MEGA MATRIX CORP.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2019
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from ____________ to
____________
Commission File Number:
001-13387
AeroCentury Corp.
(Exact
name of Registrant as Specified in Its Charter)
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Delaware
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94-3263974
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(IRS
Employer Identification No.)
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1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address
of Principal Executive Offices)
Registrant’s telephone number, including
area code:
(650)
340-1888
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Trading
Symbol
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Name of
each exchange on which registered
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Common Stock, par
value $0.001 per share
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ACY
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NYSE American
Exchange
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Securities registered pursuant to
Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes
☐
No
☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐
No
☒
Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
☒
No
☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted 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 such files).
Yes
☒
No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated
filer
☐
Accelerated filer
☐
Non-accelerated
filer
☒
Smaller reporting
company
☒
Emerging growth
company ☐
If an emerging
growth company, 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. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
The aggregate
market value of the voting and non-voting common equity held by
non-affiliates as of June 28, 2019, the last business day of
the registrant’s most recently completed second fiscal
quarter (based upon the closing sale price of the
registrant’s common stock as of such date, as reported by the
NYSE American Exchange) was $8,565,600. Shares of common stock held
by the registrant's officers and directors and beneficial owners of
10% or more of the outstanding shares of the registrant's common
stock have been excluded from the calculation of this amount
because such persons may be deemed to be affiliates of the
registrant; however, the treatment of these persons as affiliates
of the registrant for purposes of this calculation is not, and
shall not be considered, a determination as to whether any such
person is an affiliate of the registrant for any other
purpose.
The number of
shares of the registrant’s common stock outstanding as of
March 30, 2020 was 1,545,884.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III of this
Annual Report on Form 10-K incorporates information by reference to
the registrant’s Proxy Statement for its 2020 Annual Meeting
of Stockholders. Except as expressly incorporated by reference,
such Proxy Statement shall not be deemed to be a part of this
Annual Report on Form 10-K.
As used in this report, unless the context indicates otherwise,
“AeroCentury” refers to AeroCentury Corp. and the
“Company” refers to AeroCentury together with its
consolidated subsidiaries.
This Annual Report
on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). All statements in
this report other than statements of historical fact are
forward-looking statements for purposes of these provisions,
including any statements of the Company’s plans and
objectives for future operations, the Company’s future
financial or economic performance (including known or anticipated
trends), and the assumptions underlying or related to the
foregoing. Statements that include the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates,"
"potential," or "continue," or the negative thereof, or other
comparable terminology, are forward-looking
statements.
Forward-looking
statements in this report include statements about the following
matters, although this list is not exhaustive:
●
The Company’s
business plans and strategies, including its continued focus on
acquiring used regional aircraft, any potential for acquiring and
managing new types and models of regional aircraft, and its
expectation that most of its future growth will be outside of North
America;
●
Certain industry
trends and their impact on the Company and its performance,
including: increasing competition that results in higher
acquisition prices for many of the aircraft types that the Company
has targeted to buy and, at the same time, downward pressure on
lease rates for these aircraft; relatively lower market demand for
older aircraft types that are no longer in production, which could
cause certain of the Company’s aircraft to remain off lease
for significant periods of time; and expectations of shakeouts of
weaker carriers in economically troubled regions, which could
impact the financial condition and viability of certain of the
Company’s customers, and as a result, their demand for the
Company’s aircraft and their ability to fulfill their lease
commitments and other obligations to the Company under existing
leases;
●
The effects on the
airline industry and the global economy of events such as public
health emergencies or natural disasters, such as the recent
coronavirus (COVID-19) outbreak;
●
Expectations about
the Company’s future liquidity, cash flow and capital
requirements;
●
The Company’s
ability to convert its credit facility into a term loan
facility;
●
The Company’s
ability to obtain additional debt or equity financing to repay its
indebtedness;
●
The Company’s
ability to comply with its recently established term loans and
other outstanding debt instruments, including making payments of
principal and interest thereunder as and when required and
complying with the financial and other covenants included in these
instruments;
●
The Company’s
ability to reach agreement with its special-purpose subsidiary term
loan lender regarding certain lessee payment defaults arising from
COVID-19 pandemic fallout;
●
The Company’s
ability to access additional sources of capital in the future as
and when needed, in the amounts desired, on terms favorable to the
Company, or at all;
●
The expected impact
of existing or known threatened legal proceedings;
●
The effect on the
Company and its customers of complying with applicable government
and regulatory requirements in the numerous jurisdictions in which
the Company and its customers operate;
●
The Company’s
cyber vulnerabilities and the anticipated effects on the Company if
a cybersecurity threat or incident were to
materialize;
●
General economic,
market, political and regulatory conditions, including anticipated
changes in these conditions and the impact of such changes on
customer demand and other facets of the Company’s business;
and
●
The impact of the
foregoing on the prevailing market price and trading volume of the
Company’s common stock.
All of the
Company’s forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to
differ materially from those projected or assumed by such
forward-looking statements. Among the factors that could cause such
differences are: the effects on the airline industry and global
economy of public health emergencies, including the recent
coronavirus outbreak; continued availability of financing; the
Company’s ability to convert its credit facility into a term
loan facility; the Company’s ability to comply with the
covenants under its term loans and other debt instruments; the
potential impact on the Company’s debt obligations of
developments regarding LIBOR, including the potential phasing out
of this metric; the Company's ability to locate and acquire
appropriate revenue-producing assets; deterioration of the market
for or appraised values of aircraft owned by the Company;
volatility in interest rates; any noncompliance by the Company's
lessees with obligations under their respective leases, including
payment obligations; any economic downturn or other financial
crisis; the timing, rate and amount of maintenance expenses for the
Company’s asset portfolio, as well as the distribution of
these expenses among the assets in the portfolio; the Company's
ability to raise capital on acceptable terms when needed and in
desired amounts, or at all; limited trading volume in the Company's
stock; and the other factors detailed under "Factors That May
Affect Future Results and Liquidity" in Item 7 of this report. In
addition, the Company operates in a competitive and evolving
industry in which new risks emerge from time to time, and it is not
possible for the Company to predict all of the risks it may face,
nor can it assess the impact of all factors on its business or the
extent to which any factor or combination of factors could cause
actual results to differ from expectations. As a result of these
and other potential risks and uncertainties, the Company’s
forward-looking statements should not be relied on or viewed as
predictions of future events.
This cautionary
statement should be read as qualifying all forward-looking
statements included in this report, wherever they appear. All
forward-looking statements and descriptions of risks included in
this report are made as of the date hereof based on information
available to the Company as of the date hereof, and except as
required by applicable law, the Company assumes no obligation to
update any such forward-looking statement or risk for any reason.
You should, however, consult the risks and other disclosures
described in the reports the Company files from time to time with
the Securities and Exchange Commission (“SEC”) after
the date of this report for updated information.
2
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and
Issuer
Purchases of Equity Securities
Item 12
Security Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
3
P
ART I
I
tem 1. Business.
Business of the Company
The Company is engaged in the
business of investing in used regional aircraft equipment and
leasing the equipment to foreign and domestic regional air
carriers.
The Company’s principal business objective
is to acquire aircraft assets and manage those assets in order to
provide a return on investment through lease revenue and,
eventually, sale proceeds. The Company strives to achieve this
objective by reinvesting cash flow from operations and using
short-term and long-term debt and/or equity financing. The Company
believes its ability to achieve this objective depends in large
part on its success in three areas: asset selection and
acquisition, lessee selection and obtaining financing to acquire
aircraft and engines.
As
of December 31, 2019, the Company’s aircraft portfolio
consisted of eleven aircraft held for lease, six aircraft held
under sales-type or direct finance leases and seven aircraft held
for sale two of which are being sold in parts. Most of the
Company’s aircraft are mid-life regional aircraft, and its
globally diverse customer base consists of nine airlines operating
in seven countries.
On
October 1, 2018, AeroCentury acquired JetFleet Holding Corp.
(“JHC”) in a reverse triangular merger
(“Merger”) for consideration of approximately $2.9
million in cash and 129,217 shares of common stock. JHC is the sole
shareholder of JetFleet Management Corp. (“JMC”), which
is an integrated aircraft management, marketing and financing
business that manages and administers the Company's portfolio of
aircraft assets. Before the Merger, such management and
administration were performed pursuant to the terms of a management
agreement (the "Management Agreement") between the Company and JMC.
Post-Merger, the management and administration services provided
under the Management Agreement have become internalized and under
the control and management of the Company itself.
A decrease in air
travel, lack of demand for air travel or downturn in the aviation
industry caused by public health emergencies or natural disasters,
such as the recent coronavirus (COVID-19) outbreak, could result in
lower utilization of our aircraft assets, which could in turn
materially and adversely affect our business, financial condition
and results of operations.
Asset Selection and Acquisition
. The
Company typically acquires assets in one of three ways. The Company
may purchase an asset already subject to a lease and assume the
rights and obligations of the seller, as lessor under the existing
lease. Additionally, the Company may purchase an asset from an air
carrier and lease it back to the air carrier. Finally, the Company
may purchase an asset from a seller and then immediately enter into
a new lease for the aircraft with a third-party lessee. In this
last case, the Company typically does not purchase an asset unless
a potential lessee has been identified and has committed to lease
the asset.
The Company locates
customers through marketing efforts utilizing website listings,
attendance at industry conferences, referrals from existing
industry contacts and current customers, and focused
advertising.
The Company
generally targets used regional aircraft with purchase prices
between $10 million and $20 million and lease terms of three to ten
years. In identifying and selecting assets for acquisition, the
Company evaluates, among other things, the type of asset, its
current price and projected future value, its versatility or
specialized uses, the current and projected availability of and
demand for that asset, and the type and number of future potential
lessees. Because the Company has extensive experience in
purchasing, leasing and selling used regional aircraft, it believes
it has the expertise and industry knowledge to purchase these
assets at appropriate prices and maintain an acceptable overall
on-lease rate for them.
In order to improve
the remarketability of an aircraft after expiration of a lease, the
Company’s leases generally contain provisions that require
lessees to either return the aircraft in a condition that allows
the Company to expediently re-lease or sell the aircraft, or pay
sufficient amounts based on usage under the lease to cover any
maintenance or overhaul of the aircraft required to bring the
aircraft to such a state.
Lessee Selection
. The Company’s
customer base primarily consists of regional commercial aircraft
operators located in globally diverse markets and seeking to access
aircraft under operating leases. The Company expects to continue to
target these customer markets for the foreseeable future, and
expects any customer growth in the near term would be from lessees
operating outside of North America. When considering whether to
enter into transactions with a lessee, the Company generally
reviews the lessee’s creditworthiness, growth prospects,
financial status and backing; the experience of its management; and
the impact of legal and regulatory matters in the lessee’s
market, all of which are weighed in determining the lease terms
offered to the lessee. In addition, it is the Company’s
policy to monitor the lessee’s business and financial
performance closely throughout the term of the lease, and, if
requested, provide assistance drawn from the experience of the
Company’s management in many areas of the air carrier
industry. Because of its “hands-on” approach to
portfolio management, the Company believes it is able to enter into
transactions with lessees in a wider range of markets than may be
possible for traditional, large lending institutions and leasing
companies.
Availability of Financing.
The Company
has funded its asset acquisitions primarily through debt financing,
supplemented by free cash flow. The Company’s primary source
of debt financing has been a Credit Facility provided by a
syndicate of banks with MUFG Union Bank, NA, (“MUFG”)
as agent (the “MUFG Credit Facility”). The Company is
currently in negotiations with the MUFG Credit Facility lenders
(“Credit Facility Lenders”) to convert the MUFG Credit
Facility into a term loan facility (as anticipated to be converted,
the “MUFG Term Loan” and, collectively with the MUFG
Credit Facility, “MUFG Indebtedness”). Therefore, the
MUFG Credit Facility is expected to no longer be a source of asset
acquisition financing. The Company has engaged an investment
banking advisor to assist in obtaining additional debt or equity
financing which, if successful, would be used to repay the MUFG
Indebtedness.
The Company’s
portfolio of assets has historically generated lease and sale
revenues that have exceeded the Company’s cash expenses,
which have consisted mainly of maintenance costs, principal and
interest payments on debt, professional fees, insurance premiums,
management fees (before the Merger) and salaries and employee
benefits (after the Merger). This historical excess cash from
operations has aided in the Company’s ability to continue to
add to its aircraft portfolio over time. However, until the MUFG
Indebtedness is repaid or refinanced, the Company will likely be
required to apply any excess cash flow toward repayment of the MUFG
Indebtedness. Even if the MUFG Indebtedness is repaid, and a new
credit facility is obtained by the Company, the Company’s
performance and cash flow are subject to fluctuations and a number
of risks and uncertainties, and as a result, free cash flow may not
serve as a viable source of funding in some periods.
See Item 7 of
this report for more information about trends in and expectations
about the Company’s performance and liquidity.
4
Competition
The Company
competes with other leasing companies, banks, financial
institutions, private equity firms, aircraft leasing syndicates,
aircraft manufacturers, distributors, airlines and aircraft
operators, equipment managers, equipment leasing programs and other
parties for its regional air carrier customers. Many of these
competitors have longer operating histories, more experience,
larger customer bases, more expansive brand recognition, deeper
market penetration and significantly greater financial resources.
Competition has continued to increase significantly as competitors
who have traditionally neglected the regional air carrier market
have recently focused on this market. The industry has also
experienced a number of consolidations of smaller leasing
companies, creating a handful of very large companies operating in
this market, as well as new entrants to the market.
Competition in this
industry is based on a number of factors, including price, lease
terms, variety of product selection (in other words, the type(s) of
aircraft available for lease), reputation, ability to execute
transactions as committed, and customer service. Among these, the
Company believes price and lease terms may be the most important
competitive factors, and as a result, the entry of new competitors
into the market, the creation of larger competitors due to
consolidation, and/or the entry of traditional large aircraft
lessors into the regional aircraft niche, particularly those with
greater access to capital than the Company, could lead to fewer
acquisition opportunities for the Company and/or lease terms that
are less favorable to the Company, as well as fewer renewals of
existing leases or new leases of existing aircraft.
The
Company, however, believes that it has a competitive advantage due
to its experience and operational efficiency in financing the
transaction sizes that are desired by many in the regional air
carrier market. While the Company believes in its competitive
advantage over the long term, should a global health emergency,
such as the coronavirus outbreak, develop that materially disrupts
the airline industry or slows down passenger growth globally, such
growth and demand may be negatively impacted over the short to
medium term.
Dependence on Significant Customers
For the year ended
December 31, 2019, the Company’s five largest customers
accounted for 23%, 23%, 16%, 14%, and 10% of operating lease
revenue. For the year ended December 31, 2018, the Company’s
four largest customers accounted for 30%, 21%, 15%, and 13% of
operating lease revenue. This concentration of credit risk with
respect to lease receivables will diminish in the future only if
the Company is able to expand its customer base by re-leasing
assets currently on lease to significant customers to new customers
at lease-end and/or acquiring assets for lease to new customers.
Conversely, sales of assets without the acquisition of additional
assets may increase the concentration of significant customers in
the Company’s portfolio.
Environmental Matters
Compliance with
federal, state and local environmental laws, including provisions
regulating the discharge of greenhouse gas emissions (including
carbon dioxide (CO2)) into the environment, aircraft noise
regulations, and remedial agreements or other actions relating to
these provisions or the environment otherwise, has not had, and is
not expected to have, a material effect on the Company’s
capital expenditures, financial condition, results of operations or
competitive position.
5
Employees
Prior to the
Merger, JMC was responsible for all administration and management
of the Company pursuant to the terms of the Management Agreement.
With the acquisition of JHC by the Company on October 1, 2018, the
Company assumed the role of employer (through its JMC subsidiary)
of the staff of such subsidiary at the time of the Merger. As of
December 31, 2019, the Company had 10 total employees,
including 9 full-time employees.
Patents, Trademarks and Licenses
The Company has a
registered trademark for the “AeroCentury” name. The
Company relies primarily on trademark and trade secrets law, as
well as non-disclosure contracts, to protect its intellectual
property and proprietary information.
Available Information
AeroCentury is a Delaware
corporation incorporated in 1997.
Its headquarters is
located at 1440 Chapin Avenue, Suite 310, Burlingame, California
94010. The main telephone number is (650) 340-1888. The
Company’s website is located at:
http://www.aerocentury.com.
The Company files
and furnishes periodic reports, proxy statements and other
information with the SEC. Copies of these materials are made
available free of charge on the Company’s website through the
Investor Relations link (SEC Filings) as soon as reasonably
practicable after they are electronically filed with or furnished
to the SEC. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the SEC, including the Company.
6
I
tem 1A. Risk Factors.
Disclosure under
this item has been omitted pursuant to the rules of the SEC that
permit smaller reporting companies to omit this information.
However, please see the description of certain risks and
uncertainties that could impact the Company’s performance,
liquidity and stock price and volume set forth under
Factors that May Affect Future Results and
Liquidity
in Item 7 of this report.
I
tem 1B. Unresolved Staff Comments.
None.
I
tem 2. Properties.
As of December 31,
2019, the Company did not own any real property, plant or
materially important physical properties. The Company leases its
principal executive office space at 1440 Chapin Avenue, Suite 310,
Burlingame, California 94010 under a lease agreement that expires
on June 30, 2020.
For information
regarding the aircraft and aircraft engines owned by the Company,
refer to the information under “
Fleet Summary
” in Item 7 of
this report and Notes 2 and 3 to the Company’s consolidated
financial statements in Item 8 of this report.
I
tem 3. Legal Proceedings.
The Company from
time to time engages in ordinary course litigation incidental to
the business, typically relating to lease collection matters
against defaulting lessees and mechanic’s lien claims by
vendors hired by lessees. Although the Company cannot predict the
impact or outcome of any of these proceedings, including, among
other things, the amount or timing of any liabilities or other
costs it may incur, none of the pending legal proceedings to which
the Company is a party or any of its property is subject is
anticipated to have a material effect on the Company’s
business, financial condition or results of
operations.
Item
4. Mine Safety Disclosures.
Not
applicable.
7
P
ART II
I
tem 5.
Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
.
Market Information
The Company’s
common stock is traded on the NYSE American Exchange under the
symbol “ACY.”
Number of Holders
According to the
Company’s transfer agent, the Company had approximately 1,100
stockholders of record as of March 30, 2020. Because brokers and
other institutions and nominees hold many of the Company’s
shares of Common Stock on behalf of beneficial owners, the Company
is unable to estimate the total number of beneficial owners
represented by those nominees.
Dividends
Although the
Company’s earnings in some periods may indicate an ability to
pay cash dividends, the Company has not declared or paid any such
dividends to date, and has no plans to do so in the foreseeable
future because it intends to re-invest any earnings into the
acquisition of additional revenue-generating aircraft and
equipment.
I
tem 6. Selected Financial
Data.
Disclosure under
this item has been omitted pursuant to the rules of the SEC that
permit smaller reporting companies to omit this
information.
8
I
tem 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis should be read together with
the Company’s audited consolidated financial statements and
the related notes included in this report. This discussion and
analysis contains forward-looking statements. Please see the
cautionary note regarding these statements at the beginning of this
report.
Overview
The Company
provides leasing and finance services to regional airlines
worldwide. The Company is principally engaged in leasing its
aircraft portfolio, primarily consisting of mid-life regional
aircraft, through operating leases and finance leases to its
globally diverse customer base of nine airlines in seven countries.
In addition to leasing activities, the Company sells aircraft from
its operating lease portfolio to third parties, including other
leasing companies, financial services companies, and airlines. Its
operating performance is driven by the composition of its aircraft
portfolio, the terms of its leases, and the interest rate of its
debt, as well as asset sales.
During 2019, the
Company purchased no aircraft and the Company sold one aircraft
that had been held for lease, one aircraft that had been
reclassified during the year from held for lease to a sales-type
finance lease and two aircraft and an engine that been held for
sale. The Company also reclassified three aircraft from held for
lease to held for sale. The Company ended the year with a total of
eleven aircraft held for lease, with a net book value of
approximately $108 million. This represents a 41% decrease compared
to the net book value of the Company’s aircraft and engines
held for lease at December 31, 2018. In addition to the aircraft
held for lease at year end, the Company held six aircraft subject
to finance leases and held seven aircraft for sale, two of which
are being sold in parts.
Average portfolio
utilization was approximately 95% and 92% during 2019 and 2018,
respectively. The year-to-year increase was due to sales during
2018 and 2019 of assets that were off lease in the 2018 period, the
effects of which were partially offset by aircraft that were on
lease in 2018, but off lease for part of 2019.
Net loss for 2019
and 2018 was $16.7 million and $8.1 million, respectively,
resulting in basic and diluted loss per share of $(10.78) and
$(5.58), respectively. Pre-tax profit margin (which the Company
calculates as its income before income tax provision as a
percentage of its revenues and other income) was (49%) and (33%) in
2019 and 2018, respectively.
MUFG Credit Facility Default and Conversion into Term
Loan
Historically, the
Company has used its MUFG Credit Facility as its primary source of
acquisition financing. In February 2019, the MUFG Credit Facility
was extended to February 19, 2023, and was amended in certain other
respects as described under
Liquidity and Capital Resources
.
Contemporaneously, the Company refinanced, using new non-recourse
term loans (“Nord Term Loans”) from
Norddeutsche Landesbank
Girozentrale, New York Branch (“Nord”)
with an
aggregate principal of $44.3 million, four aircraft that previously
served as collateral under the MUFG Credit Facility and two
aircraft that previously served as collateral under special-purpose
subsidiary financings.
As of December 31,
2019, the Company owed $84.1 million in principal amount and $0.4
million in accrued interest under the MUFG Credit Facility, and
$30.9 million in principal amount and $0.1 million in accrued
interest under the Nord Term Loans.
During the third
quarter of 2019 as a result of significant past due payments from
the customer, the Company terminated the leases for, and
repossessed, four of its aircraft held for lease. The customer, a
European regional airline and one of the Company’s largest
customers based on operating lease revenue, subsequently ceased
operations and declared bankruptcy. The Company applied the
security deposits and a portion of collected maintenance reserves
it held against past due rent due from the customer. The remaining
balance of collected maintenance reserves equal to $17.0 million
was recognized as maintenance reserves revenue. The Company also
recorded impairment losses totaling $22.3 million for the four
aircraft based on appraised values or expected sales proceeds, and
reclassified two of the four aircraft from held for lease to held
for sale. As a result of the lease terminations, the four aircraft
were newly appraised based on the maintenance-adjusted condition of
the aircraft, rather than the basis previously used for their
appraisal, which considered future cash flows under the leases.
