (Sistema Brasileiro de Poupança e Empréstimo), or “SBPE,” are regulated by the Central Bank. Such financings can be obtained through the SFH, which is strictly regulated by the Brazilian government, or through the mortgage portfolio system, where banks are free to set the financing conditions. SFH financing offers fixed interest rates lower than the market rates, capped at around 12% per year, and SFH financing contract terms vary, in general,

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between 15 and 30 years. The mortgage portfolio system financing offers market interest rates as determined by the financial institutions, generally varying between 18.5% and 12% per year.

 

CMN Resolution No. 3,932/2010 provides for the allocation of the funds deposited in savings accounts in the entities comprising SBPE and states that the following conditions must be met for SFH financing: (1) the maximum amount of the financing is 80% of the appraisal price of the property, as a general rule; (2) the maximum appraisal price for the financed unit is R$750,000950,000 (applicable to the States of Rio de Janeiro, São Paulo, Minas Gerais and Distrito Federal) or R$650,000800,000 (applicable to other Brazilian States); (3) the maximum actual cost to the borrower, which includes charges such as interest, fees and other financial costs, except insurance and other costs, may not exceed 12% per year; and (4) the borrower is responsible for the potential outstanding balance verified at the end of the financing term, (such term might be extended by half of the initial term).

 

SFH financings need to be secured by at least one of the following: (1) a first mortgage over the unit that is being financed; or (2) a conditional sale over the unit that is being financed, as prescribed by Law No. 9,514 of November 20, 1997, as amended by Law No. 10,931 of August 2, 2004, Law No. 11,076 of December 30, 2004, Law No. 11,481 of May 31, 2007, Law No. 12,703 of August 07, 2012, Law No. 12,810 of May 15, 2013, Law No. 13,043 enacted on November 13, 2014, and Law No. 13,097 enacted on January 19,2015 (“and Law No. 13,465 enacted on July 11, 2017 (“Law no. 9,514”); or, (3) a first mortgage or conditional sale, as determined by Law No. 9,514, of other property owned by the borrower or by a third party;party or (4) other guarantees, as established by the financing agent. SFH funds are only released upon the formalization of one of these methods of guaranteeing the loan.

 

TheAs of 2014, the federal government has announced, in 2014,implemented changes into the regulations on financing and construction in order to promote growth in the real estate market. Among theThe implemented measures announced are:are, among others: (1) all the acts involving immovable propertyreal estate will be entered on the property’s record in the land registry office, i.e., unregistered acts and actions enforceable against third parties in good faith, even if the unregistered act or action challenges ownership to the property; (2) the buyer of a real estate property will be able to give property as guarantee to finance another, or to purchase other assets with funds raised in savings accounts; (3) banks will be able tocan issue a new type of security, the Secured Real Estate Note (LIG –Covered Bonds (Letras Imobiliárias Garantidas, or “LIGs”), pursuant to CMN Resolution No. 4,598, enacted on August 29, 2017, which is exempt from income tax to raise more funds and borrow to finance the purchase of real estate; and (4) banks may grant payroll loans, in which the parcels will be charged to the worker'sworker’s salary in the private sector with more facilities, resulting in lower interests; and (5) the Brazilian government will create a type of credit that will be easier for the bank to recapture the property in case of default.interests.

 

Mortgage portfolio

 

While a large portion of the funds in the deposits in saving accounts are allocated to the SFH, some of the funds are allocated to loans granted at market rates. CMN Resolution No. 3,932/10, as amended, established that at least 65% of these deposits should be used for real estate financing, with a minimum of 80% of the financing going to housing loans under the SFH and the remaining balance for loans granted at market rates which are usually higher than in SFH loans, including mortgage portfolio used by banks for the concession of housing loans.

 

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In early 2005 the Brazilian government took a number of measures to better regulate the use of the funds raised in savings account deposits in order to promote growth of the real estate sector, these measures included: (1) the cancellation of payments to the Central Bank of funds not invested in real estate financing in January, February and March; (2) the creation of a real estate interbank deposit market to allow financial institutions with excessive investments in real estate to trade with financial institutions that have capacity for more real estate credits; (3) a review of the factors used in the calculation guidelines of the SFH in order to stimulate financing for the acquisition of new real estate properties at a low cost, applicable as of January 1, 2005; and (4) authorization for the SFH to provide financing to legal entities for the construction of development projects for their employees, provided that such entities follow all SFH guidelines; (5)guidelines.

In 2014, the Brazilian government adopted measures to facilitate the purchase of financed properties, as discussed in 2013,SFH above, and in 2016, the increase in the operating limits of the SFH to units with a maximum sales priceprices of R$750,000800,000 and (6) in 2014, measuresR$950,000 (applicable only to facilitate the purchaseStates of financed properties, as discussed in “Rio de Janeiro, São Paulo, Minas Gerais and theHousing Finance SystemDistrito Federal, or “SFH”” above.). These changes have significantly increased the funds available for investments in the Brazilian real estate sector.

 

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Real Estate Finance System, or “SFI”

 

The SFI was created by Law No. 9,514 to establish assignment, acquisition and securitization criteria for real estate credits. The system seeks to develop primary (loans) and secondary (trading of securities backed by receivables) markets for the financing of real estate properties by creating advantageous payment conditions and special protection of creditors’ rights. The SFI supervises real estate financing transactions carried out by savings banks, commercial banks, investment banks, real estate credit portfolio banks, housing loan associations, savings and loan associations, mortgage companies and other entities authorized by the CMN to provide such financing. SFI real estate credits may be freely negotiated by the parties, under the following conditions: (1) the amount loaned and the related adjustments must be fully reimbursed; (2) interest must be paid at the rates established by the contract; (3) interest must be capitalized; and (4) borrowers must purchase life and permanent disability insurance.

 

Real estate sales, rental, or other real estate property financing in general, can be negotiated with non-financial institutions under the same conditions permitted by authorized entities under the SFI. In these cases, non-financial entities are authorized to charge capitalized interest rates greater than 12% per year.

 

The following types of guarantees are applicable to loans approved by the SFI: (1) mortgages; (2) fiduciary assignment of credit rights resulting from sales contracts; (3) guarantee of credit rights resulting from contracts of sale or promise of sale of property; and (4) conditional sale of real estate property.

 

Law No. 9,514 also reformed securitizations of real estate assets provisions, making them less expensive and more attractive. The securitization of credits in the context of the SFI is made through real estate securitization companies, non-financial institutions formed as joint stock companies whose objective is to acquire and securitize real estate credits. Funds raised by the securitizing companies can be made through the issuance of debentures or notes, or the creation of a new type of CRI. According to applicable law, CRIs are nominative credit securities issued exclusively by securitizing companies, backed by real estate credits, freely negotiated, and payable in cash. CRIs tend to have, among others, the following characteristics: they are issued in book-entry form, they may have fixed or floating interest rates and can be paid in installments, they may contain adjustment provisions, they are registered and traded through centralized systems of custody and financial settlement of private securities and they can be secured by the assets of the issuing company.

 

Minha Casa, Minha Vida program

 

Provisional Measure No. 459 enacted on March 25, 2009, converted into Law No. 11,977 enacted on July 7, 2009, amended by Law No. 12,249 enacted on June 11, 2010, Law No. 12,424 enacted on June 16, 2011, Law No. 12,693 enacted on July 24, 2012, Law No. 13,043 enacted on November 13, 2014 and Law No. 13,097 enacted on January 19, 2015, created a public housing program called “Minha Casa, Minha Vida.” Provisional Measure No. 514 enacted on December 1, 2010, converted into Law No. 12,424 enacted on June 16, 2011, modified the aforementioned legislation, which calls for government investment of more than R$30 billion and is focused on building one million houses for families with monthly incomes of up to ten times the minimum wage. Under this program, the government is authorized to finance families purchasing houses with assessed values between R$90,000 and R$190,000.240,000. Law No. 12,868 enacted on October 15, 2013, released resources for "Minha Casa Melhor", in which CEF provides to each beneficiary of the program "Minha Casa Minha Vida" subsidized credit up to R$5,000 for the purchase of furniture and appliances, with interest rate of 5% per year and repayable in 48 months.

 

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Municipal Legislation

 

Municipal planning is regulated by articles 182 and 183 of the Federal Constitution and by Law No. 10,257 of July 10, 2001 (Estatuto da Cidade), as amended, or Law No. 10,257. Law No. 10,257 provides, among other things, for the establishment of (1) rules for the parceling, use and occupation of urban tracts of land in each municipality for the collective welfare and environmental balance of the community; and (2) a master plan, which shall be reviewed every 10 years. The master plan is the guiding tool used to plan developments in the urban areas of each municipality and is used as a reference by all public and private agents acting within the municipality. It establishes the strategic goals and general guidelines for urban construction, the objectives and guidelines for differentiated areas of planning and the instruments for their deployment.

 

We set out below certain details of the laws governing the municipal planning of the two major cities in which we operate, São Paulo and Rio de Janeiro:

 

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São Paulo municipality

 

City laws govern the zoning, construction, parceling, use and occupation of land in the municipality of São Paulo. They set forth technical and urban planning requirements for parceling, and provide that the division, subdivision or segregation of urban tracts of land are subject to the prior approval of the São Paulo municipal government. Moreover, the zoning laws describe the types of permissible uses for the land and their respective characteristics, by dividing São Paulo into areas of use with fixed locations, limits and boundaries. They also provide for fines and sanctions for noncompliance.

 

Municipal Law No. 11,228 of June 25, 1992, approved the Code of Works and Construction, regulated by Decree 32,329 of September 23, 1992, which governs administrative and executive procedures and sets forth the rules to be followed in the planning, licensing, execution, maintenance and use of public works and construction within properties in the municipality of São Paulo, and provides for sanctions and fines applicable in cases of non-compliance with these rules.

 

On July 31, 2014, Municipal Law No. 16,050 was published, replacing Municipal Law No. 13,430 of September 13, 2002, approving the master plan and creating the Planning System of the municipality of São Paulo and regulating the new master plan of the municipality. The new master plan provides a series of guidelines for the development and growth of the city of São Paulo for the next 16 years, in order to (i) incentivize the use of public and non-motorized forms of transport; (ii) reduce the housing deficit; (iii) improve the access of residential areas to commercial areas of the city; and (iv) incentivize the development of urban areas already equipped with public transportation infrastructure, among other guidelines.

 

On FebruaryMarch 22, 2016, Municipal Law No. 16,402 was published, replacing Municipal Law No. 13,885 of August 25, 2016, Draft Bill No. 272/2015 was approved by2004, regulating the Chamber of Deputies of São Paulo, which relates tonew rules regarding the parceling, use and occupation of land in the municipality of São Paulo. Draft Bill No. 272/2015 is subject to ratification by the mayor of São Paulo.

 

Rio de Janeiro municipality

 

Decree 322 of March 3, 1976, as amended, of the municipalityMunicipality of Rio de Janeiro, and Decree “E” 3,800 of April 20, 1970, as amended, of the then State of Guanabara, jointly created the municipality’s Zoning Regulation, Land Parceling Regulation and Construction Regulation. These regulations control the use of the municipality land, including urban zoning, use of properties, development of construction sites and conditions for the use of each zone in the municipality. The Ten-year master plan of the municipality, approved pursuant to Supplementary Law No. 111 of January 1, 2011, establishes rules and procedures related to urban policy of the municipality, determines guidelines, provides instruments for its execution and defines area policies and their related programs, aiming at meeting the social needs of the city.

On January 14, 2019, Municipal Law No. 198 was published, replacing the former Code of Works and Construction of the Municipality of Rio de Janeiro. The new Code has only 40 articles, replacing the over 500 provided for in the former code, and its principal goal is to modernize and simplify the rules for developers. The simplification of the licensing process allows for more flexible urbanization parameters. Among the important changes brought about by Law No. 198, we highlight the following:

(i) Minimum Size: The new rule allows for properties with a minimum size of 25 square meters (or 82 square feet), except in the boroughs of Barra da Tijuca, Recreio dos Bandeirantes, Vargem Grande, Vargem Pequena and Ilha do Governador. According to the old rules, the minimum useable area of the apartments varied from 28 square meters (91 square feet) in the Central and Northern regions and 60 square meters (196 square feet) in the Southern Region;

(ii) Parking: It is no longer required for a building built within a radius of 800 meters (2,624 feet) from an underground, train, BRT and/or VLT station to have at least one parking space for each one of its individual units. The requirement now is one parking space for every four apartments;

(iii) Playground: It is no longer required for a building to have a playground;

(iv) Marquees: Marquees, which have been forbidden since 2007, are once again allowed in the city’s building designs;

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(v) Elevators: Elevators are now required only in buildings with more than five stories;

(vi) Cultural Heritage Buildings: Cultural Heritage Buildings may have their use changed, pursuant to the compliance with the rules enforced by the preservation regulatory bodies;

(vii) Balconies: No limits on the construction of a balcony were established in the new code. Sealing off balconies is still allowed, provided that the legal requirements are met;

(viii) Mezzanines: Non-residential units may have a mezzanine that occupies 100% of its useable area pursuant to payment of a fee to City Hall;

(ix) Condo Villages: It is once again permitted to build condo villages in town, which may have up to 36 units. According to the old rules, these used to be allowed only in the boroughs of Campo Grande and Tijuca. The code also determines that the upkeep of the village street, its entrance and common services are the obligation of its occupants;

(x) Bike Racks: It is now required of residential buildings to have a designated place for storing bicycles; and

(xi) Retrofit: The rules for the calculation of the Total Built Area, parking spaces and adaptation of the building in the retrofitting of existing buildings have been made more flexible.

 

Environmental Issues

 

We are subject to a variety of Brazilian federal, state and local laws and regulations concerning the protection of the environment, as well as urban regulations and zoning restrictions, as described below. Applicable environmental laws may vary according to the development’s location, the site’s environmental conditions and the present and former uses of the site. Compliance with these environmental laws may result in delays, cause us to incur in substantial costs, and prohibit or severely restrict project development. Before we purchase any real estate, we conduct investigations of all necessary and applicable environmental issues, including the possible existence of hazardous or toxic materials, as well as any inadequately disposed waste substances. During the investigations we also identify the existence of water wells and protected vegetation, observing the proximity of the real estate property to permanent preservation areas. We generally condition the real estate property acquisitions on obtaining the required regulatory approvals prior to closing.

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We have adopted certain practices to further our commitment to environmental protection and landscape development. Through our Selective Collection Project, we have partnered in environmental education initiatives with private and governmental entities, including non-governmental organizations. We provide training to all of our outsourced workers (before we begin work on any particular project), that focuses on the importance of preserving the environment and how to effectively collect, store and control materials for recycling. Alphaville was given the “ECO Award” in 2006 and 2007 (by the American Chamber of Commerce), the “Top Ambiental Award” (Top Environmental Award) in 2007 and 2008 (by the Brazilian Association of Marketing and Sales Agents, in recognition for its environmentally responsible practices) and the “Top Social Award” in 2008 and 2009 (by the Brazilian Association of Marketing and Sales Agents, in recognition for its socially responsible practices). Our Eldorado Business Tower building is the first building in Latin American, to be pre-certified by the U.S. Green Building Council as a Leed CS 2.0 Platinum building for leadership in energy and environmental design.

 

Environmental licenses and authorizations

 

Brazilian environmental policy requires environmental licenses and permits for the construction and operation of real estate projects. Environmental licensing is required for both initial construction and alteration in existing developments, and the licenses must be periodically renewed. The Brazilian Institute of Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis), or the IBAMA, is responsible for granting such licenses for projects with regionaldeveloped in two states or national impact on the environment.in federal conservation units. In other cases, state or municipal environmental agencies are responsible for granting such environmental licenses, depending on the extent of environmental impacts caused by certain projects.

 

The environmental licensing process is comprised of three stages: preliminary license, installation license and operational license. The preliminary license, issued during the preliminary planning phase of the project, authorizes the location and basic development, and establishes the conditions and technical requirements to be observed in further stages of development. The installation license authorizes the facility’s construction. The operating license authorizes

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the commencement and continuation of operational activities. Operating licenses are subject to compulsory renewal depending on their validity. The licensing of activities that may significantly impact the environment, as determined by the competent environmental agency and according to the Environmental Impact StudyAssessment and Environmental Impactits related Report (“EIA/RIMA”), requires environmental offset payments, to be invested in conservation units (e.g. national parks, biological reserves etc.), pursuant to Article 36 of Law No. 9,985/00. The value of the environmental offset is established by the environmental agency conducting the licensing proceeding, according to the “ecosystem impact level” of the proposed activity, pursuant to Article 31-A of Federal Decree No. 6,848/09.

 

The installation, operation or alteration of projects without proper and valid environmental licensing or the non-compliance with the conditions or technical requirements of the respective environmental licenses, may subject the violator to administrative sanctions that may range from fines (R$500 to R$10 million), as well as the suspension of activities and, depending on the specific circumstances, criminal liability (of individuals andand/or companies), pursuant to Federal Law No. 9,605/98.98 and civil liability (in case environmental damage occurs).

 

The construction, maintenance and sale of our projects may be hampered or halted by delays in the issuance of applicable licenses or even by failure to obtaining such licenses.

 

The construction of real estate developments often requires land moving activities, and in many cases, the cutting down of trees. In addition to environmental licenses and permits, Brazilian legislation requires specific environmental authorizations for the development of projects, based on the characteristics of the project, its location and the natural features inherent to the area. The development of projects that require the cutting of trees or removing vegetation must receive specific authorizations from environmental agencies. Companies that apply for an authorization for vegetation removal are required to perform the reforestation of other areas as a compensatory measure, such as reforestation or to repair the affected areas, which may imply additional expenses. Brazilian legislation also requires special protections for certain specific types of flora and areas with special ecological purpose, imposing additional legal requirements to removal of such vegetation.

 

The removal of vegetation without proper and valid authorization, or non-compliance with the authorization requirements, may subject the transgressor to civil liability (in case environmental damage occurs), administrative

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sanctions (such as fines) and, according to specific circumstances, criminal liability (of individuals and/or companies), pursuant to Federal Law No. 9,605/98.

 

The licensing of projects with relevant environmental impacts located in a conservation unit or within its buffer zone will depend on prior authorization from the conservation unit’s managing office.

In addition, the development of projects that require water abstraction from bodies of water or groundwater, as well as the discharge of effluents into water bodies, are subject to specific water use grants, to be issued by the relevant authorities. Water use grants are subject to certain conditions and technical requirements, including maximum capacity requirements and effluent treatment standards.standards, and are subject to automatic renewal.

Moreover, some of our projects require the transfer of wildlife to other areas, which is subject to specific authorizations issued by the state environmental agencies. To catch, handle and transfer wildlife without the proper authorization may result in administrative sanctions of up to R$5,000.00 per animal, pursuant to Federal Decree 6,514/08.

 

Waste disposal

 

Brazilian legislation relies on several standards and procedures for waste management. All waste must be properly stored, treated, transported and disposed of, in order to avoid the occurrence of environmental damages – and as a result, environmental liability.

 

The Brazilian “National Waste Management Policy” (Federal Law No. 12,305/10) and CONAMA Resolution 307/2002 specifically regulatesregulate the handling of solid waste generated by the construction sector. CompaniesAs part of their licensing procedure, companies are required to present and have a solid waste management plan approved by statecompetent environmental agency and must comply with the conditions and obligations set forth in such plan. Failure to comply with such obligations may lead to civil (obligation to repair/indemnify in case of pollution), administrative (e.g. fines, suspension of activities etc.) and, according to specific circumstances, criminal liability.

 

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Regarding civil liability, because Brazilian legislation imposes strict, joint and several liability for environmental damages, companies may be held liable for any environmental damages that may arise as a result of its activities, including waste generated thereof, which must be properly stored, treated, transported and disposed of. Likewise, the hiring of third parties for management of waste generated from our activities does not exempt us from civil environmental liability.

 

Contaminated areas

 

We develop and construct projects in several states within Brazil. Each state has its Environmental Secretary and/or Environmental Agency. The São Paulo State Secretary of Environment (Secretaria de Estado do Meio Ambiente de São Paulo), or the “SMA,” and the State Environmental Agency of São Paulo (Companhia Ambiental do Estado de São Paulo), or “CETESB,” are the principal environmental regulatory entities of the State of São Paulo, and they have adopted procedures with regard to the management of contaminated areas, including the creation of environmental standards to preserve the quality of land and underground water, as well as procedures to be complied with if contamination is confirmed. The standards established by CETESB are used as reference by most Brazilian states that have no specific regulation on contaminated land management.

 

In addition, the Rio de Janeiro State Secretary of Environment (Secretaria de Estado do Meio Ambiente e Desenvolvimento Urbano do Rio de Janeiro) and the Rio de Janeiro State Environmental Agency, or “INEA,” also maintain their own quality standards, in combination with those established by the National Environmental Council (Conselho Nacional do Meio Ambiente), or “CONAMA”.“CONAMA.” Other states have similar requirements.

 

If contaminated areas are identified in the development of our projects, we must provide proper disclosure to environmental authorities and registration before real estate property records. Given the strict liability regime, we may be required to proceed with the remedial actions deemed necessary by environmental agencies in order to comply with technical standards set forth for each kind of project, even if we have not caused the contamination, and may result in delays for the project development’s completion. Prior approval from environmental agencies before engaging in remedial actions may be necessary. All emergency actions to prevent and mitigate risks to the environment and public health, if required, must be adopted promptly and at our expense.

 

Non-compliance with the guidelines established by the environmental and health entities may result in criminal, as well as administrative penalties. Moreover, the owners and holders of properties may be required to pay for costs relating to the clean-up of any contaminated soil or groundwater located in their properties, even if they did not cause the contamination.

 

If there are contaminated areas in the properties where our projects will be developed, this must be disclosed to our clients.

 

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Environmental liability

 

Article 225 of the Brazilian Federal Constitution, provides that “activities that are harmful to the environment shall subject violators, whether individuals or companies, to criminal and administrative sanctions, regardless of the obligation to repair the damage caused.” Therefore, the Brazilian Federal Constitution provided for environmental liability in three distinct fields: civil, administrative and criminal. As an example, payment of an administrative fine does not offer exemption from the duty to make reparations or indemnify for damages that might be caused by harmful conduct, nor does it offer exemption from possible criminal charges prompted by the event.

 

Civil environmental liability in Brazil is considered by case law aspropter rem, that is, liability attaches to the real estate property. Therefore, whoever buys or holds environmentally damaged land will succeed in the liability for the clean-up or recovery and for reparation of potential damage to third parties. Although this liability can be contractually allocated between the parties, it cannot be opposed either administratively or before third parties, meaning the concept of abona fide prospective purchaser does not exist in civil environmental liability in Brazil.

 

In addition, Federal Law No. 6,938/81 establishes strict liability for the recovery of environmental damages or, if not possible, compensation or indemnity for such damages, with joint and several liability established among all those directly or indirectly contributing to environmental degradation, regardless of the degree of participation in the damage. Each of those involved may be held liable for the full amount of the damages. Moreover, pursuant to Article 4 of Federal Law 9,605/1998, Brazilian environmental legislation determines that the corporate veil may be pierced

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whenever the veil is considered to be an obstacle to recovery for environmental damages. As a result, the controlling legal entity can be found liable despite a limited liability legal status.

 

At the administrative level, environmental liability may be assigned through administrative sanctions imposed by the competent environmental entities, pursuant to Law No. 9,605/98 which “rules on the criminal and administrative sanctions deriving from conduct and activities that are harmful to the environment” and pursuant to Federal Decree No. 6,514/08. These sanctions may include, among others: (1) fines of up to R$50 million, tailored to the economic capacity and track record of the offender, in addition to the severity of the facts and past performance, with the possibility of these fines being imposed at double or triple rates for repeated offenses; (2) suspension or interdiction of the activities of the respective enterprise; and (3) withdrawal of tax incentives and benefits. Administrative liability falls on the person engaged in the conduct described as an administrative offense.

 

Criminal liability is personal, arising directly from the unlawful conduct of the agent, with the crimes necessarily being specifically addressed in the law. Brazilian law allows criminal liability to be assigned to individual persons as well as corporate entities. When liability is assigned to the latter, the individual persons taking the decision that resulted in the criminal conduct (such as directors, officers, administrators, board members, members of technical entities, auditors, managers, agents or representatives) may also be penalized to the extent of their culpability. Moreover, Brazilian environmental legislation determines that the corporate veil may be pierced whenever the veil is considered to be an obstacle to recovery for environmental damages. As a result the controlling legal entity can be found liable despite a limited liability legal status.

Although administrative and criminal liability require a direct connection with the action or omission that resulted in breach of environmental legislation or environmental damage, financial penalties may be imposed that may pierce the corporate veil and disregard the legal entity doctrine. Article 4 of Federal Law No. 9,605/1998 expressly provides for the possibility of piercing the corporate veil if necessary for the recovery or compensation of environmental damages.

 

C.       Organizational Structure

 

The following chart shows our organizational structure for our principal subsidiaries, including our now affiliate Alphaville, all of them incorporated in Brazil, as of December 31, 2015:

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 Brazil:

 

(*)We held 30% of this entity at December, 2015, December 31, 2014 and December 31, 2013.

(**) At December 31, 2013 we held 70% of this entity and acquired the 30% remaining in November 21, 2014. At December 31, 2015 we held 100% of this entity.Tela de celular com texto preto sobre fundo branco

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For more information on our remaining subsidiaries and jointly-controlled entities, see “Item 4. Information on the Company—“—B. Business Overview—Subsidiaries.” A list of our significant subsidiaries as determined in accordance with Rule 1-02(w) of Regulation S-X is being filed as Exhibit 8.1 to this annual report.

 

D.       Property and Equipment

 

We lease our headquarters located at Av. Nações UnidasPres. Juscelino Kubitschek, No. 8,501, 19th floor,1830, Block 2, 3rd Floor, 04543-900 – São Paulo, SP — Brazil. We also lease our branch office located at Av. Dr. Marcos Penteado de Ulhôa Rodrigues, 939, 11th floor Jatobá Tower, Barueri, SP — Brazil. Currently, we and our main subsidiaries leasedlease approximately 12,132950 square meters.meters in this office. We believe our current facilities are adequate for the full development of our operations.

 

As of December 31, 2015,2019, our property and equipment recorded on our balance sheet mainly consisted of sales stands, facilities, model apartments, computer equipment, vehicles and leasehold improvements, among others, the balance of which was R$49.214.2 million.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A.       Operating Results

 

The financial statements for the years ended December 31, 2015, 2014, 2013, 20122019, 2018, 2017, 2016 and 20112015 were prepared in accordance with the accounting practices adopted in Brazil, which comprise the rules of the Brazilian Securities Commission (CVM), and the standards, interpretations and guidelines of the Accounting Standards Pronouncements Committee (CPC), and are in compliance with the International Financial Reporting Standards (IFRS) adopted in Brazil, including the Guideline OCPC 04—Applicationguidance contained in Circular Letter CVM/SNC/SEP 02/2018, of December 12, 2018, which establishes the Technical Interpretation ICPC 02 to the Brazilian Real Estate Development Entities—regarding the revenueaccounting procedures for recognition, measurement and the respective costs and expensesdisclosure of certain types of transactions arising from contracts for purchase and sale of real estate unit not yet completed in real estate development operations over the construction progress (percentage of completion method).entities. The Brazilian GAAP applied by us is not in compliance with IFRS as issued by IASB.

 

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Followingour analysis of certain strategic options, our management decided to sell 50% of Tenda’s total capital stock, and transfer the acquisition, formation and incorporationremaining 50% of Tenda’s total capital stock to our shareholders in connection with a reduction in our total capital stock. Accordingly, on December 14, 2016, we entered into an SPA with Jaguar pursuant to which we agreed to sell Tenda shares representing up to 30% of the entities Alphaville, FIT and Bairro Novo in 2007 and following the mergertotal capital stock of FIT into Tenda, in 2008, our financial results for 2007 and 2008 included the results of the following segments: Gafisa S.A., Alphaville, Tenda, FIT (merged with Tenda in October 2008) and Bairro Novo. Further, following Gafisa’s withdrawal from Bairro Novo and the exchange of all the remaining Tenda shares not held by Gafisa into Gafisa shares, our financial results for 2013, 2012 and 2011 included the results of the following segments” Gafisa S.A., Alphaville and Tenda. On December 9, 2013, we completed the sale ofat a majority interest in Alphavilleprice equal to Private Equity AE Investimentos e Participações (“Fundo AE”), a company controlled by Pátria Investimentos Ltda. and Blackstone Real Estate Advisor L.P., which was previously announced on June 7, 2013. All conditions precedent to the completion of the transaction were met, including governmental approval. The transaction was concluded with a sale of 50% interest by Gafisa and 20% interest by Tenda, with Gafisa retaining the remaining 30% of Alphaville capital stock. As a result, since November 30, 2013, Alphaville results are no longer consolidated in our financial statements.R$8.13 per share.

 

In October 2014, Shertis Empreendimentos e Participações S.A. or “Shertis”, which heldThe spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a 20% interest inreduction of the capital stock of Alphaville, was merged into Gafisa. AsTenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a result and asreduction of the date of this annual report, we hold a direct 30% interest in the capital stock of Alphaville.Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.

 

On November 21, 2014, we acquired the remaining shares of Cipesa Empreendimentos Imobiliários S.A. in the amount of R$6,354. As a result of this transaction, the results of operations of Tenda have been presented as discontinued operations under Brazilian GAAP in the Company’s 2017, 2016, and 2015 consolidated statements of operations, and the Company recorded a net effect of the write-off of goodwill,an impairment loss in the amount of R$17,604.610.1 million for the year ended December 31, 2016, related to the measurement of disposal group held for sale at the lower of its carrying value and the fair value less cost to sell, taking into account the price of R$8.13 per share described above. Additionally, for the period ended May 4, 2017, under Brazilian GAAP, the fair value of discontinued operations was adjusted in the amount of R$215.4 million, considering the weighted average price per share at R$12.12 and the amount of R$107.7 million related to the obligation to sell Tenda shares at a price equal to R$8.13 per share, which was reflected in the profit or loss of discontinued operations, in order to reflect the difference between the fair value of the group of assets held for sale and the effective selling price.

 

See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background and Recent Developments.” Our chief executive officer, who is responsible for allocating resources among these businesses and monitoring their progress, uses economic present value data, which is derived from a combination of historical operating results and forecasted operating results, to assess segment information primarily on the basis of different business segments.

 

Overview

 

We generate our revenues mainly from the development and sale of real estate developments. We recognize revenues from the sale of real estate developments over the course of their construction periods, based on a financial measure of completion and not at the time that the sales agreements are executed. To a lesser extent, we also generate revenues from real estate services such as construction, technical and real estate management we render to third parties. We structure some of our projects through either our subsidiaries or jointly-controlled entities organized as special purpose vehicles.

 

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Brazilian Economic Environment

 

Our business andWe believe that our results of operations and financial performance are significantlyand will continue to be affected by changes in the Brazilian economic environment, including changes in employment levels, population growth, consumer confidence, stability of income levelsfollowing macroeconomic trends and availability of financing for land home site acquisitions.factors:

 

AtAll of our operations are located in Brazil. As a result, our revenues and profitability are affected by political and economic developments in Brazil and the endeffect that these factors have on the availability of 2010credit, disposable income, employment rates and average wages in Brazil. Our operations, and the beginning of 2011, the Central Bank began implementing more restrictive monetary policies as a precaution against unsustainable economic growth. In the second half of 2011, with growing uncertaintyindustry in general, are particularly sensitive to changes in economic conditions, dueconditions.

Brazil is the largest economy in part to ongoing volatilityLatin America, as measured by gross domestic product, or GDP. The following table shows data for real GDP, inflation and interest rates in global financial markets, particularly in Europe,Brazil and the Central Bank began to implement an easing process. As of December 31, 2011, the Central Bank had set the basic interestU.S. dollar/real exchange rate at 11%the dates and thereal depreciated by 12.6% relative to the U.S. dollar in 2011. As of December 31, 2011, thereal/U.S. dollar exchange rate was R$1.87 per US$1.00. During this period, inflation according to the INPC was 6.50%.

By the second half of 2011, the Brazilian economy faced growing uncertainty and economic conditions began to deteriorate, due in part to ongoing volatility in global financial markets, particularly in Europe. In order to avoid a contraction in economic growth, the Central Bank began to implement easing measures combining macroeconomic policies and interest rate decreases in order to stimulate demand.

As of December 31, 2012, the Central Bank had set the SELIC rate at 7.25% and thereal depreciated 8.8% relative to the U.S. dollar in 2012. As of December 31, 2012, thereal/U.S. dollar exchange rate was R$2.048 per US$1.00. During this period, inflation according to the IPCA was 5.8%.

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As of December 31, 2013, the Central Bank set the SELIC rate at 10% and thereal depreciated 13.2% relative to the U.S. dollar in 2013. As of December 31, 2013, thereal/U.S. dollar exchange rate was R$2.3575 per US$1.00. During this period, inflation according to the IPCA was 5.9%.

As of December 31, 2014, the Central Bank set the SELIC rate at 11.75% and thereal depreciated 12.7% relative to the U.S. dollar in 2014. As of December 31, 2014, thereal/U.S. dollar exchange rate was R$2.6550 per US$1.00. During this period, inflation according to the IPCA was 6.4%.

As of December 31, 2015, the Central Bank set the SELIC rate at 14.25% and thereal depreciated 47.0% relative to the U.S. dollar in 2015. As of December 31, 2015, thereal/U.S. dollar exchange rate was R$3.9048 per US$1.00. During this period, inflation according to the IPCA was 10.7%.

The table below shows the actual growth of the Brazilian GDP, inflation, interest rates and dollar exchange rates for the periods indicated:indicated.

 

  Year ended December 31,
  2015 2014 2013
  (%, unless otherwise stated)
Real growth in GDP  (3.8)  n/a   2.3 
Inflation rate (INPC)(1)  11.3   6.2   5.5 
Inflation rate (IGP—M)(2)  10.5   3.7   5.5 
National Construction Cost Index (INCC)(3)  7.5   6.9   8.1 
TJLP rate(4)  7.0   5.0   5.0 
CDI rate(5)  13.2   10.8   8.1 
Appreciation (devaluation) of the real vs. US$  (47.0)  (12.7)  (13.2)
Exchange rate (closing) — US$1.00  R$3.90   R$2.65     R$2.35 
Exchange rate (average)(6) — US$1.00  R$3.39   R$2.35   R$2.18 

  Year ended December 31,
  2019 2018 2017
  (%, unless otherwise stated)
Real growth in GDP  1.1   1.1   1.0 
Inflation rate (INPC)(1)  4.5   3.4   2.1 
Inflation rate (IGP—M)(2)  7.3   7.6   (0.5)
National Construction Cost Index (INCC)(3)  4.2   3.8   4.3 
TJLP rate(4)  5.6   7.0   7.0 
CDI rate(5)  4.7   6.4   9.9 
Appreciation (devaluation) of the real vs. US$  (4.0)  (17.1)  (1.5)
Exchange rate (closing) — US$1.00  R$ 4.031   R$ 3.88   R$ 3.31 
Exchange rate (average)(6) — US$1.00  R$ 3.944   R$ 3.65   R$ 3.20 
 

_________________

(1)INPC: consumer price index measured by the IBGE.

 

(2)General Market Price Index (Índice Geral de Preços-Mercado) measured by the FGV.

 

(3)National Index of Construction Cost (Índice Nacional de Custo da Construção) measured by the FGV.

 

(4)Represents the interest rate used by BNDES for long-term financing (end of period).

 

(5)Represents an average of interbank overnight rates in Brazil (accumulated for period-end month, annualized).

 

(6)Average exchange rate for the last day of each month in the period indicated.

 

Brazilian Real Estate Sector

 

The Brazilian real estate sector is characterized by cyclical performance influenced by various macroeconomic factors. DemandFor example, demand for housing, the availability of financing and growth in population and incomes are, among others, factors that influence the performance of the real estate market.

 

Since 1994, Brazil’s ability to control inflation has contributed to the country’s economic recovery (particularly at the lower income level) and allowed Brazil to assert itself more effectively into the global economic context. For example, during the second half of the 1990s, policies that promoted economic liberalization and privatization of public services facilitated a significant influx of foreign investment. This environment generated pressure among the Brazilian financial and business communities to encourage responsible and transparent public management, promoting economic stability. In general, the current and previous presidential administrations have adopted comparatively austere economic policies, characterized by increased independence of the Central Bank, transparency and control over public accounts. Another significant effect of Brazil’s heightened international profile and economic stability was an increase in the competitiveness of various economic sectors, with a notable improvement in standards of corporate administration and governance. This pattern, along with favorable conditions in the global economy, has contributed to improved economic indicators in Brazil.

In addition, since 2006, the Brazilian government has enacted incentives in the real estate sector, including the following:

 

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·Provisional Measure No. 321 enacted on September 12, 2006, later converted into Law No. 11,434 enacted on December 28, 2006 and amended by Law No. 12,599 enacted on March 23, 2012, gave banks the option to charge fixed interest rates on mortgages;

 

·Law No. 10,820 enacted on December 17, 2003, amended by Law No. 10,953 enacted on September 27, 2004, regulated by Decree No. 5,892 enacted on September 12, 2006, as amended by Decree No. 4,840 enacted on September 17, 2003, as amended by Law No. 13,097 enacted on January 19, 2015, allowed payroll deductible mortgage loans to employees of both public and private entities;

 

·Decree No. 6,006 enacted on December 28, 2006, replaced by Decree No. 7,660 enacted on December 23, 2011, implemented a 50% tax cut on Tax on Manufactured Products (Imposto sobre Produtos Industrializados), or IPI, levied on the acquisition of important construction products, including certain types of tubes, ceilings, walls, doors, toilets and other materials. In 2009, other decrees eliminated the IPI levied on the acquisition of similar products, but were implemented for a limited term only and were set to expire in March 2010, but were extended until December 31, 2012;

 

·Provisional Measure No. 459 enacted on March 25, 2009, converted into Law No. 11,977 enacted on July 7, 2009, amended by Law No. 12,249 enacted on June 11, 2010, Law No. 12,424 enacted on June 16, 2011 and Law No. 12,693 enacted on July 24, 2012, Law No. 12,722 enacted on October 3, 2012, Law No. 13,043 enacted on November 13, 2014 and Law No. 13,097 enacted on January 19, 2015 created a public housing program called “Minha Casa, Minha Vida,” which calls for government investment of more than R$30 billion and is focused on building one million houses for families with monthly incomes of up to ten times the minimum wage. Under this program, the government is authorized to finance families purchasing houses with assessed values between R$90,000 and R$190,000;

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·Provisional Measure No. 514 enacted on December 1, 2010, converted into Law No. 12,424 enacted on June 16, 2011 confirmed the extension of “Minha Casa, Minha Vida” through 2014, and a total investment of R$72 billion, more than doubled the R$34 billion allocated to the initial program. The goal of the second phase of the “Minha Casa, Minha Vida” program is to deliver two million homes in four years encompassing an even lower income segment than previously targeted, but also expanded the current resources available to 40% of the total new amount to be destined to the lower-income segments;

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·Provisional Measure No. 620 enacted on June 12, 2013, converted into Law No. 12,686 enacted on October 15, 2013, which released resources for "Minha Casa Melhor", in which CEF provides to each beneficiary of the program "Minha Casa Minha Vida" subsidized credit up to R$5,000 for the purchase of furniture and appliances, with interest rate of 5% per year and repayable in 48 months; and

Industrializados), or IPI, levied on the acquisition of important construction products, including certain types of tubes, ceilings, walls, doors, toilets and other materials. In 2009, other decrees eliminated the IPI levied on the acquisition of similar products, but were implemented for a limited term only and were set to expire in March 2010, but were extended until December 31, 2012;

 

·Provisional Measure No. 656 enacted on October 7, 2014, converted into Law No. 13,097 enacted on January 19, 2015 (“Law No. 13,097”), which establishes mechanisms for protecting purchasers and recipients ofin rem rights which enter into legal transactions based on the information contained in the real estate records. In addition, deals with payroll loans, establishing the concentration of acts in the real estate property registration and creates the Real Estate Covered Bonds (LIG -Letras Imobiliárias Garantidas).LIG.

 

·Normative Instructions No. 30 and No. 31 enacted on December 30, 2015, which establish new interests rates and loan limit subsidies for the 2nd and 3rd brackets of the “National Individual Loan Program” segment of the FGTS.

·CMN Resolution No. 4,598/2017, which regulates the issuance of LIGs by financial institutions, establishing its general characteristics, procedures and applicable requirements, including with regards to underlying assets backing such securities, as well as other guidelines applicable to the LIG trustee and to LIG holders’ meetings.

·Law No. 13,777 enacted on November 20, 2018, established a new form of condominium - a “multi-property” condominium. Multi-property allows the co-owners of a property to each use it for a pre-determined period of time as its single owner. Each “time fraction” is indivisible and bound to the right of use of the property for periods of no less than 7 days, which can be fixed and determined or change from year to year.

·Law No. 13,786 enacted on December 12, 2018, which regulates the dissolution or termination of purchase and sale agreements involving real estate development activities, in order to foster legal and economic confidence in the real estate development sector.

·Municipal Law No. 198 enacted on January 14, 2019, which replaced the former Code of Works and Construction of the municipality of Rio de Janeiro. The new Code has only 40 articles, replacing the over 500 provided for in the former code, and its principal goal is to modernize and simplify the rules for developers. The simplification of the licensing process allows for more flexible urbanization parameters.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with Brazilian GAAP requires management to make judgments, estimates and adopts assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, as well as the disclosure of contingent liabilities, at the balance sheet date. Assets and liabilities subject to estimates and assumptions include the useful life of property plant and equipment, impairment of assets, deferred tax assets, provision for uncertainty tax positions, labor and civil risks, and the measurement of the estimated cost of ventures and financial instruments. Estimates are used for, among other things, impairment of non-financial assets, transactions with share-based payment, provisions for tax, labor and civil risks, fair value of financial instruments, estimated costs of ventures, realization of deferred income tax and other similar provisions. Although we believe that our judgments and estimates are based on reasonable assumptions, thatas they are subject to several risks and uncertainties and are made in light of information available to us, our actual results may differ from these judgments and estimates.

 

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In this sense, we set forth below summarized information related to our critical accounting policies. See the noteNote 2.2 to our consolidated financial statements, included elsewhere in this annual report for further information on these and other accounting policies we adopt.

 

Impairment of non-financial assets

 

We annually review the carrying amount of assets, with the objective of evaluating events or changes in the economic, operational or technological circumstances that may indicate a decrease or loss in the recoverable amount of such assets. Should such evidence exist, and the carrying amount exceeds the recoverable amount, a provision for impairment loss is recognized in the statement of operations by adjusting the carrying amount to the recoverable amount. A test for impairment of intangible assets with indefinite useful lives and goodwill is performed at least

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annually or when circumstances indicate a decrease in the carrying amount. As of December 31, 2014, the Company has recorded a provision for impairment for land and goodwill related to the acquisition of Cipesa Empreendimentos Imobiliários S.A.

As of December 31, 2016, the Company recorded an impairment loss related to Tenda’s discontinued operations in the amount of R$610.1 million. As of December 31, 2017 and 2018, the Company recorded an impairment loss related to the goodwill on the remeasurement of the investment in AUSA in the amounts of R$127.4 million and R$112.8 million, respectively. On December 27, 2019, we sold our remaining stake in Alphaville and the remaining goodwill balance was written down in the amount of R$161.1 million. The recoverable amount of an asset or of a certain cash-generating unit is defined as the greater of its value in use and its fair value less costs to sell. When estimating the value in use of an asset, the estimated future cash flows are discounted to present value using a pre-tax discount rate that reflects the weighted average cost of capital for the industry in which the cash-generating unit operates. Cash flows are derived from the budget for the following five years, and do not include restructuring activities for which the Company has not yet committed or future significant investments that will improve the asset basis of the cash-generating unit being tested. The recoverable amount is sensitive to the discount rate used under the discounted cash flow method, as well as the estimated future cash inflows and the growth rate used. The fair value less costs to sell is determined, whenever possible, based on a binding sale agreement in an arm’s length transaction between knowledgeable and willing parties, adjusted for expenses attributable to the sale of the asset, or, in the absence of a binding sale agreement, based on the market price in an active market, or on a recent transaction with similar assets.

 

The main assumptions used in the estimate of value in use are the following: Revenue – revenues were projected between 2016 and 2020 considering the growth in sales and client base of the different cash-generating units. Operating costs and expenses – costs and expenses were projected in line with the Company’s historical performance, as well as the historical growth of revenues. The key assumptions were based on the Company’s historical performance and on reasonable macroeconomic assumptions, and supported by the financial market projections, documented and approved by the Company’s management.

Properties for sale

 

Our properties for sale are stated at construction cost, which cannot exceed its net realizable value. In the case of real estate developments in progress, the portion in inventory corresponds to the cost incurred for units that have not yet been sold.

 

The cost of properties for sale includes expenditures incurred in the acquisition of the land and in construction (including foundation, structure, finishing and the respective costs of construction materials), costs of own and outsourced labor, and financial costs directly related to the ventures.

 

Land is recorded at acquisition cost. See “Item 4. Information on the Company—B. Business Overview—Our Operations—Real Estate Activities—Land Acquisition”. Land can be acquired for cash, in installments, through barter for units that are completed or in construction of other ventures, or through barter for receivables from future sales of ventures. The cost of land related to bartered units comprises the estimated sale price in cash, this fair value being recorded as contra-entry to the advances from customers-barter.

 

The interest on loans and financing directly related to ventures financed by the National Housing System (SFH) and other credit facilities which funds are used to finance the construction and acquisition of land are capitalized over the development and construction stage, and recognized in the statement of operations in the proportion to the units sold.

 

We have the policy of annually conducting tests on our landbank, comparing its carrying amount and its recoverable amount, and on the units in construction and completed units, comparing the unit construction cost with the sale value of units in inventory. The assumptions that usually underlie the calculation of the recoverable value of assets are based on expected cash flows, and economic viability studies of real estate ventures that show the recoverability of assets or its market value, all discounted to present value.

 

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The classification of land into current or non-current assets is carried out by the Management based on the schedule of the real estate venture launches. Management periodically reviews the estimates of real estate venture launches.

 

In accordance with our internal policy, each individual project launched has been internally evaluated taking into consideration the following: (1) assumptions for market, sales forecast, economics and operating conditions; (2) cash flow analysis using the discounted cash flow method; (3) approval by an investment committee; and (4) inclusion in the business plan regarding the timetable and backlog for development releases. This process is part of our corporate governance practices. We update the assumptions on an annual basis and consider the continuing viability for each project for impairment test purposes.

 

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Transactions with share-based payment

 

We measure the cost of transactions with employees to be settled with shares based on the fair value of equity instruments on the grant date. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to grantgranted equity instruments, which depends on the grant terms and conditions. It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend income, and the corresponding assumptions.

 

Provisions for legal claims

 

We recognize a provision for tax, labor and civil claims. The assessment of the probability of a loss includes the evaluation of the available evidence, the hierarchy of Laws, existing case law, the latest court decisions and their significance in the judicial system, as well as the opinion of external legal counsel. The provisions are reviewed and adjusted to take into account the changes in circumstances, such as the applicable expiration term, findings of tax inspections, or additional exposures found based on new court issues or decisions. The settlement of transactions involving these estimates may result in amounts different from those estimated in view of the inaccuracies inherent in the process of estimating them. The Company reviews its estimates and assumptions on a monthly basis.

 

Taxes on income

 

Current income tax and social contribution

 

Current income tax is the expected tax payable or receivable to be offset in relation to taxable profit or loss for the year. To calculate the current income tax and social contribution on net profits, we adopt the regime set forth by Law No. 12,973 enacted on May 13, 2014 and in force as of January 1, 2015. The new regime is based on the Brazilian accounting standards introduced by Laws No. 16,638/2007 and No. 11,941/2009, from the tax basis of such taxes, thus revoking the Brazilian Transitory Tax Regime, or “RTT”.“RTT.”

 

Taxes on income in Brazil comprise income tax (25%) and social contribution on net profits (9%), for entities on the standard profit regime, for which the composite statutory rate is 34%. Deferred taxes for these entities are recognized as at the balance sheet date for all temporary tax differences between the tax bases of assets and liabilities, and their carrying amounts.

 

As permitted by tax legislation, certain subsidiaries opted for the presumed profit regime, a method under which taxable profit is calculated as a percentage of gross sales. For these companies, income tax is calculated on presumed profits of 8% of gross revenues and social contribution on presumed profits of 12% on gross revenues, to which income tax and social contribution rates of 25% and 9%, respectively, are applied.

 

As permitted by tax legislation, the development of certain ventures are subject to the “afetação” regime, whereby the land and its features where a real estate will be developed, as well as other binding assets and rights, are separated from the assets of the developer and comprise the “patrimônio de afetação(detached assets)(Detached Assets) of the corresponding development and which real estate units will be delivered to the buyers. In addition, certain subsidiaries elected the irrevocable option for the Special Taxation Regime (RET), adopting the “patrimônio de afetação”, according to which the income tax, social contribution on net profits, PIS and COFINS are calculated at 4% on monthly gross revenuesrevenues.

 

On May 13, 2014, Provisional Measure No. 627 was converted into Law No. 12,973/14, revoking the RTT and bringing significant changes to Brazilian tax legislation. The new rules came into effect on January 1, 2015, with an option to adhere to the new rules from January 1, 2014. During 2014, we analyzed the potential impact of the new rules on our consolidated financial statements and internal control structure. Based on our analysis, we concluded

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that the new rules would not have a material impact on how we account for taxes in 2014 and we therefore opted not to adopt them from January 1, 2014. We have adhered to the new rules since January 1, 2015.

 

Deferred income tax and social contribution

 

Deferred tax is recognized in relation to tax losses and temporary differences between the carrying amount of assets and liabilities for accounting purposes and the corresponding amounts used for tax purposes. It is recognized to the extent that it is probable that future taxable income will be available to be used to offset deferred tax assets, based on profit projections made using internal assumptions and considering future economic scenarios that estimate their full or partial use. The recognized amounts are periodically reviewed and the impacts of realization or settlement are

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reflected in compliance with tax legislation provisions. Tax credits on accumulated tax losses do not have an expiration date, however, they can only be offset against up to 30% of the taxable profit for each year. Companies that opt for the presumed profit tax regime do not record tax losses and do not have temporary differences, and for this reason, deferred taxes are not recognized.

 

To the extent that the realization of deferred tax assets is not considered to be probable, this amount is not recorded. We record deferred tax on a net basis, determined by legal entity and same jurisdiction. For entities with cumulative tax losses for the last three years, the Company and its subsidiaries recognized deferred tax assets and liabilities based on the following assumptions:

 

·100% of deferred tax liabilities on temporary differences;

 

·Deferred tax assets on temporary differences that have realization terms similar to deferred tax liabilities, and relate to the same legal entity, are recorded up to the limit of the deferred tax liabilities; and

 

·In situations where recent losses indicate that future taxable income is uncertain, deferred tax assets are not recognized on deductible temporary differences in excess of deferred tax liabilities recorded on taxable temporary difference liabilities nor is an asset recognized for the carry forward of unused tax losses.

 

Provision for non-recognitionMeasurement of the deferred tax asset balance

 

Our projections assume that a significant portion of our business will be conducted in our principal holding companies, and this enables the recovery of a substantial portion of our accumulated tax losses.

 

However, several external factors, beyond our control, may affect such tax calculations, in addition to possible requirements to segregate ventures in their own development entities (SPEs, for example) to a greater extent than we intend. There is also the possibility that taxation rulings relating to new ventures or even ventures that have already been developed within the principal holding companies, may require the exclusion of such businesses and for such businesses to file their own tax returns separate from that of the Company.

 

A reduction in the concentration of projects in holding companies with tax losses carried forward may, therefore, compromise the expected recovery of losses carried forward, which is the reason we partially recognized a deferred income tax asset.

 

Fair value of financial instruments

 

When the fair value of the financial assets and liabilities presented in the balance sheet cannot be obtained in the active market, it is determined using valuation techniques, including the discounted cash flow method. The data for such methods is based on those available in the market, when possible; however, when such data is not available in the market, a certain level of judgment is required to establish the fair value. This judgment includes considerations on the data used, such as liquidity risk, credit risk, and volatility. Changes in the assumptions about these factors may affect the presented fair value of financial instruments.

 

Estimated cost of construction

 

Total estimated costs, mainly comprising the incurred and future costs for completing the construction works, were reviewed in the preparation of these financial statements, and changes to estimates are possible. The percentage of completion, which is the method for revenue recognition, is measured in view of the incurred cost in relation to the total estimated cost of the respective project.

Real estate development and sales

The Company applied CPC 47 – Revenue from Contracts with Customers from January 1, 2018, including the guidance contained in Circular Letter CVM/SNC/SEP 02/2018, of December 12, 2018, which establishes the accounting procedures for recognition, measurement and disclosure of certain types of transactions arising from contracts for purchase and sale of real estate unit not yet completed in real estate development entities.

According to CPC 47, the recognition of revenue from contracts with customers became subject to a new regulation, based on transfer of control over promised goods or service, which can be at a point in time or over time,

 

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Developmentaccording to the satisfaction or not of the “contractual performance obligations”. Revenue is measured in an amount that reflects the consideration the entity expects to be entitled to and saleis based on a five-step model as follows: (1) identification of real estatecontract; (2) identification of performance obligations; (3) determination of transaction price; (4) allocation of transaction price to performance obligations; (5) revenue recognition.

 

Real estate developmentThe Company records the accounting effects of contracts only when: (i) the parties to the contract have approved the contract; (ii) the Company can identify each party’s rights and salesthe established payment terms; (iii) the contract has commercial substance; and (iv) the Company has determined that the collection of consideration to which the Company is entitled is probable.

 

Revenues, as well as costs and expenses directly relating to real estate development units sold and not yet finished, are allocated to the statement of operations over the construction period and the following procedures are adopted:

 

(a)       For the sales of completed units, revenues are recorded when the sale is completed and the transfer of significant risks and benefits has occurred,control, regardless of the receipt from the customer of the contracted amount;

 

(b)       For the sales of units under construction, the following applies:

 

·The incurred cost, including the cost of land, and other directly related expenditure, that correspond to the units sold is fully recognized in the consolidated statement of operations;

 

·Sales revenues are recognized in profit or loss, using the percentage-of-completion method for each venture, this percentage being measured in view of the incurred cost in relation to the total estimated cost of the respective venturesventures;

 

·Revenue recognized in excess of actual payments received from customers is recorded as either a current or non-current asset in “Trade accounts receivable”. Any payment received in connection with the sales of units that exceeds the amount of revenue recognized is recorded as “Payables for purchase of land and advances from customers"customers”;

 

·Interest and inflation-indexation charges on accounts receivable as from the time the units are delivered, as well as the adjustment to present value of accounts receivable, are recognized in profit or loss on a pro rata basis using the accruals basis of accounting;effective interest method;

 

·The financial charges on accounts payable for acquisition of land and those directly associated with the financing of construction are recorded in properties for sale and recorded in the incurred cost of finished units until their completion, and follow the same recognition criteria as for the recognition of the cost of real estate units sold while under construction;

 

·Taxes levied and deferred on the difference between real estate development revenues and the cumulative revenue subject to tax are calculated and recognized when this difference in revenue is recognized; and

 

·Advertising and publicity expenses are recorded in the consolidated statement of operations on an accrual basis.profit or loss as incurred.

 

Construction services

 

Revenues from real estate services are recognized as services are rendered and consist primarily of amounts received in connection with construction management activities for third parties, and technical advisory services, mainly related to developments in the Gafisa segment where we retain an equity interest.

 

Barter transactions

 

Barter transactions have the objective of receiving land from third parties and are settled with the delivery of real estate units or transfer of portions of the revenue from the sale of real estate units of ventures. The value of the land acquired is determined based on the fair value, as a component of inventory of properties for sale, with a corresponding entry to advances from customers’ liabilities. Revenues and costs incurred from barter transactions are included in profit or loss over the course of construction period of ventures, as described in item (b). above.

 

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Allowance for doubtful accounts and cancelled contractsexpected credit losses

 

We annually review the assumptions used in establishing an allowance for doubtful accounts and cancelled contracts,expected credit losses, in view of the revision of historical data of its current operation and improvement of measurement estimates.

 

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We record an allowance for doubtful accounts and cancelledexpected credit losses for all sales contracts for customers whose installments are past due, based on the annually reviewed assumptions for each segment. For the Gafisa segment, we record an allowance for doubtful accounts for contracts for customers whose installments are over 360 days past due for completedof real estate units, even though all of our financing plans are guaranteed by a conditional sale of the unit, with the transfer of the full property rights of the unit to the customer upon the full payment of the outstanding installments. For the Tenda segment, we record an allowance for cancelled contracts for customers whose financing balance has not yet been received from financial agents and for customers whose installments are over 90 days past due. This allowance is calculated based on the percentage of the construction work completion, a methodology adopted for recognizing income for the year and the amounts are considered sufficient by managementaccrued as a contra-entry to cover possible future lossesthe recognition of the respective development revenue, based on accounts receivable.data history of its current operations and estimates. Such analysis is individually made for each sales contract, in line with CPC 48 – Financial Instruments, item 5.5.17 (c).

 

Disposal group held for sale and profit or loss from discontinued operations

The Company classifies a disposal group as held for sale if its carrying value is recovered by the sale transaction. The asset or group of assets held for sale are available for immediate sale at current market conditions, subject only to applicable customary terms for the sale of such assets held for sale, resulting in a high sale probability.

For a sale to be highly probable, management must be committed to the sale of the asset, and must initiate an active search to identify a buyer and complete the sale. In addition, the asset held for sale shall also be effectively marketed for sale at a price that is reasonable in relation to its current fair value and, the sale must be completed within one year of the classification date, unless events beyond the control of the Company result in an extension of such period.

The asset held for sale is measured at the lower of its carrying value and the fair value less cost to sell. In case the carrying value is higher than the fair value, an impairment loss is recognized in statement of profit or loss for the year. Any reversal or gain will only be recorded within the limit of the recognized loss. As of December 31, 2016, the Company recorded an impairment loss related to Tenda’s discontinued operations in the amount of R$610.1 million. For the period ended May 4, 2017, the Company carried out the remeasurement of the fair value of the disposal group held for sale, related to Tenda, considering the weighted average value per share for exercising preemptive rights traded over the period between March 17, 2017 and March 31, 2017, as measurement basis, leading to the price of R$12.12 per share, and, accordingly, valuing Tenda at R$754.5 million (R$539.0 million in 2016).

The assets and liabilities of the group of discontinued assets are shown in single line items in our assets and liabilities. The profit or loss of discontinued operations is presented as a single amount in the statement of profit or loss, contemplating the total post-tax profit or loss of such operations less any impairment-related loss.

Launches and Contracted Sales

 

Launches

 

The table below presents detailed information on our launches for the periods presented, including developments launched by our jointly-controlled entities in partnership with third parties:

 

  As of and for the year ended December 31,
  2015 2014 2013
Launches (in millions of reais)  2,085   1,636   2,886 
Number of projects launched  42   23   37 
Number of units launched(1)  10,089   6,073   11,072 
Launched usable area (m2)(2)(3)  428,257   326,421   2,893,541 
Percentage of Gafisa investment  85%  100%  76%

 

As of and for the year ended December 31, 

 

2019 

2018 

2017(3) 

Launches (in millions of reais)729554
Number of projects launched65
Number of units launched(1)1,0361,601
Launched usable area (m2)(2)84,13282,940
Percentage of Gafisa investment100%98%
 

_________________

(1)The units delivered in exchange for land pursuant to barter arrangements are not included.

 

(2)One square meter is equal to approximately 10.76 square feet.

 

(3)DoesThe information as of and for the year ended December 31, 2017 and December 31, 2016 does not include Terreno Cajamar Alphaville (approximately 5,420,927m²).developments launched under the Tenda brand, the results of operations of which have been presented as discontinued operations in our consolidated statements of operations as of December 31, 2016, and its spin-off was concluded in May 2017.

 

In 2015,2019, we did not launch any residential developments.

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In 2018, we launched 11under the Gafisa brand 6 residential developments with a total potential sales value of R$2.1 billion, with Gafisa accounting for 48%728.7 million and 100% of launches and Tenda for 52% in terms of potential sales value. 20 of thethese developments we launched were located in the state of São Paulo, 9 developments were located in the state of Rio de Janeiro and the remaining 13 developments were located in Camaçari, Salvador and Lauro de Freitas, in the state of Bahia, Vespasiano and Belo Horizonte, in the state of Minas Gerais Porto Alegre, in the state of Rio Grande do Sul and Paulista, Camaragibe and Jaboatão dos Guararapes, in the state of Pernambuco.Paulo.

 

In 2014,2017, we launched 23under the Gafisa brand 5 residential developments with a total potential sales value of R$1.6 billion, with Gafisa accounting for 62.5%553.9 million and 80% of launches and Tenda for 37.5% in terms of potential sales value. 11 of thethese developments we launched were located in the state of São Paulo 6 developments wereand 20%, 1 project, is located in Curitiba. During the state of Rio de Janeiro and the remaining 6 developments were located in Camaçari, Salvador and Lauro de Freitas, in the state of Bahia, Vespasiano, in the state of Minas Gerais and Jaboatão dos Guararapes, in the state of Pernambuco.

In 2013, we launched 37 residential developments with a total potential sales value of R$2.9 billion, with Gafisa accounting for 38% of launches, Tenda for 12% and Alphaville the remaining 51% in terms of potential sales value. The total sales value for 2013 wasyear, approximately 2% lower than the total sales value of R$3.0 billion for 35 residential developments launched in 2012. In 2013, 18 of the 37 developments we launched were located in the state of São Paulo, while another four developments were located in the state of Rio de Janeiro. The remaining 15 residential developments launched were located in cities of Camaçari, in the state of Bahia, Porto Alegre, in the state of Rio Grande do Sul, Salvador, in the state of Bahia, Ponta Grossa, in the state of Paraná, Vitória da Conquista, in the state of Bahia, Barra dos Coqueiros, in the state of Sergipe, Feira de Santana, in the state of Bahia, Dourados, in the state of Mato Grosso do Sul, Anápolis, in the state of Goiás, Linhares, in the state of Espírito Santo and Belém in state of Pará. In 2012, we launched 35 residential developments with a total potential sales value of R$3.0 billion, with Gafisa accounting for 54% of launches and Alphaville the remaining 46% in terms of potential sales values (compared to a 28% share in 2011). This sales value was approximately 21% lower than that achieved in 2011, during which we launched 49 residential developments totaling R$3.5 billion. We refocused our business operations in 2012 to prioritize cash flow and reduction of net debt, restructuring the debt profile and reducing launches of new units, while still generating what we consider to be an appropriate volume of business of R$3.0 billion. In 2012, 17 of the 35 developments we launched were located in the state of São Paulo, while another three developments were located in the state of Rio de Janeiro. The remaining 15 residential developments launched were located in the cities

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of Juiz de Fora, in the state of Minas Gerais, Aracaju, in the state of Sergipe, Anapolis, in the state of Goiás, Mossoró, in the state of Rio Grande do Norte, Vespasiano, in the state of Minas Gerais, Brasília, in the state of Distrito Federal, Barra dos Coqueiros, in the state of Sergipe, Teresina, in the state of Piaui, Pelotas, in the state of Rio Grande do Sul, Porto Velho, in the state of Roraima, Vitória da Conquista, in the state of Bahia, Resende, Campo Grande, in the state of Mato Grosso do Sul and Camaçari, in the state of Bahia.

During 2015, approximately 24%10.3% of our launches in terms of potential sales value was generated from launches outside the states of São Paulo and Rio de Janeiro. The affordable entry-level business accounted for approximately 52% of our total potential sales value for the year ended December 31, 2015, of which 45.7% was generated from launches outside the states of São Paulo and Rio de Janeiro.

 

During 2014, approximately 16.6% of our launches in terms of potential sales value was generated from launches outside the states of São Paulo and Rio de Janeiro. The affordable entry-level business accounted for approximately 37.5% of our total sales value for the year ended December 31, 2014, of which 44.2% was generated from launches outside the states of São Paulo and Rio de Janeiro.

During 2013, approximately 37.4% of our launches in terms of potential sales value was generated from launches outside the states of São Paulo and Rio de Janeiro. The affordable entry-level business accounted for approximately 20% of our total sales value for the year ended December 31, 2013. During 2012, approximately 37.8% of our total sales value was generated from launches outside the states of São Paulo and Rio de Janeiro. The affordable entry-level business accounted for approximately 3% of our total sales value for the year ended December 31, 2012. For the year ended December 31, 2011, the affordable entry-level business represented approximately 10% of our total sales value.

Gafisa segment

 

In 2015, Gafisa launches totaled R$996.3 million, a 2.6% decrease compared with 2014.2019, we did not launch any residential developments.

 

Contracted sales for 2019 totaled R$ 195.7 million, a decrease of 75.9% from 2018. This amount is 100% related to sales of inventories. The lack of new project launches for the year directly affected sales performance.

In 2018, Gafisa launches totaled R$914.8728.7 million, a 31.5% increase compared with 2017.

Contracted sales for 2018 totaled R$813.2 million, up 12.8%12.9% from 2014.2017. Sales of units launched over the year accounted for 30.8%49.4%, while sales of inventories accounted for the remaining 69.2%50.6%.

 

In 2014,2017, Gafisa launches totaled R$1.0 billion,553.9 million, a 6%39.8% decrease compared with 2013.2016.

 

Contracted sales for the year2017 totaled R$811720.2 million, down 16%11.1% from 2013.2016. Sales of units launched over the year accounted for 42.2%38.5%, while sales of inventories accounted for the remaining 57.8%61.5%.

 

In 2013, Gafisa launches totaled R$1.1 billion, a 32.5% decrease compared with 2012, with the Gafisa segment accounting for 38% of the consolidated launches for the period.

Contracted sales for the year totaled R$981 million, down 39.9% from 2012. Sales of units launched over the year accounted for 60%, while sales of inventories accounted for the remaining 40%.

In 2015,2019, Gafisa delivered 222 ventures/stages and 4,986365 units, accounting for R$2.4 billion171.4 million in Potential Sales Volume.

 

The market value of Gafisa segment inventories reached R$2.0 881.7 million at the end of 2019, compared to R$1.23 billion at the end of 2015, compared to2018 and R$2.31.5 billion at the end of 2014 and R$2.1 billion at the end of 2013.2017.

 

Tenda segment

Full-year Tenda launches in 2011 totaled R$398 million, a 75% reduction compared to 2010, and included 17 projects/phases across 8 states and the cancellation in the fourth quarter of 2011 of R$103 million of projects no longer feasible under the Company’s new criteria adopted in the third quarter of 2011. No more than 30% of these projects had been completed. This more conservative approach to Tenda’s operations led to full-year sales of R$330 million, a 77% reduction compared to 2010, in line with the reduced volume of launches. In 2012, Tenda worked to reduce the complexity of its operations and master the fundamentals of its new operating model suspending launches. Tenda resumed the launch of new ventures in 2013, reaching R$338.8 million in the launches of 8 new developments, totaling 12% of the consolidated launches for 2013.

In 2015, Tenda launches totaled R$1.1 billion. Contracted sales for the year totaled R$1.0 billion, a 257% increase compared with 2014. Sales of units launched over the year accounted for 50.0%, while sales of inventories accounted for the remaining 50.0%.

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Cancellation levels decreased significantly in 2015 mainly due to Tenda’s increased efficiency and improved controls. The primary driver of the reduction in cancellations was the implementation of a sales process by which potential customers were required to obtain approved financing with CEF as part of the purchase process, which significantly decreases the probability of cancellation. Out of R$1.0 billion in property launches during 2015, we recorded sales of R$889 million in which financing has already been obtained by the end purchaser.

Out of R$613.3 million in property launches during 2014, we recorded sales of R$176.8 million in which financing had already been obtained and reached a total amount of R$396.0 million in net sales. In 2013, out of R$338.8 million in property launches, we recorded sales of R$217.4 million. Of the R$217.4 million, R$122.0 million is related to sales in which financing had already been obtained by the end purchaser, with the remaining R$95.4 million relating to sales in which financing was being finalized at the end of 2013.

In 2015, The Tenda segment delivered 21 ventures/stages, and 5,711units accounting for R$802.5 million in Potential Sales Value.

The market value of Tenda inventories was R$899.8 million at the end of 2015, compared to R$828.7 million at the end of 2014 and R$618.4 million at the end of 2013

Contracted sales

 

The following table shows the composition of our contracted sales by the type of development, according to units sold during the same year that they were launched and the units sold in the years after they were launched, as well as their respective percentages in relation to total sales for the periods presented:

 

  As of and for the year ended December 31,
  2015 2014 2013
Type of development (in millions ofreais, unless otherwise stated)
Luxury buildings  212.7   108.8   367.7 
Middle-income buildings  676.5   650.0   431.9 
Affordable entry-level housing (2)  1,034.1   396.0   490.4 
Commercial  7.6   52.2   161.5 
Land(1)  

N/A

   

N/A

   1,062.2 
Total contracted sales  1,930.9   1,207.0   2,513.8 
Sale of units launched in the year  789.6   519.2   1,502.8 
Percentage of total contracted sales  41%  43%  60%
Sale of units launched during prior years  1,141.3   687.8   1,010.9 
Percentage of total contracted sales  59%  57%  40%

  As of and for the year ended December 31,
  2019 2018 2017(2)
Type of development (in millions of reais, unless otherwise stated)
Luxury middle-income buildings  109.3   333.4   358.7 
Entry-level developments  94.5   459.2   343.9 
Commercial  (8.1)  20.6   17.6 
Total contracted sales(1)  195.7   813.2   720.2 
Sale of units launched in the year  —     401.8   277.7 
Percentage of total contracted sales  —     49.4%  39%
Sale of units launched during prior years  —     411.3   442.5 
Percentage of total contracted sales  —     50.6%  61%
 
(1)Includes Gafisa’s participation on the Alphaville Barra da Tijuca project.

_________________

(2)Amount net of sales cancellation.

The following table shows our and our main subsidiaries’ and our current affiliate Alphaville’s, contracted sales for the periods presented:

  As of and for the year ended December 31,
  2015 2014 2013
Contracted sales (in millions of reais, unless otherwise stated)
Gafisa  914.8   811.0   961.2 
Tenda (1)  1,016.1   396.0   490.4 
Alphaville (2)        1,062.2 
Total contracted sales  1,930.9   1,207.0   2,513.8 
(-) Discontinued operations        (1,062.2)
Total contracted sales  1,930.9   1,207.0   1,451.6 
(1)Amount net of sales cancellation.

 

(2)ThisThe information is presented for comparison purposesas of and for the year ended December 31, 2013 only, as we sold our controlling interest in Alphaville2017 do not include developments launched under the Tenda brand, which was spun off on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.May 4, 2017.

 

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The following table shows our and our main subsidiaries’ contracted sales for the periods presented:

 

  As of and for the year ended December 31,
  2019 2018 2017
  (in millions of reais, unless otherwise stated)
Contracted sales(1)      
Gafisa  195.7   813.2   720.2 
Total contracted sales  195.7   813.2   720.2 

_________________

(1)Amount net of sales cancellation.

In 2015,2019, we did not launch any developments.

In 2018, we sold 40.9%49% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$1,930.9813.2 million, an increase of approximately 60%13% compared to 2014.2017.

 

In 2014,2017, we sold 42.2%50.0% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$1,207.0720.2 million, a decrease of approximately 16.9%11% compared to 2013, net of discontinued operations.

In 2013, we sold 60% of the launched units, which combined with the sales of units launched during prior periods, resulted in total contracted sales of R$2,513.8 million, a decrease of approximately 5% compared to 2012.

In 2015, we sold 50.0% of the units launched during that year through our Tenda brand, which together with the sales of units launched during prior periods, resulted in total contracted sales of R$1,016.1 million. In 2014, we sold 29.6% of units launched during that year through our Tenda brand, which together with the sales of units launched during prior periods, resulted in total contracted sales of R$396.0 million. In 2013, we sold 44% of units launched during that year through our Tenda brand, which together with the sales of units launched during prior periods, resulted in total contracted sales of R$490.4 million.

Our sales contracts are irrevocable under Brazilian law, which means a customer does not have a unilateral ability to terminate a contract once it is executed, or require a refund of amounts previously unpaid unless we agree. To the extent that a customer is not in compliance with its obligations under a contract, we have the option to either force compliance through the Brazilian courts, or agree to “default” by the customer. Should we agree to such default, the customer is then charged penalties as defined in the contracts with any remaining amounts remitted to the customer. Penalties charged by Tenda have historically been 20% of amounts paid, while penalties charged by Gafisa have historically been significantly higher (average about 60-65% of amounts paid).2016.

 

We provide a limited amount of post-construction client financing, although this financing is not available to Tenda clients.financing. Our default rate was 11.8%15.1%, 7.4%14.3% and 9.3%14.1% as of December 31, 2015, 20142019, 2018 and 2013,2017, respectively.

 

The table below shows the penalties charged to customers that have defaulted and had their contracts cancelled for the periods presented:

 

  As of and for the year ended December 31,
  2015 2014 2013
  (in millions of reais)
 Gafisa   22.6   16.4   13.3 
 Tenda   2.1   1.1   2.3 
 Alphaville (1)         5.9 

(1)This information is presented for comparison purposes only, as we sold our controlling interest on December 9, 2013 and currently hold a 30% non-controlling interest in Alphaville.
 

As of and for the year ended December 31, 

 

2019 

2018 

2017 

 (in millions of reais)
Gafisa3.212.520.3

 

The following table sets forth the growth of our contracted sales expected to be recognized, as well as the amount corresponding to the expected cost of units sold, and the expected margin, all of them to be recognized in future periods, for the periods presented:

 

  As of and for the year ended December 31,
  2015 2014 2013
  (in millions of reais, unless otherwise stated)
Sales to be recognized  793.0   1,064.0   1,863.4 
Net sales(1)  764.0   1,025.2   1,795.4 
Cost of units sold to be recognized(2)  (453.9)  (628.8)  (1,181.3)
Expected gross margin—yet to be recognized(3)  310.1   396.4   614.3 
Expected margin percentage  40.6%  38.7%  34.2%

  As of and for the year ended December 31,
  2019(4) 2018(4) 2017(4)
  (in millions of reais, unless otherwise stated)
Sales to be recognized  437.7   572.2   644.3 
Net sales to be recognized(1)  421.7   551.3   620.8 
Cost of units sold to be recognized(2)  (271.1)  (354.5)  (405.1)
Expected gross margin—yet to be recognized(3)  150.6   196.8   215.7 
Expected margin percentage  35.7%  35.7%  34.8%
 

_________________

(1)Excludes indirect PIS and COFINS taxes of 3.65%. This information includes ventures that are subject to restriction due to a contractual clause, which defines the legal period of 180 days in which the Company can cancel a development.

 

(2)The estimated gross profit shown does not consider the tax effects or the present value adjustment, and the costs of lands, financial charges and guarantees, which will be carried out to the extent they are realized.

 

(3)Based on management’s estimates.

(4)This amount relates to the Gafisa segment only, since Tenda was spun off on May 4, 2017.

 

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Gross Operating Revenues

 

Our revenues are derived mainly from the development and sale of real estate and, to a much lesser extent, the rendering of construction services to third parties on certain developments in the Gafisa segment where we retain an equity interest.

 

Real estate development and sales

 

Real estate development revenues, including inflation adjustments and interest from credit sales, comprise revenues from the sales of units in the residential buildings we develop, and to a lesser extent, the sales of lots and commercial buildings.

 

Construction services rendered

 

Our revenues generated by real estate services consist substantially of amounts received in connection with construction management activities for third parties, technical management and real estate management, related to developments in the Gafisa segment where we retain an equity interest. As of December 31, 2015, 0.6%2019, 0.03% of our net operating revenues were derived from constructions services rendered.

 

Operating Costs

 

Our operating costs consist of real estate development costs and, to a lesser extent, costs of services rendered.

 

Real estate development costs

 

Real estate development costs consist of costs of land, construction (which includes costs for a broad variety of raw materials and labor), capitalized interest (financial costs) from project specific financing, projects, foundations, structuring and furnishing, as well as costs for outsourced labor. The items making up our costs, as a percentage of our total cost were as set forth for the periods presented:presented.

 

  For the year ended December 31,
  2015 2014 2013
Land  18.7%  15.1%  14.2%
Construction costs  64.8%  68.6%  70.6%
Financial costs  10.0%  10.0%  8.2%
Development costs  6.4%  6.3%  7.0%
Total  100.0%  100.0%  100.0%

  For the year ended December 31,
  2019 2018 2017
Land  14.15%  32.51%  31.98%
Construction costs  70.11%  50.74%  51.73%
Financial costs  13.54%  13.35%  12.85%
Development costs  2.20%  3.40%  3.44%
Total  100.0%  100.0%  100.0%

 

One of our principal real estate development costs is the cost of land. Over the last five years, land represented, on average, 17%27.90% of our total cost of development. However, this is an extremely volatile component, varying according to characteristics of the land, the region where the land is located, the type of development to be launched and market conditions. Land can be acquired for cash, through the exchange of units once the building is constructed, through financial swaps (whereby a portion of sales is given to the owner of land as a form of financing for the land), or through a combination of the three options.

 

No single raw material alone represents a significant portion of our total costs of development, but over the last five fiscal years, raw materials represented, on average, 35% of our total cost of development. The index that measures construction cost variation, the INCC, increased by 7.5%4.2%, 7.0%3.8% and 8.1%4.3% in 2015, 20142019, 2018 and 2013,2017, respectively. Although some of the principal raw materials, such as steel, have experienced significant price

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increases well above the level of inflation over the last four years, we have reduced our raw materials costs by developing and using new construction techniques and materials.

 

Over the last five years, we have incurred most of our construction costs from the 1st to the 18th month of construction of a development, as shown in the table below:

 

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Period of construction

Percentage of costs incurred(1)

1st to 6th month16%10%
7th to 12th month25%22%
13th to 18th month31%23%
19th to 24th month20%18%
25th to 30th month8%17%

 

_________________

(1)Including cost of land.

 

Real estate services

 

Our costs of real estate services consist of direct and indirect labor fees and outsourced services.

 

Operating Expenses

 

Our operating expenses include selling, general and administrative expenses, depreciation and amortization expenses and revenues and revaluation of investment in affiliates.

 

Selling expenses

 

Selling expenses include advertising, promotion, brokerage fees and similar expenses.

 

General and administrative expenses

 

General and administrative expenses principally include the following:

 

·employee compensation and related expenses;

 

·fees for outsourced services, such as legal, auditing, consulting and others;

 

·management fees and expenses;

 

·stock option plan expenses;

 

·overhead corporate expenses;

 

·expenses related to legal claims and commitments; and

 

·legal expenses related to public notaries and commercial registers, among others.

 

Depreciation and amortization

 

Depreciation expenses consist of depreciation of our property and equipment. Since January 1, 2009, goodwill is no longer amortized under Brazilian GAAP.

 

Revaluation of investment in affiliates

Revaluation of investment, in line with the definition provided for in the paragraph 25 of CPC 36 (R3) – Consolidated Statements, consists in recognizing the addition related to the revaluation of the portion of the remaining investment of 30% with the sale of and cease of control over Alphaville.

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Financial Income and Expenses

 

Financial income includes income from financial investments. Interest revenues are recognized on an accrual basis.effective interest method. Financial expenses generally consist of interest payable on loans, financings and debentures and are also recognized on an accruals basis.effective interest method.

 

Taxes on Income

 

In general, taxes on income in Brazil consist of federal income tax (25%) and social contribution on net profits (9%), for a composite statutory tax rate of 34%. We calculate income tax and social contribution in accordance with the “taxable profit” regime. Our subsidiaries and jointly-controlled entities, however, with annual billings lower than a specified threshold, may calculate their respective income and social contribution taxes through either this “taxable profit” regime or through the “presumed profit” regime, depending on our strategic tax planning. For the companies that opt for the “presumed profit” regime, the income tax basis is calculated as 8% of gross revenues and the social

65 

contribution basis is calculated as 12% of gross revenues, to which income tax and social contribution rates of 25% and 9%, respectively, are applied.

 

As permitted by tax legislation, the development of certain ventures are subject to the “afetação” regime, whereby the land and its features where real estate will be developed, as well as other binding assets and rights, are separated from the assets of the developer and comprise the “patrimônio de afetação” (detached assets)(Detached Assets) of the corresponding development and whose real estate units will be delivered to the buyers. In addition, certain subsidiaries made the irrevocable option for the Special Taxation Regime (RET), adopting the “patrimônio de afetação”, according to which the income tax, social contribution on net profits, PIS and COFINS are calculated at 4% monthly on gross revenues.

 

Net profitloss from discontinued operations

 

The profitnet income (loss) from discontinued operations represents the results of operations of AlphavilleTenda for the period January 1, 2013 to November 30, 2013,ended May 4, 2017, as well as the results of operations for this entity for the comparative periods. This line item also contains the gain onimpairment (loss) reversal related to the measurement of disposal group held for sale at the lower of our 70% controlling interest in this entity, which occurred in December 2013.its carrying value and the fair value less cost to sell.

 

In accordance with CPC 31 – Non-current Asset Held for Sale and Discontinued Operations, the profitThe income (loss) of discontinued operations is presented as a single amount in statement of operations, which includes the total after-tax-income of these operations, less any impairment-related loss.

 

Results of Operations

 

The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with Brazilian GAAP. References to increases or decreases in any given period relate to the corresponding preceding period, unless otherwise indicated.

 

As explained in Note 8.2 to the Company’s 2013our consolidated financial statements for the year ended December 31, 2019, the results of operations of AlphavilleTenda have been retrospectively presented as discontinued operations under Brazilian GAAP in the Company’s 20132017 consolidated statements of operations given its disposal during 2013. In addition, with the adoption of CPCs 19 (R2) (or IFRS 11) and 36 (R3) (or IFRS 10), starting from January 1, 2013, the proportional consolidation method for investments in jointly-controlled investees, which was previously applied by the Company, is no longer allowed under Brazilian GAAP.operations.

 


Results of Operations for the Years Ended December 31, 20152019 and 20142018

 

Net operating revenue

 

On a consolidated basis, netNet operating revenue for the year ended December 31, 2015,2019, recognized by the Percentagepercentage of Completion (“PoC”)completion revenue recognition method, was R$2.3 billion, an increase400.4 million, a decrease of 6.7%58% from R$2.15 billion960.9 million for the year ended December 31, 2014, as a result of an increase in Tenda segment sales,2018, mainly due to a higher levelthe lack of new launches under Tenda’s new business model implemented in 2013. During 2015, Gafisa and Tenda brands accounted for 63% and 37% of net operating revenue, respectively.during the year.

 

The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal) totaled R$2.5 billion437.3 million for the year ended December 31, 2015, an increase2019, a decrease of R$219.7610.9 million or 9.7%

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58.3% compared with the same period in 20142018 of R$2.31.05 billion. The tax deductions from gross revenue reached R$191.036.8 million in 20152019 from R$174.787.3 million in 2014,2018, representing an increasea decrease of 9.3%57.8%, which was mainly impacted by higher launch volumes in Tenda.

In addition, due to the continuing deteriorationlack of economic conditions in Brazilnew launches during 2015, the Company continued to take a more conservative and selective approach with respect to the development and launch of products, focusing mainly on the middle to high income segment, in order to prioritize stable levels of profitability.year.

 

During 2015,2019, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 7.49%4,2%. This resulted in an increase in our construction costs and consequently, the prices of our units.units for some projects, notably those launched in 2018 and 2019 and expected to be delivered in 2020. This increase was offset by (i) monthly increases in the sale prices of our inventory units, and (ii) monthly upward adjustments of outstanding balances on our units sold, in order to reflect inflationary increases.

 

Operating costs

 

Operating costs in 20152019 totaled R$1.7 billion,282.6 million, a 3.6% increase66.6% decrease compared to R$1.6 billion846.2 million in 2014,2018, as a result of an increasethe lack of new launches and a reversal of impairment adjustments in salesour landbank and inventory in the Tenda segment, dueamount of R$27.1 million, compared to a higher levelan expense of launches under Tenda’s new business model implementedR$63.1 million in 2013. Cost related to construction is the main component of operating cost, totaling R$1.3 billion, equivalent to 78.4% of the original total cost base of projects. Operating costs, as a percentage of net operating revenue, decreased from 74.8% in 2014 to 72.7% in 2015, mainly due to better performance on construction projects.2018.

 

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Gross profit

 

Gross profit in 20152019 totaled R$626.8117.7 million, representing an increase of 15.7%,approximately 3% from gross profit of R$541.7114.7 million in 2014. The2018. This increase was mainly due to (i)reflects the replacement of Gafisa and Tenda segment legacy projects with more recent projects launchedefficient measures taken by the Company’s new management during the period, despite the decrease in core markets, and (ii)revenues during the higher level of launches under Tenda’s new business model since 2013, which contain higher margins. Tenda launches totaled R$1.1 billion in 2015, an increase from R$613.3 million in 2014.same period.

 

In 2015,2019, the gross margin generated from our activities increased to 27.3% as29.4% compared to 25.2%11.9% in 2014. This increase was due to the recognition of higher margins from recent projects, mainly Tenda projects, which offset the recognition of lower margins in connection with prior year projects.2018.

 

Selling expenses

 

Selling expenses in 20152019 totaled R$163.314.8 million, representing an increasea decrease of 10.3% as82.4% compared to R$148.084.4 million in 2014, mainly due to an increase in marketing expenses and expenses associated with the increase of launches under Tenda’s new business model. Selling expenses in 2015 represented 7.1% of our net operating revenue compared to 6.9% in 2014.2018.

 

General and administrative expenses, not including depreciation and amortization expenses

 

General and administrative expenses were R$181.454.1 million in 2015,2019, a 14.4%5.2% decrease from the R$211.957.1 million recorded in 2014, reflecting our strategy2018. However, recurring general and administrative expenses decreased from R$74.4 million in 2018 to R$50.8 million in 2019, with savings of realigning costsR$23.6 million, or 31.7% Overall, these savings are attributable to the phaseimplementation of our expenses reduction plan over the course of the year, which adjusted our expenses structure in line with our new business cycle and to the current challenging macroeconomic scenario in Brazil. Our payroll expenses decreased by 6.6%, totaling R$74.2 million in 2015.model.

 

Depreciation and amortization

 

Depreciation and amortization in 20152019 was R$47.414.1 million, a decrease of R$31.9 million33.4% when compared to the R$79.321.3 million recorded in 2014,2018. This decrease was mainly due to the lower levellack of Gafisanew launches in 20152019 and lower investments in sales stands.

Other income and expenses, net

Net other expenses totaled R$31.6 million in 2019, compared to a non-recurring goodwill impairment of R$14.5298.9 million recorded in 2014 as a2018. This decrease is mainly due to (i) the result of the incorporationdivestment in Alphaville Urbanismo in the amount of an expense of R$78.0 million, (ii) an income of R$66.4 million related to the outcome of the arbitration decision related to venture construction contracts with partners and (iii) a subsidiary.lawsuits related expense of R$20.6 million. In 2018, the amount of R$298,9 million was related to loss on realization of investment stated at fair value in the amount of R$112.8 million and R$172.4 million related to lawsuits expenses.

