GOL Gol Linhas Aereas Inteligentes SA

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

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

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

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Statement of Comprehensive Income

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”, resulting in an initial adjustment to accumulated losses. For further information, see Note 4.1.1.

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

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(*) Over-the-counter derivative (“Capped call”) with certain of the Notes subscribers with the objective of minimizing the potential dilution of the Company's preferred shares and ADSs.            

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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 main purpose is to exercise control of GOL Linhas Aéreas S.A. (“GLA”), which operates regular and non-scheduled passenger flight transportation services and the development of loyalty programs, 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 a Boeing 737 Max 8 aircraft, the Company’s Management suspended the operation of its seven aircraft prior to this being mandated by regulatory authorities, given that safety is the Company’s number one priority. As a result, the Company quickly reconfigured its flight network. 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 need and does not intend to interrupt any of its routes due to the suspension of the use of these aircraft.

During the second and third quarters 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 September 30, 2019, the Company’s deficit totaled R$8,137,019, versus R$4,985,412 as of December 31, 2018. The increase was primarily due to (a) the initial adoption of IFRS 16 – “Leases”, with impact of R$2,436,077; (b) losses in the period of R$468,982; and (c) unrealized cash flow hedge losses, net of income tax and social contribution, totaling R$316,977.

Negative net working capital on September 30, 2019 was of R$5,441,957 (negative R$3,889,721 on December 31, 2018), the variation was primarily due to the initial adoption of IFRS 16 with impact of R$849,040 and increase in loan obligations of R$1,377,755 due to long-term to short-term transfers according to the maturity dates, net of changes between other short-term assets and liabilities.

GLA is highly sensitive to the economy and the U.S. dollar, as approximately 41.55% of its costs are denominated in U.S. dollar (“US$”) 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 carries out several initiatives to adjust its fleet size to demand 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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At the end of 2017, the Company implemented initiatives to restructure its statement of financial position, extending terms and reducing the financial cost of its debt structure, as a result of an offering carried out on December 11, 2017, which raised US$500 million with interest rates of 7.1% p.a., partially used to amortize debt with an average rate of 9.8% p.a.

In October 2018, the Company concluded the refinancing of debentures of its wholly owned subsidiary GLA, fully amortizing the amount of R$1,025,000 and issuing a new series of non-convertible, unsecured debentures in the amount of R$887,500, thus reducing debt by R$137,500. The new debentures were issued with interest at 120.0% of the Interbank Deposit Certificate (“CDI”) rate, a significant reduction in relation to the amortized debt, at 132.0% of the CDI rate. This operation deleveraged the Company’s statement of financial position and adjusted GLA’s operating cash flow generation by amortizing its liabilities.

In March, April and July 2019, the Company raised a total of US$425 million 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.

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

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(a)   These comprise exclusive investment.

(b)   Company with functional currency in Argentine pesos.

(c) On February 1, 2019, the subsidiary Smiles Fidelidade sold its equity interest for the total amount of R$914, recognized in the consolidated statement of income under “Other operating income”.

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 not admissible, 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 has not influenced the Company’s decision to terminate existing agreements with the subsidiary, Smiles Fidelidade, at the end of their term. 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 several steps to strengthen and expand its internal control and compliance programs, the details of which were presented in the annual financial statements disclosed on February 27, 2019.

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 in December 2016 (“Agreement”), under which the Company agreed to pay R$12 million in fines and make improvements to its compliance program. In turn, the Federal Public Ministry agreed not to raise any charges related to activities that are the subject of the Agreement. In addition, the Company paid R$4.2 million in fines to the Brazilian tax authorities.

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

There were no further developments on the subject during the nine-month period ended September 30, 2019.

2.     Basis of preparation and presentation of the unaudited 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 unaudited interim condensed consolidated financial statements, Management used disclosure criteria 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 end of the last fiscal year ended December 31, 2018, as well as the updating of relevant information included in the annual financial statements disclosed on February 27, 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 comprising exclusive investment funds, measured at fair value;

·     derivative financial instruments measured at fair value; and

·     investments accounted for using the equity method.

The Company’s unaudited interim condensed consolidated financial statements as of September 30, 2019 and for the period ended September 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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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 October 30, 2019.