During that same quarter, the Company also (i) recorded impairment
losses of $15,000 on another of its aircraft held for sale and $1.0
million related to airframe parts that are held for sale, both of
which were based on
estimated sales proceeds; and
(ii)
recorded a bad debt
allowance of $
3.9 million
as a result of payment delinquencies by two
other
customers that lease three of
the Company’s aircraft subject to finance leases. T
he
Company reduced its bad debt allowance by $1.0 million during the
fourth quarter of 2019, as a result of cash received during the
quarter and anticipated cash to be received from the lessees in the
first quarter of 2020.
At December 31, 2019,
appraisal values for assets included in the borrowing base were
updated, and increased the Borrowing Base Deficit to $29.8 million
at that date.
As a result of the
aforementioned impairment losses and bad debt allowance, as of
September 30, 2019 and December 31, 2019, the Company was in
default of its borrowing base covenant under the MUFG Credit
Facility (the “Borrowing Base Default”), due to the
outstanding facility balance exceeding the minimum required
collateral value coverage by approximately $9.4 million and $29.8
million, respectively.
The Company was not
in compliance with various covenants contained in the MUFG Credit
Facility agreement, including those related to interest coverage
and debt service coverage ratios and a no-net-loss requirement
under the MUFG Credit Facility, at September 30, 2019 and at
December 31, 2019.
On
October 15, 2019, the agent bank for the Credit Facility Lenders
under the MUFG Credit Facility delivered a Reservation of Rights
Letter to the Company which contained notice of the Borrowing Base
Default and a demand for repayment of the amount of the Borrowing
Base Deficit by January 13, 2020, and also contained formal notices
of default under the MUFG Credit Facility relating to the alleged
material adverse effects on the Company’s business of the
recent early termination of leases for three aircraft and potential
financial covenant noncompliance based on the Company’s
financial projections provided to the Credit Facility Lenders (the
Borrowing Base Default and such other defaults referred to as the
“Specified Defaults”). The Reservation of Rights Letter
also informed the Company that further advances under the MUFG
Credit Facility agreement would no longer be permitted due to the
existence of such defaults.
In October,
November and December 2019, the Company, agent bank and the
Credit Facility
Lenders
entered into a Forbearance Agreement and amendments
extending the Forbearance Agreement with respect to the Specified
Defaults under the MUFG Credit Facility. The Forbearance Agreement
(i) provided that the
Credit Facility Lenders
temporarily forbear from exercising default remedies under the MUFG
Credit Facility agreement for the Specified Defaults, (ii) reduced
the maximum availability under the MUFG Credit Facility to $85
million and (iii) extended the cure period for the Borrowing Base
Deficit from January 13, 2020 to February 12, 2020. The Forbearance
Agreement also allowed the Company to continue to use LIBOR as its
benchmark interest rate, but increased the margin on the
Company’s LIBOR-based loans under the MUFG Credit Facility
from a maximum of 3.75% to 6.00% and set the margin on the
Company’s prime rate-based loans at 2.75%, as well as added a
provision for paid-in-kind interest (“PIK Interest) of 2.5%
to be added to the outstanding balance of the MUFG Credit Facility
debt in lieu of a cash payment. The Company paid cash fees of
$406,250 in connection with the Forbearance Agreement and
amendments, and accrued a fee of $832,100, which was added to the
outstanding balance of the MUFG Credit Facility debt in lieu of a
cash payment. The Forbearance Agreement was in effect until
December 30, 2019, after which the Company and the
Credit Facility Lenders
agreed not to further amend the Forbearance Agreement.
On February 12, 2020, the Credit
Facility Lenders delivered a Reservation of Rights Letter to the
Company which contained notice of the failure to cure the Borrowing
Base Default by February 12, 2020. On March 16, 2020, the Credit
Facility Lenders delivered a Reservations of Rights Letter to the
Company that contained notice that the defaults under the MUFG
Credit Facility constituted a default under the swap agreements
related to the MUFG Credit Facility debt, and the swap agreements
for the MUFG Credit Facility were terminated.
The
termination of the MUFG Swaps will require that the Company pay
$3.1 million in connection with such termination. The termination
payment owed to the swap counterparty is secured by the collateral
that secures the MUFG Indebtedness, and increases the amount of
indebtedness secured by the Credit Facility Lender’s blanket
lien on the Company’s assets.
The Company is
currently in negotiations with the Credit Facility Lenders to
convert the MUFG Credit Facility into the MUFG Term Loan.
Therefore, the MUFG Credit Facility is expected to no longer be a
source of asset acquisition financing. The Company has engaged an
investment banking advisor to assist in obtaining additional debt
or equity financing which, if successful, would be used to repay
the MUFG Indebtedness.
Nord Term Loan Default
In March 2020, one
of the Company’s customers, which leases two regional jet
aircraft subject to Nord Term Loan financing, did not timely make
its quarterly rent payment. The lessee payment default under the
leases and the resulting corresponding loan payment defaults by the
Company’s special-purpose subsidiaries resulted in defaults
under their respective Nord Term Loan agreements. The lessee, a
major Spanish regional carrier, was severely affected by the
COVID-19 pandemic, and was required to cease operations as part of
Spain’s lockdown, but has indicated to the Company that it
intends to honor its lease commitments. The Company is currently in
discussions with the lessee regarding its overdue payment
obligations and has entered into negotiations with Nord regarding a
workout for the corresponding overdue Nord Term Loan
payments.
9
Fleet Summary
(a) Assets Held for Lease
Key portfolio
metrics of the Company’s aircraft held for lease as of
December 31
, 2019 and December
31, 2018 were as follows:
|
|
December 31
,
2019
|
December
31,
2018
|
|
Number of aircraft
and engines held for lease
|
11
|
18
|
|
|
|
|
|
Weighted average
fleet age
|
11.8
years
|
11.1
years
|
|
Weighted average
remaining lease term
|
41
months
|
58
months
|
|
Aggregate fleet net
book value
|
$
108,368,600
|
$
184,019,900
|
|
|
For
the Years Ended
December 31
,
|
|
|
|
2019
|
2018
|
|
Average portfolio
utilization
|
95
%
|
92
%
|
The increase in
portfolio utilization between periods was primarily due to sales
during 2018 and 2019 of assets that were off lease in the 2018
period, the effects of which were partially offset by aircraft that
were on lease in 2018, but off lease for part of 2019.
The following table
sets forth the net book value and percentage of the net book value,
by type, of the Company’s assets that were held for lease at
December 31
, 2019 and December
31, 2018:
|
|
December 31
, 2019
|
December 31,
2018
|
||
|
Type
|
Number
owned
|
% of
net book value
|
Number
owned
|
% of
net book value
|
|
Turboprop
aircraft:
|
|
|
|
|
|
Bombardier
Dash-8-400
|
2
|
20
%
|
2
|
13
%
|
|
Bombardier
Dash-8-300
|
-
|
-
%
|
2
|
5
%
|
|
|
|
|
|
|
|
Regional jet
aircraft:
|
|
|
|
|
|
Embraer
175
|
3
|
26
%
|
3
|
16
%
|
|
Canadair
1000
|
2
|
21
%
|
2
|
14
%
|
|
Canadair
700
|
3
|
20
%
|
3
|
12
%
|
|
Canadair
900
|
1
|
13
%
|
5
|
39
%
|
|
|
|
|
|
|
|
Engines:
|
|
|
|
|
|
Pratt
& Whitney 150A
|
-
|
-
%
|
1
|
1
%
|
During 2019, the
Company purchased no aircraft and sold one aircraft that had been
held for lease, one aircraft that had been reclassified during the
year from held for lease to a sales-type finance lease and two
aircraft and an engine that been held for sale, as well as certain
aircraft parts. The Company also reclassified three aircraft from
held for lease to held for sale. During 2018, the Company purchased
two aircraft subject to operating leases and sold five aircraft and
certain aircraft parts.
The following table
sets forth the net book value and percentage of the net book value
of the Company’s assets that were held for lease at
December 31
, 2019 and December
31, 2018 in the indicated regions (based on the domicile of the
lessee):
|
|
December 31
, 2019
|
December 31,
2018
|
||
|
Region
|
Net
book value
|
%
of
net
book value
|
Net
book value
|
%
of
net
book value
|
|
North
America
|
$
63,799,600
|
59
%
|
$
68,485,400
|
37
%
|
|
Europe
|
44,569,000
|
41
%
|
110,069,000
|
60
%
|
|
Asia
|
-
|
-
%
|
5,465,500
|
3
%
|
|
|
$
108,368,600
|
100
%
|
$
184,019,900
|
100
%
|
For the year ended
December
31, 2019,
approximately 30%, 23%, 23% and 10% of the Company’s
operating lease revenue was derived from customers in the United
States, Spain, Slovenia and Croatia, respectively. For the year
ended
December
31, 2018,
approximately 30%, 28% and 21% of the Company’s operating
lease revenue was derived from customers in Slovenia, the United
States and Spain, respectively. Operating lease revenue does not
include interest income from the Company’s finance leases.
The following table sets forth geographic information about the
Company’s operating lease revenue for leased aircraft and
aircraft equipment, grouped by domicile of the lessee:
|
|
For
the Years Ended
December
31,
|
|||
|
|
2019
|
2018
|
||
|
Region
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
|
Europe
|
4
|
59
%
|
4
|
59
%
|
|
North
America
|
3
|
40
%
|
4
|
37
%
|
|
Asia
|
1
|
1
%
|
1
|
4
%
|
At
December 31
, 2019 and December 31, 2018,
the Company also had six aircraft subject to finance leases. For
the year ended December 31, 2019, approximately 57% and 43% of the
Company’s finance lease revenue was derived from customers in
Africa and Europe, respectively. For the year ended
December 31
, 2018, approximately 67% and
33% of the Company’s finance lease revenue was derived from
customers in Africa and Europe, respectively.
(b) Assets Held for Sale
Assets held for
sale at
December 31
, 2019
consisted of three Canadair 900 aircraft, one Saab 340B Plus
turboprop aircraft, one Bombardier Dash-8-300 aircraft and airframe
parts from two turboprop aircraft.
10
Results of Operations
(i) Revenues and Other Income
Revenues and other
income increased by 61% to $43.6 million in 2019 from $27.1 million
in 2018. The increase was primarily a result of increased
maintenance reserves revenue and a gain on sale of assets in 2019
as opposed to a loss on sale of assets in 2018, the effects of
which were partially offset by decreases in operating and finance
lease revenues.
Operating lease
revenue decreased by 7% to $25.6 million in 2019 from $27.6 million
in 2018, primarily due to reduced rent income resulting from the
early termination of four aircraft leases with one of the
Company’s customers and the sale of an asset in 2019 that had
been on lease until the time of sale. These decreases were
partially offset by revenue from two aircraft purchased in the
second quarter of 2018 and an asset that was on lease in 2019, but
off lease in 2018.
Maintenance
reserves that are retained by the Company at lease end are recorded
as revenue at that time. During 2019, the Company recorded $17.0
million of such revenue, arising from maintenance reserves retained
upon the termination of four aircraft leases with one customer.
During 2018, the Company recorded $1.6 million of such revenue,
arising from cash received from the former lessee of three aircraft
after such aircraft were returned to the Company by the lessee
during 2017, which amounts were not accrued at lease termination
based on management’s evaluation of the creditworthiness of
the lessee.
During 2019, the
Company recorded a net gain of $0.3 million on the sale of two
aircraft, an engine and aircraft parts and a net loss of $0.2
million on the reclassification of an aircraft from held for lease
to a finance lease receivable.
During 2018, the Company recorded
net gains totaling $0.1 million on the sale of an aircraft and
aircraft parts and losses totaling $3.5 million on the sale of four
aircraft.
Finance lease
revenue decreased by 32% to $0.9 million in 2019 from $1.3 million
in 2018, primarily due to a lower finance lease receivables balance
in 2019 and the purchase by the lessee of three aircraft subject to
finance leases during the third quarter of
2018.
(ii) Expenses
Total expenses
increased by 79% to $64.8 million in 2019 from $36.2 million in
2018. The increase was primarily a result of increases in asset
impairment
losses
, bad debt expense and
interest expense, the effects of which were partially offset by
decreases in overhead expenses and settlement loss recorded in
connection with the acquisition of JHC in 2018.
During 2019, the Company recorded
impairment charges totaling $31.0 million on four assets held for
sale, based on appraised values, and five assets held for sale,
based on expected sales proceeds.
As a result of four lease
terminations during the year, the appraised values were based on
the maintenance-adjusted condition of the aircraft, rather than the
previous basis, which reflected future cash flows under the leases.
During 2018, the Company recorded impairments totaling $3.0 million
on four aircraft held for sale, based on appraised
values.
As
a result of payment delinquencies during 2019 by two customers that
lease three of the Company’s aircraft subject to finance
leases, the Company also recorded a bad debt expense of $2.9
million. The Company recorded no bad debt expense during
2018.
The Company’s
interest expense increased by 19% to $11.3 million in 2019 from
$9.5 million in 2018, primarily as a result of a higher average
interest rate and $0.3 million of valuation charges related to the
Company’s interest rate swaps, as well as a $1.1 million
write-off of a portion of the Company’s unamortized
debt issuance costs related to the
MUFG Credit Facility, the effects of which were partially offset
by
a lower average debt balance.
After the Merger,
JMC’s operating expenses, including salaries and employee
benefits, became the responsibility of the Company. In 2019,
overhead expenses of approximately $6.6 million were comprised of
salaries and employee benefits and professional fees, general and
administrative expenses. In 2018, overhead expenses of
approximately $7.4 million were comprised of management fees paid
to JMC under the Management Agreement, based on the net book value
of the Company’s aircraft and engines and finance lease
receivable balances, salaries and employee benefits after the
Merger, and professional fees, general and administrative expenses.
Professional fees, general and administrative and other expenses in
2018 included $485,000 incurred in connection with the acquisition
of JHC.
11
Liquidity and Capital Resources
(a)
MUFG Credit Facility
As discussed in
Management Discussion and Analysis
– Overview
, the Company’s $145 million MUFG
Credit Facility was previously the Company’s primary source
of acquisition financing. The Company is currently in negotiations
with the Credit Facility Lenders to convert the MUFG Credit
Facility into the MUFG Term Loan. If conversion occurs, the MUFG
Credit Facility will no longer be a source of debt financing for
the Company’s acquisitions. The Company has engaged an
investment banking advisor to assist in obtaining debt or equity
financing which, if successful, would be used to repay the MUFG
Indebtedness. Unless and until the MUFG Term Loan is refinanced
with a new lender, substantially all the excess cash flow of the
Company will be required to be applied toward repayment of the MUFG
Term Loan, unless the Credit Facility Lenders approve other uses of
such excess funds.
In March 2019, the
Company entered into interest rate swaps (the “MUFG
Swaps”) with respect to the variable interest rate payment
amounts due for $50 million of the $84 million of outstanding MUFG
Credit Facility debt.
On March 12, 2020, MUFG notified the
Company that it had terminated the MUFG Swaps. The Company incurred
a liability to the swap counterparties of $3.1 million in
connection with such termination.
If the Company is
not successful in converting the MUFG Credit Facility into the MUFG
Term Loan, the Credit Facility Lenders have the right to declare a
default and would have the option to require an enforced sale of
the Company’s assets pursuant to a specified timetable, or,
in the alternative, declare an acceleration of the debt and
immediately foreclose upon the Company’s assets, including
its ownership interests in the Nord Term Loan-financed
special-purpose
subsidiaries
.
The Company’s
ability to develop, obtain approval for and achieve its
recapitalization plan (as defined below) is subject to a variety of
factors, as discussed in
Liquidity
and Capital Resources—MUFG Credit Facility
. If the
Company is not able to maintain compliance with the MUFG Term Loan
and raise sufficient capital or refinancing debt to repay all
amounts owed under the MUFG Indebtedness, then the Company’s
financial condition and liquidity would be materially adversely
affected and its ability to continue operations could be materially
jeopardized.
If the Company does
not achieve its Recapitalization Plan and its anticipated
results,
the Credit
Facility
Lenders would
thereafter have the right to exercise any and all remedies for
default under the applicable MUFG Indebtedness agreement. Such
remedies include, but are not limited to, declaring the entire
indebtedness immediately due and payable, and if the Company were
unable to repay such accelerated indebtedness, foreclosing upon the
assets of the Company that secure the MUFG Indebtedness, which
consist of all of the Company’s assets except for certain
assets held in the Company’s single asset special-purpose
financing subsidiaries.
The consolidated
financial statements presented in this Annual Report on Form 10-K
have been prepared on a going concern basis and do not include any
adjustments that might arise as a result of uncertainties about the
Company’s ability to continue as a going
concern.
(b)
Special-purpose Financing and Nord Term
Loans
In
August 2016, the Company acquired, using wholly-owned
special-purpose entities, two regional jet aircraft, using cash and
third-party financing (referred to as “special-purpose
financing” or “UK LLC SPE Financing”) separate
from the MUFG Credit Facility.
In February 2019,
the UK LLC SPE Financing was repaid as part of a refinancing
involving the Nord Term Loans, which were made to special-purpose
subsidiaries of AeroCentury (the “LLC Borrowers”).
Under the Nord Term Loans, four aircraft that previously served as
collateral under the MUFG Credit Facility were moved into newly
formed special-purpose subsidiaries and, along with the aircraft
owned by the two existing special-purpose subsidiaries, were
pledged as collateral under the Nord Term Loans.
All of the
Nord
Term Loans
contain cross-default provisions, so that any default by a lessee
of any of the subject aircraft could result in the
Nord
Term Loan lender
exercising its remedies under the
Nord
Term Loan agreement,
including, but not limited to, possession of the aircraft that is
subject to a lessee default. Currently, the Nord Term Loans are
fully performing and were unaffected by the Company’s default
under the MUFG Credit Facility.
Collectively, the
LLC Borrowers entered into six interest rate derivatives, or
interest rate swaps. Each such interest rate swap has a notional
amount that mirrors the amortization under the corresponding
Nord
Term Loan
entered into by the LLC Borrowers, effectively converting each of
the six
Nord
Term
Loans from a variable to a fixed interest rate. Each of these six
interest rate swaps extend for the length of the corresponding
Nord
Term Loan,
with maturities from 2020 through 2025.
One of the aircraft
that was subject to Nord Term Loan financing was sold during the
fourth quarter of 2019 and the related Nord Term Loan and
interest rate
swap were terminated.
In March 2020, one
of the Company’s customers, which leases two regional jet
aircraft subject to Nord Term Loan financing, did not timely make
its quarterly rent payment. As a result, the special-purpose
subsidiary borrowers that hold the aircraft did not have sufficient
cash to meet the corresponding quarterly Nord Term Loan payment
installments. The parent corporation was not permitted to fund the
special-purpose subsidiary borrower’s loan payment
obligations due to restrictions under the MUFG Credit Facility. The
late payment by the lessee constituted an event of default under
the Term Loan on March 19, 2020, and the Term Loan nonpayment
constituted
an event of
default under the Nord Term Loan for each subsidiary on March 27,
2020. The lessee, a major Spanish regional carrier, was severely
impacted by the COVID-19 pandemic, and was required to cease
operations as part of Spain’s lockdown, but has indicated to
the Company that it intends to honor its lease commitments in due
course when able. The Company is currently reviewing its options
for remedies and has entered into negotiations with Nord regarding
a workout for the corresponding overdue Nord Term Loan
payments.
12
(c) Cash Flow
The
Company’s primary sources of cash from operations are
payments due under the Company’s operating and finance
leases, maintenance reserves, which are billed monthly to lessees
based on asset usage, and proceeds from the sale of aircraft and
engines.
The Company’s
primary uses of cash are for (i) principal and interest due under
the MUFG Indebtedness and the Nord Term Loans, (ii), salaries,
employee benefits and general and administrative expenses, (iii)
maintenance expense and (iv) reimbursement to lessees from
collected maintenance reserves.
As discussed elsewhere in this
report, the Company had a $29.8 million Borrowing Base Deficit
under its MUFG Credit Facility at December 31, 2019. The Company is
currently in negotiations with the Credit Facility Lenders to
convert the MUFG Credit Facility into the MUFG Term Loan.
The Company has engaged an investment banking advisor to help (i)
formulate and analyze various strategic financial alternatives to
address the Company’s capital structure, strategic and
financing needs, as well as corporate level transactions aimed at
achieving maximum value for the Company’s stockholders; and
(ii) locate and negotiate with potential lenders, investors or
transaction partners who would play a role in the Company’s
plan (“Recapitalization Plan”).
Until the MUFG
Indebtedness is repaid, the Company’s cash flow will be
subject to monitoring and approval by the Credit Facility Lenders.
Because the MUFG Term Loan agreement will likely require any
accumulation of cash not needed to fund future general and
administrative expenses or overhead or expected required payment to
lessees to be deposited into a restricted account or used to pay
down the balance of the MUFG Term Loan, the Company’s ability
to meet unanticipated cash payment obligations may be wholly
dependent upon obtaining approval from the Credit Facility Lenders
to access the restricted cash account.
In addition, MUFG
and the Company have not agreed upon the terms for payment of the
$3.1 million owed in connection with the termination of the MUFG
Swaps. The Company expects such terms to be addressed in connection
with negotiations and resolution of the conversion of the MUFG
Credit Facility into the MUFG Term Loan.
As a result of these factors, there is substantial doubt regarding
the Company’s ability to continue as a going
concern.
The Company’s
ability to develop, obtain approval for and achieve its
Recapitalization Plan is subject to a variety of factors, as
discussed under
Liquidity and
Capital Resources—MUFG Credit Facility
. If the Company
is not able to either satisfy the requirements under the
Recapitalization Plan, maintain compliance with its MUFG
Indebtedness or raise sufficient capital to repay all amounts owed
under the MUFG Indebtedness, then the Company’s financial
condition and liquidity would be materially adversely affected and
its ability to continue operations could be materially
jeopardized.
In
that case, the Company may need to curtail certain of its
operations, including any asset acquisition or other growth plans,
cut costs in other ways, incur additional debt or sell equity or
certain of its revenue-producing assets in order to raise capital
(which it may not be able to do on reasonable terms, or at all), or
be forced into bankruptcy or liquidation.