 

Financial income and expenses, net

 

Net financial expenses totaled R$38.159.6 million in 2015,2019, compared to net financial expenses of R$8.980.5 million in 2014.2018. The differencedecrease is mainly due to a decrease in financial revenuesinterest expenses as a result of 20.8% and higher average interest rates for loans and financingsa decrease in our levels of indebtedness during the period.

 

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Taxes on income

 

Income tax and social contribution and deferred taxes for 2015 amounted tohad a positive impact of R$7.237.2 million in 2019 compared to R$15.325.1 million in 2014. For2018. This increase was mainly due to a net tax credit of R$49.2 million from the year ended December 31, 2015, current tax expenses amounted to R$24.6 million (compared to R$33.3 milion in 2014), comprisedwrite down of R$4.3 million related to Gafisa’s holding tax calculation on the standard profit regime, and R$20.2 million related to our subsidiaries’ tax calculation on the presumed profit regime and the Special Taxation Regime (RET). Additionally, deferred tax income amounted to R$17.4 in 2015 (R$18.0 million in 2014) and is mainlygoodwill related to the increasedivestment in AUSA and the gain from the acquisition of temporary differences, asGDU Loteamentos in the business combination operation. Accordingly, the provision for income tax and social contribution had a resultpositive impact of an increaseR$35.3 million in our provisions.2019, compared to R$25.1 million in 2018.

 

Net income attributable to non-controlling interest

 

Net income attributable to non-controlling interests decreased from a net loss of R$1.21.8 million in 20142018 to a net loss of R$3.50.4 million in 2015, due to the overall negative financial results of our subsidiaries for the year ended December 31, 2015.2019.

 

Net income (loss) attributable to owners of Gafisa

 

Net incomeloss attributable to owners of Gafisa increased towas of R$74.426.0 million in 2015,2019, compared to a net loss of R$42.5419.5 million in 2014.2018. This increase is mainly due to (i)variation resulted from the further consolidationCompany´s comprehensive restructuring process, reducing expenses, renegotiating material indebtedness, a reduction in accounting provisions and the reestablishment of healthy margins.

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If we exclude the effect of the Gafisa segment’s production cycle and (ii) the higher leveldivestment of launches under Tenda’s new business model implemented in 2013, which contain higher margins than legacy projects.Alphaville Urbanismo S.A., we would have had a net profit of R$15.1 million.

 

Results of Operations for the Years Ended December 31, 20142018 and 20132017

 

Net operating revenue

 

On a consolidated basis, netNet operating revenue for the year ended December 31, 2014,2018, recognized by the PoCpercentage of completion revenue recognition method, was R$2.15 billion, a decrease960.9 million, an increase of 13.3%22.2% from R$2.5 billion786.2 million for the year ended December 31, 2013, as a result of a lower level of launches in Gafisa2017, mainly due to (i) the increase in the previous 2 years.

The reductionrecognition of revenue from construction projects and their improved performance, and (ii) the two projects launched in the level2018, Upside Pinheiros and Moov Belém, which are almost 100% sold as of launches in Gafisa is primarily due to the implementation of the Company’s new strategy at the beginning of 2012. The Company’s new strategy aimed to reduce operational complexity, improve the cost and expenses structure, develop a new operational model for Tenda and consolidate Gafisa’s strategic positioning in the markets of São Paulo and Rio de Janeiro. In addition, due to the economic slowdown in Brazil during the second half of 2014, the Company took a more conservative and selective approach to the development and launch of products in order to prioritize stable levels of profitability.

In terms of Potential Sales Volume, Gafisa launched projects totaling R$1.6 billion in 2012, R$1.1 billion in 2013 and R$1.0 billion in 2014. Tenda did not launch any projects in 2012, launched projects totaling R$339 million in 2013 and R$613 million in 2014.

During 2014, the Gafisa and Tenda brands accounted for 73% and 27% of total net operating revenue, respectively.December 31, 2018.

 

The gross revenue generated from the sale of property and barter transactions, net of the cancellation provision (reversal), totaled R$2.31.05 billion for the year ended December 31, 2014, a decrease2018, an increase of R$374.1213.1 million or 13.8% from26% compared with the same period in 2017 of R$2.7 billion for the year ended December 31, 2013. Tax835.1 million. The tax deductions from gross revenue totaledreached R$174.787.3 million for the year ended December 31, 2014, a decrease of 20.1%in 2018 from R$218.648.9 million for the year ended December 31, 2013. This decreasein 2017, representing an increase of 78%, which was mainly due to the lowerimpacted by higher launch volumes in Gafisa and Tenda, a decrease in net revenue from the delivery of Tenda legacy projects, and also to the initial stages of the recognition of revenues from Tenda projects starting in 2013, recognized using the PoC method, as Tenda resumed its launches only during 2013.volumes.

 

During 2014,2018, inflation as measured by the INCC, the main Brazilian indicator for civil construction costs, was 6.9%3.84%. This resulted in an increase in our construction costs and consequently, the prices of our units prices.for some projects, notably those launched in 2017 and 2018 and expected to be delivered in 2019. This increase was offset by (i) monthly increases in the sale prices of our inventory units, and (ii) monthly upward adjustments of outstanding balances on our units sold, in order to reflect inflationary increases.

 

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Operating costs

 

Operating costs in 20142018 totaled R$1.6 billion,846.2 million, a 6.7% decrease of 14% as compared to R$1.9 billion906.5 million in 2013, due to the lower level of operations2017, as a result of thea lower levelimpact of launches in Gafisa during 2013 and 2014. During 2014, costs related to construction totaled R$1.2 billion, equivalent to 76.3% of our total operating costs. Operating costs, as a percentage of net operating revenue, decreased from 75.1% in 2013 to 74.8% in 2014, despite the above mentioned inflation effect (6.9%)impairment adjustments in our costs. This decreaselandbank and inventory in the Company’s cost structure was mainly dueamount of R$63.1 million, compared to a better performance on construction projects.R$147.3 million in 2017

 

Gross profit

 

Gross profit in 20142018 totaled R$541.7114.7 million, representing an increase from gross loss of R$120.3 million in 2017. This increase was mainly due to (i) higher volume of launches and sales, (ii) better macroeconomic conditions in Brazil, (iii) a decrease in dissolutions (cancellations of 12.3%sales), fromand (iv) the effects of the impairment adjustments in our landbank and inventory in the amount of R$617.4 million in 2013. The improvement of gross margin resulted from the replacement of Gafisa and Tenda segment legacy projects by projects launched in core markets and under the new Tenda business model, which contain higher margins.63.1 million.

 

In 2014,2018, the gross margin generated from our activities increased to 25.2%11.9% as compared to 24.9%negative 34.5% in 2013. This increase was due to the recognition of higher margins from recent projects, which offset the recognition of lower margins in connection with prior year projects.2017.

 

Selling expenses

 

Selling expenses in 20142018 totaled R$148.084.4 million, representing a decrease of 31.3%3.6% as compared to R$215.687.6 million in 2013,2017, mainly due to the effectiveness of the sales process through its own Tenda stores, allowing greater control and efficiency in this line, and due to a decrease in (i) product marketing and selling expenses, as a result of our corporate restructuring; and (ii) brokerage and sales commission expenses, as a decrease inresult of lower sales commissions expenses resulting fromvolume during the lower volume of sales in 2014 under both Gafisa and Tenda brands.period. Selling expenses in 20142018 represented 6.9%8.8% of our net operating revenue compared to 8.7%14.4% in 2013.2017.

 

General and administrative expenses, not including depreciation and amortization expenses

 

General and administrative expenses were R$211.957.1 million in 2014,2018, a 9.4%38% decrease overfrom the R$234.092.7 million recorded in 2013, reflecting our strategy of realigning costs to our current size and the phase of our business cycle. General expenses decreased to R$13.1 million in 2014 from R$17.3 million in 2013.2017. This decrease iswas mainly due to a decrease(i) the net reversal of bonus provisions for 2017 and 2018, amounting to R$14.8 million in our payroll liability as a result of the reduction in the total number of employees.2018; (ii) reduced services expenses; and (iii) lower salaries and charges expenses.

 

Depreciation and amortization

 

Depreciation and amortization in 20142018, was R$79.321.3 million, an increasea decrease of R$16.310.7 million when compared to the R$63.032.0 million recorded in 2013, mainly due2017. Additionally, in 2017 the amount of R$25.5 million was recognized as an amortization related to the incorporationwrite off of a subsidiary, which generated athe goodwill impairment of R$14.5 million.on the AUSA acquisition.

 

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Financial income and expenses, net

 

Net financial expenses totaled R$8.980.5 million in 2014,2018, compared to net financial expenses of R$162.5107.3 million in 2013.2017. The differencedecrease is mainly due to an increasea decrease in financial revenuesinterest expenses as a result of 93.4% and to the reductiona decrease in our levels of total debtindebtedness during the period.

 

Taxes on income

 

Income tax and social contribution and deferred taxes for 2014 amounted tohad a positive impact of R$15.325.1 million in 2018 compared to R$2.825.9 million in 2013.2017, reflecting a tax credit of R$26 million from the impairment of goodwill that resulted from the remeasurement of our remaining 30% interest in AUSA in 2018. Accordingly, the provision for income tax and social contribution had a positive impact of R$21.7 million in 2018, compared to R$23.1 million in 2017.

 

The provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required. The Company assesses whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. Judgment is required in determining the future tax consequences of events that have been recognized in the Company’s consolidated financial statements and/or tax returns.

74 

Net income attributable to non-controlling interest

 

Net income attributable to non-controlling interests increased from a gain of R$235 thousand in 2013 to a loss of R$1.20.3 million in 2014, due2017 to the overall negative financial resultsa net loss of our subsidiaries for the year ended December 31, 2014.R$1.8 million in 2018.

 

Net income (loss) attributable to owners of Gafisa

 

Net incomeloss attributable to owners of Gafisa decreasedwas of R$419.5 million in 2018, compared to a net loss of R$42.5760.2 million in 2014, compared to a net income of R$867.4 million in 2013.2017. This decrease isvariation was mainly due to the decrease in income resulting from the discontinuation of our operations in Alphaville following the sale of our 70% interest in Alphaville in December 2013.(i) higher launches and sales, (ii) lower cancellations and (iii) reduced expenses.

 

Business SegmentsSegment

 

See “Item 4. Information on the Company—A. History and Development of the Company—Historical Background and Recent Developments.” Our chief executive officer,

Following the consummation of the Tenda spin-off on May 4, 2017 and the completion of the discontinuation of Tenda’s operations (see Note 8.2 to our consolidated financial statements), the Company operates one business segment. Accordingly, our management, who is responsible for allocating resources among these businesses and monitoring theirour business progress, uses data derived from a combination of historical operating results and forecasted operating results,our consolidated financial statements to assess segment information primarily on the basis of different business segments.

We provide below a measure of historical results, selected segment assets and other related information for each reporting segment. The information below is derived from our statutory accounting records which are maintained in accordance with Brazilian GAAP. No individual customer represented more than 10% of our net operating revenue.

  For Year Ended December 31, 2015
  Gafisa Tenda Total
  (millions ofreais except for percentages)
Net operating revenue  1,443.3   851.0   2,294.3 
Operating costs  (1,061.9)  (605.6)  (1.667,5)
Gross profit  381.4   245.4   626.8 
Gross margin  26.4%  28.8%  27.3%
Net income from continuing operations  44.1   30.3   74.4 

  For Year Ended December 31, 2014
  Gafisa Tenda Total
  (millions ofreais except for percentages)
Net operating revenue  1,580.9   570.1   2,151.0 
Operating costs  (1,165.0)  (444.2)  (1,609.2)
Gross profit  415.9   125.9   541.8 
Gross margin  26.3%  22.1%  25.2%
Net income (loss) from continuing operations  66.9   (109.4)  (42.5)

  For Year Ended December 31, 2013
  Gafisa (1) Tenda Total
  (millions ofreais except for percentages)
Net operating revenue  1,663.7   817.5   2,481.2 
Operating costs  (1,111.6)  (752.2)  (1,863.8)
Gross profit  552.2   65.2   617.4 
Gross margin  33.2%  8.0%  24.9%
Net income (loss) from continuing operations  363.7   (127.1)  236.6 
Net income from discontinued operations  588.6   42.5   631.1 

(1)Includes all subsidiaries except Tenda.

75 


Gafisa Segment

Years Ended December 31, 2015 and 2014

Net operating revenue

Net operating revenue for the Gafisa segment was R$1.443,3 million in 2015 compared to the net operating revenue of R$1,580.9 million in 2014, which represents a decrease of 8.7%. This decrease was mainly due to the mix of sales in the period, which was more concentrated in projects launched in 2014 and the reduction in the level of launches in Gafisa in 2015.

Operating costs

The costs of development and sale and barter transactions in 2015 totaled R$1.1billion, a decrease of 8.8% compared with the R$1.2 billion reported in 2014. This decrease was mainly due to the lower volume of projects under construction.

Gross profit

The gross profit in 2015 was R$381.4 million, representing a decrease of 8.3% compared with the R$415.9 million reported in 2014,make decisions. Therefore, in line with CPC 22 – Operating Segments, the decrease in net operating revenues. The gross margin in 2015 generated by our projects sales increasedCompany understands that there is no reportable business segment to 26.4% compared to 26.3%be disclosed in the same period of 2014. This increase was primarily due to the lower volume of projects under constructionyears ended December 31, 2019, 2018 and the mix of sales in 2015, which was more concentrated in projects recently launched and with higher profit margins.2017.

 

Net income from continuing operations

Net income for the Gafisa segment was R$44.1 million in 2015, compared to a net income of R$66.9 million in 2014. The decrease in net income is primarily a result of the following: (i) lower level of revenues; (ii) higher expenses related to contingencies; and (iii) negative impact of net financial income in 2015 when compared to 2014. Net income from continuing operations as a percentage of net operating revenues was positive 3.0% in 2015 as compared to positive 4.2% in 2014.

Tenda Segment

Years Ended December 31, 2015 and 2014

Net operating revenue

Net operating revenue of sales and/or services during 2015 totaled R$851.0 million, compared to R$570.1 million in 2014, an increase of 49.3%. In 2015, Construtora Tenda S.A accounted for 37% of the consolidated net operating revenue. This increase was mainly due to an increase in sales under the Tenda segment, as a result of the higher level of launches under Tenda’s new business model implemented in 2013.

Operating costs

The costs of development and sale of property and barter transactions in 2015 totaled R$605.6 million, compared to R$444.2 million in 2014. This increase was mainly due to the higher volume of projects launched under Tenda’s new business model since 2013.

Gross profit

Gross profit in 2015 was R$245.4 million, compared to R$125.9 million in 2014. Gross margins increased from 22.1% in 2014 to 28.8% in 2015, impacted by the replacement of Tenda’s legacy projects by projects launched pursuant to Tenda’s new business model, the profit margins of which are higher.

Net income (loss) from continuing operations

Net income for the Tenda segment was R$30.3 million in 2015, compared to a net loss of R$109.4 million in 2014. This increase in net income is a result of the higher volume of projects launched under Tenda’s new business model during 2015.

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Gafisa Segment

Years Ended December 31, 2014 and 2013

Net operating revenue

Net operating revenue for the Gafisa segment was R$1,580.9 million in 2014 compared to the net operating revenue of R$1,663.7 million in 2013, which represents a decrease of 5.0%. This decrease was primarily due to the lower volume of launches during 2014 (a decrease of 6% compared to 2013).

Operating costs

The costs of the sale and barter transactions in 2014 totaled R$1.2 billion, an increase of 4.8% compared with the R$1.1 billion reported in 2013. This increase was mainly due to the increase in construction costs in 2014.

Gross profit

The gross profit in 2014 was R$415.9 million, representing an decrease of 24.7% compared with the R$552.2 million reported in 2013. The gross margin in 2014 generated by our projects sales decreased to 26.3% compared to 33.2% in the same period of 2013. This decrease was primarily due to the lower volume of launches during 2014 and certain non-recurring events such as (i) the recording of a provision for impairment on landbank and properties for sale and (ii) adjustments in the five-year limited warranties we provide to cover structural defects.

Net income (loss) from continuing operations

Net income for the Gafisa segment was R$66.9 million in 2014, compared to a net income of R$363.7 million in 2013. The decrease in net income is primarily a result of the revaluation of the portion of our remaining 30% interest in Alphaville (following the sale of our 70% controlling interest in Alphaville in December 2013) in the amount of R$375.8 million. Net income (loss) from continuing operations as a percentage of net operating revenues was positive 4.2% in 2014 as compared to positive 21.8% in 2013.

Tenda Segment

Years Ended December 31, 2014 and 2013

Net operating revenue

Net operating revenue of sales and/or services during 2014 totaled R$570.1 million, compared to R$817.5 million in 2013, a decrease of 30.3%. In 2014, Construtora Tenda S.A accounted for 26.5% of the consolidated net operating revenue. This decrease was mainly due to the decrease in the delivery of legacy projects in 2014, which was higher in 2013.

Operating costs

The costs of development and sale of property and barter transactions in 2014 totaled R$444.2 million, compared to R$752.2 million in 2013. This decrease was mainly due to Tenda’s efficient control over the construction process and focus on the completion and the run-off of legacy projects. The final phase of Tenda legacy projects ended in 2014 with around 2,593 units to be delivered. In addition, Tenda recorded a reversal of the cancellation provision in the amount of R$68.0 million.

Gross profit

Gross profit in 2014 was R$125.9 million, compared to gross profit in 2013 of R$65.2 million. In 2014, gross margins increased from 8.0% in 2013 to 22.1% in 2014.

Net income (loss) from continuing operations

Net loss for Tenda segment was R$109.4 million in 2014, compared to a net loss of R$127.1 million in 2013. This decrease of net loss in 2014 when compared to 2013 is a result of Tenda’s better performance reflecting its new strategy of Tenda launches under a new business model, based on three basic pillars: operating efficiency, risk management and capital discipline. Currently, the Company operates in 5 macro regions: São Paulo, Rio de Janeiro, Minas Gerais, Northeast (Bahia and Pernambuco) and South (Rio Grande do Sul).

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B.       Liquidity and Capital Resources

 

Our transactions are financed mainly through the contracting of real estate financing and securitization of receivables. When necessary and in accordance with market demands, we carry out long-term financing for the sale of our developments. In order to turn over our capital and accelerate its return, we try to transfer to banks and sell to the market the receivables portfolio of our units.

 

In 2015,2019, we did not carry out any receivables sales with recourse.

In 2018, we did not carry out any receivables sales with recourse.

In 2017, we carried out the following receivables sales with recourse:

 

On December 3, 2015,March 28, 2017, Gafisa and its subsidiaries entered into a CCI transaction relatingrelated to a portfolio comprising selectselected residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$32.230.2 million in exchange for cash at the transfer date, discounted to present value, for R$24.5 million.

In 2014, we carried out the following receivables sales with recourse:

On November 25, 2014, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$15.2 million in exchange for cash at the transfer date, discounted to present value, for R$12.4 million.

In 2013, we carried out the following receivables sales with recourse:

On May 28, 2013 after selling all the subordinated series of Gafisa FIDC, the remaining receivable portfolio of the initial sales, was transferred to investors and the Company was still required to grant the guarantee to its holders.

On November 29, 2013, a selected portfolio of sales receivables from us and our subsidiaries was transferred to investors. The assigned portfolio amounts to R$24.1 million in exchange of cash at the transfer data, discounted to present value, by R$19.623.0 million.

 

Construction financing lines of credit are available and we have fulfilled substantially all of our construction financing needs for 20152019, 2018 and 20142017 at consolidated rates similar to the CDI rate. In order to mitigate the effects of the 2008 global credit crisis, the Brazilian government has announced additional lines of credit to assist the construction industry and its customers, including R$6 billion from the FGTS (a Government Severance Indemnity Fund for Employees). In 2009, we approved the issue of two series of debentures for Gafisa and Tenda in the total amount of R$1.2 billion. In addition, local financial institutions are financing up to 80% of construction costs, through

69 

the Brazilian Saving and Loan System (Sistema Brasileiro de Poupança e Empréstimo — SBPE) indexed to TR (Taxa Referencial) and a fixed rate spread.

 

During 2015,2019, our customers’ ability to obtain bank mortgage loans continued to improve, with interest rates in the range of 6%+TR (affordable entry level)7.99% to 10%9.75%+TR, depending on family income and credit score.

 

The following table shows the balance of our receivables from clients for the development and sale of properties for the periods presented:

 

 As of December 31, As of December 31,
 2015 2014 2013 2019 2018 2017(1)
 (in millions of reais) (in millions ofreais)
Real estate development receivables:            
Current  1,395.3   1,440.5   1,909.9   442.5   468.0   374.9 
Long-term  407.1   384.8   313.8   103.0   174.0   199.3 
Total  1,802.4   1,825.3   2,223.7   545.5   642.0   574.2 
Receivables to be recognized on our balance sheet according to percentage of completion method:                        
Current           —     —     —   
Long-term  793,0   1,064.0   1,863.4   437.6   572.2   644.3 
Total  793,0   1,064.0   1,863.4   437.6   572.2   644.3 
Total receivables from clients  2,595.4   2,889.3   4,087.1 
Total receivables from clients – portion recognized plus portion not recognized  995.0   1,214.2   1,328.4 

_________________

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(1)This amount relates to the Gafisa segment only, since Tenda’s results of operations have been presented as discontinued operations in our consolidated financial statements as of December 31, 2017, and since the Tenda business spin-off was completed on May 4, 2017.

 

The total balance of receivables on the balance sheet has the following maturity profile:

 

 

As of December 31, 2015

Maturity(in millions reais)
Overdue392.2
20161,003.1
2017987.3
2018102.4
201942.2
2020 onwards68.2
Total2,595.40

  As of December 31, 2019
  (in millions reais)
Maturity  
Overdue  159.3 
2020  577.1 
2021  239.9 
2022  5.3 
2023  3.2 
2024 onwards  10.3 
Total  995.1 

 

Loans made to our clients are generally adjusted on a monthly basis as follows: (1) during construction, by the INCC in São Paulo, Rio de Janeiro and other Brazilian cities; and (2) after delivery set forth in the contract, by the IGP-M plus 12% per annum in all markets.

 

We limit our exposure to credit risk by selling to a broad customer base and by continuously analyzing the credit of our clients. As of February, 29, 2016,March 31, 2020, our clients’ default level was 11.99%15.3% of our accounts receivable for Gafisa and 12.16% for Tenda.Gafisa. We annually review the assumptions used in establishing an allowance for doubtful accountsexpected credit losses and cancelled contracts, in view of the revision of historical data of its current operation and improvement of measurement estimates. The Company records an allowance for doubtfulexpected credit losses with a factor applied over the accounts receivables not impaired based on credit loss experiences for each real estate development and cancelled contracts for customers whose installmentswhen a cash inflow risk is identified. Contracts are past due, based onmonitored to identify the assumptions made about each segment of the Company.moment when these conditions are mitigated. This allowance is calculated based on the percentage of the construction work completion, a methodology adopted for recognizing income for the year. The allowance for doubtful accountsexpected credit losses and cancelled contracts totaled R$78.853.8 million as of December 31, 20152019 and is considered sufficient by our management to cover expected futureincurred losses on the realization of accounts receivable.

 

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Cash Flows

 

Operating activities

 

NetIn 2019, net cash generated from operating activities totaled R$91.744.0 million, compared to R$31.5 million in 2015 compared to R$41.9 million in 2014. This increase reflects the improved operational and financial management in both Gafisa and Tenda segments, with a higher volume of sales and revenues from projects with higher gross margins. The R$91.7 million was primarily composed of: (1) income before income tax and social contribution in the amount of R$78.2 million, as a result of our improved operational and financial performance; (2) a decrease in expenses (income) not affecting cash and cash equivalents, totaling R$279.9 million in 2015; (3) an increase in properties for sale totaling R$130.9 million, attributable to landbank and construction; and (4) other less significant increases and decreases in other operating categories.

Net2018. In 2018, net cash generated from operating activities totaled R$41.931.5 million, compared to R$206.9 million in 2014 compared to2017. This decrease is mainly composed of (i) a R$297.695.7 million increase in 2013. Thereceivables from clients and a R$41.9339.6 million was primarily composed of: (1) a decrease in inventory; (ii) a R$14.5 million decrease in related party transactions; (iii) expenses (income)in the net amount of R$227.2 million which did not affectingaffect our cash and cash equivalents, totalingof which R$305.038.1 million relates to impairment adjustments of AUSA goodwill and impairment adjustments in 2014; (2) an increase in properties for sale of R$462.4 million attributable toour landbank and construction; (3) a decrease in trade accounts receivableinventory, R$15.5 million of R$391.6 million;equity losses during the period, and (4)R$172.4 million of which relates to provisions for contingencies; and (v) other less significantrelevant increases and decreases in other operatingoperational categories.

 

Investing activities

 

Net cash generatedused in investing activities, including the acquisition of property,assets, equipment and new investments was R$361.5300.6 million in 20152019, compared to a net cash generated in investing activities of R$752.03.1 million in 2014. Our cash used2018. This variation is mainly due to the increase in 2015 was mainly related toshort term investments in marketable securities, restricted securities and loans in the amount of R$417.7387.3 million, which was lower than the amount of R$761.1 million in 2014 mainly duerelated to the continuing deterioration of economic conditionscapital increases in Brazil in 2015.2019.

 

Net cash generatedused in investing activities, including the acquisition of property,assets, equipment and new investments was R$752.03.1 million in 20142018, compared to a net cash used ingenerated from investing activities of R$102.3445.4 million in 2013. Our cash generated in 2014 was mainly related to investments in marketable securities, restricted securities and loans in the amount of R$761.6 million and investments in property and equipment in the amount of R$88.5 million.2017.

 

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Financing activities

 

Net cash usedgenerated from financing activities in 20152019 totaled R$480.5236.7 million, compared to the net cash used from financing activities in 20142018 of R$899.124.6 million. The higher cash usedgenerated in 20152019 compared to 2018 was mainly attributable to: repaymentto (i) the R$404.9 million capital increases in 2019 (ii) a reduction on increase and amortization of loans and financing, net of the increase of new contracts, totaling R$524.7 million, in line with our conservative approach to allocation of capital, and the purchase of treasury shares totaling R$24.2 million. The decrease in the net cash used from financing activities in 2015 compared to R$899.1 million in the previous year is mainly due to the occurrence of non-recurring events in 2014, primarily the payment of dividends and interest on equity in the amount of R$150.0 million, payment to venture partners totaling R$112.7 million and a higher amount of treasury shares purchased totaling R$115.3 million in 2014 when compared to R$24.2 million in 2015.

During 2014 and in December 2013, we used R$1.6 billion and R$423.0 million, respectively, of the proceeds from the sale of our controlling interest in Alphaville (completed on December 9, 2013) to repay part of our total gross debt in an effort to reduce it. During 2014 and 2013, we also used R$208.7 million of such proceeds to fund our share buyback programs.financing.

 

Net cash used from financing activities in 20142018 totaled R$899.124.6 million, compared to the net cash used from financing activities in 20132017 of R$568.1528.6 million. The lower cash used in 20142018 compared to 2017 was mainly attributable to: repaymentto (i) the R$250.8 million capital increase concluded in February and (ii) a reduction on amortization of loans and financing. There was no net cash used from financing net ofactivities related to the increase of new contracts, totalingdisposal group held for sale in 2018 compared to R$541.724.1 million payment of dividends and interest on equity in the amount of R$150.0 million and the purchase of treasury shares totaling R$115.3 million.2017.

 

Pledged mortgage receivables and short-term investments

 

As of December 31, 2015,2019, substantially all of our mortgage receivables totaling R$1,673.3132.3 million are pledged. In addition, R$108.533.6 million of our short-term investments and collaterals are restricted as they have been pledged.

 

Capital Expenditures

 

In 2015,2019, we invested R$54.63.6 million in propertymachinery and equipment, primarily information technology equipment, software, the construction of sales stands, facilities, model apartmentsproject

In 2018, we invested R$12.5 million in machinery and related furnishingsequipment, information technology equipment, software, project planning and office facilities in São Paulo.information technology projects. Our main investments during the period were investments in information technology equipment and software, which totaled R$31.7 million, the construction ofrelated to sales stands, which totaledamounted to R$9.4 million, and third party leasehold improvements and facilities, which totaled R$2.89.7 million.

 

In 2014,2017, we invested R$88.520.5 million in propertymachinery and equipment, primarily information technology equipment, software, the construction of sales stands, facilities, model apartmentsproject planning and related furnishings and office facilities in São Paulo.information technology projects. Our main investments during the period were the construction ofrelated to sales stands which totaled R$19.3 million, investments in information technology equipment and software acquisitions, which totaledamounted to R$17.67.3 million and third party leasehold improvements and facilities, which totaled R$6.7 million.

In 2013, we invested R$81.06.4 million, in property and equipment, primarily information technology equipment, software, the construction of sales stands, facilities, model apartments and related furnishings and office facilities in São Paulo. Our main investments during the period were the construction of sales stands, which totaled R$9.9 million, investments in information technology equipment and software, which totaled R$43.9 million, and third party leasehold improvements and facilities, which totaled R$12.2 million.respectively.

 

Our capital expenditures are all made in Brazil and are usually funded by local debt capital markets. We currently do not have any significant capital expenditures in progress.

 

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Indebtedness

 

When we consider appropriate, we have incurred indebtedness within SFH, which offers lower interest rates than the private market. When our customers obtain a mortgage, we use the proceeds to redeem our SFH indebtedness. We intend to continue our strategy of maintaining low levels of debt comprised mainly of transactions within SFH or long-term transactions.

 

As of December 31, 2015,2019, we had outstanding debt in the total amount of R$2,156730.7 million, a decrease of 17.0%17.8% as compared to December 31, 2014.2018. As of December 31, 2015,2019, our indebtedness principally consisted of: (1) debentures totaling R$858.0197.5 million, (2) working capital loans in the total amount oftotaling R$131.155.0 million, and (3) other loans (mainly SFH) in the total amount oftotaling R$1,162478.2 million. In addition, we had outstanding payables to venture partners in the amount of R$4.9 million.

80

 

As of December 31, 2014,2018, we had outstanding debt in the total amount of R$2,598889.4 million, a decrease of 15.5%19.5% as compared to December 31, 2013.2017. As of December 31, 2014,2018, our indebtedness principally consisted of: (1) debentures totaling R$1,189265.7 million, (2) working capital loans in the total amount oftotaling R$26995.6 million, and (3) other loans (mainly SFH) in the total amount oftotaling R$1,129 million. In addition, we had outstanding payables to venture partners in the amount of R$11528.1 million.

 

As of December 31, 2013, we had outstanding debt in the total amount of R$3,060 million, a decrease of 15.9% as compared to December 31, 2012. As of December 31, 2013, our indebtedness principally consisted of: (1) debentures totaling R$1,421.2 million, (2) working capital loans in the total amount of R$550.1 million and (3) other loans (mainly SFH) in the total amount of R$1,088.3 million. In addition, we had outstanding payables to venture partners in the amount of R$124 million.

  Maturity
  Total 2016 2017 2018 2019 and thereafter
  (in millions ofreais)
Debentures (Project Finance)  654. 4   354.9   299.6       
Debentures (Working Capital)  203.5   34.7   45.1   83.5   40.2 
Other Working Capital  131.1   102.8   25.1   2.2   1.0 
Housing Finance System (SFH)  1,161.7   569.6   415.3   164.8   12.0 
Payables to venture partners  4.9   3.8   1.1       
Total  2,155.7   1,065.7   786.2   250.5   53,2 

Payables to venture partners refer to contributions received from venture partners of R$45.0 million in 2011, which will be fully redeemed by us until 2017.

  Maturity as of December 31, 2019
  Total 2020 2021 2022 2023 and thereafter
  (in millions of reais)
Debentures (Projects)  159.5   146.8   11.9   0.8   —   
Housing Finance System (SFH)  279.1   279.1   —     —     —   
Real State Finance System (SFI)  177.1   116.1   61   —     —   
Bank credit notes (Projects)  37.8   0.1   37.7   —     —   
Project debt total  653.5   542.1   110.6   0.8   —   
Debentures (Working Capital)  38.1   11.4   11.2   10.5   5.0 
Other Working Capital  39.1   30.9   4.4   3.8   —   
Working Capital debt total  77.2   42.3   15.6   14.3   5.0 
Total  730.7   584.4   126.2   15.1   5.0 

 

On June 27, 2011, eight certificates of bank credit (CCBs) were issued by the Company, totaling R$65.0 million. CCBs are guaranteed by 30,485,608 shares issued by Gafisa SPE-89 Empreendimentos Imobiliários S.A. Funds from the aforementioned CCBs were allocated to develop residential projects.

As part of the funding through issuance of Certificates of Bank Credit– CCB, the Company entered into a paid usufruct agreement in connection with 100% of the preferred shares in SPE-89 Empreendimentos Imobiliários S.A for a period of six years, having raised R$45.0 million recorded based on the effective interest method of amortization in the consolidated statement of operations.

On May 9, 2013,March 28, 2017 we issued a Certificate of Bank Credit (CCB)CCB in a total amount of R$21747 million due in 2017.2021. The CCB is guaranteed by pledge of to be performed units of selected ventures and real estate receivables. This issuance was fully redeemed by October 7, 2013.

 

On October 7, 2013,November 30, 2017 we issued a CCB in the Company entered into a loan agreement in a total amount of R$30040 million due in July 2017. This agreement was2021. The CCB is guaranteed by a pledge of to be performed units of selected ventures and real estate receivables.

 

On September, 29, 20142018, we issued a CCB in the Company entered into a loan agreementamount of R$19440 million due in October 2018. This agreement was2021. The CCB is guaranteed by a pledge of to be performed units of selected ventures and real estate receivables.

 

Debenture programIn April 2019, we issued a CCB in the amount of R$10 million due in 2022. The CCB is guaranteed by real estate receivables.

 

On May 16, 2008, the CVM approved our third debenture program under which we can issue upThe actual ratios and minimum and maximum amounts stipulated by restrictive covenants related to R$1.0 billion in non-convertible debentures. The first issuance under the third debenture program consisted of 25,000 nominal, non-convertible debentures with a face value of R$10,000, which were issued in two series totaling R$250.0 million. The debentures provide for the payment of annual interest corresponding to 107.2% of the CDI rate, which, on March, was renegotiated to 120.0% of the CDI rate, calculated from the subscription date, with a maturity of 5 years. Onthese CCBs at December 31, 2013, the issuance was bought back in accordance with its instruments and canceled afterwards. The issuance had certain covenants which would restrict Company’s ability to take certain actions, including incurring additional debt, and may require us to repay or refinance our indebtedness if we2019 are unable to meet certain ratios. The ratios, its parameters and our performance are no longer applicable for the Company.as follows:

 

In April 2009, Tenda’s first debenture program was approved, under which we issued R$600.0 million in non-convertible debentures. The debentures provide for payment of annual interest at a rate of 9.25% + TR per annum, calculated from the subscription date. Proceeds from the issuance of the debentures will be used solely to finance

At December 31, 2019 

Loans and Financing
Total accounts receivable (2) plus inventory required to be below zero
or 2.0 times over venture debt (3)
4.52 times
Total account receivable plus inventory of completed units required to
be below zero or 2.0 times over net debt (1) less venture debt (3)
(9.04) times
Total debt, less venture debt, less cash and cash equivalents and short-term
investments, cannot exceed 75% of equity plus non-controlling interests
16.03%
Total receivable (2) plus unappropriated income plus total inventory of
completed units required to be 1.5 time over the net debt plus payable
for purchase of properties plus unappropriated cost
3.79 times

8172 

_________________

(1)Net debt refers to total debt less cash and cash equivalents.

 

(2)Total accounts receivables, whenever mentioned, refers to the amount reflected in the Balance Sheet plus the amount to be recognized according to the PoC and not yet shown in the Balance Sheet.

(3)Venture debt and general guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by SFH, as well as the debt related to the seventh placement.

 

real estate ventures focused exclusively on the affordable entry-level segment that meet certain eligibility criteria. Guarantees are comprised of assignments of receivables and bank accounts. The debentures are scheduled to mature in December 2016.

Additionally, certain covenants contained in the agreement governing Tenda’s debentureDebenture program restrict its ability to take certain actions, including incurring additional debt, and may require Tenda to repay or refinance the debenture if it is unable to meet certain financial ratios. The ratios, its parameters and our performance against them are summarized below.

In August 2009, the CVM approved our sixth issuance, which consisted of non-convertible simple debentures in two series, secured by a general guarantee, maturing in four years and unit face value at the issuance date of R$10,000, totaling R$250 million. The debentures provide for the payment of annual interest corresponding to the CDI rateplus 2.00% to 3.25% per annum, calculated from the subscription date. Under the sixth issuance, we are obligated to acquire all outstanding debentures upon the request of debenture holders whenever we raise money through the issuance of non-debt securities in excess of R$500.0 million. We also have the right to repurchase the debentures in the occurrence of a liquidity event. In October 2010, the Company carried out the early redemption of the first series of this placement in the amount of R$150.0 million. On June 2, 2014, the Company redeemed all outstanding debentures under the sixth issuance in the amount of R$100.0 million.

 

In November 2009, the CVM approved our seventh issuance under which2017, we received R$600 million in non-convertible debentures. The debentures provide for payment of annual interest at a rate of 8.25% to 10.25% plus TR per annum, calculated from the subscription date. Proceeds from the issuance of the debentures will be used solely to finance real estate ventures. The debentures are scheduled to mature in December 2017.

In September 2010, the CVM approved our eighth issuance which consistedissued two series of non-convertible debentures in two series maturing in five and six years, respectively the first and the second series, withtotaling R$120 million on a unit face value at the issuance date of R$1,000, for an aggregate of R$300 million. The debentures provide for the payment of annual interest corresponding to the CDI rate plus 1.95% in the first series and IPCA plus 7.96% in the second series, calculated from the subscription date.private placement basis. The first series of the debentures was redeemedtotaling R$90 million is secured by (i) first-priority mortgages over select real estate ventures of the Company in its entirety on October 15, 2015.

In July 2014, the CVM approved the private placementand (ii) fiduciary assignments of our ninth issuance which consisted of non-convertible debentures in a single series maturing in July 2018, for an aggregate of R$130 million. The debentures provide for the payment of semi annual interest corresponding to the CDI rate plus 1.90%. The issuance is guaranteed by real estate receivables and a pledge of units of selectedgenerated by such select real estate ventures. Proceeds fromIn November 2017, the issuance will be used solely to finance such selected real estate ventures. The debenturesdebenture holders assigned their fiduciary rights in the real estate receivables in favor ofto a real estate securitization SPE,special purpose entity, which issued CRIs backed by such real estate receivables. The second series of debentures totaling R$30 million, and guaranteed by a fiduciary guarantee, has not been placed with investors as of the date of this annual report. The proceeds of the debentures will be used to fund the development of the aforementioned real estate ventures only.

 

In December 2014,May 2018, we issued non-convertible debentures, with a general guarantee, as a single series in the CVM approvedtotal amount of R$76 million, with final maturity in July 2020. The proceeds from the placement will be used in the development of select real estate ventures and their guarantees are represented by the conditional sale of real estate receivables and the purchase of completion bond related to a specific venture. The face value of the private placement will accrue interest equal to the cumulative variation of our tenth issuance which consisted ofInterbank Deposit (DI) plus 3.75% per annum.

In July 2018, we issued non-convertible debentures, inwith a general guarantee, as a single series maturing in January 2020, for an aggregatethe total amount of R$55 million.90 million, with a final maturity in June 2022. The private placement was concluded in January 2015. The debentures provide for the payment of semi annual interest corresponding to the IPCA plus 8.22%. The issuance is guaranteed by a pledge of units of selected real estate ventures. Proceedsproceeds from the issuanceplacement will be used solely to finance such selectedin the development of select real estate ventures.ventures and their guarantees are represented by the conditional sale of real estate receivables. The face value of the private placement will accrue interest equal to the cumulative variation of Interbank Deposit (DI) plus 3% per annum.

In April 2019, we issued non-convertible debentures, with a general guarantee, as a single series in the total amount of R$40 million, with a final maturity in October 2020. The proceeds from the placement will be used in the development of the “Gafisa Square Ipiranga” and “Moov Espaço Cerâmica” real estate ventures, and their guarantees are represented by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the private placement will accrue interest equal to the cumulative variation of Interbank Deposit (DI) plus 5% per annum.

 

We have various covenants relating to our debentures issuances described above. These mainly consist of (i) cross default provisions, whereby outstanding indebtedness will become immediately due and payable in the event that the Company or its subsidiaries do not comply with their obligations under any other credit facility for a value in excess of the amounts set forth therein; (ii) restrictions on transfer of control and merger and acquisition transactions; (iii) limitations on our ability to incur debt; (iv) limitations or creating liens on assets; (v) limitations on the distribution of dividends if we are under default and (vi) the following ratios and limits to be calculated on a quarterly basis. The table below sets forth these ratios and limits as amended.

 

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The actual ratios and minimum and maximum amounts stipulated by these restrictive covenants at December 31, 20152019 are as follows:

 

 

At December 31, 2015

Seventh placement2019 

Total accountaccounts receivable (2) plus inventory required to be below zero or 2.0 times over net debt (4) less venture debt (3)(14.12)(14.62) times
Total debt less venture debt (3), less cash and cash equivalents and short-term investments (1), cannot exceed 75% of equity plus non-controlling interests(12.19)%
Total account receivable plus unappropriated income plus total inventory of finished units required to be 1.5 time over the net debt plus payable for purchase of properties plus unappropriated cost2.25 times

Eighth placement — first and second series, second issuance of Promissory Notes, first and second series

Total accounts receivable plus inventory of finished units required to be below zero or 2.0 times greater than net debt less venture debt(7.73) times
Total debt less venture debt, less cash and cash equivalents and short—term investments (1), cannot exceed 75% of equity plus non-controlling interests(12.19)%

Ninth placement

Total accounts receivable plus total inventory required to be below zero or greater than 2.0 times over net debt3.71 times
Net debt cannot exceed 100% of equity plus non-controlling interests46.44%

Tenth placement

Total accounts receivable plus inventory required to be below zero or 2.0 times over net debt less venture debt (3)(14.12) times
Total debt less venture debt (3), less cash and cash equivalents and short-term investments (1), cannot exceed 75% of equity plus non-controlling interests(12.19)%

First placement – Tenda

Total accounts receivable plus inventory required to be equal to or 2.0 times over net debt less debt with secured guarantee (3) or below zero, considering that TR(2) plus TE(4) is always above zero(6.79) times
Net debt less debt with secured guarantee (3) shall not be in excess of 50% of equity(21.47)%
Total account receivable plus unappropriated income plus total inventory of finished units required to be 1.5 times the net debt plus payable for purchase of properties plus unappropriated cost2.47 times-15.81%

_________________

(1)Cash and cash equivalents and short-term investments refer to cash and cash equivalents and marketable securities.

 

(2)Total accounts receivables, whenever mentioned, refers to the amount reflected in the Balance Sheet plus the amount to be recognized according to the PoC and not yet shown in the Balance SheetSheet.

 

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(3)Venture debt and general guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by SFH, as well as the debt related to the seventh placement.

 

(4)Total inventory.Net debt refers to total debt less cash and cash equivalents

 

We expect to comply with the covenants in the agreements governing our outstanding indebtedness which may limit our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions. See “Item 3. Key Information—D. Risk Factors—Our level of indebtedness could have an adverse effect on our financial health, diminish our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or the real estate industry.”

 

OnAs of December 31, 2015,2019, the Company wasand its subsidiaries were in compliance with all of its covenants.the contractual covenants provided for in our debentures and our credit instruments.

 

Financing through the Housing Finance System (SFH)

 

Most of our financing is incurred directly or through our subsidiaries or jointly-controlled entities from the principal banks that operate within SFH. As of December 31, 2015,2019, the interest rates on these loans generally varied between 8.30%10.0% and 12.80%14.2% per annum, plus TR, and the loans generally mature through May 2016March 2020 and August 2020.July 2021. This financing is secured by mortgages on property and by security interests on the receivables from clients. As of December 31, 2015,2019, we had 6313 loan agreements in effect, with a balance of R$1,162456.2 million. At the same date

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we also had R$7444.5 million in aggregate principal amount of financing agreements with SFH, the funds of which will be released through the date of completion as construction of the corresponding development’s progress.

 

On March 26, 2020, we completed the renegotiation of our financial liabilities with Banco do Brasil S.A. in the total amount of R$138.4 million. As part of the renegotiation, the final maturity of such financial liabilities was extended to June 2025 and we reduced the cost of servicing them, giving us the time we need to sell the units in inventory tied to this debt. The completion of this renegotiation strengthens our capital structure and our credit relationship with Banco do Brasil and the financial markets in general.

Securitization deals and Fund — FIDC

On March 31, 2009, we entered into a securitized receivables transaction, whereby we assigned a portfolio of select residential and commercial real estate receivables to “Gafisa FIDC” which issued senior and subordinated quotas. This first issuance of senior quotas was made through an offering restricted to qualified investors. Subordinated quotas were subscribed exclusively by Gafisa S.A. Gafisa FIDC acquired the present value of the portfolio based on an agreed discount rate. We provide Gafisa FIDC with administrative and accounting services including the reconciliation and analysis of receivables and collections and can be replaced by another collection agent in the event of non-fulfillment with contractual parameters. The senior and subordinated quotas are remunerated based on the IGP-M index plus interest of 12% per year. Because the subordinated quotas have a disproportional percentage of the expected losses, Gafisa FIDC was considered a variable interest entity and was fully consolidated in our financial statements as of December 31, 2012, 2011 and 2010. On May 28, 2013, the Company entered into an agreement to sell the subordinated quotas to seniors investors in exchange for R$5 million in cash and R$3 million of real estate receivables. The Company remained obligated to fully register the real estate pledge to investors.

In June 2009, we issued debt securities backed by CCI. The transaction consists of an assignment of a portfolio comprised of select residential real estate receivables from Gafisa and its subsidiaries. We assigned a receivables portfolio in the amount of R$89.1 million in exchange for cash at the transfer date, discounted to present value, totaling R$69.3 million, recorded as “Other accounts payable—Credit Assignments”. Eight book CCIs were issued in this transaction, which are backed by receivables which installments fall due on and up to June 2014.

 

On June 27, 2011, the Company and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$203.9 million (R$185.2 million – Gafisa’s interest) in exchange for cash, at the transfer date, discounted to present value, for R$171.7 million (R$155.9 million – Gafisa’s interest), recorded under “Obligations assumed on assignment of receivables”.

 

On September 29, 2011, the Company and its subsidiaries entered into a Private Instrument for Assignment of Real Estate Receivables and Other Covenants which consist of an assignment of a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The amount of real estate receivables assignment paid by the Assignee amounts to R$238.4 million (R$221.4 million - Gafisa’s interest). The assignment amount will be settled by the Assignee by offsetting the Housing Financial System (SFH) debt balance of the own bank. On July 6, 2012, the remaining balance was settled by issuance of Bank Deposit Certificate (CDB) guaranteed in favor of the Company.

On December 22, 2011, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$72.4 million in exchange for cash at the transfer date, discounted to present value, by R$60.1 million, classified as “Obligations with assignment of receivables”.

On May 9, 2012, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$64.9 million in exchange for cash at the transfer date, discounted to present value, by R$45.2 million.receivables.”

 

On July 6, 2012, Gafisa and its subsidiaries entered into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$18.2 million in exchange for cash at the transfer date, discounted to present value, for R$11.5 million.

 

On December 27, 2012, Gafisa and its subsidiaries enter into a CCI transaction relating to a portfolio comprising select residential real estate receivables from Gafisa and its subsidiaries. The assigned portfolio of receivables amounts to R$72.0 million in exchange for cash at the transfer date, discounted to present value, by R$61.6 million.

 

On November 29, 2013, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$24.2 million in exchange of cash at the transfer date, discounted to present value, by R$19.6 million.

 

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On November 25, 2014, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$15.2 million in exchange of cash at the transfer date, discounted to present value, by R$12.4 million.

 

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On December 3, 2015, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$32.2 million in exchange of cash at the transfer date, discounted to present value, by R$24.5 million.

On March 4, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$36.4 million in exchange for cash at the transfer date, discounted to present value, for R$27.3 million.

On May 09, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$23.0 million in exchange for cash at the transfer date, discounted to present value, for R$17.5 million.

On August 16, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$21.4 million in exchange for cash at the transfer date, discounted to present value, for R$14.9 million.

On December 21, 2016, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$27.0 million in exchange for cash at the transfer date, discounted to present value, for R$19.5 million.

On March 28, 2017, a selected portfolio of sales receivables from Gafisa and its subsidiaries was transferred to investors. The assigned portfolio amounts to R$30.2 million in exchange for cash at the transfer date, discounted to present value, for R$23.0 million.

In 2019 and 2018, we did not perform any transfer of sales receivables from Gafisa and its subsidiaries to investors.

 

Pursuant to Article 125 of the Brazilian Civil Code, the CCI-Investor carries general guarantees represented by statutory liens on real estate units, effective as soon as the conditional restrictions included in the registration are lifted, as reflected in the real estate deed on (i) the assignment of receivables from the assignors to SPEs, as provided for in Article 167, item II, (21) of Law No. 6,015, of December 31, 1973; and (ii) the issue of CCI-Investor by SPEs, as provided for in Article 18, paragraph 5 of Law No. 10,931/04.

 

We will be compensated for, among other things, the reconciliation of the receipt of receivables, guarantee the CCIs, and the collection of past due receivables. The transaction structure provides for the substitution of us as collection agent in the event of non-fulfillment of the responsibilities described in the collection service contract.

 

Working Capital

 

We believe that our current working capital is sufficient for our present requirements and that our sources of funds from financing activities are sufficient to meet the financing of our activities and cover our need for funds for at least the next twelve months. Additionally, as a result of the Tenda spin-off which was consummated on May 4, 2017, we received cash totaling R$219.5 million in connection with the exercise by the Gafisa shareholders of their preemptive rights to acquire up to 50% of the share capital of Tenda, as well as cash totaling R$105.2 million in connection with the Tenda share capital reduction, both of which have contributed to solidifying the liquidity and capital structure of the Company. As a result of the gradual recovery of the Brazilian economy and as part of the Company’s strategy to reinforce its liquidity, strengthen its capital structure and solidify the Company’s strategic and operational positioning for a new cycle of the real estate market, we issued and sold 16,717,752 new common shares of the Company for a total amount of R$250.8 million, all in registered, book-entry form, and with no par value, at a price per share equal to R$15.00, of which R$0.01 per share was allocated to capital, and R$14.99 per share was allocated to capital reserves.

In 2019, our Board of Directors ratified the following capital increases:

·On June 24, 2019: subscription and payment of 26,273,962 new common shares, of which 12,170,035 shares were subscribed at the price of R$5.12 and 14,103,927 shares were subscribed at the price of R$4.96, totaling R$62.3 million and R$69.9 million, respectively.

75 

·On October 23, 2019: subscription and payment of 48,968,124 new common shares, of which 45,554,148 shares were subscribed at the price of R$5.58 and 3,413,976 shares were subscribed at the price of R$5.42, totaling R$254.2 million and R$18.5 million, respectively.

 

U.S. GAAP Reconciliation

 

We prepare our consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Our net income attributable to owners of Gafisa, in accordance with Brazilian GAAP, was a net income of R$74.4 million, a net loss of R$42.526.0 million, R$419.5 million and a net income of R$867.4760.2 million in 2015, 20142019, 2018 and 2013,2017, respectively. Under U.S. GAAP, our net loss waslosses were R$10.160.7 million, our net income was R$42.3452.6 million and our net income was R$1,322.5621.8 million in 2015, 20142019, 2018 and 2013,2017, respectively.

 

Our equity, in accordance with Brazilian GAAP, was R$3,097.2882.8 million, R$3,058.4493.2 million and R$3,214.5715.1 million as of December 31, 2015, 20142019, 2018 and 2013,2017, respectively. Under U.S. GAAP, we recorded total equity of R$2,704.9595.4 million, R$2,750.9240.4 million and R$2,822.2495.4 million as of December 31, 2015, 20142019, 2018 and 2013,2017, respectively.

 

The following items generated the most significant differences between Brazilian GAAP and U.S. GAAP in determining net income and shareholders’ equity:

 

·revenue recognition;

·business combinations;

·temporary equity; and

 

·effects of deferred taxes on the differences above; and

·non-controlling interest.difference above.

 

For a discussion of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to our financial statements and a reconciliation of net income and equity see Note 3132 to our consolidated financial statements included elsewhere in this annual report and “Item 3.A. Key Information—Selected Financial Data.”

 

New Accounting Pronouncements, Interpretations and Guidance

 

Pronouncements (new or revised) and interpretation applicable to years beginning January 1, 20152019

 

The Company adopted all of the pronouncements (new or revised) and interpretations issued by the CPC applicable to its operations which were effective as of December 31, 2015.2019.

 

ThereThe following standards are no other standards or interpretations that were issued and not yet adopted that could, in the opinion of our management, have a significant impact on the profit, loss or equity disclosed by the Company.

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On May 28, 2014, the IASB published IFRS 15, which establishes principles that will apply to the recognition of revenue under IFRS. IFRS 15 will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When adopted, IFRS 15 will supersede most of the detailed guidance on the recognition of revenue that currently applies under IFRS. IFRS 15 will be effective for annual periodseffect beginning on or after January 1, 2018, and earlier application of IFRS 15 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 15 will be subject to the implementation of IFRS 15 in Brazil and the prior approval of the CPC and the CVM.

In July 2014, the IASB published IFRS 9, which establishes, among other principles, principles that will apply to the classification, measurement and recognition of financial assets and liabilities. IFRS 9 will replace (i) earlier versions of IFRS 9 and (ii) IAS 39. IFRS 9 is comprised of three phases:

Phase 1 - Classification and measurement of financial assets and liabilities: Phase 1 introduces an approach for the classification of financial assets driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach will replace existing rule-based requirements. The new model will also result in a single impairment model being applied to all financial instruments.

Phase 2 - Impairment: Phase 2 introduces a new, expected loss impairment model that will require more timely recognition of expected credit losses. It will require entities to account for expected credit losses (as opposed to incurred credit losses) from when financial instruments are first recognized. It will also lower the threshold for recognition of full lifetime expected losses.

Phase 3 - Hedge Accounting: Phase 3 replaces the rule-based hedge accounting requirements in IAS 39. It will introduce a reformed model for hedge accounting with enhanced disclosures about risk management activity. The new model will align the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements. In addition, as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements.

IFRS 9 will be effective for annual periods beginning on or after January 1, 2018. Earlier application of IFRS 9 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 9 will be subject to the implementation of IFRS 9 in Brazil and the prior approval of the CPC and the CVM.2019:

 

On January 13, 2016, the IASB published IFRS 16 – Leases (“IFRS 16”), which establishes principles that will apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessors and lessees. IFRS 16 will require lessors to recognize a lease liability reflecting future lease payments and a “right-of-use assets” for all lease contracts, except certain short-term leases and leases for low-value assets. The principles that apply to the recognition, measurement, presentation and disclosure of leases in the financial statements of lessees will remain substantially the same. IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, and earlier application of IFRS 16 will be permitted for IFRS purposes. In Brazil, earlier application of IFRS 16 will be subject to the implementation of IFRS 16 in Brazil and the prior approval of the CPC and the CVM. The standard can be applied either on the cumulative catch-up approach or the full retrospective method, and is currently being evaluated by the Company.

 

We areBased on available information, the right-of-use assets and lease liabilities was recognized in the processamount of evaluatingR$4.5 million as of January 1, 2019.

The ICPC 22 – Uncertainty Over Income Tax Treatments deals with the recognition of income taxes in the cases in which the tax treatments involve uncertainty that affects the application of IAS 12 (CPC 32) and does not apply to taxes out of the scope of IAS 12 nor do specifically include the requirements related to the interest and fines associated with uncertain tax treatments. The interpretation did not have impact on the Company’s Financial Statements.

The following standard amendments and interpretations will not have a significant impact on the consolidated financial statements of IFRS 9, IFRS 15 and IFRS 16the Company:

·Amendments to references to the conceptual framework in IFRS standards (CPC 00)

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·Definition of a business (amendments to the CPC 15/IFRS 3)

·Definition of materiality (amendments to the CPC 26/IAS 1 and CPC 23/IAS8)

·IFRS 17 Insurance Contracts

There is no other standard, amendment or issued interpretation that is not yet adopted that could, in the opinion of our management, have a significant impact on our financial statements. As of the date of this annual report, we have not completed our analysis of IFRS 9, IFRS 15 and IFRS 16 and we have not determined the extent to which IFRS 9, IFRS 15 and IFRS 16 will impact our financial statements once they are adopted.upon adoption.

 

Recently Adopted and Issued U.S. GAAP Accounting Standards

 

RecentlyPlease refer to Note 32(c) to our consolidated financial information for a description of recently adopted USU.S. GAAP accounting standards

In January 2013, the FASB and recently issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of Update 2011-11, Disclosures about Offsetting Assets and Liabilities, applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments were effective for the Company on January 01, 2013 and the disclosures areU.S. GAAP accounting standards.

 

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required to be retrospectively applied for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. The adoption of ASU 2013-01, which is related to disclosure only, did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in ASU 2013-02 to Topic 220, Other Comprehensive Income, update, supersedeC.       Research and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05Development, Patents and 2011-12. ASU 2013-02 requires either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new guidance was effective prospectively for the Company on January 01, 2013. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.Licenses, etc.

In February 2013, the FASB issued ASU 2013-04, Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the update is fixed at the reporting date, except for obligations addressed with existing U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-04 did not have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

The amendments in ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The adoption of ASU 2013-11 did not have a material impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323). The amendments in ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments in ASU 2014-01 should be applied retrospectively to all periods presented and are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU 2014-01 did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08 - Presentation of financial statements (topic 205) and property, plant, and equipment (Topic 360). The amendments in ASU 2014-08 change the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when some criteria occurs. Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. The amendments in ASU 2014-08 require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. The amendments in ASU 2014-08 require additional disclosures about discontinued operations. The amendments in ASU 2014-08 are effective to all

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disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of ASU 2014-08, which is related to disclosure only, did not have a material impact on our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-17 - Business combinations (Topic 805) - Pushdown Accounting. The objective of ASU 2014-17 is to provide guidance for determining whether and at what threshold an acquiree (acquired entity) that is a business or nonprofit activity can reflect the acquirer's accounting and reporting basis (pushdown accounting) in its separate financial statements. Paragraphs 805-50-S99-1 through S99-4 of the Codification provide limited guidance for SEC registrants for determining whether and when a new accounting and reporting basis should be established in an acquiree's separate financial statements. However, because diversity in practice exists with respect to the application of pushdown accounting among entities that are not SEC registrants, the amendments provide guidance for entities that are SEC registrants and for those that are not. The amendments in ASU 2014-17 are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. The adoption of ASU 2014-17 did not have a material impact on our consolidated financial statements.

Recently issued US GAAP accounting standards

In May 2014, the FASB issued ASU 2014-09 - Revenue from contracts with customers (Topic 606). The amendments in ASU 2014-09 create revenue from contracts with customers (Topic 606), and supersede the revenue recognition requirements in revenue recognition (topic 605), including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in revenue recognition—construction-type and production-type contracts (subtopic 605-35), and create new subtopic 340-40, other assets and deferred costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impacts of the adoption of ASU 2014-09 on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12 - Compensation—stock compensation (Topic 718). Some share-based payment awards that require a specific performance target to be achieved before the employee can benefit from the award, also require an employee to render service until the performance target is achieved. In some cases, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the employee is rendering service on the date the performance target is achieved. Some entities account for those performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value. Others treat them as nonvesting conditions that affect the grant-date fair value of the award. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impacts of the adoption of ASU 2014-12 on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 - Presentation of financial statements—going concern (Subtopic 205-40). The amendments in ASU 2014-15 provide U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We are currently evaluating the impacts of the adoption of ASU 2014-15 on our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16 - Derivatives and hedging (Topic 815) - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. Certain classes of shares include features that entitle the holders to preferences and rights (such as conversion rights, redemption rights, voting powers, and liquidation and dividend payment preferences) over the other shareholders. Shares that include embedded derivative features are referred to as hybrid financial instruments, which must be separated from the host contract and accounted for as a derivative if certain criteria are met under

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Subtopic 815-10. One criterion requires evaluating whether the nature of the host contract is more akin to debt or to equity and whether the economic characteristics and risks of the embedded derivative feature are “clearly and closely related” to the host contract. In making that evaluation, an issuer or investor may consider all terms and features in a hybrid financial instrument including the embedded derivative feature that is being evaluated for separate accounting or may consider all terms and features in the hybrid financial instrument except for the embedded derivative feature that is being evaluated for separate accounting. The use of different methods can result in different accounting outcomes for economically similar hybrid financial instruments. Additionally, there is diversity in practice with respect to the consideration of redemption features in relation to other features when determining whether the nature of a host contract is more akin to debt or to equity. The amendments apply to all reporting entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share. The amendments in ASU 2014-16 are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The adoption of ASU 2014-16 is not expected to have a material impact on our consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income statement - Extraordinary and unusual items (Subtopic 225-20). The objective of ASU 2015-01 is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in ASU 2015-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively and also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of ASU 2015-01 is not expected to have a material impact on our consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. ASU 2015-02 affects the following areas: (i) Limited partnerships and similar legal entities, (ii) Evaluating fees paid to a decision maker or a service provider as a variable interest, (iii) The effect of fee arrangements on the primary beneficiary determination, (iv) The effect of related parties on the primary beneficiary determination and (v) Certain investment funds. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Overall, the amendments in ASU 2015-02 are an improvement to current GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and because they place more emphasis on risk of loss when determining a controlling financial interest. The amendments in ASU 2015-02 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 – Interest - Imputation of Interest (Subtopic 835-30). To simplify the presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by ASU 2015-03. For public business entities, ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of ASU 2015-03 is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-04 - Compensation - Retirement Benefits (Topic 715). For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in ASU 2015-04 provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in ASU 2015-04. The amendments in ASU 2015-04 are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2015-04 is not expected to have a material impact on our consolidated financial statements.

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In April 2015, the FASB issued ASU 2015-05 - Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the amendments in ASU 2015-05 will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. The adoption of ASU 2015-05 is not expected to have a material impact on our consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Pursuant to the amendments in ASU 2015-07, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. The amendments in ASU 2015-07 are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2015-07 is not expected to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11 - Simplifying the Measurement of Inventory. The amendments in ASU 2015-11 more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on our consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15 - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 implements SEC guidance pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. For public business entities, the amendments in ASU 2015-15 should be adopted concurrently with the adoption of ASU 2015-03. The adoption of ASU 2015-15 is not expected to have a material impact on our consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16 - Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in ASU 2015-16 require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. An entity should present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2015-16 is not expected to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 - Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in ASU 2015-17. The amendments in ASU 2015-17 will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is

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permitted. The adoption of the Update is not expected to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2016-01 is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The FASB is issuing ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. ASU 2016-02, along with IFRS 16, are the result of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For public business entities, the amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. We are currently evaluating the impacts of the adoption of ASU 2016-02 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06 - Contingent Put and Call Options in Debt Instruments. The amendments in ASU 2016-06 clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. For public business entities, the amendments in ASU 2016-06 are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2016-06 is not expected to have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting. The amendments in ASU 2016-07 eliminate the requirement to retroactively adopt the equity method of accounting. For public business entities, the amendments in ASU 2016-07 are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier application is permitted. The adoption of ASU 2016-07 is not expected to have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1. Identify the contract(s) with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in ASU 2016-08 do not change the core principle of the guidance. The amendments clarify the implementation guidance on principal versus agent considerations. For public business entities, the amendments in ASU 2016-08 affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-08 are the same as the effective date and transition requirements of Update 2014-09. Earlier application is permitted. We are currently evaluating the impacts of the adoption of ASU 2016-08 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09 - Improvements to Employee Share-Based Payment Accounting. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this Update are effective for annual periods

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beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

C.Research and Development, Patents and Licenses, etc.

 

We have a research and development department for new products, processes and methodologies focused on reducing the construction cycle. As of December 31, 2015, 2014 and 2013, we had 6, 10 and 10 employees engaged in research and development activities, respectively. Our research and development expenditures in 2015, 20142019, 2018 and 20132017 were immaterial. See also “Item 4. Information on the Company—B. Business Overview—Construction.”

 

D.Trend Information

D.       Trend Information

 

Elsewhere in this annual report, including under “Item 3. Key Information—D. Risk Factors” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Brazilian Real Estate Sector,” we discuss trends, uncertainties, demands, commitments or events which could have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that could cause reported financial information to not necessarily be indicative of future operating results or financial condition.

 

In addition, while we believe the long termlong-term prospects for the Brazilian housing market have not changed during 2013, 2014 and 2015,over the past five years, we recognized that we needed to adjust how we have approached the demand for high growth and diversification in the market in order to achieve sustainable, profitable growth. In the Brazilian housing market, demand has outstripped supply on all fronts, from units and availability of skilled labor, to reliable and experienced suppliers and building partners, to financing, and to the ability to rapidly issue permits and obtain the necessary approvals to deliver units under theMinha Casa Minha Vida program.units.

 

In December 2016, following the second halfconclusion of 2011,our analysis of certain strategic options, our management team conducteddecided to sell 50% of Tenda’s total capital stock, and transfer the remaining 50% of Tenda’s total capital stock to our shareholders in connection with a detailed analysisreduction in our total capital stock. Accordingly, on December 14, 2016, we entered into an SPA with Jaguar Real Estate Partners LP (“Jaguar”) pursuant to which we offered to sell Tenda shares representing up to 30% of our operationsthe total capital stock of Tenda, at a price equal to R$8.13 per share.

The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a reduction of the capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and profitabilityfor a total amount of R$219.5 million, with no shares being acquired by project, regionJaguar; and brand and has developed certain strategies to address(iv) the market trends that we have identified. As partsatisfaction of our revised strategies, we plan to continue to simplify and streamline our organizational and operational structure to reinforce the fundamental strengths of each of our brands. In particular, we determined the specific geographic markets where each of our brands has the strongest prospects for performance and where we enjoy supply chain efficiencies, and will focus our efforts for each brand in its respective geographic markets. We also implemented a new management structure that, among other things, assigns each brand manager direct responsibilityconditions precedent for the operating performanceconsummation of each brand.the spin-off. In addition, we are implementing a corporate culture shift within ouron May 4, 2017, the Tenda brand focusedshares were listed on the transfer of receivablesB3 and on aligning incentives across the organization (including from senior managementbegan to individual project engineers) to encourage project execution based on high-quality, on-time, under-budget performance.

In 2013 Gafisa completed its strategic repositioning, which commenced in early 2012. Our goal was to reduce the level of debt, restrict the Company's exposure to unprofitable businesses and markets and improve in margins and cash generation. One of the several initiatives we adopted to achieve this goal was the sale of a 70% interest in Alphaville, which contributed to a decrease in our leverage.

By the end of 2013 we finalized our five-year business plan for the period from 2014 to 2018. We set guidelines for our business including the expected size of Gafisa and Tenda operations, appropriate leverage, profitability guidelines, and our commitment to capital discipline and shareholder value generation, which are reflected in the guidance released to the market at the end of 2013.

We also expect to continue to build on the progress we have made in consolidating our back office and establishing shared operations among our three brands. With the implementation of the SAP enterprise application software platform across all of our divisions, we believe we will have the appropriate tools and data to make more effective management and supply decisions. We believe the successful implementation of these initiatives will help produce more stable cash flow and contribute toward a return to sustainable growth.publicly trade.

 

On February 2, 2014, Gafisa’s boardSeptember 25, 2018, GWI convened an Extraordinary Shareholders’ Meeting for the purpose of directors authorized management to initiate studies for a potential spin-off of Gafisa and Tenda business units into two independent publicly traded companies. Our management initiated the studies in the first quarter of 2014. The main objectivesdismissing members of the proposed spin-off are to:Board of Directors and electing new members through a multiple-vote process. GWI approved the dismissal of the entire Board of Directors and elected directors for five of the seven vacant seats. See “Item 6. Directors, Senior Management and Employees—C. Board Practices”, for further information about our Board of Directors. Within three days of the dismissal and election of the new Board of Directors, the Company’s executive board was removed from office.

 

·enable shareholders to allocate resources between Gafisa and Tenda in line with their interests and investment strategies;

On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the NYSE and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On

 

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·enable Gafisa and Tenda to respond faster to the opportunities in their target markets;

·establish sustainable capital structures for each of Gafisa and Tenda, based on each company’s risk profile and strategic priorities;

·give greater visibility to the market on the individual performance of each of Gafisa and Tenda, enabling better assessment of intrinsic value; and

·increase the ability of Gafisa and Tenda to attract and retain talent, through the development of appropriate cultures and compensation structures consistent with the specific results of each business.

As partDecember 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the studies, we (i) separated several joint departmentsADSs, and sent a copy to the NYSE on the same day. The last day of Gafisatrading on NYSE for our ADSs was December 14, 2018, and Tenda, including, among others,our ADSs were delisted from the services, personnelNYSE on December 17, 2018. Our ADSs remain eligible for trading in the over-the-counter markets in the United States, and management department and the legal department, (ii) converted Tenda’s issuer registration with the CVM from category B to category A, (iii) entered into negotiations with several banks and insurance companies to open lines of credit for Tenda that are independent of Gafisa, and (iv) reviewed our contracts with our third party counterparties and evaluated the potential impact of a spin-off on those contracts. In parallel, wecommon shares will continue to assess separation alternatives forbe listed and admitted to trading in the GafisaNovo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and Tenda business units.communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the Exchange Act.

 

The implementationDuring February, March and April 2019, the members of these strategic initiatives could have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or could cause reported financial informationthe Company’s Board of Directors elected in late 2018 resigned, with the exception of Pedro Carvalho de Mello, and new members were elected to not necessarily be indicativereplace them. As of future operating results or financial condition.the date of this annual report, following the Annual General Meeting held on April 15, 2019, Gafisa’s Board of Directors is composed of the following members: (i) Leo Julian Simpson (nominated as chairman of the Board of Directors on April 15, 2019), (ii) Antonio Carlos Romanoski, (iii) Demian Fiocca, (iv) Eduardo Larangeira Jácome, (v) Nelson Sequeiros Rodriguez Tanure, (vi) Roberto Luz Portella and (vii) Thomas Cornelius Azevedo Reichenheim, all nominated on April 15, 2019.

 

In 2015,On April 15, 2019, at the government announcedAnnual General Meeting, the third phaseshareholders resolved to suspend the shareholder rights of GWI Asset Management S.A. and the other members of the program “Minha Casa, Minha VidaGWI Group due to GWI Group’s non-compliance with the Company’s Bylaws as they relate to the Tender Offer request. In addition, it was resolved to increase the limit of authorized capital of the Company from 71,031,876 ordinary shares to 120,000,000 ordinary shares. This increase in the Company’s authorized capital enables us to issue new shares in a sufficient amount to accommodate the financial restructuring of the Company.

On April 15, 2019, following the General Meeting, in order to raise funds for investments, the newly appointed Board of Directors approved a capital increase of 26,273,962 new common shares. These newly issued common shares were offered privately to the Company’s shareholders, and were issued at the reference price of R$ 6.02 per common share (which was determined following an audit conducted by a specialized firm). The program aimsBoard of Directors also appointed Roberto Luz Portella as Chief Executive Officer, Chief Financial Officer and Investor Relations Officer and Eduardo Larangeira Jácome as Operational Executive Officer.

On August 15, 2019, the Board of Directors approved another capital increase of 48,968,124 new common shares. These newly issued common shares were offered privately to reduce the housing deficit in Brazil, which asCompany’s shareholders at B3 S.A. – Brasil, Bolsa, Balcão (former BM&FBovespa), and were issued at the reference price of 2014R$ 6.57 per common share (which was estimated to be 5.2 million houses. The program’s “MCMV I”determined following an audit conducted by a specialized firm). Following the preemptive rights exercise period and “MCMV II” phases call for total government investment of up to R$230 billion, to be made available through financing from the CEFsubsequent subscriptions periods, we issued and BB,sold 45.554.148 and aim to build approximately 4.1 million houses for families with monthly incomes of up to ten times the minimum wage. This program offers, among other things, long-term financing, lower interest rates, greater share3,413,976, respectively, new common shares of the property financedCompany for a total amount of R$254.2 million and R$18.5 million, respectively, all in registered, book-entry form, and with no par value, at a price per share equal to the client, subsidies basedR$5.58 and R$5.42, respectively. Accordingly, on income level, lower insurance costs and the creationOctober 23, 2019, our board of director approved a guarantor fund to refinance debt in case of unemployment. On March 30, 2016, the Brazilian government launched “MCMVIII”, the third phase of the program, which aims to build approximately 2 million housescapital increase in the next three years, with a total investmentamount of approximately R$210.6 billion.272.7 million. As of the date of this annual report, the Brazilian government has not released any further details regarding the implementationshare capital of the third phaseCompany totaled R$2,926.3 million, represented by 120,000,000 common shares, all in registered, book-entry form, and with no par value.

On August 30, 2019 the Board of Directors appointed André Luis Ackermann as Chief Financial Officer, and Eduardo Larangeira Jácome tendered his resignation to the position of Management Officer, effective as of September 30, 2019. Eduardo Larangeira Jácome remains as a member of the program.Restructuring Committee until December 31, 2019 and a member of the Company’s Board of Directors.

 

During 2015,Also, on September 20, 2019, Roberto Luz Portella resigned from his position as Chief Executive Officer and Investor Relations Officer. Following his resignation, on September 23, 2019, the Company continuedBoard of Directors appointed André Luis Ackermann as Investor Relations Officer cumulating with his former responsibilities as Chief Financial Officer.

On December 27, 2019, we concluded the sale of our remaining 21.20% stake in Alphaville for R$100 million, which was paid through the offsetting of certain credits and the delivery of assets. This transaction is in line with the Company’s strategy to evaluateoptimize and improve the potential spin-offCompany’s portfolio and capital allocation, aiming at creating value for our shareholders.

At a Board of Directors meeting held on February 2, 2020, Mr. Roberto Luz Portella tendered his resignation as a member of the GafisaCompany’s Board of Directors. At the same meeting, Mr. João Antônio Lopes Filho was elected as the new member of the Company’s Board of Directors.

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On March 2, 2020, with the aim to strengthen our executive team, our Board of Directors approved a new organizational structure and Tenda business units into two separate entities. During 2015,elected the following three new Executive Officers: (i) Guilherme Augusto Soares Benevides as Chief Operations Officer and Vice-president of Operations; (ii) Fábio Freitas Romano as Assistant Vice-president of Operations; and (iii) Ian Masini Monteiro de Andrade as Chief Financial Officer and Investor Relations Officer and Vice-president of Management and Finance.

On March 27, 2020, our Board of Directors approved the establishment of the Company’s share buyback program with the objective of generating value for the Company’s shareholders, that was confirmed by the General Shareholders Meeting held on April 30, 2020. Shares purchased by the Company as part of the spin-off studies, we (i) separated several joint departments of Gafisabuyback program will be held in treasury, and Tenda, including, among others, the services, personnel and management department and the legal department, (ii) converted Tenda’s issuer registrationmay subsequently be canceled, sold and/or used in connection with the exercise of stock options granted by the Company. The maximum number of shares the Company may acquire under this program is 10,327,558 common shares, pursuant to Article 8 of CVM from category B to category A, (iii) entered into negotiations with several banksInstruction No. 567/15. This buyback program ends on May 4, 2021. Under our current shares repurchase program, any acquisition by us of our own shares must be made on a stock exchange and insurance companies to open lines of credit for Tenda that are independent of Gafisa, and (iv) reviewed our contracts with our third party counterparties and evaluated the potential impactcannot be made by means of a spin-off on those contracts.private transaction. See “Item 10. Additional Information—B. Memorandum and Bylaws—Purchases by us of our own Shares,” for further information.

On March 2, 2020, the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of UPCON into the Company. On April 30, 2020 all required approvals were obtained, and UPCON became a wholly-owned subsidiary of Gafisa.

Since March 2020, the COVID-19 pandemic has spread across Brazil and other countries, and governments have implemented a series of measures including travel restrictions and quarantines to contain COVID-19, which has adversely affected the real estate industry in the regions where we operate. The duration and severity of the COVID-19 pandemic in Brazil and globally is still uncertain, which may further delay the recovery of the real estate industry and negatively impact it. As of the date of this annual report, we are also evaluating potential capital structure options for eachhave not suffered a significant increase in customer default or a reduction in sales volume. Moreover, the construction of the Gafisa and Tenda business units should we conclude the potential spin-off, taking into account the business cycle of each business unit. In parallel, weour projects continue to assess separation alternativesbe on schedule. However, due to the COVID-19 pandemic, we have postponed launches planned for the Gafisasecond quarter and Tenda business units. As communicated in the material fact dated April 29, 2015,second half of 2020. Accordingly, considering the spin-off studies are ongoingscenario of uncertainty as to when the COVID-19 pandemic will end and normal economic activity will take longer to be concluded than had been initially expected. Accordingly,resume, as well as the negative impacts the COVID-19 pandemic will have on Brazil’s economy, management has, as of the date of this annual report, evaluated the effects of COVID-19 on our business, including on our projections of profit or loss and cash generation based on our best estimates, and has concluded that there is no need to recognize additional loss allowance, and that there is no material adverse effect on our operations. Given the uncertainty surrounding COVID-19, we are going to continue to monitor the COVID-19 pandemic to continually update our projections and analysis on any effect on our financial information, and we cannot currently estimate when the potential spin-off of the Gafisaimpact that COVID-19 will have on our 2020 financial performance and Tenda business units may be concluded.cash flows.

 

E.       Off Balance Sheet Arrangements

 

We currently do not have any off-balance sheet arrangements or significant transactions with unconsolidated entities not reflected in our consolidated financial statements. All of our interests in and/or relationships with our subsidiaries or jointly-controlled entities are recorded in our consolidated financial statements.

 

F.       Tabular Disclosure of Contractual Obligations

 

The table below presents the maturity of our significant contractual obligations as of December 31, 2015.2019. The table does not include deferred income tax liability.

 

  Maturity Schedule
  Total Less than 1 year 1-3 years 3-5 years More than 5 years
  (in millions of reais)
Loans and financing  533.1   426.1   107.0   —     —   
Debentures  197.5   158.2   39.3   —     —   
Interest(1)  128.7   64.6   60.4   3.7   —   
Real estate development obligations(2)  488.0   296.4   191.4   0.2   —   
Obligations for land purchase  208.3   115.2   73.6   19.5   —   
Credit assignments  40.3   20.5   15.3   3.6   0.9 
Obligations from operating leases  9.6   2.1   4.4   3.1   —   
Other accounts payable  144.6   135.5   9.1   —     —   
Total  

1.750.1 

   

1.218.6 

   500.5   30.1   0.9 

9379 

  Maturity Schedule
  Total Less than 1 year 1-3 years 3-5 years More than 5 years
  (in millions of reais)
Loans and financing  1,292.9   672.4   619.5   1.0    
Debentures  858.0   389.6   448.3   20.1    
Interest (1)  355.1   198.0   143.6   13.5    
Real estate development obligations (2)  1,247.5   909.9   337.0   0.6    
Obligations for land purchase  570.1   321.6   235.4   13.1    
Payables to venture partners (3)  4.9   3.8   1.1       
Credit assignments  59.3   23.5   21.5   14.3    
Obligations from operating leases  84.9   14.7   32.7   37.5    
Other accounts payable  196.6   163.4   33.2       
Total  4,669.3   2,696.9   1,872.3   100.1    

_________________

(1)Estimated interest payments are determined using the interest rate as of December 31, 2015.2019. However, our long-term debt is subject to variable interest rates and inflation indices, and these estimated payments may differ significantly from payments actually made.

 

(2)Including commitments not reflected in the balance—CFC Resolution No. 963. Pursuant to Brazilian GAAP, and since the adoption of CFC Resolution No. 963, the total costs to be incurred on the units launched but not sold are not recorded on our balance sheet. As of December 31, 2015,2019, the amount of “real estate development obligations” related to units launched but not sold was R$739.6178.5 million.

(3)Payables to venture partners accrue a minimum annual dividend equivalent to the variation in CDI, which is not included in the table above.

On June 8, 2012, according to the material fact then disclosed, the third phase of the Investment Agreement and Other Covenants entered into on October 2, 2006 (“Investment Agreement”), established the rules and conditions for Gafisa related to the acquisition of the remaining 20% interest in the capital stock of Alphaville not held by the Company. While the valuation of the capital stock had been agreed by both parties, the number of shares that should be issued by the Company to settle this transaction was being decided in arbitration proceedings initiated by the noncontrolling holders of Alphaville, which was concluded in July 2013. Therefore, there was an embedded derivative component to the Investment Agreement, relating to the Company’s obligation to purchase the Alphaville shares held by the non-controlling interest. As the fair value of this embedded derivative for all reporting periods had no significant value, since the settlement of the derivative would be based on the fair value of Alphaville’s capital stock, no derivative asset or liability had been recorded. The settlement that was to be made in cash or shares represented an amount of R$359.0 million as of December 31, 2012. In case of issuance of 70,251,551 common shares of Gafisa to the other shareholders of Alphaville, these shareholders of Alphaville would receive 13.96% of Gafisa’s total capital stock and would become relevant shareholders of Gafisa.

 

We also recorded provisions for contingencies in relation to labor, tax and civil lawsuits in the amounts of R$100.3153.0 million and R$142.7123.9 million in current and non-current liabilities, respectively, as of December 31, 2015.2019.

G.       Safe Harbor

See “Cautionary Statement Regarding Forward-Looking Statements.”

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.Directors and Senior Management Board of Directors

A.       Directors and Senior Management Board of Directors

 

The table below shows the names, positions, and terms of office of the members of our board of directors:

 

Name

Age

Position

Election Date

Term of Office(1)

Odair Garcia Senra(2)(3)69
Leo Julian Simpson (2)64ChairmanApril 25, 201615, 2019Annual Shareholders’ General Meeting in 20182021
Guilherme Affonso Ferreira(2)(3)Antonio Carlos Romanoski (2)6574DirectorApril 25, 201615, 2019Annual Shareholders’ General Meeting in 20182021
Maurício Marcellini Pereira(2)(3)Thomas Cornelius Azevedo Reichenheim (2)4273DirectorApril 25, 201615, 2019Annual Shareholders’ General Meeting in 20182021
Cláudio José Carvalho de Andrade(2)(3)Nelson Sequeiros Rodriguez Tanure (2)4468DirectorApril 25, 201615, 2019Annual Shareholders’ General Meeting in 2018

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Name

Age

Position

Election Date

Term of Office(1)

2021
José Écio Pereira da Costa Junior(2)(3)João Antonio Lopes Filho6456DirectorApril 25, 201630, 2020Annual Shareholders’ General Meeting in 20182021
Rodolpho Amboss(2)(3)Eduardo Larangeira Jácome5264DirectorApril 25, 201615, 2019Annual Shareholders’ General Meeting in 20182021
Francisco Vidal Luna (2)(3)Denise dos Passos Ramos6944DirectorApril 25, 201630, 2020Annual Shareholders’ General Meeting in 20182021
Gilberto Benevides68DirectorApril 30, 2020Annual Shareholders’ General Meeting in 2021

 

_________________

(1)Under Brazilian corporate law, an annual general shareholders’ meeting must take place within the first four months of the calendar year.

 

(2)Independent member pursuant to NYSE rules.

(3)Independent member pursuant to Brazilian Law. According to Brazilian Law, a director is considered independent when: (1) he/she has no relationship with the company, except for holding shares; (2) he/she is not a controlling shareholder, spouse or relative of the controlling shareholder, has not been in the past three years linked to any company or entity related to the controlling shareholder; (3) he/she has not been in the past three years an employee nor an executive of the company, of the controlling shareholder or of any subsidiary of the company; (4) he/she is not a supplier or buyer, direct or indirect, of the company where the arrangement exceeds a certain amount; (5) he/she is not an employee or manager of any company which renders services to the company or which uses services or products from the company; (6) he/she is not a spouse or relative of any member of the company’s management; and (7) he/she does not receive any compensation from the company, except for the compensation related to its position as a board member.

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company’s management; and (7) he/she does not receive any compensation from the company, except for the compensation related to its position as a board member.

 

Our directors are not subject to mandatory retirement due to age.

 

The following is a summary of the business experience and principal outside business interests of the current members of our board of directors.

 

Odair Garcia SenraAntonio Carlos Romanoski. Mr. Garcia Senra is currentlyAntonio Carlos Romanoski held several positions at the chairmanElectric Power Company of our boardParaná - COPEL for 17 years, including Manager of directors. He started as an intern at former Gomes de Almeida FernandesFinance and occupied positions in the Company as construction engineer, general manager of construction, construction officer, and institutional relations officer. Currently he also holds the following positions: member of the board of directors of Tenda; member of the board of directors of Alphaville Urbanismo S.A.;Human Resources, Administrative Officer, of SECOVI SP – Sindicato das Empresas de Compra, Venda, Locação e Administração de Imóveis Residenciais e Comerciais de São Paulo, union for the companies involved in buying, selling and administrating Real Estate in São Paulo; Vice President of SINDUSCON SP – Sindicato da Indústria da Construção Civil do Estado de São Paulo, union for the construction companies in São Paulo; member of the board of directors of Instituto Mauá de Tecnologia, appointed as a representative of SINDUSCON SP; member of the Consulting Counsel of FIABCI/Brasil – Federação Internacional das Profissões Imobiliárias; andChief Financial Officer of BRIO Investimentos Imobiliários S.A., a Real Estate asset management.

In the past 5 years, he has held, among others, the following positions: Operational Officer of Construtora Tenda S.A., and member of the boardBoard of directorsDirectors. He also served as Superintendent (resident) overseeing the construction of São Carlos Empreendimentos e Participações S.A., a company specialized in asset management of commercial Real Estatethe Salto Osório and Foz do Areia Power Plants. He holds a bachelor’s degree in civil engineering from the Civil Engineering School of Mauá and was also a professorresponsible for attracting foreign financing from international agencies. Mr. Romanoski also worked for 15 years at the Civil Engineering School of Mauá in 1972.

