GOL Gol Linhas Aereas Inteligentes SA

Gol Linhas Aéreas Inteligentes S.A.

Unaudited interim consolidated statements of operations

Six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except basic and diluted earnings (loss) per share)

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

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Gol Linhas Aéreas Inteligentes S.A.

Unaudited interim consolidated statements of comprehensive income

Six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$)

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

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(a) On January 1, 2019, the Company adopted IFRS 16 – “Leases” which resulted in an initial adjustment in accumulated losses. For further details, see Note 4.1.1.

(b) Gol Finance, through Gol Equity Finance, acquired premium issued by the Company in the context of the issue of Exchangeable Senior Notes, as per Note 18.1.1.

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

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Gol Linhas Aéreas Inteligentes S.A.

Unaudited interim consolidated statements of cash flows

Six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$)

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Gol Linhas Aéreas Inteligentes S.A.

Unaudited interim consolidated statements of cash flows

Six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$)

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

1.   General information

Gol Linhas Aéreas Inteligentes S.A. (the “Company” or “GLAI”) is a publicly-listed company incorporated on March 12, 2004, under the Brazilian Corporate Law. According to the Bylaws, the Company's corporate purpose is primarily the exercise of GOL Linhas Aéreas SA ("GLA") shareholder control, of which operates regular and non-scheduled passenger flight transportation services, loyalty programs development, among others.

The Company’s shares are traded on B3 S.A. - Brasil, Bolsa, Balcão (“B3”) and on the New York Stock Exchange (“NYSE”). The Company adopted Level 2 Differentiated Corporate Governance Practices from B3 and is included in the Special Corporate Governance Stock Index (“IGC”) and the Special Tag Along Stock Index (“ITAG”), which were created for companies committed to apply differentiated corporate governance practices.

The Company’s corporate address is located at Praça Comandante Linneu Gomes, s/n, concierge 3, building 24, Jardim Aeroporto, São Paulo, Brazil.

As of March 11, 2019, as a result of the second accident involving an aircraft Boeing 737 Max 8, the Company’s Management decided to suspend the operation of its seven aircraft of this model willingly, before the regulatory agencies manifested themselves on the matter, given that safety is the Company’s number one priority. As a result, the Company reconfigured its flight network with the objective of minimizing the  inconvenience to its passengers. The use of these aircraft is subject to authorization by the Brazilian regulatory authorities and destination countries, mainly the United States of America. The Company did not interrupt any of its routes due to the suspension of the use of these aircraft and has no plans to do so.

The Company’s Management assessed and carried out impairment tests for these aircraft by comparing their carrying amount with the market value indicated in specialized publications (“BlueBook”), concluding that there are no losses related to the right-of-use asset and, therefore, no provision was recognized.

1.1.   Capital structure and net working capital

As of June 30, 2019, the Company had a deficit in  shareholders' equity of R$7,477,065 (R$4,985,412 as of December 31, 2018). The increase was mainly due to the initial adoption of IFRS 16 – “Leases”. On the same date, the consolidated net working capital (total current assets less total current liabilities) was negative by R$4,053,871 (negative by R$3,889,721 as of December 31, 2018).

GLA is highly sensitive to the economy and also to the U.S. dollar (“US$”), as approximately 41.4% of its costs are denominated in U.S. dollar and GLA’s capacity to adjust ticket prices charged to its customers in order to offset the U.S. dollar appreciation is dependent on capacity (offer) and ticket prices practiced by the competitors.

The Company implemented several initiatives to adjust its fleet size to the economy growth and match seat supply to demand, in order to maintain a high load factor, reduce costs and adjust its capital structure.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

At the end of 2017, the Company executed initiatives to restructure its balance sheet, which led to an extension of terms and the reduction of the financial cost of its debt structure as a result of an offer made on December 11, 2017, raising funds in the amount of US$500,000 with interest rates of 7.1% p.a., partially intended for the amortization of debts with an average rate of 9.8% p.a.

In October 2018, the Company completed the refinancing of the debentures of its wholly-owned subsidiary GLA, pre-paying the total amount of R$1,025,000 and issuing a new series of non-convertible and unsecured debentures in the amount of R$887,500, resulting in a reduction of indebtedness of R$137,500. The new debentures were issued with interest of 120.0% of the Interbank Deposit Certificate ("CDI"), representing a substantial reduction compared to the amortized debt, which was 132.0% of CDI. This operation represented additional deleveraging of the Company's balance sheet and better adjusted the generation of GLA's operating cash flows with the amortization of its liabilities.