The Company’s
payments for maintenance consist of reimbursements to lessees for
eligible maintenance costs under their leases and maintenance
incurred directly by the Company for preparation of off-lease
assets for re-lease to new customers. The timing and amount of such
payments may vary widely between quarterly and annual periods, as
the required maintenance events can vary greatly in magnitude and
cost, and the performance of the required maintenance events by the
lessee or the Company, as applicable, are not regularly scheduled
calendar events and do not occur at uniform intervals. The
Company’s maintenance payments typically constitute a large
portion of its cash needs, and the Company has in the past borrowed
additional funds under the MUFG Credit Facility to provide funding
for these payments. Such funding will no longer be available under
the MUFG Term Loan, if converted, and the Company will need to use
excess cash flow or obtain permission from the Credit Facility
Lenders to use funds in its restricted account.
The amount of
interest paid by the Company depends primarily on the outstanding
balance of the MUFG Indebtedness and Nord Term Loans and any future
debt incurred in connection with the Company’s
Recapitalization Plan.
The entire Nord
Term Loan indebtedness is covered by interest rate swaps, and
therefore, the Company has effectively converted the Nord Term Loan
interest payments to fixed rate payments.
A portion of the
Company’s indebtedness, as well as related interest rate
swaps, use LIBOR as a benchmark for establishing the rates at which
interest accrues. LIBOR is the subject of recent national,
international and other regulatory guidance and proposals for
reform. These reforms and other pressures may cause LIBOR to
disappear entirely on or after December 31, 2021, or to perform
differently than in the past. Although the consequences of these
developments cannot be entirely predicted, they could affect cash
flow, as they may require the Company to pay increased costs for
its LIBOR debt or even cause an acceleration of maturity of such
debt if a suitable replacement index cannot be agreed upon or is
not available.
Actual results could deviate substantially from
the assumptions management has made in forecasting the
Company’s future cash flow. As discussed in
Liquidity and
Capital Resources – (a) Credit Facility
and in
Outlook
and
Factors that May Affect Future
Results and Liquidity
, there
are a number of factors that may cause actual results to deviate
from these forecasts. If these assumptions prove to be incorrect
and the Company’s cash requirements exceed its cash flow, the
Company would need to pursue additional sources of financing to
satisfy these requirements, which may not be available when needed,
on acceptable terms or at all. See
Factors that May Affect Future
Results and Liquidity
for more
information about financing risks and
limitations.
(i) Operating activities
The Company’s
cash flow from operations decreased by $9.8 million in 2019
compared to 2018. As discussed below, the decrease in cash flow was
primarily a result of decreases in payments received for rent and
maintenance reserves, the effects of which were partially offset by
a decrease in payments made for maintenance.
(A)
Payments for rent
Receipts from
lessees for rent decreased by $6.4 million in 2019 compared to
2018, primarily due to delinquencies related to one of the
Company’s customers, and the sale of an aircraft during the
first quarter of 2019, the effects of which were partially offset
by rent for two aircraft acquired during the second quarter of 2018
and rent for an asset that was on lease in the 2019 period, but off
lease in the 2018 period.
(B)
Payments
for
maintenance
reserves
Receipts from
lessees for maintenance reserves decreased by $5.3 million in 2019
compared to 2018, primarily due to delinquencies related to one of
the Company’s customers, as well as cash received in the 2018
period from the former lessee of three aircraft that were returned
to the Company during 2017. Such payments were for unpaid
maintenance reserves, as well as amounts due pursuant to the return
conditions of the applicable leases. The Company did not accrue
unpaid reserves or return condition amounts at the time of lease
termination based on management’s evaluation of the
creditworthiness of the lessee. Therefore, the Company has
accounted for the former lessee’s payments as maintenance
reserves revenue as the payments were received in
2018.
(C)
Payments for
maintenance
Payments made for
maintenance decreased by $1.3 million in 2019 compared to 2018 as a
result of decreased maintenance performed by the Company on
off-lease aircraft to prepare them for sale or re-lease and
decreased lessee maintenance reserves claims in 2019.
(ii) Investing activities
During
2019 and 2018, the Company received net cash of $16.8 million and
$16.6 million, respectively, from asset sales. During 2019 and
2018, the Company used cash of $0 and $22.8 million, respectively,
for aircraft acquisitions. During 2018, the Company also used $2.9
million related to AeroCentury’s acquisition of
JHC.
(iii) Financing activities
During
2019 and 2018, the Company borrowed $6.0 million and $21.0 million,
respectively, under the MUFG Credit Facility. In 2019 and 2018, the
Company repaid $44.3 million and $32.6 million, respectively, of
its total outstanding debt under the MUFG Credit Facility. Such
repayments were funded by excess cash flow, the sale of assets and,
in 2019, a portion of the $44.3 million in proceeds from the Nord
Term Loans. During 2019 and 2018, the Company’s
special-purpose entities repaid $9.2 million and $4.3 million,
respectively, of UK LLC SPE Financing. During 2019, the Company
also repaid $13.4 million of principal under the Nord Term Loans.
During 2019 and 2018, the Company paid $6.5 million and $0.1
million, respectively, for debt issuance and amendment
fees.
(iv) Off balance sheet arrangements
The
Company has no material off -balance sheet
arrangements.
Critical Accounting Policies, Judgments and Estimates
The Company’s
discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements
included in this report, which have been prepared in accordance
with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities at the date
of the financial statements or during the applicable reporting
period. In the event that actual results differ from these
estimates or the Company adjusts these estimates in future periods,
the Company’s operating results and financial position could
be materially affected. For a further discussion of Critical
Accounting Policies, Judgments and Estimates, refer to Note 1 to
the Company’s financial statements in Item 8 of this Annual
Report on Form 10-K.
13
Outlook
MUFG
Indebtedness.
As
discussed in
Overview
and
Liquidity and Capital
Resources
, the
Company is currently in negotiations with the Credit Facility
Lenders to convert the MUFG Credit Facility into the MUFG Term
Loan.
The Company has engaged an investment banking advisor
to help (i) formulate a Recapitalization Plan and analyze various
strategic financial alternatives to address the Company’s
capital structure, strategic and financing needs, as well as
corporate level transactions aimed at achieving maximum value for
the Company’s stockholders; and (ii) locate and negotiate
with potential lenders, investors or transaction partners that
would play a role in the Company’s Recapitalization
Plan.
The Company’s
short term future financial condition and prospects are now almost
wholly dependent on two critical factors: (i) the Company’s
ability to successfully enter into an amendment with the Credit
Facility Lenders to convert the Credit Facility into term
indebtedness and maintain compliance with such MUFG Indebtedness
until it is able to repay and refinance such indebtedness and (ii)
the Company’s ability to develop, obtain approval for, and
execute a Recapitalization Plan that will allow the Company to
refinance the MUFG Indebtedness and obtain new debt and/or equity
capital to fund its asset growth. If the Company is not able to
satisfy these conditions, the Company’s financial condition
and liquidity would be materially adversely affected and its
ability to continue long-term operations could be materially
jeopardized.
Nord Term Loan Default
.
As discussed in
Overview
and
Liquidity and Capital Resources
, due to
nonpayment of quarterly lease payments due on March 17, 2020 by the
lessee of two aircraft, and the corresponding Nord Term Loan
payment default by the Company’s special-purpose subsidiary
borrowers, an event of default has occurred under the Nord Term
Loans for each of those subsidiaries. The lease payment default by
the lessee, which is a well-established major regional European
carrier that has been consistently in compliance with its lease
obligations over the history of its lease with the Company, was a
direct result of the COVID-19 pandemic and the catastrophic impact
of the pandemic and the ensuing governmental response on the
airline industry. The Company is currently reviewing its options
for remedies against the lessee. It has also entered into
negotiations with Nord regarding a workout for the corresponding
overdue Nord Term Loan payments, which will permit the
Company’s special-purpose subsidiaries to continue to own the
aircraft and manage their lease payment revenue and loan payment
obligations until the airline industry recovers and resumes normal
operations, or the aircraft can be refinanced. While the Company
believes that the status of the lessees of the Nord-financed
aircraft as established major carriers with a long and consistent
payment history, combined with the overwhelming but hopefully
temporary nature of the COVID-19 impact on the industry, make a
compelling basis for Nord to grant a temporary accommodation under
the Nord Term Loan agreements, there is no assurance that the
Company will be successful in reaching an accommodation with Nord.
Failure to reach some accommodation could lead to repossession of
all five aircraft owned by the Company’s special-purpose
subsidiaries, and may have a significant impact on the success of
the Company’s effort to restructure the MUFG
Indebtedness.
Impact of COVID-19 Pandemic.
The
ongoing COVID-19 pandemic has had an overwhelming adverse effect on
all forms of transportation globally, but most acutely for the
airline industry. The combined effect of fear of infection during
air travel and international and domestic travel restrictions has
caused a dramatic decrease in passenger loads in all areas of the
world, not just in those countries with active clusters of
COVID-19, as well as in airline ticket net bookings (i.e. bookings
made less bookings canceled) of flights. This has led to
significant cash flow issues for airlines, including some of the
Company’s customers, and some airlines may be unable to
timely meet their obligations under their lease obligations with
the Company unless government financial support is received, of
which there can be no assurance. Any significant nonpayment or late
payment of lease payments by a significant lessee or combination of
lessees could in turn impose limits on the Company’s ability
to fund its ongoing operations as well as cause new defaults under
the Company’s debt obligations, which in turn could lead to
an immediate acceleration of debt and foreclosure upon the
Company’s assets. Furthermore, for the duration of the
pandemic and a period of financial recovery thereafter, sale and
acquisition transactions are likely to be curtailed entirely or
delayed while the industry returns to financial stability, which
could impact the Company’s ability to implement its
Recapitalization Plan.
14
Factors that May Affect Future Results and Liquidity
The Company’s
business, financial condition, results of operations, liquidity,
prospects and reputation could be affected by a number of factors.
In addition to matters discussed elsewhere in this discussion, the
Company believes the following are the most significant factors
that may impact the Company; however, additional or other factors
not presently known to the Company or that management presently
deems immaterial could also impact the Company and its performance
and liquidity.
Noncompliance with MUFG Indebtedness.
The Company’s primary acquisition financing has been the MUFG
Credit Facility, which is secured by a blanket lien on all assets
of the Company, including its ownership interests in the Nord Term
Loan-financed
special-purpose subsidiaries
.
The Company is currently
in negotiations with the Credit Facility Lenders to convert the
MUFG Credit Facility into the MUFG Term Loan.
If the Company
fails to comply with any of the MUFG Indebtedness requirements, the
Credit Facility
Lenders
can declare a default under the MUFG Indebtedness
and accelerate the indebtedness and foreclose upon the
Company’s assets.
Nord Payment Default.
As discussed in
Overview
and
Liquidity and Capital Resources
, due to
nonpayment of quarterly lease payments due on March 17, 2020 by the
lessee of two aircraft and the corresponding Nord Term Loan payment
default by the Company’s special-purpose subsidiary
borrowers, an event of default has occurred under the Nord Term
Loans for each of those subsidiaries. The parent company is not in
a financial position to cure such default and is prohibited from
doing so in any event under the MUFG Indebtedness. The Company has
entered into negotiations with Nord regarding a workout for the
corresponding overdue Nord Term Loan payments, which will permit
the Company’s special-purpose subsidiaries to continue to own
the aircraft and manage their lease payment revenue and loan
payment obligations until the airline industry recovers and resumes
normal operations or the aircraft can be refinanced. There is no
assurance that the Company will be successful in reaching an
accommodation with Nord. Failure to reach some accommodation could
lead to repossession of all five aircraft owned by the
Company’s special-purpose subsidiaries, and may have a
significant negative impact on the success of the Company’s
effort to restructure the MUFG Indebtedness.
Availability of Financing.
T
he Company is currently
in negotiations with the Credit Facility Lenders to convert the
MUFG Credit Facility into the MUFG Term Loan, which will not be
available
to fund acquisition of aircraft assets. If and
when the MUFG Indebtedness is repaid, the Company will need to find
a new source of acquisition funding, either through equity
investment proceeds, a new revolving credit facility, or new
asset-specific financing, or a combination of any of the three.
Until the final Recapitalization Plan is executed the Company will
not have any means to acquire new aircraft assets. There can be no
assurance that the Company will be able to obtain such additional
capital when needed, in the amounts desired or on favorable
terms.
MUFG Swap Hedging Dedesignation and
Termination.
Seven of the interest rate swaps entered into
by the Company were previously designated as cash flow hedges. If
at any time after designation of a cash flow hedge it is no longer
probable that the forecasted hedged cash flows will occur, hedge
accounting is no longer permitted and a hedge is
“dedesignated.” After dedesignation, if it is still
considered reasonably possible that the forecasted cash flows will
occur, the amount previously recognized in other comprehensive
income/(loss) will continue to be reversed as the forecasted cash
flows affect earnings. However, if after dedesignation it is
probable that the forecasted cash flows will not occur, amounts
deferred in accumulated other comprehensive income/(loss) will be
recognized in earnings immediately.
In October 2019,
the Company determined that it was no longer probable that
forecasted cash flows for the MUFG Swaps would occur as scheduled
as a result of the Company’s defaults under the MUFG Credit
Facility. The Company, therefore, was required to dedesignate those
interest rate swaps.
The MUFG Swaps were
terminated in March 2020, and the accumulated other comprehensive
loss related to such cash flows will be recognized as an expense in
the first quarter of 2020. In addition, the termination of the MUFG
Swaps will require that the Company pay $3.1 million in connection
with such termination. The termination payment owed to the swap
counterparty is secured by the collateral that secures the MUFG
Indebtedness, and increases the amount of indebtedness secured by
the Credit Facility Lender’s blanket lien on the
Company’s assets.
Impact of COVID-19 Pandemic.
The
ongoing COVID-19 pandemic has had an overwhelming adverse effect on
all forms of transportation globally, but most acutely for the
airline industry. The combined effect of fear of infection during
air travel and international and domestic travel restrictions has
caused a dramatic decrease in passenger loads in all areas of the
world, not just in those countries with active clusters of
COVID-19, as well as in airline ticket net bookings (i.e. bookings
made less bookings canceled) of flights. This has led to
significant cash flow issues for airlines, including some of the
Company’s customers, and some airlines may be unable to
timely meet their obligations under their lease obligations with
the Company, unless government financial support is received, of
which there can be no assurance. Any significant nonpayment or late
payment of lease payments by a significant lessee or combination of
lessees could in turn cause new defaults under the Company’s
debt obligations, which in turn could lead to an immediate
acceleration of debt and foreclosure upon the Company’s
assets. Furthermore, for the duration of the pandemic and a period
of financial recovery thereafter, sale and acquisition transactions
are likely to be curtailed entirely or delayed while the industry
returns to financial stability, which could impact the
Company’s ability to implement its Recapitalization
Plan.
General Economic Conditions and Lowered Demand
for Travel.
Because of the international nature of the
Company’s business, a downturn in the health of the global
economy could have a negative impact on the Company’s
financial results, as demand for air travel generally decreases
during slow or no-growth periods, and thus demand by airlines for
aircraft capacity is also decreased. As discussed above, the
COVID-19 pandemic is in its early stages, but it has already caused
significant disruptions to the global supply chain, the stock
market and consumer and business-to-business commerce, the effects
of which may endure well beyond the current pandemic’s life
cycle and result in low or negative growth in future periods While
lower demand for air travel may actually lead to business
opportunities as airlines turn to smaller aircraft to right-size
capacity, it also presents potential challenges for the Company as
it may impact the values of aircraft in the Company’s
portfolio, lower market rents for aircraft that are being offered
for lease by the Company, cause Company customers to be unable to
meet their lease obligations, or reduce demand by airlines that
would be potential customers for additional or replacement regional
aircraft offered by the Company.
Because the
Company’s portfolio is not entirely globally diversified,
even in a growing global economy, a localized downturn in one of
the key regions in which the Company leases assets could have a
significant adverse impact on the Company. The Company’s
significant sources of operating lease revenue by region are
summarized in
Fleet Summary
– Assets Held for Lease
.
Much of the recent
growth in demand for regional aircraft has come from developing
countries, and has been driven by mining or other resource
extraction operations by Chinese enterprises in these countries. A
downturn in the Chinese domestic or export economy that reduces
demand for imported raw materials, such as an extended period of
economic slowdown associated with the COVID-19 pandemic, could have
a significant negative longer-term impact on the demand for
business and regional aircraft in these developing countries,
including in some of the markets in which the Company does, or
seeks to do, business.
Furthermore,
instability arising from new U.S. sanctions or trade wars against
U.S. trading partners, and the global reaction to such sanctions,
or due to other factors, could have a negative impact on the
Company’s customers located in regions affected by such
sanctions.
Also, the
withdrawal of the United Kingdom (“UK”) from the
European Union, known as “Brexit,” could threaten
“open-sky” policies under which UK-based carriers
operate throughout the European Union, and European Union-based
carriers operate between the UK and other European Union countries.
Losing open-sky flight rights could have a significant negative
impact on the health of the Company’s European lessees and,
as a result, the financial performance and condition of the
Company.
If international
conflicts erupt into military hostilities, heightened visa
requirements make international travel more difficult, terrorist
attacks involving aircraft or airports occur, or a major flu or
pandemic outbreak occurs, passengers may avoid air travel
altogether, and global air travel worldwide could be significantly
affected. Any such occurrence would have an adverse impact on many
of the Company’s customers.
Airline reductions
in capacity in response to lower passenger loads can result in
reduced demand for aircraft and aircraft engines and a
corresponding decrease in market lease rental rates and aircraft
values. This reduced market value could affect the Company’s
results if the market value of an asset or assets in the
Company’s portfolio falls below carrying value, and the
Company determines that a write-down of the value is appropriate.
Furthermore, if older, expiring leases are replaced with leases at
decreased lease rates, the lease revenue from the Company’s
existing portfolio is likely to decline, with the magnitude of the
decline dependent on the length of the downturn and the depth of
the decline in market rents.
Nord Term Loan Risks
. The
special-purpose subsidiaries that own the five aircraft serving as
collateral for the Nord Term Loans are the named borrowers, and
each Nord Term Loan is secured by the corresponding aircraft owned
by the applicable LLC Borrower. AeroCentury, as the parent
corporation of each LLC Borrower, is not a party to the Term Loan
agreements, but has entered into agreements with lessees of the LLC
Borrowers to guarantee certain obligations to such lessees under
each lessee’s lease agreement with an LLC Borrower and with
the Term Loan lender to guarantee certain representations,
warranties and covenants delivered by the LLC Borrowers to the Term
Loan lender in connection with the refinancing transaction. As a
result, although the Term Loans are non-recourse to AeroCentury,
AeroCentury could become directly responsible for the LLC
Borrowers’ obligations under the Term Loans and the related
lease agreements pursuant to these guaranty arrangements. Moreover,
any noncompliance under the Term Loans by any LLC Borrower could
negatively affect the liquidity, aircraft portfolio and reputation
of the Company as a whole.
The required
payments under each Nord Term Loan are expected to be funded by the
operating lease rental revenue received from the lessee of and
sales proceeds from the corresponding aircraft, and each LLC
Borrower’s continued compliance with its Nord Term Loan will
depend upon the lessee’s compliance with its lease payment
obligations. Failure by a lessee to make timely payments could
result in a default under the applicable Term Loan and could result
in an acceleration of all Nord Term Loan indebtedness of the
applicable LLC Borrower or foreclosure by the Term Loan lender on
the applicable aircraft. Furthermore, a default by any LLC Borrower
under its Term Loan would also constitute a default under the MUFG
Indebtedness, and therefore any failure by an LLC Borrower’s
lessee to comply with its lease payment obligations or any other
compliance failure by an LLC Borrower under its Term Loan could
result in the Company’s noncompliance under several of its
debt agreements, which could have a material negative adverse
effect on the Company’s liquidity and capital
resources.
In March 2020, one
of the Company’s customers, which leases two regional jet
aircraft subject to Nord Term Loan financing, did not make its
quarterly rent payment which, in turn, resulted in a loan payment
default by the Company’s special-purpose subsidiary that owns
the aircraft. The Company is currently discussing remedies with
both the customer and Nord.
15
Lessee Credit Risk.
The Company
carefully evaluates the credit risk of each customer and attempts
to obtain a third-party guaranty, letters of credit or other credit
enhancements, if it deems them necessary, in addition to customary
security deposits. There can be no assurance, however, that such
enhancements will be available, or that, if obtained, they will
fully protect the Company from losses resulting from a lessee
default or bankruptcy.
If a U.S. lessee
defaults under a lease and seeks protection under Chapter 11 of the
United States Bankruptcy Code, Section 1110 of the Bankruptcy Code
would automatically prevent the Company from exercising any
remedies against such lessee for a period of 60 days. After the
60-day period had passed, the lessee would have to agree to perform
the lease obligations and cure any defaults, or the Company would
have the right to repossess the equipment. However, this procedure
under the Bankruptcy Code has been subject to significant
litigation, and it is possible that the Company’s enforcement
rights would be further adversely affected in the event of a
bankruptcy filing by a defaulting lessee.
Lessees located in
low-growth or no-growth areas of the world carry heightened risk of
lessee default. The Company has had customers that have experienced
significant financial difficulties, become insolvent, or have
entered bankruptcy proceedings, including the European regional
airline that ceased operations and declared bankruptcy after the
Company terminated its leases and repossessed the four aircraft
subject to the leases in the third quarter of 2019. A
customer’s insolvency or bankruptcy usually results in the
Company’s total loss of the receivables from that customer,
as well as additional costs in order to repossess and, in some
cases, repair the aircraft leased by the customer. The Company
closely monitors the performance of all of its lessees and its risk
exposure to any lessee that may be facing financial difficulties,
in order to guide decisions with respect to such lessee in an
attempt to mitigate losses in the event the lessee is unable to
meet or rejects its lease obligations. There can be no assurance,
however, that additional customers will not become insolvent, file
for bankruptcy or otherwise fail to perform their lease
obligations, or that the Company will be able to mitigate any of
the resultant losses.
It is possible that
the Company may enter into deferral agreements for overdue lessee
obligations. When a customer requests a deferral of lease
obligations, the Company evaluates the lessee’s financial
plan, the likelihood that the lessee can remain a viable carrier,
and whether the deferral is likely to be repaid according to the
agreed schedule. The Company may elect to record the deferred rent
and reserves payments from the lessee on a cash basis, which could
have a material effect on the Company’s financial results in
the applicable periods. Deferral agreements with lessees also
reduce the Company’s borrowing capacity under its MUFG Credit
Facility.