Guilherme Affonso Ferreira. Mr. Ferreira is currently a member of our board of directors and the CEO of Bahema ParticipaçõesRefrigeração Paraná S.A., a financial investment company. Currentlythe second largest manufacturer of Domestic Appliances in Brazil, where he also holdsheld the following positions: memberpositions of Chief Financial Officer, General Director and Market Relations Officer. He oversaw the merger and acquisition process of Industries Pereira Lopez and led the restructuring process of the boardProsdócimo Organizations, overseeing the merger and incorporation of directors of Tenda, member14 companies. He coordinated the logistics of the board of directors and Finance and Strategic Committees of Petrobras S.A., an oil and gas company; membersale of the board of directors of SulAméricacompany to Electrolux do Brasil S.A., an insurance company; memberwhere he then served as Chief Executive Officer for three years and as Member of the boardBoard of directorsDirectors. He supported the merger of Valid Soluções e Serviços de Segurança em Meios de Pagamento e IdentificaçãoRefripar with Electrolux S.A.; a company that specializes in payment facilitation program, system identification and telecommunication; member, creating Electrolux do Brasil, as well as the merger of the board of directors and Audit Committee of Arezzo Indústria e Comércio S.A., a shoes retailer; memberElectrolux / Prosdócimo brands. In addition, Mr. Romanoski served as president of the boardAtlas of directors of T$F Entretenimento S.A.; and member of the board of directors of Entidades Benemerentes, Instituto de Cidadania Empresarial, Esporte Solidário e AACD, all third sector entities. In the past 5 yearsHome Appliances industry, where he was also, among others, member of the following board of directors: Companhia Brasileira de Distribuição (Pão de Açucar), a retail company; Tavex Algodonera S.A., a textile company; Ideiasnet S.A., a technology, media and telecommunications company, Banco Indusval, a financial institution and B2W S.A., an electronic commerce company. He holds a production engineering degree from the University of São Paulo and a master’s degree in economics and political science from Macalester College.

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Maurício Marcellini Pereira. Mr. Pereira is currently a member of our board of directors. Currently he is alsohas remained a member of the boardBoard of directorsDirectors since 1988. Mr. Romanoski served as Member of Tendathe Board of Directors of TEKA - Tecelagem Kuenrich S.A. in 2003 and Investment Officer ofFundação dos Economiários Federais – FUNCEF, a pension fund for2004, and in the employees of Caixa Econômica Federal.

In the past 5 yearssame period, he has held, among others, the following positions: Executive Officer of New Business of Caixa Participações S.A. – CAIXAPAR, a company specialized in strategic corporate stakeswas a member of the boardBoard of directorsDirectors of Elo ServiçosFerropar - Ferrovia Paraná S.A., He has been a debitshareholder of CEFI - Center of Excellence in Finance since 1994, which provides business advice with specialization in mergers, acquisitions, family businesses and credit card administrator memberfinancial structuring. He coordinated the following projects, among others: City Hall of Curitiba - Financial restructuring and capitalization - Inepar S / A Indústria e Construção - Restructuring of the board of directors of Telemar Participações S.A., a telecommunication company, memberGroup and creation of the board of directors of Brasil Ferrovias S.A. and Ferronorte S.A., railway companies; and a memberHolding Company - De Lara Transportes - Evaluation of the fiscal councilcompany and advisor in the sale to ALL - Sonae Emplanta - Advisory on fundraising for Shopping Center - Copel - Member of Tim Participações S.A.,the Consortium for the privatization of the company - HSBC - Training of 2,000 managers and directors in the EVA concept - Souza Cruz - Advice on investment project in the State of Paraná - Unimed Rio - Restructuring and market adequacy. He is also a telecom company. He holds a degree in business administration from Minas Gerais Federal University, an MBA in Finance from Ibmec Business School and is getting his master’s degree in pension economics from Brasília University (UnB).shareholder of Romanoski & Associados.

 

Cláudio José Carvalho de AndradeNelson Sequeiros Rodriguez Tanure. Mr. AndradeNelson Sequeiros Rodriguez Tanure is currentlyChief Executive Officer of Docas Investimentos S.A. He has been an investor of PETRO RIO S.A. since 2013, and he acquired Editora Pesos S.A. in 2006. He entered into a memberusufruct agreement for the Jornal do Brasil, Gazeta Mercantil and Forbes magazine brands in 2001. Mr. Tanure acquired control of our boardDocas S.A. and of directors,its subsidiaries Boavista S.A. and partner of Polo Capital Gestão de RecursosBoavista Trading in 1999, and several other real estate asset and management companies that form parthe incorporated ISHIBRAS, forming the company Indústrias Verolme-Ishibras S.A. in 1994. He served as Chairman of the Polo groupBoard of companies. HeDirectors of SADE VIGESA S.A. (a union of South American Engineering and Villares equipment) in 1991, and he acquired EMAQ VEROLME ESTALEIROS S.A. (a merger of EMAQ Engenharia e Máquinas S.A. and Verolme Shipyard) in 1989. In 1983, he founded Representação e Comércio Internacional Ltda., a Brazilian trading and holding company which is also memberthe controlling shareholder of the board of directors of TendaServiços de Engenharia e Equipamentos S.A. and a member of the board of directors of CasaEngenharia e Video Rio de JaneiroMáquinas S.A., an electronic retail company.

In the past 5 years, he has held, among others, the following positions: member of the board of directors of Telefônica Data Holding, a telecommunication company alternate member of the fiscal councils of Banco Panamericano S.A., and Banco Sofisa S.A., both financial institutions, and alternate member of the fiscal council of Copel – Companhia Paranaense de Energia, an energy development company. He holds a degree in Business Administration from EAESP Getulio Vargas Foundation University.the Federal University of Bahia in 1975, and he graduated from the Institut des Hautes Etudes de Development Economique et Social - Université Paris I in 1976. He holds a specialization from the Owner / President Management Program at Harvard Business School.

 

José Écio Pereira da Costa JúniorLeo Julian Simpson. Mr. Pereira da CostaLeo Julian Simpson began his career as a financial lawyer at Rickerbys & Pardoes, working in property development of industrial and recreational facilities in England. In 1986, he expanded these skills at Shimizu Corporation, Japan’s largest finance and leisure entrepreneur in Europe and Asia. In 1987, he began working at McKenna & Co. documenting and financing international infrastructure projects in the telecommunications, energy and transportation sectors, including in the construction of airports and power plants in the United Kingdom. In addition, Mr. Simpson provided legal advice supporting the creation of companies such as National Grid, France Telecom, Sprint Corporation and Intelig Telecomunicações in Brazil. He became commercial director and then president of Intelig Telecomunicações, a position he held until the company was sold by Brazilian investors to TIM. Mr. Simpson graduated with a degree in law from Bristol University in England in 1977.

Eduardo Langeira Jácome. Mr. Jácome has served as Officer and Director of Gafisa S.A. since March 15, 2019 and April 15, 2019, respectively. He graduated in Business Administration from the School of Political and Economic Sciences of Rio de Janeiro. He has 45 years of experience in Business Management and Human Resources, 35 of

81 

which have been in executive positions. He worked for 23 years at IBM, three years at Coca Cola Andina, five years at Telemar / Oi, four years at Cia. Brasileira de Multimídia and one year at HRT / PetroRio. He has held planning, implementation and management positions at People & Business Solutions (2006), Global Sports Network (2010) and PBS Technology (2015). He is a member (2018-2020) of our boardthe Executive Board of directorsMercoSerra, the Development Agency of Serra Carioca, which is a private entity created to support the economic development of the region formed by Nova Friburgo, Petrópolis and Teresópolis. Mr. Jácome serves as Member of the Fiscal Council (2018-2020) of ACIANF - Commercial, Industrial and Agricultural Association of Nova Friburgo, and in 2016, he was approved as an Associate Member of the Brazilian Institute of Corporate Governance (IBGC).

João Antonio Lopes Filho.Mr. João Antonio Lopes Filho was the founding partner of Portcapital and manager of the Aespoespacial Fund. He was a partner at JEPereira Consultoria em Gestão de Negócios S/S Ltda.,Banco Fator S.A. from 1994 to 2008, responsible for the Corporate Finance, Mergers and Acquisitions, Capital Markets and Private Equity division. He was responsible for the Venture Capital Fund between 1999-2006 (Santa Catarina Emerging Companies Fund). He was a consulting company. He also holds the following positions: member of the boardBoard of directorsDirectors of Tenda and Princecampos Participações S.A., a public transportation company; alternate memberTrafo Equipamentos Elétricos SA from 2003 to 2007. He was Managing Partner of the board of directors and member of audit committee of Fibria S.A. and Votorantim Cimentos S.A.; member of the audit committee of Votorantim Metais S.A. and Citrosuco S.A.

He has also been an auditing partner of Deloitte Touche TohmatsuTrevisan Auditores Independentes, S/C Ltda.,having developed the Mergers, Acquisitions and Privatizations Advisory Area and coordinated the Human Resources, Productivity, Quality Advisory Areas and Training. He was an auditor at Price Watherhouse, having participated in the past 5 years he has also been a member of BRMALLS S.A., a shopping mall management company. He holds a bachelor’s degree in business administration fromFundação Getúlio Vargasaudits at large banks and a bachelor’s degree in accounting from Faculdade São Judas Tadeu.

Rodolpho Amboss. Mr. Amboss is a member of our board of directors. He also holds the following positions: member of the board of directors of Tenda; founding partner and managing director of Silverpeak Real Estate Partners LP, Real Estate asset management and fund; member of board of directors of BR Properties, a construction company specializing in industrial sheds and large commercial buildingsmultinational companies. He holds a degree in civil engineeringEconomic Sciences from Universidade Mackenzie and Fund Manager at CVM.

Thomas Cornelius Azevedo Reichenheim. Mr. Thomas Cornelius Azevedo Reichenheim is the former Director of several companies, notably Auxiliary Bank, Auxiliary Investment Bank, Auxiliar Seguradora, La Fonte Fechaduras and LFTel S.A. He is also the owner of Carisma Comercial Ltda. of T.R Portfolios Ltda. where he advises on the creation of capital and financial institutions. Mr. Reichenheim graduated with a degree in Business Administration from the Fundação Getúlio Vargas, in 1972, and in Law from Faculdades Metropolitanas Unidas, in 1972.

Denise dos Passos Ramos.Mrs. Ramos has over 20 years’ experience in the real estate sector, including as a lawyer at Banif – Banco Internacional do Funchal (Brasil) S.A. and as Operating Legal Advisor to the Legal Office of Ipiranga Produtos de Petróleo S.A. She was also head of the legal department of Petroflex Indústria e Comércio S.A., a company of the Lanxess Energizing Chemistry group. She is currently Chief Executive Officer at Alberta Albko Ltda. Mrs. Ramos holds a Law degree from Universidade Federal do Rio de Janeiro Federal University and completed an MBA in Business Management from the Booth School of Business of the University of Chicago.Fundação Getúlio Vargas. Also, Mrs. Ramos completed graduate programs in Contractual Law from Fundação Getúlio Vargas and Environmental Law from Pontifícia Universidade Católica do Rio de Janeiro.

 

Francisco Vidal LunaGilberto Benevides. Mr. Luna isGilberto Benevides has more than 40 years’ experience in the construction and real estate sector. He worked at Company S.A. from 1984 to 2008, including between 2006 and 2008 when Company S.A. was a memberpublicly traded company, and was part of our boardthe management team of directors and the board of directors of Tenda. He currently is on the board of directors of several Municipal owned or related companies and foundations, such as Sabesp, Desenvolve São Paulo, Museu da Língua Portuguesa, Museu do Futebol, Fundação Faculdade de Medicina – FFM andCompany S.A. from 2008 to 2010. Since 2010, he has been member of Board of Directors of several others suchserved as SP Urbanismo, SP Obras, SP Tur, SP Trans, CET and Prodam. In the past 5 years, he has also held, among others, the following positions: member of board of officers of Banco Tokyo-Mitsubishi UFJ do Brasilan officer for UPCON Incorporadora S.A. He graduated with a degree in Civil Engineering from Mackenzie University, and a member of management of other banks, such as Banco InterAmerican Express (former Banco SRL), Banco Nossa Caixa Desenvolvimento and Banco Nacional de Desenvolvimento Econômico – BNDES. Mr. Luna has an economics degree and post-graduate degree in Business Management from the University of São Paulo.Mackenzie University.

 

The table below shows the names, positions, and terms of office of our executive officers:

 

Name

Age

Position

Election Date

Term of Office

Sandro Rogério da Silva GambaAndré Luis Ackermann4042Chief Executive OfficerStatutory DirectorMay 05, 2014March 02, 2020May 04, 2017March 02, 2023
Andre Bergstein45
Ian Andrade43

Investors Relations and Chief Financial Officer and Investor Relations

March 02, 2020March 02, 2023
Guilherme Benevides38Chief Operational Officer

May 05, 201417, 2019

May 04, 201716, 2022
Cauê Cardoso37Statutory DirectorJanuary 28, 2020January 28, 2023
Guilherme Luis Pesenti36Statutory DirectorJanuary 28, 2020January 28, 2023
Luiz Carlos Siciliano51Operational Executive OfficerMay 05, 2014May 04, 2017
Octavio Marques Flores41Operational Executive OfficerMay 05, 2014May 04, 2017
Katia Varalla LevyFernando Ortiz42Operational Executive OfficerStatutory DirectorMay 05, 2014January 28, 2020May 04, 2017January 28, 2023
Fabio Freitas Romano45Statutory DirectorMarch 02, 2020March 02, 2023
Saulo Nunes54Statutory DirectorMarch 02, 2020March 02, 2023

 

9682 

 

The business address of each of our executive officers is Av. Nações UnidasPres. Juscelino Kubitschek, No. 8,501, 19th floor , 05425-0701830, Block 2, 3rd Floor, 04543-900 – São Paulo, SP – Brazil.

 

The following is a summary of the business experience and principal outside business interests of the current members of our board of executive officers.

Sandro Rogério da Silva Gamba. Mr. Gamba is currently our chief executive officer and his current term commenced in May 2014, with a term of office through May 4, 2017. With over 15 years at Gafisa, having worked as head of business development for Gafisa and Tenda in the São Paulo region, he has significant institutional knowledge and oversaw the growth of our business in São Paulo, our largest region. Previously, he served us in a number of senior roles in the São Paulo region, including head of business development for Gafisa and director and manager of land prospecting. Mr. Gamba holds a degree in civil engineering from Mackenzie University, advanced degrees in engineering and real estate management from the University of São Paulo andFundação Armando Alvares Penteado, and an executive master’s in business administration from IBMEC.

Andre Bergstein. Mr. Bergstein is currently our chief financial officer and investor relations officer, and his current term commenced in May 2014, with a term of office through May 4, 2017. He is also a member of the board of directors of Alphaville Urbanismo S.A. In the past five years he has also occupied the following positions: (i) Real Estate Executive of Plural Capital Gestora de Recursos Ltda., an asset management company; (ii) CFO of Brazilian Securities Cia de Securitização S.A., a securitization of financial credits company; (iii) CFO and Investor Relations Officer of Brazilian Finance & Real Estate S.A., holding company of Brazilian Securities Cia de Securitização S.A.

Luiz Carlos Siciliano. Mr. Siciliano is currently one of our operational executive officers, responsible internally for business development in the state of Rio de Janeiro, and his current term commenced in May 2014, with a term of office through May 04, 2017. Mr. Siciliano brings considerable sales and marketing managerial expertise to his newly expanded role from both his tenure at Gafisa as well as from his prior professional experience. He has worked for us since 2005 and, previously, he was director of sales and marketing and head of the supply chain, IT, legal department and shared services center. Prior to joining us, Mr. Siciliano worked at AmBev from 1992 to 2004 in positions of increasing responsibility, and he holds a master’s degree in business administration degrees from IBMEC and Pontifícia Universidade Católica (PUC) in Rio de Janeiro.

Octavio Marques Flores. Mr. Flores is currently one of our operational executive officers, responsible internally for several development and construction departments. Mr. Flores joined us in 2007 and in the last five years he served as prospection manager, business owner and business officer.

Katia Varalla Levy. Mrs. Levy is currently one of our operational executive officers, responsible internally for responsible internally for several development and construction departments. Mrs. Levy joined us in 1992 as intern, and in the last five years she served as product development manager and product development officer.

Our Relationship with our Executive Officers and Directors

 

As of December 31, 2015,2019, our board of officers in the aggregate held 0.5%0.0137% of our share capital and our board of directors in the aggregate held a 0.2%0.0107% direct or indirect interest in our share capital. As of December 31, 2015,2019, there were no contracts of any type or any other material agreements entered into by us with theany members of our board of directors andor with any member of our board of officers.officers, other than those pertaining to their roles within the Company. As of December 31, 2015,2019, some of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.

 

As of December 31, 2014,2018, our board of officers in the aggregate held 0.4%0.00046% of our share capital and our board of directors in the aggregate held a 0.2%49.07% direct or indirect interest in our share capital. As of December 31, 2018, there were no contracts of any type or any other material agreements entered into by us with any members of our board of directors or with any member of our board of officers. As of December 31, 2018, some of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.

 

As of December 31, 2013,2017, our board of officers in the aggregate held 0.3%0.064% of our share capital and our board of directors in the aggregate held less than a 0.1%0.397% direct or indirect interest in our share capital. As of December 31, 2017, there were no contracts of any type or any other material agreements entered into by us with the members of our board of directors and our board of officers. As of December 31, 2017, some of our executive officers held interests in our subsidiaries as directors and/or executive officers. In none of these cases, as of the referenced date, were the interests held material.

 

B.       Compensation

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B.Compensation

 

For each of 2015, 20142019, 2018 and 20132017

 

Under Brazilian corporate law, the company’s shareholders are responsible for establishing the aggregate amount paid to members of the board of directors, the executive officers and the members of the fiscal council. Once the shareholders establish an aggregate amount of compensation, the members of the board of directors are then responsible for setting individual compensation levels.

 

For each of 2015, 20142019, 2018 and 2013,2017, the aggregate compensation we paid to the members of the board of directors was R$2.00.9 million, R$1.81.5 million and R$1.92.0 million, respectively, considering Gafisa and Tenda for the years ended December 31, 2015 and 2014 and Gafisa, Tenda and Alphaville for the year ended December 31, 2013.respectively.

 

For each of 2015, 20142019, 2018 and 2013,2017, the aggregate compensation we paid to the members of the fiscal council was R$255112 thousand, R$244219 thousand and R$55.3243 thousand, respectively, considering Gafisa and Tenda for the years ended December 31, 2015 and 2014 and Gafisa, Tenda and Alphaville for the year ended December 31, 2013.respectively.

 

For each of 2015, 20142019, 2018 and 2013,2017, the aggregate compensation we paid to the executive officers was R$9.6 7.0 million (net of bonuses for Gafisa executive officers), R$5.4 million (net of bonuses for Gafisa executive officers) and R$7.7 million (net of bonuses for Gafisa and Tenda executive officers), R$8.7 million (net of bonuses for Gafisa executive officers), and R$49.6 million, respectively, which includes, unless otherwise indicated, fixed compensation, annual bonus amounts and the costs related to Stock Options Programs, considering Gafisa and Tenda for the years ended December 31, 2015 and 2014 and Gafisa, Tenda and Alphaville for the year ended December 31, 2013.Programs.

 

Approximately 59%40% of the total compensation paid to Gafisa officers and 8% of the total compensation paid to Tenda officers is variable. The amountsFor the year ended December 31, 2019, 2018 and 2017, there were no payment related to short-term bonuses paid for our officers were, for each of 2015, 2014 and 2013, R$3.2 million, R$3.4 million and R$4.7 million, respectively.(Gafisa only).

 

For each of 2015, 20142019, 2018 and 2013,2017, the individual compensation we paid to members of our board of directors (fixed compensation in 2013, fixed compensation in 2014 and fixed compensation in 2015)compensation), fiscal council (fixed compensation) and officers (fixed compensation, short-term bonus and costs related to Stock Options Programs) is set forth in the tables below.

 

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Gafisa

 

2015 Board of Directors Fiscal Council Executive Officers
Number of members (1)  7.00   3.00   5.00 
Annual highest individual compensation (in R$)  304,284   66,000   3,393,078 
Annual lowest individual compensation (in R$)(2)  195,048   66,000   980,516 
Annual average individual compensation (in R$)  241,863   66,000   2,128,272 

2019 

Board of Directors 

Fiscal Council 

Executive Officers 

Number of members(1)1036
Annual highest individual compensation (in R$)105,06739,200700,000
Annual lowest individual compensation (in R$)(2)36,66724,000225,000
Annual average individual compensation (in R$)85,33330,200333,000
 

_________________

(1)Based on the average number of members during the period.

 

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

 

2014 Board of Directors Fiscal Council Executive Officers
Number of members (1)  7.67   3.00   5.17 
Annual highest individual compensation (in R$)  308,868   63,500   3,732,593 
Annual lowest individual compensation (in R$)(2)  185,778   63,500   2,691,098 
Annual average individual compensation (in R$)  226,852   63,007   3,321,336 

2018 

Board of Directors 

Fiscal Council 

Executive Officers 

Number of members(1)5.52.834.5
Annual highest individual compensation (in R$)182,69872,000842,400
Annual lowest individual compensation (in R$)(2)48,22028,40926,200
Annual average individual compensation (in R$)91,19351,600286,534
 

_________________

(1)Based on the average number of members during the period.

 

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

 

2013 Board of Directors Fiscal Council Executive Officers
Number of members (1)  9.00   3.00   6.00 
Annual highest individual compensation (in R$)  316,079   55,200   5,957,562 
Annual lowest individual compensation (in R$)(2)  172,800   55,200   2,681,366 
Annual average individual compensation (in R$)  210,992   55,200   3,632,792 

2017 

Board of Directors 

Fiscal Council 

Executive Officers 

Number of members(1)7.003.005.17
Annual highest individual compensation (in R$)365,14181,0002,428,107
Annual lowest individual compensation (in R$)(2)234,05881,0002,428,107
Annual average individual compensation (in R$)290,23681,0001,485,097
 

_________________

(1)Based on the average number of members during the period.

 

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

 

C.       Board Practices

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Tenda

2015 Board of Directors Fiscal Council Executive Officers
Number of members (1)  10.00   3.00   10.33 
Annual highest individual compensation (in R$)  126,254   38,400   1,969,515 
Annual lowest individual compensation (in R$)(2)  100,000   9,456   47,892 
Annual average individual compensation (in R$)  112,084   19,104   753,090 

(1)Based on the average number of members during the period.

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

(3)Members of the Board of Directors at Tenda were also Executive Officers at Gafisa and therefore received compensation for this position.

2014 Board of Directors Fiscal Council Executive Officers
Number of members (1)  5.75   3.00   8.83 
Annual highest individual compensation (in R$)  126,324   38,400   2,821,951 
Annual lowest individual compensation (in R$)(2)     8,688   886,515 
Annual average individual compensation (in R$)  126,324   13,829   924,046 

(1)Based on the average number of members during the period.

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

(3)Members of the Board of Directors at Tenda were also Executive Officers at Gafisa and therefore received compensation for this position.

2013 Board of Directors (3) Fiscal Council Executive Officers
Number of members(1)  4.00   3.00   8.58 
Annual highest individual compensation (in R$)     38,400   3,763,649 
Annual lowest individual compensation (in R$)(2)     8,136   524,867 
Annual average individual compensation (in R$)     18,224   1,299,961 

(1)Based on the average number of members during the period.

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

(3)Members of the Board of Directors at Tenda were also Executive Officers at Gafisa and therefore received compensation for this position.

Alphaville

As set forth in item “4. Information on the Company—A.History and Development of the Company”, we completed the sale of a controlling interest in Alphaville, on December 9, 2013. As a result, Alphaville was no longer consolidated in the financial statements of the Company as of that date. In this annual report, while financial

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information related to Alphaville is treated as discontinued operations, all operating information related to our business includes full operating information for Alphaville through December 9, 2013.

2013 Board of Directors (3) Fiscal Council(4) Executive Officers
Number of members (1)  5.00   1.25   6.00 
Annual highest individual compensation (in R$) (5)     16,300   9,741,730 
Annual lowest individual compensation (in R$)(2)     16,300   540,229 
Annual average individual compensation (in R$)(5)     16,300   3,232,127 

(1)Based on the average number of members during the period.

(2)Annual lowest individual compensation includes only the members of board of directors, fiscal council and executive officers who served an entire year and does not include members who are also executive officers (if a member is an executive officer, he or she is paid as an executive officer).

(3)Members of the Board of Directors at Alphaville were also Executive Officers at Gafisa and do not received compensation for this position.

(4)The Fiscal Council was dissolved in June 2013.

(5)This amount includes the stock options consideration related to the sale of 70% of Alphaville.

C.Board Practices

 

General Information

 

We are managed by a board of directors consisting of at least five and up to nine directors and at least two and up to eight executive officers. Our directors are elected for a two-year term and our executive officers are elected for a three-year term. Reelection of officers and directors is permitted. We also have (1)(i) a fiscal council, which under Brazilian Law is not a permanent body, although currently installed; (2)installed, (ii) permanent advisory committees created in accordance with our bylaws, namely: an audit committee and a corporate governance and compensation committee and a nominating and corporate governance committee; and (iii) executive committees established by the Board of Directors, namely: an investment executive committee, a finance executive committee, and an ethics executive committee. See “—A. Directors and Senior Management.Management Board of Directors.

 

Board of Directors

 

Our board of directors is our decision-making body responsible for formulating general guidelines and policies for our business, including our long term strategies. Among other things, our board of directors is responsible for appointing and supervising our executive officers.

 

84 

Our board of directors meets at least once every two months and at any other time when a meeting is called by its chairman or by at least two other effective members. The decisions of our board of directors are taken by the majority vote of those members present at the respective meeting and constituting a quorum of at least four members. In the event of a tie vote, the chairman of our board of directors has, in addition to his personal vote, the right to cast a tie-breaking vote. In addition, pursuant to Brazilian corporate law, a member of our board of directors is prevented from voting in any shareholders’ or board of directors’ meeting, or from acting in any business or transaction, in which he may have a conflict of interest with our company.

 

Under Brazilian corporate law, a company’s board of directors must have at least three members. Our bylaws provide for a board of directors of up to nine members, from which at least 20% or two members, whichever is greater, shall be independent members, as determined by the Listing Rules of theNovo Mercado. Our directors are elected at our annual general shareholders’ meeting for a two-year term of office, with reelection permitted, and are subject to removal at any time by our shareholders at a shareholders’ general meeting. Although the Listing Rules of theNovo Mercadorequire at least 20% or two independent members, our board of directors currently has sixseven independent members, out of a total of seveneight members.

 

Article 141 of Brazilian corporate law provides that shareholders with at least 10% of a company’s total capital stock may request the adoption of the multiple voting procedure for the election of the board of directors, even where there is no provision for this in the company’s bylaws. The multiple voting procedure grants each share as

100

many votes as the number of board members, and allows shareholders to allocate either all of their votes to a single candidate or to distribute their votes among several candidates.

 

All the voting proceedings discussed in the previous paragraphs currently apply to our company.

 

As prescribed by CVM Instruction No. 282, of June 26, 1998, the minimum voting capital percentage required for the adoption of the multiple voting procedure in publicly-held companies may be reduced as a result of the amount of its capital stock. Based on the current amount of our capital stock, shareholders representing 5% of our total capital stock may request the adoption of the multiple voting procedure in order to elect the members to our board of directors. The referred minimum percentage may vary from 5% to 10% depending on the amount of our capital stock, as prescribed in the aforementioned CVM Instruction No. 282, of June 26, 1998. If the adoption of the multiple voting procedure is not requested, directors are elected by a majority vote of our shareholders, and such shareholders who, individually or collectively, represent at least 10% of our shares, are entitled to appoint, in a separate vote, a director and its alternate.

 

The Listing Rules of theNovo Mercado also provide that all members of our board of directors and our board of officers must comply by means of the execution of a management compliance statement, with obligations set forth under theNovo Mercado Listing Agreement, the Market Arbitration Chamber Rules and the Listing Rules of theNovo Mercado, including, but not limited, to: (1) any shareholder that becomes our controlling shareholder, or becomes part of our controlling group, must comply, by means of executing of the controlling shareholder compliance statement, with the obligations set forth under theNovo Mercado Listing Agreement, the Market Arbitration Chamber Rules and the Listing Rules of theNovo Mercado; (2) any indirect controlling shareholder of our company must fully comply with the obligations establishedarbitration clause in theNovo Mercado Listing Agreement, the Market Arbitration Chamber Rules, the Listing Rules of theNovo Mercado, Brazilian corporate law, Brazilian Securities Regulations and our bylaws; (3) use best efforts to ensure that our shares are widely held through public share offerings; (4) re-establish the minimum percentage of outstanding floating stock, in case additional shares are issued or the controlling power over our company is transferred; (5) inform BM&FBOVESPA with respect to the trading of the securities held by our controlling shareholders; (4) comply with the rules imposed on our directors in the event our public company registration with the CVM is cancelled; and (7) comply with rules and regulations applicable in the event of the delisting of our company from theNovo Mercado. bylaws before taking office.

 

Executive Officers

 

Under Brazilian corporate law, a company’s board of executive officers must have at least two members, and each of such members must be a resident in Brazil. Furthermore, no more than one-third of our directors may serve as members of our board of officers at any given time. In addition, under the Listing Rules of theNovo Mercado, the chief executive officer of our company shall not serve as the chairman of the board of directors.

 

Our executive officers are our legal representatives and are primarily responsible for managing our day-to-day operations and implementing the general policies and guidelines set forth in our shareholders’ general meetings and by our board of directors. Our bylaws require that our board of officers be composed of at least two members and a maximum of eight members. The members of our board of officers are appointed by our board of directors for a term of three-years, and may be reelected or removed by our board of directors at any time. Our bylaws and our board of directors determine the role of our executive officers. Currently, we have a board of officers comprised of foureight members: (1) Mr. Sandro Rogerio daAndré Luis Ackermann, Saulo Nunes, Ian Monteiro de Andrade, Guilherme Augusto Soares Benevides, Cauê Cardoso, Guilherme Luis Pesenti e Silva, Gamba, who is the chief executive officer, (2) Mr. Andre Bergstein, who is the chief financial officerLuiz Fernando Ortiz, and investor relations officer, (3) Mr. Luiz Carlos Siciliano, who is an operational executive officer, (4) Mr. Octavio Marques Flores, who is an operational executive officer, and (4) Mrs. Katia Varalla Levy, who is an operational executive officer.Fabio Freitas Romano.

 

The chief executive officer submitsCFO/IRO and the COO submit the business plan, annual budget, investment plans and new expansion plans for Gafisa and our subsidiaries to the approval of the board of directors. The chief executive officer enactsThey enact these plans and developsdevelop our strategy and operational plan, including the manner in which we will execute the resolutions approved at the shareholders’ meeting and by the board of directors. Together with the other officers, hethey also supervises and

85 

coordinates our activities. The officer in charge of investor relations supplies our financial information to investors, the CVM and the BM&FBOVESPA,B3, and is also responsible for keeping an updated register based on the applicable regulations.

 

Fiscal Council

 

Under Brazilian corporate law, the fiscal council is a corporate body independent from the management of the company and its external auditors. The company fiscal council is not a permanent body, and whenever installed, must consist

101

of no less than three and no more than five members. The primary responsibility of the fiscal council is to review management’s activities and the company’s financial statements and to report its findings to the shareholders of the company. The fiscal council is not equivalent to an audit committee as contemplated by the Securities Exchange Act, as amended. Under Brazilian corporate law, a fiscal council must be established at a shareholders’ general meeting upon request of shareholders representing at least 10% of the shares with voting rights, or 5% of the shares with no voting rights, and its members shall remain in office until the annual general shareholders’ meeting of the year following their election. Each member of the fiscal council is entitled to receive compensation in an amount equal to at least 10% of the average amount paid to each executive officer (excluding benefits and profit sharing).

 

As prescribed by CVM Instruction No. 324, of January 19, 2000, the minimum voting capital percentage required to request thefiscalthe fiscal council to be installed may be reduced as a result of the amount of the company’s capital stock. Based on the current amount of our capital stock, shareholders representing 2% of our voting capital stock may request the fiscal council to be installed. The referred minimum percentage may vary from 2% to 8% depending on the amount of our capital stock, as prescribed in the aforementioned CVM instruction.

 

Individuals who are also employees or members of the administrative bodies of our company, of companies controlled by us, or of companies forming a group of companies with us (pursuant to Chapter XXI of Law No. 6,404/76)Brazilian corporate law), as well as spouses or parents of our management, cannot serve on the fiscal council.

 

Our by-laws provide for a non-permanent fiscal council composed of at least three and up to five members, which can be formed and have its members elected at the shareholders’ general meeting, as requested by the shareholders, in the events set forth by Brazilian corporate law. When in operation, the compensation of our fiscal council is set at the shareholders’ general meeting that elects it.

 

OurWe do not currently have a fiscal council has threein place and will not form a fiscal council or have members (Olavo Fortes Campos Rodrigues Junior, Peter Edward Cortes Marsden Wilsonelected to it unless requested and Laiza Fabiola Martins de Santa Rosa) and three alternates (Marcello Mascotto Iannalfo, Marcelo Martins Louro and Alessandro de Oliveira Nascimento).approved by the shareholders at a shareholders’ general meeting, as set forth by Brazilian corporate law.

 

We have also have established a permanent audit committee. See “Item 6.C. Directors, Senior Management and Employees—Board Practices—“—Audit Committee.”

 

Audit Committee

Our bylaws provide for an Audit Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Audit Committee must be comprised of at least three members, all of which must be independent members of our Board of Directors. The Audit Committee is currently comprised by Jose Ecio Pereira da Costa Junior, who is also the chairman, Maurício Marcellini Pereira and Francisco Vidal Luna,. Our board of directors has determined that Jose Ecio Pereira da Costa Junior, Maurício Marcellini Pereira and Francisco Vidal Luna are each independent as set forth in the NYSE Listed Companies Manual as well as being independent for the purpose of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Jose Ecio Pereira da Costa Junior is an audit committee financial expert within the meaning of the regulations promulgated by the United States Securities and Exchange Commission.

This committee has responsibility for, among others, planning and reviewing our annual and quarterly reports and accounts with the involvement of our auditors, focusing particularly on compliance with legal requirements and accounting standards, and ensuring that an effective system of internal financial controls is maintained, as set forth in the Company’s by-laws. The ultimate responsibility for reviewing and approving our annual and quarterly reports and accounts remains with our directors.

Compensation Committee

Our bylaws provide for a Compensation Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Compensation Committee must be comprised of at least three members, all of which must be independent members of our Board of Directors. The Compensation Committee is currently comprised by Cláudio José Carvalho de Andrade, who is also the chairman, Guilherme Affonso Ferreira and Rodolpho Amboss. This committee, among other things, reviews and makes recommendations to our directors regarding its compensation policies and all forms of compensation to be provided to our executive officers and other employees.

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Nominating and Corporate Governance Committee

Our bylaws provide for a Nominating and Corporate Governance Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Nominating and Corporate Governance Committee must be comprised of at least three members, all of which must be independent members of our Board of Directors. The Nominating and Corporate Governance Committee is currently comprised by Cláudio José Carvalho de Andrade, who is also the chairman, Guilherme Affonso Ferreira and Rodolpho Amboss. This committee, among other things, considers and periodically reports on matters relating to the size, identification, selection and qualification of the board of directors, executive officers and candidates nominated for the board of directors and its committees and is responsible for overseeing compliance with the corporate governance principles applicable to us under our bylaws and other policies, as well as for proposing improvements and changes to such applicable principles.

Investment Executive Committee

On January 13, 2006, our board of directors modified the structure of our incorporation and new businesses committee, renaming it the Investment Committee and on September 9, 2010 it was renamed to Investment Executive Committee, in order to clarify that this is a collegiate body to provide advice and guidance to the Board of Directors, composed solely by members of the Board of Officers (statutory or otherwise). Our Investment Executive Committee is a non-permanent body and its duties are, among others, to: (1) analyze, discuss and recommend land acquisitions and new real estate developments; (2) advise our executive officers during the negotiation of new deals and the structuring of new developments; (3) supervise the beginning of new projects and their related cash flows; and (4) in special cases, assist in the negotiation and structuring of new types of business. Each decision by our investment committee to acquire land is made by ensuring that the investment meets the minimum return threshold set by us and comparing it with other potential investments. Such decision is made independent of the geographical location of the investment in order to maximize return on our capital allocation as a whole.

Currently, our Investment Executive Committee is in operation and is comprised by Sandro Rogério da Silva Gamba (also the Coordinator of the Committee), Andre Bergstein, Luiz Carlos Siciliano, Octavio Marques Flores and Katia Varalla Levy.

Finance Executive Committee

Our directors have established a Finance Executive Committee composed by André Bergstein (also the Coordinator of the Committee), Sandro Rogério da Silva Gamba, and Gustavo Moscatelli. This committee, among others, evaluates and makes periodic recommendations to our board of directors regarding risk and financial investments policies.

Ethics Executive Committee

On September 9, 2010, our board of directors renamed the Ethics Committee, created on February 17, 2006, the Ethics Executive Committee. The Ethics Executive Committee is a collegiate body tasked with providing advice and guidance to the board of directors, elected by the board of directors, and is composed primarily of members of the board of officers (statutory or otherwise). Currently, it is composed of the following members: Sandro Rogério da Silva Gamba (Coordinator of the Committee), André Bergstein, Luiz Carlos Siciliano, Norival Zanata Junior and Adriana Farhat. This committee is responsible, among others, for the actions related to violation of our Code of Business Conduct and Ethics, solving ethics conflicts and evaluating the adequacy of amendments to the Code of Business Conduct and Ethics and proposing them to the board of directors.

Summary of Significant Differences of Corporate Governance Practices

NYSE Corporate Governance Rules provide that we are required to disclose any significant differences on our corporate governance practices from those required to be followed by U.S. companies under NYSE listing standard. We have summarized these significant differences below.

We are permitted to follow practice in Brazil in lieu of the provisions of the NYSE Corporate Governance Rules, except that we will be required to have a qualifying audit committee under Section 303A.06 of the Rules, or avail ourselves of an appropriate exemption. In addition, Section 303A.12(b) provides that our chief executive officer is obligated to promptly notify the NYSE in writing after any of our executive officers becomes aware of any material non-compliance with any applicable provisions of the NYSE Corporate Governance Rules.

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Majority of Independent Directors

NYSE Rule 303A.01 provides that each NYSE-listed company must have a majority of independent directors. Neither Brazilian corporate law nor our by-laws require that we have a majority of independent members. Notwithstanding this, the majority of our board members qualify as independent directors under NYSE rules.

Separate Meetings of Non-Management Directors

NYSE Rule 303A.03 provides that the non-management directors of each NYSE-listed company must meet at regularly scheduled executive sessions without management. According to the Listing Rules of theNovo Mercado, the chief executive officer may not serve as the chairman of the Board of Directors. In addition, under Brazilian corporate law, up to one-third of the members of the board of directors can also hold management positions. Under Brazilian corporate law, there is no specific requirement that non-management directors meet regularly without management. Notwithstanding the foregoing, our board of directors consists entirely of non-management directors and holds regular meetings without the management and as such we believe we are in compliance with the NYSE Rule 303A.03.

Nominating and Corporate Governance Committee

NYSE Rule 303A.04 provides that each U.S. listed company must have a nominating and corporate governance committee composed entirely of independent directors. We are required to have such a committee under our bylaws, which is nevertheless not required under Brazilian law. Therefore, we have a Nominating and Corporate Governance Committee responsible for considering and periodically reporting on matters relating to the size, identification, selection and qualification of the board of directors and candidates nominated for the board of directors and its committees; and for overseeing compliance with the corporate governance principles applicable to us under our bylaws and other policies, as well as for proposing improvements and changes to such applicable principles.

Compensation Committee

NYSE Rule 303A.05 provides that each U.S. listed company must have a compensation committee composed entirely of independent directors. We are required to have such a committee under our bylaws, which is nevertheless not required under Brazilian law. Therefore, we have a Compensation Committee responsible for reviewing and making recommendations to our directors regarding our compensation policies and all forms of compensation to be provided to our executive officers and other employees. With respect to compensation, under Brazilian corporate law, the shareholders determine the total or individual compensation of our board members and executive officers, including benefits and allowances, at a general shareholders’ meeting. If the shareholders only determine the total compensation, it is incumbent upon the board of directors to establish the individual amounts. The Compensation Committee, is responsible for advising the board of directors in such task. See “Item 6.B. Directors, Senior Management and Employees—Compensation.”

Audit Committee

 

NYSE Rule 303A.06Our bylaws provide for an Audit Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Audit Committee must be comprised of at least three members, all of which must be independent members. The Audit Committee is currently composed of Gilberto Braga, Pedro Carvalho de Mello and Thomas Cornelius Azevedo Reichenheim. Our board of directors has determined Gilberto Braga and Pedro Carvalho de Mello are each independent for the requirementspurpose of Rule 10A-3 of the SEC provideExchange Act. Our board of directors has determined that each U.S. listed companyGilberto Braga is required to have an audit committee consisting entirelyfinancial expert within the meaning of independent members that complythe regulations promulgated by the United States Securities and Exchange Commission.

This committee has responsibility for, among others, planning and reviewing our annual and quarterly reports and accounts with the involvement of our auditors, focusing particularly on compliance with legal requirements and accounting standards, and ensuring that an effective system of Rule 10A-3. In addition,internal financial controls is maintained, as set forth in the audit committee must have a written charter compliantCompany’s by-laws. The ultimate responsibility for reviewing and approving our annual and quarterly reports and accounts remains with the requirements of NYSE Rule 303.A.07(c), have an internal audit position and otherwise fulfill all other requirements of the NYSE and Rule 10A-3. The SEC recognized that due to the local legislation for foreign private issuers, some of the responsibilities of the audit committee could be subordinated by local laws to our other bodies.directors.

 

We are required to have such a committee under our bylaws, which is nevertheless not required under Brazilian law. Therefore, we have an AuditCorporate Governance and Compensation Committee with the following responsibilities:

 

·Pre-approving services to be provided by our independent auditor;

Our bylaws provide for a Corporate Governance and Compensation Committee that convenes regularly, as often as it determines is appropriate to carry out its responsibilities. The Corporate Governance and Compensation Committee must be comprised of at least three members, all of which must be independent. The Corporate Governance and Compensation Committee is currently comprised of Antonio Carlos Romanoski,, Nelson Sequeiros Rodriguez

 

·Choosing and overseeing the work of any accounting firm engaged for the purpose of preparing or issuing an audit report or performing any other service;

·Reviewing auditor independence issues and rotation policy;

·Supervising the appointment of our independent auditors;

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·Discussing with management and auditors major audit issues;

·Reviewing financial statements prior to their publication, including the related notes, management’s report and auditor’s opinion;

·Reviewing our annual report and financial statements;

·Providing recommendations to the board of directors on the audit committee’s policies and practices;

·Reviewing recommendations given by our independent auditor and internal audits and management’s responses;

·Evaluating the performance, responsibilities, budget and staffing of our internal audit function and review the internal audit plan;

·Providing recommendations on the audit committee’s bylaws; and

·Reviewing our Code of Business Conduct and Ethics and the procedures for monitoringTanure, and Thomas Cornelius Azevedo Reichenheim. This committee, among other things, considers and periodically reports on matters relating to the size, identification, selection and qualification of the board of directors, executive officers and candidates nominated for the board of directors and its committees, is responsible for overseeing compliance with it.

Equity Compensation Plans

NYSE Rule 303A.08 provides that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, with certain limited exemptions as described in the rule. Under Brazilian corporate law, shareholder pre-approval is required for the adoption of equity compensation plans and any material revision thereto.

Corporate Governance Guidelines

NYSE Rule 303A.09 provides that each U.S. listed company must adopt and disclose their corporate governance guidelines. Although we do not have a similar requirement under Brazilian law, our bylaws contain a comprehensive list of principles that must be complied with at all times by all of our directors and officers. Our Nominating and Corporate Governance Committee may also propose new principles and amendments to existing principles. In addition, we have listed our common shares in theNovo Mercado (New Market) of the São Paulo Stock Exchange (BM&FBOVESPA), which requires adherence to the corporate governance standards established under the Listing Rules of theNovo Mercado, as described under “Item 10. Additional Information—B. Memorandum and Bylaws.” Finally, we have adopted a written policy of trading of securities and disclosure matters.

Code of Business Conduct and Ethics

NYSE Rule 303A.10 provides that each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We are requiredprinciples applicable to have a Code of Business Conduct and Ethicsus under our bylaws and under the Listing Rulesother policies, as well as for proposing improvements and changes to such applicable principles; reviews and makes recommendations to our directors regarding its compensation policies and all forms of theNovo Mercado. We have adopted such a Code on July 10, 2007compensation to be provided to our executive officers and the last review of the Code was approved on July 17, 2014. See “Item 16B. Code of Business Conduct and Ethics.”other employees.

 

D.Employees

D.       Employees

 

As of December 31, 2015,2019, we had 2,350215 employees at Gafisa Group across the following states:

 

States

Gafisa
Number of Employees

Bahia236
Distrito Federal1
Goiás2
Maranhão2
Minas Gerais116
Pará30
Paraná3
Pernambuco130

Rio de Janeiro355

Rio Grande do Sul1351
São Paulo1,340

214 

Total2,350

215

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The table below shows the number of employees for the periods presented, within the macro areas of the company:

 

Period Operations Administration & Finance Business Development Sales Total
 2015   1,297   499   167   387   2,350 
 2014   1,134   527   191   310   2,162 
 2013(1)  2,008   722   404   212   3,346 
 2012   2,551   811   395   267   4,024 
 2011   3,459   695   301   332   4,787 

Period 

Operations 

Administration & Finance 

Business Development 

Sales 

Total 

20199890819215
20182341272635422
201724221360131646
2016(1)1,2445001515652,460
20151,2974991673872,350
 

_________________

Note:*TheFor the years ended December 31, 2017, 2018 and 2019, the numbers presented in the tables above for the year of 2013 refer to the employees of Gafisa, Group (Gafisa’s Business Unit, Tenda’s Business Unit, Alphaville’s Business Unit as well asand do not refer to the corporate areas, including the shared services center).employees of Tenda.

 

(1)Total number includes 529 Alphaville’s1,684 Tenda employees, of which 290 are917 were allocated in Operations, 95236 in Administration and Finance, 13561 in Business Development and 9470 in Sales.

 

Our administrative employees carry out management, finance, information technology, legal and human resources activities among others. Our construction site employees focus on management and oversight of our construction workers, the majority being outsourced. The outsourced professionals are hired by the contractors to carry out various tasks on the construction sites. As of the date of this annual report, we estimate that around 6,481approximately 775 outsourced professionals are providing services to Gafisa and Tenda across Brazil, all in the following regions:Southeast region of Brazil.

RegionOutsourced Professionals
North/Central West-
Northeast740
South142
Southeast5,599
Total6,481

 

We offer training programs to our employees, subcontractors and outsourced employees. All of our professionals involved in the construction of our developments are trained prior to the beginning of their work and are supervised directly by our engineers.

 

The majority of our employees and outsourced professionals of the State of São Paulo are enrolled with the Civil Construction Industries Workers’ Union (SINTRACON). As a rule, the Civil Construction of Large Building Industry in the State of São Paulo (SINDUSCON-SP) annually negotiates with SINTRACON collective bargaining agreements applicable to our employees. The most recent collective bargaining agreement for our employees and outsourced professionals in the State of São Paulo was executed in May 2015,2019, establishing a salary adjustment of between 6% (administrative areas) and 8% (operations)5.07% as of May 2015.2019. This collective bargaining agreement became effective in May 20152019 and will expire in April 2016.2020. The majority of our employees and outsourced professionals of the State of Rio de Janeiro are members of the Civil Construction, Tiles, Cement, Marble and Granite Products, Road Construction, Paving, and Land Moving and Industrial Maintenance and Assembly Industries’ Workers Union of the Rio de Janeiro Municipality (SINTRACONST-RIO). As a rule, the Civil Construction of Large Building Industry in the State of Rio de Janeiro (SINDUSCON-RIO) annually negotiates with SINTRACONST-RIO the collective bargaining agreements applicable to our employees. The most recent collective bargaining agreement for our employees and outsourced professionals in the State of Rio de Janeiro was executed in May 2015,2019, establishing a salary adjustment of 7%3.5% as of March 2015.May 2019. This collective bargaining agreement became effective in March 2015May 2019 and will expireexpired in February 2016.April 2020. As of the date of this

 

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annual report, we are negotiating the collective bargaining agreements for our employees in the states of São Paulo and Rio de Janeiro related to 2020.

 

We believe that our relationship with our employees and workers’ unions is good. In all the regions where we operate, we maintain a stable relationship with the workers unions, which generally decreases the risk of strikes.

 

The benefits we offer to our permanent employees include life insurance, dental plan, health insurance, meal tickets and profit sharing.

 

Health and Safety

 

We are committed to preventing work-related accidents and diseases. Accordingly, we maintain a risk prevention program which seeks to maintain and enhance the health and physical conditions of our employees, by anticipating, recognizing, evaluating and controlling any existing or potential environmental risks in the workplace.

 

In addition, we have an internal committee for the avoidance of accidents, which seeks to prevent diseases and accidents from occurring in the workplace. We make significant investments in this area, providing frequent training programs for our construction employees as well as for our subcontractors’ employees, and we require our subcontractors to follow strict guidelines.

 

E.       Share Ownership

 

As of the date of this annual report, our directors and executive officers do not hold, on an aggregate basis, any direct or indirectindirect. interest of greater than 0.635%5% of our total share capital or of the share capital of any of our subsidiaries or jointly-controlled entities. As of December 31, 2015,2019, some of our executive officers held interests in our subsidiaries and jointly-controlled entities as directors and executive officers. In none of these cases, as of the date of this annual report, were the interests held material.

 

The table below sets forth the number of our total shares beneficially owned by each of our directors and executive officers as of the date of this annual report:

 

Name

Position 

Position

Number of Shares Owned

Sandro Rogério da Silva GambaDenise dos Passos RamosMember of the Board of DirectorsChief Executive Officer555
Thomas Cornelius Azevedo ReichenheimPresident of the Board of Directors742,3265,000
Andre BergsteinLuis AckermannStatutory DirectorChief Financial Officer and Investor Relations Officer554,83110,000
Luiz Carlos SicilianoFernando OrtizOfficer296,683
Cláudio José Carvalho de AndradeStatutory Director349,000
Odair Garcia SenraDirector243,505
Katia Varalla LeyOfficer139,778
Octavio Marques FloresOfficer73,5023,112
Guilherme Affonso FerreiraLuis Pesenti e SilvaStatutory Director10280,000
José Écio Pereira da Costa JuniorSaulo Nunes de Aquino FilhoStatutory Director2
Francisco Vidal LundaDirector0
Maurício Marcellini PereiraDirector0
Rodolpho AmbossDirector0
Total2,399,7295,800

 

Stock Option Plans

 

Gafisa’s stock option plans seek to: (1) encourage our expansion and success by allowing our executives and key employees to acquire shares of our capital stock in order to encourage their integration with the company; (2) allow us to obtain and retain the services of executives and key employees by offering them the benefit of becoming one of our shareholders; and (3) align the interests of our executives and key employees with the interests of our shareholders.

 

Tenda’s stock option plans seek to: (1) allow Tenda to hire and retain the services of executives and key employees by offering them the benefit of becoming one of our shareholders; and (2) align the interests of Tenda executives and key employees with the interests of our shareholders.

We have individual agreements with our key employees and executives for both Gafisa, and Tenda, under which they are entitled to purchase shares of our capital stock pursuant to the terms and conditions of the stock option plans and the specific conditions set forth in their agreements.

 

In 2002, our shareholders ratified the terms and conditions of our stock option plan. A standard stock option program to grant subscription rights related to our preferred shares was approved by our board of directors at a meeting held on April 3, 2000. As a result of our entry in theNovo Mercado segment of BM&FBOVESPA,B3, our

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preferred shares were converted into common shares, and therefore all options relating to this plan grant subscription rights related to our common shares. Currently, we do not have any stock option grants related to this plan.

 

On February 3, 2006, our shareholders approved a new stock option plan. Under the 2006 stock option plan, our board of directors may release further programs on a regular basis of options to purchase up to 5% of the total

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outstanding shares of our company, as set forth in the 2006 stock option plan. Such new programs would grant our executives and key employees the right to subscribe and/or acquire our shares for a set price, under terms and conditions according to the agreements set for each participant. Currently, we do not have any stock option grants related to this plan.

 

Our most recent stock option plan was approved on May 18, 2008 during a special shareholders’ general meeting. Under this new stock option plan, our board of directors may create additional programs on a regular basis for options to purchase up to 5% of the total outstanding shares of our company, as set forth in the 2008 stock option plan.

 

Under this stock option plan, the board of directors may also grant different types of options to certain beneficiaries, namely “A options”, which are regular options, and “B options,” for the exercise price of R$0.01.0.09. The exercise of B options, if granted, is subject to the proportional purchase of common shares or exercise of a regular option under this 2008 plan, according to the terms and conditions set forth in each program, and to lapse two years from the common share purchase date.

 

On August 11, 2014, our shareholders approved Tenda’s first stock option plan. Under this stock option plan, our board of directors may release further programs on a regular basis of options to purchase up to 10%As of the total outstanding sharesdate of our company. Such new programs would grant our executives and key employees the right to subscribe and/or acquire our shares for a set price, under terms and conditions according to the agreements set for each participant.

As of December 31, 2015,this annual report, all active stock option Programs follow the Plan approved in 2008.

 

2012 Programs

 

Two stock option programs were approved in 2012 for executivesexecutive officers and key employees.

 

The first is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.

 

As of December 31, 2015, 3,560,000 options to purchase shares of our common shares have been granted to executive officers pursuant to this program. Out of the amount granted, 2,141,372 have been acquired or expired pursuant to such program.

Under the second program, the board of directors may grant different types of B options for the exercise price of R$0.010.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market price, granted under this second program, according to the terms and conditions set forth in such second program, and to lapse one year from the grant date.

 

As of December 31, 2015,the date of this annual report, options to purchase 4,079,048101,099 shares of our common shares have been granted to key employees and executivesexecutive officers pursuant to this second program. The options granted included 3,005,532 “B” options. Out of the total options granted, 3,564,698none have been acquired or expired pursuant to such second program.agreement.

 

2013 Programs

 

Two stock option programs were approved in 2013 for executivesexecutive officers and key employees.

 

The first is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.

 

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As of December 31, 2015, 1,370,037 options to purchase shares of our common shares have been granted to executive officers pursuant to this agreement and none has been acquired. Out of the amount granted, 692,099 have been expired pursuant to such agreements.

Under the second program, the board of directors may grant different types of B options for the exercise price of R$0.010.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market price, granted under this program, according to the terms and conditions set forth in this second program, and to lapse one year from the grant date.

 

As of December 31, 2015,the date of this annual report, options to purchase 4,013,59050,281 shares of our common shares have been granted to key employees and executivesexecutive officers pursuant to this second program. The options granted included 2,928,810 “B” options. Out of the total options granted, 2,521,091none have been acquired or expired pursuant to such second program.agreement.

 

2014 Programs

 

One stock option program was approved in 2014 for executives and key employees.

 

Under this program, the board of directors may grant different types of B options for the exercise price of R$0.010.09 per share. The exercise of B options, if granted, is subject to the proportional exercise of regular options at market

89 

price, granted under this program, according to the terms and conditions set forth in each program, and to lapse one year from the grant date.

 

As of the date of this annual report, options to purchase 4,361,763161,068 shares of our common shares have been granted to employees and executives pursuant to this agreement. The options granted included 1,680,670100,254 “B” options. Out of the total options granted, none10,412 have been acquired. Out of the amount granted, 289,000 have beenacquired, expired or cancelled pursuant to such agreements, in connection with an executive that is no longer employed by us.program.

 

2015 Programs

 

One stock option program was approved in 2015 for executives and key employees.

 

This program is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.

 

As of the date of this annual report, options to purchase 3,567,201264,570 shares of our common shares have been granted to key employees and executive officers pursuant to this agreement. Out of the total options granted, 6,907 have been acquired, expired or cancelled pursuant to such program.

In addition to the above stock option program, the board of directors approved a “Phantom Shares” program, payable in cash in accordance with the amount of options exercisable by the executives and key employees during the exercise period under the 2015 stock option program.

2016 Programs

One stock option program was approved in 2016 for executives and key employees.

This program is a standard stock option program granting subscription rights related to our common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire our shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.

As of the date of this annual report, options to purchase 163,900 shares of our common shares have been granted to key employees and executive officers pursuant to this agreement. Out of the total options granted, none have been acquired or expired pursuant to such agreement.

 

In addition to the above stock option program, the board of directors approved a “Phantom Shares” program, payable in cash in accordance with the amount of options exercisable by the executives and key employees during the exercise period under 2015the 2016 stock option program.

 

Tenda programs2017 Programs

 

2014No stock option program was approved in 2017 for executives and key employees.

2018 Programs

 

One stock option program was approved in 2014 by the board of directors of Tenda2018 for executives and key employees of Tenda.employees.

 

TheThis program is a standard stock option program granting subscription rights related to Tenda’sour common shares. Under this program, the board of directors may grant to certain beneficiaries the right to subscribe and/or acquire Tenda’sour shares for a set price, under the terms and conditions set forth in the stock option plan agreement entered into with each participant.

 

As of the date of this annual report, options to purchase 42,259,687325,980 shares of Tenda’sour common shares have been granted to key employees and executivesexecutive officers pursuant to this agreement. Out of the total options granted, none have been acquired or expired pursuant to such agreement.

 

10990 

Active Programs Number of Stock Options granted Number of Stock Options Outstanding (Not Expired or exercised) as of the date of this annual report Exercise Price per Stock Option Expiration
August 2012 (Standard SOP) (1)  3,560,000   1,418,628   R$2.73   August 2025 
August 2012 (Restricted Type B) (1)  3,005,532   514,350   R$0.01   August 2016 
May 2013 (Standard SOP) (1)  1,370,037   677,938   R$3.66   May 2017 
May 2013 (Restricted Type B) (1)  2,928,810   1,492,499   R$0.01   May 2017 
March 2014 (Restricted Type A) (1)  2,681,093   2,456,093   R$3.13   March 2020 
March 2014 (Restricted Type B) (1)  1,680,670   1,616,670   R$0.01   March 2020 
August 2014 (Standard SOP) (Tenda)  42,259,687   42,259,687   R$0.77   March 2024 
April 2015 (Standard SOP) (Gafisa)  3,567,201   3,567,201   R$2.24   April 2021 
Total      54,003,066         

After the vesting period of 4 years, the options may be exercised in whole or in part as follows: 60% as of March 30, 2022; 20% as of March 30, 2023 and 20% remaining as of March 30, 2024. The price set for the 2018 Program was R$15.00.

 

Gafisa Active Programs Number of Stock Options granted (2) Number of Stock Options Outstanding (Not Expired or exercised) as of the date of this annual report (2) Exercise Price per Stock Option (2) Expiration
August 2012 (Standard SOP) (1)  264,036   77,852   17.01   August 2025 
May 2013 (Standard SOP) (1)  101,612   21,210   28.29   May 2027 
March 2014 (Restricted Type A) (1)  198,850   174,835   23.76   March 2020 
March 2014 (Restricted Type B) (1)  124,651   70,109   0.09   March 2020 
April 2015 (Standard SOP) (Gafisa)  264,570   276,758   16.16   April 2021 
April 2016 (Standard SOP) (Gafisa)  163,900   176,221   19.40   April 2022 
March 2018 (Standard SOP) (Gafisa)  2,685,474   433,398   15.00   March 2025 
Total      1,230,383         
_________________
 

(1)Options unvested or vested and not yet exercised.

 

(2)Considering the reverse stock split of all Gafisa’s shares at a ratio of 13.483023074 to 1 consummated on March 23, 2017 and other adjustments.

2019 Programs

No stock option program was approved in 2019 for executives and key employees.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.Major Shareholders

A.       Major Shareholders

 

As of the date of this annual report, the following shareholders held more than 5.0% of our common shares. The following table sets forth information of our directors and officers as a group, as well as common shares held in treasury and other shares in the public float. Each holder of common shares has the same rights.

 

Shareholders Shares (%) Shares (%)
Polo Capital Gestão de Recursos Ltda. And Polo Capital Internacional Gestão de Recursos Ltda  69,108,486   18.28 
Fundação dos Economiarios Federais (“FUNCEF”)  23,835,800   6.30 
Pátria Investimentos Ltda.  21,171,700   5.60 
Board of Directors  16,428   0.0137%
Treasury shares  2,981,052   2.4842%
Planner Group  36,344,327   30.2869%
Public Float  253,365,419   67.02   80,658,193   67.2152%
Treasury shares  10,584,757   2.80 
Total  378,066,162   100.0   120,000,000   100.00%

 

We had a total of 9137 record shareholders located in the United States, 75% of which hold shares traded at BM&FBOVESPA and 25% of which hold ADSs traded on the NYSE.States. We are not aware of any shareholders’ agreement currently in force with our main shareholder.

 

On December 9, 2013, we completed the sale of a majority interest in Alphaville to Private Equity AE Investimentos e Participações (“Fundo AE”), a company controlled by Pátria Investimentos Ltda. and Blackstone Real Estate Advisor L.P., which was previously announced on June 7, 2013. All conditions precedent to the completion of the transaction were met, including governmental approval. The transaction was concluded with a sale of 50% interest by Gafisa and 20% interest by Tenda, with Gafisa retaining the remaining 30% of Alphaville capital stock. The proceeds from the transaction, post adjustments agreed to in the Share and Purchase Agreement, were R$1.54 billion, consisting of R$1.25 billion from Fundo AE for the acquisition of Alphaville shares, and an R$290 million dividend distribution by Alphaville.B.       Related Party Transactions

B.Related Party Transactions

 

Other than arrangements which are described in “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management— Management Board of Directors—Our Relationship with our Executive Officers and Directors” and the transaction described below, since January 1, 2007, there has not been, and there is not currently proposed, any material transaction or series of similar transactions to which we were or will be a party in which any director, executive officer, holder of 5% of our capital stock or any member of their immediate family had or will have a direct or indirect interest.

 

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Under Brazilian corporate law, our directors and executive officers cannot vote on any matter in which they have a conflict of interest and such transactions can only be approved on reasonable and fair terms and under conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties.

 

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We participate in the development of real estate ventures with other partners, directly or through related parties, based on the constitutive documents of condominiums and/or consortia. The management structure of these enterprises and the cash management are centralized in the lead partner of the enterprise, which manages the construction schedule and budgets. Thus, the lead partner ensures that the investments of the necessary funds are made and allocated as planned. The sources and uses of resources of the venture are reflected in the balance sheet of the ventures, reflecting the respective participation percentages of the partners, which are not subject to inflation adjustments or financial charges and do not have a predetermined maturity date. The average term for the development and completion of the projects in which the resources are invested is between 24 and 30 months. As of December 31, 2015, 2014 and 2013, we had current accounts receivable fromPlease refer to Note 21 to our consolidated financial statements for further information on balances with related parties related to real estate ventures of R$95.1 million, R$142.7 million and R$82.5 million, respectively, and we had current accounts payable from related parties related to real estate ventures of R$87.1 million, R$156.5 million and R$133.7 million, respectively.parties.

 

As of and for the years ended December 31, 2015, 20142019, 2018 and 2013,2017, we have not entered into any loan or other type of financing agreement with our directors or executive officers. In the years ended December 31, 2019, 2018 and 2017, there were no units sold to management members, and the amount receivable R$0.2 million as of December 31, 2017. There was no amount receivable as of December 31, 2018 and 2019.

 

C.Interests of Experts and Counsel

C.       Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A.       Consolidated Statements and Other Financial Information

 

For our consolidated financial statements and notes thereto see “Item 18. Financial Statements.”

 

Legal Proceedings

 

We are currently party to several legal and administrative proceedings arising from the normal course of our business, principally relating to civil, environmental, tax and labor claims. We establish provisions in our balance sheets relating to potential losses from litigation based on estimates of probable losses. Brazilian GAAP requires us to establish provisions in connection with probable losses and we record a provision when, in the opinion of our management, we feel that an adverse outcome in a litigation is probable and a loss can be estimated. The determination of the amounts provisioned is based on the amounts involved in the claims and the opinion of our management.external legal counsel.

 

Civil Claims

 

As of December 31, 2015,2019, we were a party to 5,271on 4,420 civil actions,claims, totaling R$611685.1 million. Of these actions,claims, we were the plaintiff in 316214 actions and the defendant in 4,9554,206 actions, with aggregate amounts of R$15730.8 million and R$454654.2 million, respectively.

Most of these civil claims involve ordinary course of business matters relating to the development of our properties, including annulment of contractual clauses and termination of agreements with the reimbursement of the amounts paid. We have also have a fewminority civil claims where we discuss the resolution of the construction partnership.

 

As of December 31, 2015,2019, the provisions related to civil claims include R$4213.4 million related to lawsuits in which the Company is included as successor in enforcement actions for judicial and extrajudicial debts, in which the original debtor is a former shareholder of Gafisa, Cimob Companhia Imobiliária (“Cimob”) or companies that are part of the economic group of Cimob. The plaintiff alleges that the Company should be liable for the debts of Cimob. We have made judicial deposits amounting to R$44.126.4 million in connection with these claims. The Company is filing appeals against all decisions, as it considers that the inclusion of Gafisa in the claims to be legally unreasonable; these appeals aim at releasing amounts and obtaining the recognition that it cannot be held liable for the debt of a company that does not have any relationship with Gafisa. The Company has obtained both favourablefavorable and unfavourableunfavorable decisions on appeal, and the final decision of each pending appeal cannot be predicted at present.

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The Company is a plaintiff in proceedings against Cimob and its former and current controlling shareholders. The Company is seeking (i) restitution of amounts already paid by the Company in connection with the lawsuits in which the Company is included as successor in enforcement actions for judicial and extrajudicial debts proceedings in which the original debtor is Cimob and (ii) the recognition of the court that it does not have any relationship with Cimob and cannot therefore be held liable for the debt of Cimob. The final decision is on appeal, and cannot be predicted at present.

 

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As of December 31, 2015,2019, the provision for our civil claims amounted to R$119239.5 million.

 

Environmental Claims

 

As of December 31, 2015,2019, we were the defendants in certain environmental claims alleging damage to a permanent conservation area and we are currently not able to estimate the aggregate amount of such claims.

 

In addition, we are occasionally party to other administrative environmental inquiries or claims by the Public Prosecution Offices or by other governmental agencies or third parties. These inquiries may result in public environmental claims against us and the findings in these inquires may give rise to other administrative and criminal claims. However, based on currently available information, we do not believe these matters are, or are likely to be in the future, material to our business or financial condition.

 

In Case No. 0022897-84.2010.4.03.6100, federal prosecutors (Ministério Público Federal) argue that due to restrictions on urban and landscape rights, the approval of the Paulista Corporate Building project would have been unduly issued by the authorities. The value attributed to the case by federal prosecutors was R$320.0 million. This process was intended to prevent the conclusion of construction, but the judiciary, according to our defense, denied the request and the building has already been finalized. An appeal was filed by the federal prosecutors. The court hearing the appeal ruled in favor of the Company, and the claim was subsequently extinguished and filed.

In Case No. 20654-60.2011.4.01.3200,0020654-60.2011.4.01.3200, federal prosecutors (Ministério Público Federal) argue that the company has built one of the towers of “Riviera da Ponta Building” on Federal Government property, next to a riverbank. The federal prosecutors claimed R$88.3 million in damages, comprising both environmental liability for construction in an allegedly “protected area” and payoff for the property. We estimate the probability of the Company to be sentenced to pay R$88.3 million as remote because we believe that the federal prosecutors’ computations to get this number are unreasonable, since they neither the value nor the extension of the area supposedly invaded are accurate.

 

As of December 31, 2015,2019, we have made no provisions for environmental claims.

 

Tax Claims

 

As of December 31, 2015,2019, we were party to several tax proceedings involving tax liabilities in the aggregate amount of R$80142.8 million. As of December 31, 2015,2019, the provision for tax liabilities amounted to R$0.22.7 million. In addition, we have deposited R$14.740 million with the court in connection with some of these proceedings. These amounts take into consideration the tax liabilities of our subsidiaries, in proportion to our interest in their share capital. The main tax proceedings to which we are a party are described below.

On November 30, 2009, we and our subsidiaries Tenda, Alphaville and Gafisa Vendas joined the program for cash and installment payment of debits with the Federal Revenue Service and the Attorney-General Office of the National Treasury. The Company joined the tax amnesty and refinancing program and opted for the cash payment of tax debits amounting to R$17.3 million, of which R$10.4 million was in cash and R$6.9 million offset tax losses. Tenda, Alphaville and Gafisa Vendas opted for the installment payment of tax debits amounting to R$6.6 million, R$980 thousand and R$192 thousand, respectively, recognizing gains of R$568 thousand, R$360 thousand and R$70 thousand, respectively, relating to the offset of tax losses.

In September 2015, the Company adhered to the Tax Refinance program (REFIS), originally introduced by Law No. 11,941/2009 and reopened by virtue of Law No. 12,996/2014, which provided new conditions for lump sum or installment payment of tax-related debits with the Federal Revenue Service or the Office of Attorney-General of the National Treasury. The Company opted to pay the tax debits of certain SPEs which it controls in monthly installments of R$6,291.

Alphaville is a party to legal and administrative claims related to Federal VAT (IPI) and State VAT (ICMS) on two imports of aircraft in 2001 and 2005, respectively, under leasing agreements without purchase options. The likelihood of loss in the ICMS case is rated by legal counsel as remote. According to the negotiation of the sale of

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controlling interest of 70% in Alphaville, it was agreed in the purchase and sale contract that Gafisa is responsible in the event of an unfavorable decision.

 

Several municipalities charge a municipal tax on construction services on an arbitrated basis, which varies depending on the characteristic of the construction. We have filed lawsuits against the municipalities of São Paulo and São Caetano do Sul to challenge the calculation of the arbitrated basis on several of our developments under construction. In these proceedings, we deposited R$11.311 million with the courts and we are awaiting the final decision.

In 2019, we had favorable decisions in part of these proceedings, which canceled debts of around R$1.5 million.

In addition, the municipalities of Rio de Janeiro, Niterói, São Paulo and Santo Andre have issued tax assessments against us. We have filed administrative defenses and are awaiting the final administrative decisions. The total amount involved in these proceedings is R$11.311 million.

We filed a lawsuit against the Brazilian Internal Revenue (Receita Federal) to challenge the increase in the PIS and Cofins rates from 0% to 0.65% and 4%, respectively, on financial income earned by legal entities subject to the non-cumulative regime, on the basis that in our view, this increase is illegal and unconstitutional. Accordingly, we requested from the Brazilian courts a preliminary injunction prohibiting the Brazilian Ministry of Finance from collecting the PIS and Cofins contributions on financial revenues. The Brazilian courts denied our request. We appealed the decision and as of December 31, 2019, we had deposited R$19 million with the court in connection with the lawsuit, which is pending a final decision.

We are also party to three proceedings with the Brazilian Internal Revenue (Receita Federal) related to taxes in connection with our stock options plans, which the Brazilian Internal Revenue (Receita Federal) alleges that we owe. The total amount of the proceedings is R$38 million, and we have filed our defenses to dismiss these proceedings as we believe we do not owe these taxes. As of the date of this annual report, the proceedings are still pending and no provisions have been made.

 

Labor Claims

 

As of December 31, 2015,2019, we were a defendant in 2,7461,652 labor claims resulting from our ordinary course of business, of which approximately 82%90% were filed by outsourced workers and approximately 13%10% were filed by our

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former employees. The alleged legal bases for these claims mainly relate to termination benefits, overtime hours, employee relationship and dismissal rights. As of December 31, 2015,2019, the total value involved in the labor claims filed against us was approximately R$125107 million. As of December 31, 2015,2019, the provision for labor claims amounted to R$6334.7 million.

 

In addition, we are periodically party to other administrative labor inquiries or claims by the Public Prosecution Offices or by other governmental agencies or third parties. These inquiries may result in public labor claims against us and the findings in these inquires may give rise to other claims. However, based on currently available information, we do not believe these matters are, or are likely to be in the future, material to our business or financial condition.

 

We have adopted certain measures to audit third party contractors. The objective of these measures is to evaluate compliance by third party contractors with labor obligations to their employees. We believe this will help us minimize the risks of potential labor liabilities.

 

Arbitration

 

We are also involved in 5 arbitrations proceedings: 4 of them by partners seeking to discuss and terminate the partnership to develop a few real estate projects and 1 of themproceedings, commenced by us against a partner seeking to discuss damages suffered in connection with the development of certain real estate projects.projects, stemming from breach of contract obligations.

In summary the arbitrations proceedings are:

·Arbitration POLO:

The Company requested the filing of an Arbitration Procedure before the Mediation and Arbitration Center of the Brazil-Canada Chamber of Commerce, on July 31, 2018, against Yogo Participações and Empreendimentos Imobiliários S.A. (“Yogo”); Polo Real Estate Fund of Investments and Holdings and Polo Capital Real Estate Gestão de Recursos Ltda. as Yogo shareholders; and Comasa - Construtora Almeida de Martins Ltda., in connection with alleged breaches of certain contractual obligations. As of the date of this annual report, the arbitration is ongoing. The initial provision for this proceeding was R$12,617,783.34. As of the date of this annual report, Gafisa is seeking the current address of Comasa to notify it of the proceeding in accordance with the order of the CAM-CCBC President.

·Arbitration BKO:

In October 2013, Gafisa, SPE 111 and SPE 81 filed an arbitration proceeding against BKO alleging: (i) a default by BKO under the London Ville, Avant Garde and Vittá construction contracts, due to (i.a.) non-compliance with the physical schedule of the works, and (i.b.) overflow of the maximum guaranteed price / target cost and / or constructive defects; (ii) unilateral and unjustified termination by BKO of the Avant Garde and Vittá construction contracts; and (iii) the unenforceability of invoices issued by BKO under the construction contracts of Avant Garde and Vittá. BKO claims (i) in relation to the London Ville venture, that Gafisa failed to comply with the MOU signed between the parties to complete the work; (ii) in relation to the Avant Garde project, that Gafisa never paid the contractual bonus that BKO would be entitled since it has achieved the Target Cost stipulated in the first phase of the construction contract, which affected the second phase of the contract; (iii) in relation to the Vittá venture, that Gafisa ceased to pay for the work, which led to the termination of the contract. During the evidence stage of the proceedings, an accounting and engineering examination was commissioned. The expert examination was completed and, following the hearing of witnesses that took place on May 9, 2019 and May 10, 2019, the parties presented their final arguments. On November 12, 2019, the arbitration court ruled partially in favor of Gafisa in order to recognize most of the pleadings. The court also granted part of BKO’s pleadings. However, the decision needed to be clarified, so Gafisa filed a motion for clarification on November 18, 2019. BKO also filed a motion for clarification on November 20, 2019. Both motions were partially granted and accordingly, Gafisa’s credit represents R$66.4 million, which is fully recorded in our financial statements, and BKO’s credit represents R$0.9 million.

In parallel, taking into account possible deviations of capital and assets by BKO, Gafisa requested the seizure of R$59,949,330.66, and the Arbitral Tribunal granted the seizure of 5% (five percent) of BKO’s net sales and credits arising from a lawsuit filed by BKO (Case file No. 1068081-53.2015.8.26.0100). The seizure of net sales was later replaced by an attachment over more than 20 real estate properties belonging to BKO and some affiliated companies. The affiliated companies filed a motion to dismiss the attachment over their assets. The lower court granted the plaintiffs’ requestin limine. In response, Gafisa filed an appeal to the Court of Appeals in order to reestablish the

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attachment.On February 14, the court of appeals upheld Gafisa’s appeal, and the attachment was re-established. As of the date of this annual report, the attachment is pending execution by the respective real estate officer.

 

As of December 31, 2015,2019, we havehad not made noany provisions for our arbitration claims.

 

Other Developments

 

On June 14, 2012, we received a subpoena from the SEC Division of Enforcement related to the Matter of Certain 20-F Filer Home Builders (HO-11760). The subpoena requests that we produce all documents from January 1, 2010 to the present related to the preparation of our financial statements, including, among other things, copies of our financial policies and procedures, board and audit committee and operations committee minutes, monthly closing reports and financial packages, any documents relating to possible financial or accounting irregularities or improprieties and internal audit reports. The SEC’s investigation is a non-public, fact-finding inquiry and it is not clear what action, if any, the SEC intends to take with respect to the information it gathers. The SEC subpoena does not specify any charges. The Company has already submitted all the information requested by SEC, which as of the publication of these financial statements has not issued any opinion. We have not received any further notice from the SEC after delivering the requested information in the first half of 2012.

 

On July 31, 2012, we received a letter from the CVM: CVM/SEP/GEA-5/ Letter No. 208/2012, requesting information related to criteria for measurement and recognition of revenue and enhancement in the disclosure of some notes to our financial information. We have already provided all the information requested by the CVM. In addition, on February 19, 2013, we received a letter from the CVM: CVM/SEP/GEA-5/ Letter No. 040/2013 recommending enhancements to the notes to our financial statements regarding the percentage of assets by venture that is included in the structures of equity segregation of the purchase.

 

On July 11, 2013, the Company received CVM/SEP/GEA-5 Letter No. 240/2013, which requested information on the criteria for measuring and recognizing revenues. The Company has already provided all the information requested by CVM .CVM. On November 2013, we received a letter from the CVM: SEP/GEA-5/no 362/2013, requesting information related to some control deficiencies. We have already provided all the information requested by the CVM.

 

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The CVM letters listed above led to administrative proceeding Processo“Processo Administrativo Sancionador Nº RJ2014-9034RJ2014-9034” involving Wilson Amaral de Oliveira and Alceu Duilio Calciolari, former executive officers of the Company, and André Bergstein, currentformer chief financial officer of the Company. The former executive officers

Wilson Amaral de Oliveira, Alceu Duilio Calciolari and André Bergstein presented their defense to the alleged factsdefenses on December 8, 2014, regardingand submitted first proposals to enter into leniency agreements (termos de compromisso) on January 1, 2015, followed by second proposals in August 2017, which were approved by the lack of disclosure of some control deficiencies. ThisCVM and entered into in September 2017.

Pursuant to the leniency agreements, Wilson Amaral de Oliveira, Alceu Duilio Calciolari and André Bergstein were required to pay certain administrative fines, which they duly paid and following which administrative proceeding is pending judgment byNº RJ2014-9034 with the CVM.CVM was closed.

 

Dividend Policy

 

The amount of any of our distributions of dividends and/or interest on shareholders’ equity will depend on a series of factors, such as our financial conditions, prospects, macroeconomic conditions, tariff adjustments, regulatory changes, growth strategies and other issues our board of directors and our shareholders may consider relevant, as discussed below.

 

Amounts Available for Distribution

 

At each annual general shareholders’ meeting, our board of directors is required to propose to our shareholders how our earnings of the preceding fiscal year are to be allocated. For purposes of Brazilian corporate law, a company’s income after federal income tax for such fiscal year, net of any accumulated losses from prior fiscal years and amounts allocated to debentures, employees’ and management’s participation in earnings and founders’ shares, represents its “net income” for such fiscal year. In accordance with Brazilian corporate law, an amount equal to the company’s “net income” may be affected by the following:

 

·reduced by amounts allocated to the legal reserve;

 

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·reduced by amounts allocated to any statutory reserve;

 

·reduced by amounts allocated to the contingency reserve, if any;

 

·reduced by amounts allocated to the tax incentives reserve;

 

·reduced by amounts allocated to the investment reserve;

 

·increased by reversals of contingency reserves recorded in prior years; and

 

·increased by amounts allocated to the investment reserve, when realized and if not absorbed by losses.

 

Our calculation of net income and allocation of funds to our reserves for any fiscal year are determined on the basis of our audited unconsolidated financial statements for the immediately preceding fiscal year.

 

Allocation of Net Income

 

According to Brazilian corporate law, we have two types of reserve accounts: (1) profit reserves and (2) capital reserve.

 

Profit Reserves

 

Our profit reserves consist of the following:

 

·Legal Reserve. Under Brazilian corporate law and our by-laws, we are required to maintain a legal reserve to which we must allocate 5% of our net income for each fiscal year until the aggregate amount of such reserve equals 20% of our share capital. However, we are not required to make any allocations to our legal reserve in a fiscal year in which the legal reserve, when added to our other established capital reserves, exceeds 30% of our total share capital. The portion of our net income allocated to our legal reserve must be approved by our annual general shareholders’ meeting and the balance of such reserve may only be used to increase our share capital or to absorb losses, but is unavailable for the payment of dividends. As of December 31, 2015,2019, there was no amount allocated to our legal reserve amounted to R$35.3 million.reserve.

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·Statutory Reserve. Under Brazilian corporate law, we are permitted to provide for the allocation of part of our net income to discretionary reserve accounts that may be established in accordance with our bylaws. The allocation of our net income to discretionary reserve accounts may not be made if it serves to prevent distribution of the mandatory distributable amount. According to our bylaws, up to 71.25% of our net income may be allocated to an investment reserve to finance the expansion of our activities and the activities of our controlled companies by subscribing for capital increases, creating new projects or participating in consortia or any other type of association to achieve our corporate purpose. The allocation of this reserve cannot jeopardize the payment of the mandatory dividends. This statutory reserve is established in accordance with our bylaws as an “investmentinvestment reserve, and such reserve may not exceed 80% of our share capital. As of December 31, 2015,2019, there was no amount allocated to our statutory reserve amounted to R$268.7 millionreserve.

 

·Contingency Reserve. Under Brazilian corporate law, a percentage of our net income may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Management must indicate the cause of the anticipated loss and justify the establishment of the reserve for allocation of a percentage of our net income. Any amount so allocated in a prior year either must be reversed in the year in which the justification for the loss ceases to exist or charged off in the event that the anticipated loss occurs.occurs, whose value can be estimated. The allocations to the contingency reserve are subject to the approval of our shareholders in a general shareholders’ meeting. As of December 31, 2015,2019, there was no amount allocated to aour contingency reserve.

 

·UnrealizedNon-realized Profit Reserve. Under Brazilian corporate law, the amount by which the mandatory distributable amount exceeds the “realized” net income in a given fiscal year, as proposed by the board of directors, the excess may be allocated to the investment reserve. Brazilian corporate law defines “realized” net profits as the amount by which net profits exceed the sum of (1) the net positive results, if any, from the equity method of accounting and (2) the net profits, net gains or net returns resulting from transactions or the accounting of assets and liabilities based on their market value, to be received after the end of the following fiscal year. All amounts allocated to the unrealized profit reserve must be paid as mandatory dividends when those “unrealized” profits are realized if they have not been designated to absorb losses in subsequent periods. As of December 31, 2015, there was no amount allocated to an unrealized profit reserve.

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accounting of assets and liabilities based on their market value, to be received after the end of the following fiscal year. All amounts allocated to the non-realized profit reserve must be paid as mandatory dividends when those “non-realized” profits are realized if they have not been designated to absorb losses in subsequent periods. As of December 31, 2019, there was no amount allocated to our non-realized profit reserve.

 

·Retained Earnings Reserve. Under Brazilian corporate law, a portion of our net income may be reserved for investment projects in an amount based on a capital expenditure budget approved by our shareholders. If such budget covers more than one fiscal year, it might be reviewed annually at the general shareholders’ meeting. The allocation of this reserve cannot jeopardize the payment of the mandatory dividends. As of December 31, 2015,2019, there was no amount allocated to our retained earnings reserve.

 

Capital Reserves

 

The capital reserve is formed by (a) amounts received by shareholders in excess of the par value of shares issued (premium on capital stock), as well as the part of the issue price of the shares with no par value that exceeds the amount intended to form the capital stock; and (b) proceeds from the sale of founders’ shares and warrants. Under Brazilian corporate law, capital reserve may only be applied to: (1) absorb losses that exceed accumulated earnings and revenue reserves; (2) redeem, reimburse or buy our own shares; and (3) increase our share capital.

 

Mandatory Distribution of Dividends

 

Brazilian corporate law generally requires that the bylaws of each Brazilian company specify a minimum percentage of the amounts available for distribution by such company for each fiscal year that must be distributed to shareholders as dividends or as interest on shareholders’ equity, also known as the mandatory dividend.

 

The mandatory dividend is based on a percentage of adjusted net income, rather than a fixed monetary amount per share. Under our bylaws, at least 25% of our net income, as calculated under Brazilian GAAP and adjusted under Brazilian corporate law (which differs significantly from net income as calculated under U.S. GAAP), for the preceding fiscal year must be distributed as a mandatory dividend. Adjusted net income means the distributable amount before any deductions for profit retention and statutory reserves.

 

Under Brazilian corporate law, however, we are allowed to suspend the distribution of the mandatory dividends in any year in which our board of directors report to our general shareholders’ meeting that the distribution would be inadvisable in view of our financial condition. Such suspension is subject to the approval at the shareholders’ meeting and review by members of the fiscal council. In the case of publicly held companies, theOur board of directors

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must file a justification for such suspension with the CVM within five days of the relevant general shareholders’ meeting. If the mandatory dividend is not paid, the unpaid amount shall be attributed to a special reserve account. If not absorbed by subsequent losses, those funds shall be paid out as dividends as soon as the financial condition of the company permits.

 

The mandatory dividend may also be paid in the form of interest attributable to shareholders’ equity, beingwhich is considered asto be a deductible financial expense for purpose of calculating our income and social contribution tax obligations, provided that certain requirements are met. See “ Item“Item 10. Additional Information – Information—E. Taxation” for further information.

 

Payment of Dividends

 

We are required by Brazilian corporate law and our bylaws to hold an annual general shareholders’ meeting within the first four months following the end of each fiscal year, at which time, among other things, the shareholders have to decide on the allocation of the results from the preceding year and on the payment of dividends based on our financial results from the previous fiscal year.

 

Under Brazilian corporate law, dividends are generally required to be paid to the holder of record on the date of the dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur within the fiscal year in which such dividend was declared. A shareholder has a three-year period from the date of the dividend payment to claim dividends, which do not bear interest and are not monetarily restated, after which the aggregate amount of any unclaimed dividends shall legally revert to us.

 

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Our board of directors may declare interim dividends to be deducted from the retained earnings or profit reserves in our semi-annual or annual financial statements. In addition, our board of directors may pay dividends from our net income based on our net income registered on semi-annual or quarterly balance sheet. The dividends paid in each semester may not exceed the amounts accounted for in our capital reserve accounts. Any payment of interim dividends may be set off against the amount of mandatory dividend relating to the net profit earned in the year in which the interim dividends were paid.

 

In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying the ADSs are held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, who is the registered owner on the records of the registrar for our shares. The depositary registers the common shares underlying the ADSs with the Central Bank and, therefore, it is possible to have dividends, sales proceeds or other amounts with respect to the common shares remitted outside Brazil.

 

Payments of cash dividends and distributions, if any, are made inreais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. In the event that the custodian is unable to convert immediately thereais received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by any depreciation of the real that occurs before the dividends are converted. Under the current Brazilian tax law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which will be subject to Brazilian withholding income tax at varying tax rates. See “Item 10. Additional Information—E. Taxation.”

 

Holders of ADSs have the benefit of the electronic registration obtained from the Central Bank, which permits the depositary and the custodian to convert dividends and other distributions or sales proceeds with respect to the common shares represented by ADSs into foreign currency and remit the proceeds outside of Brazil. In the event the holder exchanges the ADSs for common shares, the holder will be entitled to continue to rely on the depositary’s certificate of registration for five business days after the exchange. Thereafter, in order to convert foreign currency and remit outside of Brazil the sales proceeds or distributions with respect to the common shares, the holder must obtain a new certificate of registration in its own name that will permit the conversion and remittance of such payments through the commercial exchange rate market.