4.     Summary of significant accounting practices

The unaudited interim condensed consolidated financial statements were prepared based on accounting policies and estimate calculation methods adopted and presented in detail in the annual financial statements for the year ended December 31, 2018, issued on February 27, 2019, except regarding:

(a)  adoption on January 1, 2019 of IFRS 16 - “Leases”, presented in Note 4.1.1; and

(b)  adoption on August 1, 2019 a new accounting hedge, presented in Note 4.2.

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

4.1.1.       IFRS 16 - “Leases”

IFRS 16 establishes the principles for recognizing, measuring, presenting and disclosing lease transactions and requires lessees to recognize all leases in accordance with a single statement of financial position model, similar to the recognition of finance leases pursuant to IFRS 16. The standard includes two recognition exemptions for lessees: leases of “low value” assets, for example, personal computers, and short-term leases, i.e. leases for which the term ends within 12 months or less. At the beginning of a lease, lessees recognize a liability to carry out payments (lease liability) and an asset representing the right to use the leased item for the lease term (right-of-use asset). Lessees shall recognize separately interest expenses from the lease liability and depreciation expenses of the right-of-use asset.

Lessees shall also reassess the lease liability if certain events occur, such as a change in the term of the lease or a change in future lease payment flows due to a variation in the reference index or rate used to calculate such payments. In general, lessees shall recognize any remeasurement to the lease liability as an adjustment against the right-of-use asset. Among the adoption methods provided for in the standard, the Company chose to adopt the modified retrospective approach.

Therefore, in accordance with IFRS 16, we did not restate comparative information and balances. Within the modified retrospective approach, 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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The Company assessed the impacts arising from the adoption of this standard, considering the above-mentioned assumptions, and thus recorded 120 aircraft lease agreements and 14 non-aircraft lease agreements as right-of-use. The effects from the initial adoption of this standard are shown in the table below:

(a) Refers to installments of operating lease that had their maturities renegotiated during 2016.

(b) Deferred income tax effects arising from the initial adoption of IFRS 16 recorded in the Smiles subsidiary.

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 has been effective since January 1, 2019, and, after assessing the matter the Company’s Management concluded that there are no impacts or need for additional disclosures in the consolidated interim financial statements due to the adoption of this standard.

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4.2.   Adoption of hedge accounting to protect future revenues

In the regular course of its operations, the Company has recurring sales in US dollars (“US$”), mainly as a result of international routes in South, Central and North America. Accordingly, Management has adopted cash flow hedge accounting as a hedge for future foreign currency revenues, which are considered highly probable, as provided for and expressed in Paragraph 6.3.1 of IFRS 9, using as instruments 50 lease agreements recorded as debt as a result of the adoption of IFRS 6 (R2), as provided for in paragraph 6.6.2 of IFRS 9.

With the adoption of hedge accounting, the foreign exchange gains and losses arising from the lease agreements (hedge instrument) will be accumulated in shareholders’ equity, “Other Comprehensive Income”, appropriated to the Company's results upon the realization of the income from sales in US$.

Hedge accounting derives from the natural hedge of the Company’s operations, portrayed by cash flow (revenues and amortization of debt in US$) and does not represent an increase in financial costs, allowing the elimination of some of the exchange rate volatility in the Company's results. The final position of shareholders’ equity is not affected by the adoption of this accounting practice. The elements of hedge accounting are: (1) hedged object: highly probable sales revenue in US$; (2) hedge instrument: 50 lease agreements linked to US$; (3) designated amount: 60 months of highly probable revenues based on a range of 80 to 85% of historically earned revenues, totaling US$903,102. (4) nature of the hedged risk: exchange variation; (5) hedged risk specification: USD/BRL spot exchange rate; (6) hedge type: cash flow.

4.3.   Reclassifications

To improve the presentation of the interim quarterly information, the following amounts were reclassified in the Balance Sheet and Cash Flow:

4.4.   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 result or equity disclosed by the Company.

5.     Seasonality

The Company expects revenues and operating results from its flights to be at their highest levels in the summer and winter months of January and July, respectively, and during the last weeks of December and in the year-end holiday period. Given the high proportion of fixed costs, this seasonality tends to drive variations in operating results across the fiscal-year quarters.

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6.     Cash and cash equivalents

      The breakdown of cash equivalents is as follows:

7.     Short-term investments

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8.     Restricted cash

(a)   The amount of R$35,977 (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 agreements from GLA.

(c)   Refers to the guarantee of bank collaterals and judicial blockages in investment funds.

9.     Trade receivables