Concentration of Lessees.
For the year
ended December 31, 2019, the Company’s five largest customers
accounted for a total of approximately 86% of the Company’s
monthly operating lease revenue. As discussed in
“
Outlook,
” one
of the Company’s largest customers based on operating lease
revenue, which operated four aircraft leased by the Company,
experienced financial difficulties and accrued a substantial
arrearage for rent and maintenance reserves, and eventually ceased
operations and declared bankruptcy. During the third quarter of
2019, the Company terminated the leases with this customer and
repossessed the aircraft. Although the Company applied the security
deposits and a portion of the maintenance reserves it held to past
due rent and recorded $17.0 million of revenue for the remaining
maintenance reserves, the Company also recorded impairment
losses
totaling
$22.3 million related to the four aircraft based on appraisals or
estimated sales proceeds. The impairment
losses
resulted in the
Borrowing Base Default and noncompliance with several covenants
under the Company’s MUFG Credit Facility, as discussed in
Noncompliance with MUFG
Indebtedness.
A lease default by
or collection problem with one or a combination of any of the
Company’s other significant customers could have a
disproportionately negative impact on the Company’s financial
results and borrowing base under the MUFG Credit Facility, and,
therefore, the Company’s operating results are especially
sensitive to any negative developments with respect to these
customers in terms of lease compliance. In addition, if the
Company’s revenues become overly concentrated in a small
number of lessees, the Company could fail to comply with certain
financial covenants in its MUFG Credit Facility related to customer
concentration, which could result in the negative effects of such a
default as described under
Noncompliance with MUFG
Indebtedness
.
Consummation of Merger May Subject the Company
to Additional Risks.
On October 1, 2018 the Company acquired
JHC, the sole shareholder of the Company’s management
company, JMC. The acquisition of JHC subjects the Company to
certain risks, including the following:
●
Assumption
of Expenses Covered under Management Agreement.
Under the
Management Agreement with JMC, the Company paid management fees to
JMC based upon the book value of the Company’s aircraft
assets, an acquisition fee for each asset purchased by the Company,
and a remarketing/re-lease fee for each sale or re-lease
transaction entered into with respect to the Company’s
aircraft. In return, JMC provided the Company with comprehensive
management services, under which JMC had full responsibility for
payment of all employee salaries and benefits, outside technical
services, worldwide travel needed to promote the Company's
business, office space, utilities, IT and communications, furniture
and fixtures, and other general administrative and overhead costs.
Under the Management Agreement, if the fees collected were not
adequate to cover JMC’s expenses in managing the
Company’s portfolio, such losses were borne entirely by
JMC.
Upon completion of
the Merger on October 1, 2018, the Company became responsible for
all expenses that were previously incurred by JMC in managing the
Company. The risk of increased costs for these expenses is now the
responsibility of the Company, and such costs are no longer limited
to the amount of the management fee, as was the case under the
third-party management structure with JMC. Consequently, the risk
of any cost overruns or unanticipated expenses in asset management
are borne solely by the Company and are no longer shifted to an
unconsolidated third party. As a result, the Company’s
expense categories, amounts, timing and patterns could change
significantly in post-Merger periods and could be subject to
increased period-to-period fluctuations.
●
Internalization
of Management.
JHC is now a wholly-owned subsidiary of the
Company, and sole responsibility for management of the combined
company now falls upon the Company’s management. If the
Company is dissatisfied with management services, the Company will
have to address the shortcomings internally, and if they cannot be
resolved with existing management and personnel, the Company may be
required to reorganize its management structure and/or replace
personnel or seek new third-party management services, either of
which could result in the Company incurring significant expense and
use of resources.
●
Assumption
of JHC Liabilities.
By acquiring JHC in the Merger, JHC has
become a wholly-owned subsidiary of the Company. To the extent that
JHC or any of its subsidiaries have liabilities, these have become
liabilities of the Company on a consolidated basis. Although the
Merger Agreement provides for limited indemnification by JHC
shareholders for certain liabilities of JHC or its subsidiaries
that arise from pre-Merger occurrences and the Company performed
due diligence reviews of the liabilities of JHC and its
subsidiaries before completion of the Merger, the indemnification
is limited to the scope of representations and warranties in the
Merger Agreement, some of which have already expired, recovery
under the indemnification is limited to the consideration paid by
the Company to JHC’s shareholders and such due diligence
reviews are inherently non-exhaustive and may not have uncovered
all known or contingent liabilities or presently unknown
liabilities that may emerge after the Merger’s
completion.
16
Ownership Risks.
The Company’s
leases typically are for a period shorter than the entire,
anticipated, remaining useful life of the leased assets. As a
result, the Company’s recovery of its investment and
realization of its expected yield in such a leased asset is
dependent upon the Company’s ability to profitably re-lease
or sell the asset following the expiration of the lease. This
ability is affected by worldwide economic conditions, general
aircraft market conditions, regulatory changes, changes in the
supply or cost of aircraft equipment, and technological
developments that may cause the asset to become obsolete. If the
Company is unable to remarket its assets on favorable terms when
the leases for such assets expire, the Company’s financial
condition, cash flow, ability to service debt, and results of
operations could be adversely affected.
The Company
typically acquires used aircraft equipment. The market for used
aircraft equipment has been cyclical, and generally reflects
economic conditions and the strength of the travel and
transportation industry. The demand for and value of many types of
used aircraft in the recent past has been depressed by such factors
as airline financial difficulties, airline consolidations, the
number of new aircraft on order, an excess supply of newly
manufactured aircraft or used aircraft coming off lease, as well as
introduction of new aircraft models and types that may be more
technologically advanced, more fuel efficient and/or less costly to
maintain and operate. Values may also increase or decrease for
certain aircraft types that become more or less desirable based on
market conditions and changing airline capacity. Declines in the
value of the Company’s aircraft and any resulting decline in
market demand for these aircraft could materially adversely affect
the Company’s revenues, performance and liquidity.
Additionally, the Company’s ability to borrow under the
current terms of its MUFG Credit Facility is subject to a covenant
setting forth a maximum ratio of (i) the outstanding debt under the
facility to (ii) the appraised value of the collateral base of
aircraft assets securing the MUFG Credit Facility. As a result, a
significant drop in the appraised market value of the
Company’s aircraft portfolio could require the Company to
make a substantial prepayment of outstanding principal under the
MUFG Credit Facility in order to avoid a default under the MUFG
Credit Facility and limit the utility of the MUFG Credit Facility
as a source of future funding. As discussed above, these outcomes
had occurred as of September 30, 2019 due to the Borrowing Base
Default, in which the Company had a $9.4 million borrowing base
deficiency under the MUFG Credit Facility. Subsequent
updated appraisal values for assets
included in the borrowing base of the
MUFG
Credit Facility resulted in an
increase in the Borrowing Base Deficit to $29.8 million at December
31, 2019.
The Company
is currently in discussions with the
Credit Facility Lenders to convert the MUFG Credit Facility into
the MUFG Term Loan
.
In addition, a
successful investment in an asset subject to an operating lease
depends in part upon having the asset returned by the lessee in the
condition as required under the lease. Each operating lease
obligates a customer to return an asset to the Company in a
specified condition, generally in a condition that will allow the
aircraft to be readily re-leased to a new lessee, and/or pay an
economic settlement for redelivery that is not in compliance with
such specified conditions. The Company strives to ensure this
result through onsite management during the return process.
However, if a lessee becomes insolvent during the term of its lease
and the Company has to repossess the asset, it is unlikely that the
lessee would have the financial ability to meet these return
obligations. In addition, if a lessee files for bankruptcy and
rejects the aircraft lease, the lessee would be required to return
the aircraft but would be relieved from further lease obligations,
including return conditions specified in the lease. In either case,
it is likely that the Company would be required to expend funds in
excess of any maintenance reserves collected to return the asset to
a remarketable condition.
Several of the
Company’s leases do not require payment of monthly
maintenance reserves, which serve as the lessee’s advance
payment for its future repair and maintenance obligations. If
repossession due to lessee default or bankruptcy occurred under
such a lease, the Company would need to pay the costs of
unperformed repair and maintenance under the applicable lease and
would likely incur an unanticipated expense in order to re-lease or
sell the asset.
Furthermore, the
occurrence of unexpected adverse changes that impact the
Company’s estimates of expected cash flow from an asset could
result in an asset impairment charge against the Company’s
earnings. The Company periodically reviews long-term assets for
impairment, particularly when events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. An
impairment charge is recorded when the carrying amount of an asset
is estimated to be not recoverable and exceeds its fair value. The
Company recorded impairment charges for some of its aircraft in
2018 and 2019, and may be required to record asset impairment
charges in the future as a result of a prolonged weak economic
environment, challenging market conditions in the airline industry,
events related to particular lessees, assets or asset types or
other factors affecting the value of aircraft or
engines.
Interest Rate Risk.
Although the debt
under the Nord Term Loans is fully covered by interest rate swaps
that effectively convert the variable interest rate Nord Term Loan
payments to fixed rate payments, as a result of the termination of
the MUFG Swaps, the amount of interest paid by the Company under
the MUFG Indebtedness will fluctuate depending on prevailing
interest rates. Consequently, interest rate increases could
materially increase the Company’s interest payment
obligations under its MUFG Indebtedness and thus could have a
material adverse effect on the Company’s liquidity and
financial condition. Further, because the interest rates under the
Nord Term Loans are based on LIBOR and the interest on the MUFG
Indebtedness may be subject to LIBOR, which is
the subject of recent national,
international and other regulatory guidance and proposals for
reform, the amount of the Company’s interest payments under
these arrangements could increase if LIBOR is phased out or
performs differently than in the past.
Lease rates
typically, but not always, move over time with interest rates, but
market demand and numerous other asset-specific factors also affect
lease rates. Because the Company’s typical lease rates are
fixed at lease origination, interest rate changes during the lease
term have no effect on existing lease rental payments. Therefore,
if interest rates rise significantly and there is relatively little
lease origination by the Company following such rate increases, the
Company could experience decreased net income as additional
interest expense outpaces revenue growth. Further, even if
significant lease origination occurs following such rate increases,
other contemporaneous aircraft market forces may result in lower or
flat rental rates, thereby decreasing net income.
Concentration of Aircraft Type.
The
Company’s aircraft portfolio is currently focused on a small
number of aircraft types and models relative to the variety of
aircraft used in the commercial air carrier market. A change in the
desirability and availability of any of the particular types and
models of aircraft owned by the Company could affect valuations and
future rental revenues of such aircraft, and would have a
disproportionately significant impact on the Company’s
portfolio value. In addition, the Company is dependent on the
third-party companies that manufacture and provide service for the
aircraft types in the Company’s portfolio. The Company has no
control over these companies, and they could decide to curtail or
discontinue production of or service for these aircraft types at
any time or significantly increase their costs, which could
negatively impact the Company’s prospects and performance.
These effects would diminish if the Company acquires assets of
other types. Conversely, acquisition of additional aircraft of the
types currently owned by the Company will increase the
Company’s risks related to its concentration of those
aircraft types.
Competition.
The aircraft leasing
industry is highly competitive. The Company competes with other
leasing companies, banks, financial institutions, private equity
firms, aircraft leasing syndicates, aircraft manufacturers,
distributors, airlines and aircraft operators, equipment managers,
equipment leasing programs and other parties engaged in leasing,
managing or remarketing aircraft. Many of these competitors have
longer operating histories, more experience, larger customer bases,
more expansive brand recognition, deeper market penetration and
significantly greater financial resources.
Competition in the
Company's market niche of regional aircraft has increased
significantly recently as a result of increased focus on regional
air carriers by competitors who have traditionally neglected this
market, new entrants to the acquisition and leasing market and
consolidation of certain competitors. This will likely continue to
create upward pressure on acquisition prices for many of the
aircraft types that the Company has targeted to buy and, at the
same time, create downward pressure on lease rates, resulting in
lower revenues and margins for the Company and, therefore, fewer
acceptable acquisition opportunities for the Company.
Competitors in the
niche that have lower costs of capital than the Company could gain
have a significant advantage over the Company. Lower capital costs
allow competitors to offer lower lease rates to carriers and/or the
prices the competitor is able to pay for a leased asset. Due to the
Company’s recent default under its MUFG Credit Facility,
locating debt financing in line with the Company’s historical
cost of capital in the short term could be difficult thereby
exacerbating the competitive disadvantage of the Company with
respect to cost of capital, until the Company re-establishes its
financial stability following execution of its Recapitalization
Plan.
17
Risks Related to Regional Air Carriers.
The Company’s continued focus on its customer base of
regional air carriers subjects the Company to certain risks. Many
regional airlines rely heavily or even exclusively on a code-share
or other contractual relationship with a major carrier for revenue,
and can face financial difficulty or failure if the major carrier
terminates or fails to perform under the relationship or files for
bankruptcy or becomes insolvent. Some regional carriers may depend
on contractual arrangements with industrial customers such as
mining or oil companies, or franchises from governmental agencies
that provide subsidies for operating essential air routes, which
may be subject to termination or cancellation on short notice.
Furthermore, many lessees in the regional air carrier market are
start-up, low-capital, and/or low-margin operators. A current
concern for regional air carriers is the supply of qualified
pilots. Due to recently imposed regulations of the U.S. Federal
Aviation Administration requiring a higher minimum number of hours
to qualify as a commercial passenger pilot, many regional airlines
have had difficulty meeting their business plans for expansion.
This could in turn affect demand for the aircraft types in the
Company’s portfolio and the Company’s business,
performance and liquidity.
International Risks.
The Company leases
assets in overseas markets. Leases with foreign lessees, however,
may present different risks than those with domestic lessees. Most
of the Company’s expected growth is outside of North
America.
A lease with a
foreign lessee is subject to risks related to the economy of the
country or region in which such lessee is located, which may be
weaker or less stable than the U.S. economy. An economic downturn
in a particular country or region may impact a foreign
lessee’s ability to make lease payments, even if the U.S. and
other foreign economies remain strong and stable.
The Company is
subject to certain risks related to currency conversion
fluctuations. The Company currently has one customer with rent
obligations payable in Euros, and the Company may, from time to
time, agree to additional leases that permit payment in foreign
currency, which would subject such lease revenue to monetary risk
due to currency exchange rate fluctuations. During the periods
covered by this report, the Company considers the estimated effect
on its revenues of foreign currency exchange rate fluctuations to
be immaterial; however, the impact of these fluctuations may
increase in future periods if additional rent obligations become
payable in foreign currencies.
Even with U.S.
dollar-denominated lease payment provisions, the Company could
still be negatively affected by a devaluation of a foreign
lessee’s local currency relative to the U.S. dollar, which
would make it more difficult for the lessee to meet its U.S.
dollar-denominated payments and increase the risk of default of
that lessee, particularly if its revenue is primarily derived in
its local currency.
Foreign lessees
that operate internationally may also face restrictions on
repatriating foreign revenue to their home country. This could
create a cash flow crisis for an otherwise profitable carrier,
affecting its ability to meet its lease obligations. Foreign
lessees may also face restrictions on payment obligations to
foreign vendors, including the Company, which may affect their
ability to timely meet lease obligations to the
Company.
Foreign lessees are
not subject to U.S. bankruptcy laws, although there may be debtor
protection similar to U.S. bankruptcy laws available in some
jurisdictions. Certain countries do not have a central registration
or recording system which can be used to locally record the
Company’s interest in equipment and related leases. This
could make it more difficult for the Company to recover an aircraft
in the event of a default by a foreign lessee. In any event,
collection and enforcement may be more difficult and complicated in
foreign countries.
Ownership of a
leased asset operating in a foreign country and/or by a foreign
carrier may subject the Company to additional tax liabilities that
are not present with aircraft operated in the United States.
Depending on the jurisdiction, laws governing such tax liabilities
may be complex, not well formed or not uniformly enforced. In such
jurisdictions, the Company may decide to take an uncertain tax
position based on the best advice of the local tax experts it
engages, which position may be challenged by the taxing authority.
Any such challenge could result in increased tax obligations in
these jurisdictions going forward or assessments of liability by
the taxing authority, in which case the Company may be required to
pay penalties and interest on the assessed amount that would not
give rise to a corresponding foreign tax credit on the
Company’s U.S. tax returns.
The
Trump administration and members of the U.S. Congress have made
public statements about significant changes in U.S. trade policy
and have taken certain actions that materially impact U.S. trade,
including terminating, renegotiating or otherwise modifying U.S.
trade agreements with countries in various regions and imposing
tariffs on certain goods imported into the United States. These
changes in U.S. trade policy have triggered and could continue to
trigger retaliatory actions by affected countries, including China,
resulting in “trade wars” with these countries. These
trade wars could generally increase the cost of aircraft, aircraft
and engine components and other goods regularly imported by the
Company’s customers, thereby increasing costs of operations
for its air carrier customers that are located in the affected
countries. The increased costs could materially and adversely
impact the financial health of affected air carriers, which in turn
could have a negative impact on the Company’s business
opportunities, and if the Company’s lessees are significantly
affected, could have a direct impact on the Company’s
financial results. Furthermore, the Company often incurs
maintenance or repair expenses not covered by lessees in foreign
countries, which expenses could increase if such countries are
affected by such a trade war.
Level of Portfolio Diversification.
The
Company intends to continue to focus solely on regional aircraft.
Although the Company invested in a limited number of turboprop
aircraft types in the past, including two in 2018, the Company has
also acquired several regional jet aircraft types, which now
comprise a larger percentage of the Company’s portfolio based
on number of aircraft and net book value. The Company may continue
to seek acquisition opportunities for new types and models of
aircraft used by the Company’s targeted customer base of
regional air carriers. Acquisition of aircraft types not previously
owned by the Company entails greater ownership risk due to the
Company’s lack of experience managing those assets and the
potentially different types of customers that may lease them.
Conversely, the Company’s focus on a more limited set of
aircraft types and solely on regional aircraft subjects the Company
to risks that disproportionately impact these aircraft markets,
which are described elsewhere in this discussion. As a result, the
level of asset and market diversification the Company chooses to
pursue could have a significant impact on its performance and
results.
18
Transition to LIBOR
alternative reference rate.
The
London Inter-bank Offered Rate (“LIBOR”) represents the
interest rate at which banks offer to lend funds to one another in
the international interbank market for short-term loans, and is the
index rate of a portion of the Company’s
MUFG
Credit Facility debt and the Nord Term
Loan
s
of the LLC Borrower
subsidiaries. Beginning in 2008, concerns were expressed that some
of the member banks surveyed by the British Bankers’
Association in connection with the calculation of LIBOR rates may
have been under-reporting or otherwise manipulating the interbank
lending rates applicable to them. Regulators and law enforcement
agencies from a number of governments have conducted investigations
relating to the calculation of LIBOR across a range of maturities
and currencies. If manipulation of LIBOR or another inter-bank
lending rate occurred, it may have resulted in that rate being
artificially lower (or higher) than it otherwise would have been.
Responsibility for the calculation of LIBOR was transferred to ICE
Benchmark Administration Limited, as independent LIBOR
administrator, effective February 1, 2014.
On
July 27, 2017, the U.K. Financial Conduct Authority announced that
it will no longer persuade or compel banks to submit rates for the
calculation of LIBOR rates after 2021 (the “July 27th
Announcement”). The July 27th Announcement indicates that the
continuation of LIBOR on the current basis cannot and will not be
guaranteed after 2021. Consequently,
at
this time, it is not possible to
predict whether and to what extent banks will continue to provide
LIBOR submissions to the administrator of LIBOR or whether any
additional reforms to LIBOR may be enacted in the United Kingdom or
elsewhere. Similarly, it is not possible to predict whether LIBOR
will continue to be viewed as an acceptable benchmark, what rate or
rates may become accepted alternatives to LIBOR or the effect of
any such changes in views or alternatives on the value of
LIBOR-linked securities.
Although the Financial Stability Oversight Council
has recommended a transition to an alternative reference rate in
the event LIBOR is no longer available after 2021, which would
affect the Company’s
MUFG
Indebtedness and some of its Term Loans, such
plans are still in development and, if enacted, could present
challenges. Moreover, contracts linked to LIBOR are vast in number
and value, are intertwined with numerous financial products and
services, and have diverse parties. The downstream effect of
unwinding or transitioning such contracts could cause instability
and negatively impact the financial markets and individual
institutions. The uncertainty surrounding the sustainability of
LIBOR more generally could undermine market integrity and threaten
individual financial institutions and the U.S. financial system
more broadly.
With respect to the Company’s
indebtedness,
if
LIBOR is no longer published after 2021
and
the Company and its lenders
are unable
to agree on a mutually acceptable
LIBOR
alternative
for any
outstanding
debt indexed to
LIBOR
,
the
debt
agreements could
be
terminated and repayment of the indebtedness
could be
accelerated
to become
immediately due and payable to
the
lender
. This
outcome
could also lead to substantial
breakage fees being payable by the Company in addition to the
outstanding principal of such debt.
If any of these risks
were to occur, the Company could experience material cash
shortfalls or be forced into bankruptcy or
liquidation.
Swap Counterparty Credit
Risks.
AeroCentury
and its LLC Borrowers have entered
into certain interest rate swaps to hedge the interest rate risk
associated with a portion of the
MUFG
Credit Facility and all of
the Nord Term
Loans
indebtedness. These interest
rate swap agreements effectively convert the variable
interest
rate
payments under
the LLC Borrower Term Loan indebtedness to fixed rate
payments, and were intended to provide some economic hedge against
interest rate fluctuations related to the MUFG Credit
Facility
. If an interest rate swap
counterparty cannot perform under the terms of the interest rate
swap due to insolvency, bankruptcy or other reasons, the Company
would not receive payments due from the counterparty under that
interest rate swap
agreement, in which case
, depending on interest rate conditions at the
time of such default, the Company
could be
unable to meet its variable interest rate debt
obligations
and may
default
under one or more loan agreements. In such a case,
the debt
under the loan agreement could be accelerated and become
immediately due and payable,
the
collateral securing the loan indebtedness could be foreclosed upon,
and/or the Company might incur a loss on the fair market value of
the interest rate swap agreement.
Any such outcome could
have a material adverse effect on the Company’s performance,
liquidity and ability to continue operations.
Swap Breakage Fees.