 

Under current Brazilian legislation, the Brazilian government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Common Shares and the ADSs.”

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Interest on Equity

 

Under the Brazilian tax legislation effective January 1, 1996, Brazilian companies are permitted to pay “interest” to holders of equity securities and treat such payments as a deductible financial expense for Brazilian income tax purposes and, from 1997, for social contribution on net profit purposes. The purpose of the tax law change is to encourage the use of equity investment, as opposed to debt, to finance corporate activities. Payment of such interest may be made at the discretion of our board of directors. The amount of any such notional “interest” payment to holders of equity securities is generally limited in respect of any particular year to the greater of:

 

·50% of net income (after the deduction of the provisions for social contribution on net profits but before taking into account the provision for corporate income tax and the interest attributable to shareholders’ equity) for the period in respect of which the payment is made; or

 

·50% of the sum of retained earnings and profit reserves as of the beginning of the year in respect to which such payment is made.

 

For tax deduction purposes, the rate applied in calculating interest attributable to shareholders’ equity cannot exceed thepro rata die variation of the Long Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, as determined by the Central Bank from time to time.

 

For accounting purposes, although the interest should be reflected in the statement of operations for tax deduction, the charge is reversed before the calculation of the net income in the statutory financial statements and deducted from

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the shareholders’ equity in the same way as the dividend. Any payment of interest with respect to the common shares is subject to withholding income tax at the rate of 15% or 25% if a holder that is not domiciled in Brazil for purposes of Brazilian taxation is domiciled in a country or location defined as a “tax favorable jurisdiction.” The definition of “tax favorable jurisdiction” includes countries and locations (a) that do not impose income tax, (b) that impose income tax at a rate of 20% or less, or (c) where local laws do not allow access to information related to shareholding composition, ownership of investments, or the identity of the ultimate beneficiary of earnings that are attributed to non-residents. On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for determining a “tax favorable jurisdiction” from 20% to 17%. Please refer to “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations—Gains”Income—Interest on Shareholders’ Equity” below for a discussion thatof tax consequences related to the definitionreceipt of “tax favorable jurisdiction” may be broadenedpayments of interest attributable to shareholders’ equity by an interpretationa non-resident holder of Law No. 11,727.our common shares or ADSs.

 

The amount distributed to shareholders as interest attributable to equity, net of any withholding tax, may be included as part of the minimum mandatory dividend. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest attributable to shareholders’ equity, after payment of the applicable withholding tax, plus the amount of declared dividends, is at least equivalent to the amount of the minimum mandatory dividend. A shareholder has a three-year period from the date of the interest payment to claim interest attributable to equity, after which the aggregate amount of any unclaimed interest shall legally revert to us.

 

If a payment of interest on equity is recorded at net value as part of a mandatory dividend, we will pay the income tax on behalf of our shareholders at the time the payment is distributed. Otherwise, the income tax will be paid by the shareholders, subject to our obligation to retain and collect taxes on the payment.

 

History of Payment of Dividends and Interest on Equity

In 2010, we distributed dividends in the total amount of R$50.7 million, or R$0.12 per share (after giving effect to the stock split of one existing share into two newly issued shares approved at our shareholders’ meeting on February 22, 2010), for fiscal year 2009. In 2011, we distributed dividends in the total amount of R$98.8 million, or R$0.2991 per share, for fiscal year 2010.

In 2012, we did not distribute any dividends, related to fiscal year 2011. In 2013, we did not distribute any dividends, related to fiscal year 2012.

On December 20, 2013, we approved the distribution of interest on equity, charging the account of net income for the current fiscal year, according to the extraordinary balance sheet of December 3, 2013 and deducted from the mandatory minimum dividends of 2013 fiscal year, as set forth on §7, Article 9, Law 9,249/95 and CVM Deliberation No. 207/96, in the gross amount of R$130.2 million, corresponding to R$0.3111 per outstanding share.

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On April 25, 2014, we approved the payment of dividends in the total amount of R$32.9 million, or R$0.082 per share (excluding treasury shares) for fiscal year 2013. The dividends were distributed on December 11, 2014, as approved by a meeting of the board of directors held on December 1, 2014.

On April 25, 2014, we approved the distribution of interest on equity, charging the account of net income for the current fiscal year, according to the extraordinary balance sheet of December 3, 2013 and deducted from the mandatory minimum dividends of 2013 fiscal year, as set forth on §7, Article 9, Law 9,249/95 and CVM Deliberation No. 207/96, in the gross amount of R$130.2 million, corresponding to R$0.3111 per outstanding share. The interest on equity was distributed on December 11, 2014, as approved by a meeting of the board of directors held on December 1, 2014.

 

In 2015, we did not distribute any dividends related to fiscal year 2014.

 

B.Significant Changes

On April 25, 2016, we approved the payment of dividends in the total amount of R$17.7 million, or R$0.048 per share (excluding treasury shares) for fiscal year 2015. The dividends were distributed on December 22, 2016, as approved by a meeting of the board of directors held on December 16, 2016.

In 2016, we did not distribute any dividends related to fiscal year 2015.

In 2017, we did not distribute any dividends related to fiscal year 2016.

In 2018, we did not distribute any dividends related to fiscal year 2017.

In 2019, we did not distribute any dividends related to fiscal year 2018.

B.       Significant Changes

 

None.

 

ITEM 9. THE OFFER AND LISTING

 

A.       Offer and Listing Details

A.Offer and Listing Details

 

Our common shares started trading on the BM&FBOVESPAB3 on February 17, 2006 and the ADSs started trading on the NYSE on March 16, 2007. The table below sets forth,last day for the indicated periods, the high and low closing pricestrading of theour ADSs on the NYSE was December 14, 2018.

On November 26, 2018, our Board of Directors approved the voluntary delisting of our ADSs from the NYSE and a proposal to maintain our ADR facility as a Level 1 ADR program to enable investors to retain their ADSs. On December 7, 2018, we filed a Form 25 with the SEC to effect the delisting of the ADSs, and sent a copy to the NYSE on the same day. The last day of trading on NYSE for our ADSs was December 14, 2018, and our ADSs were delisted from the NYSE on December 17, 2018. Our ADSs remain eligible for trading in U.S. dollars,the over-the-counter markets in the United States, and theour common shares will continue to be listed and admitted to trading in the Novo Mercado segment of the B3. In addition to the information we are required to report under applicable Brazilian regulations, we intend to continue publishing English translations of our annual report, interim results and communications on our investor relations website at (www.ri.gafisa.com.br), in accordance with Rule 12g3-2(b) under the BM&FBOVESPA, inreais:Exchange Act.

 

  New York Stock Exchange São Paulo Stock Exchange
  High Low Volume(1) High Low Volume(1)
  (in US$ per ADS) (inreais per common shares)
Year Ended            
December 31, 2011  12.25   4.10   3,548,148   15.17   4.30   8,082,453 
December 31, 2012  5.47   2.09   2,911,582   6.78   2.05   14,660,144 
December 31, 2013  5.13   2.22   1,853,011   5.23   2.62   10,648,389 
December 31, 2014  3.58   1.33   1,184,125   3.90   1.86   5,990,816 
December 31, 2015  1.89   0.88   483,148   2.95   1.78   3,784,043 
Quarter                        
First quarter 2014  3.20   2.38   1,419,632   3.72   2.81   8,831,330 
Second quarter 2014  3.58   2.82   1,047,098   3.90   3.12   5,831,732 
Third quarter 2014  3.30   2.20   1,269,670   3.70   2.72   3,895,209 
Fourth quarter 2014  2.57   1.33   1,008,996   3.14   1.86   5,547,077 
First quarter 2015  1.70   1.07   753,723   2.35   1.78   4,547,867 
Second quarter 2015  1.89   1.30   507,015   2.95   2.15   3,607,857 
Third quarter 2015  1.70   0.88   441,346   2.73   1.91   3,995,428 
Fourth quarter 2015  1.43   0.93   243,567   2.80   1.95   2,961,135 
Month                        
October 2015  1.34   0.93   236,268   2.70   1.95   3,886,667 
November 2015  1.43   1.22   217,566   2.80   2.46   2,560,605 
December 2015  1.38   1.08   274,502   2.63   2.28   2,369,830 
January 2016  1.17   0.95   196,819   2.42   2.07   2,553,347 
February 2016  1.30   1.06   117,989   2.71   2.23   2,285,963 
March 2016  1.53   1.23   270,017   2.99   2.38   3,022,514 
April 2016 (through April 26, 2016)  1.52   1.23   217,405   2.82   2.38   2,550,431 

(1)Average number of shares traded per day.

In September 2007, we joined the BM&FBOVESPA Index, or “IBM&FBOVESPA,” the main indicator of the Brazilian stock market’s average performance. We are part of the IBrX-100,IbrX-100, an index measuring the total return on a theoretical portfolio composed of 100 stocks selected among BM&FBOVESPA’sB3’s most actively traded securities. Additionally, we are part of the MSCI Emerging Markets Index, which is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Through the inclusion on these indices, our stock has expanded opportunity for increased liquidity. Prior to joining the indices, we traded at a daily average

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We are also part of the following indices of the Brazilian stock market:

 

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·IbrA:IBRA: This index comprises all stocks actively traded on the cash market operated by BM&FBOVESPAB3 that have a certain minimum liquidity and active trading criteria;

 

·IBRX 100: This index measures the average stock performance of the 100 most actively traded stocks of the Brazilian stock market.

·ICON: This index measures the average stock performance of the more actively traded cyclical and non-cyclical consumer stocks.

·IMOB: The IMOBThis index is a real estate sector index covering BM&FBOVESPA’sB3’s most actively traded securities;

 

·IGCX: The IGCXThis index comprises all stocks trading on theNovo Mercadoand Levels 1 and 2 of the BM&FBOVESPA;B3;

 

·IGCT: The stocks that comprise this index are selected as constituents of the Special Corporate Governance Equity Index (IGC) to the extent they meet certain additional membership criteria;

 

·IGC-NM: This index comprises stocks listed for trading on the Novo Mercado segment of the BM&FBOVESPA;B3;

 

·ITAG: This index comprises stocks which give minority shareholders enhanced tag-along rights protection in addition to the protection required by law in the event of a change of control;

 

·SMLL: This index comprises small capitalization stocks; and

 

·IDIV:INDX: This index comprises higher dividend-yielding stocks.was developed to measure the performance of the most representative companies of the industrial sector, an important segment of the Brazilian economy. Its theoretical portfolio is composed by the industry’s most representative stocks, which are selected among B3’s most actively traded securities.

 

B.Plan of Distribution

B.       Plan of Distribution

 

Not applicable.

 

C.Markets

C.       Markets

 

Our common shares are listed on the BM&FBOVESPAB3 under the symbol “GFSA3”“GFSA3,” and the ADSs are listed on the NYSEthey trade OTC under the symbol “GFA.“GFSAY.

 

Trading on the BM&FBOVESPAB3

 

Trading on the São Paulo Stock Exchange is conducted every business day, from 10:00 a.m. to 5:00 p.m. or 6:00 p.m. (depending on the time of the year), on an electronic trading system called the PUMA Trading System (“PUMA”). Trading is also conducted between 5:30 p.m. (or 6:30 p.m.) and 6:00 p.m. (or 7:00 p.m.), on an online system connected to PUMA and Internet brokers called the “after market” The “after-market” trading is scheduled after the close of principal trading sessions, when investors may send purchase and sell orders and trade through the home broker system. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.

 

The CVM and the BM&FBOVESPAB3 have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Trading in securities listed on the BM&FBOVESPA,B3, including theNovo Mercado, Bovespa Mais, Bovespa Mais Nível 2 and Levels 1 and 2 segments, may be effected off the exchanges in the unorganized over-the-counter market in certain circumstances.

 

The shares of all companies listed on the BM&FBOVESPA,B3, including theNovo Mercado, Bovespa Mais, Bovespa Mais Nível 2 and Level 1 and Level 2 companies, are traded together.

 

Settlement of transactions occurs three business days after the trade date, without adjustments to the purchase price. Delivery of and payment for shares are made through the facilities of separate clearing houses for each exchange, which maintain accounts for brokerage firms, the BM&FBOVESPA BrazilianCentral Securities DepositaryDepository of the B3 (Central Depositária de

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Ativos da BM&FBOVESPA), formerly the BM&FBOVESPA Securities Clearinghouse (Companhia Brasileira de Liquidação e CustódiaB3). The seller is ordinarily required to deliver the shares to the BM&FBOVESPAB3 clearing house on the second business day following the trade date.

 

In order to maintain control over the fluctuation of the BM&FBOVESPAB3 index, the BM&FBOVESPAB3 has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever specified indices of the BM&FBOVESPAB3 fall below the limits of approximately 10% and 15%, respectively, in relation to the closing index levels for the previous trading session.

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Although the Brazilian equity market is the largest in Latin America in terms of capitalization, it is smaller and less liquid than the major U.S. and European securities markets. The BM&FBOVESPAB3 is significantly less liquid than the NYSE, or other major exchanges in the world. The BM&FBOVESPA, had a market capitalization of US$489.7 billion asAs of December 31, 2015 and an2019, the average daily trading volume of US$2.1for all companies listed on B3, the only Brazilian stock exchange, represented approximately R$4.3 billion, for 2015. In comparison, the NYSE had a market capitalization of US$18.4 trillion as of December 31, 2015 and an average daily trading volume of approximately US$44.1 billion for 2015.according to B3 data. Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA,B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by government entities or by one main shareholder. The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the common shares at the time and price you desire and, as a result, could negatively impact the market price of these securities.

 

Trading on Brazilian stock exchanges by non-residents of Brazil is subject to registration procedures. See “—Investment in Our Common Shares by Non-Residents of Brazil.”

 

Regulation of Brazilian Securities Markets

 

The Brazilian securities markets are mainly governed by Law No. 6,385, of December 7, 1976, Law No. 4,728, of July 14, 1965 and Brazilian corporate law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the CMN; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.

 

These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders. They also provide for restrictions on insider trading. However, the Brazilian securities markets may not be considered to be as highly regulated and supervised as the U.S. securities markets or securities markets in some other jurisdictions. Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM. See “Item 10. Additional Information—B. Memorandum and Bylaws—Disclosure Requirements.”

 

We have the option to ask that trading in our securities on the BM&FBOVESPAB3 be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBOVESPAB3 or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.B3.

 

Under Brazilian corporate law, a corporation is either public,publicly held, as we are, or closely held. All public companies are registered with the CVM and are subject to reporting requirements. A company registered with the CVM may trade its securities either on the BM&FBOVESPA,B3, if it has registered to have its securities traded at the BM&FBOVESPA,B3, or on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations. Our common shares are listed onNovo Mercado segment of the BM&FBOVESPA.B3.

 

The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM (and in the relevant over the counter market) serves as intermediary. The Brazilian over-the-counter market is divided into two categories: (i) an organized over the counter market, in which the transactions are supervised by self-regulating entities authorized by the CVM; and (ii) a non-organized over the counter market, in which the transactions are not supervised by self-regulating entities authorized by the CVM. In either case, transactions are directly traded outside of the stock exchange market, through a financial institution authorized by the CVM. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.

 

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Investment in Our Common Shares by Non-Residents of Brazil

 

Portfolio Investment

 

Investors residing outside Brazil are authorized to purchase equity instruments, including our common shares, in the form of foreign portfolio investments on the BM&FBOVESPA,B3, provided that they comply with the

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registration requirements set forth in (i) CVM Instruction No. 560, published on March 25, 2015, which revoked CVM Instruction No. 325 and (ii) Resolution No. 4,373 of September 29, 2014, issued by CMN (“Resolution No. 4,373”).

 

With certain exceptions, Resolution No. 4,373/14 investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a stock, futures or organized over-the-counter market authorized by the CVM. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our common shares are made through the foreign exchange market. See “Item 10. Additional Information—D. Exchange Controls.”

 

In order to become a Resolution No. 4,373/14 investor, an investor residing outside Brazil must:

 

·appoint a representative in Brazil with powers to take actions relating to the investment;investment (before CVM, Central Bank and other regulatory entities) and to receive judicial notifications;

 

·appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM;

 

·appoint a tax representative in Brazil;

 

·through its representative in Brazil, register itself as a foreign investor with the CVM and the Central Bank; and

 

·through its representative in Brazil, register itself with the Brazilian Internal Revenue (Receita Federal)(Receita Federal) pursuant to Regulatory Instruction No. 1,470 of May 30, 2014, and Regulatory Instruction No. 1,548 of February 13, 2015, as the case may be.

 

Securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373/14 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions carried out in the Brazilian stock exchanges or in organized over-the-counter markets licensed by the CVM. Therefore, as a general rule, no private sale of securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373/14 are permitted.

 

Foreign Direct Investment

 

Foreign direct investors under Law No. 4,131/62 may sell their shares in both private or open market transactions, but these investors will generally be subject to less favorable tax treatment on gains as compared to foreign portfolio investors.

 

A foreign direct investor under Law No. 4,131/62 must:

 

·register itself as a foreign direct investor and the investment with the Central Bank;

 

·obtain a taxpayer identification number from the Brazilian tax authorities;

 

·appoint a tax representative in Brazil; and

 

·appoint a representative in Brazil for service of process in respect of suits based on Brazilian corporate law.

 

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Depositary Receipts

 

Resolution No. 4,373/14, which revoked Resolutions No. 1,927/92 and 3,845/10 of the CMN, regulates the issuance of depositary receipts in foreign markets in connection with shares of Brazilian issuers. Our ADSs program was approved by the CVM on March 8, 2007.

 

If a holder of ADSs decides to exchange ADSs for the underlying common shares, the holder may (1) sell the common shares on the BM&FBOVESPAB3 and rely on the depositary’s electronic registration for five business days from the date of the exchange to obtain and remit U.S. dollars abroad upon the holder’s sale of our common shares; (2) convert its investment into a foreign portfolio investment under Resolution No.4,373/14, subject to simultaneous foreign exchange transactions (without actual inflow or outflow of funds); or (3) convert its investment into a foreign direct investment under Law No. 4,131/62, subject to simultaneous foreign exchange transactions.

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If a holder of ADSs wishes to convert its investment into either a foreign portfolio investment under Resolution No. 4,373/14 or a foreign direct investment under Law No. 4,131/62, it should first comply with such regulations, obtaining his own foreign investor registration with the Central Bank or with the CVM as the case may be, in advance of exchanging the ADSs for common shares and of executing the simultaneous foreign exchange agreements.

 

The custodian is permitted to update the depositary’s electronic registration to reflect conversions of foreign portfolio investments under Resolution No. 4,373/14 into ADSs. If a foreign direct investor under Law No. 4,131/62 wishes to deposit its shares into the ADR program in exchange for ADSs, such holder will be required to execute simultaneous foreign exchange transactions and to present to the custodian evidence of payment of the applicable taxes. Please refer to “Item 10. Additional Information—E. Taxation—Brazilian Tax Considerations” for a description of the tax consequences to an investor residing outside Brazil of investing in our common shares in Brazil.

 

D.Selling Shareholders

D.       Selling Shareholders

 

Not applicable.

 

E.Dilution

E.       Dilution

 

Not applicable.

 

F.Expenses of the Issue

F.       Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A.Share Capital

A.       Share Capital

 

Not applicable.

 

B.Memorandum and Bylaws

B.       Memorandum and Bylaws

 

Registration

 

We are currently a publicly-held company incorporated under the lawsLaws of Brazil, registered with the Board of Trade of the State of São Paulo (JUCESP) under NIRE 35300147952 and with the CVM under No. 01610-1, and enrolled with the Brazilian Taxpayer’s Authorities under CNPJ/MF No. 01,545,826/0001-07.

 

Corporate Purposes

 

Article 3 of our bylaws provides that our corporate purpose is to: (1) promote and develop any type of real estate project, whether our own or that of a third party, in the latter case as a contractor and agent; (2) purchase and sell any type of real estate; (3) perform civil construction and provide civil engineering services; and (4) develop and implement marketing strategies for any type of real estate project, whether our own or that of a third party. In addition, we may participate in companies that are not affiliated to us in Brazil and outside of Brazil.

 

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Issued Share Capital

 

As of December 31, 2015,2019, our share capital was R$2,740,661,187.74,2.926.280.318,14, all of which was fully subscribed and paid-in. Our share capital iswas comprised of 378,066,162120,000,000 registered, book-entry common shares, without par value. Under our bylaws, our board of directors may increase our share capital to the limit of our authorized capital by issuing up to 600,000,000120,000,000 common shares without the need of specific shareholder approval. Our shareholders must approve any capital increase above that amount at a shareholders’ general meeting. Pursuant to the agreement entered into with the BM&FBOVESPAB3 for the listing of our shares on theNovo Mercado, we are not permitted to issue preferred shares.

 

On March 15, 2019 the Company received a letter signed by Planner Corretora de Valores S.A. and Planner Redwood Asset Management Administração de Recursos Ltda. (both jointly known as “Planner”), in the capacity of administrators of investment funds holding 18.55% of the Company’s capital stock, requesting the Board of Directors of the Company to convene an Extraordinary General Meeting (“EGM”) pursuant to article 123 of the Brazilian Corporation Law to increase the Company’s authorized capital, from the then 71,031,876 (seventy-one million, thirty-one thousand, eight hundred and seventy-six) common shares to 120,000,000 (one hundred and twenty million) common shares, with the consequent amendment of article 6 of the Company’s Bylaws. The Meeting was held on April 15, 2019, and the Shareholders approved the increase in the authorized capital to 120,000,000.

Novo Mercado

 

Our shares were accepted for trading on theNovo Mercado on February 17, 2006. In order to delist our sharesA voluntary delisting from theNovo Mercado and since we currently do not havemust be preceded by a controlling shareholder, the general shareholders’ meeting that decides upon the delisting shall appoint among those presents the person that, upon its express

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acceptance, must conduct apublic tender offer, forpursuant to the purchaserules applicable to the cancellation of the shares of our capital stock outstanding in the market.registration as a public company. See “—Delisting from theNovo Mercado.” In theNovo Mercado, listed companies are required to, among others, (1) only issue common shares, (2) maintain a minimum free float equal to at least 25% of the company’s capital stock (or 15% of the company’s capital stock, provided its Average Daily Trading Volume (ADTV) remains equal to or greater than R$25,000,000.00), (3) detail and include additional information in the quarterly information and (4) make available the annual financial statements in English and based on international accounting standards.

 

The rules imposed by theNovo Mercado aim at providing transparency in relation to the activities and economic situation of the companies to the market, as well as more power to the minority shareholders in the management of the companies, among other rights. The main rules relating to theNovo Mercado, to which the company is subject, are summarized below.

 

According to CMN Resolution No. 3,792 of September 24, 2009, which governs the closed complementary social security entities’ investment policy (Entidades Fechadas de Previdência Complementar — EFPC), such pension funds may invest up to 70% of its variable income investment portfolio (in which are included corporate stakes) in publicly held companies listed in theNovo Mercado, which may, therefore, improve the development of this corporate governance segment, benefiting the companies listed therein, taking into account the immense financial equity held by such pension funds in Brazil.

 

Authorization for Trading in the Novo Mercado

 

Firstly, the company that is authorized to list its securities on theNovo Mercado of BM&FBOVESPAB3 shall keep its listed company registerregistry with the CVM updated, which allows the trading of the company’s common shares at the stock market. The Listing Rules of theNovo Mercado were revised in 20112017 and the new rules are in full force and effect since May 10, 2011. By June 9, 2011, we had alreadyJanuary 2, 2018. We have adapted our bylaws to the new rules of theNovo Mercado.Mercado, at the General Shareholders Meeting dated of April 24, 2018.

 

According to the Listing Rules of theNovo Mercado, the company willing to negotiate its securities on theNovo Mercado shall, among other conditions: (1) along with its controlling shareholder (if any), execute a Listing Agreement in theNovo MercadoMercado;, (2) adapt its bylaws to comply with the minimum requirements determined in the Listing Rules of theNovo Mercado; and (3) file the Management Compliance Statements and the Fiscal Council Compliance Statements (if applicable) with BM&FBOVESPA, duly executed by all managers and members of the fiscal council, respectively. The capital of the company shall be exclusively divided into common shares and a minimum free float equal to 25% of the capital stock (or 15% of the company’s capital stock, provided its Average Daily Trading Volume (ADTV) remains equal to or greater than R$25,000,000.00) shall be maintained by the company. The existence of founders’ shares by the companies listed on theNovo Mercado is prohibited.

 

In addition to the previous requirements, the company’s bylaws may not (1) establish any provision which restricts the number of votes of any shareholder or group of shareholders (as defined in the Listing Rules of theNovo Mercado)

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to a percentage inferior to 5% of the company’s corporate capital, (2) determine qualified quorums for matters submitted for the approval of the shareholders’ general meetings, except as provided by law, nor (3) restrict or establish any encumbrance to shareholders who vote favorably to the suppression or amendment of any provision of the company’s bylaws.

 

Board of Directors

 

The board of directors of companies authorized to have their shares traded on theNovo Mercado shall be comprised of at least five members, of which at least 20% or 2 members, whichever is greater, shall be independent, as defined in the Listing Rules of theNovo Mercado. The members of the board of directors shall be elected by a shareholders’ general meeting for a maximum two-year term of office, and are eligible for reelection. All new members of the board of directors, and of the board of officers shall sign a Management Compliance Statement which shall be filed with BM&FBOVESPA within 15 daysand of the date such members take office. Through such Compliance Statement, the company’s directors and officers are personally responsible for complyingfiscal council shall, before taking office, undertake to comply with the Listing Agreementarbitration clause in theNovo Mercado, the Rules of the Market Arbitration Chamber, the Listing Rules of theNovo Mercado and any other rule issued by BM&FBOVESPA regarding theNovo Mercado. bylaws.

 

The positions of chairman of the board of directors and of chief executive officer may not be cumulatedheld by the same person, except in the event of (1) a transition period (limited to 3 years as of the date the company was authorized to negotiate on theNovo Mercado, except if BM&FBOVESPA authorizes otherwise); or (2) vacancy, for a maximum period of 180 days.

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Directors shall inform the company of any other board of directors, executive committee, fiscal council or any other office occupied by thempositions in other companies or entities, which information willthis sense, as well as steps being taken to cease such cumulation, must be sentdisclosed by the company to BM&FBOVESPA pursuant to the terms established in the Listing Rules of theNovo Mercado.company.

 

The board of directors shall always disclose to the market an opinion regarding any tender offer of the company’s shares, informing, among others, their position on the convenience and consequences of such offer in respect to (a) the interests (a)of the company and of the shareholders regarding the price and regardingthe potential impact on the liquidity of such securities held by the shareholders, (b) the strategic plans disclosed by the offering shareholder with regard to the company and (b)(c) any alternatives to the acceptance of the company, stating their reasons for being favorable or againsttender offer available in the offer.market. Additionally, the board of directors shall always emphasize that each shareholder is responsible for the final decision regarding the acceptance or not of such tender offer.

 

Other Novo Mercado Characteristics

 

Novo Mercado rules cover other areas designed to foster high levels of corporate governance and market transparency. Companies are required to keep the minimum stock percentage floating in the market in order to foster dispersion of share ownership. In addition, companies are obliged to assign tag-along rights to their shareholders in order to ensure equal treatment if a controlling shareholder sells its controlling stake.

 

TheNovo Mercado rules require companies to provide quarterly information on the number of shares held by the controlling shareholder, if any, in addition to other information required by the Listing Rules of theNovo Mercado. We provide such required information on a quarterly basis and voluntarily on a monthly basis. Companies are also required to give more disclosure regarding related party transactions in which a company may be involved. The Listing Rules of theNovo Mercado also require companies to prepare and disclose to BM&FBOVESPAB3 and to the market a Securities Negotiation Policy applicable at least to the company, its controlling shareholders, directors, officers, members of the fiscal council and members of other committees, as well as a Code of Conduct establishing the company’s principles and values regarding its relationship with its management, employees, service providers and any person or entity with which the company maintains any relation. Pursuant toNovo Mercado rules, the company also needs to structure and disclose a process for evaluating the board of directors, its committees and officers.

 

Finally, the company, controlling shareholders, other shareholders, directors, officers and members of a company’s fiscal council are required to submit to arbitration any disputes or conflicts relatedthat may arise relating to or arising fromtheir status as issuer, shareholders, management and fiscal council members, especially in light of the provisions of Law 6,385/76, Law 6,404/76, the company’s bylaws, the rules issued by the National Monetary Council, the Central Bank of Brazil and CVM, as well as other rules applicable to the securities market in general, Listing Rules of theNovo Mercado, the Listing Agreement inother rules and regulations established by B3, and theNovo Mercado, the Penalties Regulation and the Arbitration Clause, specifically with regard to their application, validity, effectiveness and interpretation. participation agreement. The arbitrations shall take place before the Market Arbitration Chamber established by the BM&FBOVESPAB3 and shall be conducted in accordance with the Rules of the Market Arbitration Chamber.

 

Company Management

 

We are managed by a board of directors (Conselho de Administração) and a board of officers (Diretoria). See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”

 

The members of the board of directors and of the board of officers must be individuals, provided that the latter must also be Brazilian residents.

 

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Conflict of Interests

 

According to the Brazilian corporate law a director or an officer shall not take part in any corporate transaction in which he/she has an interest which conflicts with the interest of the company. In this case, he/she shall disclose his/her disqualification to the other directors or officers and shall cause the nature and extent of his/her interest to be recorded in the minutes of the board of directors or board of officers’ meeting, as the case may be.

 

With due compliance with the rules above relating to conflict of interests, a director or an officer may only contract with the company under reasonable and fair conditions, identical to those which prevail in the market or under which the corporation would contract with third parties. Any business contracted otherwise is voidable and the director or the officer concerned shall be obliged to transfer to the corporation all benefits which he/she may have obtained in such business.

 

According to Brazilian corporate law, a director or officer may not:

 

·perform any act of generosity to the detriment of the company;

 

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·without prior approval of the shareholders’ general meeting or the board of directors, borrow money or property from the company or use its property, services or take advantage of its standing for his/her own benefit, for the benefit of a company in which he/she has an interest or for the benefit of a third party; and

 

·by virtue of his or her position, receive any type of direct or indirect personal advantage from third parties, without authorization in the bylaws or from a shareholders’ general meeting.

 

According to our bylaws, any business or agreement between the company and any shareholder, director or officer must be previously approved by the board of directors, except if specified in our annual budget or business plan.

 

Rules for Retirement

 

There is no retirement age limit relating to directors or officers pursuant to the Brazilian law and our bylaws.

 

Policy for the Trading of Our Securities

 

On, August 10, 2015,March 26, 2020, our board of directors approved the secondthird amendment of our Conduct Manual on Information Disclosure and Use and Securities Trading Policy, passedwhich was approved on July 15, 2009, whichand establishes the following procedures regarding the policy for the trading of our securities:

 

·the company and all of our directors, executive officers, employees, membersany person with knowledge of the other bodies with technicalmaterial transaction or consultant duties,event involving our possible controlling shareholders, and whoever by virtue of his/her position, job, or post at our company, or our subsidiaries and affiliates, and who have signed the compliance statement and became aware of the information ofthat has yet to be disclosed to the market, especially those parties with a material transactioncommercial, professional or event involving our company,trust-based relationship with the Company, including independent auditors, securities analysts, consultants and securities brokers or dealers , are restricted from trading in our securities until such material transaction or event is disclosed to the market as a material fact, except as regards treasury stock transactions, through private trading, the exercise of options to purchase shares of our capital stock, with stock option plan approved by the shareholders, or a possible buyback, also through private trading performed by Bound Parties when carried out by us, provided that such buyback program is carried due to the exercise of stock options in connectionaccordance with the plan or program.an Individual Investment Plan.. This restriction is extended to periods prior to the announcement of such information or annual or interim financial statements or prior to disclosure of a material fact in accordance with applicable law;

 

·trading of our securities or transactions related to our securities carried out by the aforementioned persons pursuant to an Individual Investment Program, consisting of long-term investments, as defined in the Trading Policy, is not subject to the aforementioned restrictions; provided that the Individual Investment Program is filed with the investors relations officer at least 30 days in advance;

 

·the restrictions of the Trading Policy also apply to our former directors and executive officers who resigned prior to the public disclosure of a transaction or fact that began during their administration (a) for the six month period following the end of their duties with the company, or (b) until the disclosure of the material event or the related financial statements, whichever occurs first; and

 

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·the abovementioned restrictions also apply to indirect trading carried out by such persons, except those conducted by investment funds, provided that the investment funds are not exclusive and the transaction decisions taken by the investment fund officers cannot be influenced by its unit holders.

 

Rights of Common Shares

 

Each of our common shares entitles its holder to one vote at an annual or special shareholders’ general meeting. A holder of ADSs has the right under the deposit agreement to instruct the depositary to exercise the voting rights for the common shares represented by his/hers ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Common Shares and the ADSs.” Pursuant to our bylaws, Brazilian corporate law and theNovo Mercado rules, owners of common shares are entitled to dividends, or other distributions made in respect of common shares, in proportion to their ownership of outstanding shares. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy” and “Item 9. The Offer and Listing—C. Markets— Investment in Our Common Shares by Non-Residents of Brazil” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon our liquidation, holders of our shares are entitled to share all our remaining assets, after payment of all our liabilities, ratably in accordance with their respective participation in the total amount of our issued and outstanding shares. Holders of our common shares are entitled to participate on apro rata basis in future capital calls by our company except in some specific circumstances under Brazilian law, as described in “—Preemptive Rights.” Our common shares have tag along

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rights, which enable their holders to, upon the sale of a controlling interest in us, receive 100% of the price paid per common share of the controlling block by a single or series of transaction.

 

Options

 

According to our bylaws, we may, within our authorized share capital and upon resolution of the shareholders’ general meeting, grant stock options to (1) our directors, executive officers and employees, or (2) individuals who provide services to us or to companies we control.

 

Appraisal Rights

 

Shareholders who are absent, dissent or abstain from voting on certain actions taken during a shareholders’ general meeting have the right under Brazilian corporate law to withdraw from our company and to receive the value of their shares.

 

According to Brazilian corporate law, shareholder appraisal rights may be exercised in the following circumstances, among others:

 

·a reduction in the percentage of our mandatory dividends;

 

·a change in our corporate purpose;

 

·an acquisition, by our company, of a controlling stake in another company if the acquisition price is outside of the limits established by Brazilian corporate law;

 

·a merger of shares involving our company, a merger of our company into another company, if we are not the surviving entity, or our consolidation with another company; or

 

·an approval of our participation in a group of companies (as defined in Brazilian corporate law).

 

Brazilian corporate law further provides that any resolution regarding a spin-off will also entitle shareholders to withdraw if the spin-off:

 

·causes a change in our corporate purpose, except if the equity is spun-off to a company whose primary activities are consistent with our corporate purposes;

 

·reduces our mandatory dividends; or

 

·causes us to join a group of companies (as defined in Brazilian corporate law).

 

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In cases where (1) our company merges with another company where we are not the surviving company, or (2) we are consolidated with another company, or (3) we participate in a group of companies (as defined in Brazilian corporate law), our shareholders will not be entitled to withdraw from our company if their respective shares are (a) liquid, i.e. part of the BM&FBOVESPAB3 index or other stock exchange index in Brazil or abroad, (as defined by the CVM), and (b) widely held, such that less than 50% of our shares are held by a controlling shareholder or by companies a controlling shareholder controls. We are currently part of the IBOVESPA (the BM&FBOVESPAB3 index) and have no controlling shareholder. Therefore, our shares are, at present, considered liquid and widely held for the purposes of this paragraph.

 

The right to withdraw expires 30 days after publication of the minutes of the relevant shareholders’ general meeting. We are entitled to reconsider any action giving rise to withdrawal rights for within 10 days after the expiration of the 30-day period if the redemption of shares of absent, dissenting or non-voting shareholders would jeopardize our financial stability. If shareholders exercise withdrawal rights, they are entitled to receive the economic value of the company’s shares, as determined by a valuation report issued by a specialized firm. If the resolution giving rise to the appraisal rights is made later than 60 days after the date of the last approved balance sheet, the shareholder may demand that his or her shares be valued according to a new balance sheet dated no less than 60 days before the resolution date. In this case, we must immediately pay 80% of the equity value of the shares according to the most recent balance sheet approved by our shareholders, and the remaining balance must be paid within 120 days after the date of the resolution of the shareholders’ general meeting.

 

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Redemption of Shares

 

According to Brazilian corporate law, we may redeem our shares by a decision taken in a special shareholders’ general meeting by shareholders representing at least 50% of our share capital. The share redemption may be paid with our profit, profit reserves or capital reserves. If the share redemption is not applicable to all shares, the redemption will be made by lottery. If custody shares are picked in the lottery and there are no rules established in the custody agreement, the financial institution will specify on apro rata basis, the shares to be redeemed.

 

Registration of Shares

 

Our shares are held in book-entry form with Itaú Unibanco Corretora S.A., which will act as the custodian agent for our shares. Transfer of our shares will be carried out by means of book entry by Itaú Unibanco S.A., debiting the share account of the seller and crediting the share account of the buyer, with the presentation of a written order of the transferor or a judicial authorization or order to effect such transfers.

 

Preemptive Rights

 

Except as provided below, our shareholders have a general preemptive right to participate in any issuance of new shares, convertible debentures and warrants, in proportion to their respective shareholding at such time, but the conversion of debentures and subscription warrants into shares, the granting of options to purchase shares and the issuance of shares as a result of its exercise, are not subject to preemptive rights. In addition, Brazilian corporate law allows for companies’ bylaws to give the board of directors the power to exclude preemptive rights or reduce the exercise period of such rights with respect to the issuance of new shares, debentures convertible into shares and subscription warrants up to the limit of the authorized share capital if the distribution of those shares, debentures or subscription warrants is effected through a sale on a stock exchange, through a public offering or through an exchange of shares in a tender offer the purpose of which is to acquire control of another company. Shareholders are allowed to exercise the preemptive rights for a period of at least 30 days following the publication of notice of the issuance of shares, convertible debentures and warrants, and the right may be transferred or disposed of for consideration.

 

Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares underlying the ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Common Shares and the ADSs—Holders of ADSs may be unable to exercise preemptive rights with respect to our common shares underlying the ADSs.”

 

Shareholders’ General Meetings

 

Under Brazilian corporate law, at our shareholders’ meetings, shareholders are empowered to take any action relating to our corporate purpose and to pass any such resolutions as they deem necessary. The approval of our financial statements and the determination of the allocation of our net profits with respect to each fiscal year take place at our annual general shareholders’ meeting immediately following such fiscal year. The election of our directors and, if requested by shareholders, of members of our fiscal council typically takes place at the annual general shareholders’ meeting, although under Brazilian corporate law it may also occur at a special shareholders’ general meeting.

 

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A special shareholders’ general meeting may be held concurrently with the annual general shareholders’ meeting. Pursuant to our bylaws and Brazilian corporate law, the following actions, among others, may only be taken at a general shareholders’ meeting:

 

·amendment of our bylaws, including amendment of our corporate purpose;

 

·election and dismissal, at any time, of our directors and members of our fiscal council;

 

·determination of the aggregate compensation of our board of directors and board of officers, as well as the fiscal council’s compensation;

 

·approval of stock splits and reverse stock splits;

 

·approval of a stock option plan;

 

·approval of the company’s financial statements;

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·resolution upon the destination of our net profits and distribution of dividends;

 

·election of the fiscal council to function in the event of our dissolution;

 

·cancellation of our registration with the CVM as a publicly-held company;

 

·suspension of the rights of a shareholder who has violated Brazilian corporate law or our bylaws;

 

·acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in consideration for shares of our capital stock;

 

·approval of our transformation into a limited liability company or any other corporate form;

 

·delisting of our common shares from theNovo Mercado;

 

·appointment of a financial institution responsible for our valuation, in the event of a mandatory tender offer, specifically in the event that a tender offer for our common shares is carried out in connection with the delisting of our common shares from theNovo Mercado or cancellation of our registration as a publicly-held company;

 

·reduction in the percentage of mandatory dividends;

 

·participation in a group of companies (as defined in Brazilian corporate law);

 

·approval of any merger, consolidation with another company or spin-off;

 

·approval of our dissolution or liquidation, the appointment and dismissal of the respective liquidator and the official review of the reports prepared by him or her; and

 

·authorization to petition for bankruptcy or request for judicial or extrajudicial restructuring.

 

According to Brazilian corporate law, neither a company’s bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of specific rights, such as:

 

·the right to participate in the distribution of profits;

 

·the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company;

 

·preemptive rights in the event of subscription of shares, convertible debentures or subscription warrants, except in some specific circumstances under Brazilian law described in “—Preemptive Rights;”

 

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·the right to inspect and monitor the management of the company’s business in accordance with Brazilian corporate law; and

 

·the right to withdraw from the company in the cases specified in Brazilian corporate law, described in “—Appraisal Rights.”

 

Quorum for our Shareholders’ General Meetings

 

As a general rule, Brazilian corporate law provides that a quorum at a shareholders’ general meeting consists of shareholders representing at least 25% of a company’s voting capital on the first call and, if that quorum is not reached, any percentage on the second call. A quorum for the purposes of amending our bylaws consists of shareholders representing at least two-thirds of voting capital on the first call and any percentage on the second call.

 

As a general rule, the affirmative vote of shareholders representing at least the majority of our issued and outstanding common shares present in person, remotely (as described in “—Remote Voting”) or represented by proxy at a shareholders’ general meeting is required to ratify any proposed action, with abstentions not taken into account. However, the affirmative vote of shareholders representing one-half of our issued and outstanding voting capital is required to:

 

·reduce the percentage of mandatory dividends;

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·change our corporate purpose;

 

·merge or consolidate our company with another company;

 

·spin-off a portion of our assets or liabilities;

 

·approve our participation in a group of companies (as defined in Brazilian corporate law);

 

·apply for cancellation of any voluntary liquidation;

 

·approve our dissolution; and

 

·approve the merger of all our shares into another company.

 

A quorum smaller than one-half of our issued and outstanding voting capital may be authorized by the CVM for a publicly-held company with widely-traded and widespread shares that has had less than half of the holders of its voting shares in attendance at its last three shareholders’ meetings. In such case, resolutions may only be taken on a third call.

 

According to our bylaws and for so long as we are listed on theNovo Mercado, we may not issue preferred shares or founders’ shares and we will have to conduct a tender offer in order to delist ourselves from theNovo Mercado.

 

Notice of our Shareholders’ General Meetings

 

According to Brazilian corporate law, notice of our shareholders’ general meetings must be published at least three times in theDiário Oficial do Estado de São Paulo, the official newspaper of the State of São Paulo, and in another widely circulated newspaper in the same State, previously chosen at an annual shareholders meeting, which, in our case isO Estado de São Paulo. The

According to CVM Instruction No. 559 of March 27, 2015 (which deals with the approval of ADR programs), the first notice must be published no later than 15 days before the date of the meeting on the first call, and no later than eight days before the date of the meeting on the second call. However, in certain circumstances, upon the request of any shareholder, the CVM may require that the first notice be published 30 days in advance of the meeting if the meeting relates to complex transactions and, accordingly, shareholders need more time to be familiarized with and analyze such transactions.

In addition, the CVM may suspend for up to 15 days the required prior notice of the special shareholders’ general meeting so that it may further analyze the proposal to be voted upon at such meeting. Such call notice in all circumstances shall contain the date, time, place and agenda for the meeting and a list of the documents that will be required from our shareholders to be admitted at the meetings, and in case of amendments to the bylaws, the indication of the relevant matters. CVM Instruction No. 481 of December 17, 2009 also requires that additional information be

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disclosed in the call notice for certain matters. For example, in the event of an election of directors, the call notice shall also disclose the minimum percentage of equity participation required from a shareholder to request the adoption of cumulative voting procedures. All documents pertaining to the matters to be discussed at the shareholders’ general meeting shall be made available to the shareholders upon publication of the first call notice, except if the law or CVM regulations provide otherwise. Pursuant to CVM Instruction No. 418, the company should provide one (1) month before the date on the general meeting, among others, the following documents (i) copy of the financial statements; (ii) independent auditors’ report; (iii) opinion of the fiscal council, including dissenting votes, if any; and (iv) remote vote bulletin.

 

Location of our Shareholders’ General Meetings

 

Our shareholders’ meetings shall take place at our head offices at Av. Nações UnidasPres. Juscelino Kubitschek, No. 8,501, 19th floor, 05425-070 –1830, Block 2, 3rd Floor, 04543-900 �� São Paulo, SP – Brazil. Brazilian corporate law allows our shareholders to hold meetings outside our head offices in the event of force majeure, provided that the relevant notice contains a clear indication of the place where the meeting will occur, which, in any case, shall never be held outside the city where the company’s headquarters are located.

 

Who May Call our Shareholders’ General Meetings

 

According to Brazilian corporate law, our board of directors may call a shareholders’ general meeting. Shareholders’ general meetings may also be called by:

 

·any shareholder, if our directors fail to call a shareholders’ general meeting within 60 days after the date they were required to do so under applicable laws and our bylaws;

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·shareholders holding at least 5% of our share capital if our directors fail to call a meeting within eight days after receipt of a request to call the meeting by those shareholders, and such request must indicate the proposed agenda;

 

·shareholders holding at least 5% of voting share capital or 5% of non-voting share capital if our directors fail to call a meeting within eight days after receipt of a request to call the meeting to convene a fiscal council; and

 

·our fiscal council (if installed), in the event our board of directors delays calling an annual shareholders’ meeting for more than one month. The fiscal council may also call a special general shareholders’ meeting at any time if it believes that there are significant or urgent matters to be addressed.

 

There is an obligation of the chairman of our board of directors to call a shareholders’ general meeting if: (1) we are not under control of a shareholder holding more than 50% of our voting capital, and (2) BM&FBOVESPAB3 determines that the price of our shares shall be quoted separately or that the trading of our shares on theNovo Mercado shall be suspended by reason of non-compliance with the listing rules ofNovo Mercado. At such a meeting all members of our board of directors must be replaced. In the event the shareholders’ general meeting is not called by the chairman of the board of directors within the time period established in our bylaws, the meeting may be called by any shareholder of the company.

 

Conditions for Admission at our Shareholders’ General Meetings

 

A shareholder may be represented at a shareholders’ general meeting by a proxy, as long as the proxy is appointed less than a year before such shareholders’ general meeting. The proxy must be either a shareholder, an executive officer or a director of our company, a lawyer or a financial institution. An investment fund must be represented by its investment fund officer. A legal entity may be represented by its legal representative.

 

Shareholders attending a shareholders’ general meeting must deliver proof of their status as shareholders and proof that they hold the shares they intend to vote by delivery of proper identification and a receipt issued by the custodian agent of our shares.

 

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Remote Voting

Participation and remote voting at the general shareholders’ meetings of publicly-held companies is regulated by CVM Instruction No. 481 of December 2009, as amended from time to time, which aims to facilitate the participation of shareholders in general meetings either through voting or through the submission of proposals. This rule provides the following:

·the creation of a remote voting ballot through which shareholders may exercise their right to vote prior to the date the general meeting is held;

·the possibility to include in the voting bulletin a list of candidates and submit minority shareholders´ proposals for deliberation at the general meeting, with due observance of certain deadlines and percentages of equity interest, in order to facilitate shareholders’ participation in general meetings; and

·the deadlines, procedures and means of transmitting the bulletin, which may be transmitted by the shareholder: (a) to the custodian (if the shares held by the shareholder are kept at a centralized deposit), (b) to the book-entry agent of the shares issued by the company (if such shares are not kept at a centralized deposit) or (c) directly to the company.

In addition, publicly-held companies are required to adopt certain measures in connection with the voting process. Publicly-held companies are required to: (1) inform the market of the adoption of the cumulative voting process in annual meetings immediately upon receipt of the first valid requirement, (2) disclose the final voting summary statements, the final voting detailed statements, as well as any voting statement presented by a shareholder at the general meetings and (3) register in the minutes of the general meeting the number of approving, rejecting or abstaining votes for each item on the agenda, including the votes received by each member of the Board of Directors and/or Fiscal Council elected in such annual shareholders’ meeting.

The application of CVM Rule No. 561 became mandatory on January 1, 2017 for companies that on April 9, 2015 had at least one share class listed either on the Index Brasil 100 or the IBOVESPA index of the B3, such as Gafisa.

Arbitration

 

Any disputes or controversies involving our company, our shareholders, members of our management or our fiscal council that may arise relating to or arising fromtheir status as issuer, shareholders, management and fiscal council members, especially in light of the Listing Agreement onprovisions of Law 6,385/76, Law 6,404/76, theNovo Mercado, Listing Rules, our company’s bylaws, Brazilian corporate law, the rules publishedissued by the CMN,National Monetary Council, the Central Bank theand CVM, any shareholders’ agreement filed at our headquarters, andas well as other rules applicable to the Brazilian capital marketssecurities market in general, Listing Rules of theNovo Mercado, other rules and regulations established by B3 and theNovo Mercado participation agreement, must be submitted to arbitration conducted in accordance with the Rules of the Market Arbitration Chamber established by the BM&FBOVESPA.B3.

 

Going Private Process

 

We may become a private company by the decision of our shareholders only if we conduct a public tender offer to acquire all of our outstanding shares in accordance with the rules and regulations of Brazilian corporate law, the CVM and theNovo Mercado regulations which requires:

 

·a fair bid price at least equal to the value estimated of the company; and

 

·shareholders holding more than two thirds of the outstanding shares have specifically approved the process or accepted the offer.

 

The minimum price offered for the shares in the public tender offer will correspond to the economic value of such shares, as determined by a valuation report issued by a specialized firm, and we may only purchase shares from shareholders that have voted in favor of us becoming a private company after purchasing all shares from the other shareholders that did not vote in favor of such deliberation and that have accepted the public tender offer.

 

The valuation report must be prepared by a specialized and independent firm of recognized experience chosen by the shareholders representing the majority of the outstanding shares present at the relevant shareholders’ meeting (excluding, for such purposes, treasury shares, shares held by our affiliates and by other companies that are a part of

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our economic group, as well as blank votes) from a list of three institutions presented by our board of directors. All

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the expenses and costs incurred in connection with the preparation of the valuation report must be paid for by the person making the tender offer.

 

Shareholders holding at least 10% of our outstanding shares may require our management to call a special shareholders’ general meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public offering. The shareholders who make such request as well as those who vote in its favor must reimburse us for any costs involved in preparing the new valuation, if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the public offering must be made at the higher price.

 

Delisting from theNovo Mercado

 

We may, at any time, delist our common shares from theNovo Mercado, provided that shareholders approve the decision and that the BM&FBOVESPA is notified in writing at least 30 days in advance.decision. Delisting of shares from theNovo Mercado does not require delisting from the BM&FBOVESPA.B3.

 

IfFor our common shares areto be delisted from theNovo Mercado, our controlling shareholders, if any, willit must be required to conductpreceded by a tender offer for the acquisition of our outstanding common shares. In case there are no controlling shareholders, the shareholders’ general meeting deciding on the delisting must also appoint who will be responsible for the mandatory tender offer. The minimum price offered for the shares in the public tender offer will correspondpursuant to the economic value ofrules applicable to the shares, as determinedgoing private process. Such tender offer may be dismissed if a waiver is approved by a valuation report issued by a specialized firm chosen by thegeneral shareholders representing a majority of the outstanding shares (excluding, for such purposes, shares held by the controlling shareholders, if any, and their affiliates, treasury shares, shares held by our affiliates, and blank votes) from a list of three institutions presented by our board of directors. All the expenses and costs incurred in connection with the preparation of the valuation report must be paid for by the controlling shareholder, if any, or by us.meeting.

 

If our delisting from theNovo Mercado occurs due to the cancellation of our registration as a publicly held company, all the other requirements established by such delisting shall be followed. See “—Going Private Process.”

 

InIf the eventreorganization involves resulting companies that we delist duedo not intend to a corporate reorganization where the surviving company is not admittedapply for listing on theNovo Mercado within one hundred and twenty days as, this structure must be approved by a majority of the date ofcompany’s shareholders holding free float shares and present at the shareholders’ general meeting that resolved on the corporate reorganization, the then-controlling shareholders will need to carry out a public tender offer for the acquisition of the shares held by the other shareholders, and the minimum price offered per share shall be the economic value of the shares. In case the company does not have controlling shareholders, the shareholders’ general meeting that decided on the delisting must also determine who will be responsible for the mandatory tender offer, and in case the shareholders’ general meeting fails to do so, the shareholders who approved the corporate reorganization will be responsible for the tender offer. The notice of public tender offer shall be given to the BM&FBOVESPA and released to the market immediately after the shareholders’ general meeting that has approved the corporate reorganization.meeting.

 

If our share control is sold within twelve months of our delisting from theNovo Mercado, the selling controlling shareholder and the acquirer shall offer (i) to acquire the shares of all other shareholders under the same conditions offered to the selling controlling shareholder.shareholder or (ii) to pay the difference between the tender offer price accepted by former shareholders, duly updated, and the price obtained by the controlling shareholder in selling its own shares.

 

Sale of a Controlling Stake in our Company

 

Under the Listing Rules of theNovo Mercado, the sale of a controlling interest in our company, either through a single transaction or through successive transactions, takes place under a suspension or resolution condition, where the acquirer agrees to, within the time and pursuant to the conditions specified under Brazilian corporate law and the Listing Rules of theNovo Mercado, make a tender offer of the remaining shares of the other shareholders under the same terms and conditions granted to the selling controlling shareholder.

 

A tender offer is also required under the following conditions:

 

·when rights are assigned for a subscription of shares and other securities or rights related to securities convertible into shares that results in the sale of the company’s controlling stake;

 

·when, if the controlling shareholder is an entity, the control of such controlling entity is transferred; and

 

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·when a controlling stake is acquired through an agreement for the purchase of shares. In this case, the acquirer is obligated to make a tender offer under the same terms and conditions granted to the selling shareholders and reimburse the shareholders from whom he/she had purchased the shares traded on stock exchanges within the six months before the sale date of the company’s share control. The reimbursement value is the difference between the price paid to the selling controlling shareholder and the amount traded on stock exchanges per share, during this period, adjusted by the inflation in the period. Such amount shall be distributed among all persons who sold shares issued by the company in the stock market trading session in which the acquirer made its acquisitions, proportionally to the daily net selling balance of each acquisition, being BM&FBOVESPAB3 responsible for processing such distribution according to its regulations.

 

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The buyer, when necessary, must take the necessary measures to recompose the minimum 25% of outstanding shares in the market within the subsequent six months.

 

Mandatory Tender Offer in Case of Acquisition of a 30%Relevant Equity Stake

 

Under the rules of our bylaws, if any person acquires our shares directly or indirectly, or any securities or rights related to such shares, in an amount representing 30%50% or more of our corporate capital, such acquirer has to carry out a mandatory tender offer for the acquisition of all shares issued by the Company. The minimum price offered for the shares in the public tender offer will correspond to the economic value of such shares, as determined by a valuation report issued by a specialized firm.

 

The valuation report must be prepared by a specialized and independent firm of recognized experience chosen by the shareholders representing the majority of the outstanding shares present at the relevant shareholders’ meeting (excluding, for such purposes, shares held by the controlling shareholder, if any, by the members of the board of directors and officers appointed, directly or indirectly, by the controlling shareholder, if any, treasury shares, as well as abstentions) from a list of three institutions presented by our board of directors. All the expenses and costs incurred in connection with the preparation of the valuation report must be paid for by the person making the tender offer.

 

Shareholders holding at least 10% of our outstanding shares may require our management to call a special shareholders’ general meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public offering. The shareholders who make such request as well as those who vote in its favor must reimburse us for any costs involved in preparing the new valuation, if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the acquirer may either increase the offer price or withdraw the tender offer, in the latter case provided that it shall dispose of the shares in excess of 30%50% of our corporate capital within 3 months counted from the special general meeting mentioned in this paragraph.

 

A tender offer as a result of an acquisition of a 30%relevant equity stake, in accordance to our bylaws, is not mandatory in any of the following cases: (1) if after the acquisition of such 30% equity stake, the same shareholder who held more than 50% of our shares remains as controlling shareholder; (2) if a 30%the relevant equity stake is obtained as a result of purchases made under another public tender offer for the acquisition of our shares, by their economic value, made in accordance with theNovo Mercado Listing Rules or with the applicable law; provided that the offer was made for all shares of the company and at least the minimum price, equivalent to the price of the mandatory tender offer, has been paid; (3) if a 30%relevant equity stake is obtained involuntarily as a result of a corporate reorganizations, cancellation of shares in treasury, share redemption, capital reduction, or of a subscription of shares made under a primary public offer for distribution of our shares where the preemptive rights were not exercised by all shareholders who had it or which did not have as subscribers as expected; or (4) in the case of a sale of a controlling stake, which is subject to the rules described above for such case.

 

Purchases by us of our own Shares

 

Purchases by us of our own shares are regulated by CVM Rule No. 567 of September, 2015. The rule requires us to obtain the prior approval of our shareholders in connection with a purchase by us of our own shares if such purchase:

·is conducted outside an organized securities markets and results, whether in a single transaction or by a series of transactions, in us acquiring more than 5% of the type or class of shares in circulation over a period of 18 months;

·is conducted outside an organized securities markets and is for a price that is, (i) in the case of an acquisition of shares, more than 10% greater than the market quotation for such shares, or (ii) in the case of a disposal of shares, more than 10% lower than the market quotation for such shares;

·aims to change or preserve the composition of the controlling stock or the administrative structure of the company; or

·is conducted outside an organized securities markets with a related party.

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Our bylaws entitle our board of directors tomay approve the acquisition of our own shares.shares in other circumstances. The decision to acquire our shares for purposes of maintaining the acquired shares in treasury or of cancelling them may not, among other things:

 

·result in the reduction of our share capital;

 

·require the use of resources greater than our profit reserves and other available reserves, as provided in our financial statements;

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·create, as a result of any action or inaction, directly or indirectly, any artificial demand, supply or condition relating to share price;

 

·involve any unfair practice;

 

·be used for the acquisition of unpaid shares or shares held by our controlling shareholders; or

 

·when a public offer for acquisition of the shares of the company is being made.

 

We may not keep in treasury more than 10% of our outstanding common shares, including the shares held by our subsidiaries and affiliates.

On February 26, 2014, the Board of Directors of Tenda approved the closing of Tenda’s repurchase of shares program as approved on December 9, 2013. During the course of this program, Tenda purchased 15,500,000 common shares issued by Gafisa to be kept in treasury and future disposal.

On the same date, the Board of Directors of Gafisa approved the repurchase of its common shares to be kept in treasury and future cancellation or disposal up to 17,456,434, which corresponded to 10% of the then outstanding common shares. The purchase of shares by Gafisa under this program was conditioned on the maintenance of Gafisa’s consolidated net debt to equity ratio at or below 60%. This program ended on February 25, 2015.

 

On February 2, 2015, our Board of Directors approved the closing of a repurchase of shares program as approved on December 3, 2014. During the course of this program, we purchased 30,207,130 of Gafisa’s common shares to be kept in treasury and future disposal.

 

On the same date, the Board of Directors of Gafisa approved the repurchase of its common shares to be kept in treasury and future cancellation or disposal up to 27,000,000, which corresponded to 10% of the then outstanding common shares.

 

On March 3, 2016, the Board of Directors of Gafisa approved the closing of the repurchase of shares program as approved on February 2, 2015. During the course of this program, we purchased 1,000,000 of Gafisa’s common shares to be kept in treasury and future disposal.

 

On the same date, the Board of Directors of Gafisa approved the creation of a repurchase program of its common shares to be kept in treasury and future cancellation or disposal up to 8,198,565 common shares, which corresponded to 5% of the then outstanding common shares. The objective of this program is to acquire shares in order to effectively use the Company’s available funds, aiming at medium-term and long-term profitability. Additionally, a portion of the shares to be acquired might be reserved for the exercise of options and/or shares to be granted in the Stock Option Plan previously approved by the Company’s shareholders at the Company’s general meeting. The purchase of shares by Gafisa under this program was conditioned on the maintenance of Gafisa’s consolidated net debt to equity ratio at or below 60%. This program endsended on September 2, 2017.

 

On March 3, 2016, theSeptember 28, 2018, our Board of Directors of Gafisa approved the creationopening of a repurchasethe Company’s share buyback program with the objective of its common shares, up to a maximumgenerating value for the Company’s shareholders. Shares purchased by the Company as part of 8.2 million common shares which, when added to the 10.6 million shares currently keptbuyback program will be held in treasury, correspond to 5%and may subsequently be canceled, sold and/or used in connection with the exercise of the total common shares issuedstock options granted by the Company. The objective of this program is to acquire shares in order to effectively use the Company’s available funds, aiming at medium-term and long-term profitability. Additionally, a portion of the shares to be acquired might be reserved for the exercise of options and/or shares to be granted in the Stock Option Plan previously approved by the Company’s shareholders at the Company’s general meeting. The purchasemaximum number of shares by Gafisathe Company may acquire under this program is conditioned3,516,970 common shares, pursuant to Article 8 of CVM Instruction No. 567/15. This buyback program ended on October 1, 2019.

On March 27, 2020, our Board of Directors approved the maintenance of Gafisa’s Consolidated Net Debt to Equity ratio in a level equal or lower than 60% at the timeestablishment of the shares’ purchase.Company’s share buyback program with the objective of generating value for the Company’s shareholders, that was confirmed by the General Shareholders Meeting held on April 30, 2020. Shares purchased by the Company as part of the buyback program will be held in treasury, and may subsequently be canceled, sold and/or used in connection with the exercise of stock options granted by the Company. The maximum number of shares the Company may acquire under this program is 10,327,558 common shares, pursuant to Article 8 of CVM Instruction No. 567/15. This buyback program ends on September 2, 2017 

May 4, 2021. Under our current shares repurchase program, any acquisition by us of our own shares must be made on a stock exchange and cannot be made inby means of a private transaction. See “Item 10. Additional Information—B. Memorandum and Bylaws—Purchases by us of our own Shares,” for further information.

 

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Disclosure Requirements

 

We are subject to the reporting requirements established by Brazilian corporate law and the CVM. Furthermore, because we are listed with theNovo Mercado, we must also follow the disclosure requirements provided for in the Listing Rules of theNovo Mercado.

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Disclosure of Information

 

The Brazilian securities regulations require that a publicly-held corporation provide the CVM and the relevant stock exchanges with periodic information that includes annual information statements, quarterly financial statements, quarterly management reports, independent auditor reports, notices and minutes of shareholders’ meetings, among others. In addition, we also must disclose any material development related to our business to the CVM and the BM&FBOVESPA.B3.

 

We observe theNovo Mercado disclosure standards and are required to, among other things:

 

·present the company’s financial statements, standard financial statements form (DFP), quarterly information form (ITR) and Reference Form (Formulário de Referência);

·material events;

·information about dividends and other distributions in notices to shareholders or market notices;

·earnings releases;

 

·include a note in the quarterly information form (ITR) regarding all operations with related parties;

 

·disclose and maintain updated the information presented in the Reference Form regarding any shareholder holding, directly or indirectly, at least 5% of the company’s capital stock, considering the information received by company from the relevant shareholders;

 

·disclose, monthly, the individual and consolidated amount and characteristics of our securities held directly or indirectly by controlling shareholders (if this is the case);, as well as persons related to the controlling shareholder; and

 

·disclose, monthly, the individual and consolidated changes in the amount of securities held by controlling shareholders (if this is the case), as well as their respective spouses or dependents, as per their income tax statements, aspersons related to the case may be.controlling shareholder.

 

Disclosure of Trading by Insiders

 

Pursuant to the rules of theNovo Mercado, each of our possible controlling shareholders must disclose to the BM&FBOVESPAB3 information in connection with the total amount and characteristics of securities owned, directly or indirectly, by them and issued by us, or any derivatives referenced in such securities, as well as any subsequent trading of such securities and derivatives. In the case of individuals, such information shall also include securities held by the spouse, companion or dependents of such persons, included in the annual income tax statement of such controlling shareholder. This information must be communicated to the BM&FBOVESPAB3 within 10 days following the end of each month.

 

CVM regulations require our directors, executive officers, members of the fiscal council, and members of any other technical or advisory body to disclose to us, to the CVM and to the BM&FBOVESPA,B3, the total amount, the characteristics and form of acquisition of securities issued by us, listed companies under our control or the control of our listed controlling shareholders, including derivatives referenced in such securities that are held by each of them, as well as any change in such investments within 10 days after the end of the month when the securities were traded.traded, any change in information related to the tax-payer registry number (CNPJ or CPF) must be communicated to the company within 15 days after the change. In the case of individuals, such information shall also include securities held by the spouse, companion or dependents of such persons, included in the annual income tax statement and companies controlled directly or indirectly by such person.

 

As of September 2015, pursuant to changes introduced by CVM Rule No. 568/15 to CVM Rule No. 358/02, we are required to disclose to the CVM and to the BM&FBOVESPAB3 the total amount and the characteristics of securities issued by us,

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which are held by us or any of our affiliates, as well as any change in such investments, within 10 days after the end of the month in which the relevant securities were traded.

 

In addition, CVM Rule No. 568/15 also amended CVM Rule No. 358/02 regarding, among other things, (1) the change in the form of calculation of trades of relevant equity interests to determine when a disclosure obligation of those trades is triggered, and (2) the regulation of individual investment plans, as described below.

 

In addition, our controlling shareholders, our shareholders who have caused the election of members of our board of directors or fiscal council, as well as any individual, legal entity or group of persons acting jointly whose direct or indirect participation reaches 5%, 10%, 15% and so on, of our shares, must provide to us, and we shall transmit to the CVM and the BM&FBOVESPA,B3, the following information:

 

·the name and qualification of the person providing the information;

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·reason and purpose for the acquisition and amount of securities to be acquired, including, as the case may be, a representation of the acquirer stating that the acquisition does not aim at modifying the management or the controlling structure of the company;

 

·amount of shares, subscription bonuses, as well as other share subscription rightssecurities and call options,related derivatives, by type and/or class, already owned, directly or indirectly, by the acquirer or any person related with the acquirer;

·amount of debentures convertible in shares, already owned, directly or indirectly, by the acquirer or person related to the acquirer, displaying the amount of shares object of the possible conversion by type and class; and

 

·information on any agreement regarding the exercise of voting rights or the purchase and sale of our securities.

 

The disclosure requirement referred to above will also apply to any person or group acting jointly, holding participation equal to or in excess of 5%, each time such person increases or decreases its participation in our shares by an amount equal to 5% of our shares.

 

Finally, pursuant to the individual investment plans introduced by CVM Rule No. 568/15, direct or indirect controlling shareholders, members of any statutory governing bodies of a publicly-held corporation, as well as any persons who, due to their responsibility, function or position in a listed company, its controlling company, subsidiaries or affiliates have potential access to insider information, are now allowed, subject to certain requirements, to trade in the company’s shares in certain periods during which such trading would otherwise be prohibited.

 

Disclosure of Material Developments

 

According to Law No. 6,385 of December 7, 1976, and subsequent amendments, and CVM Instruction No. 358 of January 3, 2002, and subsequent amendments, we must, by deliberation of the board of directors, adopt a policy of disclosure of a material act or fact. Therefore, we must disclose any material development related to our business to the CVM and to the BM&FBOVESPAB3 and must publish a notice of the material development. A development is deemed to be material if it has a material impact on the price of our securities, on the decision of investors to trade in our securities or on the decision of investors to exercise any rights as holders of any of our securities. CVM Instruction No. 358 lists some examples of material developments, including, among others: (i) a decision to promote the cancellation of registration of the publicly-held company; (ii) an incorporation, merger or spin-off involving the company or related companies; (iii) a change in the composition of the company’s equity; and (iv) a transformation or dissolution of the company.

Pursuant to CVM regulations, the Investor Relations Director is the primary responsible party for a company’s disclosure involving material developments, notwithstanding co-liability of other administrators in certain cases.

 

Under special circumstances, we may request confidential treatment of certain material developments from the CVM, when our management believes that public disclosure could result in adverse consequences to us.

 

C.Material Contracts

C.       Material Contracts

 

On December 30, 2009, the shareholders of Gafisa and Tenda approved a corporate restructuring to consolidate Gafisa’s non-controlling share ownership in Tenda. The restructuring was accomplished by exchanging all of the remaining Tenda shares not held by Gafisa into Gafisa shares. As a result of the restructuring, Tenda became a wholly-owned subsidiary of Gafisa.

 

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On May 27, 2010, the shareholders of Gafisa approved the acquisition of 20% of Alphaville’s shares, by means of a merger of the totality of shares issued by Shertis Empreendimentos e Participações S.A. or “Shertis”, which main asset are shares representing 20% of Alphaville’s shares, in the total amount of R$126.5 million. As a consequence of such merger, Gafisa issued 9,797,792 common shares, paid to the former shareholders of Shertis. On July 3, 2013, we acquired the remaining shares of Alphaville, corresponding to 20% of its capital stock, by means of the acquisition by Tenda of all the shares of EVP Participações SA, a holding company that had Renato de Albuquerque and Nuno Luís de Carvalho Lopes Alves as shareholders and the holder of the remaining shares of Alphaville. Gafisa paid R$366,661,985.11 in Brazilian national currency to the former owners of the shares.

 

On December 9, 2013, we completed the sale of a majority stake in Alphaville to Private Equity AE Investimentos e Participações (“Fundo AE”), a company controlled by Pátria Investimentos Ltda. and Blackstone Real Estate Advisor L.P., which was previously announced on June 7, 2013. All precedent conditions were met including governmental approval, to the completion of the transaction. The transaction was concluded with a sale of 50% stake by Gafisa and 20% stake by Tenda, with Gafisa retaining the remaining 30% of Alphaville capital stock. The proceeds from the transaction, post adjustments agreed to in the Share and Purchase Agreement, were R$1.54 billion, consisting of R$1.25 billion from Fundo AE for the acquisition of Alphaville shares, and an R$290 million dividend distribution by Alphaville.

 

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TableOn December 14, 2016, we entered into an SPA with Jaguar pursuant to which we will sell Tenda shares representing up to 30% of Contentsthe total capital stock of Tenda, at a price equal to R$8.13 per share, after offering 50% of the total capital stock of Tenda for the exercise of preemptive rights of Gafisa’s shareholders.

 

The spin-off of the Tenda business unit was consummated on May 4, 2017, following: (i) a reduction of the capital stock of Tenda (without the cancellation of shares), pursuant to which Gafisa, as sole shareholder at that time, received R$100 million (adjusted by the SELIC); (ii) a reduction of the capital stock of Gafisa, resulting in the distribution to Gafisa shareholders of shares corresponding to 50% of the capital stock of Tenda; (iii) the conclusion of the preemptive rights exercise pursuant to which Gafisa shareholders acquired up to 50% of the total share capital of Tenda, at the price per share set forth in the SPA with Jaguar and for a total amount of R$219.5 million, with no shares being acquired by Jaguar; and (iv) the satisfaction of other conditions precedent for the consummation of the spin-off. In addition, on May 4, 2017, the Tenda shares were listed on the B3 and began to publicly trade.

 

D.Exchange Controls

In 2018 the Company did not sign any new material contracts.

On October 21, 2019, we informed our shareholders and the market that we entered into a Purchase and Sale, Stock Redemption, Corporate Restructuring Agreement with Alphaville Urbanismo S.A., Private Equity AE Investimentos e Participações S.A. and affiliates of PEAE, setting forth the terms and conditions for the divestment of our shares in Alphaville. On December 27, 2019, we concluded the divestment sale of our remaining 21.20% stake in Alphaville for R$100 million, which was settled by offsetting certain credits and the receipt of the investee shares against assets, measured at fair value. This transaction is in line with the Company’s strategy to optimize and improve the Company’s portfolio and capital allocation, aiming at creating value for our shareholders.

On April 30, 2020, at our Annual and Extraordinary Shareholders’ Meeting, the following matters were approved in relation to the purchase and sale of UPCON Incorporadora S.A.’s shares: (i) the acquisition by Gafisa of the entire share capital of UPCON; (ii) an increase in the Company’s share capital of R$310.0 million; (iii) the issuance of two series of debentures convertible into common shares to cover the transaction with UPCON, in the total amount of R$150.0 million; (iv) changes in the composition of the Board of Directors, which will have seven to nine members; (v) the election of members to the Board of Directors; and (vi) approval of a plan to repurchase the Company’s shares, up to a limit of 10,327,558 shares to be acquired by the Company.

D.       Exchange Controls

 

There are no restrictions on ownership of our common shares by individual or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of our shares into foreign currency and to remit such amounts abroad is subject to requirements under foreign investment legislation which generally establish that the relevant investment be registered with the Central Bank and/or the CVM. Subject to certain procedures and specific regulatory provisions, the purchase and sale of foreign currency and the international transfer ofreais by a person or legal entity resident, domiciled or headquartered in Brazil, as the case may be, is allowed, without limitation as to amount, provided that the underlying transaction is legal, legitimate and has economic

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substance, as evidenced by the applicable supporting documentation submitted to the financial institution in charge of the foreign exchange transaction. In addition, foreign currencies may only be purchased through duly authorized financial institutions headquartered in Brazil. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—Restrictions on the movement of capital out of Brazil may adversely affect your ability to receive dividends and distributions on the ADSs and on our common shares, or the proceeds of any sale of our common shares” and “Item 9. The Offer and Listing—C. Markets—Investment in Our Common Shares by Non-Residents of Brazil.”

 

In the past, the Brazilian Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to let therealfloat freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. Therealmay depreciate or appreciate against the U.S. dollar substantially.

 

Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of funds abroad. We cannot assure you that such measures will not be taken by the Brazilian government in the future. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—Restrictions on the movement of capital out of Brazil may adversely affect your ability to receive dividends and distributions on the ADSs and on our common shares, or the proceeds of any sale of our common shares” and “Item 9. The Offer and Listing—C. Markets—Investment in Our Common Shares by Non-Residents of Brazil.”

 

E.Taxation

E.       Taxation

 

The following discussion contains a description of material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs. The discussion is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as of the date hereof, which are subject to change.

 

Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have entered into a Tax Information Exchange Agreement and have had discussions that may culminate in an income tax treaty. No assurance can be given, however, as to whether or when an income tax treaty will enter into force or how it will affect the U.S. Holders (as defined below) of common shares or ADSs. Prospective holders of common shares or ADSs should consult their own tax advisers as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs in their particular circumstances.

 

Brazilian Tax Considerations

 

The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of our common shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “Non-Resident Holder”). This discussion is based on Brazilian law as currently in effect, which is subject to change, possibly with retroactive effect, and subject to different interpretations. Any change in that law may change the consequences described below.

 

The tax consequences described below do not take into account the effects of any tax treaties or reciprocity agreements for tax treatment entered into by Brazil and other countries. The discussion also does not address any tax consequences under the tax laws of any state or municipality of Brazil. The description below is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, exchange, ownership and disposition of our common shares or ADSs. Each Non-Resident Holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in our common shares or ADSs.

 

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Income tax

 

Dividends. Dividends paid by a Brazilian corporation, such as our company,ourselves, including stock dividends and other dividends paid to a Non-Resident Holder of common shares or ADSs, are currently not subject to income withholding tax in Brazil to the extent that such amounts are related to profits generated after January 1, 1996. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian income withholding tax at varying rates depending on the year the profits were generated, according to the tax legislation applicable to each corresponding year. We generally expect to payThere is uncertainty regarding the taxation of dividends fromsupported by profits generated after January 1, 1996. Dividends paid by us based onearned in the 2014 calendar year, due to the new rules introduced in Brazil in order to align the Brazilian tax system with the International Financial

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Reporting Standards, or “IFRS”, as of January 1, 2015. As we did not earn profits may be subjectin that year, this issue should not apply to withholding tax, which, if due, will be borne by us. See “—New Tax Regime Created by Law No. 12,973” for further information.

 

Interest on Shareholders’ Equity. Law No. 9,249, dated December 26, 1995, as amended, permits a Brazilian corporation, such as our company,ourselves, to make distributions to shareholders of interest on shareholders’ equity as an alternative to making dividend distributions and to treat such payments as a deductible expense for purposes of calculating Brazilian corporate income tax and social contribution on net profits, to the extent the limits described below are observed. These distributions may be paid in cash. For tax purposes, this interest is limited to the dailypro rata variation of the Brazilian long-term interest rate, (“TJLP”),or TJLP, as determined by the Central Bank from time to time, and the amount of the deduction may not exceed the greater of:

 

·50% of net income (after the deduction of social contribution on net profits but before taking into account the provision for corporate income tax and the interest on shareholders’ equity) for the period in respect of which the payment is made; and

 

·50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.

 

Payment of interest on shareholders’ equity to a Non-Resident Holder is subject to income withholding tax at the rate of 15%, or 25% if the Non-Resident Holder is domiciled in a “tax favorable jurisdiction.” The definition of a “tax favorable jurisdiction” includes countries and locations (1) that do not impose income tax, (2) that impose income tax at a rate of 20% or less, or (3) where local laws do not allow access to information related to shareholder composition, ownership of investments or the identity of the beneficial owners of earnings that are attributed to non-residents.Tax Favorable Jurisdiction, as defined below.

 

On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for determining a “tax favorable jurisdiction” from 20% to 17%. Please refer to “Tax Favorable Jurisdictions and Low or Nil Tax Jurisdictions”. These payments of interest on shareholders’ equity may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on shareholders’ equity is so included, the corporationCompany is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends is at least equal to the mandatory dividend.

There are ongoing discussions in Congress regarding possible changes to the rate of withholding applied to interest on shareholders’ equity and to the deductibility limit. In particular, in 2015, Provisional Measure No. 694 was published seeking to change some of these tax rules, but it has not entered into force. There is no assurance that the same tax treatment for interest on shareholders’ equity will continue to be applied in the future.

 

Gains

 

According to Law No. 10,833/03, enacted on December 29, 2003, the disposition or sale of assets located in Brazil by a Non-Resident Holder, whether to another non-Brazilian resident or to a Brazilian resident, may be subject to capital gain taxes in Brazil.

 

WithTherefore, with respect to the disposition of our common shares, which are treated as assets located in Brazil, the Non-Resident Holdera non-Brazilian resident will be subject to income tax on the gains assessed followingaccording to the rules described below, regardless of whether the transactions are conducted in Brazil or with a Brazilian resident.

 

With respect to the ADSs, although the matter is not entirely clear, it is reasonable to arguetake the position that ADSs do not constitute assets located in Brazil for the purposes of Article 26 of Law No. 10,83310,833/03 and, therefore, that the gains realized by a Non-Resident Holder on the disposition of our ADSs to another Non-Resident Holder should not be taxed in Brazil. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. Accordingly, gains on a disposition of ADSs by a Non-Resident Holder may be subject to income tax in Brazil in the event that courts determine that ADSs constitute assets located in Brazil. For more information,

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please refer to “Item 3. Key Information—D. Risks Factors—Risks Relating to Our Common Shares and the ADSs—Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of the ADSs.”

 

As a general rule, gainsgain realized as a result of a disposition or sale transaction of common shares (or ADSs should they be deemed to be “assets located in Brazil”) areis the positive difference between the amount realized on the sale or exchangeother disposition of the securities and their acquisition cost.

 

Under Brazilian law, however, income tax rules on such gains can vary, depending on the domicile of the Non-Resident Holder, the type of registration of the investment by the Non-Resident Holder with the Central Bank and how the disposition is carried out, as described below.

 

Gains assessed on a disposition of common shares carried out on a Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market) are:

 

·exempt from income tax when the gain is earned by a Non-Resident Holder that (1) has registered its investment in Brazil with the Central Bank under the rules of Resolution No. 4,373, dated September 14, 2014, which replaced Resolution 2,689, dated January 26, 2000 (“4,373(a “4,373 Holder”) and (2) is not a resident in a country that does not tax income or that taxes it at a maximum rate of 20% (“Low or Nil Tax Jurisdiction”). Please refer to “—Discussion on Tax Favorable Jurisdictions and Low or Nil Tax Jurisdictions” below for more information on this maximum rate of 20% and its reduction to 17% for purposes unrelated to the definition of Low or Nil Tax Jurisdictions; or

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or domiciled in a country or location that does not tax income, or that taxes it at a maximum rate lower than 20%; or

 

·in all other cases, subject to income tax at a rate of up to 25% in any other case, including a case of gains recognized by a Non-Resident Holder that is not a 4,373 Holder, or is a resident in a Low or Nil Tax Jurisdiction.. In these cases, a withholding income tax of 0.005% of the sale value will be applicable and can be later offset against any income tax due on the capital gain.

 

Any other gains recognized on a sale or disposition of the common shares that is not carried out on a Brazilian stock exchange are subject to (1) income tax at thea progressive rate offrom 15% up to 22.5%, or 25% in the case ofwhen realized by a Non-Resident Holder residingthat is not resident or domiciled in a LowTax Favorable Jurisdiction; and (2) income tax up to a rate of 25% when realized by a Non-Brazilian Holder that is resident or Nildomiciled in a Tax Jurisdiction or where the local legislation does not allow access to information related to the shareholder composition of legal entities, to their ownership or to the identity of the beneficial owner of the income attributed to non-residents.Favorable Jurisdiction. In the event that these gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against the eventual income tax due on the capital gain.

 

In the case of a redemption of common shares (or ADSs, should they be deemed to be “assets located in Brazil”) or a capital reduction by a Brazilian corporation, such as our company,ourselves, the positive difference between the amount received by the Non-Resident Holder and the acquisition cost of the common shares or ADSs redeemed is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange and is therefore subject to income tax at thea rate offrom 15% to 22.5%, or up to 25%, as the case may be.described above.

 

Any exercise of preemptive rights relating to the common shares or ADSs will not be subject to Brazilian income tax. Gains realized by a Non-Resident Holder on the disposition of preemptive rights relating to the common shares (or ADSs, should they be deemed to be “assets located in Brazil”) will be subject to Brazilian income tax according to the same rules applicable to the sale or disposition of common shares.

 

As a Non-Resident Holder of ADSs, you may cancel your ADSs and exchange them for the underlying common shares and no income tax may be levied on such exchange, as long as the appropriate rules are complied with in connection with the registration of the investment with the Central Bank and as long as ADSs are not deemed to be “assets located in Brazil.” See “Item 9 The Offering and Listing—C. Markets—Investment in Our Common Shares by Non-Residents of Brazil—Depositary Receipts” for a discussion of the rules related to exchanging ADS for common shares.

 

The deposit of common shares by Non-Resident Holders in exchange for ADSs may be subject to Brazilian income tax if the acquisition cost of the common shares is lower than (a) the average price per common share on a Brazilian stock exchange on which the greatest number of such common shares were sold on the day of deposit; or (b) if no common shares were sold on that day, the average price on a Brazilian stock exchange on which the greatest number of common shares were sold in the 15 trading sessions immediately preceding such deposit. The difference between the acquisition cost and the average price of the common shares will be considered to be a capital gain subject to income tax at a rate offrom 15% up to 22.5% or 25%, as the case may be.described above. In some circumstances, there mayit could be argumentsreasonable to claimtake the position that this taxationtax is not applicable in the case of a Non-Resident Holder that is a 4,373 Holder and is not a resident in a “tax favorable jurisdiction.”Tax Favorable Jurisdiction.

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There can be no assurance that the current favorable treatment of 4,373 Holders will continue in the future.

 

OnLaw 13,259/16, dated March 16, 2016, Provisional Measure No. 692 was converted into Law 13,259/16, increasingincreased tax rates on capital gains earned by Brazilian individuals and certain legal entities. Even though the law is not very clear on this respect, theThe new rates should apply as from 2017 as follows: (i) 15% on the capital gain not exceeding R$5,000,000; (ii) 17.5% on the capital gain amount which varies from R$5,000,000 and R$10,000,000; (iii) 20% on the capital gain amount which varies from R$10,000,000 and R$30,000,000; and (iv) 22.5% on the capital gain which exceeds R$ 30,000,000. The new rates should also apply to Non-Resident Holders depending on their type of investment, jurisdiction and the sale transaction, to be determined on a case by case basis.

 

Discussion on Tax Favorable Jurisdictions and Low or NilPrivileged Tax JurisdictionsRegimes

 

On June 24, 2008, A “Tax Favorable Jurisdiction” is a country or location that (1) does not impose taxation on income or imposes the income tax at a rate lower than 20% or (2) imposes restrictions on the disclosure of shareholding composition or the ownership of the investment. A regulation issued by the Ministry of Treasury on November 28, 2014 decreased from 20% to 17% this minimum threshold for certain specific cases. The 17% threshold applies only to countries and

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regimes aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities.

Law No. 11,727 introduced11,727/08 created the concept of “privileged“Privileged Tax Regimes”, which encompasses the countries and jurisdictions that: (1) do not tax income or tax it at a maximum rate lower than 20%, or 17%, as applicable; (2) grant tax advantages to a non-resident entity or individual (i) without the need to carry out a substantial economic activity in the country or territory or (ii) conditioned to the non-exercise of a substantial economic activity in the country or territory; (3) do not tax or taxes proceeds generated abroad at a maximum rate lower than 20%, or 17%, as applicable; or (4) restricts the ownership disclosure of assets and ownership rights or restricts disclosure about economic transactions carried out.

Normative Ruling 1,037 provides a list of Tax Favorable Jurisdictions and Privileged Tax Regimes. Normative Ruling No. 1,037 is periodically updated to include and exclude countries, locations and tax regimes” which went into effect on January 1, 2009. from the lists of Tax Favorable Jurisdictions and Privileged Tax Regimes.

In principle, the best interpretation of Law No. 11,727/08 leads us to conclude that the concept of privileged tax regimesPrivileged Tax Regimes should be applied solely for purposes of transfer pricing rules in export and import transactions, for the definition of the applicable rate of withholding income tax on the remittance of specific items of income and for certain other Brazilian tax purposes that are not relevant to an investment by a Non-Resident Holder in our common shares or ADSs. Although we are of the opinion that the concept of privileged tax regimesPrivileged Tax Regimes should not affect the tax treatment of a Non-Resident Holder described above, we cannot assure you whetherthat subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of “privileged tax regimes” will extendnot apply such conceptregime to Non-Resident Holders. Investors should consult with their own tax advisors regarding the consequences of the implementation of Law No. 11,727, Normative Ruling No. 1,037 and of any related Brazilian tax treatment of a Non-Resident Holder described above.laws or regulations concerning Tax Favorable Jurisdictions and Privileged Tax Regimes.

 

On November 28, 2014, the Brazilian Revenue Service issued Rule No. 488, which reduces the threshold income tax rate for determining a “tax favorable jurisdiction” from 20% to 17%. This rule also applies for purposes of the definition of “privileged tax regimes”. However, this rule is not relevant for the definition of Low or Nil Tax Jurisdictions. In any event, differing interpretations by the tax authorities in the application of this rule to the definition of Low or Nil Tax Jurisdictions may result in a lower number of jurisdictions being characterized as Low or Nil Tax Jurisdictions. Furthermore, Normative Instruction No. 1,530/14 provides that compliance with such standards requires: (a) the signing of or the completion of negotiations for a treaty or agreement allowing the exchange of information related to the identification of income beneficiaries, shareholding structure, ownership of goods or rights, or economic transactions that are carried out; and (b) a commitment to the criteria set out in international anti-tax evasion forums of which Brazil is a member.