In March, April and July 2019, the Company raised a total of US$425,000 through the issue of bonds convertible into shares with nominal interest rates of 3.75% p.a. For further information, see Note 18.1.1 and Note 36.3.

The Company’s objective is to continue to strengthen  its balance sheet management and results in order to guarantee sustainability. Management believes   that the business plan prepared, presented and approved by the Board of Directors on January 17, 2019,  demonstrates the Company’s ability to continue as going concern.

1.2.    Ownership structure

(a)   These comprise exclusive investment funds and,  those funds’ assets are consolidated in the financial statements of the parent company.

(b)   Company with functional currency in Pesos.

(c)   On February 1, 2019, Smiles Fidelidade sold its equity interest in the associate Netpoints S.A. for R$914.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

1.3.   Corporate reorganization plan

On October 14, 2018, through a Material Fact, the Company disclosed the plans for a corporate reorganization whose main purpose was the merger of Smiles into GLA.

On December 13, 2018, the Company was informed by B3 that its migration to the Novo Mercado listing segment was inadmissible, pursuant to the Material Fact of October 14, 2018, described above.

On June 19, 2019, after five months of negotiation, the Company announced through a Material Fact that the parties were unable to reach an agreement on terms for the proposed corporate reorganization and, as a result, decided to terminate negotiations. This fact does not change the Company’s decision not to renew its agreements with Smiles Fidelidade. The Company will continue to evaluate alternatives to improve the efficiency and competitiveness of its economic group.

1.4.   Compliance program

Since 2016, the Company has taken a series of measures to strengthen and expand its internal control and compliance programs, presented in the annual financial statements for the year ended December 31, 2018.

Management is constantly reinforcing to its employees, customers and suppliers its commitment to continue improving its internal control and compliance programs.

As previously disclosed in the financial statements for the year ended December 31, 2018, the Company entered into an agreement with the Brazilian Federal Public Ministry (the “Agreement”), under which the Company agreed to pay R$12 million in fines and make improvements to its compliance program along with the Federal Public Ministry on not to raise any charges related to activities that are the subject to the Agreement, in addition, the Company paid R$4.2 million in fines to the Brazilian tax authorities.

The Company voluntarily informed the U.S. Department of Justice (“DOJ”), the Securities and Exchange Commission (“SEC”) and the Brazilian Securities Commission (“CVM”) of the external independent investigation hired by the Company and the Agreement, these authorities may impose fines and possibly other sanctions to the Company.

During the period ended June 30, 2019 there was no new developments on this matter.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

2.   Management’s statement, basis of preparation and presentation of the interim condensed consolidated financial statements

The unaudited interim condensed consolidated financial statements were prepared in accordance with International Financial Reporting Standard IAS No. 34 - "Interim Financial Information" (“IAS 34”), issued by the International Accounting Standards Board ("IASB").

The unaudited interim condensed consolidated financial statements were prepared using the Brazilian real (“R$”) as the presentation currency and the figures are expressed in thousands of Brazilian reais. The amounts disclosed in other currencies, unless otherwise indicated, are also reported in thousands. The items disclosed in foreign currencies are identified, when applicable.

The preparation of the Company’s unaudited interim condensed consolidated financial statements requires Management to make judgments, use estimates and adopt assumptions affecting the stated amounts of revenues, expenses, assets and liabilities. However, the uncertainty inherent in these judgments, assumptions and estimates could give rise to results that require a material adjustment of the book value of certain assets and liabilities in future reporting years.

The Company continually reviews its judgments, estimates and assumptions.

In preparing the unaudited interim condensed consolidated financial statements the disclosure criteria were used considering regulatory aspects and the relevance of transactions to understand the changes observed in the Company's equity, economic and financial position and its performance since the term related to the last fiscal year ended on December 31, 2018, as well as the updating of relevant information included in the annual financial statements for the year ended December 31, 2018 issued on February 28, 2019.

Management confirms that all the material information was disclosed in these unaudited interim condensed consolidated financial statements  and corresponds to the information used by Management in the development of its business management activities.

The unaudited interim condensed consolidated financial statements were prepared based on the historical cost, except for certain financial assets and liabilities measured at fair value when applicable:

·     short-term investments classified as cash and cash equivalents measured at fair value;

·     short-term investments held within exclusive investments funds measured at fair value;

·     derivative financial instruments measured at fair value; and

·     investments recorded by the equity method.