To reduce
the amount of interest that accrues under its indebtedness, the
Company could choose to prepay certain amounts borrowed under such
loans. If the Company has hedged its variable
interest
rate indebtedness, in addition to
prepayment fees that might be payable to the lender
of
the underlying indebtedness, the
Company may also be obligated to pay certain swap breakage fees to
the interest rate swap counterparty in order to unwind the interest
rate swap
related to
the
indebtedness that is being prepaid. Thus,
the
Company’s
interest rate swaps
could reduce the economic benefit that the Company might otherwise
achieve through prepayment or could render an otherwise
advantageous debt prepayment uneconomical.
Government Regulation.
There are a
number of areas in which government regulation may result in costs
to the Company. These include aircraft registration safety
requirements, required equipment modifications, maximum aircraft
age, and aircraft noise requirements. Although it is contemplated
that the burden and cost of complying with such requirements will
fall primarily upon lessees, there can be no assurance that the
cost will not fall on the Company. Additionally, even if lessees
are responsible for the costs of complying with these requirements,
changes to the requirements to make them more stringent or
otherwise increase these costs could negatively impact the
Company’s customers’ businesses, which could result in
nonperformance under their lease agreements or decreased demand for
the Company’s aircraft. Furthermore, future government
regulations could cause the value of any noncomplying equipment
owned by the Company to decline substantially. Moreover, any
failure by the Company to comply with the government regulations
applicable to it could result in sanctions, fines or other
penalties, which could harm the Company’s reputation and
performance.
Casualties and Insurance Coverage.
The
Company, as an owner of transportation equipment, may be named in a
suit claiming damages for injuries or damage to property caused by
its assets. As a triple-net lessor, the Company is generally
protected against such claims, because the lessee would be
responsible for, insure against and indemnify the Company for such
claims. A “triple net lease” is a lease under which, in
addition to monthly rental payments, the lessee is generally
responsible for the taxes, insurance and maintenance and repair of
the aircraft arising from the use and operation of the aircraft
during the term of the lease. Although the United States Aviation
Act may provide some additional protection with respect to the
Company’s aircraft assets, it is unclear to what extent such
statutory protection would be available to the Company with respect
to its assets that are operated in foreign countries where the
provisions of this law may not apply.
The Company’s
leases generally require a lessee to insure against likely risks of
loss or damage to the leased asset and liability to passengers and
third parties pursuant to industry standard insurance policies, and
require lessees to provide insurance certificates documenting the
policy periods and coverage amounts. The Company has adopted
measures designed to ensure these insurance policies continue to be
maintained, including tracking receipt of the insurance
certificates, calendaring their expiration dates, and reminding
lessees of their obligations to maintain such insurance and provide
current insurance certificates to the Company if a replacement
certificate is not timely received prior to the expiration of an
existing certificate.
Despite these
requirements and procedures, there may be certain cases where
losses or liabilities are not entirely covered by the lessee or its
insurance. Although the Company believes the possibility of such an
event is remote, any such uninsured loss or liability, or insured
loss or liability for which insurance proceeds are inadequate,
might result in a loss of invested capital in and any profits
anticipated from the applicable aircraft, as well as potential
claims directly against the Company.
Compliance with Environmental
Regulations.
Compliance with environmental regulations may
harm the Company’s business. Many aspects of aircraft
operations are subject to increasingly stringent environmental
regulations, and growing concerns about climate change may result
in the imposition by the U.S. and foreign governments of additional
regulation of carbon emissions, including requirements to adopt
technology to reduce the amount of carbon emissions or imposing a
fee or tax system on carbon emitters. Any such regulation could be
directed at the Company’s customers, as operators of
aircraft, at the Company, as an owner of aircraft, and/or on the
manufacturers of aircraft. Under the Company’s triple-net
lease arrangements, the Company would likely try to shift
responsibility for compliance to its lessees; however, it may not
be able to do so due to competitive or other market factors, and
there might be some compliance costs that the Company could not
pass through to its customers and would itself have to bear.
Although it is not expected that the costs of complying with
current environmental regulations will have a material adverse
effect on the Company’s financial position, results of
operations, or liquidity, there is no assurance that the costs of
complying with environmental regulations as amended or adopted in
the future will not have such an effect.
Cybersecurity Risks.
The Company
believes that its main vulnerabilities to a cyber-attack would be
interruption of the Company’s email communications internally
and with third parties, loss of customer and lease archives, and
loss of document sharing between the Company’s offices and
remote workers. Such an attack could temporarily impede the
efficiency of the Company’s operations; however, the Company
believes that sufficient replacement and backup mechanisms exist in
the event of such an interruption such that there would not be a
material adverse financial impact on the Company’s business.
A cyber-hacker could also gain access to and release proprietary
information of the Company, its customers, suppliers and employees
stored on the Company’s data network. Such a breach could
harm the Company’s reputation and result in competitive
disadvantages, litigation, lost revenues, additional costs, or
liability to third parties. While the Company believes that it has
sufficient cybersecurity measures in place commensurate with the
risks to the Company of a successful cyber-attack or breach of its
data security, its resources and technical sophistication may not
be adequate to prevent or adequately respond to and mitigate all
types of cyber-attacks.
Possible Volatility of Stock Price.
The
market price of the Company’s common stock is subject to
fluctuations following developments relating to the Company’s
operating results, changes in general conditions in the economy,
the financial markets or the airline industry, changes in
accounting principles or tax laws applicable to the Company or its
lessees, or other developments affecting the Company, its customers
or its competitors, or arising from other investor sentiment
unknown to the Company. Because the Company has a relatively small
capitalization of approximately 1.55 million shares outstanding,
there is a correspondingly limited amount of trading and float of
the Company’s shares. Consequently, the Company’s stock
price is more sensitive to a single large trade or a small number
of simultaneous trades along the same trend than a company with
larger capitalization and higher trading volume and float. This
stock price and trading volume volatility could limit the
Company’s ability to use its capital stock to raise capital,
if and when needed or desired, or as consideration for other types
of transactions, including strategic collaborations, investments or
acquisitions. Any such limitation could negatively affect the
Company’s performance, growth prospects and
liquidity.
19
I
tem 7A. Quantitative and Qualitative Disclosures
About Market Risk.
Disclosure under
this item has been omitted pursuant to the rules of the SEC that
permit smaller reporting companies to omit this
information.
I
tem 8. Financial Statements and
Supplementary Data.
Disclosure
of certain supplementary financial data has been omitted pursuant
to the rules of the SEC that permit smaller reporting companies to
omit such information.
The following
financial statements and schedules are included in this report
below:
(1) Financial
Statements:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2019 and 2018
Consolidated
Statements of Operations for the Years Ended December 31, 2019 and
2018
Consolidated
Statements of Comprehensive Loss for the Years Ended December 31,
2019 and 2018
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2019 and 2018
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2019 and
2018
Notes to
Consolidated Financial Statements
(2) Schedules:
All
schedules have been omitted because the required information is
presented in the consolidated financial
statements or is
not applicable.
20
Report of Independent Registered Public Accounting
Firm
Shareholders
and Board of Directors
AeroCentury
Corp.
Burlingame,
California
Opinion on the Consolidated
Financial Statements
We
have audited the accompanying consolidated balance sheets of
AeroCentury Corp. (the “Company”) as of December 31,
2019 and 2018, the related consolidated statements of operations,
comprehensive loss, stockholders’ equity, and cash flows for
the years then ended, and the related notes (collectively referred
to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Going Concern Uncertainty
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the
Company is in default of its debt obligations under the credit
facility that raises substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to
these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Change in Accounting Method Related to Leases
As
discussed in Notes 1, 2 and 8 to the consolidated financial
statements, the Company has changed its method of accounting for
leases in 2019 due to the adoption of Accounting Standards
Codification 842,
Leases
.
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. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
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.
/s/
BDO USA, LLP
We
have served as the Company’s auditor since 2006.
San
Francisco, California
March 30,
2020
21
AeroCentury
Corp.
Consolidated Balance Sheets
|
ASSETS
|
||
|
|
December
31,
|
December
31,
|
|
|
2019
|
2018
|
|
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
2,350,200
|
$
1,542,500
|
|
Restricted
cash
|
1,076,900
|
-
|
|
Securities
|
-
|
121,000
|
|
Accounts
receivable, including deferred rent of $828,000 and $869,600
at
December
31, 2019 and December 31, 2018, respectively
|
1,139,700
|
3,967,200
|
|
Finance
leases receivable, net of allowance for doubtful accounts of
$2,908,600 and $0 at December 31, 2019 and December 31, 2018,
respectively
|
8,802,100
|
15,250,900
|
|
Aircraft and aircraft engines held for lease, net
of accumulated depreciation of $31,338,700 and $36,675,500 at
December 31
,
2019 and December
31, 2018, respectively
|
108,368,600
|
184,019,900
|
|
Assets
held for sale
|
26,036,600
|
10,223,300
|
|
Property,
equipment and furnishings, net of accumulated depreciation of
$9,600 and $2,200 at December 31, 2019 and December 31, 2018,
respectively
|
62,900
|
69,100
|
|
Office lease right of use, net of accumulated
amortization of $524,500 at
December 31
, 2019
|
948,300
|
-
|
|
Favorable
office lease acquired, net of accumulated amortization of $61,700
at
December
31, 2018
|
-
|
863,300
|
|
Deferred
tax asset
|
517,700
|
254,900
|
|
Prepaid
expenses and other assets
|
292,800
|
840,100
|
|
Total
assets
|
$
149,595,800
|
$
217,152,200
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||
|
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$
736,000
|
$
1,025,600
|
|
Accrued
payroll
|
164,200
|
78,600
|
|
Notes
payable and accrued interest, net of unamortized debt issuance
costs of
$3,825,700
and $674,300 at December 31, 2019 and
December
31, 2018, respectively
|
111,638,400
|
131,092,200
|
|
Derivative
liability
|
1,824,500
|
-
|
|
Lease
liability
|
336,400
|
|
|
Maintenance
reserves
|
4,413,100
|
28,527,500
|
|
Accrued
maintenance costs
|
446,300
|
463,300
|
|
Security
deposits
|
1,034,300
|
3,367,800
|
|
Unearned
revenues
|
3,039,200
|
3,274,800
|
|
Deferred
income taxes
|
2,529,800
|
7,537,100
|
|
Income
taxes payable
|
175,000
|
497,400
|
|
Total
liabilities
|
126,337,200
|
175,864,300
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred
stock, $0.001 par value, 2,000,000 shares
authorized,
no shares issued and outstanding
|
-
|
-
|
|
Common
stock, $0.001 par value, 10,000,000 shares authorized, 1,545,884
outstanding at December 31, 2019 and December 31, 2018,
respectively
|
1,800
|
1,800
|
|
Paid-in
capital
|
16,782,800
|
16,782,800
|
|
Retained
earnings
|
10,882,100
|
27,540,600
|
|
Accumulated
other comprehensive loss
|
(1,370,800
)
|
-
|
|
|
26,295,900
|
44,325,200
|
|
Treasury
stock at cost, 213,332 shares at December 31, 2019 and December 31,
2018
|
(3,037,300
)
|
(3,037,300
)
|
|
Total
stockholders’ equity
|
23,258,600
|
41,287,900
|
|
Total
liabilities and stockholders’ equity
|
$
149,595,800
|
$
217,152,200
|
The accompanying notes are an integral part of these consolidated
financial statements.
22
AeroCentury Corp.
Consolidated Statements of Operations
|
|
For the
Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
Revenues
and other income:
|
|
|
|
Operating
lease revenue
|
$
25,609,000
|
$
27,637,500
|
|
Maintenance
reserves revenue, net
|
16,968,400
|
1,629,000
|
|
Finance
lease revenue
|
852,600
|
1,251,000
|
|
Net
gain/(loss) on disposal of assets
|
326,900
|
(3,408,700
)
|
|
Net
loss on sales-type finance leases
|
(170,600
)
|
-
|
|
Other
income
|
12,800
|
7,600
|
|
|
43,599,100
|
27,116,400
|
|
Expenses:
|
|
|
|
Provision for
impairment in value of aircraft
|
31,007,400
|
2,971,500
|
|
Depreciation
|
11,587,500
|
12,637,100
|
|
Interest
|
11,302,900
|
9,506,000
|
|
Professional fees,
general and administrative and other
|
4,005,100
|
2,343,800
|
|
Bad debt
expense
|
2,908,600
|
-
|
|
Salaries and
employee benefits
|
2,367,500
|
592,300
|
|
Maintenance
|
850,800
|
636,000
|
|
Insurance
|
621,300
|
383,700
|
|
Other
taxes
|
114,300
|
90,200
|
|
Management
fees
|
-
|
4,482,800
|
|
Settlement
loss
|
-
|
2,527,000
|
|
|
64,765,400
|
36,170,400
|
|
Loss
before income tax benefit
|
(21,166,300
)
|
(9,054,000
)
|
|
Income
tax benefit
|
(4,507,800
)
|
(972,800
)
|
|
Net
loss
|
$
(16,658,500
)
|
$
(8,081,200
)
|
|
Loss per
share:
|
|
|
|
Basic
|
$
(10.78
)
|
$
(5.58
)
|
|
Diluted
|
$
(10.78
)
|
$
(5.58
)
|
|
Weighted
average shares used in loss per share computations:
|
|
|
|
Basic
|
1,545,884
|
1,449,261
|
|
Diluted
|
1,545,884
|
1,449,261
|
The accompanying notes are an integral part of these consolidated
financial statements.
23
AeroCentury Corp.
Consolidated Statements of Comprehensive Loss
|
|
For the
Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
Net
loss
|
$
(16,658,500
)
|
$
(8,081,200
)
|
|
Other
comprehensive loss:
|
|
|
|
Unrealized
losses on derivative instruments
|
(1,932,100
)
|
-
|
|
Reclassification
of net unrealized losses on derivative
instruments
to interest expense
|
186,400
|
-
|
|
Tax
benefit related to items of other comprehensive loss
|
374,900
|
-
|
|
Other
comprehensive loss
|
(1,370,800
)
|
-
|
|
Total
comprehensive loss
|
$
(18,029,300
)
|
$
(8,081,200
)
|
The accompanying notes are an integral part of these consolidated
financial statements.
24
AeroCentury Corp.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2019 and 2018
|
|
Number of Common
Stock Shares Outstanding
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated Other
Comprehensive Loss
|
Total
|
|
Balance, December
31, 2017
|
1,416,699
|
$
1,600
|
$
14,780,100
|
$
35,621,800
|
$
(3,036,800
)
|
$
-
|
$
47,366,700
|
|
Acquisition of JHC
by AeroCentury
|
129,217
|
200
|
2,002,700
|
-
|
-
|
-
|
2,002,900
|
|
Common stock shares
held by JHC prior to the acquisition of JHC and retained as
treasury stock
|
(32
)
|
-
|
-
|
-
|
(500
)
|
-
|
(500
)
|
|
Net
loss
|
-
|
-
|
-
|
(8,081,200
)
|
-
|
-
|
(8,081,200
)
|
|
Balance December
31, 2018
|
1,545,884
|
1,800
|
16,782,800
|
27,540,600
|
(3,037,300
)
|
-
|
41,287,900
|
|
Net
loss
|
-
|
-
|
-
|
(16,658,500
)
|
-
|
-
|
(16,658,500
)
|
|
Accumulated other
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
(1,370,800
)
|
(1,370,800
)
|
|
Balance, December
31, 2019
|
1,545,884
|
$
1,800
|
$
16,782,800
|
$
10,882,100
|
$
(3,037,300
)
|
$
(1,370,800
)
|
$
23,258,600
|
The accompanying notes are an integral part of these
consolidated financial
statements.
25
AeroCentury Corp.
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
Operating
activities:
|
|
|
|
Net
loss
|
$
(16,658,500
)
|
$
(8,081,200
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Net
(gain)/loss on disposal of assets
|
(326,900
)
|
3,408,700
|
|
Net
loss on sales-type finance leases
|
170,600
|
-
|
|
Non-cash
income
|
-
|
(42,700
)
|
|
Depreciation
|
11,587,500
|
12,637,100
|
|
Amortization
|
-
|
61,700
|
|
Provision
for impairment in value of aircraft
|
31,007,400
|
2,971,500
|
|
Provision
for bad debts
|
2,908,600
|
-
|
|
Non-cash
interest
|
3,376,300
|
1,615,500
|
|
Settlement
loss
|
-
|
2,527,000
|
|
Deferred
income taxes
|
(4,895,200
)
|
(1,390,000
)
|
|
Derivative
valuations
|
154,000
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(5,962,800
)
|
(537,400
)
|
|
Finance
leases receivable
|
263,400
|
(133,100
)
|
|
Office
lease right of use
|
(948,300
)
|
-
|
|
Favorable
office lease acquired
|
863,300
|
-
|
|
Prepaid
expenses and other
|
551,700
|
(457,800
)
|
|
Taxes
receivable
|
(5,600
)
|
22,500
|
|
Accounts
payable and accrued expenses
|
(277,300
)
|
1,802,700
|
|
Accrued
payroll
|
85,600
|
(14,800
)
|
|
Accrued
interest on notes payable
|
310,200
|
(147,100
)
|
|
Office
lease liability
|
336,400
|
-
|
|
Maintenance
reserves and accrued costs
|
(14,016,200
)
|
3,552,600
|
|
Security
deposits
|
-
|
(4,100
)
|
|
Unearned
revenue
|
(32,100
)
|
827,300
|
|
Income
taxes payable
|
(322,400
)
|
(677,200
)
|
|
Net cash provided
by operating activities
|
8,169,700
|
17,941,200
|
|
Investing
activities:
|
|
|
|
Proceeds from sale
of aircraft and aircraft engines held for lease, net of re-sale
fees
|
1,702,400
|
11,688,400
|
|
Proceeds from sale
of assets held for sale, net of re-sale fees
|
15,107,000
|
4,945,200
|
|
Purchases of
aircraft and aircraft engines
|
-
|
(22,844,300
)
|
|
Proceeds from sale
of securities
|
121,000
|
-
|
|
Acquisition of JHC,
net of cash acquired
|
-
|
(2,875,100
)
|
|
Net cash provided
by/(used in) investing activities
|
16,930,400
|
(9,085,800
)
|
|
Financing
activities:
|
|
|
|
Issuance of notes
payable – MUFG Credit Facility
|
5,984,100
|
21,000,000
|
|
Repayment of notes
payable – MUFG Credit Facility
|
(44,300,000
)
|
(32,600,000
)
|
|
Issuance of notes
payable – Nord Term Loans
|
44,310,000
|
-
|
|
Repayment of notes
payable – UK LLC SPE Financing
|
(9,211,100
)
|
(4,300,700
)
|
|
Repayment of notes
payable – Nord Term Loans
|
(13,395,600
)
|
-
|
|
Debt issuance
costs
|
(6,527,700
)
|
(70,000
)
|
|
Settlement of
interest rate swap
|
(75,200)
|
-
|
|
Net cash used in
financing activities
|
(23,215,500
)
|
(15,970,700
)
|
|
Net
increase/(decrease) in cash, cash equivalents and restricted
cash
|
1,884,600
|
(7,115,300
)
|
|
Cash, cash
equivalents and restricted cash, beginning of year
|
1,542,500
|
8,657,800
|
|
Cash, cash
equivalents and restricted, end of year
|
$
3,427,100
|
$
1,542,500
|
The
accompanying notes are an integral part of these consolidated
financial statements.
AeroCentury Corp.
Consolidated
Statements of Cash Flows (continued)
The
components of cash and cash equivalents and restricted cash at the
end of each of the years presented consisted of:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
Cash and cash
equivalents
|
$
2,350,200
|
$
1,542,500
|
|
Restricted
cash
|
1,076,900
|
-
|
|
Cash, cash
equivalents and restricted cash shown in the statement of cash
flows
|
$
3,427,100
|
$
1,542,500
|
During the years
ended December 31, 2019 and 2018, the Company paid interest
totaling $8,123,100 and $8,173,900, respectively. The Company paid
income taxes of $617,600 in 2019 and $1,063,200, including $627,000
of pre-Merger taxes payable by JHC and assumed by the Company as a
result of the Merger, in 2018. During 2018, AeroCentury issued
129,217 shares valued at $2,002,900 related to its acquisition of
JHC.
The
accompanying notes are an integral part of these consolidated
financial statements.
26
AeroCentury
Corp.
Notes
to Consolidated Financial Statements
December
31, 2019
1.
Organization and
Summary of Significant Accounting Policies
(a)
The Company and Basis of
Presentation
AeroCentury
Corp. (“AeroCentury”) is a Delaware corporation
incorporated in 1997. AeroCentury together with its consolidated
subsidiaries is referred to as the
“Company.”
In
August 2016, AeroCentury formed two wholly-owned subsidiaries, ACY
19002 Limited (“ACY 19002”) and ACY 19003 Limited
(“ACY 19003”) for the purpose of acquiring aircraft
using a combination of cash and third-party financing (“UK
LLC SPE Financing” or “special-purpose
financing”) separate from AeroCentury’s credit facility
(the “MUFG Credit Facility”). The UK LLC SPE Financing
was repaid in full in February 2019 as part of a refinancing
involving new non-recourse term loans totaling approximately $44.3
million (“Nord Term Loans”) made to ACY 19002, ACY
19003, and two other newly formed special-purpose subsidiaries of
AeroCentury. See Note 6(b) for more information about the Nord Term
Loans.
On
October 1, 2018, AeroCentury acquired JetFleet Holding Corp.
(“JHC”) in a reverse triangular merger
(“Merger”) for consideration of approximately $2.9
million in cash and 129,217 shares of common stock of AeroCentury,
as determined pursuant to an Agreement and Plan of Merger (the
“Merger Agreement”) entered into by AeroCentury, JHC
and certain other parties in October 2017. JHC is the parent
company of JetFleet Management Corp. (“JMC”), which is
an integrated aircraft management, marketing and financing business
and the manager of the Company’s assets. Upon completion of
the Merger, JHC became a wholly-owned subsidiary of the Company,
and as a result, JHC's results are included in the Company's
consolidated financial statements beginning on October 1,
2018.
In
November 2018, AeroCentury formed two wholly-owned subsidiaries,
ACY SN 15129 LLC (“ACY 15129”) and ACY E-175 LLC
(“ACY E-175”), for the purpose of refinancing four of
the Company’s aircraft using the Nord Term Loans. Because the
Nord Term Loans did not close until February 2019, the subject
aircraft remained as collateral under the MUFG Credit Facility as
of December 31, 2018, and ACY 15129 and ACY E-175 had no activity
in 2018.