Tax on Foreign Exchange and Financial Transactions

 

Foreign Exchange Transactions. Brazilian law imposes a Tax on Foreign Exchange Transactions, (“or IOF/Exchange Tax”)Tax, on the conversion ofreais into foreign currency and on the conversion of foreign currency intoreais. Any inflow of funds related to investments carried out on the Brazilian financial and capital markets by 4,373 Holders is currently subject to the IOF/Exchange Tax at a rate of zero percent. Foreign exchange transactions related to outflows of funds in connection with investments carried out on the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at a rate of zero percent, which also applies to payments of dividends and interest on shareholders’ equity to 4,373 Holders with respect to investments on the Brazilian financial and capital markets.

 

Nevertheless, the rate applicable to most foreign exchange transactions is 0.38%. In any case, the Brazilian government may increase the rate at any time by up to 25% on the foreign exchange transaction amount. However, any increase in rates will only apply to future transactions.

 

The purchase of ADSs by a Non-Resident Holder outside Brazil generally does not require the execution of a foreign exchange agreement with the Brazilian Central Bank. If this is the case, the IOF/Exchange Tax is not due. The IOF/Exchange Tax is levied at a zero percent rate in connection with foreign exchange agreements, without any actual flows of funds, that are required for a cancellation of ADSs and exchange for shares traded on a Brazilian stock exchange.

 

Tax on Transactions Involving Bonds and Securities. Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, (“or IOF/Bonds Tax”)Tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. The rate of IOF/Bonds Tax applicable to transactions involving common shares is currently zero.

As from December 24, 2013, thezero percent. The rate of the IOF/Bonds Tax applicable to the transfer of shares with the sole purpose of enabling the issuance of ADSs is currently also zero percent. IfHowever, the transfer of shares with such characteristics was

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carried out before December 24, 2013, a rate of 1.5% was applied on the product of (a) the number of shares which were transferred, multiplied by (b) the closing price for those shares on the date prior to the transfer or, if such closing price was not available on that date, the last available closing price for those shares, or, in case of a public offer, the price defined in the bookbuilding process. The person responsible for paying the IOF/Bonds Tax was (a) the financial institution that acts as custodian of the shares in Brazil, or (b) in case of public offers, the leading bookrunner.

The Brazilian government may increase the rate of the IOF/Bonds Tax at any time by up to 1.5% per day on the transaction amount, but only in respect of future transactions.

New Tax Regime Created by Law No. 12,973

Normative Instruction 1,397/2013 (“NI 1,397/2013”), published in the Official Gazette on September 17, 2013, as amended by Normative Instruction 1,492/2014, regulates the RTT, in force between January 1, 2008 and December 31, 2014, to adjust, for tax purposes, the net profits calculated under the IFRS rules in accordance with Law 11,638/2007. According to NI 1,397/2013, for purposes of calculating dividends based on the profits only of calendar-year 2014, taxpayers must use the accounting books prepared according to the criteria in place on December 31, 2007, and not according to IFRS. According to such provisions, depending on the tax basis used by the taxpayer, the dividends that are distributed based on 2014 profits might be considered taxable, subject to 15% withholding tax or 25% if the Non-Resident Holder is domiciled in a country or location that is defined as a “tax favorable jurisdiction.”

Provisional Measure 627/2013 was converted into Law No. 12,973, enacted on May 13, 2014 (“Law 12,973/14”), which revoked the RTT and introduced a new tax regime, in line with the current Brazilian accounting standards (IFRS). According to Law 12,973/14, companies that elected to be taxed under the new regime on January 1, 2014 as opposed to January 1, 2015 would not be subject to taxation under NI 1,397/2013 on their dividend distributions based on 2014 profits. During 2014, we analyzed the potential impact of the new rules on our consolidated financial statements and internal controls structure. Based on our analysis, we concluded that the new rules would not have a material impact on how we account for taxes and we did not elect to adopt the tax regime set forth by Law 12,973/14 for the 2014 calendar year. Companies that did not elect to be taxed under the new regime on January 1, 2014, like ourselves, might be subject to withholding income tax on a part of the dividend distributions based on 2014 profits, according to the rules set forth under NI 1,397/2013. To the extent dividends paid by us are based on 2014 profits, any tax liabilities will be borne by us.

 

Other Brazilian Taxes

 

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADSs, except for gift and inheritance taxes that may be imposed by some Brazilian states. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of common shares or ADSs.

 

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U.S. Federal Income Tax Considerations

 

The following discussion is a summary of the material U.S. federal income tax consequences to U.S. Holders described herein of owning and disposing of common shares or ADSs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such securities. The discussion applies only to the U.S. Holders (as defined below)described below that hold common shares or ADSs as capital assets for U.S. federal income tax purposes andpurposes. This discussion does not address any alternative minimum tax or Medicare contribution tax considerations, nor does it address all of the tax consequences applicable to all categories of investors some of whichthat may be subject to special rules, such as:

 

·certain financial institutions;

 

·dealers or traders in securities who use a mark-to-market method of tax accounting;

 

·persons holding common shares or ADSs as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the common shares or ADSs;

 

·persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

 

·entities classified as partnerships for U.S. federal income tax purposes;

 

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·persons liable for the alternative minimum tax;

·tax-exempt entities, including “individual retirement accounts” or “Roth IRAs;”

 

·persons that own or are deemed to own ten percent or more of our voting stock;stock (by vote or value);

 

·persons who acquired our ADSs or common shares pursuant to the exercise of any employee stock option or otherwise as compensation; or

 

·persons holding our ADSs or common shares in connection with a trade or business conducted outside of the United States.

 

If an entity that is classified as a partnership for U.S. federal income tax purposes holds common shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding common shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of common shares or ADSs.

 

This discussion is based on the Internal Revenue Code of 1986, as amended, (the “Code”),or the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof, any of which is subject to change, possibly with retroactive effect. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.

 

You are a “U.S. Holder” if you are a beneficial owner of our common shares or ADSs and if you are, for U.S. federal income tax purposes:

 

·a citizen or individual resident of the United States;

 

·a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

 

·an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

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The summary of U.S. federal income tax consequences set out below is intended for general informational purposes only. You should consult your advisers with respect to the particular tax consequences to you of owning or disposing of common shares or ADSs, including the applicability and effect of state, local, non-U.S. and other tax laws and the possibility of changes in tax laws.

 

In general, if you own ADSs, youExcept as discussed below under “—Passive Foreign Investment Company Rules,” this discussion assumes that the Company will not be treated as the owner of the underlying shares represented by those ADSsa passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSspurposes for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary (“pre-release”) or intermediaries in the chain of ownership between U.S. Holders and the issuer of the security underlying the American depositary shares may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Brazilian taxes, and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by such parties or intermediaries.

Please consult your tax adviser concerning the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of common shares or ADSs in your particular circumstances.

This discussion assumes that the Company is not, and will not become, a passive foreign investment company, as described below.any taxable year.

 

Taxation of Distributions

 

Distributions, if any, paid on ADSs or common shares (including any amounts that are treated as interest on shareholders’ equity for Brazilian tax purposes and any Brazilian withholding taxes deducted from distributions), other than certainpro rata distributions of ordinary shares, will generally be treated as dividends to the extent paid out of the Company’s current or accumulated earnings and

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profits as determined under U.S. federal income tax principles. Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions will generally be reported to you as dividends.

 

Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury,In general, dividends paid by certain “qualified foreign corporations” to certain non-corporate U.S. Holderspersons may be taxabletaxed at ratesa preferential rate, subject to applicable to long-term capital gains. A foreignlimitations. However, if a non-U.S. corporation is treated asnot entitled to the benefits of a qualified foreigncomprehensive income tax treaty with the United States, dividends paid by such corporation will qualify for the preferential rate only with respect to dividends paid on stock that is readilyare “readily tradable on aan established securities market in the United States,States.” In 2003 the Internal Revenue Service (“IRS”) issued a notice, according to which common stock, or American depositary shares in respect of such stock, are considered as readily tradable on a U.S. established securities market if they are listed on certain national U.S. securities exchanges specified in the notice, such as the NYSE whereor NASDAQ. The IRS notice indicates that the IRS continues to consider whether, and under what conditions, the preferential rate may apply also to securities readily tradable on other securities trading platforms, such as trading over the counter. However, to date no additional trading markets have been identified by the Treasury or the IRS as qualifying markets for these purposes. Therefore, because our ADSs are traded. Youwere delisted from the NYSE on December 17, 2018, non-corporate U.S. Holders should consult your tax adviser to determine whether the favorable rate will apply to dividends you receive and whether you are subject to any special rulesexpect that limit your abilityfor as long as our ADSs continue to be taxed at this favorable rate.delisted from a qualified national U.S. exchange, dividends will be reported to them by withholding agents as not qualifying for the preferential rates.

 

The amount of a dividend will include any amounts withheld by the Company in respect of Brazilian taxes on the distribution, and any amounts the Company paid on your behalf with respect to withholding for Brazilian taxes on distributions based on our 2014 profits, as discussed in “—Brazilian Tax Considerations—New Tax Regime Created by Law No. 12,973”.distribution. The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in your income on the date of your, or in the case of ADSs, the depositary’s, receipt of the dividend. The amount of any dividend income paid inreais will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the amount of such dividend is converted into U.S. dollars after the date of such receipt. See also “—Brazilian Tax Considerations—Tax on Foreign Exchange and Financial Transactions.”Transactions” for a discussion of the Brazilian tax consequences of a conversion ofreais into U.S. dollars.

 

Subject to applicable limitations that may vary depending upon your circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Brazilian income taxes withheld from dividends on common shares or ADSs will be creditable against your U.S. federal income tax liability. The rules governing foreign tax credits are complex, and you should consult your tax adviser regarding the availability of foreign tax credits in your particular circumstances. Instead of claiming a credit, you may, at your election, deduct foreign taxes, including Brazilian taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must applyapplies to all foreign taxes paid or accrued in the relevant taxable year to foreign countries and possessions of the United States.year.

 

Sale or Other Disposition of Common Shares or ADSs

 

For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of common shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if you have held the common shares or ADSs for more than one year. Long-term capital gains of non-corporate U.S. Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

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The amount of your gain or loss will equal the difference between the amount realized on the disposition and your tax basis in the common shares or ADSs disposed of, in each case as determined in U.S. dollars. If a Brazilian tax is withheld on the sale or disposition of common shares or ADSs, your amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian tax. See “—Brazilian Tax Considerations—Gains” for a description of when a disposition may be subject to taxation by Brazil. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. Consequently, you will not be able to credit any Brazilian income tax imposed on such gains against your U.S. federal income tax liability unless you have other creditable taxable income from foreign sources in the appropriate foreign tax credit basket. You should consult your tax adviser as to whether theany Brazilian tax on gains would be creditable against your U.S. federal income tax on foreign-source income from other sources.

 

Other Brazilian Taxes

 

TheAny Brazilian IOF/Bond Tax and the IOF/Exchange Tax imposed on the deposit of common shares in exchange for ADSs and the cancellation of ADSs in exchange for common shares (as discussed above under “—Brazilian Tax Considerations—Tax on Foreign Exchange and Financial Transactions”) will not be treated as creditable foreign taxes for U.S. federal income tax purposes. U.S. Holders should consult their tax advisers regarding the treatment of these taxes for U.S. federal income tax purposes.

 

Passive Foreign Investment Company Rules

 

In general, a non-U.S. corporation is a PFIC for any taxable year if: (1) 75% or more of its gross income consists of passive income (the “income test”) or (2) 50% or more of the average value of its assets (generally determined on a quarterly basis) consists of assets that produce, or are held for the production of, passive income (including cash and cash equivalents). Generally, “passive income” includes interest, dividends, rents, royalties and certain gains. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. The Company believes that it was not a “passive foreign investment company” (a “PFIC”)PFIC for U.S. federal income tax purposes for its 20152019 taxable year. However, because the Company’s PFIC status dependsis an annual determination that can be made only after the end of each taxable year and will depend on the composition of a company’sits income and assets and the market value of its assets from time to time, which may be determined in part by reference to the market value of the Company’s stock,for each such year, there can be no assurance that the Company will not be a PFIC for the current or any other taxable year.

 

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PFIC for any taxable year. If the Company were a PFIC for any taxable year during which a U.S. Holder held common shares or ADSs, gain recognized by a U.S. Holder on a sale or other disposition (including, under certain pledges)circumstances, a pledge) of the common shares or ADSs would be allocated ratably over the U.S. Holder’s holding period for the common shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the tax on the amount allocated to that taxable year. Further, to the extent that any distribution received by a U.S. Holder on its common shares or ADSs exceeds 125% of the average of the annual distributions on common shares or ADSs received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment)treatment of the common shares or ADSs.shares). If we are a PFIC for any taxable year during which a U.S. Holder owned our shares, the U.S. Holder will generally be required to file IRSInternal Revenue Service Form 8621 with their annual U.S. federal income tax returns, subject to certain exceptions. You should consult your tax adviser to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in your particular circumstances.

 

Information Reporting and Backup Withholding

 

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (1) you are a corporation or other exempt recipient or (2) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

 

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The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.IRS.

 

Certain U.S. Holders who are individuals (and certain entities that are formed or availed of for purposes of holding certain foreign financial assets)specified entities) may be required, subject to certain exceptions, to report information relating to their ownership of securities of a non-U.S. person, subject to certain exceptions including an exception foror non-U.S. accounts through which the securities held in certain accounts maintained by U.S. financial institutions, such as our ADSs.are held. You should consult your tax adviser regarding the effect, if any, of these rules on your ownership and disposition of common shares or ADSs.

 

U.S. HOLDERS OF OUR COMMON SHARES OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES.

 

F.Dividends and Paying Agents

F.       Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

G.       Statement by Experts

 

Not applicable.

 

H.Documents on Display

H.       Documents on Display

 

Statements contained in this annual report as to the contents of any contract or other document referred to are not necessarily complete, and each of these statements is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit hereto. A copy of the complete annual report including the exhibits and schedules filed herewith may be inspected without charge at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549. Copies of such materials may be obtained by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Such reports and other information may also be inspected at the offices of the NYSE, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed over the Internet athttp://www.sec.gov.www.sec.gov.

 

We are subject to the information and periodic reporting requirements of the Securities Exchange Act and, in accordance therewith, file periodic reports and other information with the SEC. However, as a foreign private issuer,

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we are exempt from the rules under the Securities Exchange Act relating to the furnishing and content of proxy statements and relating to short-swing profits reporting and liability.

 

We furnish to Citibank, N.A., as depositary, copies of all reports we are required to file with the SEC under the Securities Exchange Act, including our annual reports in English, containing a brief description of our operations and our audited annual consolidated financial statements which are prepared in accordance with Brazilian GAAP and include a reconciliation to U.S. GAAP. In addition, we are required under the deposit agreement to furnish the depositary with copies of English translations to the extent required under the rules of the SEC of all notices of meetings of shareholders and other reports and communications that are generally made available to shareholders. Under certain circumstances, the depositary will arrange for the mailing, at our expense, of these notices, other reports and communications to all ADS holders.

 

We also file financial statements and other periodic reports with the CVM, which are available to the public from CVM’s website athttp://www.cvm.gov.br.www.cvm.gov.br.

 

I.Subsidiary Information

I.       Subsidiary Information

 

Not applicable.

 

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks arising from the normal course of our business. These market risks mainly involve the possibility that changes in interest rates may impact the value of our financial liabilities. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil.”

 

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Interest rates

 

Our results of operations and profitability are affected by changes in interest rates due to the impact that these changes have on our interest expenses relating to our variable interest rate debt instruments and on our purchase and sale contracts and on our interest income generated from our financial investments.

 

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The table below provides information about our significant interest rate-sensitive instruments (fixed and variable) as of December 31, 2015:2019:

 

 As of December 31, 2015 As of December 31, 2019
 Expected Maturity Date Expected Maturity Date
 Total 2016 2017 2018 2019 and later Principal Index(1) Fair Value Total 2019 2020 2021 2022 and later Principal Index(1) Fair Value
 (in millions of reais) (in millions of reais, unless otherwise indicated)
Liabilities:                                          
Loans, financing and debentures:                                          
Debentures  858.0   389.6   344.7   83.5   40.2   CDI/TR   828.4   197.5   158.2   23.1   11.2   5.0   CDI/IPCA   278.7 
Average interest rate  13.49%  14.52%  15.64%  15.99%  16.04%        8.60%  8.40%  8.98%  9.66%  10.08   —     —   
Loans and financing (working capital)  131.2   102.8   25.1   2.2   1.1   CDI   129.8   76.9   30.9   42.2   3.8   —     CDI   78.3 
Average interest rate  14.81%  15.86%  16.99%  17.35%  17.40%        10.18%  9.98%  10.57%  —     —     —     —   
Loans and financing — SFH  1,161.7   569.6   415.3   164.8   12.0   TR   1,107.5   456.2   395.2   61.0   —     —     TR/CDI   464.6 
Average interest rate  14.30%  14.91%  15.67%  15.98%  16.10%        11.90%  11.70%  12.30%  —     —     —     —   
Total loans, financing and debentures  2,150.9   1,062.0   785.1   250.5   53.3   TR/CDI   2,065.7   730.7   584.3   126.3   15.1   5.0   CDI/IPCA/TR   —   
Derivative financial instruments  21.7   14.1   12.3   2.0   (6.7)  CDI   21.7 
Obligation to venture partner  4.9   3.8   1.1         CDI   5.5 
Real estate development obligations(2)  1,247.5   909.9   337   0.6         1,247.5   488.0   296.4   166.5   24.9   0.2   INCC   488.0 
Obligations for purchase of land  570.1   321.6   225.2   10.2   13.1       570.5   208.3   115.2   40.2   33.4   19.5   

INCC

   208.3 
Total  3,995.1   2,311.4   

1.360.7

   263.3   59.7      3,910.9   1,465.8   1,034.8   333   73.3   24.7   —     1,517.9 
Assets:                                                        
Cash and cash equivalent  82.6   82.6                  12.4   12.4   —     —     —     CDI   12.4 
Marketable securities (current and non-current)  629.7   629.7                  401.9   401.9   —     —     —     CDI   401.9 
Receivables from clients  1,802.4   1,395.3   268.2   66.8   72.1         557.5   445.3   93.8   5.1   13.3   INCC/IGP-M   557.5 
Receivables from clients (2)  793.0   613.9   105.2   35.6   38.3       
Receivables from clients(2)  437.7   291.1   146.1   0.2   0.3   INCC/IGP-M   437.7 
Total client receivables  2,595.4   2,009.2   373.4   102.4   110.4         995.2   736.4   239.9   5.3   13.6   —     995.2 
Total  3,307.7   2,721.5   373.4   102.4   110.4         1,409.5   1,150.7   239.9   5.3   13.6   —     1,409.5 

_________________

(1)See notesNotes 12 and 13 to our consolidated financial statements for information about the interest rates on our loans, financing and debentures. As of December 31, 2015,2019, the annualized index was 13.2%5.96% for CDI, 2.6%0% for TR, 7.5%4.15% for INCC, 4.31% for IPCA and 10.5%7.32% for IGPM.

 

(2)Includes commitments and receivables arising from units sold after January 1, 2004 for which balances have not been recorded in our balance sheet—CFC Resolution No. 963.

 

We borrow funds at different rates and linked to different indices in order to try to match the financing that we provide to some of our clients. The mismatch between rates and terms on our funds borrowed and the financing we provide may adversely affect our cash flow. We constantly monitor and evaluate the impact of indexation on our assets and liabilities. If we anticipate the possibility of an interest rate mismatch between our assets and obligations, we may use derivative financial instruments in order to hedge against the risk that arises from interest rate variations.

 

Foreign Exchange Rate

 

During 2015,2019, we had no derivative financial instruments with the objective of hedging against fluctuations in foreign exchange rates. As of December 31, 2015,2019, we had no debt in foreign currency.

 

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

D.American Depositary Shares

D.       American Depositary Shares

 

Depositary Fees

 

We and the holders and beneficial owners of our ADSs and the person depositing our common shares or surrendering ADSs for cancellation are responsible for the following fees of the depositary:

 

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Service

Rate

Paid By

Issuance of ADSs upon deposit of Shares (excluding issuances as a result of distributions described in paragraph (4) below).Up to US$5.00 per 100 ADSs (or fraction thereof) issued.Person depositing our common shares or person receiving ADSs.
Delivery of common shares deposited under our deposit agreement against surrender of ADSs.Up to US$5.00 per 100 ADSs (or fraction thereof) issued.Person surrendering ADSs for purpose of withdrawal of common shares deposited under our deposit agreement or person to whom common shares deposited under our deposit agreement are delivered.
Distribution of cash dividends or other cash distributions (i.e., sale of rights and other entitlements).Up to US$2.00 per 100 ADSs (or fraction thereof) held.Person to whom distribution is made.
Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or (ii) exercise of rights to purchase additional ADSs.Up to US$2.00 per 100 ADSs (or fraction thereof) held.Person to whom distribution is made.
Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e., spin-off shares).Up to US$2.00 per 100 ADSs (or fraction thereof) held.Person to whom distribution is made.
Depositary servicesUp to US$4.00 per 100 ADSs (or fraction thereof) held.Person holding ADSs on applicable record date(s) established by the depositary.
Transfer of ADRsUS$1.50 per certificate presented for transfer.Person presenting certificate for transfer.

 

The depositary may deduct applicable depositary fees from the funds being distributed in the case of cash distributions. For distributions other than cash, the depositary will invoice the amount of the applicable depositary fees to the applicable holders.

 

Additional Charges

 

Holders and beneficial owners of our ADSs and person depositing our common shares for deposit and person surrendering ADSs for cancellation and withdrawal of our common shares will be required to pay the following charges:

 

·taxes (including applicable interest and penalties) and other governmental charges;

 

·such registration fees as may from time to time be in effect for the registration of our common shares or other common shares deposited under our deposit agreement on the share register and applicable to transfers of our common shares or other common shares deposited under our deposit agreement to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;

 

·such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of the person depositing or withdrawing our common shares or holders and beneficial owners of ADSs;

 

·the expenses and charges incurred by the depositary in the conversion of foreign currency;

 

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·such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to our common shares, common shares deposited under our deposit agreement, ADSs and ADRs; and

 

·the fees and expenses incurred by the depositary, the custodian or any nominee in connection with the servicing or delivery of common shares deposited under our deposit agreement.

 

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Direct and Indirect Payments

 

Citibank N.A., located at 388 Greenwich Ave.-Ave., New York, - NY 10013, as depositary, has agreed to reimburse certain of our reasonable expenses related to our ADR program and incurred by us in connection with the program. As of December 31, 2015,2019, we received from the depositary of our ADSs approximately US$1.6 million,96,000, which was used for general corporate purposes such as the payment of costs and expenses associated with (1) the preparation and distribution of proxy materials, (2) the preparation and distribution of marketing materials and (3) consulting and other services related to investor relations.

 

PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15. CONTROLS AND PROCEDURES

 

(a)Evaluation of Disclosure Controls and Procedures

Our management has identified material weaknesses in our internal control over financial reporting, which we describe in the “Management’s Annual Report on Internal Control over Financial Reporting”. In addition, our management has analyzed these material weaknesses and concluded that our consolidated financial statements fairly present, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented, and the impact of all facts known to our management to date has been reflected in the consolidated financial statements.

 

The Registrant maintains controls(a) Evaluation of Disclosure Controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC,Procedures

Our management, including our Principal Executive Officer and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of the Registrant’s disclosure controls and procedures as of the end of the period covered by this report conducted by the Registrant’s management, with the participation of the Chief Executive andour Chief Financial Officers, after evaluating together with other members of managementOfficer, evaluated the effectiveness of our disclosure controls and procedures (as definedas of December 31, 2019. Based upon our evaluation, our Principal Executive Officer and our Chief Financial Officer concluded that as a result of the material weaknesses in the U.S. Securities Exchange Actour internal control over financial reporting described below, as of 1934 under Rule 13a-15(e)) have concluded thatDecember 31, 2019 our disclosure controls and procedures arewere not effective to ensureprovide reasonable assurance that the Registrant is able to collect, process and disclose the information it is required to disclosebe disclosed by us in the reports it files withthat we file or submit under the SECExchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Principal Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required time periods.disclosures.

 

(b)Management’s Annual Report on Internal Control over Financial Reporting

(b) Management’s Annual Report on Internal Control over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of financial statements for external purposes in conformity with Brazilian GAAP, including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F .20-F.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

129 

Material Weaknesses in Internal Control over Financial Reporting

Management, including our Principal Executive Officer and CFO, assessed the effectivenessCompany’s internal control over financial reporting using the criteria set forth by the COSO (2013) framework. Based on the evaluation under these criteria, management determined, based upon the existence of the Registrant‘smaterial weaknesses described below, that we did not maintain effective internal controlscontrol over financial reporting as of the Evaluation Date.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. During our assessment of internal control over financial reporting as of December 31, 2015. In making this assessment,2019, we identified the Company’smaterial weaknesses described below.

The accuracy and completeness of information about contingent liabilities: Monitoring controls. The failure to maintain effective controls designed to ensure the accuracy and completeness of information about contingent liabilities. This deficiency did not result in a misstatement of the 2019 financial statements but resulted in controls relating to compliance with Company policies and procedures for evaluating the measure provisions related with the existent claims against the Company that were not fully effective.

Information Technology (“IT”): Monitoring controls. The controls related to operation of information technology (“IT”) general controls in the areas of access security, program change management usedand computer operations (“IT General Controls”) have developed, but haven't reach a sufficient standard. This deficiency did not result in a misstatement of the criteria set forth2019 financial statements, but showed that manual controls that rely on data produced by and maintained within these IT system applications and automated controls within these IT system applications were not fully effective. COAUD has requested the administration a fast implementation of the information technology ("IT") development plan, which it committed to it throughout 2020.

The material weaknesses did not result in any identified misstatements in the current period consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by the Internal Control-Integrated Framework 2013 issued by the CommitteeCompany, and there were no changes in previously released financial results. We have begun to develop remediation plans for these material weaknesses which are described below under “Remediation Efforts”.

Remediation of Sponsoring OrganizationsPrior Material Weaknesses

During our management’s assessment of the Treadway Commission (“COSO”). Based on this assessment, management believes that,internal control over financial reporting as of December 31, 2015, the Company’s internal2018, our management identified 4 (four) material weaknesses, 2 (two) of which were remediated. The material weaknesses were that we did not design, establish or maintain effective controls over financial reporting are effective based on those criteria.Loan and Financing agreements, which affected certain contractual terms in loan and financing agreements resulting in the possibility of acceleration of some debts and the Internal Audit function as the Company did not maintain at year-end an internal audit function enough to monitor control activities and to execute timely the management’s self-assessment over internal control.

During 2019, we implemented and reinforced controls to ensure procedures over:

 

(c)·Attestation ReportLoan and Financing agreements: Restrictive clauses in financing contracts and on mitigating similar situations are now analyzed in a regular basis, where the management informs that reinforced several procedures, such as: (i) Directives stipulated in the contract are regularly monitored and checked with control reports by the manager of Independent Registered Public Accounting Firmstructured operations – a new executive hired by Gafisa on August 2019 (ii) The position of the financing agreements are presented in an internal committee in order to evaluate their position and define strategies for future action

·Internal Audit area: The maintenance of an internal audit area by contracting a new manager for the area in February 2019, and in parallel a number of steps have been taken in order to restructure the area, increasing governance staffing for Internal Controls, Risks Management,

130 

and Internal Audit. The Internal Audit area remains as responsible for an independent and objective evaluation of processes, risks management, check compliance with policies and procedures and verification of controls effectiveness and efficiency.

Therefore, based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31, 2019.

Remediation Efforts

Our management has been actively engaged in the design and implementation of remediation efforts to address the identified material weakness, as well as other identified areas of risk.

The remediation efforts outlined below, which are in the process of implementation, are intended to address both the identified material weakness and related areas. The design and implementation of these and other remedial efforts are the responsibility of our management.

The accuracy and completeness of information about contingent liabilities: The management reinforces its commitment to maintain controls to ensure the accuracy and completeness of information about contingent liabilities by contracting a new manager for the area in February 2020, and in parallel a number of steps have been taken in order to restructure the area, increasing governance staffing for the management of its legal processes to reconcile any discrepant information. This movement also includes a new version of its legal management software, orientation of all service provider offices, including new ones that have assumed substantial portfolios, in order to reinforce the need for all actions accompanied by them to be evaluated in a timely manner in order to corroborate the integrity of the data used for the evaluation of their contingencies.

Information Technology (“IT”): Our Management is concentrating efforts on readjusting the design of controls in the information technology environment, updating policies and monitoring and reviewing operational controls.
We are implementing the following corrective measures in response to the deficiency related to the management of users and access rights:
• Review and improvement of automated rules related to access management;
• Map and review all critical functions, as well as access to transactions and permissions for users.

Improvement of our compensatory controls, related to the segregation of functions in ERP transactions and the expansion of the set of monitors and their respective automated reports already developed and used to identify, monitor and treat any conflict that materializes, expanding them where there is a risk and occurrence of technically justified conflicts.

(c) Attestation Report of Independent Registered Public Accounting Firm

 

The effectiveness of internal control over financial reporting as of December 31, 20152019, has been audited by KPMGBDO Auditores Independentes an independent registered public accounting firm, as stated in its report which is included under Item 18 in this annual report on Form 20-F on pages F-2 and F-3.

 

(d)Changes in Internal Control over Financial Reporting

(d) Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16. RESERVED

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

For the purposes of the Sarbanes-Oxley Act of 2002, our directors established an Audit Committee that convenes as often as it determines is appropriate to carry out its responsibilities, but at least quarterly. This committee has responsibility for planning and reviewing our annual and quarterly reports and accounts with the involvement of our auditors in that process, focusing particularly on compliance with legal requirements and accounting standards, and

131 

ensuring that an effective system of internal financial controls is maintained. The ultimate responsibility for reviewing and approving our annual and quarterly reports and accounts remains with our directors.

 

The Audit Committee convened 107 times in 2015.2019. The Audit Committee currently comprises Jose Ecio Pereira da Costa Junior, Maurício Marcellini PereiraThomas Cornelius Azevedo Reichenheim, Gilberto Braga and Francisco Vidal Luna, each of whom is a director of our company.Pedro Carvalho de Mello. Our board of directors has determined that Jose Ecio Pereira da Costa Junior, Maurício Marcellini PereiraThomas Cornelius Azevedo Reichenheim, Gilberto Braga and Francisco Vidal Luna,Pedro Carvalho de Mello are each independent as set forth in the NYSE Listed Companies Manual as well as being independent for the purpose of Rule 10A-3 of the Securities Exchange Act. Our board of directors has determined that Jose Ecio Pereira da Costa JuniorGilberto Braga is an audit committee financial expert within the meaning of the regulations promulgated by the Securities and Exchange Commission.

 

ITEM 16B. CODE OF BUSINESS CONDUCT AND ETHICS

 

On July 10, 2007, we adopted a Code of Business Conduct and Ethics (The Code) that applies to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions, as well as to our directors, other officers and employees. The objective of this code is (1) to reduce the subjectivity of personal interpretations of ethical principles; (2) to be a formal and institutional benchmark for the professional conduct of the employees, including the ethical handling of actual or apparent conflicts of interests, becoming a standard for the internal and external relationship of the Company with its shareholders, clients, employees, partners, suppliers, service providers, labor unions, competitors, society, government and the communities in which we operate; and (3) to ensure that the daily concerns with efficiency, competitiveness and profitability do not override ethical behavior.

 

The Code is regularly reviewed and updated, in order to address international and local requirements regarding ethics on business, conflict of interests, disclosure of information and anti-corruption procedures.

 

The Code was reviewed in July 2014. The objective of the review was to (1) update the message of our CEO to our employees regarding our vision, mission andorganizational culture, encouraging ethical conduct and a

148

commitment to compliance with the law,(2) reinforce the Company’s message of ethical principles and practicesto our employees and to those conducting business on our behalf in order to protect our integrity.

The Code can be obtained from our website (www.gafisa.com.br) or free of charge by requesting a copy from our Investor Relations Department at the following address: Av. Nações UnidasPres. Juscelino Kubitschek, No. 8,501, 19th floor, 05425-0701830, Block 2, 3rd Floor, 04543-900 – São Paulo, SP – Brazil, telephone 55-11-3025-9242, fax 55-11-3025-9348 and e-mailri@gafisa.com.br.

 

In July 2007, we established a “whistleblower channel” in order to receive “complaints,” by any person (provided such complaint is first reported to the Ethics Committee or Audit Committee), regarding any “unethical conduct” and “accounting, internal accounting controls, or auditing matters”. The complaints can be submitted confidentially and equally confidential and anonymous submissions of “concerns” ofanonymously at the same type by our employees and affiliates.whistleblower’s discretion. The “whistleblower channel” can be accessed through our intranet, or website, specific phone number or a letter that may be forwarded to our headquarters underto the attention of our Ethics Committee and/or Audit Committee. Since its establishment, 682950 issues were reported tothrough our “whistleblower channel,”channel”, all of themwhich related to personal conduct and information leaks and, therefore, without any financial impact on our results of operations.

 

In January 2014, we established a compliance and ethics program in order to help prevent, detect, rectify and report potential misconduct, including violations of the Foreign Corrupt Practices Act and Brazilian anti-corruption legislation (pursuant to Brazilian Law No. 12,846). This program comprises extensive risk assessment of our operations, ongoing training and advice to employees, incentives and disciplinary measures, and third party due dilligence.

In December 2015, Tenda adopted its own Code of Business Conduct and Ethics, which conserves the core values of the Gafisa code, adapting them to the lower income market, as well as aligning the new text to Tenda’s vision, mission and organizational culture.diligence.

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The relationship with our independent auditors in respect to the contracting of services unrelated to the external audit is based on principles that preserve the independence of the auditor. Our board of directors approves our financial statements, the performance by our auditors of audit and permissible non-audit services, and associated fees, supported by our Audit Committee.

 

The following table describes the total amount billed to us by BDO RCS Auditores Independentes SS (“BDO”), PricewaterhouseCoopers (“PwC”) and KPMG Auditores Independentes (“KPMG”) for services performed in 20152019 and 2014, respectively,2018, and the remuneration for these services in each year.

 

  2015 2014
  (in thousands ofreais)
Audit fees (1)  4,373   3,914 
Audit related fees (2)      
Tax fees (3)      
Total  4,373   3,914 
  2019 2018
  (in thousands of reais)
Audit fees(1)  1,725   3,234 
Audit related fees(2)  —     —   
Tax fees(3)  —     —   
Total  1,725   3,234 

 

132 

Table of Contents

_________________

(1)“Audit fees” are the aggregate fees billed by BDO, PwC and KPMG for the audit of our consolidated and annual financial statements including the audit of internal control over financial reporting, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.

 

(2)There were no “audit related fees” billed by BDO, PwC and KPMG during 20152019 or 2014.2018.

 

(3)There were no “Tax fees” billed by BDO, PwC and KPMG during 20152019 or 2014.2018.

 

Audit Committee Pre-Approval Policies and Procedures

 

Our board of directors has established pre-approval policies and procedures for the engagement of registered public accounting firm for audit and non-audit services. Under such pre-approval policies and procedures, our board of directors reviews the scope of the services to be provided by each registered public accounting firm to be engaged in order to ensure that there are no independence issues and the services are not prohibited services as defined by Sarbanes-Oxley Act of 2002.

 

149

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

None.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

None.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.None.

 

ITEM 16G. CORPORATE GOVERNANCE

 

See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

150

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

We have responded to Item 18, in lieu of reporting to this Item.

 

ITEM 18. FINANCIAL STATEMENTS

 

See our audited consolidated financial statements beginning on page F-1.

 

ITEM 19. EXHIBITS

 

We are filing the following documents as part of this Annual Report Form 20-F:

 

1.1.       Bylaws of Gafisa S.A., as amended (English), which is incorporated by reference to Exhibit 1.1 to our annual report on Form 20-F for the year ended December 31, 2010, filed with the Securities and Exchange Commission on July 5, 2012.

 

133 

2.1.       Deposit Agreement dated March 21, 2007, among Gafisa S.A., Citibank, N.A., as depositary, and the Holders and Beneficial Owners from time to time of American Depositary Shares issued thereunder, which is incorporated by reference to Exhibit 99(a) to our registration statement on Form F-6 filed with the Securities and Exchange Commission on February 22, 2007.

 

2.2.       Description of Securities registered under Section 12 of the Exchange Act*

4.1.       Merger of shares agreement dated November 6,9, 2009 between Gafisa S.A. and Construtora Tenda S.A., which is incorporated by reference to Exhibit 2.1 to our registration statement on Form F-4 filed with the Securities and Exchange Commission on November 13, 2009.

 

8.1.       List of Subsidiaries*

 

11.1.       Code of Business Conduct and Ethics (English), which is incorporated by reference to Exhibit 11.1 to our annual report on Form 20-F for the year ended December 31, 2007 filed with the Securities and Exchange Commission on June 18, 2008.

 

12.1.       Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer*

 

12.2.       Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer*

 

13.1.       Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer*

 

13.2.       Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer*

15.1       Letter from KPMG*

* Filed herewith.

 

151134 

SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

GAFISA S.A.
By:/s/ Guilherme Benevides
 Name:Guilherme Benevides
 By:/s/ Sandro Rogério da Silva Gamba
Name:Sandro Rogério da Silva Gamba
Title:Chief

Principal Executive Officer


 

 

By:/s/ Andre BergsteinIan Andrade
 Name:Andre BergsteinIan Andrade
 Title:Chief Financial Officer

 

 

Date: April 27, 2016June 22, 2020

Gafisa S.A.

Consolidated Financial Statements

December 31, 2019 and report of independent registered public accounting firm

 

152

Consolidated Financial Statements

 

Gafisa S.A.

 

December 31,2015Financial Statements

 

and Report of Independent Registered Public Accounting FirmDecember 31, 2019

 

Gafisa S.A.

Consolidated Financial Statements 

December 31,2015

Table of contents

 

Management’s Annual Report on Internal Controls over Financial ReportingF-1
Audited Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (BDO)F-23
Report of Independent Registered Public Accounting Firm (KPMG)F-F-7
4Consolidated balance sheetsF-8
Consolidated balance sheetF-5
Consolidated statementstatements of profit or lossF-710
Consolidated statementstatements of comprehensive income (loss)F-811
Consolidated statementstatements of changes in equityF-912
Consolidated statementstatements of cash flowsF-1013
Consolidated statementstatements of value addedF-1114
Notes to the consolidated financial statementsF-1215

 

Management’s Annual Report on Internal Controls over Financial Reporting

 

OurThe management of the Company is responsible for establishing and maintaining adequate internal controlscontrol over financial reporting, as defined in Rules 13a – 15(f)Rule 13a-15(f) and 15d – 15(f)15d-15(f) promulgated under the Securities and Exchange Act of 1934. Our internal control over financial reporting is1934, as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of consolidated financial statements for external purposes in accordanceconformity with accounting principles generally accepted in Brazil (“Brazilian GAAP”), along with a reconciliation of net income and equity from Brazilian GAAP, including the reconciliation to accounting principles generally accepted in the United States of America (“US GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statementsU.S. GAAP in accordance with Brazilian GAAP, along with a reconciliationItem 18 of net income and equity from Brazilian GAAP to US GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the our assets that could have a material effect on the consolidated financial statements.Form 20-F.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationevaluations of effectiveness of internal control to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, andor that the degree of compliance with the policies or procedures may deteriorate.

 

Material Weaknesses in Internal Control over Financial Reporting

Our management has assessed

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the effectivenesscompany’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. During our assessment of our internal control over financial reporting as of December 31, 2015. In making this assessment, our management used2019, we identified the criteria set forth bymaterial weaknesses described below.

The accuracy and completeness of information about contingent liabilities:Monitoring controls. The failure to maintain effective controls designed to ensure the Committeeaccuracy and completeness of Sponsoring Organizationsinformation about contingent liabilities. This deficiency did not result in a misstatement of the Treadway Commission (“COSO”)2019 financial statements but resulted in “Internal Control – Integrated Framework (2013 Framework)”.controls relating to compliance with Company policies and procedures for evaluating the measure provisions related with the existent claims against the Company that were not fully effective.

 

BasedInformation Technology (“IT”): Monitoring controls. The controls related to operation of information technology (“IT”) general controls in the areas of access security, program change management and computer operations (“IT General Controls”) have developed, but haven't reach a sufficient standard. This deficiency did not result in a misstatement of the 2019 financial statements, but showed that manual controls that rely on this evaluation, managementdata produced by and maintained within these IT system applications and automated controls within these IT system applications were not fully effective. COAUD has concluded thatrequested the Company's internal control over financial reporting was effective asadministration a fast implementation of December 31, 2015.the information technology ("IT") development plan, which it committed to it throughout 2020.

 

The effectivenessmaterial weaknesses did not result in any identified misstatements in the current period consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by the Company’sCompany, and there were no changes in previously released financial results. We have begun to develop remediation plans for these material weaknesses which are described below under “Remediation Efforts”.

F-1 

Remediation of Prior Material Weaknesses

During our management’s assessment of internal control over financial reporting as of December 31, 2015,2018, our management identified 2 (two) material weaknesses. The material weaknesses were that we did not design, establish or maintain effective controls over Loan and Financing agreements, which affected certain contractual terms in loan and financing agreements resulting in the possibility of acceleration of some debts and the Internal Audit function as the Company did not maintain at year-end an internal audit function enough to monitor control activities and to execute timely the management’s self-assessment over internal control.

During 2019, we implemented and reinforced controls to ensure procedures over:

·Loan and Financing agreements: Restrictive clauses in financing contracts and on mitigating similar situations are now analysed in a regular basis, where the management informs that reinforced several procedures, such as: (i) Directives stipulated in the contrac are regularly monitored and checked with control reports by the manager of structured operations – a new executive hired by Gafisa on August 2019 (ii) The position of the financing agreements are presented in an internal committee in order to evaluate their position and define strategies for future action

·Internal Audit area: The maintenance of an internal audit area by contracting a new manager for the area in February 2019, and in parallel a number of steps have been taken in order to restructure the area, increasing governance staffing for Internal Controls, Risks Management, and Internal Audit. The Internal Audit area remains as responsible for an independent and objective evaluation of processes, risks management, check compliance with policies and procedures and verification of controls effectiveness and efficiency.

Therefore, based upon the measures adopted, our management concluded that the actions implemented represented an improvement in the mitigation of risks in the control environment over this process and concluded that this deficiency was remediated as of December 31, 2019.

Remediation Efforts

Our management has been auditedactively engaged in the design and implementation of remediation efforts to address the identified material weakness, as well as other identified areas of risk.

The remediation efforts outlined below, which are in the process of implementation, are intended to address both the identified material weakness and related areas. The design and implementation of these and other remedial efforts are the responsibility of our management.

The accuracy and completeness of information about contingent liabilities: The management reinforces its commitment to maintain controls to ensure the accuracy and completeness of information about contingent liabilities by KPMG Auditores Independentes, an independent registered public accounting firm,contracting a new manager for the area in February 2020, and in parallel a number of steps have been taken in order to restructure the area, increasing governance staffing for the management of its legal processes to reconcile any discrepant information. This movement also includes a new version of it´s legal management software, orientation of all service provider offices, including new ones that have assumed substantial portfolios, in order to reinforce the need for all actions accompanied by them to be evaluated in a timely manner in order to corroborate the integrity of the data used for the evaluation of their contingencies.

Information Technology (“IT”): Our Management is concentrating efforts on readjusting the design of controls in the information technology environment, updating policies and monitoring and reviewing operational controls.


We are implementing the following corrective measures in response to the deficiency related to the management of users and access rights:


• Review and improvement of automated rules related to access management;
• Map and review all critical functions, as statedwell as access to transactions and permissions for users.

Improvement of our compensatory controls, related to the segregation of functions in ERP transactions and the expansion of the set of monitors and their report which appears herein.respective automated reports already developed and used to identify, monitor and treat any conflict that materializes, expanding them where there is a risk and occurrence of technically justified conflicts.

 

São Paulo, Brazil
April 27, 2016

June 22, 2020

 

By:/s/ Sandro Rogério da Silva GambaGuilherme Augusto Soares Benevides 
 Name:Sandro Rogério da Silva GambaGuilherme Augusto Soares Benevides 
 Title:Chief ExecutiveOperational Officer 
  
By:/s/ Andre BergsteinIan Monteiro de Andrade 
 Name:Andre BergsteinIan Monteiro de Andrade 
 Title:Investor Relations and Chief Financial Officer 

F-1F-2 

 

Report of Independent Registered Public Accounting Firm

 

TheTo Stockholders and Board of Directors and Shareholders

of Gafisa S.A.

 

Opinion on Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Gafisa S.A. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of profit or loss, comprehensive income (loss), changes in equity, cash flows and value added for each of the years in the three year period ended December 31, 2015. We also have audited Gafisa S.A.’s internal control over financial reporting as of December 31, 2015,2019, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of profit and loss and comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as “the financial statements”) and our report dated June 22, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s AnnualManagement’s Report on Internal Control over Financial Reporting” under item 15 of the Company’s Form 20-F.Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our auditsaudit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses described below have been identified and included in management assessment:

F-3 

·Failure to maintain controls to ensure the accuracy and completeness of information about contingent liabilities. Specifically, the Company did not design or implement controls to monitor compliance with Company policies and procedures for evaluating provisions related to existent claims against the Company.

·Failure to maintain controls related to operation of information technology (“IT”) general controls in the areas of access security, program change management and computer operations (“IT General Controls”). The deficiencies in IT General Controls also resulted in a conclusion that manual controls that rely on data produced by and maintained within these affected IT system applications and automated controls within these affected IT system applications were ineffective.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report on those financial statements.

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

São Paulo, Brazil

June 22, 2020

/s/ BDO RCS Auditores Independentes SS

 

F-2F-4 

Report of Independent Registered Public Accounting Firm

 

To Stockholders and Board of Directors of Gafisa S.A.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Gafisa S.A. (the “Company”) and subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of profit and loss and comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gafisa S.A.the Company and subsidiaries as ofat December 31, 20152019 and 2014,2018, and the results of their operations and their cash flows and their value added for each of the two years in the three-years period ended on December 31, 2015,2019, in conformity with Brazilian accounting practices, adopted in Brazil applicable to Brazilian real estate development entities. Alsoentities, registered with the Brazilian Securities Commission (“CVM”).

We also have audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2015,2019, based on criteria established inInternal Control – Control—Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).(“COSO”), and our report dated June 22, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Change in Accounting practices adoptedPrinciple

As discussed in BrazilNote 3.1 to the consolidated financial statements, the Company changed its method for accounting for leases using the modified retrospective method in 2019.

Differences from U.S. Generally Accepted Accounting Principles

Brazilian accounting practices, applicable to Brazilian real estate development entities, registered with the Brazilian Securities Commission (CVM), vary in certain significant respects from accounting principlesU.S. generally accepted in the United States of America.accounting principles. Information relating to the nature and effect of such differences is presented in Note 3132 to the consolidated financial statements.

 

São Paulo - Brazil
April 27, 2016

F-5 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company's auditor since 2018.

São Paulo, Brazil

June 22, 2020

/s/ KPMGBDO RCS Auditores Independentes SS

 

 

F-3F-6 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors Gafisa S.A.:

Opinion on the Consolidated Financial Statements

We have audited, before the effects of the adjustments to retrospectively apply the change in accounting effective as of January 1, 2018 as issued by the Brazilian Accounting Standards Committee, Comitê de Pronunciamentos Contábeis (CPC), CPC 48 - Financial Instruments and CPC 47 - Revenue from Contracts with Customers, the consolidated statements of profit or loss, comprehensive income (loss), cash flows, changes in equity and value added for the year ended December 31, 2017 and the related notes, collectively, the consolidated financial statements. The 2017 consolidated financial statements before the effects of the adjustments to retrospectively apply the aforementioned change in accounting are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments to retrospectively apply the aforementioned change in accounting, present fairly, in all material respects, the results of its operations and its cash flows for the years ended December 31, 2017, in conformity with accounting practices adopted in Brazil applicable to Real Estate entities.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting effective as of January 1, 2018 as issued by the Brazilian Accounting Standards Committee, Comitê de Pronunciamentos Contábeis (CPC), CPC 48 - Financial Instruments and CPC 47 - Revenue from Contracts with Customers and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provides a reasonable basis for our opinion.

We have served as the Company’s auditor from 2013 to 2017.

São Paulo, Brazil

April 27, 2018

/s/ KPMG Auditores Independentes

F-7 

Gafisa S.A.

Consolidated balance sheets

As of December 31, 2019 and 2018

(In thousand of Brazilian Reais)

  Notes  2019  2018 
          
Current assets         
Cash and cash equivalents 4.1   12,435   32,304 
Short-term investments 4.2   401,895   104,856 
Trade accounts receivable 5   442,542   467,992 
Properties for sale 6   799,099   890,460 
Receivables from related parties 21.1   77,606   64,660 
Prepaid expenses    1,860   2,668 
Non-current assets held for sale 8.1   7,014   90,588 
Other assets 7   67,395   42,283 
Total current assets     1,809,846   1,695,811 
            
Non-current assets           
Trade accounts receivable 5   103,058   174,017 
Properties for sale 6   279,207   198,941 
Receivables from related parties 21.1   33,416   28,409 
Other assets 7   166,916   95,194 
      582,597   496,561 
            
Investments in ownership interests 9   126,363   302,065 
Property and equipment 10   14,159   20,073 
Intangible assets 11   7,084   11,770 
      147,606   333,908 
            
Total non-current assets     730,203   830,469 
            
            
            
            
Total assets     2,540,049   2,526,280 

The accompanying notes are an integral part of these financial statements.

F-8 

Gafisa S.A.

 

Consolidated balance sheets

As of December 31, 2019 and 2018

(In thousand of Brazilian Reais)

  Notes  2019  2018 
          
Current liabilities         
Loans and financing 12   426,124   285,612 
Debentures 13   158,179   62,783 
Payable for purchase of properties and advances from customers 17   117,515   113,355 
Payables for goods and service suppliers    95,450   119,847 
Taxes and contributions    69,868   57,276 
Salaries, payroll charges and profit sharing    12,291   6,780 
Provision for legal claims and commitments 16   153,033   138,201 
Obligations assumed on the assignment of receivables 14   20,526   25,046 
Payables to related parties 21.1   64,384   56,164 
Other payables 15   135,492   173,951 
Total current liabilities     1,252,862   1,039,015 
            
Non-current liabilities           
Loans and financing 12   107,029   338,135 
Debentures 13   39,346   202,883 
Payable for purchase of properties and advances from customers 17   93,075   196,076 
Deferred income tax and social contributions 19   12,114   49,372 
Provision for legal claims and commitments 16   123,878   155,608 
Obligations assumed on the assignment of receivables 14   19,835   32,140 
Other payables 15   9,065   19,860 
Total non-current liabilities     404,342   994,074 
            
Equity           
Capital 18.1   2,926,280   2,521,319 
Treasury shares 18.1   (43,517)  (58,950)
Capital reserves and reserve for granting stock options    337,611   337,351 
Accumulated losses 18.2   (2,338,964)  (2,308,403)
      881,410   491,317 
Non-controlling interests     1,435   1,874 
Total equity     882,465   493,191 
Total liabilities and equity     2,540,049   2,526,280 

The accompanying notes are an integral part of these financial statements.

F-9 

Gafisa S.A.

Consolidated statement of profit or loss

Years ended December 31, 20152019, 2018 and 2014

2017

(In thousands of Brazilian Reais)

     
  Note 2015 2014
       
Current assets      
Cash and cash equivalents 4.1  82,640   109,895 
Short-term investments 4.2  629,671   1,047,359 
Trade accounts receivable 5  1,395,273   1,440,498 
Properties for sale 6  1,880,377   1,695,817 
Receivables from related parties 21.1  95,118   142,732 
Prepaid expenses -  7,171   15,442 
Other assets 7  120,657   128,905 
Assets held for sale 8  105,857   110,563 
Total current assets    4,316,764   4,691,211 
           
Non-current assets          
Trade accounts receivable 5  407,091   384,821 
Properties for sale 6  750,240   816,525 
Receivables from related parties 21.1  109,193   107,067 
Other assets 7  82,880   112,241 
     1,349,404   1,420,654 
           
Investments 9  967,646   968,393 
Property and equipment 10  49,176   48,691 
Intangible assets 11  77,342   76,903 
     1,094,164   1,093,987 
           
Total non-current assets    2,443,568   2,514,641 
           
           
           
           
Total assets    6,760,332   7,205,852 

See accompanying notes to consolidated financial statements.

F-4

Gafisa S.A.

Consolidated balance sheets 

Years ended December 31, 2015 and 2014

(In thousands of Brazilian Reais)

     
  Note 2015 2014
       
Current liabilities      
Loans and financing 12  672,365   550,058 
Debentures 13  389,621   504,387 
Payable for purchase of properties and advances from customers 17  361,420   490,605 
Payables for goods and service suppliers -  57,335   95,131 
Taxes and contributions -  102,057   114,424 
Salaries, payroll charges and profit sharing -  60,102   65,039 
Minimum mandatory dividends -  17,682   - 
Provision for legal claims and commitments 16  100,312   103,034 
Obligations assumed on the assignment of receivables 14  23,482   24,135 
Payables to related parties 21.1  87,100   156,503 
Derivative financial instruments 20.i.b  14,056   3,340 
Other payables 15  163,437   164,213 
Total current liabilities    2,048,969   2,270,869 
           
Non-current          
Loans and financing 12  620,470   847,367 
Debentures 13  468,337   684,712 
Payables for purchase of properties and advances from customers 17  248,514   101,137 
Deferred income tax and social contribution 19  16,489   34,740 
Provision for legal claims and commitments 16  142,670   136,540 
Obligations assumed on the assignment  of receivables 14  35,811   31,994 
Payables to related parties 21.1  41,002   - 
Derivative financial instruments 20.i.b  7,618   4,833 
Other payables 15  33,216   35,257 
Total non-current liabilities    1,614,127   1,876,580 
           
Equity          
Capital 18.1  2,740,662   2,740,662 
Treasury shares 18.1  (25,980)  (79,059)
Capital reserves and reserve for granting stock options -  76,834   69,897 
Income reserve -  303,975   323,845 
Equity attributable to shareholders of Gafisa    3,095,491   3,055,345 
Equity attributable to non-controlling interest    1,745   3,058 
Total equity    3,097,236   3,058,403 
Total liabilities and equity    6,760,332   7,205,852 

See accompanying notes to consolidated financial statements.

F-5

Gafisa S.A.

Consolidated statements of profit or loss 

Years ended December 31, 2015, 2014 and 2013

(In thousands of Brazilian Reais, except as stated otherwise)

       
  Note 2015 2014 2013
Continuing operations        
Net operating revenue 22  2,294,319   2,150,998   2,481,211 
               
Operating costs              
Real estate development and sales of properties 23  (1,667,505)  (1,609,246)  (1,863,766)
               
Gross profit    626,814   541,752   617,445 
               
Operating (expenses) income              
Selling expenses 23  (163,260)  (148,041)  (215,649)
General and administrative expenses 23  (181,413)  (211,906)  (234,023)
Income from equity method investments 9  41,766   19,263   7,370 
Remeasurement of investment in associate        -   375,853 
Depreciation and amortization 10 and 11  (47,420)  (79,251)  (63,014)
Provision for legal claims    (118,449)  (113,064)  (78,402)
Other income (expenses), net 23  (41,752)  (28,285)  (7,709)
               
Income (loss)  before financial income and expenses and income tax and social contribution    116,286   (19,532)  401,871 
               
Financial expenses 24  (162,258)  (165,712)  (243,586)
Financial income 24  124,131   156,794   81,083 
               
Income (loss) before income tax and social contribution    78,159   (28,450)  239,368 
               
Current income tax and social contribution    (24,598)  (33,330)  (23,690)
Deferred income tax and social contribution    17,418   18,055   20,878 
               
Total Income tax and social contribution 19.i  (7,180)  (15,275)  (2,812)
               
Net income (loss) from continuing operations    70,979   (43,725)  236,556 
               
Net income from discontinued operations        -   631,122 
               
Net income (loss) for the year    70,979   (43,725)  867,678 
               
(-) Attributable to:              
Non-controlling interests    (3,470)  (1,176)  235 
Shareholders of Gafisa    74,449   (42,549)  867,443 
               
Weighted average number of shares (in thousands)    367,572   401,905   426,300 
               
Basic earning (loss) per thousand weighted average number of shares - In Reais    0.2025   (0.1059)  2.0348 
From continuing operations    0.2025   (0.1059)  0.7358 
From discontinued operations    -   -   1.2990 
               
Diluted earning (loss) per thousand weighted average number of shares - In Reais    0.2012   (0.1059)  2.0226 
From continuing operations    0.2012   (0.1059)  0.7315 
From discontinued operations    -   -   1.2911 

See accompanying notes to consolidated financial statements.

F-6

Gafisa S.A.

Consolidated statements of comprehensive income (loss) 

Years ended December 31, 2015, 2014 and 2013

(In thousandsthousand of Brazilian Reais, except if stated otherwise)

 

     
  2015  2014  2013 
       
Net income (loss) for the year  70,979   (43,725)  867,678 
             
Total comprehensive income (loss), net of taxes  70,979   (43,725)  867,678 
             
Attributable to:            
Shareholders of Gafisa  74,449   (42,549)  867,443 
Non-controlling interests  (3,470)  (1,176)  235 
             
  Notes  2019  2018  2017 
             
Continuing operations            
Net operating revenue 22   400,465   960,891   786,174 
                
Operating costs               
Real estate development and sales of properties 23   (282,684)  (846,169)  (906,486)
                
Gross profit     117,781   114,722   (120,312)
                
Operating (expenses) income               
Selling expenses 23   (14,889)  (84,431)  (87,568)
General and administrative expenses 23   (68,314)  (78,379)  (150,235)
Income from equity method investments 9   (5,003)  (15,483)  (204,863)
Other income (expenses), net 23   (31,627)  (298,935)  (211,550)
                
Profit (loss)  before finance income and expenses and income tax and social contribution     (2,052)  (362,506)  (774,528)
                
Finance expenses 24   (76,830)  (100,074)  (137,001)
Finance income 24   17,206   19,553   29,733 
                
Loss before income tax and social contribution     (61,676)  (443,027)  (881,796)
                
Current income tax and social contribution     (1,984)  (3,349)  (2,832)
Deferred income tax and social contribution     37,259   25,100   25,932 
                
Total Income tax and social contribution 19.i  35,275   21,751   23,100 
                
Net income (loss) from continuing operations     (26,401)  (421,276)  (858,696)
                
Net income (loss) from discontinued operations           98,175 
                
Loss for the year     (26,401)  (421,276)  (760,521)
                
(-)Attributable to:               
Noncontrolling interests     (361)  (1,750)  (281)
Owners of the parent     (26,040)  (419,526)  (760,240)
                
Weighted average number of shares (in thousands) 27   68,584   41,147   26,891 
                
Basic earnings (loss) per thousand shares - In Reais 27   (0.380)  (10.196)  (28.271)
From continuing operations     (0.380)  (10.196)  (31.922)
From discontinued operations           3.651 
                
Diluted earnings (loss) per thousand shares - In Reais 27   (0.380)  (10.196)  (28.271)
From continuing operations     (0.380)  (10.196)  (31.922)
From discontinued operations           3.651 
                

 

SeeThe accompanying notes to consolidatedare an integral part of these financial statements.

F-10 

Gafisa S.A.

Consolidated statement of comprehensive income (loss)

Years ended December 31, 2019, 2018 and 2017

(In thousand of Brazilian Reais, except if stated otherwise)

  2019  2018  2017 
          
Loss for the year  (26,401)  (421,276)  (760,521)
             
Total comprehensive income for the year, net of taxes  (26,401)  (421,276)  (760,521)
             
Attributable to:            
Owners of the parent  (26,040)  (419,526)  (760,240)
Non-controlling interests  (361)  (1,750)  (281)
             

The accompanying notes are an integral part of these financial statements.

 

F-7F-11 

Gafisa S.A.

Consolidated statementsstatement of changes in equity

Years ended December 31, 2015, 20142019, 2018 and 2013

2017

(In thousands of Brazilian Reais)

 

    Attributed to Shareholders of Gafisa    
          Income Reserve        
  Note Capital Treasury shares Reserve for granting shares Legal reserve Reserve for investments Retained earnings (accumulated losses) Total Company Non-controlling interests Total
Balances at December 31, 2012    2,735,794   (1,731)  36,964   -   -   (235,582)  2,535,445   150,384   2,685,829 
                                       
Exercised stock options -  4,868   -   -   -   -   -   4,868   3,065   7,933 
Stock option plan 18.3  -   -   17,419   -   -   -   17,419   2,687   20,106 
Repurchase of treasury shares 18.1      (71,339)  -   -   -   -   (71,339)  (3,556)  (74,895)
Acquisition of non-controlling interests                                (120,051)  (120,051)
Net income for the year -  -   -   -   -   -   867,443   867,443   235   867,678 
Allocation: 18.2                                    
Legal reserve    -   -   -   31,593   -   (31,593)  -   -   - 
Interest on equity    -   -   -   -   -   (130,192)  (130,192)  -   (130,192)
Declared dividends    -   -   -   -   -   (32,920)  (32,920)  (9,005)  (41,925)
Reserve for future investments    -   -   -   -   437,156   (437,156)  -   -   - 
                                       
Balances at December 31, 2013    2,740,662   (73,070)  54,383   31,593   437,156   -   3,190,724   23,759   3,214,483 
                                       
Stock option plan 18.3  -   -   15,514   -   -   -   15,514   -   15,514 
Treasury shares  acquired 18.1  -   (115,265)  -   -   -   -   (115,265)  -   (115,265)
Treasury shares sold 18.1  -   17,583   -   -   (10,662)  -   6,921   -   6,921 
Treasury shares cancelled 18.1  -   91,693   -   -   (91,693)  -   -   -   - 
Acquisition of non-controlling interests    -   -   -   -   -   -   -   (19,525)  (19,525)
Loss for the year -  -   -   -   -   -   (42,549)  (42,549)  (1,176)  (43,725)
Absorption of loss for the year with Income reserves: 18.2  -   -   -   -   (42,549)  42,549   -   -   - 
                                       
Balances at December 31, 2014    2,740,662   (79,059)  69,897   31,593   292,252   -   3,055,345   3,058   3,058,403 
                                       
Capital increase    -   -   -   -   -   -   -   2,157   2,157 
Stock option plan 18.3  -   -   6,937   -   -   -   6,937   -   6,937 
Treasury shares acquired 18.1  -   (24,157)  -   -   -   -   (24,157)  -   (24,157)
Treasury shares sold 18.1  -   3,022   -   -   (2,423)  -   599   -   599 
Treasury shares cancelled 18.1  -   74,214   -   -   (74,214)  -   -   -   - 
Net income for the year -  -   -   -   -   -   74,449   74,449   (3,470)  70,979 
Allocation: 18.2                                    
Legal reserve    -   -   -   3,722   -   (3,722)  -   -   - 
Declared dividends    -   -   -   -       (17,682)  (17,682)  -   (17,682)
Reserve for investments    -   -   -   -   53,045   (53,045)  -   -   - 
                                       
Balances at December 31, 2015    2,740,662   (25,980)  76,834   35,315   268,660   -   3,095,491   1,745   3,097,236 
     Attributed to Owners of the Parent       
  Notes  Capital  Treasury shares  Reserve for capital and granting shares  Accumulated losses  Total Company  Noncontrolling interests  Total Consolidated 
Balances at December 31, 2016     2,740,662   (32,524)  81,948   (995,712)  1,794,374   2,128   1,796,502 
                                
Capital decrease 18.1   (219,510)        (107,720)  (327,230)     (327,230)
Stock option plan 18.3         3,500      3,500       3,500 
Treasury shares sold 18.1      3,435      (2,617)  818      818 
Write-off discontinued operations (a)                   2,000   2,000 
Net loss for the year             (760,240)  (760,240)  (281)  (760,521)
                                
Balances as of December 31, 2017     2,521,152   (29,089)  85,448   (1,866,289)  711,222   3,847   715,069 
                                
Capital increase 18.1   167      250,599      250,766      250,766 
Stock option plan 18.3         1,304      1,304      1,304 
Treasury shares sold 18.1      2,351      (1,525)  826      826 
Share repurchase program 18.1      (32,212)      (21,063)  (53,275)     (53,275)
Recognition of reserves                   (223)  (223)
Loss for the year             (419,526)  (419,526)  (1,750)  (421,276)
                                
Balances as of December 31, 2018     2,521,319   (58,950)  337,351   (2,308,403)  491,317   1,874   493,191 
                                
Capital increase 18.1   404,961      (157)     404,804      404,804 
Stock option plan 18.3         417       417      417 
Treasury shares sold 18.1      141      7   148      148 
Treasury shares cancelled 18.1      5,747      (5,747)         
Treasury shares reissued 18.1      (20,671)     20,671          
Share repurchase program 18.1      30,216      (19,452)  10,764      10,764 
Recognition of reserves                   (78)  (78)
Loss for the year             (26,040)  (26,040)  (361)  (26,401)
                                
Balances as of December 31, 2019     2,926,280   (43,517)  337,611   (2,338,964)  881,410   1,435   882,845 

(a)Amount regarding the write-off of the debt balance of non-controlling interests related to Construtora Tenda S.A, in view of the spin-off of the Companies (Note 8.2),

 

SeeThe accompanying notes to consolidatedare an integral part of these financial statements.

 

F-8F-12 

Gafisa S.A.

Consolidated statements of cash flow statement 

Years ended December 31,2015, 201431, 2019, 2018 and 2013

2017

(In thousands of Brazilian Reais)

 

    
 2015 2014 2013 2019  2018 2017 
Operating activities           
Income (loss) before income tax and social contribution  78,159   (28,450)  239,368 
Profit (loss) before income tax and social contribution  (61,676)  (443,027)  (881,796)
Expenses/(income) not affecting cash and cash equivalents:                        
Depreciation and amortization (Notes 10 and 11)  47,420   61,647   63,014   14,181   21,290   32,046 
Stock option expense (Note 18.3)  9,964   34,006   17,419 
Stock option plan expense (Note 18.3)  (2,366)  1,927   4,964 
Unrealized interests and charges, net  88,960   69,355   28,476   5,448   11,156   46,168 
Warranty provision (Note 15)  7,480   (839)  (20,928)  (7,521)  (4,130)  (3,498)
Provision for legal claims and commitments (Note 16)  118,449   113,064   78,402   20,598   172,432   107,848 
Provision for profit sharing (Note 25 (iii))  25,502   35,006   59,651   5,000   (14,750)  13,375 
Allowance for doubtful accounts and cancelled contracts (Note 5)  21,182   (14,616)  (27,102)
Allowance for expected credit losses and cancelled contracts (Note 5)  (47,257)  (41,827)  (187,283)
Provision for realization of non-financial assets:                        
Properties and land for sale (Note 6 and 8)  (13,176)  (6,089)  2,829   (37,446)  (74,689)  123,751 
Intangible assets (Note 11)  -   17,604   962 
Provision for penalties due to delay in construction works (Note 15)  5,283       
Income from equity method investments (Note 9)  (41,766)  (19,263)  (7,370)  5,003   15,483   217,303 
Remeasurement of investment in associate  -   -   (375,853)
Financial instruments (Note 20)  17,153   7,492   5,103      (763)  (818)
Provision for penalties due to delay in construction works (Note 15)  (4,450)  (6,867)  (21,719)
Write-off of property and equipment and intangible assets, net (Notes 10 and 11)  6,242   8,808   23,708 
Write-off of investments (Note 9)  (3,083)  5,748   - 
Derecognition of goodwill from remeasurement of investment in associate (Note 9)     112,800   101,953 
Result of divestment in associate (Note 9)  78,008       
(Record)/Write-off of goodwill on acquisition of subsidiary (Note 9)        25,476 
                        
Decrease/(increase) in operating assets                        
Trade accounts receivable  10,924   391,625   260,557   115,003   (95,740)  260,090 
Properties for sale and land available for sale  (130,938)  (462,417)  (189,968)  151,465   367,864   346,210 
Other assets  (7,117)  (11,574)  24,659   (32,044)  (15,880)  (9,317)
Prepaid expenses  8,271   19,743   26,497   808   2,867   (2,987)
                        
Increase/(decrease) in operating liabilities                        
Payables for purchase of properties and advances from customers  18,192   103,392   (19,812)
Payable for purchase of properties and advances from customers  (87,003)  597   13,137 
Taxes and contributions  (12,367)  (26,088)  (31,158)  12,592   10,846   (5,412)
Payables for goods and service suppliers  (37,796)  15,789   (8,314)  (37,750)  32,732   18,683 
Salaries, payroll charges and profit sharing  (30,440)  (66,158)  (47,517)  511   (6,459)  (14,266)
Other payables  (97,175)  (51,853)  198,586   (76,443)  (3,434)  (20,341)
Transactions with related parties  19,338   (37,732)  37,772   21,608   (14,497)  (27,548)
Paid taxes  (7,180)  (109,442)  (19,609)  (1,983)  (3,348)  (2,832)
            
Net cash and cash equivalents from operating activities  91,748   41,891   297,653 
Cash from (used) in operating activities related to discontinued operations        51,959 
Cash and cash equivalents from operating activities  44,019   31,450   206,865 
                        
Investing activities                        
Acquisition of 20% in AUSA  -   -   (366,662)
Sale of controlling interests in AUSA  -   -   1,254,521 
Cash from discontinued operation  -   -   (155,755)
Purchase of property and equipment and intangible assets (Notes 10 and 11)  (54,586)  (88,532)  (80,993)
Purchase of short-term investments  (5,404,968)  (4,855,621)  (4,674,281)
Acquisition of property and equipment and intangible assets (Notes 10 and 11)  (3,581)  (12,511)  (20,463)
Increase in short-term investments  (387,319)  (1,090,796)  (1,079,167)
Redemption of short-term investments  5,822,656   5,617,231   3,681,342   90,280   1,104,875   1,183,878 
Investments  (1,636)  29,026   (102,639)     (4,629)  (2,598)
Dividends received (Note 9)  -   49,849   342,176 
            
Net cash and cash equivalents from (used in) investing activities  361,466   751,953   (102,291)
Transaction costs related to the transaction of spin-off of Gafisa and Tenda (Note 8.2)        (9,545)
Proceeds from the exercise of preemptive rights        219,510 
Proceeds from the refund for Tenda’s capital        105,170 
Cash from investing activities related to discontinued operations        48,663 
Cash from (used in) investing activities  (300,620)  (3,061)  445,448 
                        
Financing activities                        
Proceeds from stock options exercised  -   -   4,868 
Redeemable shares of Credit Rights Investment Fund (FIDC)  -   -   (5,089)
Increase in loans, financing and debentures  845,935   822,123   1,783,183   122,639   412,768   453,370 
Payment of loans, financing and debentures - principal  (1,064,324)  (1,048,057)  (1,875,270)  (229,846)  (528,252)  (870,472)
Payment of loans, financing and debentures - interest  (306,302)  (315,798)  (259,285)  (56,976)  (111,157)  (161,734)
Assignment of receivables  24,558   12,434   -         21,513 
Payables to venture partners  (6,135)  (112,650)  (112,743)        (1,237)
Payment of dividends and interest on equity  -   (150,042)  - 
Loan transactions with related parties  49,357   1,193   (32,449)  (11,179)  (1,289)  5,044 
Disposal of treasury shares (Note 18.1)  3,022   17,583   - 
Result of the disposal of treasury shares (Note 18.1)  (2,423)  (10,664)  - 
Repurchase of treasury shares (Note 18.1)  (24,157)  (115,265)  (71,339)
Repurchase of and proceeds from treasury shares (Note 18.1)  7,132   (47,448)  818 
Capital increase  404,962   167    
Subscription and payment of common shares     250,599    
Cash from (used in) the financing activities related to discontinued operations        24,089 
Cash and cash equivalents from (used in) financing activities  236,732   (24,612)  (528,609)
                        
Net cash and cash equivalents from (used in) financing activities  (480,469)  (899,143)  (568,124)
(-) Net change in cash and cash equivalents related to discontinued operations        (124,711)
                        
Net decrease in cash and cash equivalents  (27,255)  (105,299)  (372,762)
Net increase/(decrease) in cash and cash equivalents  (19,869)  3,777   (1,007)
                        
Cash and cash equivalents                        
At the beginning of the year  109,895   215,194   587,956   32,304   28,527   29,534 
At the end of the year  82,640   109,895   215,194   12,435   32,304   28,527 
                        
Net decrease in cash and cash equivalents  (27,255)  (105,299)  (372,762)
Net increase (decrease) in cash and cash equivalents  (19,869)  3,777   (1,007)

 

SeeThe accompanying notes to consolidatedare an integral part of these financial statements.


F-9F-13 

Gafisa S.A.

Consolidated statements ofadded value added statement

Years ended December 31, 2015, 20142019, 2018 and 2013

2017

(In thousands of Brazilian Reais)

 

      
 2015 2014 2013 2019  2018  2017 
             
             
Revenues 2,485,290  2,325,677  3,330,981   437,289   1,048,145   858,640 
Real estate development and sales  2,475,927   2,256,198   2,618,737 
Real estate development and sales of properties  390,032   1,006,317   671,357 
Reversal (recognition) of allowance for doubtful accounts and cancelled contracts  9,363   69,479   81,122   47,257   41,828   187,283 
Profit from discontinued operations  -   -   631,122 
Inputs acquired from third parties (including taxes on purchases)  (1,728,586)  (1,667,210)  (1,904,141)  (306,908)  (1,075,054)  (1,013,885)
Operating costs - Real estate development and sales  (1,501,536)  (1,437,656)  (1,706,554)
Operating costs- Real estate development and sales  (244,409)  (733,265)  (789,971)
Materials, energy, outsourced labor and other  (227,050)  (229,554)  (197,587)  82,009   (228,989)  (194,660)
            
            
Profit or loss of discontinued operations        98,175 
Gain from bargain purchase  16,592       
Loss on realization of investment measured at fair value  (161,100)  (112,800)  (127,429)
                        
Gross value added  756,704   658,467   1,426,840   130,381   (26,909)  (155,245)
                        
Depreciation and amortization  (47,420)  (79,251)  (63,014)  (14,181)  (21,290)  (32,046)
                        
Net value added produced (distributed) by the Company  709,284   579,216   1,363,826 
Net value added produced by the entity  116,200   (48,199)  (187,291)
                        
Value added received on transfer  165,897   176,057   464,306   12,203   4,070   (175,130)
Profit of investment stated at fair value  -   -   375,873 
Income from equity method investments  41,766   19,263   7,350   (5,003)  (15,483)  (204,863)
Financial income  124,131   156,794   81,083 
Finance income  17,206   19,553   29,733 
                        
Total value added to be distributed  875,181   755,273   1,828,132   128,403   (44,129)  (362,421)
                        
Value added distribution  875,181   755,273   1,828,132   128,403   (44,129)  (362,421)
Personnel and payroll charges  216,177   216,410   285,276   28,429   75,300   94,180 
Taxes and contributions  242,941   229,919   264,795   7,106   81,339   44,556 
Interest and rents  341,614   351,493   410,618   118,908   218,758   259,083 
Interest on equity  -   -   130,192 
Dividends (Note 18.2)  17,682   -   32,920 
Net income (loss) attributable to non-controlling interests  3,470   1,176   (235)
Net income (absorbed losses)  53,297   (43,725)  704,566 
Retained earnings attributable to noncontrolling interests  361   1,750   281 
Incurred losses  (26,401)  (421,276)  (760,521)

 

SeeThe accompanying notes to consolidatedare an integral part of these financial statements.

 

F-10F-14 

Gafisa S.A.

Notes to the consolidated financialfinanciaol statements

December 31, 2015

2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

1.Operations

 

Gafisa S.A. ("Gafisa" or "Company") is a publicly traded company with registered office at Avenida das Nações Unidas, 8.501, 19th floor,Presidente Juscelino Kubitschek, nº 1.830, conjunto comercial nº32, 3o andar, Bloco 2, in the city and state of São Paulo, Brazil, and commencedbegan its operations in 1997 with the objectives of: (i) promoting and managing all forms of real estate ventures on its own behalf or for third parties (in the latter case, as construction company andor proxy); (ii) selling and purchasing real estate properties; (iii) providing civil construction and civil engineering services; (iv) developing and implementing marketing strategies related to its own and third party real estate ventures; and (v) investing in other companies withwho share similar objectives.

 

The Company has stocks traded atBM&FBovespa B3 S.A. – Brasil, Bolsa, de Valores, Mercadorias e Futuros and at the New York Stock Exchange (NYSE)Balcão (former BM&FBovespa), reporting its information to the Brazilian Securities and Exchange Commission (CVM) and the U.S. Securities and Exchange Commission (SEC). The ADSs were delisted on the NYSE on December 17, 2018, and are currently traded over the counter (OTC).

 

The Company enters into real estate development projects with third parties through specific purpose partnerships (“Sociedades de Propósito Específico” or–or “SPEs”) or through the formation of consortia and condominiums. Subsidiaries significantly share the managerial and operating structures, and corporate, managerial and operating costs with the Company. The SPEs, condominiums and consortia operate solely in the real estate industry and are linked to specific ventures. Controlled entities substantially share

1.1Change in Shareholding

On February 14, 2019, 14,600,000 shares held by the managerial and operating structures andgroup GWI Asset Management S.A., corresponding to 33.67% stake in the corporate, managerial and operating costs withCompany, were auctioned. As a result of this auction, Planner Corretora de Valores S.A., by means of the investment funds it manages, started to hold 8,000,000 common shares, corresponding to 18.45% of total common shares issued by the Company.

 

1.2Capital increase

On June 24, 2019, the Board of Directors ratified the increase in capital approved in its meeting held on April 29, 2015, following15, 2019, by subscription and payment of 26,273,962 new common shares, of which 12,170,035 are new shares subscribed and paid-in by the material fact disclosed on February 7, 2014,shareholders who exercised their preemptive rights at the Company disclosed aprice of R$5.12, and 14,103,927 are new material fact informing to itsshares subscribed and paid-in by the shareholders andwho subscribed the market that the work for the potential separationremaining shares of the business units Gafisacapital increase at the price of R$4.96, totaling R$62,310 and Tenda continue to be carried out, aiming at fulfillingR$69,954, respectively.

On October 23, 2019, the sufficient conditions for its implementation. However, in view that the process for definingBoard of Directors ratified the capital structure is stillincrease approved in progress,its meeting held on August 15, 2019, by subscription and taking into account that such definition is a necessary step towardspayment of 48,968,124 new common shares, of which 45,554,148 are new shares, subscribed and paid-in by the separation process,shareholders who exercised their preemptive rights at the business unit Tenda has not yet shown characteristics that enable its immediate separation under current conditions,price of R$5.58, and accordingly, it is not yet possible to estimate a term for completing3,413,976 new shares, subscribed and paid-in by the potential separation.shareholders who subscribed the remaining shares of capital increase at the price of R$5.42, totaling R$254,195 and R$18,504, respectively.

 

F-11F-15 

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

1.Operations--Continued

1.3Divestment of associate

On October 21, 2019, the Company disclosed a Material Fact whereby it informed about the Contract for Purchase, Sale and Redemption of Shares, Corporate Restructuring and Other Covenants, entered into with Alphaville Urbanismo S.A. (“Alphaville”), Private Equity AE Investimentos e Participações S.A. (“PEAE”) and PEAE affiliated companies, aimed at establishing the terms and conditions under which it is implementing the divestment of Gafisa’s 21.20% ownership interest in Alphaville. The reduction in the former interest of 30% is a result of an increase in capital made by PEAE’s affiliated companies. The total amount of the transaction is equivalent to R$100,000, settled by offsetting receivables and receipt of the investee shares against assets, measured at fair value. On December 27, 2019, the Company disclosed a Material Fact informing about the completion of this transaction (Note 9.1).

1.4Letter of Intent - UPCON Acquisition

On December 16, 2019, the Company disclosed a Material Fact whereby it informed that it entered into a non-binding Letter of Intent with UPCON Incorporadora S.A. (“UPCON”), concerning the acquisition by the Company of the totality of shares issued by UPCON. On March 2, 2020, the Company informed that the Administrative Council for Economic Defense (CADE) approved, without restriction, the merger of the totality of shares of UPCON into the Company. Once the required approval stages are completed, UPCON will become a wholly-owned subsidiary of Gafisa. (Note 31.(i)).

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies

 

2.1.Basis of presentation and preparation of individual and consolidated financial statements

 

The consolidated financial statements were authorized for issue byOn June 22, 2020, the Company’s Board of Directors on April 27, 2016.approved these individual and consolidated financial statements of the Company and authorized their disclosure.

 

The consolidated financial statements of the Company have been prepared and are being presented according to the accounting practices adopted in Brazil, including the pronouncements issued by the CPC, approved by the Brazilian Securities and Exchange Commission (CVM) (“Brazilian GAAP” or “BR GAAP”).

 

Brazilian GAAP, differs from International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) in certain respects, including the fact that under Brazilian GAAP permits the application of percentage of completion accounting by real estate companies inis applied under more circumstances than are permitted by IFRS.IFRS, including interpretations on the accounting treatment for cancelations. This application of Brazilian GAAP is commonly referred to in Brazil as “IFRSIFRS applicable to real estate development entities in Brazil, as approvedregistered with the CVM. The aspects related to the transfer of control in the sale of real estate units follow the understanding expressed by the Accounting Pronouncements Committee, orCVM in Circular Letter/CVM/SNC/SEP 02/2018 about the application of Technical Pronouncement CPC the CVM and the Federal Accounting Council, or CFC, including CPC Guideline 0447Application of the Technical Interpretation ICPC 02 to the Brazilian Real Estate Development Entities –Revenue from contracts with customers (IFRS 15), regarding revenue recognition, and the respective costs and expenses arising from real estate development operations by reference to the stage of completion (percentage of completion method)”., including the accounting treatment for cancelations. Accordingly, for the purpose of its annual filing with the United States Securities and Exchange Commission, the accompanying consolidated financial statements prepared in accordance with BR GAAP have been reconciled to US GAAP as presented in Note 31.32 to these financial statements. US GAAP condensed consolidated balance sheets have been included in Note 3132 (d)(i) for 20152019, 2018 and 2014 and2017 US GAAP consolidated statement of profit or loss and comprehensive income (loss) for the years ended December 31, 2015, 20142019, 2018 and 20132017 have been included in Note 3132 (d)(ii) and Note 3132 (d)(iii), respectively.

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.1.Basis of presentation and preparation of individual and consolidated financial statements--Continued

 

The consolidated financial statements have been prepared on historical cost, except for those measured at fair value, when indicated, and on a going concern basis. Management makes an assessment of the Company’s ability to continue as going concern when preparing the consolidated financial statements.

All amounts reported in the accompanying financial statements are in thousands of Reais, except as otherwise stated.

 

2.1.1.Consolidated financial statements

 

The consolidated financial statements of the Company include the financial statements of Gafisa and its direct and indirect subsidiaries. The Company controls an entity when it is exposed to, or has right to variable returns arising from its involvement with the entity and has the ability to affect those returns through the power that it exerts over the entity. The existence and the potential effects of voting rights, which are currently exercisable or convertible, are taken into account when evaluating whether the Company controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date the control on which the control commences until the date on which control ceases.

 

The accounting practices have been applied consistently by all subsidiaries included in the consolidated financial statements. The subsidiaries have the same fiscal year as the Company.

 

2.1.2.Functional and presentation currency

 

The functional and presentation currency of the Company is Brazilian Real.

 

2.1.3.PresentationStatement of segment informationCash Flows

 

The presentationIn view of the disclosure of the discontinued operations related to Tenda, and in line with CPC 03 (R-2) – Statement of Cash Flows (IAS 7) and CPC 31 - Non-current Assets Held for Sale and Discontinued Operations (IFRS 5), the information on operating, segment information is consistent withfinancing and investing activities related to discontinued operations are presented in separated lines in the internal reports provided toStatement of Cash Flows of the main decision makers of operational matters,Company for the Statutory Board, who are responsible for allocating resources, assessing the performance of operating segments and making strategic decisions.year ended December 31, 2017.

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies

 

2.2.1.Accounting judgments, estimates and assumptions

 

Accounting estimates and judgments are evaluated on an ongoing basis based on historical experience and other factors, including expectations on future events, considered reasonable under the circumstances.

 

(i)Judgments, estimates and assumptions

The preparation of the consolidated financial statements of the Company requires managementManagement to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, as well as the disclosure of contingent liabilities, at the reporting date.

 

Assets and liabilities subject to estimates and assumptions include the provision for impairment of assets,asset, transactions with share-based payment, provision for tax, labor and civillegal claims, fair value of financial instruments, measurement of the estimated cost of construction, deferred tax assets, among others.

 

The main assumptions related to sources of uncertainty over future estimates and other important sources of uncertainty over estimates at the reporting date, which may result in different amounts upon settlement are discussed below:

 

a)Impairment loss of non-financial assets

 

An impairment loss exists when the asset’s carrying amount exceeds its recoverable amount, which is the higher of an asset’s fair value less costs to sell and its value in use.

 

The calculation of the fair value less costscost to sell is based on available information on sale transactions of similar assets or market prices less additional costs of disposal. The calculation of the value in use is based on the discounted cash flow model.

 

Cash flows are derived based on the budget for the following five years, and do not include uncommitted restructuring activities or future significant investments that will improve the asset basis of the cash-generating unit being tested. The recoverable amount is sensitive to the discount rate used under the discounted cash flow method, the estimated future cash inflows, and to the growth rate used for purposes of extrapolation.

 

Indefinite life intangible assets and goodwill attributable to future economic benefit are tested at least annually, and/or when circumstances indicate a decrease in the carrying value. The main assumptions used for determining the recoverable amount of cash-generating units are detailed in Note 9.

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies --Continuedpolicies--Continued

 

2.2.1.Accounting judgments, estimates and assumptions --Continued

(i)Judgments, estimates and assumptions --Continued

a)Impairment of non-financial assets--Continued

Indefinite life intangible assets and goodwill attributable to future economic benefit are tested at least annually or when circumstances indicate a decrease in the carrying value. The main assumptions used for determining the recoverable amount of cash-generating unit are detailed in Note 11.

 

b)Share-based payment transactions

 

The Company measures the cost of transactions with employees to be settled with shares based on the fair value of equity instruments on the grant date. For cash-settled share-based transactions, the liability is required to be remeasured at the end of each reporting period through the settlement date, recognizing in profit or loss possible changes in fair value, which requires revaluation of the estimates used at the end of each reporting period. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to grant equity instruments, which depends on the grant terms and conditions.

 

It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend income, and the corresponding assumptions. The assumptions and models used to estimatefor estimating the fair value of share-based payments are disclosed in Note 18.3.

 

c)Provision for tax, labor and civillegal claims

 

The Company is party to many lawsuits and administrative proceedings and recognizes a provision for tax, labor and civil claims (Note 16). The assessmentProvisions are recognized for all claims related to lawsuits which likelihoods of the probability of a loss includes the evaluation of the available evidences, the hierarchy of Laws, existing case law, the latest court decisions and their significance in the judicial system, and the opinion of external legal counsel.losses are considered probable. Provisions are reviewed and adjusted to take into account anythe changes in circumstances, such as applicable statutes of limitations, findings of tax inspections, or additional exposures found based on new court issues or decisions.