The Company’s unaudited interim condensed consolidated financial statements as of June 30, 2019 and for the period ended June 30, 2019 have been prepared assuming that it will continue as going concern, realizing assets and settling liabilities in the normal course of business, as per Note 1.1.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

3.   Approval for issuance of the unaudited interim condensed consolidated financial statements

The unaudited interim condensed consolidated financial statements were authorized for issue by Management on September 27, 2019.

4.   Summary of significant accounting practices

The unaudited interim condensed consolidated financial statements presented were prepared based on accounting policies, accounting practices and calculation methods adopted and presented in the financial statements for the year ended December 31, 2018, issued on February 28, 2019, except for the adoption of IFRS 16 - "Leases", presented in Note 4.1.1 of these unaudited interim condensed consolidated financial statements.

4.1.         New standards and accounting pronouncements adopted in the period ended June 30, 2019

4.1.1.    IFRS 16 - “Leases”

IFRS 16 – “Leases” sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets, e.g., personal computers, and short-term leases, e.g., leases with a lease term of 12 months or less. At the commencement date of a lease, a lessee will recognize a liability to make lease payments (a lease liability) and an asset representing the right to use the underlying asset during the lease term (a right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees are also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

Among the adoption methods provided for in the standard, the Company chose to adopt the modified retrospective method, therefore, in accordance with IFRS 16, did not restate comparative information and balances. Within the modified retrospective method, the Company chose to adopt the following transition practical expedients and exemptions:

·        the Company used hindsight, such as in determining the lease term and considering extensions and renegotiations throughout the agreement; and

·        the Company applied a single discount rate to its portfolio of leases with similar characteristics, considering the remaining term of the agreements and the guarantee provided for by the assets.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

The Company assessed the impacts arising from the adoption of this standard, considering the above-mentioned assumptions, and recorded 120 aircraft and flight equipment lease agreements and 14 other lease agreements as right-of-use, and the effects of the initial adoptions are shown in the table below:

(*) The amount refers to the tax credit constituted from the initial adoption of IFRS 16 recorded in the deferred tax asset of the subsidiary Smiles Fidelidade.

The deferred taxes over IFRS 16 adjustments as of January 1, 2019 were not recognized since GLA has a history of losses in recent years.

As a consequence of the adoption of IFRS 16, the Company recorded some reclassifications in the balance sheet as of December 31, 2018, presented for comparison purposes, as shown below:

4.1.2.       IFRIC 23 - “Uncertainty Over Income Tax Treatments”

In June 2017, the IASB issued IFRIC 23, which clarifies the application of requirements in IAS 12 - “Income Taxes” when there is uncertainty over the acceptance of income tax treatments by the tax authority. The interpretation clarifies that, if it is not probable that the tax authority will accept the income tax treatments, the amounts of tax assets and liabilities shall be adjusted to reflect the best resolution of the uncertainty. IFRIC 23 is effective since January 1, 2019, after assessing the matter the Company’s Management concluded that there are no impacts or needs of additional disclosure in these unaudited interim condensed consolidated financial statements arising from the application of this standard.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

4.2.         New accounting standards and pronouncements not yet adopted

There are no other standards and interpretations issued and not yet adopted that may have a significant impact on the results or equity disclosed by the Company.

5.   Seasonality

The Company expects its revenues and operating results for its flights to reach their highest levels during the summer and winter holidays in January and July, respectively, and in the last two weeks of December during the holiday season of year end. Given the large proportion of fixed costs, this seasonality tends to cause variations in the operating results between the quarters of the year.

6.   Cash and cash equivalents

The breakdown of cash equivalents is as follows:

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

7.   Short-term investments

The increase during the period in Investment funds reflects the change in the characteristics of the investments and Management's intention to manage the Company's financial resources.

8.   Restricted cash

(a)   The amount of R$35,356 (R$33,928 as of December 31, 2018) refers to a guarantee for GLAI’s legal proceedings. The other amounts relate to guarantees of GLA letters of credit .

(b)   Related to deposits made to obtain letters of credit for aircraft leases from GLA.

(c)   Refers mainly to bank guarantees.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

9.   Trade receivables

The aging list of trade receivables, net of allowance for expected loss on trade receivables accounts, is as follows:

The changes in allowance for doubtful accounts are as follows:

 (*) Recoveries occurred during the period are reflected in the changes to the receivables portfolio balance.

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GOL Linhas Aéreas Inteligentes S.A.

Notes to the unaudited interim condensed consolidated financial statements

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian Reais - R$, except when otherwise indicated)

10. Inventories

The changes in provision for obsolescence are as follows:

11. Deferred and recoverable taxes

11.1. Recoverable taxes

11.2. Deferred tax assets (liabilities)