Financial
information for AeroCentury and its consolidated subsidiaries is
presented on a consolidated basis in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) based upon the continuation of the business as
a going concern. All intercompany balances and transactions have
been eliminated in consolidation.
(b)
Going Concern
As discussed in
Note 6, the Company was in default under its MUFG Credit Facility
as of December 31, 2019. The MUFG Credit
Facility
lenders
(“Credit Facility Lenders”) have the right to exercise
any and all remedies for default under the MUFG Credit Facility
agreement. Such remedies include, but are not limited to, declaring
the entire indebtedness immediately due and payable and, if the
Company were unable to repay such accelerated indebtedness
(including its obligation in connection with the termination of two
interest rate swaps entered into in connection with the MUFG Credit
Facility (the “MUFG Swaps”), foreclosing upon the
assets of the Company that secure the MUFG Indebtedness, which
consist of all of the Company’s assets except for certain
assets held in the Company’s single asset special-purpose
financing subsidiaries.
In addition, as
discussed in Note 15, the coronavirus pandemic has led to
significant cash flow issues for airlines, including some of the
Company’s customers, and some airlines may be unable to
timely meet their obligations under their lease obligations with
the Company unless government financial support is received, of
which there can be no assurance. Any significant nonpayment or late
payment of lease payments by a significant lessee or combination of
lessees could in turn impose limits on the Company’s ability
to fund its ongoing operations as well as cause new defaults under
the Company’s debt obligations, which in turn could lead to
an immediate acceleration of debt and foreclosure upon the
Company’s assets.
As a result of these factors,
there is substantial doubt regarding the Company’s ability to
continue as a going concern.
The Company is
currently in negotiations with the Credit Facility Lenders to
convert the MUFG Credit Facility into a term loan facility (as
converted, the
The Company is
currently in negotiations with the Credit Facility Lenders to
convert the MUFG Credit Facility into a term loan facility (as
converted, the “MUFG Term Loan” and, collectively with
the MUFG Credit Facility, “MUFG Indebtedness”). The
Company has engaged an investment banking advisor to assist in
obtaining additional debt or equity financing (the
“Recapitalization Plan”) which, if successful, would be
used to repay the MUFG Indebtedness. However, there is no
assurance that this will occur. This is further exacerbated
by the significance of the COVID-19 uncertainties discussed in Note
15.
27
The consolidated
financial statements presented in this Annual Report on Form 10-K
have been prepared on a going concern basis and do not include any
adjustments that might arise as a result of uncertainties about the
Company’s ability to continue as a going
concern.
(c)
Use of Estimates
The
Company’s consolidated financial statements have been
prepared in accordance with GAAP. The preparation of consolidated
financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable for
making judgments that are not readily apparent from other
sources.
The
most significant estimates with regard to these consolidated
financial statements are the residual values and useful lives of
the Company’s long-lived assets, the amount and timing of
future cash flows associated with each asset that are used to
evaluate whether assets are impaired, accrued maintenance costs,
accounting for income taxes, the assumptions used to value the
Company’s derivative instruments, the valuation of the right
of use asset and related lease liability associated with the
Company’s office, and the amounts recorded as allowances for
doubtful accounts.
(d) Comprehensive Income/(Loss)
The Company
reflects changes in the fair value of its interest rate swap
derivatives that are designated as hedges in other comprehensive
income/(loss). Such amounts are reclassified into earnings in the
periods in which the hedged transaction occurs or when it is
probable that the hedged transactions will no longer occur, and are
included in interest expense.
(e) Cash, Cash Equivalents and Restricted
Cash
The Company
considers highly liquid investments readily convertible into known
amounts of cash, with original maturities of 90 days or less from
the date of acquisition, as cash equivalents.
The Company’s restricted cash is held in an account with the
agent for the Company’s MUFG Credit Facility and
disbursements from the account are subject to the control and
discretion of the agent for payment of principal on the MUFG Credit
Facility as well as for the Company’s operating
expenses.
(f) Securities
At December 31,
2018, the Company owned 121 shares of non-voting preferred stock in
a non-public company. The stock, which had a cumulative preferred
annual dividend of 10% and a liquidation value of $1,000 per share,
was sold during 2019.
(g) Lease Accounting, Favorable Lease Acquired and Lease Right
of Use Asset
In February 2016,
the Financial Accounting Standards Board ("FASB") issued Topic 842
-
Leases
in the Accounting
Standards Codification ("ASC"). Topic 842 substantially modifies
lessee accounting for leases, requiring that lessees recognize
lease assets and liabilities for leases extending beyond one year.
Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the
income statement. The Company adopted Topic 842 on January 1, 2019,
electing to apply its provisions on the date of adoption and to
record the cumulative effect as an adjustment to retained earnings.
Lessor accounting under Topic 842 is similar to the prior
accounting standard and the Company has elected to apply practical
expedients under which the Company will not have to reevaluate
whether a contract is a lease, the classification of its existing
leases or its capitalized initial direct costs. In addition, the
Company, as lessor, has elected the practical expedient to combine
lease and non-lease components as one combined component for its
leased aircraft for purposes of determining whether that combined
component should be accounted for under Topic 606, which
establishes rules that affect the amount and timing of revenue
recognition for contracts with customers, or Topic
842.
The new standard
requires a lessor to classify leases as sales-type, finance, or
operating. A lease is treated as sales-type if it transfers all of
the risks and rewards, as well as control of the underlying asset,
to the lessee. If risks and rewards are conveyed without the
transfer of control, the lease is treated as a finance lease. If
the lessor does not convey risks and rewards or control, an
operating lease results. As a result of application of the
practical expedients, the Company was not required to alter the
classification or carrying value of its leased or finance lease
assets.
In connection with
the Company’s acquisition of JHC, as discussed in Note 10,
the Company recognized that the lease of its office facilities had
rents that were substantially below the market for such office
space. Consequently, the Company recorded $925,000 as the value of
below-market rents at the October 1, 2018 date of the JHC
acquisition, and amortized such amount on a level basis over the
remaining term of the office lease, including two one-year bargain
renewal options. The Company recorded $61,700 of amortization in
2018.
28
Lessee reporting
was changed by the new standard, requiring that the balance sheet
reflect a liability for most operating lease obligations as well as
a “right of use” asset. As such, in January 2019, the
Company was required to record a lease obligation of approximately
$610,000 in connection with the lease of its headquarters office,
and to increase the capitalized leasehold interest / right of use
asset by $610,000, as discussed in Note 8. There was no effect on
retained earnings recorded as a result of adoption of the standard.
The Company elected the lessee practical expedient to combine the
lease and non-lease components.
(h)
Aircraft Capitalization and
Depreciation
The
Company’s interests in aircraft and aircraft engines are
recorded at cost, which includes acquisition costs. Since
inception, the Company has typically purchased only used aircraft
and aircraft engines. It is the Company’s policy to hold
aircraft for approximately twelve years unless market conditions
dictate otherwise. Therefore, depreciation of aircraft is initially
computed using the straight-line method over the anticipated
holding period to an estimated residual value based on appraisal.
For an aircraft engine held for lease as a spare, the Company
estimates the length of time that it will hold the aircraft engine
based upon estimated usage, repair costs and other factors, and
depreciates it to the appraised residual value over such period
using the straight-line method.
The
Company periodically reviews plans for lease or sale of its
aircraft and aircraft engines and changes, as appropriate, the
remaining expected holding period for such assets. Estimated
residual values are reviewed and adjusted periodically, based upon
updated estimates obtained from an independent appraiser. Decreases
in the fair value of aircraft could affect not only the current
value, discussed below, but also the estimated residual
value.
Assets that are
held for sale are not subject to depreciation and are separately
classified on the balance sheet. Such assets are carried at the
lower of their carrying value or estimated fair values, less costs
to sell.
(i)
Property, Equipment
and Furnishings
The Company’s
interests in equipment are recorded at cost and depreciated using
the straight-line method over five years. The Company’s
leasehold improvements are recorded at cost and amortized using the
straight-line
method
over the shorter of the lease term or the estimated useful lives of
the respective assets.
(j) Impairment of Long-lived Assets
The Company reviews
assets for impairment when there has been an event or a change in
circumstances indicating that the carrying amount of a long-lived
asset may not be recoverable. In addition, the Company routinely
reviews all long-lived assets for impairment semi-annually.
Recoverability of an asset is measured by comparison of its
carrying amount to the future estimated undiscounted cash flows
(without interest charges) that the asset is expected to generate.
Estimates are based on currently available market data and
independent appraisals and are subject to fluctuation from time to
time. If these estimated future cash flows are less than the
carrying value of an asset at the time of evaluation, any
impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair value. Fair
value is determined by reference to independent appraisals and
other factors considered relevant by management. Significant
management judgment is required in the forecasting of future
operating results that are used in the preparation of estimated
future undiscounted cash flows and, if different conditions prevail
in the future, material write-downs may occur.
As discussed in
Note 9, the Company recorded impairment losses totaling $31.0
million and $3.0 million in 2019 and 2018, respectively, as a
result of the Company’s determination that the carrying
values for certain aircraft were not recoverable.
The 2019 impairment
losses consisted of (i) $24.0 million resulting from appraised
values for four aircraft that are held for sale, assuming sale in a
reasonably short time (“Orderly Liquidation Value”) and
(ii) $7.0 million resulting from estimated or actual sales proceeds
for five assets held for sale, three of which were sold during
2019.
The 2018 impairment
losses consisted of (i) $2.7 million resulting from Orderly
Liquidation Values for four aircraft held for sale and (ii) $0.3
million resulting from writing a fifth aircraft down to its
appraised value.
29
(k) Deferred Financing Costs and Commitment Fees
Costs incurred in
connection with debt financing are deferred and amortized over the
term of the debt using the effective interest method or, in certain
instances where the differences are not material, using the
straight-line method. Costs incurred in connection with the MUFG
Credit Facility are deferred and amortized using the straight-line
method. Commitment fees for unused funds are expensed as
incurred.
(l) Security Deposits
The Company’s
leases are typically structured so that if any event of default
occurs under a lease, the Company may apply all or a portion of the
lessee’s security deposit to cure such default. If such
application of the security deposit is made, the lessee typically
is required to replenish and maintain the full amount of the
deposit during the remaining lease term. All of the security
deposits received by the Company are refundable to the lessee at
the end of the lease upon satisfaction of all lease
terms.
(m) Taxes
As part of the
process of preparing the Company’s consolidated financial
statements, management estimates income taxes in each of the
jurisdictions in which the Company operates. This process involves
estimating the Company’s current tax exposure under the most
recent tax laws and assessing temporary differences resulting from
differing treatment of items for tax and GAAP purposes. These
differences result in deferred tax assets and liabilities, which
are included in the balance sheet. Management also assesses the
likelihood that the Company’s deferred tax assets will be
recovered from future taxable income, and, to the extent management
believes it is more likely than not that some portion or all of the
deferred tax assets will not be realized, the Company establishes a
valuation allowance. To the extent the Company establishes a
valuation allowance or changes the allowance in a period, the
Company reflects the corresponding increase or decrease within the
tax provision in the statement of operations. Significant
management judgment is required in determining the Company’s
future taxable income for purposes of assessing the Company’s
ability to realize any benefit from its deferred taxes. After
considering the Company’s significant amounts of net deferred
tax liabilities which are future reversing taxable temporary
differences, the Company has determined that no valuation allowance
is required for its deferred tax assets.
The Company accrues
non-income based sales, use, value added and franchise taxes as
other tax expense in the statement of operations.
(n) Revenue Recognition, Accounts Receivable and Allowance for
Doubtful Accounts
Revenue from
leasing of aircraft assets pursuant to operating leases is
recognized on a straight-line basis over the terms of the
applicable lease agreements. Deferred payments are recorded as
accrued rent when the cash rent received is lower than the
straight-line revenue recognized. Such receivables decrease over
the term of the applicable leases. Interest income is recognized on
finance leases based on the interest rate implicit in the lease and
the outstanding balance of the lease receivable.
Maintenance
reserves retained by the Company at lease-end are recognized as
maintenance reserves revenue.
In instances where
collectability is not reasonably assured, the Company recognizes
revenue as cash payments are received. The Company estimates and
charges to income a provision for bad debts based on its experience
with each specific customer, the amount and length of payment
arrearages, and its analysis of the lessee’s overall
financial condition. If the financial condition of any of the
Company’s customers deteriorates, it could result in actual
losses exceeding any estimated allowances.
The Company had an
allowance for doubtful accounts of $2,908,600 and $0 at December
31, 2019 and 2018, respectively.
30
(o) Comprehensive Income
The Company
reflects changes in the fair value of its interest rate swap
derivatives that are designated as hedges in other comprehensive
income/(loss). Such amounts are reclassified into earnings in the
periods in which the hedged transaction occurs, and are included in
interest expense.
(p) Finance Leases
The Company
recognized interest earned on finance leases in the amount of
$852,600 and
$1,251,000
in 2019 and 2018,
respectively.
As a result of
payment delinquencies by two customers that lease three of the
Company’s aircraft subject to finance leases, the Company
recorded a bad debt allowance of $2,957,800 during
2019.
(q)
Maintenance Reserves and Accrued Maintenance Costs
Maintenance
costs under the Company’s triple net leases are generally the
responsibility of the lessees. Some of the Company’s leases
require payment of maintenance reserves, which are based upon
lessee-reported usage and billed monthly, and are intended to
accumulate and be applied by the Company toward reimbursement of
most or all of the cost of the lessees’ performance of
certain maintenance obligations under the leases. Such
reimbursements reduce the associated maintenance reserve
liability.
Maintenance
reserves are characterized as either refundable or non-refundable
depending on their disposition at lease-end. The Company retains
non-refundable maintenance reserves at lease-end, even if the
lessee has met all of its obligations under the lease, including
any return conditions applicable to the leased asset, while
refundable reserves are returned to the lessee under such
circumstances. Any reserves retained by the Company at lease-end
are recorded as revenue at that time.
Accrued
maintenance costs include (i) maintenance for work performed for
off-lease aircraft, which is not related to the release of
maintenance reserves received from lessees and which is expensed as
incurred, and (ii) lessor maintenance obligations assumed and
recognized as a liability upon acquisition of aircraft subject to a
lease with such provisions.
(r) Interest Rate Hedging
During the first
quarter of 2019, the Company entered into certain derivative
instruments to mitigate its exposure to variable interest rates
under the Term Loans debt and a portion of the MUFG Credit Facility
debt. Hedge accounting is applied to such a transaction only if
specific criteria have been met, the transaction is deemed to be
“highly effective” and the transaction has been
designated as a hedge at its inception. Under hedge accounting
treatment, generally, the effects of derivative transactions are
recorded in earnings for the period in which the hedge transaction
affects earnings. A change in value of a hedging instrument is
reported as a component of other comprehensive income/(loss) and is
reclassified into earnings in the period in which the transaction
being hedged affects earnings.
If at any time
after designation of a cash flow hedge, such as those entered into
by the Company, it is no longer probable that the forecasted cash
flows will occur, hedge accounting is no longer permitted and a
hedge is “dedesignated.” After dedesignation, if it is
still considered reasonably possible that the forecasted cash flows
will occur, the amount previously recognized in other comprehensive
income/(loss) will continue to be reversed as the forecasted
transactions affect earnings. However, if after dedesignation it is
probable that the forecasted transactions will not occur, amounts
deferred in accumulated other comprehensive income/(loss) will be
recognized in earnings immediately.
As noted in Note 7,
in October 2019 the Company became aware that, as a result of
certain defaults under its MUFG Credit Facility, certain of the
forecasted transactions related to its MUFG Credit Facility
interest rate swaps are no longer probable of occurring and, hence,
those swaps were dedesignated from hedge accounting at that time.
As discussed in Note 15, the two swaps related to the MUFG Credit
Facility were terminated in March 2020 and the Company incurred a
$3.1 million obligation in connection with such
termination.
31
(s)
Recent Accounting
Pronouncements
ASU 2016-13
The FASB issued ASU
2016-13,
Financial Instruments
– Credit Losses (Topic 326)
, in June of 2016
(“ASU 2016-13”)
.
ASU 2016-13 provides that financial
assets measured at amortized cost are to be presented as a net
amount, reflecting a reduction for a valuation allowance to present
the amount expected to be collected (the “current expected
credit loss” model of reporting). As such, expected credit
losses will be reflected in the carrying value of assets and losses
will be recognized before they become probable, as is required
under the Company’s present accounting practice. In the case
of assets held as available for sale, the amount of the valuation
allowance will be limited to an amount that reflects the marketable
value of the debt instrument. This amendment to GAAP is
effective
in the first
quarter of 2023 for calendar-year SEC filers that are smaller
reporting companies as of the one-time determination date. Early
adoption is permitted beginning in 2019. The Company plans to adopt
the new guidance on January 1, 2023, and has not determined the
impact of this adoption on its consolidated financial
statements
.
ASU 2019-12
In December 2019,
the FASB issued ASU 2019-12,
Income Taxes (Topic 740),
a new
accounting standard update to simplify the accounting for income
taxes. The new guidance removes certain exceptions for recognizing
deferred taxes for investments, performing intraperiod allocation
and calculating income taxes in interim periods. It also adds
guidance to reduce complexity in certain areas, including
recognizing deferred taxes for tax goodwill and allocating taxes to
members of a consolidated group. This guidance will be effective
for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2021. The Company is currently
evaluating the impact of the new guidance on its consolidated
financial statements and related disclosures.
2.
Aircraft Lease
Assets
As discussed in
Note 1, the Company adopted Topic 842 on January 1, 2019, and
elected to use certain practical expedients that resulted in
continuing the classification of capitalized indirect cost
associated with its operating and finance leases. As such, there
was no adjustment to its accounts related to the carrying value of
its sales-type and finance leases, assets held for lease or
capitalized initial direct costs, and its leases continue to be
accounted for in the same manner as they had been before adoption
of the new accounting standard.
The Company’s
leases are normally “triple net leases” under which the
lessee is obligated to bear all costs, including tax, maintenance
and insurance, on the leased assets during the term of the lease.
In most cases, the lessee is obligated to provide a security
deposit or letter of credit to secure its performance obligations
under the lease, and in some cases, is required to pay maintenance
reserves based on utilization of the aircraft, which reserves are
available for qualified maintenance costs during the lease term and
may or may not be refundable at the end of the lease. Typically,
the leases also contain minimum return conditions, as well as an
economic adjustment payable by the lessee (and in some instances by
the lessor) for amounts by which the various aircraft or engine
components are worse or better than a targeted condition set forth
in the lease. Some leases contain renewal or purchase options,
although the Company’s sales-type and finance leases all
contain a bargain purchase option at lease end which the Company
expects the lessees to exercise or require that the lessee purchase
the aircraft at lease-end for a specified price.
Because all of the
Company’s leases transfer use and possession of the asset to
the lessee and contain no other substantial undertakings by the
Company, the Company has concluded that all of its lease contracts
qualify for lease accounting under Topic 842. Certain lessee
payments of what would otherwise be lessor costs (such as insurance
and property taxes) are excluded from both revenue and
expense.
The Company
evaluates the expected return on its leased assets by considering
both the rents receivable over the lease term, any expected
additional consideration at lease end, and the residual value of
the asset at the end of the lease. In some cases, the Company
depreciates the asset to the expected residual value because it
expects to sell the asset at lease end; in other cases, it may
expect to re-lease the asset to the same or another lessee and the
depreciation term and related residual value will differ from the
initial lease term and initial residual value. Residual value is
estimated by considering future estimates provided by independent
appraisers, although it may be adjusted by the Company based on
expected return conditions or location, specific lessee
considerations, or other market information.
Two of the
Company’s operating lease assets are subject to manufacturer
residual value guarantees at the end of their lease terms in the
fourth quarter of 2020 and totaling approximately $20 million.
Three additional aircraft are subject
to residual value guarantees, but the Company expects to retain the
aircraft after the date of such guarantees and re-lease them to the
current or other lessees.
The Company considers the best
market for managing and/or selling its assets at the end of its
leases, although it does not expect to retain ownership of the
assets under finance leases given the lessees’ bargain
purchase options or required purchase.
32
(a)
Assets Held for Lease
At December
31
, 2019
and December 31, 2018,
the Company’s aircraft and aircraft engines held for lease
consisted of the following:
|
|
December
31, 2019
|
December
31, 2018
|
||
|
Type
|
Number
Owned
|
% of
net book value
|
Number
owned
|
% of
net book value
|
|
Regional jet
aircraft
|
9
|
80
%
|
13
|
81
%
|
|
Turboprop
aircraft
|
2
|
20
%
|
4
|
18
%
|
|
Engines
|
-
|
-
%
|
1
|
1
%
|
The Company did not
purchase any aircraft held for lease during 2019. During the third
quarter, the Company terminated the leases for four of its aircraft
held for lease as a result of significant past due payments from
the customer and repossessed the aircraft. The customer
subsequently ceased operations and declared bankruptcy. The Company
applied the security deposits and a portion of collected
maintenance reserves it held to the past due rent due from the
customer and recorded $16,968,400 of maintenance reserves revenue
for the balance of the collected maintenance reserves. The Company
also recorded impairment losses totaling $28,424,000 for the four
aircraft based on appraised values for three of the aircraft and
expected sales proceeds for the fourth aircraft, and reclassified
the four aircraft to held for sale. As a result of the lease
terminations, the appraised values were based on the
maintenance-adjusted condition of the aircraft, rather than the
previous basis, which reflected future cash flows under the leases.
One of the aircraft was sold during the fourth quarter of
2019.
None of the
Company’s aircraft held for lease were off lease at
December 31
, 2019. As discussed
below, the Company has seven off-lease aircraft that are held for
sale: (i) two turboprop aircraft that were reclassified to held for
sale in the third quarter of 2018, one of which is subject to a
short-term lease, (ii) three regional jet aircraft that were
reclassified to held for sale during 2019 and (iii) two turboprop
aircraft that are being sold in parts.
As of
December 31
, 2019, minimum future lease
revenue payments receivable under non-cancelable operating leases
were as follows:
|
Years ending
December 31
|
|
|
|
|
|
2020
|
$
17,650,900
|
|
2021
|
10,392,000
|
|
2022
|
8,639,600
|
|
2023
|
8,639,600
|
|
2024
|
6,826,100
|
|
Thereafter
|
1,683,300
|
|
|
$
53,831,500
|
The
remaining weighted average lease term of the Company’s assets
under operating leases was 41 months and 58 months at December 31,
2019 and December 31, 2018, respectively.