 

F-15

Gafisa S.A.Contingent liabilities for which losses are considered possible are only disclosed in a note to financial statements, and those for which losses are considered remote are neither accrued nor disclosed.

 

Notes to the consolidated financial statements--Continued

December 31, 2015

(AmountsContingent assets are recognized only when there are secured guarantees or final and unappealable favorable court decisions. Contingent assets with probable favorable decision are only disclosed in thousands of Brazilian Reais, except as otherwise stated)explanatory note.

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.1.Accounting judgments, estimates and assumptions --Continued

(i)Judgments, estimates and assumptions --Continued

c)Provision for tax, labor and civil claims --Continued

 

There are uncertainties inherent in the interpretation of complex tax rules and in the value and timing of future taxable income. In the ordinary course of business, the Company and its subsidiaries are subject to assessments, audits, legal claims and administrative proceedings in civil, tax and labor matters.

 

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.1.Accounting judgments, estimates and assumptions--Continued

d)Fair value of financial instrumentsAllowance for expected credit losses

 

WhenThe Company recognizes an allowance for expected credit losses for all sale contracts of real estate units, and the fair valuesamounts are accrued as contra-entry to the recognition of financial assetsthe respective development revenue, based on data history of its current operations and liabilities presentedestimates. This allowance is calculated based on the percentage of completion of the construction work, the methodology used for recognizing profit or loss (Note 2.2.2). Such analysis is individually made by sale contract, in the balance sheet cannot be obtained in the active market, they are determined using valuation techniques, including the discounted cash flow method.line with CPC 48 – Financial Instruments, item 5.5.17 (c).

 

The data for such methods is based on available market information; however, when it is not viable, a certain level of judgment is requiredSuch estimates are annually reviewed to establish the fair value. The judgment includes considerations regarding the data used, such as interest rates, liquidity risk, credit risk,consider any changes in circumstances and volatility. Changes in the assumptions about these factors may affect the stated fair value of financial instruments.histories.

 

e)Warranty provision

The measurement of the warranty provision, to cover expenditures for repairing construction defects covered during the warranty period, is based on the estimate that considers the history of incurred expenditures adjusted by the future expectation, which is regularly reviewed, except for the subsidiaries that operate with third-party companies, which are the own guarantors of the provided construction services. The warranty term provided is five years from the delivery of the venture.

f)Estimated cost of construction

 

Estimated costs, mainly comprising the incurred and futureestimated costs for completing the construction projects,works, are regularly reviewed, based on the progress of construction, and any resulting adjustments are recognized in profit or loss of the Company.

 

f)g)Realization of deferred income tax

 

A deferred tax asset is recognized when it is probable that a taxable profit will be available in subsequent years to offset the deferred tax asset, based on projections of results, and based on internal assumptions and future economic scenarios.scenarios that enable its total or partial use.

 

The other provisions recognized in the Company are described in Note 2.2.23.

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F-16

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

2.2.1.Accounting judgments, estimates and assumptions--Continued

h)Allowance for contract cancellation

The Company recognizes an allowance for contract cancellation when a cash inflow risk is identified. Contracts are monitored to identify the moment when these conditions are mitigated.

While there is such risk, no revenue or cost is recognized in profit or loss, and the amounts are only recorded in asset and liability accounts.

The other provisions recognized in the Company are described in Note 2.2.22.

 

2.2.2.Recognition of revenue and expenses

The Company applied CPC 47 – Revenue from Contracts with Customers from January 1, 2018, including the guidance contained in Circular Letter CVM/SNC/SEP 02/2018, of December 12, 2018, which establishes the accounting procedures for recognition, measurement and disclosure of certain types of transactions arising from contracts for purchase and sale of real estate unit not yet completed in real estate development entities.

According to CPC 47, the recognition of revenue from contracts with customers is based on transfer of control over promised goods or service, which can be at a point in time or over time, according to the satisfaction or not of the “contractual performance obligations”. Revenue is measured in an amount that reflects the consideration the entity expects to be entitled and is based on a five-step model detailed as follows: 1) identification of contract; 2) identification of performance obligations; 3) determination of transaction price; 4) allocation of transaction price to performance obligations; 5) revenue recognition.

The Company records the accounting effects of contracts only when: (i) the parties have approved the contract; (ii) it can identify each party’s rights and the established payment terms; (iii) the contract has commercial substance; and (iv) is probable that it will collect the consideration to which the Company is entitled.

 

(i)Real estate development and sales

 

(a)For the sales of completed units, revenues are recognized upon completion of the sale and thewith transfer of significant risks and benefits,control, regardless of the timing of cash receipt from the customer.

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.2.Recognition of revenue and expenses--Continued

(i)Real estate development and sales --Continued

 

(b)For the construction phase of units sold, but not yet completed:

 

·The incurred cost (including cost of land, and other directly related expenditures) that corresponds to the units sold is included in profit or loss. For the units not yet sold, the incurred cost is included in inventoryproperties for sale (Note 2.2.7);

 

·Sales revenues are appropriated to profit or loss, using the percentage-of-completion method for each project, this percentage being measured in view of the incurred cost in relation to the total estimated cost of the respective project;

 

·Revenue recognized in excess of actual payments received from customers is recorded as either a current or non-current asset in “Trade accounts receivable”. Any payment received in connection with the sales of units that exceeds the amount of revenuerevenues recognized is recorded as “Payables for purchase of landproperties and advances from customers ";customers";

 

·Interest and inflation-adjustmentinflation-indexation charges on accounts receivable from the time the units are sold and delivered, as well as the adjustment to present value of account receivable, are included in “Real estate development, sale, barter transactions and construction services” when incurred, on a pro rata basis using the accrualsaccrual basis of accounting;

 

·Financial charges on accountsaccount payable for acquisition of land and those directly associated with the financing of construction are capitalized and recorded in properties for sale and included in the incurred cost of units under construction until their completion, and follow the same recognition criteria as the cost of real estate development for units sold while under construction;

 

·The taxes levied and deferred on the difference between real estate development revenues and the cumulative revenue subject to tax are calculated and recognized when this difference in revenue is recognized;

·Other expenses, including advertising and publicity, are recognized in profit or loss when incurred.

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

 

2.2.2.Recognition of revenue and expenses--Continued

(i)Real estate development and sales--Continued

·Taxes levied and deferred on the difference between real estate development revenues and the cumulative revenue subject to tax are calculated and recognized when this difference in revenue is recognized; and

·Other expenses, including advertising and publicity, are recognized in profit or loss when incurred.

 

(ii)Construction services

 

Revenues from real estate services are recognized as services are rendered and tied to the construction management activities for third parties and technical advisory services.

 

(iii)Barter transactions

 

Barter transactions have the objective of receiving land from third parties that are settled with the delivery of real estate units or transfer of portions of the revenue from the sale of real estate units of ventures. The value of the land acquired is determined on the fair value of the units to be delivered, as a component of “properties for sales”sale”, with a corresponding entry to “payable“payables for purchase of properties and advances from customers”. Revenues and costs incurred from barter transactions are included in profit or loss over the course of construction period of ventures, as previously described in item (i)(b).

 

2.2.3.Financial instruments

 

Financial instruments are recognized from the date the Company becomes a party to the contractual provisions of financial instruments,instruments.

(a)Financial assets

The Company determines the classification of its financial assets upon initial recognition, when it becomes a party to the contractual provisions of the instrument, based on the instrument model in which mainly comprisethe asset is managed and its contractual cash and cash equivalents, short-termflow characteristics.

Financial assets are initially recognized at fair value, plus, in the case of investments accounts receivable, loans and financing, suppliers, and other debts.not measured at fair value through profit or loss, directly attributable transaction costs.

 

After initial recognition, the Company’s financial instrumentsintruments are measured as described below:

F-18

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.3.Financial instruments --Continued

 

(i)Financial instruments at fair value through profit or loss

 

A financial instrument is classified at fair value through profit or loss when it is held for trading, or designated as such upon initial recognition, orwhen it meets the definition of a derivative and hedge accounting is not applied.recognition.

 

Financial instruments are designated at fair value through profit or loss if the Company manages these investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s documented investment strategy orand risk management. After initial recognition, related transaction costs are recognized in profit or loss when incurred.

Financial instruments at fair value through profit or loss are measured at fair value, and their changes therein are recognized in profit or loss.

 

ForIn the year ended December 31, 2015,2019, the Company helddid not have derivative financial instruments with the objective of mitigating the risk of its exposure to the volatility of indices and interest rates, recognized at the fair value directly in profit or loss.loss for the year. In accordance with its treasury policies, the Company does not have or issue derivative financial instruments for purposes other than to mitigate risk.for hedging.

 

The Company does not adopt the hedge accounting practice.

 

(ii)Financial assets

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Financial assets are classified into financial assets at fair value through profit or loss, receivables, held-to-maturity investments and available-for-sale financial assets. The Company determines the classification of its financial assets upon initial recognition, when the Company becomes a party to the contractual provisions of the instrument.

Financial assets are initially recognized at fair value, plus, in the case of investments not measured at fair value through profit or loss, directly attributable transaction costs.

The financial assets of the Company include cash and cash equivalents, short-term investments, trade accounts receivable and derivative financial instruments.

F-19

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

 

2.2.3.Financial instruments--Continued

(ii)Financial assets --Continued

Derecognition (write-off)

 

(a)A financial asset (or, as the case may be, a portion of a financial asset or portion of a group of similar financial assets) is derecognized when:Financial assets –Continued

(ii)Financial instruments at amortized cost

The Company classifies financial assets as measured at amortized cost only if both criteria are met, the asset is held within a business model whose objective is to collet the contractual cash flows and the contractual terms give rise to cash flows, at specific dates, which relate only to the payments of principal and interest.

Financial assets measured as at amortized cost by the Company includes: cash and cash equivalents, certain short-term financial investments, accounts receivable, and other receivables.

Derecognition (write-off)

A financial asset (or, as the case may be, a portion of a financial asset or portion of a group of similar financial assets) is derecognized when:

 

·The contractual rights to thereceive cash flows from theinflows of an asset expire; or

 

·The Company transfers theits rights to receive cash inflows of an asset or assume an obligation ofto fully pay the cash inflows received, without significant delay, to a third party because of a “transfer” agreement; and (a) the Company substantially transfers the risks and rewards of the asset, or (b) the Company does not substantially transfer or retain all risks and rewards related to the asset, but transfers the control over the asset.

 

When the Company has transferred its rights to receive cash inflows of an asset, andor signed an agreement to passtransfer it, on, and has not substantially transferred or has retained all risks and rewards related to the asset, an asset is recognized to the extent of the continuous involvement of the Company with the asset. In this case, the Company also recognizes a related liability. The transferred asset and related liability are measured based on the rights and obligations that the Company has maintained.

 

The continuous involvement by means of a guarantee on the transferred asset is measured at the lower of the original carrying value of the asset orand the highest consideration that may be required from the Company.

 

(iii)Financial liabilities

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Financial liabilities through profit or loss include trading financial liabilities and financial liabilities designated as such upon initial recognition.

Loans and financing

Subsequent to initial recognition, loans and financing accruing interest are measured at amortized cost, using the effective interest rate method. Gains and losses are recognized in statement of profit or loss, at the time liabilities are written-off, as well as during the amortization process using the effective interest rate method.

F-20

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

 

2.2.3.Financial instruments--Continued

 

(iii)(a)Financial assets--Continued

Impairment of Financial assets:

Financial assets, except for those designated at fair value through profit or loss, are tested for indication of impairment at the end of each reporting period. The impairment losses are recognized if, and only if, there is objective evidence of impairment of the financial asset as a result of one or more events that have occurred after its initial recognition, with impact on the estimated future cash flows of such asset.

For financial assets recorded at cost, the impairment loss corresponds to the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the current return rate of a similar asset. This impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is directly reduced by the impairment loss for all financial assets, except for accounts receivable, in which the carrying amount is reduced by allowance. Subsequent recoveries of previously derecognized amounts are credited to the allowance. The changes in the carrying amount of the allowance are recognized in profit or loss.

(b)Financial liabilities

Financial liabilities are classified at initial recognition at amortized cost or measured at fair value through profit or loss.

Financial liabilities at fair value through profit or loss include financial liabilities for trading and financial liabilities designated at initial recognition as fair value through profit or loss.

Loans and financing

Subsequent to initial recognition, loans and financing accruing interest are measured at amortized cost, using the effective interest rate method. Gains and losses are recognized in statement of profit or loss, at the time liabilities are derecognized, as well as during the amortization process using the effective interest rate method.

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policiesDerecognition (write-off)--Continued

 

2.2.3.A financial liability is derecognized when its contractual obligations are discharged, cancelled or expired.Financial instruments--Continued

 

(b)Financial liabilities --Continued

Derecognition (write-off)

A financial liability is derecognized when its contractual obligations are discharged, cancelled or expire.

When an existing financial liability is substituted for another from the same creditor, under substantially different terms, or when the terms of an existing liability are significantly modified, this substitution or change is treated as a derecognition of the original liability and recognition of a new liability, the difference in between the carrying amount and the fair value of the new liability is substituted by another from the same creditor, under substantially different terms, or when the terms of an existing liability are significantly modified, this substitution or change is treated as a derecognition of the original liability and recognition of a new liability. The difference in the corresponding carrying values is recognized in profit or loss.

Financial instrument – net presentation

Financial assets and liabilities are stated at their net amounts in the balance sheet when, and only when, there is a current and enforceable legal right to offset the amounts, and if there is intention to offset them or realize the asset and settle the liability simultaneously. The legal right shall not be contingent in future events and shall be applicable in the normal course of business, and in case of default, insolvency or bankruptcy of the company or counterparty.

 

2.2.4.Cash and cash equivalents and short-term investments

 

Cash and cash equivalents substantially comprise demand deposits and bank certificates of deposit held under resalerepurchase agreements, denominated in Reais, with high market liquidity and original contractual maturities of 90 days or less, and for which there are no penalties or other restrictions for the immediate redemption thereof.

 

Cash equivalents are classified as financial assets at fair value through profit or loss and are recorded at the original amounts plus income earned, calculated on a “pro rata basis", which are equivalent to their market values, not having any impact to be accounted for in the Company’s equity.

 

Short-term investments include bank deposit certificates, federal government bonds, exclusive investment funds that arehave their underlying assets fully consolidated and also restricted cash in guaranteesguarantee to loans, which are classified at fair value through profit or loss (Note 4.2).

 

F-21

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.5.Trade accountaccounts receivable

 

These are presented at present and net realizable values. The classification between current and noncurrentnon-current is made based on the expected maturity of contract installments.

 

The installments due are indexed based on the National Civil Construction Index (INCC) during the period of construction, and based on the General Market PricesPrice Index (IGP-M) and interest at 12% p.a., after the delivery of the units.

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.5.Trade accounts receivable--Continued

 

The adjustment to present value is calculated between the contract signature date and the estimated date to transfer the completed property keys to the buyer, using a discount rate represented by the average rate of the financing obtained by the Company, net of inflation, as mentioned in Note 2.2.20.2.2.19.

 

The amortization of the present value adjustment, consideringConsidering that financing its customers is an important part of the Company operations, consiststhe reversal of financing its clients until key delivery,the present value adjustment was carried out as contra-entry to the group of “Real estate development, sale, barter transactions and construction services”revenue, consistently with interest accruedincurred on the portion of receivables balance related to the period subsequent to the handover of keys.

 

2.2.6.Mortgage-backed Securities (CRIs) and Housing Loan Certificate (CCI)

 

The Company and its subsidiaries carry out the assignment and/or securitization of receivables related to completed projects and those still under construction. This securitization is carried out through the issuance of the “HousingHousing Loan Certificate”Certificate (“Cédula de Crédito Imobiliário” or “CCI”)CCI), which is assigned to financial institutions that grant loans.institutions. When there is no right of recourse, this assignment is recorded as reduction of accounts receivable. When there is right of recourse against the Company, the assigned receivable is maintained in the balance sheet and the funds from assignment are classified into the account “Obligations assumed on assignment of receivable”, until receivables are settled by customers.

 

In this situation, the transaction cost is recorded in “financial“finance expenses” in the statement of profit or loss for the year in which the transferit is made.

 

TheWhen there are financial guarantees, when a participation is acquired (subordinated CRI) and maintained to secure disposed receivables,represented by the acquisition of subordinated CRI, they are recorded on the balance sheetstatement of financial position as “short-term investments” at the realizable value, which is equivalent to fair value.

F-22

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

 

2.2.7.Properties for sale

 

The Company and its subsidiaries acquire land for future real estate developments, on payment conditions in current currency or through barter transactions. Land acquired through barter transaction is stated at fair value of the units to be delivered, and the revenue and cost are recognized according to the criteria described in Note 2.2.2 (iii).

 

Properties are measured at the lower of construction cost and net realizable value. In the case of real estate under construction, the portion in inventories corresponds to the cost incurred for units that have not yet been sold. The incurred cost comprises construction costs (materials, own or outsourced labor, and other related items), and legal expenses relating to the acquisition of land and projects, land costs, and financial charges which relate to a project over the construction period.

 

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.7.Properties for sale --Continued

The classification of land between current and noncurrentnon-current assets is made by Management based on the expected period for launching real estate ventures. Management periodically revises the estimates of real estate ventures launches.

 

2.2.8.Selling expenses - commissions

Brokerage expenditures are recorded in profit or loss under the account “Selling expenses” employing the same percentage-of-completion criteria used for revenue recognition. The charges related to sales commission paid by the buyer to their broker are not recognized as revenue or expense of the Company.

2.2.9.Prepaid expenses

 

These are recognized in profit or loss as incurred using the accrual basis of accounting.

 

F-23

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.10.2.2.9.Land available for sale

 

Land available for sale is measured at the lower of the carrying value and the fair value less the costs to sell, and is classified as held for sale if its carrying value is to be recovered through a sale transaction of the land. This condition is considered fulfilled only when the sale is highly probable, and the asset is available for immediate sale inunder its current condition. Management shall undertakecommit to sell it in awithin one year afterof the classification date.

 

2.2.11.2.2.10.Investments in associates

 

Investments in associates are recorded in the Company using the equity method.

 

When the Company's equity inshare of the losses of associates is equal to or higher than the amount invested, since the Company recognizes the residual portion in net capital deficiency since it assumes obligations and makes payments on behalf of these companies. For this purpose,companies, the Company recognizes a provision at an amount considered appropriate to meet the obligations of the associates (Note 9).

 

2.2.12.2.2.11.Property and equipment

 

Items of property and equipment are measured at cost, less accumulated depreciation and/or any accumulated impairment losses, if applicable.

 

An item of property and equipment is derecognized when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition of an asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is recognized in profit or loss upon derecognition.

 

Depreciation is calculated based on the straight-line method considering the estimated useful lives of the assets (Note 10).

 

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.11.Property and equipment --Continued

Expenditures incurred in the construction of sales stands, display apartments and related furnishings are capitalized as property and equipment of the Company and its subsidiaries. Depreciation of these assets commences upon launch of the development and is recorded over the average term the stand is in use, and is written-off when it is retired.

 

Property and equipment are subject to periodic assessments of impairment.

 

F-24

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.13.2.2.12.Intangible assets

 

(i)Expenditures related to the acquisition and implementation of computer systems and software licenses are recorded at acquisition cost, and amortized on straight-line basis over a period of up to five years, and are subject to periodic assessments of impairment of assets.

 

(ii)The Company’s investments in subsidiaries include goodwill when the acquisition cost exceeds the market value of net assets of the acquiree.

 

The goodwill recorded as of December 31, 2015 and 2014 refers to acquisitions before the date of transition to CPC/IFRS (January 1, 2009), and the Company opted to not retrospectively recognize the acquisitions of investments before the transition date, to adjust any of the respective goodwill.

Impairment testing of goodwill is performed at least annually, or whenever circumstances indicate an impairment loss.

 

2.2.14.2.2.13.Payables for purchase of properties and advances from customer due to barter

 

Payables for purchase of landproperties are recognized at the amounts corresponding to the contractual obligations assumed. Subsequently they are measured at amortized cost, plus, when applicable, interest and charges proportional to the incurred period (“pro rata” basis), net of present value adjustment.

 

The obligations related to barter transactions of land in exchange for real estate units are stated at fair value of the units to be delivered.

 

F-25

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies --Continued

2.2.Summary of significant accounting policies --Continued

2.2.15.2.2.14.Income tax and social contribution on net income

 

(i)Current income tax and social contribution

 

Current income tax is the expected tax payable or receivable/to be offset in relation to taxable profit for the year. In the year 2014, the Company and its subsidiaries used the Brazilian Transitory Tax Regime (RTT), which permitted the exclusion of the effect from the changes, introduced by Laws No. 11,638/2007 and No. 11,941/2009, in the tax basis of such taxes.

 

Income taxes in Brazil comprise income tax (25%) and social contribution on net income (9%), for entities on the standard profit regime, for which the composite statutory rate is 34%. Deferred taxes for these entities are recognized on all temporary tax differences at the reporting date between the tax bases of assets and liabilities, and their carrying values.

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.14.Income tax and social contribution on net income --Continued

(i)Current income tax and social contribution --Continued

 

As permitted by tax legislation, certain subsidiaries opted for the presumed profit regime, a method under which the taxable profit is calculated as a percentage of gross sales. For these companies, the income tax is calculated on estimated profits at rate of 8% and 12% of gross revenues, respectively, on which the rates of the respective tax and contribution are levied.

 

As permitted by tax legislation, the development of certain ventures are subject to the “afetação” regime, based on which the land and its featuresany other related right where a real estate will be developed, as well as other binding assets, rights and rights,obligations, are separated from the developer’s assets, of the developer and comprise the “patrimônio de afetação” (detached assets), of the corresponding development and which real estate units will be delivered to the buyers. Its main objective is to provide guarantees to the buyers’ rights in acquisition of units in construction. In addition, certain subsidiaries made the irrevocable option for the Special Taxation Regime (RET), adopting the "patrimô”patrimônio de afetação"o”, according to which the income tax and social contribution are calculated at 1.92% on gross revenues (4% also levying PIS and COFINS on revenues).

F-26

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.15.Income tax and social contribution --Continued

 

(ii)Deferred income tax and social contribution

 

Deferred taxes are recognized in relation to tax losses and temporary differences between the carrying amount of assets and liabilities for accounting purposes and the corresponding amounts used for tax purposes.

 

Deferred tax assetsThey are recognized to the extent that it is probable that future taxable incomeprofit will be available to be used to offsetfor offsetting deferred tax assets, based on profit projections made using internal assumptions, and considering future economic scenarios that make it possible their full or partial use, upon the recognition of a provision for the non-realization of the balance. The recognized amounts are periodically reviewed, and the impacts of realization or settlement are reflected in compliance with tax legislation provisions.

 

Deferred tax on accumulated tax losses does not have an expiration date, however, they can only be offset against up to 30% of the taxable profit for each year. Companies that opt for the presumed profit tax regime cannot offset tax losses for a period in subsequent years.

 

Deferred tax assets and liabilities are stated at net amount in the balance sheet when there is the legal right and intention to offset them when determining the current taxes, related to the same legal entity and the same tax authority.

 

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.2.16.2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.15.Other current and non-current liabilities

 

These liabilities are stated at their known or estimated amounts, plus, when applicable, adjustment for charges and inflation-indexed variations through the balance sheet date, which contra-entry is recorded in profit or loss. When applicable, current and non-current liabilities are recorded at present value based on interest rates that reflect the term, currency and risk of each transaction.

 

F-27

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.17.2.2.16.Stock option plans

 

As approved by its Board of Directors, the Company offers executives and employees share-based compensation plans (“Stock Options”)(stock options), as payments for services received.

 

The fair value of options is determined on the grant date, considering that it is recognized as expense in profit or loss (as contra-entry to equity), to the extent services are provided by employees and executives.

 

In an equity-settled transaction, in which the plan is modified, a minimum expense is recognized corresponding to the expense that would have been recorded if the terms have not been changed. An additional expense is recognized for any modification that increases the total fair value of granted options, or that otherwise benefits the employee, measured on the modification date.

 

In case of cancellation of a stock option plan, this is treated as if it had been vested on the cancellation date, and any unrecognized plan expense is immediately recognized. However, if a new plan replaces the cancelled plan, and a substitute plan is designated on the grant date, the cancelled plan and the new plan are treated as if they were a modification of the original plan, as previously mentioned.

 

The Company annually revises its estimates of the amount of options that shall be vested, considering the vesting conditions not related to the market and the conditions based on length of service. The Company recognizes the impact of the revision of the initial estimates, if any, in the statement of profit or loss, as contra-entry to equity.

 

2.2.18.2.2.17.Share-based payment – Phantom Shares

 

The Company has a cash-settled share-based payment plan (phantom shares) under fixed terms and conditions. There is no expectation of the effective negotiation of shares, once there shall be no issue and/or delivery of shares for settling the plan.

The Company has a cash-settled share-based payment plan (phantom shares) under fixed terms and conditions. There is no expectation of the effective negotiation of shares, once there shall be no issue and/or delivery of shares for settling the plan.

 

According to CPC 10 (R1) – Share-based Payment, these amounts are recorded as a liability, with contra-entry in profit or loss for the year, based on the fair value of the phantom shares granted, and during the vesting period. The fair value of this liability is remeasured and adjusted every reporting period, according to the change in the fair value of the benefit granted and vesting.

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Table of Contents

 

F-28

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

 

2.2.19.2.2.17.Share-based payment – Phantom Shares--Continued

These amounts are recorded as a liability, with contra-entry in profit or loss for the year, based on the fair value of the phantom shares granted, and during the vesting period. The fair value of this liability is remeasured and adjusted every reporting period, according to the change in the fair value of the benefit granted and vesting.

2.2.18.Other employee benefits

 

The salaries and benefits granted to the Company’s employees and executives include fixed compensation (salaries, social security contributions (INSS), Government Severance Indemnity Fund for Employees (FGTS), vacation pay, and 13th monthly salary, among others)other) and variable compensation such as profit sharing, bonus, and share-basedstock option-based payments. These benefits are recorded in profit or loss for the year, under the account “General and administrative expenses”, as they are incurred.

 

The bonus system operates with individual and corporate targets, structured based on the efficiency of corporate goals, followed by the business goals and, finally, individual goals.

 

The Company and its subsidiaries do not offer private pension or retirement plans.

 

2.2.20.2.2.19.Present value adjustment – assets and liabilities

 

Assets and liabilities arising from long or short-term transactions are adjusted to present value, if the financing component is significant.

 

In installment sales of not completed units, real estate development entities adjust receivables by an inflation index, including the installment related to the delivery of units, without accrual of interest, and shall be discounted to present value, as the agreed inflation indexesrates do not include interest.

 

Borrowing costs and other financing costs directly attributable to the construction of real estate ventures are capitalized. Therefore, the reversal of the present value adjustment of an obligation related to these items is included in the cost of real estate unit sold or in the inventories of properties for sale, as the case may be, until the period of construction of the project is completed.

 

Accordingly, certain assets and liabilities are adjusted to present value based on discount rates that reflect the best estimate of the time value of money.

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Table of Contents

Gafisa S.A.

Notes to the money over time.consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.19.Present value adjustment – assets and liabilities --Continued

 

The applied discount rate’s underlying economic basis and assumption is the average rate of the financing and loans obtained by the Company, net of the inflation-indexinflationary effect (Notes 5 and 12).

 

F-29

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies --Continued

2.2.Summary of significant accounting policies --Continued

2.2.21.2.2.20.Debenture and public offering costs

 

Transaction costs and premiums on issuance of securities are accounted for as a direct reduction ofin the amount raised by the Company. In addition, transaction costsCompany and premiums on issuance of debt securities are amortized over the terms of the instrument and the net balance is classified as reduction ofin the respective transaction (Note13)(Note 13).

 

2.2.22.2.2.21.BorrowingLoans and financing costs

 

BorrowingLoans and financing costs which are directly attributable to the development of assets for sale and land, are capitalized as part of the cost of that asset during the construction period, since there are borrowings outstanding, which are recognized in profit or loss to the extent units are sold. All other borrowingloans and financing costs are expensed aswhen incurred. BorrowingThese costs comprise interest and other related costs incurred, including those for raising finances.debt issuance.

 

2.2.23.2.2.22.Provisions

Provisions are recognized when the Company has a present obligation as a result of a past event that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

(i)Provision for legal claims

The Company is party to various lawsuits and administrative proceedings. Provisions are recognized for all contingencies related to lawsuits, in which risk of loss is considered probable.

Contingent liabilities for which losses are considered possible are only disclosed in a note to the consolidated financial statements, and those for which losses are considered remote are neither accrued nor disclosed.

F-30

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.23.Provisions --Continued

 

(i)Provision for legal claims --Continued

Contingent assets are recognized only when there are real guarantees or favorable final and unappealable court decisions. Contingent assets with probable favorable decisions are only disclosed in the notes. As of December 31, 2015 and 2014 there are no claims involving contingent assets recorded in the consolidated balance sheet of the Company.

(ii)Allowance for doubtful account and cancelled contracts

The Company reviews annually its assumptions related to the establishment of its allowance for doubtful account and cancelled contracts, taking into account the review of the histories of its current operations and improvement of estimates.

The Company records an allowance for doubtful accounts and cancelled contracts for customers whose installments are past due, based on the assumptions made about each segment of the Company. This allowance is calculated based on the percentage of completion of the construction work, a methodology adopted for recognizing profit or loss for the year (Note 2.2.2).

(iii)Provision for penalties due to delay in construction work

 

As contractually provided, the Company has the practice of provisioning the charges payable to eligible customers for projects whose delivery is delayed over 180 days, pursuant to the respective contractual clause and history of payments.

 

(iv)Warranty provision

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Table of Contents

 

The Company and its subsidiaries recognize a provision to cover expenditures for repairing construction defects covered during the warranty period, based on the estimate that considers the history of incurred expenditures adjusted by the future expectation, except for the subsidiaries that operate with outsourced companies, which are the direct guarantors of the constructions services provided. The warranty period is five years from the delivery of the venture.

F-31

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

2.Presentation of financial statements and summary of significant accounting policies--Continued

 

2.2.Summary of significant accounting policies--Continued

 

2.2.23.Provisions --Continued

(v)Provision for impairment of non-financial assets

When there is evidence of impairment of asset, and the net carrying value exceeds the recoverable amount, a provision for impairment is recorded, adjusting the net carrying value to the recoverable value. Goodwill and intangible assets with indefinite useful lives have the recovery of their net carrying amounts tested annually, regardless whether there is any indication of impairment, by comparing the net carrying value to the recoverable amount measured by cash flows discounted to present value, using a discount rate before taxes, which reflects the weighted average cost of capital of the Company.

2.2.24.Sales taxes

 

Expenses and assets are recognized net of sales taxes, except:

·When the sales taxes incurred in the purchase of goods or services are not recoverable from tax authorities, in which event sales taxes are recognized as a portion of the acquisition cost of the asset or expense item, as the case may be; and

·When the amounts receivable and payable are shown together with the sales taxes.

·When the net amount of sales taxes, recoverable or payable, is included as a receivables or payable item in the balance sheet.

UnderFor companies under the non-cumulative taxationtaxable profit regime, the PIS and COFINS contribution rates are 1.65% and 7.6%, respectively, for companies under the taxable profit taxation regime, levied on gross revenue and discounting certain credits determined based on incurred costs and expenses. For companies that opt for the presumed profit taxation regime, under the cumulative taxation regime, the PIS and COFINS contribution rates are 0.65% and 3%, respectively, on gross revenue, without discounts of credits in relation to incurred costs and expenses. In addition, certaincertains subsidiaries made the irrevocable option for the SpecialSpectial Taxation Regime (RET), adopting the "patrimô“patrimônio de afetação"o”, according to which the PIS and COFINS are calculated at 0.37% and 1.71%, respectively, on gross revenue.

 

2.2.25.2.2.24.Treasury shares

 

Own equity instruments that are repurchased (treasury shares) are recognized at cost and charged to equity. No gain or loss is recognized in the statement of profit or loss upon purchase, sale, issue, or cancellation of the Company’s own equity instruments.

 

F-32

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies --Continued

2.2.26.2.2.25.Interest on equity and dividends

 

The portion of declared dividends and interest on equity (JCP) are recorded as current liabilities in the heading “Dividends payable”. Mandatory dividends are also recorded as current liabilities since it is a legal obligation provided for in the By-laws of the Company.

 

For corporate and accounting purposes, the interest on equity is reported as allocation of profit directly to equity at gross amount.

2.2.27.2.2.26.Earnings (loss) per share – basic and diluted

 

Basic earnings (loss) per share are calculated by dividing the net income (loss) attributable (allocated) to ordinarycommon shareholders by the weighted average number of common shares outstanding over the period.

 

Diluted earnings per share are calculated in a similar manner, except that the weighted average number of shares outstanding isare increased, to include the additional shares that would be outstanding, in case the shares with dilutive potential attributable to stock option had been issued over the respective periods, using the weighted average price of shares.

 

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.2.28.2.Non-current assets held for salePresentation of financial statements and profitsummary of discontinued operationssignificant accounting policies--Continued

 

2.2.The Company classifies a non-currentSummary of significant accounting policies--Continued

2.2.27.Non-current asset as held for sale if its carrying amount is expected to be recovered by means of a sale transaction. In such case, the asset or the group of assets held for sale must be available for immediate sale on current conditions, subject to the usual and customary terms for selling such assets held for sale and its sale must be highly probable.profit or loss from discontinued operations

The Company classifies a disposal group as held for sale if its carrying value is expected to be recovered by means of a sale transaction. In such case, the asset or group of assets held for sale must be available for immediate sale on current conditions, subject to the usual and customary terms for selling such assets held for sale and its sale must be highly probable.

 

For a sale to be considered highly probable, Management must be committed to a plan to sell the asset, and have initiated a program for finding a buyer and complete the plan at a price that is reasonable in relation to its current fair value. In addition, the sale must be expected to be completed within one year afterof the classification date, unless events that are beyond the control of the Company change thissuch period.

 

The asset held for sale is measured at the lower of its carrying amountvalue and fair value less cost to sell. In case the carrying value exceeds its fair value, an impairment loss is recognized in profit or loss for the year. Any reversal or gain shall only be recognized to the extent of such recognized loss.

 

The profit of discontinued operations is presented at a single amount in statement of profit or loss, which includes the total after-tax income of these operations, less any impairment-related loss. The net cash flow amounts

The assets and liabilities of the group of assets held for sale are presented separately in the consolidated financial statements. The profit or loss of discontinued operations is presented at a single amount in the statement of profit or loss, which included the total after-tax income of these operations less any impairment-related loss. The net cash flows attributable to operating, investing and financing activities of discontinued operations are presented in Note 8.2.

On December 9, 2013, the Company disclosed a material fact informing the completion of transaction for selling the majority interest (70%) it held in Alphaville Urbanismo S.A. (AUSA), as detailed in Note 8.2.

 

According to Note 8.2, the transaction of spin-off transaction between Gafisa and Tenda was completed on May 4, 2017 with the effective delivery of the totality of shares comprising Tenda’s capital in the respective processes of capital decrease and preemptive rights.

F-33F-36 

Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

2.Presentation of financial statements and summary of significant accounting policies--Continued

2.2.Summary of significant accounting policies--Continued

2.2.28.Divestment of associate and recognition of subsidiary’s net assets received at fair value

The cost of an acquisition is measured by the sum of the transferred consideration, measured at fair value at the acquisition date, and the amount of any non-controlling interests in the acquired entity. The acquisition directly related costs shall be recognized as expense when incurred.

In the acquisition of a business, Management evaluates the financial assets and liabilities assumed to classify and allocate them according to the contractual terms, the economic circumstances, and the pertinent conditions that exist at the acquisition date.

Goodwill is initially measured as the excess of the consideration transferred over the fair value of the acquired net assets (identifiable assets and assumed liabilities, net). If the consideration is lower than the fair value of acquired net assets, the difference shall be recognized as gain in the statement of profit or loss. Gains from a bargain purchase are immediately recognized in profit or loss.

After initial recognition, goodwill is measured at cost, less any accumulated loss on recoverable amount. For purposes of testing the recoverable amount, the goodwill acquired in a business combination, from the acquisition date, shall be allocated to each of the cash-generating units of the Company that are expected to be benefitted from the combination synergies, regardless of the other assets or liabilities of the acquired entity that are attributed to such units.

In the year ended December 31, 2019, the Company concluded the divestment of the associate Alphaville Urbanismo, and received shares in the investee with assets measured at fair value.

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Table of Contents

Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

3.New standards, changes and interpretation of standards issued and adopted from 2019, and not yet adopted

3.1New standards, changes and interpretation of standards issued and adopted from 2019

Beginning on January 1st, 2019, the following standard is in effect:

(i)IFRS 16 – Leases (CPC 06 (R2)) this standard replaces the previous lease standard, IAS 17/CPC 06 (R1) – Leases, and related interpretation, and establishes the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, that is, the customer(lessees) and providers (lessors). Lessees are required to recognize a lease liability reflecting the future lease payments and a “right-of-use assets” for practically all lease contracts, except certain short-term leases and contracts of low-value assets. For lessors, the criteria for recognition and measurement of leases in the financial statements are substantially maintained. This standard is effective from January 1st, 2019.

The impact of the first-time adoption on the opening balance as of January 1st, 2019 is as follows:

  Company  Consolidated 
  Originally reported balances  Impact from applying the CPC 06 R2 (Note 10)  Balances after applying the CPC 06 (R2) as of 01/01/2019  Originally reported balances  Impact from applying the CPC 06 R2 (Note 10)  Balances after applying the CPC 06 (R2) as of 01/01/2019 
Statement of financial position               
Assets                  
Total current assets  1,367,727      1,367,727   1,683,371      1,683,371 
Total non-current assets  1,852,040   4,457   1,856,497   842,909   4,457   847,366 
Total Assets  3,219,767   4,457   3,224,224   2,526,280   4,457   2,530,737 
                         
Liabilities                        
Total current liabilities  1,819,565   1,118   1,820,683   1,039,015   1,118   1,040,133 
Total non-current liabilities  908,885   3,339   912,224   994,074   3,339   997,413 
Total equity  491,317      491,317   493,191      493,191 
Total liabilities and equity  3,219,767   4,457   3,224,224   2,526,280   4,457   2,530,737 
                         
(ii)The ICPC 22 – Uncertainty Over Income Tax Treatments deals with the recognition of income taxes in the cases in which the tax treatments involve uncertainty that affects the application of IAS 12 (CPC 32) and does not apply to taxes out of the scope of IAS 12 nor do specifically include the requirements related to the interest and fines associated with uncertain tax treatments. The interpretation did not have impact on the Company’s Financial Statements.

(iii)The amendments to IAS 28 - Long term interests in associates and Joint Ventures clarifies that an entity applies IFRS 9 – Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. This amendment did not have impact on the Company’s Financial Statements.

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

3.New standards, changes and interpretation of standards issued and adopted from 2019, and not yet adopted--Continued

3.2New standards, changes and interpretation of standards issued and not yet adopted

 

·IFRS 9 – Financial Instruments

IFRS 9 includesA series of new standards will be in effect for the reviewed guidance on classification and measurement of financial instruments, a new expected credit loss model for calculating the impairment of financial assets and new requirements for hedge accounting. The standard maintains the existing guidance on the recognition and derecognition of financial instruments of IAS 39. IFRS 9 is effective for years beginning on or after January 1, 2018.2019. The Company has not adopted these standards in the preparation of the accompanying Financial Statements. The following standard amendments and interpretations shall not have a significant impact on the Consolidated Financial Statements of the Company:

 

·(i)Amendments to references to the conceptual framework in IFRS 15 – Revenue from Contracts with Customersstandards (CPC 00)

This standard introduces new requirements for measurement and recognition of revenue . IFRS 15 – Revenue from Contracts with Customers, requires an entity to recognize the amount of revenue reflecting the consideration it expects to receive in exchange for the control over such goods or services. The new standard is going to replace existing revenue recognition guidance, including IAS 18, IAS 11 and IFRIC 13. The new standard is applicable beginning on or after January 1, 2018. The standard can be applied retrospectively, adopting a cumulative effect approach.

 

·(ii)Definition of a business (amendments to the CPC 15/IFRS 16 – Leases3)

 

This standard replaces the previous lease standard, IAS 17/CPC 06 (R1) – Leases, and related interpretation, and establishes the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, that is, the customers (lessees) and providers (lessors). Lessees are required to recognize a lease liability reflecting the future lease payments and a “right-of-use assets” for practically all lease contracts, except certain short-term leases and contracts of low-value assets. For lessors, the criteria for recognition and measurement of leases in the financial statements are substantially maintained. This standard is effective beginning on January 1, 2019.

(iii)Definition of materiality (amendments to the CPC 26/IAS 1 and CPC 23/IAS8)

 

The Company is evaluating the effects of the IFRS 9, 15 and 16 on its financial statements and has not yet concluded its analysis on the impact of their adoption.

The Accounting Pronouncements Committee (CPC) has not yet issued an accounting pronouncement or change to effective pronouncements corresponding to all of the new IFRS. Accordingly, entities that disclose their financial statements according to the accounting practices adopted in Brazil are not permitted to early adopt such IFRS.

(iv)IFRS 17 Insurance Contracts.

 

There is no other standard, changes to standards or interpretation issued and not yet adopted that could, inon the Management’s opinion, have significant impact arising from their adoption on its financial statements.

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

4.Cash and cash equivalents and short-term investments

 

4.1.Cash and cash equivalents

 

   2015   2014 
         
Cash and banks  69,560   85,059 
Securities purchased under resale agreements (a)  13,080   24,836 
Total cash and cash equivalents (Note 20.ii.a and 20.iii)  82,640   109,895 

(a)Securities purchased under resale agreement comprise securities issued by Banks with a repurchase commitment by the bank, and resale commitment by the customer, at rates and maturities agreed upon, backed by private or government securities, depending on the bank. The securities are registered with Central de Custódia e de Liquidação Financeira de Títulos (“ CETIP”).

As of December 31, 2015,the securities purchased under resale agreement include interest earnedfrom 75% to 100.5%of Interbank Deposit Certificates (CDI) (from 70% to 101% of CDI in 2014).All transactions are with what management considers to be top tier financial institutions.
    
  2019  2018 
       
Cash and banks  12,435   11,406 
Government bonds (LFT)     20,898 

Total cash and cash equivalents

(Note 20.i.d, 20.ii.a and 20.iii)

  12,435   32,304 

 

4.2.Short-term investments

 

   2015   2014 
         
Fixed-income funds (a)  279,486   326,977 
Government bonds (LFT) (a)  18,631   77,911 
Corporate securities (LF/DPGE) (a)  95,801   - 
Securities purchased under resale agreements  25,548   361,226 
Bank certificates of deposit (a) / (b)  101,733   103,219 
Restricted cash in guarantee to loans (c)  31,633   104,039 
Restricted credits (d)  76,839   73,987 
Total short-term investments (Note 20.i.d, 20.ii.a and 20.iii)  629,671   1,047,359 

    
  2019  2018 
       
Fixed-income funds (a)  125,962   33,245 
Government bonds (LFT) (a)  231,725    
Securities purchased under resale agreements (b)  125   1,524 
Bank certificates of deposit (c)  10,523   49,025 
Restricted cash in guarantee to loans (d)  33,560   6,961 
Equity securities (e)     14,101 
         

Total Short-term investments 

(Note 20.i.d, 20.ii.a and 20.iii)

  401,895   104,856 

 

(a)Structure of exclusive InvestmentExclusive fund managed by Planner Trustee Distribuidora de Títulos e Valores Mobiliarios and and open-end funds aimed at earningwhose purpose is to invest in financial assets and/or fixed-income investment modalities that follow the fluctuations in interest on funds in excess of the variationrates in the Interbank Deposit Certificateinterbank deposit market (CDI). These, by investing its funds have mandates of risks that are periodically monitored and observe the internalmostly in investment policies in effect.fund shares and/or investment funds comprising investment fund shares.

 

(b)As of December 31, 2015, Bank Certificates2019, the IOF-exempt securities purchased under resale agreement include earned interests of Deposit (CDBs) include interest earned varying from 90% to 107% (from 70% to 108% in 2014)73% of Interbank Deposit Certificates (CDI) rate. The CDBs earn an average income in excess of those from securities purchased under resale agreements; however, the Company performs investments in short term operations (up to 20 working days) through securities purchased under resale agreements mainly due to the exemption of IOF, which is not granted in the case of CDBs. .

 

(c)Restricted cashAs of December 31, 2019, Certificates of Bank Deposit (CDBs) include interest earned through the statement of financial position’s reporting date, ranging from 90% to 103.5% (from 90% to 101.2% in guarantee to loans are investments in fixed-income funds, with appreciation2018) of shares through investments only in federal government bonds, indexed to fixed rates or to price indexes, and pledged to guarantee a portion of the Company’s issuances. These amounts are periodically released, when there is a surplus of guarantee in the issuance and/or as provided for in the indenture. See further information in Notes 13 and 16(b)Interbank Deposit Certificates (CDI).

 

(d)Restricted creditscash in guarantee to loans are represented to funds pledged to transactions with financial institutions.

(e)Equity securities are represented by onlendinginvestments in the shares of companies listed onNovo Mercado of B3, and which make up the funds from associate credit (“crédito associativo”),IBrX index. These transactions were settled in the period ended February 8, 2019, and reported a typegain of government real estate financing, which are in process of approval at the Caixa Econômica Federal (a Federally owned Brazilian bank used for real estate financing purpose). These approvals are made to the extent the contracts signed with customers at the financial institutions are regularized, which the Company expect to be in up to 90 days.R$2,846.

 

5.Trade accounts receivable

    
  2019  2018 
       
Real estate development and sales  593,229   737,291 
( - ) Allowance for expected credit losses  (16,265)  (18,159)
( - ) Allowance for cancelled contracts  (37,485)  (82,847)
( - ) Present value adjustment  (8,518)  (19,391)
Services and construction and other receivables  14,639   25,115 
         

Total trade accounts receivable

(Note 20.i.d e 20.ii.a)

  545,600   642,009 
         
Current  442,542   467,992 
Non-current  103,058   174,017 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

5.Trade accounts receivable from real estate development and services--Continued

 

   
   2015   2014 
         
Real estate development and sales  1,895,795   1,919,846 
( - ) Allowance for doubtful accounts and cancelled contracts  (100,530)  (109,893)
( - ) Present value adjustments  (31,052)  (24,642)
Services and construction and other receivables  38,151   40,008 
Total trade accounts receivable of development and services (Note 20.ii.a)  1,802,364   1,825,319 
         
Current  1,395,273   1,440,498 
Non-current  407,091   384,821 

The current and non-current portions have the following maturities:maturities:

   
Maturity  2015   2014 
         
Overdue  492,721   579,137 
2015  -   995,896 
2016  948,998   187,719 
2017  324,513   112,191 
2018  80,850   18,969 
2019  33,335   18,734 
2020 onwards  53,529   47,208 
   1,933,946   1,959,854 
( - ) Adjustment to present value  (31,052)  (24,642)
( - ) Allowance for doubtful account and cancelled contracts  (100,530)  (109,893)
   1,802,364   1,825,319 
     
Maturity  2019  2018 
        
Overdue:         
 Up to 90 days   32,740   64,177 
 From 91 to 180 days   17,510   21,832 
 Over 180 days   115,619   90,818 
     165,869   176,827 
           
Maturity:         
 2019      396,266 
 2020   325,613   118,400 
 2021   97,194   64,392 
 2022   5,378   1,727 
 2023 onwards   13,813   4,794 
     441,998   585,579 
           
 ( - ) Present value adjustment   (8,518)  (19,391)
 ( - ) Allowance for expected credit losses and cancelled contracts (a)   (53,750)  (101,006)
           
     545,600   642,009 

(a)Allowance related to the cancellations of sales contracts recognized as revenue overtime during the construction phase.

 

The balance of accounts receivable from units sold and not yet deliveredcompleted is not fully reflected in the consolidated financial statements. The balanceIts recording is limited to the portion of the recordedrecognized revenues net of the amounts already received, according to the accounting practice mentioned inNote 2.2.2(i)Note2.2.2(i)(b).

 

As of December 31, 2015,2019, the amount received from customers in excess of the recognized revenues totaled R$39,74314,197 (R$21,23612,069 in 2014)2018) in the consolidated financial statements, and are classified in the heading “Payables for purchase of properties and advances from customers" (Note 17). Additionally, as of December 31, 2018, the amount related to contract assets totaled R$256,106 (R$270,085 in 2018).

 

Accounts receivable from completed real estate units financed by the Company are in general subject to IGP-M variation plus annual interest of 12%, with revenue being recorded in profit or loss in the account “Revenue from real estate development and sale, barter transactions and construction services". The interest amounts recognized, in the consolidated financial statements for the year ended December 31,2015totaledR$39,844 (R$36,216 in 2014 and R$31,419 in 2013).

 

The balances of allowance for doubtful accounts and cancelled contracts,expected credit losses are considered sufficient by the Company’s management to cover the estimatedestimate of future losses on realization of the accounts receivable.

 

During the years ended December 31, 2019 and 2018, the changes in the allowance for expected credit losses are summarized as follows:

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

5.Trade accounts receivable of development and services--Continued

 

The change in the allowance for doubtful accounts and cancelled contracts for the years ended December 31, 2015 and 2014, is as follows:

   
  Receivables 

Properties for

sale (Note 6)

 Net
       
Balance at December 31, 2013  (179,372)  107,172   (72,200)
Write-offs (Notes 22 and 23)  69,479   (54,863)  14,616 
Balance at December 31, 2014  (109,893)  52,309   (57,584)
Additions (Note 22)  (6,749)  -   (6,749)
Write-offs (Notes 22 and 23)  16,112   (30,545)  (14,433)
Balance at December 31, 2015  (100,530)  21,764   (78,766)

Balance at December 31, 2017(142,833)
Additions (Note 22)(2,653)
Write-offs / Reversals (Note 22)44,480
Balance at December 31, 2018(101,006)
Additions (Note 22)(26,150)
Write-offs / Reversals (Note 22)73,406
Balance at December 31, 2019(53,750)

 

The reversal of the present value adjustment recognized in revenue from real estate development for the year ended December 31,20152019 totaled R$6,41010,873 (R$1,6604,504 in 2014 and R$1,214 in 2013)2018)in the consolidated financial statements.

 

Receivables from units not yet completed were measured at present value using a discount rate determined according to the criteria described in Note 2.2.2. The discount rate applied by the Company and its subsidiaries was 6.78%6.64% for the year 2019 (7.19% in 2015 (3.27 to 4.64% in 2014)2018),net of Civil Construction National Index (INCC).

 

The Company entered into the following Real Estate Receivables AgreementHousing Loan Certificate (CCI) transactions, which are aimed to transferconsisting of the assignment of a portfolio comprising select residential and business real estate receivables delivered and yet to be delivered arising out of Gafisa and its subsidiaries to the assignee.subsidiaries. The assigned portfolios, discounted to present value, are recorded under the heading “obligations assumed on the assignment of receivables”.

 

  Transaction Assigned Portfolio discounted to (Note 14)
     date   portfolio   present value   2015   2014 
                       
 (i)   Jun 27, 2011   203,915   171,694   4,775   8,851 
 (ii)   Dec 22, 2011   72,384   60,097   2,236   3,985 
 (iii)   Jul 06, 2012   18,207   13,917   368   1,483 
 (iv)   Nov 14, 2012   181,981   149,025   4,351   6,151 
 (v)   Dec 27, 2012   72,021   61,647   7,541   8,604 
 (vi)   Nov 29, 2013   24,149   19,564   6,362   9,459 
 (vii)   Nov 25, 2014   15,200   12,434   6,696   11,513 
 (viii)   Dec 03, 2015   32,192   24,469   24,558   - 

F-37

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

    

Transaction balance

(Note 14)

 Transaction dateAssigned portfolioPortfolio discounted to present value20192018
(i)Jun/27/2011203,915171,694412882
(ii)Dec/22//201172,38460,097-372
(iii)Jul/06/201218,20713,917-10
(iv)Nov/14/2012181,981149,0252,5862,547
(v)Dec/27/201272,02161,6471,6833,151
(vi)Nov/29/201324,14919,5641,1701,877
(vii)Nov/25/201415,20012,4341,2031,895
(viii)Dec/03/201532,19224,4695,3007,797
(ix)Feb/19/201627,95427,3346,4299,645
(x)May/09/201617,82717,5044,6256,790
(xi)Ago/19/2016 (a)15,41814,9432,3923,075
(xii)Dec/21/201621,10219,5326,1067,441
(xiii)Mar/29/201723,74822,9938,45511,704
    40,36157,186

 

5.(a)Trade accounts receivableThe consolidated balance of developmentthe transaction as of December 31, 2019 and services --Continued2018 (Note 14) does not include the jointly-controlled entities, which are accounted for using the equity method, according to CPCs 18(R2) and 19(R2).

Transaction (i) was entered into with Banco BTG Pactual S.A. (Note 14).

Transactions (ii) and (iii) were entered into with Polo Multisetorial Fundo de Investimento em Direitos Creditórios (Note 14).

Transactions (iv), (v), (vi) and (vii) were entered into with Polo Multisetorial Fundo de Investimento em Direitos Creditórios Não Padronizados (Note 14).

Transactions (viii), (ix), (x), (xi), (xii) and (xiii) were entered into with Polo Capital Securitizadora S.A. (Note 14).

 

In the transactions above, the Company and its subsidiaries are jointly responsible until the time of the transfer of the collateral to the securitization company.

 

For the items(i) to (iii) and (viii) to (xiii)above, the Company was engaged to perform, among other duties, the management of the receipt of receivables, the assignment’s underlying assets, and collection fromof defaulting customers, among other, according to the criteria of each investor, being paid for these services.

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

5.Trade accounts receivable--Continued

 

The difference between the face value of the portfolio of receivables and the amount discounted to present value was recorded in profit or loss for the year in the account “Discount inrelated to Securitization Transaction” under financialfinance expenses.

 

6.Properties for sale

 

     
  2015   2014  2019  2018 
             
Land  1,443,460   1,311,847   573,715   403,524 
( - ) Write-down to net realizable value of land  (110,182)  (96,972)
( - ) Adjustment to present value  (16,771)  (5,503)  (5,198)  (14,570)
Property under construction  857,619   905,190 
Real estate cost in the recognition of the provision for cancelled contracts (Note 5)  21,764   52,309 
Property under construction (Note 29)  355,980   403,732 
Completed units  333,036   260,808   283,991   377,477 
( - ) Provision for realization of properties for sale  (8,491)  (12,309)
( - ) Write-down to net realizable value of properties under construction and completed units  (67,099)  (67,632)
Allowance for cancelled contracts  47,099   83,842 
        
Total properties for sale  2,630,617   2,512,342   1,078,306   1,089,401 
                
Current portion  1,880,377   1,695,817   799,099   890,460 
Non-current portion  750,240   816,525   279,207   198,941 

 

ForIn the years ended December 31,20152019 and 2014,2018,the change in the provision for impairmentwrite-down to net realizable value of land and properties for saleunder construction and completed units is summarized as follows:

 

   
Balance at December 31,201331, 2017  (11,276179,462)
AdditionsReclassification from land available for sale (Note 8.1)  (4,46215,937)
Reclassification to land available for sale (Note 8.1)27,874
Additions:
Land (Note 23)(30,550)
Property under construction and completed units (Note 23)(8,097)
Write-offs (a)  3,42941,569 
Balance at December 31,201431, 2018  (12,309164,603)
AdditionsReclassification from land available for sale (Note 8.1)  (1,23639,756)
Write-offs (a)  5,05427,079
 
Balance at December 31,201531, 2019  (8,491177,280)

(a)The amount of write-offs refers to the respective units sold in the period.

The amount of properties for sale offered as guarantee for financial liabilities is described in Note 12.

 

As disclosed in Note 12, the balance of capitalized financial charges as of December 31, 2015 amounts toR$354,5512019 was R$210,412 (R$276,613223,807 in 2014 and R$214,298 in 2013)2018) in the consolidated financial statements.

 

7.Other assets

    
  2019  2018 
       
Advances to suppliers  20,702   7,424 
Recoverable taxes (IRRF, PIS, COFINS, among other)  17,285   23,260 
Arbitration decision amount (a)  66,391    
Judicial deposit (Note 16.a)  129,933   106,793 
Total other assets  234,311   137,477 
         
Current portion  67,395   42,283 
Non-current portion  166,916   95,194 

(a)Amount related to the outcome of the arbitration decision related to venture construction contracts with partners, which was awarded on November 12, 2019 by the Arbitration Court, managed by the Center for Arbitration and Mediation of the Chamber of Commerce Brazil – Canada.

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

7.Other assets

   
   2015   2014 
         
Advances to suppliers  7,102   5,082 
Recoverable taxes (IRRF, PIS, COFINS, among other)  66,289   76,000 
Judicial deposit (Note 16)  125,358   154,939 
Other  4,788   5,125 
         
Total other assets  203,537   241,146 
         
Current portion  120,657   128,905 
Non-current portion  82,880   112,241 
         
8.AssetsNon-current assets held for sale

 

8.1Land available for sale

 

The Company, in line with its strategic direction, opted to sell land not included in the business planin effect.Likewise, it devised a specific plan for the sale of such land. The carrying value of such land, adjusted to market value when applicable, after the test for impairment, is as follows:

    
  Cost  Provision for impairment  Net balance 
          
Balance at December 31, 2017  233,522   (118,730)  114,792 
Reclassification from properties for sale (Note 6)  58,795   (27,875)  30,920 
Reclassification to properties for sale (Note 6)  (40,262)  15,937   (24,325)
Additions (Note 23)  25,349   (24,499)  850 
Reversal/Write-offs (a)  (127,916)  96,267   (31,649)
Balance at December 31, 2018  149,488   (58,900)  90,588 
Reclassification from properties for sale (Note 6)            
Reclassification to properties for sale (Note 6)  (83,579)  39,756   (43,823)
Additions (Note 23)            
Reversal/Write-offs (b)  (50,117)  10,366   (39,751)
Balance at December 31, 2019  15,792   (8,778)  7,014 

(a)The amount of write-offs over the period mainly refers to the sale of land in June 2018, located in the city of Salvador, Bahia, through the SPEs Manhattan Residencial 02 and Manhattan Comercial 02, for the amount of R$28,500, of which R$12,060 receivable in 24 months, and the remaining balance of R$16,440 was settled on July 24, 2018.

 

(b)The Company,amount of write-offs over the period mainly refers to the cancelled land sales contract in line with its strategic direction, opted to sell land not includedJanuary2019,located in the Business Plan approved forcity of2016.Therefore, it devised a specific plan for the sale of such land. The carrying value of such land, adjusted to market value when applicable, after the test for impairment, is as follows:Rio de Janeiro – RJ.

 

   
  Cost Provision for impairment Net balance
       
Balance at December 31,  2013  172,110   (57,263)  114,847 
Additions  23,313   (24,990)  (1,677)
Reversal/Write-offs  (33,686)  31,079   (2,607)
Balance at December 31, 2014  161,737   (51,174)  110,563 
Additions  9,735   (19,152)  (9,417)
Transfer from (to) properties for sale, net  (617)  -   (617)
Reversal/Write-offs  (23,182)  28,510   5,328 
Balance at December 31, 2015  147,673   (41,816)  105,857 
             
Gafisa segment  19,457   (15,090)  4,367 
Tenda segment  128,216   (26,726)  101,490 

8.2Profit from Non-current asset held for sale and profit or loss of discontinued operations

 

On December 9, 2013, the Company disclosed the completion of the sale transaction of its 70% interest in AUSA. As a result of this transaction, a gain of R$631,122 was recorded in the Company’s results under the heading “Net income from discontinued operations”, as shown below:

  2019  2018  2017 
          
Reversal of impairment loss (i)        215,440 
Portion related to payable for sale of shares (iii)        (107,720)
Transaction costs        (9,545)
Impairment loss on Tenda’s profit or loss        (22,780)
Tenda’s profit or loss for the period (ii)        22,780 
Profit or loss of discontinued operations        98,175 

 

2013

(i) The measurement of non-current asset held for sale at the lower of its carrying value and the fair value less cost to sell. For the period ended May 4, 2017, the fair value of discontinued operations was adjusted, considering the weighted average price per share for exercising preemptive rights at R$12.12.

(ii) Amounts of assets held for sale, liabilities related to assets held for sale, and profit or loss of discontinued operations, net of the eliminations related to intercompany transactions, for the period ended May 04, 2017.

(iii) Amount received

1,254,521
(-) Write-off of investments(318,086)
(-) Write-offR$107,720 related to the obligation to sell 50% of goodwill(379,829)
(-) Transaction cost(16,336)
540,270
Income from equity method investments166,964
Tax expenses(76,112)
631,122Construtora Tenda S.A.’s shares for the price of R$8.13 per share, settled on May 4, 2017, reflected in the profit or loss of discontinued operations, in order to reflect the difference between the fair value of the group of assets held for sale and the effective selling price.

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

8.AssetsNon-current assets held for sale--Continued

 

8.2Profit from Non-current asset held for sale and profit or loss of discontinued operations--Continued

 

In accordance with As of May 4, 2017,the provisionsCompany’s Management carried out the remeasurement of paragraph 38the fair value of CPCthe disposal group held for sale, related to Construtora TendaS.A. The basis for measurement used (i) the price of R$8.13 per share, related to the transaction settled on May 4, 2017, and (ii) the weighted average price per share of the exercise of preemptive rights traded over the period between March 17 and 31, – Non-current Asset Held for Sale and Discontinued Operations,2017, calculated at R$3.99 per share. The resulting price of R$12.12 per share indicated, at that time, a valuation of Construtora Tenda S.A. in the Company presents below theamount of R$754,460.

The main lines inof the statementstatements of profit or loss and cash flows ofAUSA the subsidiary Tenda are as follows:

 

Statement of profit or loss2013(a)
Net operating revenue810,397
Operating costs(429,066)
Operating expenses, net(140,838)
Income from equity method investments3,445
Financial expenses(27,258)
Income tax and social contribution(21,783)
194,897
Non-controlling interests(18,459)
Net income for the year176,438

Cash flows2013(a)
Operating activities(197,093)
Investing activities66,664
Financing activities(1,350)

(a)Balance referred to the period ended December 9, 2013, date of completion of the sale of controlling interests in AUSA.

Statement of profit or loss Period ended 05/04/2017   Cash flowPeriod ended 05/04/2017  
          
Net operating revenue 404,737   Operating activities51,959  
Operating costs (269,144)   Investing activities48,663  
Operating expenses, net (104,310)   Financing activities24,089  
Depreciation and amortization (5,723)       
Income from equity method investments 269       
Financial income (expenses) 101       
Income tax and social contribution (4,519)       
  21,411       
Non-controlling interests (1,369)       
Net income for the year 22,780       

 

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Table of Contents

Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

9.
9.Investments in associates and jointly-controlled investees

(i)Ownership interest

 

(a)(i)Information on associates and jointly-controlled investees

 

  Interest in capital - %Total assetsTotal liabilitiesEquity and advance for future capital increaseProfit (loss) for the yearInvestmentsIncome from equity method investments 
Direct investees 2015201420152015201520142015201420152014201520142013
               
Alphaville Urbanismo S.A -  30% 30% 2,564,240  1,835,721  728,519  561,664  148,144  107,662  218,556  168,499  50,478  32,283  - 
Gafisa SPE-116 Emp. Imob. Ltda (a)  50% 50% 158,177  54,805  103,372  78,620  22,864  (5,380) 51,686  39,310  11,432  (2,690) 4,470 
Gafisa e Ivo Rizzo Em. Im. Ltda. (a)  80% 80% 31,829  80  31,749  31,442  (26) 1  25,399  25,153  (21) 1  (1)
Varandas Grand Park Em. Im.  Ltda (a)(c)  50% 50% 115,893  72,305  43,588  56,761  (2,197) 5,924  21,794  28,380  (1,704) 4,642  1,430 
Sitio Jatiuca Emp. Imob. SPE Ltda (a)  50% 50% 45,525  4,055  41,470  55,655  3,680  2,591  20,735  27,827  1,840  1,295  (2,975)
Parque Arvores Empr. Imob. Ltda. (a)(c)  50% 50% 39,518  6,140  33,378  49,004  1,684  4,072  16,689  24,502  1,724  5,519  6,371 
Alto Barra de Sao Miguel Em. Im. Ltda (a)  50% 50% 24,919  1,415  23,504  22,504  1,001  (439) 11,752  11,252  500  (315) 410 
Atins Emp. Imob.s Ltda (a)  50% 50% 28,965  13,188  15,777  15,402  (183) 72  7,888  7,701  (92) 37  - 
Parque Aguas Empr. Imob. Ltda. (a)(c)  50% 50% 16,666  1,402  15,264  23,178  805  2,255  7,632  11,589  388  2,925  2,529 
Costa Maggiore Empr. Imob. Ltda. (a)  50% 50% 13,080  2,932  10,148  11,989  470  1,626  5,724  5,994  334  936  1,977 
Dubai Residencial Empr. Imob. Ltda. (a)(c)  50% 50% 11,130  568  10,562  11,061  621  227  5,281  5,531  (2,053) (4,303) 5,581 
Other (*) -        475,196  329,014  146,182  183,025  (15,179) (55,739) 33,110  53,562  (8,796) 4,834  (33,572)
                                           
Saí Amarela S.A. (a)  50% 50% 2,375  61  2,314  2,354  (102) (99) 1,126  918  (51) (50) (1,920)
Gafisa SPE-51 Emp. Imob. Ltda. (a)  60% 60% 2,750  1,088  1,662  3,954  869  (458) 997  2,372  521  (275) - 
Other (*)          498  32  466  934  (704) 57  73  417  (270) (5) (1,422)
Indirect jointly-controlled investees - Gafisa          5,623  1,181  4,442  7,242  63  (500) 2,196  3,707  200  (330) (3,342)
                                           
Acedio SPE Emp. Imob. Ltda. -  55% 55% 4,535  3,859  676  4,883  (1,973) 6  372  2,685  (1,085) 3  (1)
Maria Inês SPE Emp. Imob. Ltda. -  60% 60% 21,291  241  21,050  20,914  137  55  12,630  12,548  82  33  183 
Fit 02 SPE Emp. Imob. Ltda. -  60% 60% 9,932  50  9,882  11,942  (2,060) 184  5,929  7,165  (1,236) 110  1 
Fit Jardim Botânico SPE Emp. Imob. Ltda. -  55% 55% 9,999  -  9,999  38,559  (5,639) (822) 5,554  21,207  (3,101) (451) 716 
Fit 11 SPE Emp. Imob. Ltda. -  70% 70% 35,697  3,635  32,062  29,604  253  (2,643) 22,443  20,723  177  (1,851) 4,326 
Fit 31 SPE Emp. Imob. Ltda. -  70% 70% 17,622  1,167  16,455  11,759  (2,529) (3,047) 11,518  8,231  (1,771) (2,133) (3,712)
Fit 34 SPE Emp. Imob. Ltda. -  70% 70% 34,323  689  33,634  31,746  2,131  1,597  23,544  22,221  1,492  1,118  3,000 
Fit 03 SPE Emp. Imob. Ltda. -  80% 80% 11,640  236  11,404  10,807  597  764  9,123  8,646  476  611  (1,633)
Imbuí I SPE Emp. Imob. Ltda. -  50% 50% 8,901  178  8,723  8,813  (90) (68) 4,362  4,406  (16) (41) (100)
Città Ipitanga SPE Emp. Imob. Ltda. -  50% 50% 12,424  663  11,761  11,703  (2) (810) 5,880  5,852  (1) (403) (189)
Grand Park - Pq. dos Pássaros SPE Emp. Imob. Ltda. -  50% 50% 25,239  2,773  22,466  37,291  (3,997) 2,595  11,233  18,646  (1,998) 1,304  6,260 
Citta Itapua Emp. Imob. SPE Ltda. -  50% 50% 19,213  1,198  18,015  12,431  8,463  (1,311) 9,007  6,215  4,231  (670) (298)
SPE Franere Gafisa 08 Emp. Imob. LTDA. -  50% 50% 54,804  6,973  47,831  37,618  18,180  (25,394) 23,916  18,809  9,090  (12,697) 5,993 
Fit 13 SPE Emp. Imob. Ltda. (b)  50% 50% 36,960  2,473  34,487  31,476  3,010  99  17,840  18,399  (534) 49  16,314 
Other (*) -        73,872  3,886  69,986  34,611  41,128  (3,907) -  3,780  (4,055) (4,164) 394 
Indirect jointly-controlled investees - Tenda -        376,452  28,021  348,431  334,157  57,609  (32,702) 163,351  179,533  1,751  (19,182) 31,254 
                                           
Subtotal          3,907,213  2,350,827  1,556,386  1,441,704  219,122  29,670  591,793  592,540  55,981  25,652  14,132 
                                           
Addition to remeasurement of investment in associate (d)                          375,853  375,853  -  -  - 
Total investments                            967,646  968,393  55,981  25,652  14,132 
(*)Includes companies with investment balances below R$ 5,000.                                          
             
  Interest in capital - %Total assetsTotal liabilitiesEquity and advance for future capital increaseProfit (loss) for the yearInvestmentsIncome from equity method investments 
Jointly-controlled investees: 201920182019201920192018 2019201820192018201920182017
                
Gafisa e Ivo Rizzo SPE-47 Emp. Imob. Ltda. 80%80%21,0771,17019,90719,901 6(53)13,43813,4335(42)4
Sitio Jatiuca Emp. Imob. SPE Ltda 50%50%35,2525,61529,63629,413 2231,27014,81814,707111635(5,021)
Varandas Grand Park Emp. Imob. SPE Ltda.(a)50%50%36,8138,03928,77324,989 2,7422,68614,38712,4951,9171,450(2,984)
Gafisa SPE-116 Emp. Imob. Ltda. 50%50%31,5336,42225,11122,537 2,574(20,971)12,55511,2681,287(10,486)(2,354)
Parque Arvores Empr. Imob. Ltda.(a)50%50%27,8333,21824,61631,153 3,11675512,30815,5771,4072692,000
Atins Emp. Imob. Ltda. 50%50%26,6565,84320,81317,729 3,084(1,269)10,4068,8641,542(635)398
FIT 13 SPE Emp. Imob. Ltda. 50%50%23,1713,39219,77919,706 7269,8899,853363(3)
Performance Gafisa Gen. Severiano Ltda 50%50%11,6582711,63111,701 (69)2035,8165,850(35)102(17)
Other (*)(a)--68,88130,13038,75256,340 (1,078)(9,432)29,12240,449(6,651)(6,701)(6,573)
Subtotal Jointly-controlled investees   282,87463,856219,018233,469 10,669(26,805)122,739132,496(381)(15,405)(14,550)
                
Associates:               
Alphaville Urbanismo S.A.(d)-30%1,653,1413,132,453(1,479,312)(937,369) (603,985)(755,032)----(186,856)
Citta Ville SPE Emp. Imob. Ltda.-50%50%5,5841,3114,27214,465 1,5712,2352,1367,2337851,118(2,051)
Other (*)   1,202141,1871,134 55141,4881,236312(15)
Indirect jointly-controlled investees Gafisa   1,659,9273,133,778(1,473,853)(921,770) (602,359)(752,783)3,6248,4698161,120(188,922)
                
Goodwill from remeasurement of investment in associate(b)         -161,100---
                
Total Investments          126,363302,065435(14,285)(203,472)
            
(*)Includes companies with investment balances below R$ 5,000.           

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

9.Investments in associates and jointly-controlled investees--Continued

 

(i)Ownership interest --Continued

(a)Information on associates and jointly-controlled investees --Continued

 

           
 Interest in capital - %Total assetsTotal liabilitiesEquity and advance for future capital increaseProfit (loss) for the yearProvision for capital deficiencyIncome from equity method investments 
Direct investees2015201420152015201520142015201420152014201520142013
Provision for net capital deficiency (e):             
Manhattan Residencial 01 Spe Ltda 50% 50% 30,847  120,166  (89,319) (65,678) (21,261) (21,017) (44,627) (32,839) (10,631) (10,509) (6,762)
Manhattan Comercial 01 Spe Ltda 50% 50% 12,765  20,651  (7,887) -  (9,408) -  (4,350) -  (4,704) -  - 
Other (*)       79,126  81,684  (2,557) (17,538) (2,212) (2,711) (5,424) (43) 1,120  4,120  - 
Total provision for net capital deficiency       122,738  222,501  (99,763) (83,216) (32,881) (23,728) (54,401) (32,882) (14,215) (6,389) (6,762)
                                        
Total Income from equity method investments                               41,766  19,263  7,370 
          
 Interest in capital - %Total assetsTotal liabilitiesEquity and advance for future capital increaseProfit (loss) for the yearInvestmentsIncome from equity method investments 
Provision for net capital deficiency (c):201920182019201920192018 2019201820192018201920182017
               
Gafisa SPE 113 Em. Imob. Ltda.60%60%40,87047,661(6,791)- (10,415)-(4,075)-(6,249)--
Manhattan Square Emp. Imob. Res. 01 SPE Ltda50%50%2,6179,184(6,567)(4,225) (313)(1,395)(3,284)(2,113)(1,130)(872)(1,581)
Manhattan Square Emp.Imob. Com. 01 SPE Ltda50%50%3,2569,815(6,558)(2,247) (294)(232)(3,279)(1,124)(2,175)(337)(1,131)
Other (*)  16,48220,967(4,485)(5,830) (3,180)(7,165)(325)(298)4,116111,321
Total provision for net capital deficiency  63,22587,627(24,401)(12,302)-(14,202)(8,792)(10,963)(3,535)(5,438)(1,198)(1,391)
               
Total Income from equity method investments           (5,003)(15,483)(204,863)

(*)Includes (Includes companies with investment balances belowR$ 5,000. (R$ 5,000).

 

(a)Joint venture.

(b)Joint venture with Tenda associates.

(c)The Company recorded expense of R$2,454791 in Income from equity method investments for 2015the period ended December 31, 2019 related to the recognition, by joint ventures,jointly-controlled entities, of adjustments in prior years,year adjustments, in accordance with the ICPC09 (R2) - Individual, Separate and Consolidated Financial Statements and the Equity Method of Accounting.

 

(d)(b)Amount related to the addition ofgoodwill arising from the remeasurement of the portion of the remaining investment of 30% in the associate AUSA, in the amount of R$375,853,161,100 in 2018, arising from the sale of control over the entity. AtOn December 31, 201527, 2019, the Company completed the process of divestment of AUSA in a transaction totaling R$100,000, settled by offsetting receivables and 2014, the impairment test, which is performed annually or when circumstances indicate impairmentreceipt of carrying value, did not identify the need of recognizing an impairment provisionshares in the realization. The main assumptions adopted for determining the recoverable amount of the remaining investment of AUSA are detailed in Note 11.investee against assets (Note 9.1).

 

(e)(c)The provision for net capital deficiency is recorded in the heading “Other payables” (Note 15).

 

(b)(d)In view of the net capital deficiency of AUSA as of December 31, 2018, in line with CPC 18 (R2) – Investment in Associates, Subsidiaries and Joint Ventures, the Company discontinued the recognition of its interest in future losses after reducing to zero the carrying amount of the 30% interest.

(ii)Information on significant investees

 Significant investee:   Other investees:
 Alphaville Urbanismo S.A.   Jointly-controlled investees  
 201920182017   201920182017  
            
Cash and cash equivalents-11,282    37,26733,193   
Current assets-974,853    265,219322,413   
Non-current assets-908,617    17,64435,452   
Current liabilities-549,884    42,97595,864   
Non-current liabilities-2,255,091    20,87128,533   
            
Net revenue-68,629108,321   63,55167,846(1,344)  
Operating costs-(189,917)(420,381)   (45,014)(76,256)(13,193)  
Depreciation and Amortization-(13,469)(13,733)   (21)(5)(624)  
Finance income (expenses)-(366,627)(252,114)   670(4,787)(7,879)  
Income tax and social contribution-(6,388)3,385   (1,883)(1,938)(203)  
Profit (loss) from Continued Operations-(755,032)(764,142)   10,669(26,805)(37,898)  

(iii)Change in investments

 

Consolidated
Balance at December 31, 20142018 968,393302,065
Income from equity method investments (a) 55,981               435
Capital contribution (decrease)(reduction) (b) (4,873)  (19,846)
Dividends receivableDerecognition of goodwill on remeasurement of investment at fair value (Note 9.i.c) (52,773)(161,100)
Other investments 9184,808
Balance at December 31, 20152019 967,646126,363

(a) Amount related to the assignment of shares in controlled SPEs of Gafisa S.A., to SPE Novum Direziones, which is a wholly owned subsidiary of the Company, in the amount of R$ 27,843.

(*) Non cash transaction.

F-42F-47 

Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

9.Investments in associates and jointly-controlled investees--Continued

 

9.1 Divestment of associate and recognition of subsidiary’s net assets received at fair value

(i)Divestment of Alphaville Urbanismo

According to Note 1, on December 27, 2019, the Company disclosed the completion of the divestment of its 21.20% interest in Alphaville. The total amount of the transaction is equivalent to R$100,000, settled by offsetting receivables amounting to R$33,500 and receipt of shares in the investee against assets amounting to R$66,500, measured at fair value.

 

10.PropertyBy the means of this transaction, through the receipt of shares, the Company acquired the control of SPE GDU Loteamentos Ltda. According to ICPC 09 (R2) and equipment IFRS3/CPC (15 (R1), as a result of this transaction, the Company made the allocation of the amount of R$39,886 in the line item “Properties for sale”, in the consolidated information and recognized the amount of R$16,592 as gain from bargain purchase.

     
Type 2014  Addition Write off and 100% depreciated items  2015 
Cost        
Hardware  22,333   9,017   (3,207)  28,143 
Leasehold improvements and installations  24,516   2,819   (9,886)  17,449 
Furniture and fixtures  5,453   57   (7)  5,503 
Machinery and equipment  4,020   22   (3)  4,039 
Molds  10,035   3,032   -   13,067 
Sales stands  15,083   9,426   (8,785)  15,724 
   81,440   24,373   (21,888)  83,925 
                 
Accumulated depreciation                
Hardware  (11,457)  (5,224)  3,207   (13,474)
Leasehold improvements and installations  (12,225)  (5,579)  9,886   (7,918)
Furniture and fixtures  (3,115)  (556)  7   (3,664)
Machinery and equipment  (1,498)  (403)  3   (1,898)
Molds  (915)  (2,464)  -   (3,379)
Sales stands  (3,539)  (9,636)  8,759   (4,416)
   (32,749)  (23,862)  21,862   (34,749)
                 
Total property and equipment  48,691   511   (26)  49,176 
                 

 

The following useful lives and rates are usedtable shows the determination of the acquisition cost determined according to calculate depreciation:CVM Resolution 665/11:

 

Disposal of Alphaville (goodwill)Useful lifeAnnual depreciation rate - %

Leasehold improvements and installations4 years25161,100
Furniture and fixtureNet assets received at fair value of GDU10 years1083,092
HardwareResult of this transaction (effect on profit or loss)5 years2078,008
Machinery and equipment10 years10
Molds10 years10
Sales stands1 year100 

The residualCompany commissioned a specialized company to make a study to obtain the Purchase Price Allocation (PPA) for measurement of the fair value useful life,of the identified assets and depreciation methods are reviewedallocation of amount. We summarize below the allocation of goodwill arising from the transaction, considering the fair values of the assets and liabilities of the SPE received at the end of each year; no change was made in relation to the information for the prior year.acquisition date:

 

 Acquired net assets CPC 15 (R1) adjustments Acquired net assets at fair value

Properties for sale

43,206 39,886 83,092
Total current assets43,206 39,886 83,092
Total non-current assets-    
      
Total assets43,206 39,886 83,092
      
Equity43,206 39,886 83,092
Total liabilities43,206 39,886 83,092

Property and equipment are subject to periodic analysis

F-48 

Table of impairment. At December 31, 2015, and 2014 there was no indication of impairment of property and equipment.Contents

 

F-43

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

11.9.Intangible assetsInvestments in associates and jointly-controlled investees--Continued

 

       
     
  2014       2015
  Balance Addition Write-down / amortization 100% amortized items Balance
Goodwill          
AUSA  25,476   -   -   -   25,476 
                     
Software – Cost  101,581   22,665   -   (13,687)  110,559 
Software – Depreciation  (58,555)  -   (20,540)  13,687   (65,408)
Other  8,401   3,796   (5,482)  -   6,715 
   51,427   26,461   (26,022)  -   51,866 
                     
Total intangible assets  76,903   26,461   (26,022)  -   77,342 
                     

Other intangible9.1 Divestment of associate and recognition of subsidiary’s net assets comprise expenditures on the acquisition and implementation of information systems and software licenses, amortized over the average term of five years (20% per year).received at fair value--Continued

 

Goodwill arises fromIn line with ICPC 09 and CPC 15, the difference between the consideration paidmeasurement of acquired assets and the equity of acquirees, calculated on acquisition date, and isassumed liabilities was based on the expectation of future economic benefits.

fair value. The Company evaluatedmeasured the recovery ofassets considering the carrying value of goodwill using the “value in use” concept, applyingincome approach and discounted cash flow models of the cash-generating units.flow. The process for determining the fair value in use involves the use of assumptions, judgments and estimates relating to cash flows, such as growth rate of revenues, costs and expenses, estimates of investment and future working capital, and discount rates. The assumptions relating to projections of growth, cash flow and future cash flows are based on the Company’sentity’s business plan, approved by the management,Management, as well as on comparable market data, and represent the Management’s best estimate of the economic conditions that will prevail during the entity’s economic life, of the different cash-generating units, group of assets that provides the generation of cash flows. The future cash flows were discounted based on the rate representative of the cost of capital. Consistent with the economic valuation techniques, theThe evaluation of the value in use is made for a five-yeartwenty two-year period, and after such period, considering the perpetuity of assumptions in view of the capacity for indefinite business continuity.consistently with economic valuation techniques. The main assumptions used in the estimate of value in use are the following: a)(a) revenue – revenues were projected for the period between 20162020 and 20202041, considering theprojection of launches and growth in sales, construction progress and client base, ofincluding the different cash-generating units; b) Operatinginflation adjustments to trade accounts receivable and provided services; (b) operating costs and expenses – costs and expenses were projected in line with the Company’s historicalmarket performance, as well as the historical growth of revenues.revenue; (c) discount rate of 9.90% in nominal terms, and (d) going concern assumption, in line of the entity’s business plan. The key assumptions were based on the Company’s historicalde market performance over the past five yearsof business units, and on reasonable macroeconomic assumptions, and supported by the financial market projections. The

In the years ended December 31, 2018 and 2017, the impairment test offor goodwill performed by the Company’s intangible assets did not resultCompany resulted in the need forof recognizing a provision for impairment loss in the year ended December 31, 2015 (R$17,604 in 2014amounts of R$112,800 and R$963 in 2013,127,429, respectively, related to the goodwill on acquisitionremeasurement of Cipesa).investment in the associate AUSA.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

10.Property and equipment

Type 2018  Initial application CPC 06 (R2) (Note 3)  Addition  Write-off  100% depreciated items  2019 
Cost                        
Hardware  10,297      318      (1,504)  9,111 
Leasehold improvements and installations  834            (63)  771 
Furniture and fixtures  764            (23)  741 
Machinery and equipment  2,640            (79)  2,561 
Right-of-use asset     4,457      (1,222)     3,235 
Sales stands  16,541      552   (5,455)     11,638 
   31,076   4,457   870   (6,677)  (1,669)  28,057 
                         
Accumulated depreciation                        
Hardware  (2,129)     (3,280)      1,504   (3,905)
Leasehold improvements and installations  (436)     (364)      63   (737)
Furniture and fixtures  (563)     (64)      23   (604)
Machinery and equipment  (2,136)     (258)      79   (2,315)
Right-of-use asset     (1,711)            (1,711)
Sales stands  (5,739)     (4,151)  5,264      (4,626)
   (11,003)  (1,711)  (8,117)  5,264   1,669   (13,898)
                         
Total property and equipment  20,073   2,746   (7,247)  (1,413)     14,159 
                         

The following useful lives and rates are used for calculating depreciation:

Useful lifeAverage annual depreciation rate - %
Leasehold improvements and installations4 years25
Furniture and fixture10 years10
Hardware5 years20
Machinery and equipment10 years10
Sales stands1 year100

The residual value, useful life, and depreciation methods are reviewed at the end of each year; no change having been made in relation to the information for the prior year.

Property and equipment are subject to periodic analysis of impairment. As of December 31, 2019 and 2018 there was no indication of impairment of property and equipment.

11.Intangible assets

    
 2018    2019
 BalanceAdditionWrite-downAmortization100% amortized itemsBalance
       
Software – Cost26,285468(1,388)(8,012)17,353
Software – Depreciation(14,515)852(4,618)8,012(10,269)
Total intangible assets11,770468(536)(4,618)7,084

As of December 31, 2019, the test of recovery of the intangible assets of the Company resulted in the need for recognition of a provision for loss on realization (impairment) in the amount of R$536 (R$4,962 in 2018), related to the Company’s software.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

12.Loans and financing

         
Type Maturity Annual interest rate 2015 2014MaturityAnnual interest rate20192018
           
National Housing System - SFH /SFI (i)  May 2016 to August 2020   

8.30% to 12.80% + TR

117% to 120% of CDI

   1,161,707   1,128,514 December 2019 to July 2021

8.30% to 14.20% + TR

13.66% and 143% of CDI

456,247528,140
Certificate of Bank Credit - CCB (ii)
  

May 2016 to June 2019

 

   

117.90% of CDI

2.20% + CDI

13.20% Fixed

   131,128   268,911 

March 2021 to August 2021

 

Fixed 19.56%

2.5%/ 3.70%/ 4.25%+CDI

55,022

 

95,607

 

Total loans and financing (Note 20.i.d, 20.ii.a and 20.iii)          1,292,835   1,397,425 
Other transactions  21,884
  
Total loans and financing(Note 20.i.d, 20.ii.a and 20.iii))Total loans and financing(Note 20.i.d, 20.ii.a and 20.iii))533,153623,747
                   
Current portion          672,365   550,058   426,124285,612
Non-current portion          620,470   847,367   107,029338,135

 

(i)The SFH financing is used for covering costs related to the development of real estate ventures of the Company and its subsidiaries, and are guaranteed withbacked by secured guarantee by the first lienfirst-grade mortgage of real estate ventures and the fiduciary assignment or pledge of receivables.

 

(ii)In the year ended December 31, 2015,2019, the Company made the payment of Certificates of Bank Creditpayments in the total amount of R$173,133,162,065, of which R$142,118 was133,024 related to principal and R$31,01529,041 related to interest.the interest payable. Additionally, during the year, the Company entered into three CCB transactions in the amount of R$10,000, with final maturity in April 2022.

 

Rates

Rates

 

·CDI -Interbank Deposit Certificate;

 

·TR -Referential Rate.

 

The maturities of the current and non-current installments arefall due as follows:

 

   
Maturity 20152014
    
2015 -550,058
2016 672,365506,207
2017 440,418252,605
2018 166,99688,555
2019 12,049-
2020 1,007-
  1,292,8351,397,425
   
Maturity 20192018
    
2019 285,612
2020 426,124216,618
2021 103,269121,517
2022 3,760
    
  533,153623,747

 

The Company and its subsidiaries have restrictive covenants under certain loans and financing that limit their ability to perform certain actions, such as the issuance of debt, and that could require the early redemptionmaturity or refinancing of loans if the Company does not fulfill certain restrictive convents. As of December 31, 2019, the Company and its subsidiaries were in compliance with the contractual covenants, except for three SFH loans, for which we need to re-establish their guarantees. The Company is in the process of negotiating the re-establishment of the related SFH loans guarantees and have not received an acceleration notice in connection with such covenants.non-compliance. The ratioCompany analyzed all of its other debt agreements and did not identify any impact on its restrictive covenants in such other debt agreements resulting from this non-compliance.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

12.Loans and financing--Continued

The ratios and minimum and maximum amounts required under such restrictive covenants for loan and financing transactions are as of December 31, 2015 and 2014 are disclosed in Note 13.follows:

 20192018
   
   
Loans and financing  
Net debt cannot exceed 100% of equity plus noncontrolling interests (a)Debt settled152.53%
Total accounts receivable(1) plus inventory required to be below zero or 2.0 times over venture debt(2)4.52 times4.51 times
Total accounts receivable(1) plus inventory of completed units required to be below zero or 2.0 times over net debt less venture debt(2)(9.04) times7.09 times
Total debt, less venture debt, less cash and cash equivalents and short-term investments(3), cannot exceed 75% of equity plus non-controlling interests16.03%45.44%
Total receivables(1) plus unrecognized income plus total inventories of completed units required to be 1.5 time over the net debt plus payable for purchase of properties plus unrecognized cost3.75 times1.81 times
Total accounts receivable(1)plus total inventories required to be below zero or 2.0 times over net debtDebt settled3.17 times
   
(1)Total receivables, whenever mentioned, refer to the amount reflected in the Statement of Financial Position plus the amount not shown in the Statement of Financial Position.

(2)Venture debt and secured guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by the SFH.

(3)Cash and cash equivalents and short-term investments refer to cash and cash equivalents and marketable securities.

(a)For the years ended December 31, 2018, the covenant limit is 100%, according to the waiver obtained from the creditor.

 

Financial expenses of loans, financing and debentures (Note 13) are capitalized at the cost of construction of each venture and land, according to the use of funds, and recognized in profit or loss for the year, in proportionaccording to the units sold, as shown below.criteria for revenue recognition. The capitalization rate used in the determination of costs of loans eligible to capitalization ranges from 10.54% to 14.42%was 10.84% as of December 31, 2015 (10.95% to 12.24%2019 (11.55% in 2014)2018).

F-45

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

12.Loans and financing —Continued

 

The following table shows the summary of financial expenses and charges and the capitalized rateportion in the account “propertiesline item properties for sale”sale.

  2019  2018  2017 
          
Total financial charges for the year  89,737   104,066   178,137 
Capitalized financial charges (Note 30)  (30,358)  (35,686)  (74,310)
Subtotal  (Note 24)  59,379   68,380   103,827 
             
Financial charges included in “Properties for sale”:            
             
Opening balance  223,807   301,025   343,231 
Capitalized financial charges  30,358   35,686   74,310 
Financial charges related to cancelled land sales contract (Note 8.1)  (8,955)     (116,516)
Charges recognized in profit or loss (Note 23)  (38,275)  (112,904)    
Closing balance (Note 6)  206,935   223,807   301,025 

The amount of properties for sale offered as guarantee for loans, financing and debentures is R$421,120 (R$552,752 in 2018).

     
  2015 2014 2013
       
Total financial charges for the year  327,134   354,968   309,006 
Capitalized financial charges  (243,907)  (233,905)  (132,183)
             
Financial expenses (Note 24)  83,227   121,063   176,823 
             
Financial charges included in “Properties for sale”:            
             
Opening balance  276,613   214,298   239,327 
Capitalized financial charges  243,907   233,905   132,183 
Charges recognized in profit or loss (Note 23)  (165,969)  (171,590)  (157,212)
             

Closing balance (Note 6) 

  354,551   276,613   214,298 

 

13.Debentures

     
Program/placementPrincipal - R$Annual interestFinal maturity20152014
      
Seventh placement (i)450,000TR + 9.8205%December 2017452,568502,033
Eighth placement / first series (ii)-CDI + 1.95%October 2015-147,640
Eighth placement / second series (iii)5,787IPCA + 7.96%October 20168,39515,185
Ninth placement (iv)132,026CDI + 1.90%July 2018130,394134,624
Tenth placement (v)55,000IPCA + 8.22January 202064,724-
First placement (Tenda) (vi)200,000TR + 9.25%October 2016201,877389,617
      
Total debentures (Note 20.i.d, 20.ii.a and 20.iii)857,9581,189,099
      
Current portion   389,621504,387
Non-Current portion   468,337684,712
         
     
Program/placementPrincipal - R$Annual interestFinal Maturity20192018
      
Tenth placement (i)27,224IPCA + 7.8%December 2023           38,03849,299
Eleventh placement – 1st series A (ii)52,026CDI + 5.25 %May 2020           52,00869,831
Twelfth placement (iii)57,481CDI + 3.75 %December 2020           57,13965,714
Thirteenth placement (iv)35,366CDI + 3.00%June 2022           33,79280,822
Fourteenth placement (v) (a)15,597CDI + 5.00%October 2020           16,548
Total debentures (Note 20.i.d, 20.ii.a, 20.iii and 30.ii)197.525265,666
      
Current   158,17962,783
Non-current   39,346202,883

(i)(a)On May 29, 2015,April 14, 2019, the Company approved the 14th Private Placement of Non-convertible Debentures, with secured guarantee, in sole series in the total amount of up to R$40,000, with final maturity in October 2020. The net proceeds from the placement will be fully and solely used in the development of real estate ventures called “Gafisa Square Ipiranga” and “Moov Espaço Cerâmica”, and their guarantees are represented by the fiduciary assignment of real estate receivables and conditional sale of units. The face value of the Placement will accrue interest corresponding to the cumulative change in the schedule for amortization of principal was unanimously approved without any exception, and became effective at the following amounts and maturities: (i) R$25,000 on June 5, 2015; (ii) R$25,000 on December 5, 2015; (iii) R$75,000 on June 5, 2016; (iv) R$75,000 on December 5, 2016; (v) R$150,000 on June 5, 2017; and (vi) R$150,000 on December 5, 2017.Interbank Deposit (DI) plus a surcharge equivalent to 5%p.a..

 

In the year ended December 31, 2015,2019, the Company made the payment in the total amount of R$104,993, of which R$50,000 related to the Face Value of the Placement, and R$54,993 related to the interest payable.following payments:

 

(ii)In the year ended December 31, 2015, the Company made the payment in the total amount of R$164,885, of which R$144,213 related to the Face Value of the Placement, and R$20,704 related to the interest payable, thus settling all payables of the first series of the Eight Debenture Placement.
 Face value placementInterest payableTotal amortization
(i)          9,442           7,429        16,871
(ii)        17,045           7,788        24,833
(iii)        45,426           5,951        51,377
(iv)          9,187           6,099        15,286
 81,10027,267108,367

 

(iii)On October 15, 2015, the Company made the payment in the total amount of R$9,371, of which R$8,089 related to the Face Value of the second series of the Placement, and R$1,282 related to the interest payable.

The current and non-current portions have the following maturities:

 

(iv)In the year ended December 31, 2015, the Company made the payment in the total amount of R$24,317, of which R$1,294 related to the amortization of the Face Value of the Placement and R$23,023 related to the interest payable.
 Company and Consolidated
Maturity20192018
   
201962,783
2020       158,179157,700
2021         23,11943,391
2022         11,2431,792
2022           4,984
        197,525265,666

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

13.Debentures--Continued

(v)On December 10, 2014, the Board of Directors of the Company approved the placement for private distribution of the 10th placement, being the 2nd private placement of unconvertible debentures, with floating and secured guarantee, in sole series in the amount of R$55,000, fully paid on January 30, 2015 and with final maturity on January 20, 2020. The funds raised in the placement shall be used for developing select real estate ventures and its secured guarantee is represented by the collateral of the lands owned by the Company to be developed in future periods. The Face Value of the Placement shall be adjusted by the cumulative variation of the IPCA and on it interest of 8.22% p.a. shall be accrued.

(vi)In the year ended December 31, 2015, the subsidiary Tenda made the payment in the total amount of R$220,415, of which R$180,000 related to the Face Value of the Placement and R$40,415 related to the interest payable.

Maturities of current and non-current installments are as follows.

  
Maturity20152014
   
2015-504,387
2016389,621375,778
2017344,690244,690
201883,48564,244
201920,078-
202020,084-
 857,9581,189,099

As mentioned in Note 4.2, as of December 31, 2015, the balance of cash in guarantee to loans in investment funds in the amount of R$31,633 (R$104,039 in 2014) in the consolidated financial statements, is pledged as part of the calculation of the guarantee of 1st debenture placement of the subsidiary Tenda and the 7th placement of the Company.

F-47

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

13.Debentures--Continued

 

The Company is in compliancecompliant with the restrictive covenants of debentures at the reporting date of these financial debt covenants at December 31, 2015 and 2014.statements. The ratioratios and minimum and maximum amounts required under such restrictive covenants as of December 31, 2015 and 2014 are as follows:

 

 20152014
Seventh placement  
Total account receivable plus inventory required to be below zero or 2.0 times over net debt less venture debt (3)-14.12 times-9.33 times
Total debt less venture debt (3), less cash and cash equivalents and short-term investments (1), cannot exceed 75% of equity plus non-controlling interests-12.19%-19.32%
Total receivables plus unappropriated income plus total inventory of finished units required to be 1.5 time over the net debt plus payable for purchase of properties plus unappropriated cost2.25 times2.10 times
   
Eighth placement - first and second series and Loans and Financing  
Total account receivable plus inventory of finished units required to be below zero or 2.0 times over net debt less venture debt-7.73 times-5.32 times
Total debt less venture debt, less cash and cash equivalents and short-term investments (1), cannot exceed 75% of equity plus non-controlling interests-12.19%-19.32%
   
Ninth placement  
Total account receivable plus inventory required to be below zero or 2.0 times over net debt3.71 times3.86 times
Net debt cannot exceed 100% of equity plus non-controlling interests46.44%46.73%
   
Tenth placement  
Total account receivable plus inventory required to be below zero or 2.0 times over net debt less venture debt (3)-14.12 timesn/a
Total debt less venture debt (3), less cash and cash equivalents and short-term investments(1), cannot exceed 75% of equity plus non-controlling interests-12.19%n/a
   
   
First placement– Tenda  
Total accounts receivable plus inventory required to be equal to or 2.0 times over net debt less debt with secured guarantee (3) or below zero, considering that TR(4) plus TE (4) is always above zero-6.79 times-2.75 times
Net debt less debt with secured guarantee (3)required to be in excess of 50% of equity.-21.47%-46.72%
Total receivables plus unappropriated income plus total inventory of finished units required to be over 1.5 times the net debt plus payable for purchase of properties plus unappropriated cost or below zero2.47 times2.89 times
 20192018
   
   
Tenth placement  
Total receivables(1) plus inventories required to be below zero or 2.0 times over net debt less venture debt(2)(14.62) times10.63 times
Total debt, less venture debt(2), less cash and cash equivalents and short-term investments(3), cannot exceed 75% of equity plus non-controlling interests16.03%45.44%
   
   
   

 

(1)Cash and cash equivalents and short-term investments refer to cash and cash equivalents and marketable securities.

(2)Total receivables, whenever mentioned, refers to the amount reflected in the Balance SheetStatement of Financial Position plus the amount not shown in the Balance Sheet.Statement of Financial Position.

(3)(2)Venture debt and secured guarantee debt refer to SFH debts, defined as the sum of all disbursed borrowing contracts which funds were provided by SFH, as well as the debt related to the seventh placement.SFH.

(4)(3)Total inventory.Cash and cash equivalents and short-term investments refer to cash and cash equivalents and marketable securities.

F-48

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

14.Obligations assumed on the assignment of receivables

 

The Company’s transactions of assignment of receivablesthe receivable portfolio are as follows:follows:

  
 20152014
   
Assignment of receivables:  
Obligation  CCI Jun/11 - Note 5(i)4,7758,851
Obligation  CCI Dec/11 - Note 5(ii)2,2363,985
Obligation  CCI Jul/12 - Note 5(iii)3681,483
Obligation  CCI Nov/12 - Note 5(iv) (a)4,3516,151
Obligation  CCI Dec/12 - Note 5(v)7,5418,604
Obligation  CCI Nov/13 - Note 5(vi)6,3629,459
Obligation  CCI Nov/14 - Note 5(vii)6,69611,513
Obligation  CCI Dec/15 - Note 5(viii)24,558-
FIDC obligation2,4066,083

Total obligations assumed on assignment of receivables

(Note 20.iii)

59,29356,129
   
Current portion23,48224,135
Non-current potion           35,81131,994
    
  2019  2018 
       
Obligation CCI June/2011 - Note 5(i)  412   882 
Obligation CCI December/2011 - Note 5(ii)     372 
Obligation CCI July/2012 - Note 5(iii)     10 
Obligation CCI November/2012 - Note 5(iv)  2,586   2,547 
Obligation CCI December /2012 - Note 5(v)  1,683   3,151 
Obligation CCI November /2013 - Note 5(vi)  1,170   1,877 
Obligation CCI November /2014 - Note 5(vii)  1,203   1,895 
Obligation CCI December /2015 - Note 5(viii)  5,300   7,797 
Obligation CCI February/2016 - Note 5(ix)  6,429   9,645 
Obligation CCI May/2016 - Note 5(x)  4,625   6,790 
Obligation CCI August/2016 - Note 5(xi)  2,392   3,075 
Obligation CCI December /2016 - Note 5(xii)  6,106   7,441 
Obligation CCI March/2017 - Note 5(xiii)  8,455   11,704 

Total obligations assumed on assignment of receivables

(Note 20.i.d and 20.ii.a)

  40,361   57,186 
         
Current  20,526   25,046 
Non-current  19,835   32,140 

The current and non-current portions have the following maturities:

   
Maturity 20192018
    
2019 25,046
2020 20,52612,381
2021 7,0207,791
2022 4,2843,092
2023 8,5318,876
  40,36157,186

 

Regarding the above transactions except for item (a),the assignor is required to fully formalize the guarantee instruments of receivables in favor of the assignee. Until it is fully fulfilled, these amounts will be classified into a separate account in current and non-current liabilities.

 

The obligation

F-53 

Table of item (a), is guaranteed by the issuance of Subordinated Mortgage-backed Securities (CRI) limited to 4% of the issuance amount, not having right of recourse above this limit.Contents

 

15.Other payables

    
   2015 2014
      
Acquisition of interests   -   2,395 
Provision for penalties for delay in construction works
   3,213   7,663 
Cancelled contract payable   24,053   27,607 
Warranty provision   59,647   52,167 
Deferred sales taxes (PIS and COFINS)   13,129   14,163 
Provision for net capital deficiency (Note 9)   54,401   32,882 
Long-term suppliers   7,508   12,117 
Payables to venture partners (Note 20.iii) (a)   4,895   11,030 
Share-based payment - Phantom Shares (Note 18.4)   889   - 
Other liabilities   28,918   39,446 
          
Total other payables   196,653   199,470 
          
Current portion   163,437   164,213 
Non-current portion   33,216   35,257 

(a)The Company entered in June 2011 into a private instrument for establishing the usufruct of 100% preferred shares of SPE-89 Empreendimentos Imobiliários S.A., over a period of six years, raising funds amounting to R$45,000.In the year ended December 31, 2015,the total amount of dividends paid to the holders of preferred shares by SPE-89 Empreendimentos Imobiliários S.A. amounted to R$ 8,000 (Note 9).

F-49

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

14.Obligations assumed on the assignment of receivables--Continued

Transaction (i) was entered into with Banco BTG Pactual S.A. at rates of 11.48% plus INCC for receivables of units not delivered, and IGP-M or IPCA for the period after the certificate of occupancy.

Transactions (ii) and (iii) were entered into with Polo Multisetorial Fundo de Investimento em Direitos Creditórios at rates that range between 11.25% and 11.50%, plus INCC for receivables of units not delivered, and IGP-M or IPCA for the period after the certificate of occupancy.

Transactions (iv), (v), (vi) and (vii) were entered into with Polo Multisetorial Fundo de Investimento em Direitos Creditórios Não Padronizados at rates that range between 10.50% and 11.48%, plus INCC for receivables of units not delivered, and IGP-M or IPCA for the period after the certificate of occupancy.

Transactions (viii), (ix), (x), (xi), (xii) and (xiii) were entered into with Polo Capital Securitizadora S.A. at rates of 12.00%, plus INCC for receivables of units not delivered, and IGP-M or IPCA for the period after the certificate of occupancy.

15.Other payables

    
  2019  2018 
       
Provision for penalties due to delay in construction work  5,283    
Cancelled contract payable and allowance for cancelled contracts  97,255   89,461 
Warranty provision  14,419   21,940 
Long term PIS and COFINS (deferred and payable)  8,372   9,622 
Provision for net capital deficiency (Note 9.i.d)  10,963   3,535 
Long-term suppliers (Note 20.i.d)  1,382   14,734 
Forward transactions – Share Repurchase Program (Note 20.ii a and 20.iii)     38,879 
Share-based payment - Phantom Shares (Note 18.4)  1,702   4,602 
Other liabilities  5,181   11,038 
Total other payables  144,557   193,811 
         
Current portion  135,492   173,951 
Non-current portion  9,065   19,860 

 

16.Provisions for legal claims and commitments

 

The Company and its subsidiaries are parties to lawsuits and administrative proceedings at various courts and government agenciesbodies that arise from the ordinary course of business, involving tax, labor, civil, and other matters. Management, based on information provided by its legal counsel, and analysis of the pending claims and, with respect to the labor claims, based on past experience regarding the amounts claimed, recognized a provision in an amount considered sufficient to cover the estimated losses on future settlements.pending decisions. The Company does not expect any reimbursement in connection with these claims.

 

In the years ended December 31, 20152019 and 2014,2018, the changes in the provision are summarized as follows:

 

  

Civil

lawsuits(i)

 

Tax

proceedings(ii)

 Labor claims Total
Balance at December 31, 2013  134,483   173   63,272   197,928 
Additional provision (Note 23)  65,699   600   46,765   113,064 
Payment and reversal of provision not used  (42,340)  (359)  (28,719)  (71,418)
Balance at December 31, 2014  157,842   414   81,318   239,574 
Additional provision (Note 23)  68,976   12,156   37,317   118,449 
Payment and reversal of provision not used  (77,197)  (12,170)  (25,674)  (115,041)
Balance at December 31, 2015  149,621   400   92,961   242,982 
                 
Current portion  84,576   220   15,516   100,312 
Non-current portion  65,045   180   77,445   142,670 

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

16.Provisions for legal claims and commitments--Continued

ConsolidatedCivil lawsuitsTax proceedingsLabor claimsTotal
Balance at December 31, 2017138,63675958,982198,377
Additional provision (Note 23)150,140822,284172,432
Payment and reversal of provision not used(53,294)(130)(23,576)(77,000)
Balance at December 31, 2018235,48263757,690293,809
Additional provision (Note 23) (a)17,7541,3691,47520,598
Payment and reversal of provision not used(13,769)696(24,423)(37,496)
Balance at December 31, 2019239,4672,70234,742276,911
     
Current portion119,4252,01531,593153,033
Non-current portion120,0426873,149123,878

(a)Of this amount, R$12,298 is related to legal settlements recorded as subsequent events (Note 31 (vi))

(b)Civil lawsuits, tax proceedings and labor claims

 

As of December 31,2015,31, 2019, the Company and its subsidiaries have deposited in court the amount of R$125,358129,933 (R$154,939106,793 in 2014)2018) in the consolidated financial statements (Note 7).

   
  20152014
    
Civil lawsuits 81,919106,731
Tax proceedings 14,22212,350
Labor claims 29,21735,858
Total 125,358154,939

F-50

Gafisa S.A.

 

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

16.Provisions for legal claims and commitments --Continued

(a)Civil lawsuits, tax proceedings and labor claims --Continued
   
  20192018
    
Civil lawsuits 54,70648,992
Tax proceedings 41,98940,031
Labor claims 33,23817,770
Total (Note 7) 129,933106,793

 

(i)As of December 31,2015,31, 2019, the provisions related to civil claimslawsuits include R$42,29613,397 (R$65,01621,274 in 2014)2018) related to lawsuits in which the Company is included as successor in enforcement actionsthe defendant side to be liable for in and inout of court debts which the original debtor is a former shareholder of Gafisa,the Company, Cimob Companhia Imobiliária (“Cimob”), or involve other companies of the same economic group of Cimob. In these lawsuits, the plaintiff believesargues that the Company should be liable for Cimob’s debts, asbecause in its understanding the Company would have taken onrequirements for piercing of the obligationscorporate veil of Cimob after acquisitionto reach the Company (business succession, merger of assets and/or formation of a same economic group involving the Company and the Cimob Group). In addition, there are judicial deposits in the amount of R$44,099 (R$62,381 in 2014) related to these lawsuits.present.

 

The Company does not agree with the statement of facts based on which it has been included in these lawsuits and continues to dispute in court its liability for the debts of a third company, as well as the amount charged by the plaintiffs. The Company has already obtained favorable and unfavorable decisions in relation to this matter, which is the reason why it is not possible to estimate a uniform outcome in all lawsuits. The Company also aims to file a lawsuit against Cimob and its former and current parent companies to arguefor obtaining the recognition that it should not be liable for the debts of that company, as well as indemnity of the amounts already paid by the Company in lawsuits relating to the charge of debts owed only by Cimob.

 

(ii)The former subsidiary AUSA, current associate, is a party to lawsuits and administrative proceedings related to Excise Tax (IPI) and State VAT (ICMS) on two imports of aircraft in 2001 and 2005, respectively, under lease agreements without purchase option.

According to the negotiationF-55 

Table of the sale of controlling interest of 70% in AUSA, it was agreed that the Company would cover the court costs in the event of unfavorable decision. The likelihood of loss in the ICMS case was reviewed in 2015, in view of case law, and considered remote by the legal counsel (R$16,638 in 2014, and it was classified as possible).Contents

 

(iii)Environmental risk

There are various environmental laws at the federal, state and municipal levels. These environmental laws may result in delays for the Company in connection with adjustments for compliance and other costs, and impede or restrict ventures. Before acquiring a land, the Company assesses all necessary and applicable environmental issues, including the possible existence of hazardous or toxic materials, residual substance, trees, vegetation and the proximity of the land to permanent preservation areas. Therefore, before acquiring land, the Company obtains all governmental approvals, including environmental licenses and construction permits.

F-51

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

16.Provisions for legal claims and commitments--Continued

 

(a)Civil lawsuits, tax proceedings and labor claims --Continued

(iii)(ii)Environmental risk--Continuedrisk

 

Considering the diversity of environmental legislation in the federal, state and municipal levels, which may restrict or impede the development of real estate ventures, the Company analyzes all environmental risks, including the possible existence of hazardous or toxic materials, residues, vegetation and proximity of the land to permanent preservation areas, in order to mitigate risks in the development of ventures, during the process of land acquisition for future ventures.

In addition, the environmental legislation establishes criminal, civil and administrative sanctions to individuals and legal entities for activities considered as environmental infringements or offense. The penalties include the stop of development activities, loss of tax benefits, confinement and fines. The lawsuits in dispute by the Company in civil court are considered by the legal advisor to havecounsel as possible lossesloss in the amount of R$8,639829 in the consolidated statements (R$13,73418,324 in 2014)the consolidated statements in 2018).

(iii)The Company requested an Arbitration Procedure to the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, on July 31, 2018,  against Yogo Participações e Empreendimentos Imobiliários S.A. (“Yogo”); Polo Real Estate Fundo de Investimentos e Participações, and Polo Capital Real Estate Gestão de Recursos Ltda. as shareholders of Yogo; and Comasa – Construtora Almeida de Martins Ltda., in view of the breach of contractual obligations. As of December 31, 2019, the arbitration is in initial stage, no decision being awarded yet. 

 

(iv)Lawsuits in which likelihood of loss is rated as possible

 

As of December 31, 2015,2019, the Company and its subsidiaries are aware of other claims, and civil, labor and tax risks. Based on the history of probable processeslawsuits and the specific analysis of main claims, the measurement of the claims with likelihood of loss considered possible amounted to R$810,163540,593 (R$561,056319,902 in 2014)2018), based on average past outcomes adjusted to current estimates, for which the Company’s Management believes it is not necessary to recognize a provision for any losses. The change in the period was caused by change in the higher volume of lawsuits with smallerdiluted amounts, and review of the involved amounts and tax proceedingsamounts.

    
  2019  2018 
       
Civil lawsuits  388,739   197,142 
Tax proceedings  83,306   94,541 
Labor claims  68,548   28,219 
   540,593   319,902 

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in which subsidiary Tenda is defendant.thousands of Brazilian Reais, except as otherwise stated)

   
  20152014
    
Civil lawsuits 469,841441,083
Tax proceedings 263,54053,586
Labor claims 76,78266,387
  810,163561,056
16.Provisions for legal claims and commitments--Continued

 

(b)Payables related to the completion of real estate developmentsventures

 

The Company commits to complete units sold and to comply with the laws regulating the civil construction sector, including the obtainment ofobtaining licenses from the proper authorities, and compliance with the terms for starting and delivering the real estate developments,ventures, being subject to legal and contractual penalties.

As of December 31, 2015,2019, the Company and its subsidiaries have restricted cash in guarantee to loans, which will be released to the extent the guarantee indexesratios described in Note 4.2 are met, which include land and receivables pledged in guarantee of 120% of the debt outstanding.

 

(c)Other commitments

 

In addition to the commitments mentioned in Notes 6, 12 and 13, the Company has commitments related to the rental of 33two commercial properties where its facilities are located, at a monthly cost of R$1,155 adjusted by167 (including rent, condominium fees, and IPTU), indexed to the IGP-M/FGV variation. change and termination of contract in August 2024.

The rental term is from 1 to 10 years and there is a fine in caseestimate of cancelled contracts corresponding to three-monthminimum future rent or in proportion topayments of this new contract for commercial property (cancellable leases) totals R$9,486, considering the above-mentioned contract expiration, time.as follows.

 

F-52

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

  
Estimate of payment2019
  
20202,057
20212,139
20222,224
20232,314
2024 onwards752
 9,486

 

17.Payables for purchase of properties and advances from customers

         
 Maturity 2015 2014 Maturity  2019  2018 
             
Payables for purchase of properties  

January 2016 to

July 2020

   362,800   331,436   January 2020 to November 2022   68,133   137,170 
Adjustment to present value      (17,039)  (5,619)
Present value adjustment     (5,298)  (15,075)
Advances from customers                       
Development and sales (Note 5)      39,743   21,236 
Barter transaction – Land      224,430   244,689 
Development and services (Note 5)     2,359   12,069 
Barter transaction - Land (Note 30 (i))     145,396   175,267 
                       
Total payables for purchase of properties and advances from customers      609,934   591,742 
Total payables for purchase of properties and advance from customers (Notes 20.i.d and 20.ii.a)     210,590   309,431 
                       
Current portion      361,420   490,605      117,515   113,355 
Non-current portion      248,514   101,137      93,075   196,076 

The current and non-current portions have the following maturities:

     
Maturity  2019  2018 
        
 2019      113,355 
 2020   117,515   85,503 
 2021   40,219   50,954 
 2022   33,396   58,696 
 2023   10,597   923 
 2024 onwards   8,863    
     210,590   309,431 

As of December 31, 2019, the amount related to contract liabilities totaled R$159,593 (R$187,336 in 2018).

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

18.Equity

 

18.1.Capital

 

AsThe Company’s Board of Directors ratified the following capital increases in the year ended December 31, 2019:

·On June 24, 2019: subscription and payment of 26,273,962 new common shares, of which 12,170,035 shares at the price of R$5.12 and 14,103,927 shares at the price of R$4.96, totaling R$62,311 and R$69,955, respectively.

·On October 23, 2019: subscription and payment of 48,968,124 new common shares, of which 45,554,148 shares, at the price of R$5.58 and 3,413,976 shares at the price of R$5.42, totaling R$254,192 and R$18,503, respectively.

Therefore, as of December 31, 2015 and 2014,2019, the Company's authorized and paid-in capital amountsamounted to R$2,740,662,2,926,280 (R$2,521,319 in 2018), represented by 378,066,162 (408,066,162120,000,000 (43,727,589 in 2014)2018) registered common shares, withoutwith no par value, of which 10,584,756 (29,881,2862,981,052 (3,943,420 in 2014)2018) were held in treasury.

 

According to the Company’s by-laws,Articles of Incorporation, capital may be increased without further amendments,the need to amend it upon resolution of the Board of Directors, which shall set the conditions for issuance up towithin the limit of 600,000,000 (six120,000,000 (one hundred and twenty million) common shares.

 

On February 02, 2015,April 24, 2019, the Company approved the creation ofdisclosed a new program to repurchase its common shares aimed at holding them in treasury and later selling or cancelling them, over a period of 365 days, upNotice to the limitMarket informing about the re-issue of 27,000,000 shares. On the same date it took the resolution to cancel 30,000,000 (27,493,039 in 2014) common1,400,325 shares of the Company, related to the previously cancelled shares, of which (i) 1,030,325 shares had been cancelled in the meeting of the Board of Directors on December 19, 2018; and (ii) 370,000 shares had been cancelled on January 22, 2019, according to the resolution taken at the Extraordinary Shareholders’ Meeting held in treasury, without capital reduction. In the year ended December 31, 2015, 11,925,330 (43,783,234 in 2014) shares were acquired totaling R$24,157 (115,265 in 2014). Additionally, theon April 15, 2019.

The Company transferred 1,221,8609,174 shares (5,463,395(17,319 in 2014)2018), in the total amount of R$3,022141 (R$17,583530 in 2014)2018) related to the exercise of options under the stock option plan of common shares by the beneficiaries, for which it received the total amount of R$599148 (R$6,921418 in 2014).2018), and made the disposal of 59,480 shares, for which it received the total amount of R$714.

 

Treasury shares    
Type GFSA3 R$ % Market value (*)
R$ thousand
 Carrying value
R$ thousand
Acquisition date Number Weighted average price % - on shares outstanding 2015 2014 2015 2014
11/20/2001  599,486   2.8875   0.16%  1,457   1,319   1,731   1,731 
Changes in 2013:                            
Acquisition  18,500,000   3.8561   5.03%  44,955   40,700   71,339   71,339 
Changes in 2014:                            
Acquisition  43,738,234   2.6353   11.90%  106,284   96,224   115,265   115,265 
Transfer  (5,463,395)  3.2183   -1.49%  (13,276)  (12,019)  (17,583)  (17,583)
Cancellations  (27,493,039)  3.3351   -7.48%  (66,808)  (60,485)  (91,693)  (91,693)
Changes in 2015:                            
Acquisition  11,925,330   2.0257   3.25%  28,979   -   24,157   - 
Transfer  (1,221,860)  2.4733   -0.33%  (2,970)  -   (3,022)  - 
Cancellations  (30,000,000)  2.4738   -8.16%  (72,900)  -   (74,214)  - 
   10,584,756   2.4545   2.88%  25,721   65,739   25,980   79,059 
 Treasury shares  
 TypeGFSA3R$%Market value (*) R$ thousandCarrying value R$ thousand
Acquisition dateNumber (i)Weighted average price% - on shares outstanding2019201820192018
200111/20/200144,46238.93190.04%3857511,7311,731
         
2013Acquisitions1,372,09651.99271.17%11,89623,18871,33971,339
         
2014Acquisitions3,243,94735.53232.77%28,12554,823115,265115,265
2014Transfers(405,205)43.3928-0.35%(3,513)(6,848)(17,583)(17,583)
2014Cancellations(2,039,086)44.9677-1.74%(17,679)(34,461)(91,693)(91,693)
         
2015Acquisitions884,47027.31240.76%7,66814,94824,15724,157
2015Transfers(90,622)33.3473-0.08%(786)(1,531)(3,022)(3,022)
2015Cancellations(2,225,020)33.3543-1.90%(19,291)(37,603)(74,214)(74,214)
         
2016Acquisitions334,02026.02540.29%2,8965,6458,6938,693
2016Transfers(68,814)31.2290-0.06%(597)(1,163)(2,149)(2,149)
         
2017Transfers(112,203)30.6320-0.10%(973)(1,896)(3,435)(3,435)
         
2018Acquisitions13,221,30013.495311.30%114,629223,440178,425178,425
2018Transfers(17,319)30.6022-0.01%(150)(293)(530)(530)
2018Cancellation(1,030,326)--0.88%(8,933)(17,412)--
2018Disposal(9,168,280)16.1463-7.84%(79,489)(154,944)(148,034)(148,034)
         
2019Acquisitions6,794,01114.73555.81%58,904-100,113-
2019Transfers(9,174)15.3695-0.01%(80)-(141)-
2019Cancellation(370,000)15.5324-0.32%(3,208)-(5,747)-
2019Disposal(7,377,205)14.5999-6.32%(63,960)-(109,658)-
  2,981,05214.59762.55%25,84466,64443,51758,950
                  

(*)Market value calculated based on the closing share price on December 31, 2019 of R$8.67 in 2018 (R$16.90 in 2018) not considering the effect of occasional volatilities.

 

(*) Market value calculated based on the closing share price at December 31, (R$2.43 in 2015 and R$2.20 in 2014), not considering the effect

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Table of occasional volatilities.Contents

 

F-53

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

18.Equity--Continued

 

18.1.Capital--Continued

The Company holds shares in treasury acquired in 2001 in order to guarantee the performance of legal claims (Note 16(a)(i)).

 

The change in the number of outstanding shares is as follows:

 

 Common shares - In thousands

Outstanding shares as of December 31, 20132017416,45926,972
RepurchaseSubscription of treasury shares(43,738)16,718
Transfer related to the stock option plan5,46317
Repurchase of shares(13,221)
Disposal of shares9,168
Cancellation of treasury shares(1,030)
Change in shares held by the management members of the Company(25)
Outstanding shares as of December 31, 20142018378,18438,599
Subscription of shares76,642
Repurchase of shares(7,164)
Disposal of shares7,386
Cancellation of treasury shares(11,925)370
Transfer related toChange in shares held by the stock option planmanagement members of the Company1,2221,172
Outstanding shares as of December 31, 20152019367,481117,005
  
Weighted average shares outstanding (Note 27)367,57268,584

 

18.2.Allocation of profit (loss) for the year

 

According to the Company’s by-laws,Articles of Incorporation, profit for the year is allocated as follows, after deduction of occasionalfor any accumulated losses and provision for taxes and social contribution:income taxes: (i) 5% to legal reserve, until it reachesreaching up to 20% of paid-in capital, or when the legal reserve balance plus the balances of capital reserves exceedsis in excess of 30% of capital ;capital; (ii) 25% of the remaining balance to pay mandatory dividends; and (iii) amount not in excess of 71.25% to set up the Reserve for Investments, with the purpose of financing the expansion of the operations of the Company and its subsidiaries.

 

The absorption of losses for 2014 by the income reserve and allocation of net income for 2015 are as follow:

Reserve for investments as of December  31, 2013437,156
(-)Treasury shares sold and cancelled (Note 18.1)(102,355)
Net loss attributable to shareholders’ of Gafisa for 2014(42,549)
Reserve for investments as of December  31, 2014292,252
Net income attributable to shareholders’ of Gafisa for 201574,449
(-)Legal reserve (5%)(3,722)
(=)Calculation basis70,727
Minimum mandatory dividend (25%)17,682
Increase in reserve for investments53,045
Minimum mandatory dividend (25%) per share0.048

The Board of Directors, by referendum ofresolution at the Annual Shareholders’ Meeting, shall examine the accounts and financial statements related to the fiscal year 2015.2019.

 

In view of the accumulated losses as of December 31, 2019, the allocation of profit or loss for the year is not applicable.

Balance of accumulated losses for 2017(1,866,289)
Net loss for 2018(419,526)
Share repurchase program(22,588)
Balance of accumulated losses for 2018(2,308,403)
Net loss for 2019(26,040)
Share repurchase program(4,521)
Balance of accumulated losses for 2019(2,338,964)
18.3.Stock option plan

 

Expenses for granting stocks are recorded under the account “General and administrative expenses” (Note 23) and showed the following effects on profit or loss in the years ended December 31, 2015, 20142019, 2018 and 2013 are as follows::2017:

 

 201520142013
    
Gafisa7,82615,48917,263
Tenda2,138838156
 9,96416,32717,419
  2019  2018  2017 
          
Equity-settled stock option plans (i)  417   1,304   3,500 
Phantom Shares (Note 18.4)  (2,783)  623   1,464 
Total option grant expenses (Note 23)  (2,366)  1,927   4,964 

 

(i) In the year ended December 31, 2018, the amount of R$2,104 was reversed because the options of beneficiaries were cancelled for forfeiture.

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

18.Equity--Continued

 

18.3.Stock option plan -- Continued--Continued

 

(i)Gafisa

 

The Company has a total of foursix stock option plans comprising common shares, launched in 2012, 2013, 2014, 2015, 2016 and 20152018 which follows the rules established in the Stock Option Plan of the Company.

 

The granted options entitle their holders (employees) to purchasesubscribe common shares of the Company’s capital, after periods that varyrange from one to fivefour years of employment in the Company (essential condition to exercise the option), and expire six to ten years after the grant date.

 

The fair value of options is set on the grant date, and it is recognized as expense in profit or loss for the year (as contra-entry to equity) during the vestinggrace period of the plan, to the extent the services are provided by employees and management members.

 

Changes in the stock options outstanding in the years ended December 31, 20152019 and 2014,2018, including the respective weighted average exercise prices are as follows:

 

20152014 2019  2018 
Number of optionsWeighted average exercise price (Reais)Number of optionsWeighted average exercise price (Reais) Number of options  Weighted average exercise price (Reais)  Number of options  Weighted average exercise price (Reais) 
Options outstanding at the beginning of the year9,542,6431.4911,908,1281.47  1,239,557   15.58   841,172   16.99 
Options granted3,567,2012.244,361,7631.93        2,685,474   15.00 
Options exercised (i)(1,221,860)(0.49)(5,463,395)1.26  (9,174)  (16.16)  (21,079)  (16.25)
Options expired(32,000)(3.05)(748,518)3.66
Options forfeited(112,605)(0.01)(515,335)0.04
 
Options outstanding at the end of the period11,743,3791.839,542,6431.49
Options cancelled for forfeiture (ii)        (2,252,076)  (15.00)
Options cancelled and adjustment to number due to the discontinued operations of Tenda, net        (13,934)  (0.09)
Options outstanding at the end of the year  1,230,383   16.64   1,239,557   15.58 

 

(i)In the year ended December 31, 2015,2019, the amount received through exercised options was R$599148 (R$6,921418 in 2014)2018).

(ii)Options cancelled for forfeiture as the beneficiaries who would be entitled were dismissed as part of the process of turnaround and streamlining of the corporate structure of the Company.

 

As of December 31, 2015,2019, the stock options outstanding and exercisable are as follows:as:

 

Outstanding optionsExercisable options
Number of optionsWeighted average remaining contractual life (years)Weighted average exercise price (R$)Number of optionsWeighted average exercise price (R$)
     
11,743,3794.291.831,757,5982.59
Options outstandingOptions exercisable
Number of optionsWeighted average remaining contractual life (years)Weighted average exercise price (R$)Number of optionsWeighted average exercise price (R$)
     
1,230,3838.0616.64519,06419.47

 

During the year ended December 31, 2015,2019, the Company did not grant any option (2,685,474 option granted 3,567,201 optionsin 2018) in connection with its stock option planplans comprising common shares (4,361,763 options granted in 2014).shares.

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

18.Equity--Continued

 

18.3.Stock option plan -- Continued

(i)Gafisa--Continued

 

The models used by the Company for pricing granted options are the Binomial model for traditional options and the MonteCarlo model for options in the Restricted Stock Options format.

 

TheIn 2018, the fair value of the new options granted totaled R$3,232 (R$7,464 in 2014),17,032, which was determined based on the following assumptions:assumptions. In view of the cancellation of options for forfeiture of beneficiaries, the program’s fair value, considering the remaining options, is R$1,071.

 

 20152014
Pricing modelBinomialMonteCarlo
Exercise price of options (R$)R$2.24

R$3.13 type A and R$0.01 type B

Weighted average price of options  (R$)R$2.24R$ 1.93
Expected volatility (%) – (*)52%55%
Expected option life (years)5.58 years4.66 years
Dividend income (%)2.24%1.90%
Risk-free interest rate (%)13.64%10.55%
2018
Pricing modelBinomial
Exercise price of options (R$)R$15.00
Weighted average price of options ( (R$)R$15.00
Expected volatility (%) – (*)52%
Expected option life (years)4.6 years
Dividend income (%)1.98%
Risk-free interest rate (%)6.64%

 

(*)The volatility was determined based on regression analysis of the ratio of the share volatility of Gafisa S.A. to the Ibovespa index.

 

18.4.For the year ended December 31, 2014, the Company recognized in the account “Other income (expenses), net”, the expenses with the stock option plan of the former subsidiary Alphaville Urbanismo S.A., in the amount of R$17,679 related to the balance payable of exercised options, according to the contract between the parties (Note 23).

(ii)Tenda

Due to the acquisition by Gafisa of the total shares outstanding issued by Tenda, the stock option plans related to Tenda shares were transferred to Gafisa, responsible for share issuance.

Tenda has a stock option plan for common shares, created in 2014, by which a total of 42,259,687 stock options were granted to employees and management members of the subsidiary, with exercise dates between March 31, 2017 and March 31, 2020.

The granted options entitle their holders (employees) to purchase common shares of the Company’s capital, after periods that vary from five to ten years of employment in the Company (essential condition to exercise the option), and expire ten years after the grant date.

In the year ended December 31, 2015, the subsidiary Tenda did not grant options in connection with its stock option plan for common shares.

F-56

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

18. Equity--Continued

18.3.Stock option plan -- Continued

(ii)Tenda--ContinuedShare-based payment – Phantom Shares

 

The fair valueCompany has a total of the options granted in 2014 totaled R$9,346, which was determined based on the following assumptions:

2014
Pricing modelBlack-Scholes
Exercise price of options (R$)

R$0.77

Weighted average price of options (R$)R$0.76
Expected volatility (%) – (*)31.02%
Expected option life (years)4.05
Risk-free interest rate (%) (**)11.81%

(*)The volatility was determined based on the history of the BM&FBOVESPA Real Estate Index (IMOBX).

(**)The market risk-free interest rate for the option term in the grant moment varied between 11.66% and 11.81%.

18.4.Share-based payment –Phantom Shares

In the year ended December 31, 2015, atwo cash-settled share-based payment program was approved,plans with fixed terms and conditions. The beneficiaries were grantedconditions, according to the right to receive an amount equivalent to 1,898,886 phantom shares, together withplans approved by the stock option plan for the year 2015. The phantom shares have the same graceCompany, launched in 2015 and expiration period of the options, and can be partially or fully exercised during the established period.  2016.

 

As of December 31, 2015,2019, the amount of R$889,1,702 (R$4,602 in 2018), related to the fair value of the phantom shares granted, is recognized in the heading “Other payables” (Note 15).

 

19.Income tax and social contribution

 

(i)Current income tax and social contribution

(a)Brazilian Transitory Tax Regime (RTT)

The Company and its subsidiaries adopted the Brazilian Transitory Tax Regime (RTT) in the year 2014 that permitted to exclude the effect from the changes, introduced by Laws No. 11,638/2007 and No. 11,941/2009, from the tax basis of certain taxes.

Law No. 12,973/14 revoked the RTT from 2015. Such rule establishes that the adjustments should be made to the taxable profit and the accounting records for determining the tax bases of the corporate income tax (IRPJ) and social contribution on net income (CSLL). The end of the RTT was optional for the year 2014 and mandatory from 2015.

F-57

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

19.Income tax and social contribution --Continued

(i)Current income tax and social contribution --Continued

The reconciliation of the effective tax rate for the years ended December 31, 2015, 20142019, 2018 and 20132017 is as follows:

     
  2015 2014 2013
       
Profit (loss) before income tax and social contribution, and statutory interest  78,159   (28,450)  239,368 
Income tax calculated at the applicable rate - 34 %  (26,573)  9,673   (81,385)
Net effect of subsidiaries taxed by presumed profit  46,066   (2,085)  (2,316)
Tax losses (tax loss carryforwards used)  (4,101)  (9,555)  4,694 
Income from equity method investments  14,200   5,249   2,507 
Effect of the income from discontinued operations  -   -   (89,398)
Stock option plan  (3,441)  (11,562)  (5,923)
Other permanent differences  (37,524)  (7,280)  (18,443)
Charges on payables to venture partners  432   2,509   6,847 
Tax benefits recognized (not recognized)  3,761   (2,224)  180,605 
   (7,180)  (15,275)  (2,812)
             
Tax expenses  - current  (24,598)  (33,330)  (23,690)
Tax income – deferred  17,418   18,055   20,878 
       
  2019  2018  2017 
          
Loss before income tax and social contribution, and statutory interest  (61,676)  (443,027)  (881,796)
Income tax calculated at the applicable rate - 34%  20,970   150,629   299,811 
             
Net effect of subsidiaries and ventures taxed by presumed profit and RET  17,951   (11,892)  (17,876)
Income from equity method investments  (1,701)  (5,264)  (65,810)
Stock option plan  (142)  (443)  (1,190)
Net effect on divestment of associate  22,610      (56,614)
Other permanent differences  19,102   (968)  (2,169)
Charges on payables to venture partners  18   211   (1,146)
Net effect on discontinued operations        (25,413)
Recognized (unrecognized) tax credits  (43,533)  (110,522)  (106,493)
   35,275   21,751   23,100 
             
Tax expenses - current  (1,984)  (3,349)  (2,832)
Tax income (expenses) - deferred  37,259   25,100   25,932 

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

19.Income tax and social contribution--Continued

 

(ii)Deferred income tax and social contribution

 

The Company recognized deferred tax assets on tax losses and income tax and social contribution carryforwards for prior years, which have no expiration, and for which offset is limited to 30% of annual taxable profit, to the extent the taxable profit is likelyprobable to be available for offsetting temporary differences, based on the assumptions and conditions established in the business model of the Company.

 

The initial recognition and subsequent estimates of deferred income tax are carried out when it is probable that a taxable profit for the following years will be available to offset the deferred tax asset, based on projections of results prepared and underlain by internal assumptions and future economic scenarios that enable its total or partial use. As of December 31,2015 and 2014, the Company did not recognize any deferred tax assets calculated on the tax loss of the subsidiary Tenda.

As of December 31, 20152019 and 2014,2018, deferred income tax and social contribution are from the following sources:

     
  2015 2014 Movement
Assets      
Provisions for legal claims  82,614   81,455   1,159 
Temporary differences – PIS and COFINS deferred  16,404   14,960   1,444 
Provisions for realization of non-financial assets  11,776   12,793   (1,017)
Temporary differences –  CPC adjustment  44,748   18,656   26,092 
Other provisions  85,912   92,384   (6,472)
Income tax and social contribution loss carryforwards  317,282   301,598   15,684 
Tax benefits from downstream acquisition  28,165   28,165   - 
Tax credits not recognized  (272,997)  (276,758)  3,761 
   313,904   273,253   40,651 
             
Liabilities            
Negative goodwill  (92,385)  (92,385)  - 
Temporary differences –CPC adjustment  (130,929)  (111,294)  (19,635)
Differences between income taxed on cash basis  
and recorded on an accrual basis
  (107,079)  (104,314)  (1,885)
   (330,393)  (307,993)  (22,400)
             
Total net  (16,489)  (34,740)  18,251 
(ii)Deferred income tax and social contribution--Continued

    
  2019  2018 
Assets        
Provisions for legal claims  94,149   99,895 
Temporary differences – Deferred PIS and COFINS  14,997   15,722 
Provisions for realization of non-financial assets  261,816   264,022 
Temporary differences –  CPC adjustment  11,896   22,796 
Other provisions  5,325   11,838 
Income tax and social contribution loss carryforwards  432,801   375,007 
   820,984   789,280 
         
Unrecognized tax credits of continued operations  (749,399)  (705,866)
   (749,399)  (705,866)
Liabilities        
Discounts  (2,069)  (2,069)
Temporary differences –CPC adjustment  (15,237)  (67,170)
Income taxed between cash and accrual basis  (66,393)  (63,547)
   (83,699)  (132,786)
         
Total net  (12,114)  (49,372)

The balances of income tax and social contribution loss carryforwards for offset are as follows:

 
 2019 2018
 Income taxSocial contribution

Total

 

 Income taxSocial contribution

Total

 

Balance of income tax and social contribution loss carryforwards1,272,9431,272,943- 1,104,6481,104,648-
Deferred tax asset (25%/9%)318,236114,565432,801 276,16299,418375,580
Recognized deferred tax asset3,8181,37413,302 15,2735,49820,771
Unrecognized deferred tax asset314,418113,191427,609 260,88993,920354,809

In the years ended December 31, 2019 and 2018, the effect of income tax and social contribution on statement of profit or loss of the Company is mainly caused by the write-off and impairment recorded at the initial value of the portion of remeasurement of the investment stated at fair value, respectively.

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

19.Income tax and social contribution --Continued

(ii)Deferred income tax and social contribution --Continued

The Company has income tax and social contribution loss carryforwards for offset in the following amounts:

   
  2015 2014
  Income tax Social contribution 

Total

 Income tax Social contribution 

Total

Balance of income tax and social contribution loss carryforwards  933,182   933,182  -  887,052   887,052   - 
Deferred tax asset (25%/9%)  233,296   83,986  317,282  221,763   79,835   301,598 
Recognized deferred tax asset  55,712   20,056  75,768  58,455   21,044   79,499 
Unrecognized deferred tax asset  177,584   63,930  241,514  163,308   58,791   222,099 

Based on the estimate of projections for generation of future taxable profit of Gafisa, the estimated recovery of the Company’s balance of deferred income tax and social contribution is as follows:

  
 Loss carryforwards Income tax and social contribution loss
    
201616,484 5,604
20178,282 2,816
20183,056 1,039
201927,174 9,239
2020 onwards167,853 57,070
 222,849 75,768

In September 2015, the Company adhered to the Tax Refinance program (REFIS), originally introduced by Law No. 11,941/2009 and reopened by means of Law No. 12,996/2014, which provided new conditions for lump sum or installment payment of tax-related debits with the Federal Revenue Service or the Office of Attorney-General of the National Treasury. The Company opted for the installment payment of the tax debits of certain controlled SPEs in the total amount of R$6,291.

F-59

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments

 

The Company and its subsidiaries engage in operations involving financial instruments. These instruments are managed through operational strategies and internal controls aimed at providing liquidity, return and safety. The use of financial instruments with the objective offor hedging purposes is achieved through a periodical analysis of exposure to the risk that the management intends to cover (exchange, interest rate, etc.) which is submitted to the corresponding Management bodies for approval and performancesubsequent execution of the proposed strategy. The controlCompany’s policy consists of continuouslyongoing monitoring of the contracted conditions in relation to the prevailing market conditions. The Company and its subsidiaries do not use derivatives or any other risky assets for speculative purposes. The result from these operations is consistent with the policies and strategies devised by Company management.the Company’s Management. The Company and its subsidiaries operations are subject to the following risk factors:factors described below:

 

(i)Risk considerations

 

a)Credit risk

 

The Company and its subsidiaries restrict their exposure to credit risks associated with cash and cash equivalents, investing only in short-term securities of top tier financial institutions.

 

With regards to accounts receivable, the Company restricts its exposure to credit risks through sales to a broad base of customers and ongoing credit analysis. Additionally, there is no relevant history of losses due to the existence of secured guarantee, represented by real estate unit, for the recovery of its products in the cases of default during the construction period. As of December 31, 20152019 and 2014,2018, there was no significant credit risk concentration associated with clients.customers.

 

b)Derivative financial instruments

 

TheAs of December 31, 2019, the Company holdsdoes not have derivative instruments to mitigate the risk arising from its exposure to index and interest volatility recognized at their fair value in profit or loss for the year. Pursuant to its treasury policies, the Company does not own or issue derivative financial instruments other than for hedging purposes.

As of December 31, 2015, the Company had derivative contracts for hedging purposes in relation to interest fluctuations, with final maturity between June 2016 and January 2020. The derivative contracts are as follows:

 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments--Continued

 

(i)Risk considerations--Continued

 

b)Derivative financial instruments --Continued --Continued

 

 
    Reais Percentage Validity Gain (loss) not realized by derivative instruments - net
                 
Companies Swap agreements (Fixed for CDI) Face value Original Index – asset position Swap – liability position Beginning End 2015 2014
                 
Gafisa S/A Banco Votorantim S.A.  82,500  Fixed 13.7946% CDI + 1.6344%  12/22/2014   06/22/2015   -   (208)
Gafisa S/A Banco Votorantim S.A.  55,000  Fixed 11.8752% CDI + 0.2801%  06/22/2015   12/21/2015   -   (401)
Gafisa S/A Banco Votorantim S.A.  55,000  Fixed 14.2672% CDI + 1.6344%  12/21/2015   06/20/2016   (637)  (160)
Gafisa S/A Banco Votorantim S.A.  27,500  Fixed 11.1136% CDI + 0.2801%  06/20/2016   12/20/2016   (641)  (185)
Gafisa S/A Banco Votorantim S.A.  27,500  Fixed 15.1177% CDI + 1.6344%  12/20/2016   06/20/2017   (399)  58 
Gafisa S/A Banco Votorantim S.A.  130,000  CDI + 1.90% 118% CDI  07/22/2014   07/26/2018   (2,216)  (941)
Gafisa S/A Banco HSBC  194,000  Fixed 12.8727% 120% CDI  09/29/2014   10/08/2018   (15,907)  (6,336)
Gafisa S/A Banco Votorantim S.A. (a)  55,000  IPCA + 8.22% 120% CDI  03/17/2015   01/20/2020   (1,874)  - 
                     (21,674)  (8,173)
                           
             Current       (14,056)  (3,340)
             Non-current       (7,618)  (4,833)

(a)On March 17, 2015, the Company bought derivative swap transaction to mitigate the exposure to the floating rate at IPCA + 8.22% p.a. of the tenth Debenture Placement of the Company to 120% of CDI (Note 13).

DuringAdditionally, during the year ended December 31, 2015,2018, in the amount of R$17,151 (R$7,492 in 2014 and R$5,102 in 2013), which refers to net resultcontext of the interest swap transaction, was recognizedtreasury share repurchase program (Note 18.1), the Company used derivative financial instruments, through forward contracts, to make transactions with shares traded in the “financial income (expenses)” linemarket, which were settled in the statementyear ended December 31, 2019.

The estimated fair value of profit or loss forderivative financial instruments purchased by the year, allowing correlation between the impact of such transactions and interest rate fluctuationCompany was determined based on information available in the Company’s consolidatedmarket and specific valuation methodologies. However, considerable judgment was necessary for interpreting market data to produce the estimated fair value of each transaction, which may vary upon the financial statements (Note24).settlement of transactions.

The estimated fair value of derivative financial instruments contracted by the Company was determined based on information available in the market and specific valuation methodologies. However, considerable judgment was necessary for interpreting market data to produce the estimated fair value of each transaction, which may vary upon the financial settlement of transactions.

 

c)Interest rate risk

 

Interest rate risk arises from the possibility that the Company and its subsidiaries may experience gains or losses because ofarising from fluctuations in the interest rates of its financial assets and liabilities. Aiming to mitigatingmitigate this kind of risk, the Company and its subsidiaries seek to diversify funding in terms of fixed and floating rates. The interest rates on loans, financing and debentures are disclosed in Notes 12 and 13. The interest rates contracted on financial investments are disclosed in Note 4. Accounts receivable from completed real estate units completed (Note 5), are subject to annual interest rate of 12%, appropriatedrecognized on apro ratabasis.basis.

F-61

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

20.Financial instruments --Continued

(i)Risk considerations--Continued

 

d)Liquidity risk

 

Liquidity risk refers to the possibility that the Company and its subsidiaries do not have sufficient funds to meet their commitments as they become due.in view of the settlement terms of its rights and obligations.

 

To mitigate liquidity risks, and to optimize the weighted average cost of capital, the Company and its subsidiaries monitor on an on-going basis the indebtedness levels according to the market standards, and the fulfillment of covenants provided for in loan, financing and debenture agreements, in order to guarantee that the operating-cash generation and the advance funding, when necessary, are sufficient to meet the schedule of commitments, appropriately mitigating liquidity risk to the Company or its subsidiaries (Notes 12 and 13).

 

The maturitiesF-64 

Table of financial instruments, loans, financing, suppliers, payables to venture partners and debentures are as follows:

   
Year ended December 31, 2015 Less than 1 year 1 to 3 years 4 to 5 years More than 5 years Total
Loans and financing (Note 12)  672,365   619,463   1,007   -   1,292,835 
Debentures (Note 13)  389,621   448,253   20,084   -   857,958 
Payables to venture partners (Note 15)  3,755   1,140   -   -   4,895 
Suppliers  57,335   7,508   -   -   64,843 
   1,123,076   1,076,364   21,091   -   2,220,531 

Fair value classificationContents

 

The Company uses the following classification to determine and disclose the fair value of financial instruments by the valuation technique:

Level 1: quoted prices (without adjustments) in active markets for identical assets or liabilities;

Level 2: input different from the quoted prices in active markets included in Level 1, which are observable, directly (as prices) or indirectly (prices derivate); and

Level 3: inputs to asset or liability not based on observable market data (nonobservable inputs).

F-62

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments--Continued

(i)Risk considerations--Continued

d)Liquidity risk --Continued

The maturities of financial instruments of loans, financing, suppliers, debentures, forward transactions, obligations assumed on assignment of receivables, suppliers, payables for purchase of properties and advance from customers are as follows:

Year ended December 31, 2019   
Liabilities Less than 1 year  1 to 3 years  4 to 5 years  Over 5 years  Total 
Loans and financing (Note 12)  426,124   107,029         533,153 
Debentures (Note 13)  158,179   39,346         197,525 
Obligations assumed on assignment of receivables (Note 14)  20,526   15,337   3,640   858   40,361 
Suppliers (Note 15 and Note 20.ii.a)  95,450   1,382         96,832 
Payable for purchase of properties and advances from customers (Note 17)  117,515   73,571   19,504      210,590 
   817,794   236,665   23,144   858   1,078,461 
Assets                    
Cash and cash equivalents and short-term investments (Notes 4.1 and 4.2)  414,330            414,330 
Trade accounts receivable (Note 5)  442,542   89,831   13,227      545,600 
   856,872   89,831   13,227      959,930 

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

20.Financial instruments--Continued

 

(i)Risk considerations--Continued

 

d)Liquidity risk --Continued

 

Fair value classification --Continued

The Company uses the following classification to determine and disclose the fair value of financial instruments by the valuation technique o:

Level 1: quoted prices (without adjustments) in active markets for identical assets or liabilities;

Level 2: inputs other than the quoted market prices within Level 1 that are observable for asset or liability, either directly (as prices) or indirectly (derived from prices); and

Level 3: inputs for asset or liability not based on observable market data (unobservable inputs).

 

The classification level of fair value for financial instruments measured at fair value through profit or loss of the Company as of December 31,201531, 2019 and 20142018 is as follows:

 Fair value classification
As of December 31, 20192015Level 1Level 2Level 3
    
Financial assets   
Short-term investments (Note 4.2)-629,671401,895-

 

 Fair value classification
As of December 31, 20182014Level 1Level 2Level 3
    
Financial assets   
Short-term investments (Note 4.2)-1,047,359-

In addition, the fair value classification of financial instruments liabilities measured at fair value through profit or loss is as follows:

Fair value classification
As of December 31,2015Level 1Level 2104,856Level 3
Financial liabilities
Derivative financial instruments (Note 20.i.b)-21,674-

Fair value classification
As of December 31,2014Level 1Level 2Level 3
Financial liabilities
Derivative financial instruments (Note 20.i.b)-8,173-

 

In the years ended December 31, 20152019 and 2014,2018, there werewas no transferstransfer between the Levels 1 and 2 fair value classifications, nor were transfers between Levels 3 and 2 fair value classifications.

 

(ii)Fair value of financial instruments

 

a)Fair value measurement

 

The following estimateestimated fair values were determined using available market information and proper measurement methodologies. However, a considerable amount of judgment is necessary to interpret market information and estimate fair value. Accordingly, the estimates presented in this document are not necessarily indicative of amounts that the Company could realize in the current market. The use of different market assumptions and/or estimation methodology may have a significant effect on estimated fair values.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments --Continued—Continued

 

(ii)Fair value of financial instruments--Continued

 

a)Fair value measurement --Continued

 

The following methods and assumptions were used in order to estimate the fair value forof each financial instrument type for which the estimate of values is practicable.

 

(i)The amounts of cash and cash equivalents, short-term investments, and accounts receivable, other receivables, suppliers, and other current liabilities approximate to their fair values recorded in the consolidated financial statements.

 

(ii)The fair value of bank loans and other financial debts is estimated through future cash flows discounted using benchmark interest rates that are annually available for similar and outstanding debts or terms.

 

The most significant carrying values and fair values of financial assets and liabilities as of December 31, 20152019 and 20142018 are as follows:

    
 2015 201420192018 
 Carrying value Fair value Carrying value Fair valueCarrying valueFair valueCarrying valueFair valueClassification
         
Financial assets          
Cash and cash equivalents (Note 4.1)  82,640   82,640   109,895   109,895 12,43532,304(*)
Short-term investments (Note 4.2)  629,671   629,671   1,047,359   1,047,359 401,895104,856(*)
Trade accounts receivable (Note 5)  1,802,364   1,802,364   1,825,319   1,825,319 545,600642,009(**)
Loans receivable (Note 21.1)33,41628,409(**)
                  
Financial liabilities                  
Loans and financing (Note 12)  1,292,835   1,237,222   1,397,425   1,333,399 533,153542,909623,747555,855(**)
Debentures (Note 13)  857,958   828,387   1,189,099   802,948 197,525278,727265,666302,126(**)
Payables to venture partners (Note 15)  4,895   5,472   11,030   12,304 
Derivative financial instruments (Note 20(i)(b))  21,674   21,674   8,173   8,173 
Forward transactions – Share repurchase program (Note 15)38,879(**)
Suppliers  57,335   57,335   95,131   95,131 96,832134,581(**)
Obligations assumed on assignment of receivables(Note 14)40,36157,186(**)
Payable for purchase of properties and advances from customers (Note 17)210,590309,431(**)
Loans payable (Note 21.1)9,28015,451(**)

(*) Fair value through profit or loss

(**) Amortized cost

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Table of Contents

Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

20.Financial instruments --Continued

(ii)Fair value of financial instruments -- Continued

b)Risk of debt acceleration

As of December 31, 2015, the Company has loans and financing, with restrictive covenants related to cash generation, indebtedness ratios and other. These restrictive covenants have been complied with by the Company and do not limit its ability to conduct its business as usual.

c)Market risk

The Company carries out the development, construction and sales of real estate ventures. In addition to the risks that affect the real estate market as a whole, such as supply disruptions and volatility in the prices of construction materials and equipment, changes in the supply and demand for ventures in certain regions, strikes and environmental rules and zoning, the Company’s operations are particularly affected by the following risks:

·Brazilian economy, which may inhibit the development of the real estate industry as a whole, through the slowdown in economy, increase in interest rates, fluctuation of currency and political instability, besides other factors.

·Future impediments, as a result of a new regulation or market conditions, to index receivables using inflation indexes, as currently permitted, which could make a venture financially or economically unviable.

·The level of interest of buyers in a new venture launched or the sale price per unit necessary to sell all units may be below expectations, making the venture less profitable than expected.

·In the event of bankruptcy or significant financial difficulties of a large company of the real estate industry, the industry as a whole may be adversely affected, which could decrease the customer confidence in other companies operating in the industry.

·Local and regional real estate market conditions, such as oversupply, land shortage or significant increase in land acquisition cost.

·Risk of buyers having a negative perception of the security, convenience and appeal of the Company’s properties, as well as about their location.

F-65

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments--Continued

 

(ii)Fair value of financial instruments -- Continued

c)Market risk--Continued

 

·a)The Company’s profit margins may be affected by the increase in operating costs, including investments, insurance premium, taxes in general and government rates.Risk of debt acceleration

 

·The opportunities for development may decrease.

As of December 31, 2019, the Company has loans and financing contracts with restrictive covenants related to cash generation, indebtedness ratios, capitalization, debt coverage, maintenance of shareholding position, and others. The breach of such obligations by the Company may give rise to the acceleration of its debts and/or acceleration of other debts of the Company, including due to the performance of any cross default or cross acceleration clauses, which may negatively impact the profit or loss of the Company and the value of its shares.

 

·The building and sale of real estate units may not be completed as scheduled, thus increasing the construction costs or cancellation of sale contracts and fines for delay in construction work.

As of December 31, 2019, the Company and its subsidiaries were in compliance with the contractual covenants provided for in our debentures and our credit instruments, except for three SFH loans, for which we need to re-establish their guarantees. Currently, the Company is in the process of negotiating the re-establishment of the related SFH loans guarantees and we have not received an acceleration notice in connection with such non-compliance. The Company analyzed all of its other debt agreements and did not identify any impact on its restrictive covenants in such other debt agreements resulting from this non-compliance and it does not limit its ability to conduct its business as usual.

·Delinquency after the delivery of units acquired on credit. The Company has the right to file a collection action to receive the amounts due and/or repossess the real estate unit from the delinquent buyer, not being possible to guarantee that it will be able to recover the total amount of the debt balance or, once the real estate unit is repossessed, its sale on satisfactory conditions.

·Occasional change in the policies of the National Monetary Council (CMN) on the investment of funds in the National Housing System (SFH) may reduce the supply of financing to customers.

·Drop in the market value of land held in inventory, before the development of a real estate venture to which it was intended, and the incapacity to maintain the margins that were previously projected for such developments.

 

(iii)Capital stock management

 

The objective of the Company’s capital stock management is to guarantee thatthe maintenance of a strong credit rating is maintained in institutions and an optimum capital ratio, in order to support the Company’s business and maximize value to shareholders.

 

The Company controls its capital structure by making adjustments and adapting to current economic conditions. In order to maintain its structure adjusted, the Company may pay dividends, return on capital to shareholders, raisetake out new loans and issue debentures, among others.

 

There were no changes in objectives, policies or procedures during the years ended December 31, 20152019 and 2014.2018.

 

The Company included in its net debt structure: loans and financing, debentures, obligations assumed on assignment of receivables, and payables to venture partners less cash and cash equivalents and short-term investments (cash and cash equivalents and short-term investments):

 

    
  2019  2018 
       
Loans and financing (Note 12)  533,153   623,747 
Debentures (Note 13)  197,525   265,666 
( - ) Cash and cash equivalents and (Note 4.1 e 4.2)  (414,330)  (137,160)
Net debt  316,348   752,253 
Equity  882,845   493,191 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

20.Financial instruments--Continued

(iii)Capital management --Continued

   
  2015 2014
     
Loans and financing (Note 12)  1,292,835   1,397,425 
Debentures (Note 13)  857,958   1,189,099 
Obligations assumed on assignment of receivables (Note 14)  59,293   56,129 
Payables to venture partners (Note 15)  4,895   11,030 
( - ) Cash and cash equivalents and short-term investments (Note 4.1 and 4.2)
  (712,311)  (1,157,254)
Net debt  1,502,670   1,496,429 
Equity  3,097,236   3,058,403 
Equity and net debt  4,599,906   4,554,832 

 

(iv)Sensitivity analysis

 

The sensitivity analysis of financial instruments for the yearsyear ended December 31, 2015, except swap contracts, which are analyzed through their due dates, describing2019 describes the risks that may incurgive rise to material losses onchanges in the Company’s profit or loss, as provided for by CVM, through Rule No. 475/08, in order to show a 10%, 25% and 50% increase/decrease in the risk variable considered.

 

As of December 31, 2015, as well as derivatives,2019, besides the derivative instruments, the Company has the following financial instruments:

 

a)Short-term investments, loans and financing and debentures linked to the Interbank Deposit CertificatesCertificate (CDI);

b)Loans and financing and debentures linked to the Referential Rate (TR) and CDI, and debentures indexedlinked to the CDI IPCA and TR;Broad Consumer Price Index (IPCA);

c)Accounts receivable and payable for purchase of properties, linked to the National Civil Construction Index (INCC) and General Market Price Index (IGP-M).

 

For the sensitivity analysis in the year ended December 31, 2015,2019, the Company considered the interest rates of investments, loans and accounts receivables,receivable, the CDI rate at 14.14%5.96%, the TR at 1.48%0%, the INCC rate at 7.22%4.15%, IPCA at 4.31% and the National Consumer Price Index – Extended (IPCA)IGP-M at 10.67%7.32%. The scenarios considered were as follows:

 

Scenario I - Probable: 10% increase/decrease in the risk variables used for pricing

Scenario II - Possible: 25% increase/decrease in the risk variables used for pricing

Scenario III - Remote:Remote: 50% increase/decrease in the risk variables used for pricing

F-67

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

20.Financial instruments --Continued

(iv)Sensitivity analysis --Continued

 

The Company shows in the following chart the sensitivity to risks to which the Company is exposed, taking into account that the possible effects would impact the future results, based on the scenarios above,exposures shown as of December 31, 2015.2019. The effects on equity are basically the same ones onof the profit or loss.loss ones.

 

    Scenario
    I II III III II I
Instrument Risk Increase 10% Increase 25% Increase 50% Decrease 50% Decrease 25% Decrease 10%
               
Short-term investments  Increase/decrease of CDI   7,045   17,610   35,221   (35,221)  (17,610)  (7,045)
Loans and financing  Increase/decrease of CDI   (3,175)  (7,937)  (15,875)  15,875   7,937   3,175 
Debentures  Increase/decrease of CDI   (1,615)  (4,038)  (8,077)  8,077   4,038   1,615 
Derivative financial instruments  Increase/decrease of CDI   (6,065)  (14,616)  (27,896)  33,357   15,823   6,090 
                             
Net effect of CDI variation      (3,810)  (8,981)  (16,627)  22,088   10,188   3,835 
                             
Loans and financing  Increase/decrease of TR   (1,286)  (3,213)  (6,427)  6,427   3,213   1,286 
Debentures  Increase/decrease of TR   (1,199)  (2,998)  (5,997)  5,997   2,998   1,199 
                             
Net effect of TR variation      (2,485)  (6,211)  (12,424)  12,424   6,211   2,485 
                             
Debentures  Increase/decrease of IPCA   (705)  (1,762)  (3,525)  3,525   1,762   705 
                             
Net effect of IPCA variation      (705)  (1,762)  (3,525)  3,525   1,762   705 
                             
Accounts receivable  Increase/decrease of INCC   12,263   30,659   61,318   (61,318)  (30,659)  (12,263)
                             
Net effect of INCC variation      12,263   30,659   61,318   (61,318)  (30,659)  (12,263)
                             
  Scenario
  IIIIIIIIIIII
TransactionRiskIncrease  10%Increase  25%Increase  50%Decrease 50%Decrease 25%Decrease 10%
        
Financial investmentsIncrease/decrease of CDI2,0725,17910,359(2,072)(5,179)(10,359)
Loans and financingIncrease/decrease of CDI(1,429)(3,573)(7,145)1,4293,5737,145
DebenturesIncrease/decrease of CDI(804)(2,010)(4,020)8042,0104,020
        
Net effect of CDI change (161)(404)(806)161404806
        
Loans and financingIncrease/decrease of TR------
        
Net effect of TR change ------
        
DebenturesIncrease/decrease of IPCA(157)(393)(785)157393785
        
Net effect of IPCA change (157)(393)(785)157393785
        
ReceivablesIncrease/decrease of INCC1,1912,9775,954(1,191)(3,082)(5,954)
Payables for purchase of propertiesIncrease/decrease of INCC(886)(2,216)(4,431)8862,1074,431
        
Net effect of INCC change 3057611,523(305)(975)(1,523)
        
ReceivablesIncrease/decrease of IGP-M1,7634,4088,816(1,763)(4,408)(8,816)
        
Net effect of IGP-M change 1,7634,4088,816(1,763)(4,408)(8,816)

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

21.Related parties

 

21.1.Balances with related parties

 

The transactions between the Company and related companies are made under conditions and prices established between the parties.

   
Current accounts 2015 2014
     
Assets    
Current account(a):    
Total SPEs  86,010   139,947 
Condominium and consortia (b) and thirdparty’s works (c)  9,108   2,785 
Loan receivable (d)  109,193   107,067 
   204,311   249,799 
         
Current portion  95,118   142,732 
Non-current  109,193   107,067 
         
Liabilities        
Current account (a):        
 Total SPEs and Tenda  (76,620)  (156,503)
Loan payable (d)  (51,482)  - 
   (128,102)  (156,503)
         
Current portion  (87,100)  (156,503)
Non-current portion  (41.002)  - 

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

21.Related parties --Continued

21.1.Balances with related parties --Continued
    
Current account 2019  2018 
       
Assets        
Current account (a):        
Total SPEs  64,441   51,624 
Subsidiaries  57,027   43,004 
Jointly-controlled investees  7,381   8,587 
Associates  33   33 
  Condominium, consortia (b) and third-party works(c)  13,165   13,036 
Loans receivable  (d) (Note 20.ii.a)  33,416   28,409 
Dividends receivable      
   111,022   93,069 
         
Current  77,606   64,660 
Non-current  33,416   28,409 
         
Liabilities        
Current account (a):        
 Total SPEs  (55,104)  (40,713)
Subsidiaries  (29,211)  (15,780)
Jointly-controlled investees  (23,229)  (16,532)
Associates  (2,664)  (8,401)
Loans payables  (d) (Note 20.ii.a)  (9,280)  (15,451)
   (64,384)  (56,164)
         
Current  (64,384)  (56,164)
Non-current      

 

(a)The Company participates in the development of real estate ventures with other partners, directly or through related parties, based on the formation of condominiums and/or consortia. The management structure of these ventures and the cash management are centralized in the lead partner of the venture, which manages the construction schedule and budgets. Thus, the lead partner ensures that the investments of the necessary funds are made and allocated as planned. The sources and use of resources of the venture are reflected in these balances, observing the respective interest of each investor, which are not subject to indexation or financial charges and do not have a fixed maturity date. Such transactionsoperations aim at simplifying business relations that demand the joint management of amounts reciprocally owed by the involved parties and, consequently, the control over the change of amounts reciprocally grantedprovided which offset against each other at the time the current account is closed. The average term for the development and completion of the ventures in which the resources are invested is between 24 and 30 months. The Company receives a compensation for the management of these ventures.

 

(b)Refers to transactions between the consortia leader,lead partner of consortium, partners, and condominiums.

 

(c)Refers to operations in third-party’s works.

 

(d)The loans of the Company with its associates,subsidiaries, shown below, are made to provide associatessubsidiaries with cash to carry out their respective activities, subject to the respective agreed-upon financial charges. The businesses and operations with related parties are carried out in extremely commutative conditions,strictly at arm’s length, in order to protect the interests of the both parties involved in the business. The composition, nature and condition of loan receivable by the Company are shown below. Maturities for these loans range from June 2016 to the duration of the related real estate developments.

 

The composition, nature and conditions of the balances of loans receivable and payable of the Company are as follows. Loans have maturity from January 2020 and are tied to the cash flows of the related ventures.

 Consolidated  
 20152014NatureInterest rate
     
Engenho-17Construction12% p.a. + IGPM
Tembok Planej. E Desenv. Imob. Ltda. (Vistta Laguna)11,0449,891Construction12% p.a. + IGPM
Acquarelle Civilcorp Incorporações Ltda.287493Construction12% p.a. + IGPM
Manhattan Residencial I53,86249,358Construction10% p.a. + TR
Target Offices & Mall3,105-Construction12% p.a. + IGPM
Scena Laguna - Tembok Planej. e Desenv. Imob. Ltda.10,5208,361Construction12% p.a. + IGPM
Fit Jardim Botanico SPE Emp. Imob. Ltda.-10,164Construction113.5% of 126.5% of CDI
Fit 09 SPE Emp. Imob. Ltda.-8,422Construction120% of 126.5% of CDI
Fit 19 SPE Emp. Imob. Ltda.14,0974,037Construction113.5% of 126.5% of CDI
Acedio SPE Emp. Imob. Ltda.3,260936Construction113.5% of 126.5% of CDI
Atua Construtora e Incorporadora S.A.12,16812,168Construction113.50% to 112% of CDI
Blue 02 Empreendimentos Imobiliários-2,471ConstructionIGPM + interest at 12% p.a.
Other850749ConstructionSeveral
Total loan receivable109,193107,067  
     
Fit 34 SPE Empreendimentos Imobiliários Ltda.21,925-Construction6% p.a.
Fit 03 SPE Empreendimentos Imobiliários Ltda.7,912-Construction6% p.a.
Fit 11 SPE Empreendimentos Imobiliários Ltda.5,910-Construction6% p.a.
Gafisa Spe-113 Empr Imob3,788-Construction100% of CDI
Parque dos Pássaros2,725-Construction6% p.a.
Dubai Residencial2,650-Construction6% p.a.
Parque Arvores2,270-Construction6% p.a.
Parque Aguas1,772-Construction6% p.a.
Fit 31 SPE Empreendimentos Imobiliários Ltda.1,298-Construction6% p.a.
Araçagy1,232-Construction6% p.a.
Total loan payable51,482-  

    
 20192018NatureInterest rate
     
Lagunas - Tembok Planej. e Desenv. Imob. Ltda.           6,2725,486Construction12% p.a. + IGPM
Manhattan Residencial I - OAS Empreendimentos              392685Construction10% p.a. + TR
Target Offices & Mall- SPE Yogo Part. Emp. Imob. e Comasa Const.         26,75222,238Construction12% p.a. + IGPM
Total receivable         33,41628,409  
     
Dubai Residencial - Franere, Com. Const. e Imob. Ltda.1,0254,787 Construction 6% p.a.  
Parque Árvores - Franere, Com. Const. e Imob. Ltda.5,3727,877 Construction 6% p.a.  
Parque Águas - Franere, Com. Const. e Imob. Ltda.2,8832,787 Construction 6% p.a.  
Total payable9,28015,451 Construction 

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

21.Related parties--Continued

21.1.Balances with related parties--Continued

 

In the year ended December 31, 20152019 the recognized financialfinance income from interest on loans amounted to R$17,3864,195 (R$11,1204,899 in 2014 and R$12,182 in 2013) in the consolidated statement2018) (Note 25)24).

 

InformationThe information regarding management transactions and compensation is described in Note25.Note 25.

 

21.2.Endorsements, guarantees and sureties

 

The financial transactions of the subsidiaries are guaranteed by the endorsement or surety in proportion to the interest of the Company in the capital stock of such companies, in the amount of R$1,067,950132,336 as of December 31, 20152019 (R$973,808218,344 in 2014)2018).

 

22.Net operating revenue

   
 201920182017
    
Gross operating revenue   
Real estate development, sale, barter transactions and construction services390,0321,006,317647,780
(Recognition) Reversal of allowance for expected losses and cancelled contracts (Note 5)47,25741,828187,284
Taxes on sale of real estate and services(36,824)(87,254)(48,890)
Net operating revenue400,465960,891786,174

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

22.Net operating revenue

  Consolidated
  2015 2014 2013
Gross operating revenue      
Real estate development, sale, barter transactions and construction services  2,475,928   2,256,189   2,618,737 
(Recognition) Reversal of allowance for doubtful accounts and provision for cancelled contracts (Note 5)  9,363   69,479   81,122 
Taxes on sale of real estate and services  (190,972)  (174,670)  (218,648)
Net operating revenue  2,294,319   2,150,998   2,481,211 

 

23.Costs and expenses by nature

 

These are represented by the following:following:

 

    
 Consolidated 2019 2018 2017
 2015 2014 2013      
Cost of real estate development and sale:            
Construction cost  (994,556)  (949,960)  (1,137,678)  (199,538)  (406,156)  (428,458)
Land cost  (312,205)  (278,682)  (327,721)  (67,082)  (211,962)  (142,544)
Development cost  (107,008)  (105,594)  (133,350)  (6,227)  (28,799)  (31,130)
Provision for loss on realization of properties for sale (Note 6 and 8)  27,079   (63,145)  (147,332)
Capitalized financial charges (Note 12)  (165,969)  (171,590)  (157,212)  (38,275)  (112,904)  (116,516)
Maintenance / warranty  (57,222)  (48,557)  (34,578)  1,359   (23,203)  (40,506)
Provision for cancelled contracts (Note 5)  (30,545)  (54,863)  (73,227)
Total cost of real estate development and sale  (1,667,505)  (1,609,246)  (1,863,766)  (282,684)  (846,169)  (906,486)
                        
Commercial expenses:            
Product marketing expenses  (73,271)  (60,433)  (54,128)
Selling expenses:            
Product marketing  (3,950)  (40,137)  (37,407)
Brokerage and sale commission  (24,093)  (30,656)  (125,076)  (4,331)  (29,659)  (29,652)
Customer Relationship Management (CRM) and corporate marketing expenses  (44,663)  (45,622)  (25,878)
Customer Relationship Management (CRM) and corporate marketing  (6,473)  (14,386)  (19,815)
Other  (21,233)  (11,330)  (10,567)  (135)  (249)  (694)
Total commercial expenses  (163,260)  (148,041)  (215,649)
Total selling expenses  (14,889)  (84,431)  (87,568)
                        
General and administrative expenses:                        
Salaries and payroll charges  (74,242)  (79,515)  (92,574)  (20,650)  (33,921)  (33,547)
Employee benefits  (7,879)  (7,575)  (8,398)  (1,982)  (3,554)  (3,236)
Travel and utilities  (1,923)  (2,761)  (4,865)  (218)  (922)  (437)
Services  (24,289)  (30,485)  (17,306)  (16,035)  (14,011)  (17,125)
Rents and condominium fees  (13,387)  (14,189)  (9,820)  (3,803)  (5,780)  (5,567)
IT  (22,670)  (24,409)  (17,519)  (7,751)  (11,026)  (13,559)
Stock option plan (Note 18.3)  (9,964)  (16,327)  (17,419)  2,366   (1,927)  (4,964)
Reserve for profit sharing (Note 25.iii)  (25,502)  (35,006)  (59,651)
Reversal (Expense) of reserve for profit sharing (Note 25.iii)  (5,000)  14,750   (13,375)
Depreciation and amortization (Notes 10 and 11)  (14,181)  (21,290)  (57,522)
Other  (1,557)  (1,639)  (6,471)  (1,060)  (698)  (903)
Total general and administrative expenses  (181,413)  (211,906)  (234,023)  (68,314)  (78,379)  (150,235)
                        
Other income (expenses), net:                        
Expenses with lawsuits (Note 16)  (118,449)  (113,064)  (78,402)  (20,598)  (172,432)  (107,848)
Expenses with the adjustment to the stock option plan balance of AUSA (Note 18.3)  -   (17,679)  - 
Other  (41,752)  (10,606)  (7,709)
Total other income/(expenses), net  (160,201)  (141,349)  (86,111)
Loss on realization of investment stated at fair value (Note 9)  —     (112,800)  (101,953)
Result of divestment in associate (Note 9.1)  (78,008)  —     —   
Other (a)  66,979   (13,703)  (1,749)
Total other income (expenses), net  (31,627)  (298,935)  (211,550)

 

(a)Amount of R$66,391 in the consolidated statements related to the outcome of the arbitration decision related to venture construction contracts with partners, which was awarded on November 12, 2019 by the Arbitration Court, managed by the Center for Arbitration and Mediation of the Chamber of Commerce Brazil – Canada.

24.Finance income (expenses)

     
  2019 2018 2017
Finance income      
Income from financial investments  12,649   11,955   19,876 
Derivative transactions (Note 20.i.b)  —     763   818 
Finance income on loans (Note 21.i)  4,195   4,898   2,220 
Other finance income  362   1,937   6,819 
Total finance income  17,206   19,553   29,733 
             
Finance expenses            
Interest on funding, net of capitalization (Note 12)  (59,379)  (68,380)  (103,827)
Amortization of debenture cost  (2,857)  (4,224)  (5,016)
Banking expenses  (8,931)  (6,919)  (16,714)
Offered discount and other finance expenses  (5,663)  (20,551)  (11,444)
Total finance expenses  (76,830)  (100,074)  (137,001)

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

24.25.Financial income (expenses)Transactions with management and employees

   
  2015 2014 2013
Financial income      
Income from financial investments  99,551   132,980   56,095 
Financial income on loans (Note 21)  17,386   11,120   12,182 
Other financial income  7,194   12,694   12,806 
Total financial income  124,131   156,794   81,083 
             
Financial expenses            
Interest on funding, net of capitalization (Note 12)  (83,227)  (121,063)  (176,823)
Amortization of debenture cost  (3,831)  (4,144)  (8,020)
Payables to venture partners  (1,891)  (2,830)  (14,805)
Banking expenses  (6,676)  (3,818)  (12,312)
Derivative transactions (Note 20 (i) (b))  (17,151)  (7,492)  (5,102)
Discount in securitization transaction  (308)  (240)  (8,820)
Offered discount and other financial expenses  (49,174)  (26,125)  (17,704)
Total financial expenses  (162,258)  (165,712)  (243,586)

25.Transactions with management and employees

 

(i)Management compensation

 

The amounts recorded in the account “general and administrative expenses” forIn the years ended December 31, 2015, 20142019, 2018 and 2013,2017, the amounts recorded in the line item “General and administrative expenses” related to the compensation of the Company’s key management personnelManagement are as follows:

 

Management compensation Management compensation 
Year ended December 31, 2015Board of DirectorsStatutory BoardFiscal Council
Year ended December 31, 2019Board of DirectorsExecutive ManagementFiscal Council
     
Number of members7531063
Annual fixed compensation (in R$)1,6933,968198  
Salary / Fees1,6933,575198
Salary/Fees7655,91593
Direct and indirect benefits-393--10-
Monthly compensation (in R$)14133117
Other (INSS)1531,08319
Average monthly compensation (in R$)775849
Total compensation1,6933,9681989187,008112
Profit sharing (Note 25 (iii))-3,185-
Profit sharing (Note 25.iii)--
Total compensation and profit sharing1,6937,1531989187,008112

 Management compensation 
Year ended December 31, 2018Board of DirectorsExecutive ManagementFiscal Council
    
Number of members5,55,02,8
Annual fixed compensation (in R$)   
Salary/Fees1,2643,576183
Direct and indirect benefits-151-
Other (INSS)25371537
Average monthly compensation (in R$)12637018
Total compensation1,5174,442220
Profit sharing (Note 25.iii)---
Total compensation and profit sharing1,5174,442220

 Management compensation 
Year ended December 31, 2017Board of DirectorsExecutive ManagementFiscal Council
    
Number of members753
Annual fixed compensation (in R$)   
Salary / Fees1,6933,460203
Direct and indirect benefits-203-
Others (INSS)33969241
Monthly compensation (in R$)16936320
Total compensation2,0324,355244
Profit sharing (Note 25 (iii))-1,625-
Total compensation and profit sharing2,0325,980244

 

 Management compensation 
Year ended December 31, 2014Board of DirectorsStatutory BoardFiscal Council
    
Number of members853
Annual fixed compensation (in R$)1,7394,004189
Salary / Fees1,7203,630189
Direct and indirect benefits19374-
Monthly compensation (in R$)14533416
Total compensation1,7394,004189
Profit sharing (Note 25 (iii))-3,412-
Total compensation and profit sharing1,7397,416189

F-71

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

25.Transactions with management and employees--Continued

(i)Management compensation --Continued

 Management compensation 
Year ended December 31, 2013Board of DirectorsStatutory BoardFiscal Council
    
Number of members973
Annual fixed compensation (in R$)1,8994,872166
Salary / Fees1,8524,485166
Direct and indirect benefits47387-
Monthly compensation (in R$)15840614
Total compensation1,8994,872166
Profit sharing (Note 25 (iii))-6,543-
Total compensation and profit sharing1,89911,415166

TheThere is no amount related to the stock compensationexpenses with option grant to current management members of the Company’s management was R$4,428 in the year ended December 31, 2015 (R$9,744 and R$7,164Company for the years ended December 31, 20142019 and 2013, respectively)2018 (R$3,317 in 2017).