33
(b)
Sales-Type and Finance Leases
As a result of a lease amendment containing a
purchase option for an older aircraft at lease end
during
the second quarter of 2019, the Company
reclassified an asset that was previously held for
lease to a sales-type finance lease receivable and recorded a loss
of $170,600. The aircraft was sold to the lessee at lease
expiration during the fourth quarter.
During 2019, the Company also amended the
sales-type leases for two aircraft to accommodate the
lessee’s request to transfer a portion of future lease
payment obligations from one of the leases to the other, as well as
to assign one of the leases and related aircraft to a different
lessee. Payments for both leases were also amended to reflect a
higher implicit interest rate, such that the fair value of the
leases after amendment equaled the carrying value of the leases
before the amendment. No gain or loss was recognized as a result of
these lease modifications.
As a result of
payment delinquencies by these two customers, the Company recorded
a bad debt allowance of $2,907,800. As discussed in Note 15, the
leases for these two aircraft were further amended in January 2020
and a third aircraft leased to one of the lessees was sold to the
lessee.
At
December 31, 2019
and December 31, 2018,
the net investment included in sales-type finance leases and direct
financing leases receivable were as follows:
|
|
December 31
,
2019
|
December
31,
2018
|
|
Gross minimum lease
payments receivable
|
$
9,096,400
|
$
17,107,100
|
|
Less unearned
interest
|
(286,600
)
|
(1,856,200
)
|
|
Difference between
minimum lease payments receivable and collateral value of
leases
|
(7,700
)
|
-
|
|
Finance leases
receivable
|
$
8,802,100
|
$
15,250,900
|
As of
December 31, 2019
, minimum
future payments receivable under finance leases were as
follows:
|
Years ending
December 31
|
|
|
|
|
|
2020
|
$
3,817,200
|
|
2021
|
2,608,200
|
|
2022
|
2,114,000
|
|
2023
|
557,000
|
|
|
$
9,096,400
|
The
remaining weighted average lease term of the Company’s assets
under sales-type and finance leases was 20 months and 32 months at
December 31, 2019 and December 31, 2018, respectively.
As
discussed in Note 15, the customer for three of the Company’s
aircraft that are subject to direct financing leases purchased the
aircraft in March 2020.
The following is a
roll forward of the Company’s allowance for doubtful accounts
from December 31, 2018 to December 31, 2019:
|
Balance, December
31, 2018
|
$
-
|
|
Additions charged
to expense
|
2,908,600
|
|
Balance, December
31, 2019
|
$
2,908,600
|
34
3.
Assets Held for
Sale
As discussed in
Note 2(a), during 2019, the Company reclassified four regional jet
aircraft that had been held for lease to held for sale after
repossession from a customer. One of the aircraft was sold during
2019.
Assets held for
sale at
December 31
, 2019
included three of the regional jet aircraft that were repossessed
and two turboprop aircraft, one of which is subject to a short-term
operating lease, and airframe parts from two turboprop aircraft.
During 2019, the Company recorded an impairment
loss
of $1,000,000 related to
the airframe parts from one of the aircraft, based on estimated
sales proceeds.
During 2019, the
Company received $820,800 in cash and accrued $117,400 in
receivables for parts sales. These amounts were accounted for as
follows: $133,100 reduced accounts receivable for parts sales
accrued in the fourth quarter of 2018; $731,700 reduced the
carrying value of the parts; and $73,400 was recorded as gains in
excess of the carrying value of the parts. During 2018, the Company
received $1,280,100 in cash and accrued $133,100 in receivables for
parts sales. These amounts were accounted for as follows: $779,700
reduced accounts receivable for parts sales accrued in 2017,
$543,200 reduced the carrying value of the parts, and $90,300 was
recorded as gains in excess of the carrying value of the
parts.
4.
Operating Segments
The
Company operates in one business segment, the leasing of regional
aircraft to foreign and domestic regional airlines, and therefore
does not present separate segment information for lines of
business.
Approximately
30% and 28% of the Company’s operating lease revenue was
derived from lessees domiciled in the United States during 2019 and
2018, respectively. All revenues relating to aircraft leased and
operated internationally, with the exception of rent payable in
Euros for two of the Company’s aircraft, are denominated and
payable in U.S. dollars.
The tables below set forth geographic information
about the Company’s operating lease revenue and net book
value for leased aircraft and aircraft equipment, grouped by
domicile of the lessee:
|
|
For
the Years Ended December 31,
|
|
|
Operating
Lease Revenue
|
2019
|
2018
|
|
|
|
|
|
Europe and United
Kingdom
|
$
15,174,900
|
$
16,258,800
|
|
North
America
|
10,119,100
|
10,119,100
|
|
Asia
|
315,000
|
1,259,600
|
|
|
$
25,609,000
|
$
27,637,500
|
35
|
|
December
31,
|
|
|
Net
Book Value of Aircraft and Aircraft Engines Held for
Lease
|
2019
|
2018
|
|
|
|
|
|
Europe and United
Kingdom
|
$
44,569,000
|
$
110,069,000
|
|
North
America
|
63,799,600
|
68,485,400
|
|
Asia
|
-
|
5,465,500
|
|
|
$
108,368,600
|
$
184,019,900
|
The table below sets forth geographic information
about the Company’s finance lease revenue, grouped by
domicile of the lessee:
|
|
For
the Years Ended December 31,
|
|
|
Finance
Lease Revenue
|
2019
|
2018
|
|
|
|
|
|
Africa
|
$
487,000
|
$
832,800
|
|
Europe and United
Kingdom
|
365,600
|
418,200
|
|
|
$
852,600
|
$
1,251,000
|
5.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash deposits and
receivables. The Company places its deposits with financial
institutions and other creditworthy issuers and limits the amount
of credit exposure to any one party.
For the year ended
December 31, 2019, the Company had seven significant customers,
five of which individually accounted for 23%, 23%, 16%, 14% and
10%, respectively, of operating lease revenue and two of which
accounted for 57% and 38%, respectively, of finance lease revenue.
For the year ended December 31, 2018, the Company had five
significant customers, four of which individually accounted for
30%, 21%, 15% and 13%, respectively, of operating lease revenue and
one of which accounted for 67% of finance lease
revenue.
At
December 31, 2019, the Company had receivables from one customer
totaling $828,000 related to rents for 2019, representing 74% of
the Company’s total accounts receivable, all of which was for
accrued rent that is due in March 2020. At December 31, 2018, the
Company had receivables from three customers totaling $3,413,500,
representing 87% of the Company’s total accounts
receivable.
36
6.
Notes Payable and Accrued
Interest
At
December 31, 2019 and December 31, 2018, the Company’s notes
payable and accrued interest consisted of the
following:
|
|
December 31
,
2019
|
December 31
,
2018
|
|
MUFG Credit
Facility:
|
|
|
|
Principal
|
$
84,084,100
|
$
122,400,000
|
|
Unamortized
debt issuance costs
|
(3,084,200
)
|
(674,300
)
|
|
Accrued
interest
|
376,200
|
139,300
|
|
Special-purpose
financing:
|
|
|
|
Principal:
|
|
|
|
UK
SPE Financing
|
-
|
9,211,200
|
|
Nord
Term Loans
|
30,914,500
|
-
|
|
Unamortized
debt issuance costs
|
(741,500
)
|
-
|
|
Accrued
interest
|
89,300
|
16,000
|
|
|
$
111,638,400
|
$
131,092,200
|
(a)
MUFG Credit Facility
The unused amount
of the MUFG Credit Facility was $915,900 and $47,600,000 as of
December 31, 2019
and December
31, 2018, respectively.
The weighted average
interest rate on the
MUFG
Credit Facility was
10.23% and 5.92% at
December
31, 2019 and
December
31, 2018
respectively.
In addition to
payment obligations (including principal and interest payments on
outstanding borrowings and commitment fees based on the amount of
any unused portion of the MUFG Credit Facility), the MUFG Credit
Facility agreement contains financial covenants with which the
Company must comply, including, but not limited to, positive
earnings requirements, minimum net worth standards and certain
ratios, such as debt to equity ratios.
As of December 31,
2018, the Company was not in compliance with the interest coverage,
debt service coverage, no-net-loss and revenue concentration
covenants under the
MUFG
Credit Facility
agreement. The noncompliance resulted primarily from the Company
recording aircraft impairment charges and losses on sales of
aircraft totaling $3.4 million during 2018. The amendments included
in the
MUFG
Credit Facility agreement in February 2019 discussed below cured
the December 31, 2018 noncompliance and revised the compliance
requirements through the extended maturity date of the
MUFG
Credit
Facility.
In February 2019,
the
MUFG
Credit
Facility, which was to expire on May 31, 2019, was extended to
February 19, 2023, and was amended in certain other respects. Also,
four aircraft that previously served as collateral under the
MUFG
Credit
Facility and two aircraft that previously served as collateral
under special-purpose subsidiary financings were refinanced in
February 2019 using non-recourse term loans (the Nord Term Loans)
with an aggregate principal of $44.3 million.
During the third
quarter of 2019 as a result of significant past due payments from
the customer, the Company terminated the leases for, and
repossessed, four of its aircraft held for lease The customer, a
European regional airline and one of the Company’s largest
customers based on operating lease revenue, subsequently ceased
operations and declared bankruptcy. The Company applied the
security deposits and a portion of collected maintenance reserves
it held against past due rent due from the customer. The remaining
balance of collected maintenance reserves equal to $17.0 million
was recognized as maintenance reserves revenue. The Company also
recorded impairment losses totaling $22.3 million for the four
aircraft, one of which was sold during the fourth quarter, based on
appraised values for three of the aircraft and expected sales
proceeds for the fourth. As a result of the lease terminations, the
three aircraft were newly appraised based on the
maintenance-adjusted condition of the aircraft, rather than the
basis previously used for their appraisal, which considered future
cash flows under the leases.
37
During the third
quarter of 2019, the Company also recorded impairment losses of
$15,000 on another of its aircraft held for sale and $1.0 million
related to airframe parts that are held for sale, both of which
were based on
estimated
sales proceeds
.
As a result of
payment delinquencies by two
other
customers that lease three of the Company’s
aircraft subject to finance leases, the Company also recorded a bad
debt allowance of $
2.9 million
during 2019.
As a result of the aforementioned
impairment losses and bad debt allowance, as of September 30, 2019,
the Company was in default of its borrowing base covenant under the
MUFG Credit Facility (the “Borrowing Base Default”),
due to the outstanding balance under the MUFG Credit Facility
exceeding the required minimum collateral value coverage set forth
in the MUFG Credit Facility (a “Borrowing Base
Deficit”) by approximately $9.4 million. Subsequent
updated appraisal values for assets included in the borrowing base
of the
MUFG
Credit Facility resulted in an increase in the Borrowing Base
Deficit to $29.8 million at December 31, 2019. At that time, the
Company reclassified two aircraft that were repossessed during the
third quarter from held for lease to held for sale. The Company
also reduced its bad debt allowance during the fourth quarter based
on payments received in January.
The Company was not
in compliance with various covenants contained in the MUFG Credit
Facility agreement, including those related to interest coverage
and debt service coverage ratios and a no-net-loss requirement
under the MUFG Credit Facility, at September 30, 2019 and at
December 31, 2019.
On
October 15, 2019, the agent bank for the Credit Facility Lenders
delivered a Reservation of Rights Letter to the Company which
contained notice of the Borrowing Base Default and a demand for
repayment of the amount of the Borrowing Base Deficit by January
13, 2020, and also contained formal notices of default under the
MUFG Credit Facility relating to the alleged material adverse
effects on the Company’s business as a result of the early
termination of leases for three aircraft and potential financial
covenant noncompliance based on the Company’s financial
projections provided to the Credit Facility Lenders (the Borrowing
Base Default and such other defaults referred to as the
“Specified Defaults”). The Reservation of Rights Letter
also informed the Company that further advances under the MUFG
Credit Facility agreement would no longer be permitted due to the
existence of such defaults.
In October,
November and December 2019, the Company, agent bank and the Credit
Facility Lenders entered into a Forbearance Agreement and
amendments extending the Forbearance Agreement with respect to the
Specified Defaults under the MUFG Credit Facility. The Forbearance
Agreement (i) provided that the
Credit Facility Lenders
temporarily forbear from exercising default remedies under the MUFG
Credit Facility agreement for the Specified Defaults, (ii) reduced
the maximum availability under the MUFG Credit Facility to $85
million and (iii) extended the cure period for the Borrowing Base
Deficit from January 13, 2020 to February 12, 2020. The Forbearance
Agreement also allowed the Company to continue to use LIBOR as its
benchmark interest rate, but increased the margin on the
Company’s LIBOR-based loans under the MUFG Credit Facility
from a maximum of 3.75% to 6.00% and set the margin on the
Company’s prime rate-based loans at 2.75%, as well as added a
provision for paid-in-kind interest (“PIK Interest) of 2.5%
to be added to the outstanding balance of the MUFG Credit Facility
debt in lieu of a cash payment. The Company paid cash fees of
$406,250 in connection with the Forbearance Agreement and
amendments, as well as a fee of $832,100, which was added to the
outstanding balance of the MUFG Credit Facility debt in lieu of a
cash payment. The Forbearance Agreement was in effect until
December 30, 2019, after which the Company and the
Credit Facility Lenders
agreed not to further amend the Forbearance Agreement.
On February 12, 2020, the agent bank
for the Credit Facility Lenders delivered a Reservation of Rights
Letter to the Company which contained notice of the failure to cure
the Borrowing Base Default by February 12,
2020.
The Company is
currently in negotiations with the Credit Facility Lenders to
convert the MUFG Credit Facility into the MUFG Term Loan.
Therefore, the MUFG Credit Facility is expected to no longer be a
source of acquisition financing
. The Company has engaged an
investment banking advisor to help (i) formulate a Recapitalization
Plan and analyze various strategic financial alternatives to
address the Company’s capital structure, strategic and
financing needs, as well as corporate level transactions aimed at
achieving maximum value for the Company’s stockholders; and
(ii) locate and negotiate with potential lenders, investors or
transaction partners who would play a role in the Company’s
Recapitalization Plan.
The Company’s ability to
develop, obtain approval for and achieve its Recapitalization Plan
is subject to a variety of factors. If the Company is not able to satisfy
the requirements under the Recapitalization Plan, maintain
compliance with its MUFG Indebtedness or raise sufficient capital
to repay all amounts owed under the MUFG Indebtedness, the
Company’s financial condition and liquidity would be
materially adversely affected and its ability to continue
operations could be materially jeopardized.
(b)
Nord Term
Loans
On February 8,
2019, the Company, through four wholly-owned subsidiary limited
liability companies (“LLC Borrowers”), entered into a
term loan agreement with the U.S. branch of a German bank
(“Term Loan Lender”) that provides for six separate
term loans with an aggregate principal amount of $44.3 million.
Each of the Nord Term Loans is secured by a first priority security
interest in a specific aircraft (“Term Loan Collateral
Aircraft”) owned by an LLC Borrower, the lease for such
aircraft, and a pledge by the Company of its membership interest in
each of the LLC Borrowers, pursuant to a Security Agreement (the
“Security Agreement”) among the LLC Borrowers and a
security trustee, and certain pledge agreements. Two of the Term
Loan Collateral Aircraft that are owned by the Company’s two
UK special-purpose entities were previously financed using
special-purpose financing. The interest rates payable under the
Nord Term Loans vary by aircraft, and are based on a fixed margin
above either 30-day or 3-month LIBOR. The proceeds of the Nord Term
Loans were used to pay down the
MUFG
Credit Facility and pay
off the UK LLC SPE Financing. The maturity of each Nord Term Loan
varies by aircraft, with the first Nord Term Loan maturing in
October 2020 and the last Nord Term Loan maturing in May 2025. The
debt under the Term Loans is expected to be fully amortized by
rental payments received by the LLC Borrowers from the lessees of
the Term Loan Collateral Aircraft during the terms of their
respective leases and remarketing proceeds.
38
The Nord Term Loans
include covenants that impose various restrictions and obligations
on the LLC Borrowers, including covenants that require the LLC
Borrowers to obtain the Term Loan Lender’s consent before
they can take certain specified actions, and certain events of
default. If an event of default occurs, subject to certain cure
periods for certain events of default, the Term Loan Lender would
have the right to terminate its obligations under the Term Loans,
declare all or any portion of the amounts then outstanding under
the Term Loans to be accelerated and due and payable, and/or
exercise any other rights or remedies it may have under applicable
law, including foreclosing on the assets that serve as security for
the Nord Term Loans. The Company was in compliance with all
covenants under the Nord Term Loans at December 31,
2019.
One of the aircraft
that was subject to Nord Term Loan financing was sold during the
fourth quarter of 2019 and the related interest rate swap was
terminated.
As discussed in
Note 15, in March 2020, one of the Company’s customers, which
leases two regional jet aircraft subject to Nord Term Loan
financing, did not make its quarterly rent payment which, in turn,
resulted in a loan payment default by the Company’s
special-purpose subsidiary that owns the aircraft. The Company is
currently discussing remedies with both the customer and
Nord.
7. Derivative
Instruments
The Company was not
party to any derivative instruments in 2018.
In the first
quarter of 2019, the Company entered into eight fixed pay/receive
variable interest rate swaps.
Six of the interest
rate swaps were entered into by the LLC Borrowers, one of which
terminated in the fourth quarter of 2019 in connection with the
sale of the related aircraft, and provided for reduced notional
amounts that mirror the amortization under the Nord Term Loans
entered into by the LLC Borrowers, effectively converting each of
the six Nord Term Loans from a variable to a fixed interest rate,
ranging from 5.38% to 6.30%. Each of these six interest rate swaps
extended for the duration of the corresponding Term Loan, with
maturities from 2020 through 2025.
The other two
interest rate swaps, the MUFG Swaps related to the Company’s
MUFG Credit Facility, were entered into by AeroCentury and had
notional amounts totaling $50 million and were to extend through
the maturity of the MUFG Credit Facility in February 2023. Under
the ISDA agreement for these interest rate swaps, defaults under
the MUFG Credit Facility give the swap counterparty the right to
terminate the interest rate swaps with any breakage costs being the
liability of the Company. The counterparty agreed under the
Forbearance Agreement and subsequent amendments to refrain from
exercising any termination or other remedies as a result of the
Company’s defaults under the MUFG Credit Facility during the
forbearance period under the Forbearance Agreement. In March 2020,
the Company was notified that the counterparties had terminated the
MUFG Swaps.
The Company entered
into the interest rate swaps in order to reduce its exposure to the
risk of increased interest rates. With respect to the six interest
rate swaps entered into by the LLC Borrowers, the swaps were deemed
necessary so that the anticipated cash flows of such entities,
which arise entirely from the lease rents for the aircraft owned by
such entities, would be sufficient to make the required Term Loan
principal and interest payments, thereby preventing default so long
as the lessees met their lease rent payment obligations. The two
interest rate swaps entered into by AeroCentury were intended to
protect against the exposure to interest rate increases on $50
million of the Company’s MUFG Credit Facility
debt.
The Company
estimates the fair value of derivative instruments using a
discounted cash flow technique and uses creditworthiness inputs
that corroborate observable market data evaluating the
Company’s and counterparties’ risk of non-performance.
Valuation of the derivative instruments requires certain
assumptions for underlying variables and the use of different
assumptions would result in a different valuation. Management
believes it has applied assumptions consistently during the
period.
The Company
designated seven of its interest rate swaps as cash flow hedges.
Changes in the fair value of the hedged swaps are included in other
comprehensive income/(loss), which amounts are reclassified into
earnings in the period in which the transaction being hedged
affects earnings (i.e., with future settlements of the interest
rate swaps). One of the interest rate swaps was not eligible under
its terms for hedge treatment and was terminated in 2019 when the
associated asset was sold and the related debt was paid off.
Changes in fair value of non-hedge derivatives are reflected in
earnings in the periods in which they occur.
In October 2019,
the Company determined that it was no longer probable that
forecasted cash flows for its two interest rate swaps with a
nominal value of $50 million would occur as scheduled as a result
of the Company’s defaults under the MUFG Credit Facility.
Therefore, those swaps were no longer subject to hedge accounting
and changes in fair market value thereafter were recognized in
earnings as they occurred. As discussed in Note 15, the MUFG Swaps
were terminated in the first quarter of 2020 and the amount of
accumulated other comprehensive income/(loss) related to such cash
flows will be recognized as an expense at such time in the first
quarter of 2020.
39
The
Company has reflected the following amounts in its net
loss:
|
|
For the Years
Ended December 31,
|
|
|
|
2019
|
2018
|
|
Change in value of
interest rate swaps
|
$
255,200
|
$
-
|
|
Other
items
|
147,400
|
-
|
|
Included in
interest expense
|
$
402,600
|
$
-
|
|
|
|
|
|
The following amount
was included in other comprehensive income/(loss), before
tax
|
||
|
|
|
|
|
Unrealized loss on
derivative instruments
|
$
(1,932,100
)
|
$
-
|
|
Other
items
|
186,400
|
-
|
|
Change in value of
hedged interest rate swaps
|
$
(1,745,700
)
|
$
-
|
Before the
termination of the MUFG Swaps discussed in Note 15, approximately
$575,000 of the current balance of accumulated other comprehensive
income/(loss) was expected to be reclassified in the next twelve
months, although certain additional amounts may be recognized in
the event the Company determines that some of the forecasted cash
flows that are intended to be hedged under the interest rate swaps
related to its MUFG Credit Facility are probable of not
occurring.
At
December 31
, 2019, the fair value of the
Company’s interest rate swaps was as follows:
|
Designated interest
rate hedges fair value
|
$
(570,900
)
|
|
Other interest rate
swaps
|
(1,253,600
)
|
|
Total derivative
(liability)
|
$
(1,824,500
)
|
The Company evaluates the creditworthiness of the
counterparties under its hedging agreements. The swap
counterparties for the Company’s interest rate swaps are
large financial institutions in the United States that
possess
an investment grade credit
rating. Based on this rating, the Company believes that the
counterparties are creditworthy and that their continuing
performance under the hedging agreements is
probable.