 

The maximum aggregate compensation of the Company’s management members for the year 2015,2019 was established at R$13,228,7,782 (R$23,599 in 2018), as fixed and variable compensation, as approved at the Annual Shareholders’ Meeting held on April 16, 2015.30, 2019.

 

On the same occasion the compensation limit of the Fiscal Council members for their next term of office that ends in the Annual Shareholders’ Meeting to be held in 2016, was approved at R$205.

(ii)Sales transactions

 

The subsidiary Tenda has an administrative structure segregated fromIn the Company, therefore, the amounts recorded in the heading “Generalyears ended December 31, 2019 and Administrative Expenses” in the consolidated balance are added by the compensationDecember 31, 2018 no transaction of itssale of units to current Management members and are as follows:

 Management compensation 
Year ended December 31, 2015Board of DirectorsStatutory BoardFiscal Council
    
Number of members1010.333
Annual fixed compensation (in R$)3365,66257
Salary / Fees3364,95957
Direct and fringe benefits-703-
Monthly compensation (in R$)284725
Total compensation3365,66257
Profit sharing (Note 25 (iii))-6,178-
Total compensation and profit sharing33611,84057

 Management compensation 
Year ended December 31, 2014Board of DirectorsStatutory BoardFiscal Council
    
Number of members10103
Annual fixed compensation (in R$)1264,68055
Salary / Fees1264,11655
Direct and fringe benefits-564-
Monthly compensation (in R$)113905
Total compensation1264,68055
Profit sharing (Note 25 (iii))-4,704-
Total compensation and profit sharing1269,38455

was carried out.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

25.Transactions with management and employees--Continued

(i)Management compensation --Continued

 Management compensation 
Year ended December 31, 2013Board of DirectorsStatutory BoardFiscal Council
    
Number of members483
Annual fixed compensation (in R$)-4,01855
Salary / Fees-3,57455
Direct and fringe benefits-444-
Monthly compensation (in R$)-3355
Total compensation-4,01855
Profit sharing (Note 25 (iii))-5,072-
Total compensation and profit sharing-9,09055

The maximum aggregate compensation of the subsidiary Tenda’s management members for the year 2015, was established at R$14,696, as approved at the Annual Shareholders’ Meeting held on April 22, 2015.

On the same occasion the compensation limit of the Fiscal Council members for their next term of office that ends in the Annual Shareholders’ Meeting to be held in 2016, was approved at R$149.

(ii)Sales

In the year ended December 31, 2015, there were no units sold to the Management (R$1,513 in 2014) and the total receivables is R$1,610 (R$4,686 in 2014).

 

(iii)Profit sharing

 

The Company has a profit sharing plan that entitles its employees and management members, andas well as those of its subsidiaries, to participate in the distribution of profits of the Company.

 

This plan is tied to the achievement of specific targets, established, agreed-upon and approved by the Board of Directors at the beginning of each year.

 

In the year ended December 31, 2015,2019, the Company recorded a provisionreversal of expense for profit sharing amounting to R$25,5025,000 in the consolidated statement (R$35,006(reversal of R$14,750 in 2014)2018) in the account “General and Administrative Expenses" (NotaExpenses " (Note 23).

 

201520142013     
  2019  2018 2017 
Executive officers9,3638,11611,615
       
Executive officers (Note 25.i)        1,625 
Other employees16,13926,89048,036  5,000      11,750 
25,50235,00659,651
Reserve reversal     (14,750)   
Total profit sharing  5,000   (14,750)  13,375 

 

Profit sharing is calculated and reserved based on the achievement of the Company’s targets for the period. An assessment is performed subsequent to year-end of the achievement of the Company’s and its employees’ targets. The payment shall be made in April2016.year.

 

As shown in the previous tables and paragraphs, the aggregate compensation of Management and Fiscal Council members of the Company is according to the limit approved at the Annual Shareholders’ Meeting held on April 16, 2015.

F-73

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)27, 2018.

 

26.Insurance

 

Gafisa S.A. and its subsidiaries maintain insurance policies against engineering risk, barter guarantee, guarantee for the completion of the workbond, and civil liability related to unintentional personal damages caused to third parties and material damages to tangible assets, as well as against fire hazards, lightning strikes, electrical damages, natural disasters and gas explosion. The contracted coverage is considered sufficient by management to cover possible risks involving its assets and/or responsibilities.

 

The liabilities covered by insurance and the respective amounts as of December 31, 20152019 are as follows:

 

Insurance typeCoverage – R$ thousand
Engineering risks and guarantee for completion of workbond2,265,983943,646
Civil liability (Directors and Officers – D&O)161,228
 195,240
Total2,461,2231,104,874

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Gafisa S.A.

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

27.EarningEarnings (loss) per share

 

In accordance with CPC 41, the Company presentsis required to report basic and diluted losslosses per share. The comparison data of basic and diluted earnings/losslosses per share is based on the weighted average number of shares outstanding for the year, and all dilutive potential shares outstanding for each reported year, presented, respectively.

 

Diluted earnings per share is computed similarly to basic earnings per share except that the outstanding shares are increased to include the number of additional shares that would have been outstanding if the potential dilutive shares attributable to stock options and redeemable shares of non-controllingnoncontrolling interest had been issued during the respective periods, utilizingusing the weighted average stock price.

 

The following table shows the calculation of basic and diluted profit or lossearnings and losses per share. In view of the losslosses for the yearyears ended December 31, 2014,2019 and 2018, shares with dilutive potential are not considered, because the impact would be antidilutive.

       
  2015 2014 2013
Basic numerator      
Proposed dividends and interest on equity  17,682   -   150,067 
Undistributed earnings (loss)  56,767   (42,549)  717,376 
Net income (loss), attributable to shareholders of Gafisa  74,449   (42,549)  867,443 
             
Basic denominator (in thousands of shares)            
Weighted average number of shares  367,572   401,905   426,300 
             
Basic earning (loss) per share in Reais, attributable to shareholders of Gafisa  0.2025   (0.1059)  2,0348 
          
  2019  2018  2017 
Basic numerator            
Undistributed loss from continued operations  (26,040)  (419,526)  (858,415)
Undistributed profit (loss) from discontinued operations        98,175 
Undistributed profit (loss), available for the holders of common shares  (26,040)  (419,526)  (760,240)
             
Basic denominator (in thousands of shares)            
Weighted average number of shares (Note 18.1)  68,584   41,147   26,891 
             
Basic earnings (loss) per share in Reais  (0.380)  (10.196)  (28,271)
From continued operations  (0.380)  (10.196)  (31,922)
From discontinued operations          3,651 
Diluted numerator         
Undistributed loss from continued operations  (26,040)  (419,526)  (858,415)
Undistributed profit (loss) from discontinued operations        98,175 
Undistributed loss, available for the holders of common shares  (26,040)  (419,526)  (760,240)
             
Diluted denominator (in thousands of shares)            
Weighted average number of shares (Note 18.1)  68,584   41,147   26,891 
Stock options  836   572   61 
Anti-dilution effect  (836)  (572)  (61)
Diluted weighted average number of shares  68,584   41,147   26,891 
             
             
Diluted earnings (loss) per share in Reais  (0.380)  (10.196)  (28.271)
From continued operations  (0.380)  (10.196)  (31.922)
From discontinued operations        3.651 

28.Segment information

With the completion of the discontinuation of Tenda’s operations (Note 8.2), the Company operates only in one segment, according to the nature of its products.

The reports used for making decisions are the consolidated financial statements, and no longer the analysis by operating segments. Therefore, in line with CPC 22 – Operating Segments, the Company understands that there is no reportable segment to be disclosed in the years ended December 31, 2019, 2018 and 2017.

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

27.Earning (loss) per share--Continued

Diluted numerator      
Proposed dividends and interest on equity  17,682   -   150,067 
Undistributed earning (loss)  56,767   (42,549)  717,376 
Net income (loss), attributable to shareholders of Gafisa  74,449   (42,549)  867,443 
             
Diluted denominator (in thousands of shares)            
Weighted average number of shares  367,572   401,905   426,300 
Stock options  2,514   -   2,584 
Diluted weighted average number of shares  370,086   401,905   428,884 
             
             
Diluted earning (loss) per share in Reais, attributable to shareholders of Gafisa  0.2012   (0.1059)  (2,0226)
             

28.Segment information

The Company's management assesses segment information on the basis of different business segments rather than based on the geographical regions of operations.

The Company operates in the following segments: Gafisa (for ventures targeted at high and medium income) and Tenda (for ventures targeted at low income).

The Company's chief executive officer, who is responsible for allocating resources to businesses and monitoring their progresses, uses economic present value data, which is derived from a combination of historical and forecasted operating results.

The table below provides certain information related to each segment in the statement of profit or loss and balance sheet.

Segment information provided to the chief operating decision maker does not segregate operating expenses. No revenues from an individual client represented more than 10% of net sales and/or services.

       
  Gafisa S.A. Tenda 2015
Net operating revenue  1,443,357   850,962   2,294,319 
Operating costs  (1,061,921)  (605,584)  (1,667,505)
             
Gross profit  381,436   245,378   626,814 
             
Selling expenses  (97,949)  (65,311)  (163,260)
General and administrative expenses  (97,442)  (83,971)  (181,413)
Other income / (expenses), net  (107,634)  (52,567)  (160,201)
Depreciation and amortization  (32,585)  (14,835)  (47,420)
Financial expenses  (121,207)  (41,051)  (162,258)
Financial income  77,306   46,825   124,131 
Tax expenses  (658)  (6,522)  (7,180)
             
Profit (loss) for the year attributed to the shareholders of Gafisa  44,129   30,320   74,449 
             
Customers (short and long term)  1,322,949   479,415   1,802,364 
Inventories (short and long term)  1,896,613   734,004   2,630,617 
Other assets  1,635,110   692,241   2,327,351 
             
Total assets  4,854,672   1,905,660   6,760,332 
             
Total liabilities  2,884,249   778,846   3,663,095 

F-75

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

28.Segment information--Continued

  Gafisa S.A. Tenda 2014
Net operating revenue  1,580,860   570,138   2,150,998 
Operating costs  (1,164,998)  (444,248)  (1,609,246)
             
Gross profit  415,862   125,890   541,752 
             
Selling expenses  (95,063)  (52,978)  (148,041)
General and administrative expenses  (124,833)  (87,073)  (211,906)
Other income / (expenses), net  (79,113)  (62,236)  (141,349)
Depreciation and amortization  (63,607)  (15,644)  (79,251)
Financial expenses  (114,371)  (51,341)  (165,712)
Financial income  98,121   58,673   156,794 
Tax expenses  (8,947)  (6,328)  (15,275)
             
Profit (loss) for the year attributed to the shareholders of Gafisa  66,888   (109,437)  (42,549)
             
Customers (short and long term)  1,484,766   340,553   1,825,319 
Inventories (short and long term)  1,734,634   777,708   2,512,342 
Other assets  1,861,263   1,006,928   2,868,191 
             
Total assets  5,080,663   2,125,189   7,205,852 
             
Total liabilities  3,104,606   1,042,843   4,147,449 

       
  Gafisa S.A. Tenda 2013
Net operating revenue  1,663,751   817,460   2,481,211 
Operating costs  (1,111,550)  (752,216)  (1,863,766)
             
Gross profit  552,201   65,244   617,444 
             
Selling expenses  (138,093)  (77,556)  (215,649)
General and administrative expenses  (136,720)  (97,303)  (234,023)
Depreciation and amortization  (51,488)  (11,526)  (63,014)
Financial expenses  (202,239)  (41,347)  (243,586)
Financial income  43,548   37,535   81,083 
Tax expenses  5,839   (8,651)  (2,812)
             
Net profit (loss) for the year from continuing operations  363,725   (127,169)  236,556 
             
Net profit (loss) for the year from discontinued operations  588,574   42,548   631,122 
             
Customers (short and long term)  1,662,572   561,096   2,223,668 
Inventories (short and long term)  1,420,359   674,055   2,094,414 
Other assets  2,658,263   1,206,685   3,864,948 
             
Total assets  5,741,194   2,441,836   8,183,030 
             
Total liabilities  3,679,292   1,289,255   4,968,547 

F-76

Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

29.Real estate ventures under construction – information and commitments

 

In ordercompliance with Circular Letter CVM/SNC/SEP 02/2018, related to meet the provisionsrecognition of paragraphs 20 and 21 of ICPC 02, the recognized revenue amounts and incurred costs are shown in the statement of profit or loss, and the advances received in the account “Payablesfrom contracts for purchase and sale of property and advances from customer”. Thereal state units not yet completed in Brazilian real estate development companies, the Company shows belowreports information on the ventures underin construction as of December 31, 2015:2019:

  Consolidated 
  20152019
   
UnappropriatedUnrecognized sales revenue of units sold 777,679439,514
UnappropriatedUnrecognized estimated cost of units sold (445,265)(244,442)
UnappropriatedUnrecognized estimated cost of units in inventory (795,995)(179,102)
   
(i) UnappropriatedUnrecognized sales revenue of units sold  
Ventures under construction:  
(a) Contracted sales revenue 2,761,2191,368,112
AppropriatedRecognized sales revenue:
Recognized revenue973,277
Cancelled contracts – reversed revenue(44,679)
(b) Net recognized sales revenue (1,983,540)928,598
UnappropriatedUnrecognized sales revenue (a+b) (a) 777,679439,514

(ii) UnappropriatedIncome from damages for cancelled contracts1,933
(iii) Unrecognized sales revenue of contracts not eligible to revenue recognition31,855
(iv) Allowance for cancelled contracts (liabilities)
Adjustments in recognized revenues85,377
Adjustments in trade accounts receivable42,926
Income from damages for cancelled contracts(16,981)
Liabilities – return due to cancelled contracts25,470
(v) Unrecognized estimated costcosts of units sold  
Ventures under construction:  
(a) Estimated cost of units (1,626,339)(805,216)
Incurred cost of unitsunits: 1,181,074
Unappropriated estimated cost (b) (445,265)

Construction cost(591,011)
Cancelled contracts – construction costs30,237
(b) Net incurred cost(560,774)
Cost to be incurred of units sold (a+b) (b)(244,442)
(iii) UnappropriatedUnrecognized estimated costscost of units in inventory  
Ventures under construction:  
Estimated cost of units (1,724,372)(535,082)
Incurred cost of units (Note 6) 928,377355,980
UnappropriatedUnrecognized estimated cost (795,995)(179,102)

 

(a)The unappropriated sales revenue of units sold are measured by the face value of contracts, plus the contract adjustments and deducted fromfor cancellations, netnot considering the effects of the levied taxes and adjustment to present value, and do not include ventures that are subject to restriction due to a suspensive clause (legal period of 180 days in which the Company can cancel a development), and therefore is not appropriated to profit or loss.

 

(b)The unappropriated estimated cost of units sold and in inventory to be incurred do not include financial charges, which are appropriated to properties for sale and profit or loss (cost of real estate sold) in proportion to the real estate units sold at the extentas they are accrued, and also the warranty provision, which is appropriated to real estate units as the construction work progresses.incurred.

 

As of December 31, 2015, the percentage of consolidated assets in the financial statements related to real estate developments included in asset segregation structure was 33.1%.

As of December 31, 2019, the percentage of assets consolidated in the financial statements related to ventures included in the equity segregation structure of the development stood at 29.0% (25.1% in 2018).

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

30.Communication with regulatory bodiesAdditional Information on the Statement of Cash Flows

(i)Transactions that did not affect Cash and Cash Equivalents

 

On June 14, 2012,The Company and its subsidiaries performed the following investing and financing activities that did not affect cash and cash equivalents, which were not included in the statements of cash flows:

       
  2019  2018  2017 
          
Capital contribution (reduction)  19,846   (2,215)  (12,360)
Capitalized financial charges (Note 12)  (30,358)  (35,686)  (74,310)
Physical barter – Land (Note 17)  (29,871)  38,030   (14,648)
Divestment in Alphaville Urbanismo  78,008       
   37,625   129   (101,318)

(ii)Reconciliation of the asset and liability changes with the cash flows from financing activities

   Transactions affecting cash   Transactions not affecting cash 
Consolidated  

Opening balance 

2018

   

Funding/

Receipt

   

Interest

Payment

   

Principal

Payment

   Interests and inflation adjustment   Other   Closing balance 2019 
                             
Loans, financing and debentures (Notes 12 and 13)  (889,412)  (42,978)  (22,685)  229,845   (5,448)     (730,678)
Loans (Note 21.1)  12,958         (1,795)  12,973      24,136 
Paid-in capital (Note 18.1)  (2,521,319)  (404,961)              (2,926,280)
Capital reserve (Note 18.1)  (250,599)                    (250,599)
   (3,648,372)  (447,939)  (22,685)  228,050   7,525      (3,883,421)

31.Subsequent events

(i)UPCON Merger

According to Note 1, on December 16, 2019, the Company receiveddisclosed a subpoena fromMaterial Fact whereby it informed that it entered into a non-binding Letter of Intent with UPCON Incorporadora S.A. (“UPCON”), concerning the Securities Exchange Commission’s Divisionacquisition by the Company of Enforcement related to the Mattertotality of Certain 20-F Filer Home Builders listed at SEC, Foreign Private Issuers (FPI). The subpoena requestsshares issued by UPCON. On March 2, 2020, the Company informed that the Company produces all documents from January 1, 2010 to July 10, 2012, dateAdministrative Council for Economic Defense (CADE) approved, without restriction, the merger of the Company’s reply, related tototality of shares of UPCON into the preparationCompany. Once the required approval stages are completed, UPCON will become a wholly-owned subsidiary of our financial statements, including, among other things, copies of our financial policies and procedures, board and audit committee’s and operations committee’s meeting minutes, monthly closing reports and financial packages, any documents relating to possible financial or accounting irregularities or improprieties and internal audit reports. The SEC’s investigation is a non-public, fact-finding inquiry and is not clear what action, if any, the SEC intends to take with respect to the information it gathers. The SEC subpoena does not specify any charges. As of the publication of these financial statements, no further inquiries or communications have been received from the SEC related to this matter.Gafisa.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31.Subsequent events--Continued

(ii)Coronavirus – COVID-19

 

31. Supplemental Information - SummaryUntil the date of Principal Differences between Brazilian GAAPdisclosure of the Financial Statements, there was no impact from the outbreak of coronavirus on the Company’s operations. A Crisis Management Committee has been created that holds periodically meetings and accounting principles generally acceptedtotal availability for discussing and taking important disease prevention measures.

Awareness campaigns to promote actions that mitigate transmission (frequent hygiene, distancing, meeting through virtual platforms, exclusive service channel, among others) have been created. We have preventatively determined that back-office personnel work remotely, providing all employees with the required infrastructure they are able to work from home and interact with the internal team and external staff. We have implemented a series of educative and preventative measures targeted at our construction site employees, reducing the staff considered to be in the United States “US GAAP”risk group. The sales operations have focused on digital interactions with prospective customers.

The Company will keep following the implementation of the necessary actions with the Government Authorities, Ministry of Health, and trade associations.

Thus far, there is a high volatility in the Company’s stock price traded on the stock exchange as a result of the global concern for this pandemic and its developments and the Company has not noted a significant increase in customer default or reduction in sales volume. Moreover, the construction of ventures has been according to the original schedule.

However, due to the Covid-19 pandemic, the Company has postponed the launches planned for the yearssecond quarter to the second half of this year.

Therefore, even considering the scenario of uncertainty over the end of the pandemic for resuming activities and its negative impact on the country’s economy, based on its best estimate, management has performed an anlysis and has concluded that there is no need to recognize additional loss allowance, nor is any material adverse effect on its operations. The Company is going to keep monitoring the pandemic to continually update its projections and analysis on any effect on its financial information.

The development and evolution of the COVID-19 in Brazil and globally still has great uncertainty in its duration and severity, which may further amplify and delay the impact on the recovery of the real estate industry. Given the uncertainty about the situation, the Company currently cannot estimate the impact to the 2020 financial performance and cash flows and understands that at present, the projections used in the analysis of realization of its assets shall not suffer significant changes in the face of this event and keeps the adopted assumptions.

(iii)Renegotiation of liabilities

On March 26, 2020, the Company disclosed a Material Fact whereby it informed that it has completed the renegotiation of its financial liabilities with the financial institution Banco do Brasil S.A. in the total amount of R$138,355. This transaction enables the Company to extend the final maturity of such debts until June 2025 and reduce the finance cost. Also in the scope of the renegotiation, the Company started to have the time required to sell the units in inventory tied to this transaction. The completion of this renegotiation strengthens the Company’s capital structure and represents the building of closer credit relationships in the financial market.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31.Subsequent events--Continued

(iv)Annual and Extraordinary Shareholders’ Meeting

On April 30, 2020, the Annual and Extraordinary Shareholders’ Meeting was held, and the following resolutions were taken: (i) approval of the management accounts, examine, discuss and vote the Financial Statements for the year ended December 31, 2015, 20142019; (ii) deliberation about the allocation of net income for the year; (iii) setting of the management’s maximum aggregate compensation for the year 2020; and 2013(iv) approval of the capital reduction, to absorb the retained loss of the Company.

Additionally, in relation to the purchase and sale of UPCON Incorporadora S.A.’s shares, the following matters have been approved: (i) acquisition of the totality of stocks issued by UPCON by Gafisa; (ii) increase in the Company’s capital by R$310,001; (iii) issue of two series of debentures convertible into common shares to cover the transaction with UPCON, in the total amount of R$150,000; (iv) change in the composition of Board of Directors, which will have seven to nine members; (v) election of members to the Board of Directors; and (vi) plan for repurchasing the Company’s shares, within the limit of 10,327,558 shares to be acquired by the Company.

(v)Increase in capital and issue of convertible debentures – Beginning of the period for exercising preemptive rights

On May 11, 2020, the Company has disclosed a Notice to Shareholders containing information related to the exercise of the preemptive rights and convertible debentures, which will begin on May 15, 2020 and end on June 15, 2020.

In the scope of the capital increase, 75,610,000 registered book-entry common shares, with no par value, at the unit price of R$4.10 will be issued.

The first debenture series comprises 667 units, at the unit price of R$50,000, falling due on July 15, 2021, and interest of 0.50% p.a. paid with the principal on maturity date.

The second debenture series comprises 333 units, at the unit price of R$100,000, falling due on February 28, 2021, and interest of 0.50% p.a. paid with the principal on maturity date. Both series are adjusted by IGP-M.

The proceeds from the first and second debenture series will be used in the payment for the purchase of the totality of shares issued by UPCON and acquisition of the receivable that Gilberto Benevides is entitled from UPCON, in which he is a shareholder.

(vi)Legal claims settlements

The Company has recorded in its Financial Statements the following legal claims settlements in accordance with CPC 24 - Subsequent Event guidelines:

a.On April 30, 2020, it was settled an agreement in the amount of R$4,332 related to an attorney’s fee claim, to be paid by the transfer of ordinary shares

b.On June 12, 2020, it was settled an agreement in the amount of R$8,000 related to debt’s liability of former Company’s shareholder, Cimob Companhia Imobiliaria (Note 16 (a) (i)).

These legal claims were settled in view of economic and time benefits in connection with Company’s business and operations considerations.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32.Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017

 

(a)   Description of the GAAP differences

 

The Company’s accounting policies and its consolidated financial statements comply with and are prepared in accordance with Brazilian GAAP.

 

A summary of the Company’s principal accounting policies under Brazilian GAAP that differ significantly from US GAAP is set forth below.

 

Principles of consolidation(i)    Revenue recognition

 

Under both Brazilian GAAP for the year ended in December 31, 2013, the disposal of the Company´s 70% controlling interest in Alphaville is classified as a “discontinued operation”, given the fact that it’s a major line of business that was disposed of during that year. Forand US GAAP, purposes however, this disposal does not meet the definition of a “discontinued operation” given the fact that the Company continues to have significant influence over this entity through its 30% non-controlling interest. Whenshould apply the following steps for revenue recognition: 1) identify the contract with a significant continuing involvement like this existscustomer; 2) identify the operation cannot be seen as discontinued under US GAAP, consequently the results from operations of Alphavilleperformance obligations in the period from January 1contract; 3) determine the transaction price; 4) allocate the transaction price to November 30, 2013 are presentedthe performance obligations in their separate respective line items instead of being grouped together under the header “Net income from discontinued operations”, as under Brazilian GAAP (Note 8.2). In additioncontract; 5) recognize revenue when the gain on disposal which for Brazilian GAAP purposes is part of the discontinued operations line item is part of results from continuing operations for US GAAP purposes.

(i) Revenue recognitionCompany satisfies a performance obligation.

 

Under Brazilian GAAP, real estate development and retail land sales revenues, costs and related expenses are recognized based on the transfer of control, which is performed over time, according to the satisfaction or not of the contractual performance obligations. Revenue is recognized using the percentage-of-completion method of accounting, by project, measuring progress towards completion in terms of actual costs incurred versus total budgeted expenditures for each stageproject, this percentage being measured in view of a development.the incurred cost in relation to the total estimated cost of the respective project. Land is treated as a portion of budgeted construction costs and is appropriated proportionally to each real estate development. Under the percentage-of-completion method of accounting, revenues for work completed are recognized prior to receipt of actual cash proceeds or vice-versa. Revenues start to be recognized under the percentage-of-completion when the Company is no longer able to cancel the launched project, after the sales period established by law.

 

Under US GAAP for sale of individual units in a buildingUSGAAP, the Company follows the guidance of ASC 360-20-40-50606-10-25-30 (ASU 2014-09 – Revenue from contracts with customers (Topic 606)) to recognize the sale byof individual units upon delivery of keys for each real estate unit, as an indicator of the percentage-of-completion method, onlytransfer of the control, to depict the transfer of promised real estate units to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those real estate units. Revenues start to be recognized when the individualCompany satisfies a performance obligation at a point in time by transferring the real estate units in condominium projects are sold separately and allto customers, which occurs when the following criteria are met:customer obtains control of it. The amount of recognized revenue is the transaction price that is allocated to that performance obligation.

 

a. ConstructionASU 2014-09 is beyondeffective for annual reporting periods beginning after December 15, 2017. As a preliminary stage: Construction is not beyond a preliminary stage if engineeringtransition method, the Company has recognized the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings as of January 01, 2017 to all contracts at the date of initial adoption (Notes 3.1 and design work, execution of construction contracts, site clearance and preparation, excavation, and completion of the building foundation are incomplete.32 (c)(i).

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32.Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017--Continued

 

31. Supplemental Information - Summary(a) Description of Principal Differences between Brazilianthe GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continueddifferences--Continued

 

b. The buyer is committed to the extent of being unable to require a refund except for non delivery of the unit.

c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.

d. Sales prices are collectible.

e. Aggregate sales proceeds and costs can be reasonably estimated.

Collectability of the sales price is demonstrated by the buyer’s commitment to pay for the property, and there is a reasonable likelihood that the Company will collect the receivable which in turn is supported by substantial initial and continuing investments. When determining if the buyer’s initial and continuing investments are adequate, the potentially refundable amount, through judicial or other means, determined based on contractual termination clauses is excluded, pursuant to U.S. GAAP ASC 360.20.40. This standard requires amounts potentially refundable to a customer to be excluded from the initial and continuing investment test required by ASC 306.20.20, applicable prospectively as from January 1, 2008.

(i)Revenue recognition--Continued

 

(a) AUSA Revenue Recognition (Investment associate since December 9, 2013)Allowance for credit losses

 

Under USBrazilian GAAP, expected losses are measured using one of the following bases: 12-month expected credit losses, and full lifetime expected credit losses, and the Company recognized retail land salescarries out the measurement of lots that are subdivisionsthe allowance regarding the expected credit losses on contracts sold, which is recorded together with the recognition of large tracts of land by the percentage-of-completion method following ASC 976 605-25-4 and 25-6 – Retail Land, which criteria are as follows:respective revenue.

 

a. The periodUnder USGAAP, ASU 2016-13: Financial Instruments—Credit Losses (Topic 326) related to the allowance for credit losses is effective for fiscal years beginning after December 15, 2019. Therefore, for USGAAP purposes, the Company has derecognized its allowance for expected credit losses.

(ii)Net realizable value for properties for sale

Under Brazilian GAAP, a new assessment is made of cancellation with refund has expired;net realizable value in each subsequent period. When the circumstances that previously caused properties for sale to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of write-down is reversed, so that the new carrying amount is the lower of the cost and the revised net realizable value.

 

b. Cumulative payments equal or exceed 10 percent;

c. Receivables are collectible;

d. Receivables areUnder USGAAP, ASC 330-10-35-14, a reversal of a write-down for an increase in market value is not subject to subordination;

e. There has been progress on improvements. The project’s improvements have progressed beyond preliminary stages, and there are indications that the work will be completed according to plan;

f. Development is practical. There is a reasonable expectation that the land can be developed for the purposes represented and the properties will be useful for those purposes at the end of the normal payment period.

Additionally, as part of the analysis of this adjustment, the Company also determined the effect over the non-controlling interest from their consolidated subsidiaries. The reclassification of income to the non-controlling interest for this adjustment was R$(378), R$895 and R$5,232 for the years ended December 31, 2015, 2014 and 2013, respectively (Note 31(b)(i)).permitted.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013 - Continued

(ii) Business combinations

Until December 31, 2008, under Brazilian GAAP, goodwill arose from the difference between the amount paid and the Brazilian GAAP book value (normally also the tax basis) of the net assets acquired. This goodwill was normally attributed to the difference between the book value and the market value of assets acquired or justified based on expectation of future profitability and was amortized over the remaining useful lives of the assets or up to ten years. Effective January 1, 2009, goodwill is no longer amortized under Brazilian GAAP as is the case in US GAAP. Negative goodwill arises under Brazilian GAAP when the book value of assets acquired exceeds the purchase consideration; negative goodwill is not generally amortized but is realized upon disposal of the investment. For US GAAP purpose, when a business combination process generates negative goodwill, this amount is allocated first to non-current assets acquired and any remaining amount is recognized as an extraordinary gain. Additionally, investments in affiliates, including the corresponding goodwill on the acquisition of such affiliates are tested, at least, annually for impairment.

Under US GAAP, fair values are assigned to acquired assets and liabilities in business combinations, including identifiable assets. Any residual amount is allocated to goodwill. Goodwill is not amortized but, instead, is assigned to an entity’s reporting unit and tested for impairment at least annually. The differences in relation to Brazilian GAAP arise principally from the measurement of the consideration paid under US GAAP using the fair value of shares and put options issued, and the effects of amortization which are not recorded for US GAAP purposes (goodwill amortization is also no longer recorded for Brazilian GAAP purposes effective January 1, 2009).

For Brazilian GAAP purposes, the net balance of goodwill at December 31, 2015 and December 31, 2014 was R$25,476, which had been amortized to income over a period of up to 10 years until December 31, 2008.

For US GAAP purposes, the total net balance of goodwill at December 31, 2015 and December 31, 2014 was R$675 (R$18,279 in December 31, 2013).

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

(a) Tenda transaction

Under Brazilian GAAP, the acquisition was consummated on October 21, 2008. As part of the acquisition of a controlling interest in Tenda, the Company contributed the net assets of FIT Residencial amounting to R$411,241, acquiring 60% of the shareholders’ equity of Tenda (book value of the 60% interest representing an investment in net assets of R$621,643), which had a total shareholders’ equity book value of R$1,036,072.

Under Brazilian GAAP, the sale of the 40% ownership interest in FIT Residencial to Tenda shareholders in exchange for the Tenda shares generated negative goodwill of R$210,402, reflecting the gain on the sale of the interest in FIT Residencial. From October 22 to December 31, 2008 under Brazilian GAAP, the Company amortized the total amount of R$210,402 of the negative goodwill, represented by the gain on the partial sale of Fit Residencial, as required by the adoption of the new CPC’s.

Under US GAAP, the Company recorded the transfer of Fit Residencial as a partial sale to the non-controlling shareholders of Tenda and a gain of R$205,527 was recorded in the net income for the year ended December 31, 2008. The recognition of gain upon exchange of 40% ownership interest in FIT Residencial for 60% ownership interest in Tenda is presented as follows:

 

Tenda purchase consideration367,70332.
FIT Residencial USSupplemental Information - Summary of Principal Differences between Brazilian GAAP book value (40%)(162,176)
205,527and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017--Continued

 

Under US GAAP, the total cost(a)  Description of the acquisition has been allocated to the assets acquired and the liabilities assumed based on their respective fair values. Acquired intangible assets include, R$73,038 assigned to existing development contracts, which were amortized in straight-line over the estimated useful lives up to 6 years. For the year ended December 31, 2014, the amount of R$11,447 was amortized and for the year ended December 31, 2013, the amount of R$11,851 was amortized. At December 31, 2015, the total accumulated amount R$73,038 was amortized. Also, R$54,741 was assigned to registered trademarks, which were determined to have indefinite useful lives, and are not amortized, but are tested for impairment at least annually.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

The fair value allocation on the assets acquired and liabilities assumed at the acquisition date are as follows:

  Fair value
  At 100% At 60%
Current assets  539,741   323,845 
Long-term receivables  252,453   151,472 
Properties for sale - non current  174,168   104,501 
Intangible assets  42,449   25,469 
Other assets  101,191   60,714 
         
Total assets acquired  1,110,002   666,001 
         
Total liabilities assumed  (497,164)  (298,298)
         
Net assets acquired  612,838   367,703 

On December 31, 2009, the shareholders of Gafisa and Tenda approved the merger by Gafisa of total outstanding shares issued by Tenda. Because of the merger, Tenda became a wholly-owned subsidiary of Gafisa on this date.

(b) AUSA transaction

On October 2, 2006, the Company signed an agreement to acquire 100% of the capital of AUSA, a company which develops and sells residential lots throughout Brazil. This transaction was consummated on January 8, 2007 and it was approved by the Brazilian anti-trust authority (CADE) on June 18, 2007, without any restrictions. The Company initially acquired 60% of AUSA’s shares for R$198,400, of which R$20,000 was paid in cash and the remaining R$178,400 in the Company’s own shares. In connection with the acquisition, the Company issued 6,358,616 new Common shares with a book value of R$134,029, which were contributed in full settlement of the amount due in shares as part of the purchase consideration. For the purpose of determining the purchase consideration, the fair value of these shares was based on the average BM&FBOVESPA quoted stock price over a thirty day period prior to the date the agreement was signed.

Under US GAAP, the total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based on their respective fair values. Goodwill and other intangibles, none of which is deductible for tax purposes, recorded in connection with the acquisition at the time totaled R$20,902 and R$184,656, respectively.

Under US GAAP, acquired intangible assets include, R$168,072 assigned to existing development contracts, which were amortized as developments were sold and R$16,853 assigned to registered trademarks, which were determined to have indefinite useful lives, and are not amortized, but are tested for impairment at least annually.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

On March 8, 2010, the Company announced the increase of its participation in AUSA’s capital in 20%, as per the purchase agreement. The acquisition of 20% of Alphaville’s capital corresponds to an amount of R$126,490 which was paid based on issuance of 9,797,792 common shares (after the effect of the February 22, 2010 stock split) of Gafisa’s capital.

On June 8, 2012, according to the material fact then disclosed, the third phase of the Investment Agreement and Other Covenants entered into on October 2, 2006 (“Investment Agreement”), established the rules and conditions for Gafisa related to the acquisition of the remaining 20% interest in the capital stock of AUSA not held by the Company. While the valuation of the capital stock was agreed by both parties, the number of shares that should be issued by the Company to settle this transaction was being discussed on an arbitration process initiated by the non-controlling interests of AUSA, according to the material fact released on July 3, 2012. On June 6, 2013, the parties settled the arbitration process and the Company proceeded with the disposal of controlling interest in AUSA. There was an embedded derivative component to the Investment Agreement, relating to the Company's obligation to purchase the AUSA shares held by the non-controlling interest.

The fair values of assets acquired and liabilities assumed at the acquisition date under US GAAP are as follows:

  Fair value
  At 100 % At 60 %
     
Current assets  69,371   41,623 
Long-term receivables  73,478   44,087 
Other assets  17,379   10,427 
Intangible assets  307,760   184,656 
Total assets acquired  467,988   280,793 
Total liabilities assumed  (144,064)  (86,438)
Income taxes  (28,095)  (16,857)
Total liabilities assumed  (172,159)  (103,295)
Net assets acquired  295,829   177,498 

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

For the period ended December 09, 2013, the Company amortized R$10,874 of the fair value assigned in the purchase price allocation.differences--Continued

 

(iii)AcquisitionClassification of non-controlling interest in AUSAbalance sheet line items

As described above, we had an agreement to purchase the 20% non-controlling interest of AUSA in 2013. On July 3, 2013 we purchased such non-controlling interest for a purchase price of R$366,662. As we already had control of AUSA we recorded the difference between the recognized mezzanine equity line item of R$358,985 and the consideration paid of R$366,662, resulting in R$7,677 directly in stockholders’ equity.

Disposal of controlling interest in AUSA

As described in note 8.2, on December 9, 2013 the Company disclosed a material fact informing the finalization of the disposal of 70% interest in AUSA. As a result of this disposal we recorded a gain of R$1,228,429. This gain was included in the income statement in the line item “Gain on disposal of controlling interest”. In addition to the gain on the disposal we also presented the profit for the year relating to AUSA up to the disposal date of December 9, 2013 in their separate respective line items in the income statement.

As previously described we maintained a 30% equity interest in AUSA after disposal, which was classified as an associate (refer to Note 9). As a result we re-measured this investment to its fair value. This resulted in a gain of R$559,558, which was recorded in our income statement in the line item “remeasurement of investment in associate”.

The result of investments revalued to fair value is different for US GAAP purposes given the fact that the carrying amount of the net assets relating to Alphaville are different than the carrying amount under Brazilian GAAP, principally due to the cumulative revenue recognition adjustments. Consequently the gain recognized on re-measurement of the remaining investment in Alphaville (being the difference between carrying amount of the net assets and their fair value) is different as well in the amount of R$184,005.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

(c) Cipesa transaction

On October 26, 2007, the Company acquired 70% of Cipesa. The Company and Cipesa formed a new company, Cipesa Empreendimentos Imobiliários Ltda. (“Nova Cipesa”), in which Gafisa had 70% of the capital and Cipesa had 30%. At the time, the acquisition total amounted to R$90,000 and goodwill amounted to R$40,687 was recorded, based on expected future profitability under BR GAAP.

On November 21, 2014, the Company acquired the remaining portion of Cipesa Empreendimentos Imobiliários in the amount of R$6,354. As a result of this transaction, the Company recorded a net effect of the write-off of goodwill, in the amount of R$17,604. As a consequence of the acquisition of the remaining portion of Cipesa Empreendimentos Imobiliários and the consequent grant between the parties of irrevocable and irreversible settlement in relation to all rights, duties and obligations, the Company made the reversal of the then recorded acquisition’s obligation in its totality.

Under US GAAP, the total cost of the acquisition had been allocated to the assets acquired and the liabilities assumed based on their respective fair values. Goodwill is deductible for tax purposes had a total amount of R$41,634. As of December 31, 2014, goodwill recorded in connection with the acquisition was totally written-off (R$17,604 as of December 31, 2013), and R$39,577 of obligation canceled in 2014 due to the acquisition of the remaining portion of Cipesa Empreendimentos Imobiliários. Therefore, as of December 31, 2015 and December 31, 2014, there are no longer differences between Brazilian GAAP and US GAAP.

The fair values of assets acquired and liabilities assumed at the acquisition date under US GAAP are as follows:

  Fair value
  At 100% At 70%
     
Current assets  96,675   67,673 
Other assets  8   5 
Total assets acquired  96,683   67,678 
Total liabilities assumed  (2,527)  (1,769)
Income taxes  (25,061)  (17,543)
Total liabilities assumed  (27,588)  (19,312)
Net assets acquired  69,095   48,366 

For the year ended December 31, 2015, the Company did not recognize in the statement of profit or loss any amount (R$17,604 in 2014, and R$963 in 2013) of the fair value assigned in the purchase price allocation, as it is totally written-off.

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Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

(d) Redevco transaction

Through November 2007, the Company held interests in investees together with Redevco through special purpose entities, as follows: Blue I (66.67%), Blue II (50%), Jardim Lorena (50%) and Sunplace (50%). In November 2007, the Company acquired the remaining interests in each entity for R$40,000. Under Brazilian GAAP, the Company amortized the total amount of R$21,925 of the negative goodwill, as required by the adoption of the new CPCs.

Under US GAAP, the total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based on their respective fair values. Negative goodwill for those entities totaled R$11,434, which was allocated as apro rata reduction to the acquired assets. This negative goodwill results primarily from market and business conditions, in which the fair value assigned mainly to inventories and receivables exceeded the respective acquisition cost.

The combined fair values of assets acquired and liabilities assumed at the acquisition date under US GAAP are as follows:

Combined fair value at 100%
Current assets139,983
Long-term receivables16,813
Other assets170
Total assets acquired156,966
Total liabilities assumed(76,745)
Net assets acquired80,221

(iii) Classification of balance sheet line items

 

Under Brazilian GAAP, the classification of certain balance sheet items is presented differently from US GAAP. The Company has recast its consolidated balance sheet under Brazilian GAAP to present a condensed consolidated balance sheet in accordance with US GAAP (Note 31(d)32(d)(i)). The reclassifications are summarized as follows:

 

·Under Brazilian GAAP, restricted cash is presented as short-term investment in the balance sheet.sheet (Note 4.2(d)). For US GAAP purposes, restricted cash is presented separately outside of short-term investment.separately.

 

·Under Brazilian GAAP, accounts receivable present value adjustmentthe assets and monetary variation are recordedliabilities included within a disposal group classified as held for sale, must be presented separately in a single line only for the operating revenue.current year. For US GAAP purposepurposes, according to ASU 2014-08, an entity is required to present, for each comparative period, the realizationassets and liabilities of accounts receivable present value adjustment and monetary variation area disposal group that includes an asset classified as held for sale separately in the financial income/expense.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAPasset and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continuedliabilities sections.

 

·Under Brazilian GAAP, when the Company is in breach of a covenant, the waiver must be in place before the balance sheet date in order for the debt issuance costs are netted against the loan balance, whereas underto be classified as a non-current liability. Under US GAAP such costs are presented neteven if the waiver is obtained after the balance sheet date, but before the issuance of accumulated amortization,the financial statements, the debt will still be classified as deferred expenses in current anda non-current assets.liability.

 

·  Under Brazilian GAAP, deferred income taxes are netted and classified as non-current liabilities. For US GAAP purposes, deferred tax assets and liabilities are netted and classified as current or non-current based on the classification of the underlying temporary difference.

(iv) Classification of statement of income (operations) line items

(iv)Classification of statement of income (operations) line items

 

Under Brazilian GAAP, in addition to the issues noted above, the classification of certain income and expense items is presented differently from US GAAP. The Company has recast its statement of income (loss) prepared under the Brazilian GAAP to present a condensed consolidated statement of income (loss) in accordance with US GAAP (Note 31(d)32(d)(ii)). The reclassifications are summarized as follows:

 

·Under Brazilian GAAP accounts receivable present value adjustment and monetary variation are recorded in the disposal of the Company´s 70% controlling interest in Alphaville is classified as a “discontinued operation”, given the fact this it’s a major line of business that was disposed of during the year ended December 31, 2013.operating revenue. For US GAAP purposes however, this disposal does not meetpurpose the definitionrealization of a “discontinued operation” given the fact that the Company continues to have significant influence over this entity through its 30% non-controlling interest. When a significant continuing involvement like this exists the operation cannot be seen as discontinued under US GAAP, consequently the results from operations of Alphavilleaccounts receivable present value adjustment and monetary variation are classified in the period January 1 to November 30, 2013, are presented in their separate respective line items instead of being grouped together under the header “Net income from discontinued operations”, as under Brazilian GAAP (Note 8.2). In addition the gain on disposal which for Brazilian GAAP purposes is part of the discontinued operations line item is part of results from continuing operations for US GAAP purposes.financial income/expense.

 

·The net income differences between Brazilian GAAP and US GAAP (Note 31(b)32(b)(i)) were incorporated in the consolidated statement of profit or loss in accordance with US GAAP.

 

(v) Deferred income taxF-82 

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Deferred income tax differences between Brazilian GAAP and US GAAP are related to the recognition of deferred income tax on the adjustments mentioned above.

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32.Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017--Continued

 

31.(a)  Description of the GAAP differences--Continued

(v)Deferred taxes

Deferred tax differences between Brazilian GAAP and US GAAP arise related to the adjustments mentioned above.

Under Brazilian GAAP, deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the asset can be utilized.

Under US GAAP, deferred tax assets are recognized in full. A valuation allowance reduces the deferred tax asset to the amount that is the more-likely-than-not to be realized.

Deferred tax assets are recognized to the extent supported by reversing taxable temporary differences under both Brazilian GAAP and US GAAP for our most significant tax-paying components. Furthermore, for US GAAP purposes, deferred income tax results are allocated between the pretax loss from operations and the gain on discontinued operations. The differences in the amount of deferred tax asset considered realizable for the respective years are an expense of R$12,102 in 2019, R$19,930 in 2018 and a reversal of R$ 12,519 in 2017. Additionally, there is no tax benefit associated with share-based payments due to the valuation allowance position.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32.Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017-Continued

(b)  Reconciliation of significant differences between Brazilian GAAP and US GAAP

(i)Net income (loss)

  Note  2019  2018  2017 
             
Net income (loss) under Brazilian GAAP attributable to owners of Gafisa S.A.      (26,040)  (419,526)  (760,240)
Revenue recognition - net operating revenue  32(a)(i)  (13,536)  (166,968)  297,324 
Revenue recognition - operating costs  32(a)(i)  7,551   135,937   (182,367)
Revenue recognition – allowance for expected credit losses  32(a)(i)  (719)  (2,243)  (754)
Equity pick-up  32(a)(i)  (3,134)  1,637   27,946 
Present value adjustment on revenue recognition adjustments above and other      2,796   (48)  244 
Deferred tax on adjustments above, net of valuation allowance  32(a)(v)  31   (1,407)  (3,986)
Reversal of write-down in net realizable value due to an increase in market value  32(a)(ii)  (27,638)      
                 
Net income (loss) attributable to shareholders of Gafisa under US GAAP      60,689)  (452,618)  (621,833)
                 
Net income attributable to the non-controlling interests under US GAAP      (361)  (1,750)  (281)
                 
Net income (loss) under US GAAP      (61,050)  (454,368)  (622,114)
Weighted-average number of shares outstanding in the year (in thousands)                
Common shares      68,584   41,147   26,891 
Earnings (loss) per share attributable to shareholders of Gafisa                
Basic  32(d)(iv)  (0.8901)  (11.0426)  (23.1347)
Diluted  32(d)(iv)  (0.8901)  (11.0426)  (23.1347)

(a)Net income (loss) from continuing operations

  Note  2019  2018  2017 
             
Net income (loss) under Brazilian GAAP from continuing operations.      (26,401)  (421,276)  (858,696)
Revenue recognition - net operating revenue  32(a)(i)  (13,536)  (166,968)  297,324 
Revenue recognition - operating costs  32(a)(i)  7,551   135,937   (182,367)
Revenue recognition – allowance for expected credit losses  32(a)(i)  (719)  (2,243)  (754)
Equity pick-up  32(a)(i)  (3,134)  1,637   27,946 
Present value adjustment on revenue recognition adjustments above and other      2,796   (48)  244 
Deferred tax on adjustments above, net of valuation allowance  32(a)(v)  31   (1,407)  29,394 
Reversal of write-down in net realizable value due to an increase in market value  32(a)(ii)  (27,638)      
                 
Net income (loss) under US GAAP from continuing operations      (61,050)  (454,368)  (686,909)
Weighted-average number of shares outstanding in the year (in thousands)                
Common shares      68,584   41,147   26,891 
Earnings (loss) per share from continuing operations                
Basic  32(d)(iv)  (0.8901)  (11.0426)  (25.5442)
Diluted  32(d)(iv)  (0.8901)  (11.0426)  (25.5442)
                 

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 20132017 - Continued--Continued

 

Under Brazilian GAAP deferred tax assets are recognized for the estimated future tax effects of temporary differences and unused tax losses carried forward based on tax profitability history and estimated future taxable income, which takes into account all factors concerning entity´s expected future profitability. The deferred tax asset is derecognized to the extent that it is no longer probable that taxable profit will be available to compensate deferred tax assets.

(b)Reconciliation of significant differences between Brazilian GAAP and US GAAP--Continued

 

Under US GAAP deferred tax assets are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance to reduce the deferred tax asset  is recognized if upon available evidences, both positive and negative, and the weight of those evidences, the deferred tax asset is the more-likely-than-not that will not be recoverable (the amounts recognized as valuation allowance expense in the respective years are R$20,184 in 2015, R$12,882 in 2014 and R$35,363 in 2013).(i)    Net income (loss)--Continued

 

(b)   Reconciliation of significant differences between Brazilian GAAP and US GAAP

(i) Net income (loss) from discontinued operations

 

  Note 2015 2014 2013
         
Net income (loss) under Brazilian GAAP attributable to owners of Gafisa S.A.   74,449   (42,549)   867,443 
Revenue recognition - net operating revenue  31(a)(i)  57,208   295,550   (725,403)
Revenue recognition - operating costs  31(a)(i)  (55,553)  (210,366)  297,338 
Business Combination of Tenda, Redevco and Cipesa  31(a)(ii)  -   28,130   (11,851)
Business Combination of Alphaville  31(a)(ii)  -   -   (10,874)
Non-controlling interests on adjustments above  31(a)(i)  (378)  895   5,232 
Equity pick-up  31(a)(i)  (48,637)  (1,902)  (23,137)
Gain on disposal of Alphaville’s controlling interest  31(a)(ii)  -   -   764,272 
Remeasurement of investment in associate  31(a)(ii)  -   -   184,005 
Present value adjustment on revenue recognition adjustments above and other      (11,945)  (22,387)  3,059 
Deferred income tax on adjustments above  31(a)(v)  (5,044)  7,816   7,747 
Deferred income tax valuation allowance  31(a)(v)  (20,184)  (12,882)  (35,363)
                 
Net income (loss) attributable to shareholders of Gafisa under US GAAP      (10,084)  42,305   1,322,468 
                 
Net income attributable to the non-controlling interests under US GAAP      (3,092)  (2,071)  13,462 
                 
Net income (loss) under US GAAP      (13,176)  40,234   1,335,930 
Weighted-average number of shares outstanding in the year (in thousands)                
Common shares      367,572   401,905   426,300 
Earnings (loss) per share attributable to shareholders of Gafisa                
Basic  31(d)(iv)  (0.0274)  0.1053   3.1022 
Diluted  31(d)(iv)  (0.0274)  0.1053   3.0835 
  Note  2019  2018  2017 
             
Net income (loss) under Brazilian GAAP from discontinued operations.            98,175 
Revenue recognition - net operating revenue  32(a)(i)        85,460 
Revenue recognition - operating costs  32(a)(i)        (60,367)
Equity pick-up  32(a)(i)        (741)
Present value adjustment on revenue recognition adjustments above and other            971 
Deferred tax on adjustments above, net of valuation allowance  32(a)(v)        (33,815)
Impairment loss remeasurement  32(d)(iv)        (24,888)
Discontinued operation adjustments  32(b)(i)        (33,380)
                 
Net income (loss) under US GAAP from discontinued operations            64,796 
Weighted-average number of shares outstanding in the year (in thousands)                
Common shares            26,891 
Earnings (loss) per share from discontinued operations                
Basic  32(d)(iv)        2.4096 
Diluted  32(d)(iv)        2.4041 

(ii)   Equity

  Note  2019  2018  2017 
             
Equity under Brazilian GAAP      881,410   491,317   711,222 
Revenue recognition - net operating revenue  32(a)(i)  (1,144,341)  (1,097,861)  (914,334)
Revenue recognition - operating costs  32(a)(i)  890,934   847,643   696,072 
Revenue recognition – allowance for expected credit losses  32(a)(i)  1,101   1,820   4,063 
US GAAP adjustment equity accounted investees  32(a)(i)  (11,147)  (8,014)  (10,533)
Reversal of write-down in net realizable value due to an increase in market value  32(a)(ii)  (27,638)      
Deferred tax on adjustments above, net of valuation allowance  32(a)(v)  3,669   3,639   5,048 
                 
Equity attributable to shareholders of Gafisa under US GAAP      593,988   238,544   491,538 
                 
Equity attributable to non-controlling interests under US GAAP      1,435   1,874   3,847 
                 
Equity under US GAAP      595,423   240,418   495,385 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017-- Continued

(b)Reconciliation of significant differences between Brazilian GAAP and US GAAP--Continued

(ii)  Equity--Continued

Condensed changes in total equity under US GAAP

 

 2019  2018  2017 
          
At beginning of the year  240,418   495,385   1,437,993 
Changes in equity, BRGAAP  10,755   (52,449)  818 
Capital reduction (Tenda spin-off)        (327,230)
Stock options  417   1,304   3,500 
Net profit (loss) attributable to Gafisa  (60,689)  (452,618)  (621,833)
Capital increase  404,961   250,766    
Non-controlling interests  (439)  (1,973)  2,137 
Other     3    
At end of the year  595,423   240,418   495,385 

Condensed equity under US GAAP 2019  2018  2017 
          
Equity            
Common shares, comprising 117,018,984 shares outstanding
(2018 – 39,784,169; 2017 – 27,102,118)
  2,926,280   2,521,319   2,521,152 
Treasury shares  (43,517)  (58,950)  (29,089)
Accumulated reserve (losses)  (2,288,775)  (2,223,825)  (2,000,525)
             
Total equity attributable to shareholders of Gafisa  593,988   238,544   491,538 
             
Equity attributable to non-controlling interests  1,435   1,874   3,847 
             
Total equity  595,423   240,418   495,385 

(c)Recent US GAAP accounting pronouncements

(i)  Recently adopted US GAAP accounting standards

 

(ii) EquityThe adoption of the following Updates is neither applicable nor had a material impact on our consolidated financial statements, except for the Updates related to Topic 606.

 

  Note 2015 2014 2013
         
Equity under Brazilian GAAP   3,095,491 3,055,345 3,190,723
Revenue recognition - net operating revenue  31(a)(i)  (690,812)  (745,136)  (1,017,849)
Revenue recognition - operating costs  31(a)(i)  445,749   502,365   712,731 
Reversal of negative goodwill amortization of Redevco and Tenda  31(a)(ii)  (232,327)  (232,327)  (232,327)
Gain on the transfer of FIT Residencial  31(a)(ii)  205,527   205,527   205,527 
Business Combination – Tenda, Redevco and Cipesa  31(a)(ii)  83,066   83,066   (12,296)
Other, net     (2)  9,054   38,583 
Non-controlling interests on adjustments above  31(a)(i)  956   1,580   38,401 
US GAAP adjustment equity accounted investees  31(a)(i)  (63,382)  (14,818)  (12,812)
Deferred income tax on adjustments above  31(a)(v)  42,819   47,542   40,274 
Deferred income tax valuation allowance  31(a)(v)  (184,851)  (164,666)  (151,784)
                 
Equity attributable to shareholders of Gafisa under US GAAP      2,702,234   2,747,532   2,799,171 
                 
Equity attributable to non-controlling interests under US GAAP      2,648   3,339   23,074 
                 
Equity under US GAAP      2,704,882   2,750,871   2,822,245 

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Condensed changes in total equity under US GAAP 2015 2014 2013
At beginning of the year  2,750,871   2,822,245   1,672,498 
Changes in equity, BRGAAP  (23,558)  (108,344)  (66,471)
Stock options  6,937   15,514   17,419 
Net profit (loss) attributable to Gafisa  (10,084)  42,305   1,322,468 
Declared mandatory dividend  (17,682)  -   (163,112)
Non-controlling interests  (691)  (19,735)  (30,148)
AUSA – redeemable non-controlling interest  -   -   67,353 
Other  (911)  (1,114)  2,238 
At end of the year  2,704,882   2,750,871   2,822,245 

Condensed equity under US GAAP 2015 2014 2013
Equity      
Common shares, comprising 367,481,406 shares outstanding
(2014 – 378,184,876; 2013 – 416,459,715)
  2,740,662   2,740,662   2,740,662 
Treasury shares  (25,980)  (79,059)  (73,070)
Accumulated reserve (losses)  (12,448)  85,929   131,579 
             
Total equity attributable to shareholders of Gafisa  2,702,234   2,747,532   2,799,171 
             
Equity attributable to non-controlling interests  2,648   3,339   23,074 
             
Total equity  2,704,882   2,750,871   2,822,245 

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Gafisa S.A.

 

Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017- Continued

 

(c) Recent US GAAP accounting pronouncements

(c)Recent US GAAP accounting pronouncements--Continued

 

(i) Recently adopted US GAAP accounting standards

In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of Update 2011-11, Disclosures about Offsetting Assets and Liabilities, applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments were effective for the Company on January 01, 2013 and the disclosures are required to be retrospectively applied for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. The adoption of ASU 2013-01, which is related to disclosure only, did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in ASU 2013-02 to Topic 220, Other Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. ASU 2013-02 requires either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new guidance was effective prospectively for the Company on January 01, 2013. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in ASU 2013-04 to Topic 405, Liabilities, provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the update is fixed at the reporting date, except for obligations addressed with existing U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations. The amendment is effective retrospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-04 did not have a material impact on our consolidated financial statements.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013-Continued

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in ASU 2013-11 to Topic 740, Income Taxes, clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in ASU 2013-11 are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The adoption of ASU 2013-11 did not have a material impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323). The amendments in ASU 2014-01 provide guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments in ASU 2014-01 should be applied retrospectively to all periods presented and are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU 2014-01 did not have a material impact on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08 - Presentation of financial statements (topic 205) and property, plant, and equipment (Topic 360). The amendments in ASU 2014-08 change the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when some criteria occurs. Examples of a strategic shift that has (or will have) a major effect on an entity’s operations and financial results could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued--Continued

 

The amendments in ASU 2014-08 require an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. The amendments in ASU 2014-08 require additional disclosures about discontinued operations. The amendments in ASU 2014-08 are effective to all disposals (or classifications as held for sale) of components of an entity and all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The adoption of ASU 2014-08, which isfollowing Updates related to disclosure only, did not have a material impact on our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-17 - Business combinations (Topic 805) - Pushdown Accounting. The objective of ASU 2014-17 is to provide guidance for determining whether and at what threshold an acquiree (acquired entity) that is a business or nonprofit activity can reflect the acquirer's accounting and reporting basis (pushdown accounting) in its separate financial statements. Paragraphs 805-50-S99-1 through S99-4 of the Codification provide limited guidance for SEC registrants for determining whether and when a new accounting and reporting basis should be established in an acquiree's separate financial statements. However, because diversity in practice exists with respect to the application of pushdown accounting among entities that are not SEC registrants, the amendments provide guidance for entities that are SEC registrants and for those that are not. The amendments in ASU 2014-17 are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. The adoption of ASU 2014-17 did not have a material impact on our consolidated financial statements.

(ii) Recently issued US GAAP accounting standardsTopic 606 were adopted, as it follows:

 

In May 2014, the FASB issued ASU 2014-09 - Revenue from contracts with customers (Topic 606). The amendments in ASU 2014-09 create revenue from contracts with customers (Topic 606), and supersede the revenue recognition requirements in revenue recognition (topic 605), including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in revenue recognition—construction-type and production-type contracts (subtopic 605-35), and create new subtopic 340-40, other assets and deferred costs—Contracts with Customers.Customers. In summary, the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impacts of the adoption of ASU 2014-09 on our consolidated financial statements.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

In June 2014, the FASB issued ASU 2014-12 - Compensation—stock compensation (Topic 718). Some share-based payment awards that require a specific performance target to be achieved before the employee can benefit from the award, also require an employee to render service until the performance target is achieved. In some cases, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be entitled to benefit from the award regardless of whether the employee is rendering service on the date the performance target is achieved. Some entities account for those performance targets as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value. Others treat them as nonvesting conditions that affect the grant-date fair value of the award. The amendments apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impacts of the adoption of ASU 2014-12 on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15 - Presentation of financial statements—going concern (Subtopic 205-40). The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income statement - Extraordinary and unusual items (Subtopic 225-20). The objective of ASU 2015-01 is to simplify the income statement presentation requirements in Subtopic 225-20 by eliminating the concept of extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The amendments in ASU 2015-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively and also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of ASU 2015-01 is not expected to have a material impact on our consolidated financial statements.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis. ASU 2015-02 affects the following areas: (i) Limited partnerships and similar legal entities, (ii) Evaluating fees paid to a decision maker or a service provider as a variable interest, (iii) The effect of fee arrangements on the primary beneficiary determination, (iv) The effect of related parties on the primary beneficiary determination and (v) Certain investment funds. The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Overall, the amendments in ASU 2015-02 are an improvement to current GAAP because they simplify the Codification and reduce the number of consolidation models through the elimination of the indefinite deferral of Statement 167 and because they place more emphasis on risk of loss when determining a controlling financial interest. The amendments in ASU 2015-02 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03 – Interest - Imputation of Interest (Subtopic 835-30). To simplify the presentation of debt issuance costs, ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by ASU 2015-03. For public business entities, ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of ASU 2015-03 is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05 - Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

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Gafisa S.A.

Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

In May 2015, the FASB issued ASU 2015-07: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11 - Simplifying the Measurement of Inventory. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15 - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. For public business entities, the amendments in this Update should be adopted concurrent with adoption of ASU 2015-03. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

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Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

In September 2015, the FASB issued ASU 2015-16 - Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. An entity should present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17 - Balance Sheet Classification of Deferred Taxes. To simplify the presentation of deferred income taxes, the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this Update. The amendments in this Update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS). For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.

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Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The FASB is issuing this Update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification® and creating Topic 842, Leases. This Update, along with IFRS 16, Leases, are the results of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. We are currently evaluating the impacts of the adoption of ASU 2014-16 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting. The amendments in this Update eliminate the requirement to retroactively adopt the equity method of accounting. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier application is permitted. The adoption of this Update is not expected to have a material impact on our consolidated financial statements.2017.

 

In March 2016, the FASB issued ASU 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 1. Identify the contract(s) with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations in the contract; and 5. Recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this Update do not change the core principle of the guidance. The amendments clarify the implementation guidance on principal versus agent considerations. For public business entities, the amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. Earlier application is permitted. We are currently evaluating

In April 2016, the impactsFASB issued ASU 2016-10: Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of the adoptionguidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update on our consolidated financial statements.

do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09).

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 20132017- Continued

(c)Recent US GAAP accounting pronouncements--Continued

(i) Recently adopted US GAAP accounting standards--Continued

 

In MarchMay 2016, the FASB issued ASU 2016-09:2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to Employee Share-Based Payment Accounting.depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The areas for simplificationamendments in this Update involve severaldo not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update affect only some of the narrow aspects of Topic 606.

The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09).

In December 2016, the FASB issued ASU 2016-20: Technical Corrections and Improvements (Topic 606): Revenue from Contracts with Customers. The amendments in this Update include items brought to the Board’s attention through a variety of sources, including: the Codification’s online feedback mechanism; submissions to the Transition Resource Group for Revenue Recognition (TRG); and stakeholders’ technical inquiries. The amendments in this Update affect narrow aspects of the accountingguidance issued in Update 2014-09. The effective date and transition requirements for share-based payment transactions, including the income tax consequences, classificationamendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09).

In September 2017, the FASB issued ASU 2017-13: Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of awards as either equity or liabilities,Prior SEC Staff Announcements and classificationObserver Comments (SEC Update). : This Update adds, amends, and supersedes SEC paragraphs of the ASC related to the adoption and transition provisions of ASU No. 2014-09, Revenue from Contracts with Customers and ASU 2016-02, Leases for public business entities. It is effective upon issuance.

Based on the statementassessments undertaken, the adoption of the requirements above, has changed the revenue recognition, from over the time (PoC method) to a point in time, upon delivery of keys for each real estate unit. ASUs Topic 606 are effective for annual reporting periods beginning after December 15, 2017. As a transition method, the Company applied the full retrospective method and has recognized the cumulative effect of initially applying this guidance as an adjustment to the opening balance of retained earnings as of January 01, 2016 to all contracts at the date of initial application.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(c)Recent US GAAP accounting pronouncements--Continued

(i) Recently adopted US GAAP accounting standards--Continued

In June 2016, the FASB issued ASU 2016-13: Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. In addition, available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows.flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The amendments in this Update are effective for annual periodsfiscal years beginning after December 15, 2016,2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

In February 2017, the FASB issued ASU 2017-06: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965). The amendments in this Update require all plans to disclose (1) their master trust’s other asset and liability balances and (2) the dollar amount of the plan’s interest in each of those balances. The amendments will require the health and welfare benefit plan to disclose the name of the defined benefit pension plan in which those investment disclosures are provided, so that participants can easily access those statements for information about the 401(h) account assets, if needed. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(c)Recent US GAAP accounting pronouncements--Continued

(i) Recently adopted US GAAP accounting standards--Continued

In March 2017, the FASB issued ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this Update are effective for fiscal years, and interim periods within those annual periods.fiscal years, beginning after December 15, 2018. Early adoption is permitted.

In May 2017, the FASB issued ASU 2017-11: Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this Update change the classification of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. For freestanding equity-classified financial instruments, the amendments require entities that present earnings per share in accordance with FASB ASC 260, Earnings Per Share, to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. Convertible instruments with embedded conversion options that have down round features would be subject to the specialized guidance for contingent beneficial conversion features (in FASB ASC 470), including related earnings per share guidance (in FASB ASC 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of FASB ASC 480, Distinguishing Liabilities from Equity, that now are presented as pending content in the Codification, to a scope exception. For public business entities, the amendments in Part I of this Update are

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(c)Recent US GAAP accounting pronouncements--Continued

(i) Recently adopted US GAAP accounting standards--Continued

effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The adoptionamendments in Part II of this Update isdo not expected torequire any transition guidance because those amendments do not have a material impact on our consolidated financial statements.

an accounting effect.

 

(d)In August 2017, the FASB issued ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early application is permitted.

In February 2018, the FASB issued ASU 2018-02: Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update require an entity to disclose a description of its accounting policy for releasing income tax effects from accumulated other comprehensive income. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early application is permitted.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update clarify certain aspects of the guidance issued in Update 2016-01. The amendments in this Update are effective for fiscal years beginning after December 15, 2017.

In June 2018, the FASB issued ASU 2018-07: Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early application is permitted.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(c)Recent US GAAP accounting pronouncements--Continued

(ii) Recently issued US GAAP condensedaccounting standards

In January 2017, the FASB issued ASU 2017-04: Intangibles—Goodwill and Other (Topic 350). Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this Update are effective for the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

In August 2018, the FASB issued ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update are effective for fiscal years beginning after December 15, 2019. Early application is permitted.

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Notes to the consolidated financial informationfinanciaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(c)US GAAP condensed consolidated financial information

 

Based on the reconciling items and discussion above, the Gafisa S.A. consolidated balance sheets, statements of income (loss), and statement of changes in shareholders’ equity (see b(ii)) under US GAAP have been recast in condensed format as follows:

 

(i) Condensed consolidated balance sheets under US GAAP

 

 2015 2014 2013 2019  2018  2017 
Assets                  
Current assets                  
Cash and cash equivalents  82,640   109,895   215,194   12,435   32,304   28,527 
Short-term investments  552,832   973,372   1,637,602   368,335   97,895   108,502 
Restricted short-term investments  76,839   73,987   171,367   33,560   6,961   10,433 
Trade accounts receivable, net  948,927   1,016,806   1,515,648   53,558   83,433   141,869 
Properties for sale  2,379,811   2,207,240   2,163,809   1,658,394   1,790,103   1,716,633 
Prepaid expenses  7,415   15,997   35,126   1,860   2,668   5,779 
Other  326,985   389,515   277,884   165,116   198,284   219,487 
  4,375,449   4,786,812   6,016,630   2,293,258   2,211,648   2,231,230 
Non-current assets                        
Investments in associates  901,150   943,289   1,068,238   115,216   308,833   447,252 
Property and equipment, net  49,176   48,691   36,385   14,159   20,073   22,342 
Intangibles assets  131,408   138,142   148,726   7,084   11,770   18,280 
Goodwill  675   675   18,279 
Trade accounts receivable, net  290,953   275,501   258,780   12,472   32,301   47,944 
Properties for sale  750,240   816,525   652,395   279,207   198,941   339,797 
Other  194,065   223,577   278,154   200,331   123,602   86,351 
  2,317,667   2,446,400   2,460,957   628,469   695,520   961,966 
                        
Total assets  6,693,116   7,233,212   8,477,587   2,921,727   2,907,168   3,193,196 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32.Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(d)US GAAP condensed consolidated financial information--Continued

 

31.(i) Condensed consolidated balance sheets under US GAAP--Continued

  2019  2018  2017 
Liabilities            
Current liabilities            
Loans and financing  426,124   285,612   481,073 
Debentures  158,179   62,783   88,177 
Payables for purchase of properties  115,156   101,285   92,709 
Payables for goods and services suppliers  95,450   119,847   98,662 
Taxes and labor contributions  48,385   31,566   20,102 
Advances from customers  696,944   680,398   653,859 
Obligations assumed on the assignment of receivables  20,526   25,046   31,001 
Other  361,197   366,140   327,180 
   1,921,961   1,672,677   1,792,763 
Non-current liabilities            
Loans and financing  107,029   338,135   416,112 
Debentures  39,346   202,883   119,536 
Deferred tax liabilities and social contribution  12,115   49,372   74,473 
Payables for purchase of properties  93,075   196,076   152,377 
Obligations assumed on the assignment of receivables  19,835   32,140   53,392 
Provisions for legal claims  123,878   155,608   82,063 
Other  9,065   19,859   7,095 
   404,343   994,073   905,048 
             
Equity attributable to shareholders of Gafisa  593,988   238,544   491,538 
Equity attributable to non-controlling interest  1,435   1,874   3,847 
             
Total equity  595,423   240,418   495,385 
             
Total liabilities and equity  2,921,727   2,907,168   3,193,196 

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December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017- Continued

 

  2015 2014 2013
Liabilities      
Current liabilities      
Loans and financing  673,432   552,173   592,328 
Debentures  390,830   506,103   566,048 
Payables for purchase of properties  321,677   469,369   262,029 
Payables for goods and services suppliers  57,335   95,131   79,342 
Taxes and labor contributions  78,685   99,069   200,803 
Advances from customers  189,993   203,189   813,289 
Obligations assumed on the assignment of receivables  23,482   24,135   82,787 
Payables for acquisition of investments  -   -   5,102 
Declared dividends  17,682   -   150,067 
Other  478,692   541,692   508,999 
   2,231,808   2,490,861   3,260,794 
Non-current liabilities            
Loans and financing  620,896   848,861   1,051,034 
Debentures  469,903   687,487   858,293 
Deferred income tax and social contribution  163,292   151,864   168,162 
Payables for purchase of properties  248,514   101,137   79,975 
Obligations assumed on the assignment of receivables  35,811   31,994   37,110 
Payables to venture partners  1,322   4,713   10,794 
Provisions for legal claims  142,670   136,540   125,809 
Other  74,018   28,884   63,371 
   1,756,426   1,991,480   2,394,548 
             
Equity attributable to shareholders of Gafisa  2,702,234   2,747,532   2,799,171 
Equity attributable to non-controlling interest  2,648   3,339   23,074 
             
Total equity  2,704,882   2,750,871   2,822,245 
             
Total liabilities and equity  6,693,116   7,233,212   8,477,587 
(d)US GAAP condensed consolidated financial information--Continued

(ii)   Condensed consolidated statements of operations under US GAAP

  2019  2018  2017 
Gross operating revenue            
Real estate development and sales of properties  427,383   897,846   1,166,802 
Taxes on services and revenues  (41,174)  (79,782)  (63,590)
             
Net operating revenue  386,209   818,064   1,103,212 
Operating costs  (302,772)  (736,614)  (1,109,322)
             
Gross (loss) profit  83,437   81,450   (6,110)
             
Operating income (expenses)            
Selling general and administrative expenses  (69,022)  (141,520)  (180,281)
Other  (45,805)  (320,226)  (269,072)
Income (loss) before financial income and expenses and income tax and social contribution  (31,390)  (380,296)  (455,463)
             
Financial income  16,682   19,553   29,733 
Financial expenses  (73,510)  (100,121)  (136,756)
Income (loss) before income tax and social contribution  (88,218)  (460,864)  (562,486)
             
Current tax, including social contribution  37,259   (3,349)  (2,832)
Deferred tax, including social contribution  (1,954)  23,692   55,325 
Total income tax and social contribution  35,305   20,343   52,493 
             
Income (loss) before equity in results and            
non-controlling interests  (52,913)  (440,521)  (509,993)
Income from equity method investments  (8,137)  (13,847)  (176,917)
             
Net loss for the year for continuing operations  (61,050)  (454,368)  (686,910)
             
Net income (loss) for the year for discontinued operations        64,796 
             
Net loss for the year  (61,050)  (454,368)  (622,114)
             
Net income (loss) attributable to the non-controlling interests  (361)  (1,750)  (281)
Net loss attributable to shareholders of Gafisa  (60,689)  (452,618)  (621,833)

(iii)   Condensed consolidated statements of comprehensive income (loss)

  2019  2018  2017 
          
Net loss for the year  (61,050)  (454,368)  (622,114)
             
Total comprehensive loss, net of taxes  (61,050)  (454,368)  (622,114)
             
Attributable to:            
Non-controlling interests  (361)  (1,750)  (281)
Shareholders of Gafisa  (60,689)  (452,618)  (621,833)

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 20132017- Continued

(d)US GAAP condensed consolidated financial information--Continued

(iv)Disposal group held for sale

As explained in Note 8.2, the results of operations of Tenda have been presented as discontinued operations in the Company’s 2017 consolidated statements of operations.

The assets and liabilities of the group of assets held for sale are presented separately in the consolidated financial statements. The net income (loss) of discontinued operations is presented as a single amount in the statement of operations, contemplating the total after-tax profit or loss of such operations less any impairment-related loss, as demonstrated below:

2017
Impairment loss (i)
Disposal group held for sale (ii)
Total disposal group held for sale
Liabilities directly associated with assets held for sale (ii)
Reversal of impairment loss (i)215,440
Portion related to payable for sale of shares (ii)(107,720)
Impairment loss(47,666)
Tenda’s net income for the period ended May 04, 2017 (iii)47,666
Transaction costs(9,545)
Deferred tax on adjustments above, net of valuation allowance(33,379)
Net income (loss) of discontinued operations64,796

(i) The measurement of non-current asset held for sale at the lower of its carrying value and the fair value less cost to sell. For the period ended May 04, 2017, the fair value of discontinued operations was adjusted, considering the weighted average price per share for exercising preemptive rights at R$12.12 (R$8.13 per share as of December 31, 2017).

 

(ii) Condensed consolidated statementsAmount of operations under US GAAPR$107,720 related to the obligation to sell 50% of Construtora Tenda S.A.’s shares for the price of R$8.13 per share, settled on May 04, 2017, reflected in the profit or loss of discontinued operation, in order to reflect the difference between the fair value of the group of assets held for sale and the effective selling price.

 

  2015 2014 2013
Gross operating revenue      
Real estate development and sales of properties  2,539,768   2,620,827   2,803,806 
Taxes on services and revenues  (188,240)  (174,279)  (237,818)
             
Net operating revenue  2,351,528   2,446,548   2,565,988 
Operating costs  (1,732,117)  (1,819,612)  (1,995,158)
             
Gross profit  619,411   626,936   570,830 
             
Operating income (expenses)            
Selling general and administrative expenses  (344,985)  (359,330)  (602,767)
Remeasurement of investment in associate  -   -   559,858 
Other  (207,621)  (192,470)  (159,116)
Gain on disposal of controlling interest  -   -   1,228,429 
Income before financial income and expenses and income tax and social contribution  66,805   75,136   1,597,234 
             
Financial income  124,131   156,794   93,250 
Financial expenses  (164,833)  (188,718)  (280,548)
Income (loss) before income tax and social contribution  26,103   43,212   1,409,936 
             
Current income tax and social contribution  (24,598)  (33,330)  (45,741)
Deferred income tax and social contribution  (7,810)  12,991   (6,470)
Total income tax and social contribution  (32,408)  (20,339)  (52,211)
             
Income (loss) before equity in results and            
non-controlling interests  (6,305)  22,873   1,357,725 
Income from equity method investments  (6,871)  17,361   (21,795)
             
Net (loss) income for the year  (13,176)  40,234   1,335,930 
             
Net (loss) income attributable to the non-controlling interests  (3,092)  (2,071)  13,462 
Net (loss) income attributable to shareholders of Gafisa  (10,084)  42,305   1,322,468 

(iii) The amounts of the disposal group held for sale, liabilities directly associated with assets held for sale, and profit or loss of discontinued operations, net of the eliminations related to intercompany transactions.

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017- Continued

(d)US GAAP condensed consolidated financial information--Continued

(iv)Disposal group held for sale--Continued

The main lines of the statement of operations of the subsidiary Tenda are as follows:

Statement of operationsPeriod ended May 04, 2017
Net operating revenue496,004
Operating costs(329,511)
Operating expenses, net(105,652)
Depreciation and amortization(4,381)
Financial income (expenses)(4,736)
Income tax and social contribution(4,954)
Income from equity method investments237
Non-controlling interests(659)
Net income (loss) for the year47,666

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(iii) Condensed consolidated statements of comprehensive income (loss)Gafisa S.A.

 

  2015 2014 2013
Net (loss) income for the year  (13,176)  40,234   1,335,930 
             
Total comprehensive (loss) income, net of taxes  (13,176)  40,234   1,335,930 
             
Attributable to:            
Non-controlling interests  (3,092)  (2,071)  13,462 
Shareholders of Gafisa  (10,084)  42,305   1,322,468 

Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

(iv)32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(d)US GAAP condensed consolidated financial information--Continued

(v)   Earnings (loss) per share

 

Under US GAAP, the presentation of earnings (loss) per share is required for public companies, including earnings (loss) per share from continuing operations and net income (loss) per share on the face of the statement of income (loss), and the per share effect of changes in accounting principles, discontinued operations and extraordinary items either on the face of the income statement or in a note. A dual presentation is required: basic and diluted. Computations of basic and diluted earnings per share data should be based on the weighted average number of shares outstanding during the period and all dilutive potential shares outstanding during each period presented, respectively.

Under US GAAP, the presentation of earnings (loss) per share is required for public companies, including earnings (loss) per share from continuing operations and net income (loss) per share on the face of the statement of income (loss), and the per share effect of changes in accounting principles, discontinued operations and extraordinary items either on the face of the income statement or in a note. A dual presentation is required: basic and diluted. Computations of basic and diluted earnings per share data should be based on the weighted average number of shares outstanding during the period and all dilutive potential shares outstanding during each period presented, respectively.

 

The Company has issued employee stock options (Note 18.3), the dilutive effects of which are reflected in diluted earnings per share by application of the “treasury stock method”. Under the treasury stock method, earnings per share are calculated as if options were exercised at the beginning of the period, or at time of issuance, if later, and as if the funds received were used to purchase the Company’s own stock. When the stock options’ exercise price is greater than the average market price of shares, diluted earnings per share are not affected by the stock options. Under US GAAP and Brazilian GAAP, potentially dilutive securities are not considered in periods where there is a loss as the impact would be anti-dilutive. For the years ended December 31, 20152017, December 31, 2016 and December 31, 20142015 potentially dilutive stock options were not considered.

 

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017- Continued

(d)US GAAP condensed consolidated financial information--Continued

(v)    Earnings (loss) per share--Continued

 

The table below presents the determination of net income available (loss) allocated to common shareholders and weighted average common shares outstanding used to calculate basic and diluted earnings (loss) per share.

 

 2015 2014 2013 2019  2018  2017 
             
Basic numerator                  
Declared dividends  17,682   -   150,067          
U.S. GAAP undistributed profit (loss)  (27,766)  42,305   1,172,401   (60,689)  (452,618)  (621,833)
Allocated U.S. GAAP undistributed profit (loss) available for Common shareholders  (10,084)  42,305   1,322,468   (60,689)  (452,618)  (621,833)
                        
                        
Basic denominator (in thousands of shares)                        
Weighted-average number of shares  367,572   401,905   426,300   68,584   41,147   26,891 
Basic earnings (loss) per share – U.S. GAAP - R$  (0.0274)  0.1053   3.1022   (0.8849)  (11.0000)  (23.1242)

 

 2015 2014 2013 2019  2018  2017 
             
Diluted numerator                  
Dividends proposed  17,682   -   150,067          
U.S. GAAP undistributed profit (loss)  (27,766)  42,305   1,172,401   (60,689)  (452,618)  (621,833)
            
Allocated U.S. GAAP undistributed profit (loss) available for Common shareholders  (10,084)  42,305   1,322,468   (60,689)  (452,618)  (621,833)
                        
Diluted denominator (in thousands of shares)                        
Weighted-average number of shares  367,572   401,905   426,300   68,584   41,147   26,891 
Stock options  2,514   1,681   2,584   836   572   61 
Non-controlling interest shares  -   -   - 
Antidilutive effect  (2,514)  (1,681)  -   (836)  (572)  (61)
                        
Diluted weighted-average number of shares  367,572   401,905   428,884   68,584   41,147   26,891 
                        
Diluted earnings (loss) per share – U.S. GAAP - R$  (0.0274)  0.1053   3.0835   (0.8849)  (11.0000)  (23.1242)

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Notes to the consolidated financial statements--Continuedfinanciaol statements

December 31, 20152019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

 

31.32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 20142019, 2018 and 2013-Continued2017- Continued

 

(d)US GAAP condensed consolidated financial information--Continued

(v)

(vi)   Additional information – income taxes

 

Change in the valuation allowance for net operating losses and temporary differences was as follows:

 

 2015 2014 2013 2019  2018  2017 
             
Opening balance at January 1  (441,424)  (426,318)  (657,130)  (758,723)  (660,645)  (517,413)
Benefit of the utilization of operating loss carryforwards  3,731   7,349   - 
Change in valuation allowance  (20,155)  (22,455)  230,812   (51,417)  (98,078)  (143,232)
Closing balance at December 31  (457,848)  (441,424)  (426,318)  (810,140)  (758,723)  (660,645)

 

The Company recognizesreduces its deferred tax asset net ofwith a valuation allowance such that the amount of the net deferred tax asset is the amount that is more likely than not to be realized. During the year 2015,2019, movements in the valuation allowance amounted to a net increase of R$16,424. The amount of R$3,731, related to the benefit of the51,417 and there was no utilization of operating loss carryforwards, is primarily due to the continuing  restructuring process implemented by management.carryforwards.

 

During the year 2014,2018, movements in the valuation allowance amounted to a net increase of R$15,106. This is primarily related to the continuing  restructuring process implemented by management.During98,078 and there was no utilization of operating loss carryforwards.

During the year 2013,2017, movements in the valuation allowance related to changes in circumstances amounted to a reversalnet increase of R$230,812, mainly due to higher than expected taxable income. The aforementioned changes in circumstances primarily included a restructuring process implemented by management, which led to positive taxable income for fiscal year 2013 as well as a forecast143,232 and there was no utilization of positive taxable income for fiscal year 2014.operating loss carryforwards.

 

The Company records the financial statement effects of an income tax position when it is more likely than not, based on the technical merits, that it will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold value added is measured and recorded as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority.

 

As of December 31, 2015, 20142019, 2018 and 2013,2017, the Company has no amount recorded for any uncertainty in income taxes.

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Notes to the consolidated financiaol statements

December 31, 2019

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

32. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2019, 2018 and 2017- Continued

(d)US GAAP condensed consolidated financial information--Continued

(vi)   Additional information – income taxes--Continued

 

Gafisa S.A. and its subsidiaries file income tax returns in Brazil. Brazilian income tax returns are subject to inspections by tax authorities for the period beginning in 20102015 and forward, i.e., within 5 years after the filing.

 

(vi)Statement of comprehensive income (loss)

(vii)  Statement of comprehensive income (loss)

 

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss) that include charges or credits directly to equity which are not the result of transactions with owners.

 

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Notes to the consolidated financial statements--Continued

December 31, 2015

(Amounts in thousands of Brazilian Reais, except as otherwise stated)

31. Supplemental Information - Summary of Principal Differences between Brazilian GAAP and accounting principles generally accepted in the United States “US GAAP” for the years ended December 31, 2015, 2014 and 2013- Continued

(vii)(viii) Statement of cash flows

 

For each period for which a statement of profit or loss is presented and required to be reconciled to US GAAP, SEC rules require that the Company provide either a statement of cash flows prepared in accordance with US GAAP or IFRS; or furnish in a note to the financial statements a qualified description of the material differences between cash or funds flows reported in the primary financial statements and cash flows that would be reported in a statement of cash flows, prepared in accordance with US GAAP.

 

Statement of Cash flow 2019  2018  2017 
          
Operating activities  44,019   31,450   206,865 
Investing activities  (300,620)  (3,061)  320,737 
Financing activities  236,732   (24,612)  (528,609)
             

The Company’s primary differences in net income (loss) between Brazilian GAAP and net income (loss) for US GAAP are explained in items 31(a)32(a) (ii) to (vii)(vi) above. The statement of cash flows for Brazilian GAAP was prepared based on CPC 3(R2) - Statement of Cash Flows, which conforms with IAS 7.Flows.

 

(viii)(ix) Statement of value added

 

The statement of value added for new Brazilian GAAP was prepared based on CPC 09 - “Demonstração do Valor Adicionado.” For US GAAP, this statement is not required.

 

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