8. Lease
Right of Use Asset and Liability
The Company is a
lessee under a lease of the office space it occupies in Burlingame,
California, which expires in June of 2020, but also provides for
two, successive one-year lease extension options for amounts that
are substantially below the market rent for the property. The lease
provides for monthly rental payments according to a fixed schedule
of increasing rent payments. As a result of the below-market
extension options, the Company determined that it was reasonably
certain that it would extend the lease and has, therefore, included
such extended term in its calculation of the right of use asset
(“ROU Asset”) and lease liability recognized in
connection with the lease.
In addition to a
fixed monthly payment schedule, the office lease also includes an
obligation for the Company to make future variable payments for
certain common areas and building operating and lessor costs, which
have been and will be recognized as expense in the periods in which
they are incurred. As a direct pass-through of applicable expense,
such costs have not been allocated as a component of the
lease.
The ROU Asset
includes the amortized value of both the amount of liability
recognized at January 1, 2019 upon adoption of Topic 842 and the
amount attributable to the below market lease component recognized
upon acquisition of JHC on October 1, 2018.
40
The lease liability
associated with the office lease was calculated by discounting the
fixed, minimum lease payments over the remaining lease term,
including the below-market extension periods, at a discount rate of
7.25%, which represents the Company’s estimate of the
incremental borrowing rate for a collateralized loan for the type
of underlying asset that was the subject of the office lease at the
time the lease liability was evaluated. The Company estimates that
the maturities of operating lease base rent of its office space
were as follows as of
December
31
, 2019:
|
|
December 31
,
2019
|
|
2020
|
$
145,000
|
|
2021
|
147,200
|
|
2022
|
74,700
|
|
|
366,900
|
|
Discount
|
(30,500
)
|
|
Lease liability at
December 31, 2019
|
$
336,400
|
At
December 31, 2018, the Company estimated that the future minimum
lease commitments for its office space, including both the base
rent and operating expenses, and storage facility were as
follows:
|
|
December
31,
2018
|
|
2019
|
$
193,500
|
|
2020
|
196,400
|
|
2021
|
199,300
|
|
2022
|
101,100
|
|
|
$
690,300
|
|
Discount
|
|
|
Lease liability at
December 31, 2019
|
|
During the year
ended
December 31
, 2019, the
Company recognized amortization, finance costs and other expense
related to the office lease as follows:
|
Fixed rental
expense during the year
|
$
443,500
|
|
Variable lease
expense
|
116,000
|
|
Total lease expense
during the year
|
$
559,500
|
The Company expects
that the variable lease expense will total approximately $7,500 per
month through the end of the lease, including the two extension
periods.
41
9. Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value
must maximize the use of observable inputs and minimize the use of
unobservable inputs, to the extent possible. The fair value
hierarchy under GAAP is based on three levels of
inputs.
Level
1 - Quoted prices in active markets for identical assets or
liabilities.
Level
2 - Inputs other than Level 1 that are observable, either directly
or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level
3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities.
Assets and Liabilities Measured and Recorded at Fair Value on a
Recurring Basis
As of December 31,
2019, the Company measured the fair value of its interest rate
swaps of $80,914,500 (notional amount) based on Level 2 inputs, due
to the usage of inputs that can be corroborated by observable
market data. The Company estimates the fair value of derivative
instruments using a discounted cash flow technique and has used
creditworthiness inputs that corroborate observable market data
evaluating the Company’s and counterparties’ risk of
non-performance. The interest rate swaps had a net fair value
liability of $1,824,500 as of December 31, 2019. In the year ended
December 31, 2019, $255,200 was realized through the income
statement as an increase in interest expense.
The following table
shows, by level within the fair value hierarchy, the
Company’s assets and liabilities at fair value on a recurring
basis as of
December 31
, 2019
and December 31, 2018:
|
|
December
31, 2019
|
December
31, 2018
|
||||||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Money
market funds
|
$
400
|
$
400
|
$
-
|
$
-
|
$
656,400
|
$
656,400
|
$
-
|
$
-
|
|
Derivatives
|
(1,824,500
)
|
-
|
(1,824,500
)
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$
(1,824,100
)
|
$
400
|
$
(1,824,500
)
|
$
-
|
$
656,400
|
$
656,400
|
$
-
|
$
-
|
There were no
transfers between Level 1 and Level 2 during 2019 or 2018, and
there were no transfers into or out of Level 3 during the same
periods.
Assets Measured and Recorded at Fair Value on a Nonrecurring
Basis
The Company determines fair value of long-lived
assets held and used, such as aircraft and aircraft engines held
for lease and these and other assets held for sale, by reference to
independent appraisals, quoted market prices (e.g., offers to
purchase) and other factors. These are considered Level 3 within
the fair value hierarchy. An impairment charge is recorded when the
Company believes that the carrying value of an asset will not be
recovered through future net cash flows and that the asset’s
carrying value exceeds its fair value.
The Company recorded impairment charges totaling
$31,007,400 (of which $5,351,300 was related to assets sold in
2019) on nine of its assets held for sale in 2019, which had an
aggregate fair value of $25,880,700. The impairment charges were
comprised of (i) $7,031,300 based on estimated sales amounts and
(ii) $23,976,100 based on third-party appraisals. The Company
recorded impairment charges totaling $2,673,300 on four of its
aircraft held for sale in 2018, which had an aggregate fair value
of $9,900,000. The Company also recorded an impairment charge of
$298,200 on one of its aircraft held for lease in
2018.
As
discussed in Note 8, in December 2019, the Company adjusted its ROU
Asset valuation and lease liability balance to reflect a reduction
in lease space and rent effective January 1, 2020. The effects of
the adjustment were reductions of $119,100 to the ROU asset and
lease liability balance.
42
The following table
shows, by level within the fair value hierarchy, the
Company’s assets at fair value on a nonrecurring basis as of
December 31
, 2019 and December
31, 2018:
|
|
Assets
Written Down to Fair Value
|
Total
Losses
|
||||||||
|
|
December
31, 2019
|
December
31, 2018
|
For the
Years Ended December 31,
|
|||||||
|
|
|
Level
|
|
Level
|
|
|||||
|
Total
|
1
|
2
|
3
|
Total
|
1
|
2
|
3
|
2019
|
2018
|
|
|
Assets
held for sale
|
$
25,880,700
|
$
-
|
$
-
|
$
25,880,700
|
$
5,800,000
|
$
-
|
$
-
|
$
5,800,000
|
$
25,656,100
|
$
837,500
|
There were no
transfers between Level 1 and Level 2 in 2019, and there were no
transfers into or out of Level 3 during the same
periods.
Fair Value of Other Financial Instruments
The Company’s
financial instruments, other than cash and cash equivalents,
consist principally of finance leases receivable, amounts borrowed
under the MUFG Credit Facility, notes payable under special-purpose
financing and its derivative instruments. The fair value of
accounts receivable, accounts payable and the Company’s
maintenance reserves and accrued maintenance costs approximates the
carrying value of these financial instruments because of their
short-term maturity. The fair value of finance lease receivables
approximates the carrying value as discussed in Note 1(
p)
. The fair value of the
Company’s derivative instruments is discussed in Note 7 and
in this note above in “Assets and Liabilities Measured and
Recorded at Fair Value on a Recurring Basis.”
Borrowings under
the Company’s MUFG Credit Facility bear floating rates of
interest that reset periodically to a market benchmark rate plus a
credit margin. The Company believes the effective interest rate
under the MUFG Credit Facility approximates current market rates
for such indebtedness at the dates of the consolidated balance
sheets, and therefore that the outstanding principal and accrued
interest of $84,460,300 and $122,539,300 at December 31, 2019 and
December 31, 2018, respectively, approximate their fair values on
such dates. The fair value of the Company’s outstanding
balance of its MUFG Credit Facility is categorized as a Level 3
input under the GAAP fair value hierarchy.
Before their
repayment in February 2019 in connection with the Term Loans
refinancing, the amounts payable under the UK LLC SPE Financing
were payable through the fourth quarter of 2020 and bore a fixed
rate of interest. As discussed above, during February 2019, the UK
LLC SPE Financing and four assets that previously served as
collateral under the MUFG Credit Facility were refinanced using the
Term Loans. The Company believes the effective interest rate under
the special-purpose financings approximates current market rates
for such indebtedness at the dates of the consolidated balance
sheets, and therefore that the outstanding principal and accrued
interest of $31,003,800 and $9,227,200 approximate their fair
values at December 31, 2019 and December 31, 2018, respectively.
Such fair value is categorized as a Level 3 input under the GAAP
fair value hierarchy.
There were no
transfers in or out of assets or liabilities measured at fair value
under Level 3 during 2019 and 2018.
43
10. Acquisition
of Management Company
In October 2017,
AeroCentury, JHC and certain other parties entered into the Merger
Agreement for the acquisition of JHC by AeroCentury for
consideration of approximately $2.9 million in cash and 129,217
shares of common stock of AeroCentury, as determined pursuant to
the Merger Agreement. JHC is the sole shareholder of JMC, which is
the manager of the Company’s assets as described in Note 14
below.
The Merger was consummated on
October 1, 2018.
As a subsidiary of
the Company, JHC’s results are included in the
Company’s consolidated financial statements beginning on
October 1, 2018. In April 2018, subsequent to the
execution of the Merger Agreement for the acquisition of JHC, which
was signed in October 2017, the Company, JHC and JMC entered into a
waiver and reimbursement agreement (the “Waiver/Reimbursement
Agreement”), pursuant to which JHC and JMC agreed to waive
their right to receive management and acquisition fees
(“Contract Fees”) otherwise owed by the Company to JMC
pursuant to the Management Agreement for all periods after March
31, 2018 and until the consummation of the Merger, and in return,
the Company agreed to reimburse JMC for expenses incurred in
providing management services set forth under the Management
Agreement. As a result of the Waiver/Reimbursement Agreement, the
Company
became
responsible for all expenses incurred by JMC in managing the
Company as of April 1, 2018, including employee salaries, office
rent and all other general and administrative expenses. As a result
of the Merger, the Company assumed all of JHC’s assets,
comprised primarily of securities, prepaid expenses and an office
lease, as well as liabilities of approximately $0.9
million.
During the year
ended December 31, 2018, the Company accrued $485,000 of expenses
related to the Merger transaction. Such expenses are included in
professional fees, general and administrative and other in the
Company’s consolidated statements of operations.
During the fourth quarter of 2018,
the Company also recorded a settlement loss of $2,527,000 related
to the Merger.
The settlement
loss amount was estimated using an income approach. The Company
assessed the contractual terms and conditions of the previous
management agreement between the company and JMC (the
“Management Agreement”) as compared to current market
conditions and the historical and expected financial performance of
the Company and JMC. Based on the analysis performed, the Company
determined that the contractual payment terms were above market
rates. The present value of the expected differential between
payments previously required by the Management Agreement and those
that would be required if the contract reflected current market
terms was calculated over the Management Agreement contractual
term. As the management fee previously paid by the Company was
deemed to be above market and the settlement of this pre-existing
relationship resulted in a loss, the loss was recognized in the
consolidated statement of operations at the acquisition date and
reduced the estimated purchase consideration
transferred.
The
Company did not recognize any goodwill on its acquisition of JHC
because the only customer relationship JHC had was through its
contract with the Company for management of the Company’s
assets and the Company cannot recognize goodwill attributable to
its relationship with itself.
The
following table shows the allocation of the purchase price paid by
the Company for its acquisition of JHC, the assets and liabilities
that were assumed as a result of the Merger and calculation of the
settlement loss.
|
Consideration paid in the merger:
|
|
|
Cash consideration
|
$ 2,915,000
|
|
ACY stock consideration
|
2,003,000
|
|
|
4,918,000
|
|
|
|
|
Fair value of assets acquired/(liabilities assumed):
|
|
|
Cash
|
40,000
|
|
Securities
|
121,000
|
|
Accounts & note receivable
|
28,000
|
|
Prepaid expenses
|
157,000
|
|
Property, equipment and furnishings
|
79,000
|
|
Office leasehold
|
925,000
|
|
Accounts payable
|
(85,000)
|
|
Accrued vacation
|
(93,000)
|
|
Taxes payable
|
(722,000)
|
|
Deferred taxes
|
(138,000)
|
|
|
312,000
|
|
|
|
|
Excess of consideration paid over net assets acquired
|
4,606,000
|
|
|
|
|
Waiver of JMC Margin payable
|
(1,517,000)
|
|
Settlement of payable to JMC
|
(562,000)
|
|
|
|
|
Settlement Loss on Management Agreement with JMC
|
$ 2,527,000
|
11. Commitments and Contingencies
In the ordinary
course of the Company’s business, the Company may be subject
to lawsuits, arbitrations and administrative proceedings from time
to time. The Company believes that the outcome of any existing or
known threatened proceedings, even if determined adversely, should
not have a material adverse effect on the Company's business,
financial condition, liquidity or results of
operations.
44
12. Income Taxes
The
items comprising the income tax provision are as
follows:
|
|
For the
Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
Current
tax provision:
|
|
|
|
Federal
|
$
(34,100
)
|
$
-
|
|
State
|
3,300
|
3,200
|
|
Foreign
|
418,300
|
414,000
|
|
Current
tax provision
|
387,500
|
417,200
|
|
Deferred
tax benefit:
|
|
|
|
Federal
|
(4,553,700
)
|
(1,270,400
)
|
|
State
|
(78,800
)
|
(26,100
)
|
|
Foreign
|
(262,800
)
|
(93,500
)
|
|
Deferred tax
benefit
|
(4,895,300
)
|
(1,390,000
)
|
|
Total
income tax benefit
|
$
(4,507,800
)
|
$
(972,800
)
|
Total
income tax benefit differs from the amount that would be provided
by applying the statutory federal income tax rate to pretax
earnings as illustrated below:
|
|
For the
Years Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Income
tax benefit at statutory federal income tax rate
|
$
(4,444,900
)
|
$
(1,901,400
)
|
|
State
tax benefit, net of federal benefit
|
(75,900
)
|
(44,500
)
|
|
Non-deductible
Merger expenses
|
-
|
647,200
|
|
Non-deductible
management and acquisition fees
|
7,600
|
325,900
|
|
Other
non-deductible expenses
|
5,400
|
-
|
|
Total
income tax benefit
|
$
(4,507,800
)
|
$
(972,800
)
|
Temporary
differences and carry-forwards that give rise to a significant
portion of deferred tax assets and liabilities as of December 31,
2019 and 2018 were as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Deferred tax
assets:
|
|
|
|
Current and prior
year tax losses
|
$
4,980,100
|
$
4,065,100
|
|
Foreign tax
credit
|
758,400
|
611,900
|
|
Deferred interest
expense
|
269,800
|
81,800
|
|
Maintenance
reserves
|
470,000
|
3,100,800
|
|
Deferred derivative
losses
|
452,100
|
-
|
|
Deferred
maintenance, bad debt allowance and other
|
19,800
|
92,500
|
|
Alternative minimum
tax credit
|
11,400
|
45,500
|
|
Deferred
tax assets
|
6,961,600
|
7,997,600
|
|
Deferred tax
liabilities:
|
|
|
|
Accumulated
depreciation on aircraft and aircraft engines
|
(8,666,700
)
|
(14,773,800
)
|
|
Deferred
income
|
(175,600
)
|
(320,600
)
|
|
Leasehold
interest
|
(131,400
)
|
(185,400
)
|
|
Net deferred tax
liabilities
|
$
(2,012,100
)
|
$
(7,282,200
)
|
45
|
|
December
31,
|
|
|
Reported
as:
|
2019
|
2018
|
|
Deferred
tax asset
|
$
517,700
|
$
254,900
|
|
Deferred
income taxes (liability)
|
(2,529,800
)
|
(7,537,100
)
|
|
Net
deferred tax liabilities
|
$
(2,012,100
)
|
$
(7,282,200
)
|
Consolidated
deferred federal income taxes arise from temporary differences
between the valuation of assets and liabilities as determined for
financial reporting purposes and federal income tax purposes and
are measured at enacted tax rates. The Company’s deferred tax
items are measured at an effective federal tax rate of 21% as of
December 31, 2019 and December 31, 2018. Although realization is
not assured, management believes it is more likely than not that
the entire deferred federal income tax asset will be realized. The
amount of the deferred federal income tax assets considered
realizable could be reduced in the near term if estimates of future
taxable income are reduced.
The Company is
required to include on its U.S. income tax return its global
intangible low-taxed income (“GILTI”) in excess of an
allowable return on its foreign subsidiaries’ tangible
assets. Per guidance issued by the FASB, companies can either
account for deferred taxes related to GILTI or treat tax arising
from GILTI as a period cost. Both are acceptable methods subject to
an accounting policy election. On December 31, 2018, the Company
finalized its policy and has elected to use the period cost method
for GILTI. In 2018 and 2019, the Company did not include any GILTI
from its Canadian subsidiary because all the subsidiary’s
income was exempt from GILTI.
In addition, interest deductions are
limited to 30% of the Company’s adjusted taxable
income.
The Company’s adjusted taxable income is
computed without regard to any: (1) item of income, gain, deduction
or loss, which is not allocable to its trade or business; (2)
business interest income or expense; (3) net operating loss
deduction; and (4) depreciation, amortization or depletion for tax
years beginning before January 1, 2022, but taking into account
depreciation, amortization, and depletion thereafter. The amount of
interest deferred under this provision may be carried forward and
deducted in years with excess positive adjusted taxable income. The
Company had total disallowed interest expense for the years ended
December 31, 2019 and 2018, of $583,300 and $380,900, respectively.
The cumulative deferred interest expense of $964,200 may be carried
forward indefinitely until the Company has excess positive adjusted
taxable income against which it can deduct the deferred interest
balance.
The current year
federal operating loss carryovers of approximately $23.6 million
will be available to offset 80% of annual taxable income in future
years. Approximately $16 million of federal net operating loss
carryovers may be carried forward through 2037 and the remaining
$7.6 million federal net operating loss carryovers may be carried
forward indefinitely. The current year state operating loss
carryovers of approximately $385,300 will be available to offset
taxable income in the two preceding years and in future years
through 2039. The Company expects to utilize the net
operating loss carryovers remaining at December 31, 2019 in future
years.
During the year
ended December 31, 2019, the Company had pre-tax loss from domestic
sources of approximately $100,000 and pre-tax loss from foreign
sources of approximately $21.1 million. The Company had pre-tax
loss from domestic sources of approximately $6.0 million and
pre-tax loss from foreign sources of approximately $3.1 million for
the year ended December 31, 2018. The foreign tax credit carryover
will be available to offset federal tax expense in future years
through 2029.
The
Tax Cuts and Jobs Act of 2017
repealed the corporate alternative minimum tax for tax years
beginning after 2017. In addition, beginning in 2018, the
Company’s alternative minimum tax credit (“MTC”)
was available to offset federal tax expense and is refundable in an
amount equal to 50% of the excess MTC for the tax year over the
amount of the credit allowable for the year against regular tax
liability. In 2021, any remaining MTC will be fully
refundable.
The Company and its
subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state
and local, or non-U.S. income tax examinations by tax authorities
for years before 2015. At December 31, 2019, the Company had a
balance of accrued tax, penalties and interest totaling $94,400
related to unrecognized tax benefits on its non-U.S. operations
included in the Company’s accounts and taxes payable. The
Company does not anticipate any significant changes to the
unrecognized tax benefits within twelve months of this reporting
date. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
Balance at January
1
|
$
85,400
|
-
|
|
Additions for prior
years’ tax positions
|
9,000
|
85,400
|
|
Balance at December
31
|
$
94,400
|
$
85,400
|
The Company
accounts for interest related to uncertain tax positions as
interest expense, and for income tax penalties as tax
expense.
All of the
Company's tax years remain open to examination other than as barred
in the various jurisdictions by statutes of
limitation.
46
13.
Computation of Loss Per Share
Basic
and diluted earnings per share are calculated as
follows:
|
|
For the Years
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
Net
loss
|
$
(16,658,500
)
|
$
(8,081,200
)
|
|
Weighted average
shares outstanding for the period
|
1,545,884
|
1,449,261
|
|
Basic loss per
share
|
$
(10.78
)
|
$
(5.58
)
|
|
Diluted loss per
share
|
$
(10.78
)
|
$
(5.58
)
|
Basic
loss
per
common share is computed using net
loss
and the weighted average number of common shares
outstanding during the period. Diluted
loss
per common share is computed using net
(loss)/
income and the weighted average
number of common shares outstanding, assuming dilution. Weighted
average common shares
outstanding, assuming dilution,
include potentially dilutive common shares outstanding during the
period. There were no anti-dilutive shares outstanding during 2019
or 2018.
14
. Related Party Transactions
See the description
of the Merger Agreement between the Company and JHC in Note 10,
pursuant to which the Company acquired JHC in the Merger and JHC
became a wholly-owned subsidiary of the Company on October 1,
2018.
Before completion
of the Merger, the Company’s portfolio of aircraft assets was
managed and administered under the terms of a management agreement
with JMC (the “Management Agreement”). Certain officers
of the Company were also officers of JHC and JMC and held
significant ownership positions in both JHC and the Company, and
JHC was also a significant stockholder of AeroCentury. Under the
Management Agreement, JMC received a monthly management fee based
on the net asset value of the Company’s assets under
management. JMC also received an acquisition fee for locating
assets for the Company. Acquisition fees were included in the cost
basis of the asset purchased. JMC also received a remarketing fee
in connection with the re-lease or sale of the Company’s
assets. Remarketing fees were amortized over the applicable lease
term or included in the gain or loss on sale.
In April 2018,
subsequent to the execution of the Merger Agreement for the
acquisition of JHC, JHC agreed to waive its right to receive
management and acquisition fees (“Contract Fees”)
otherwise owed by the Company to JHC pursuant to the Management
Agreement for all periods after March 31, 2018 and until the
earlier of the consummation of the Merger or August 15, 2018. In
return, the Company agreed to reimburse JMC for expenses
(“Management Expense”) incurred in providing management
services set forth under the Management Agreement. In July 2018,
JHC agreed to extend the expiration of this agreement (the
“Waiver and Reimbursement Agreement”) through October
15, 2018. Thus, if the Merger Agreement was terminated on or before
October 15, 2018 or the Merger did not close by October 15, 2018,
the Company would have become obligated to pay JMC
any excess (the “JMC
Margin”) of (i) the Contract Fees that would have been paid
to JMC since April 1, 2018
in the absence of the Waiver and
Reimbursement Agreement over (ii) the Management Expenses actually
paid by the Company to JMC since April 1, 2018.
For the nine
months ended
September
30, 2018
, Contract Fees exceeded the reimbursed Management
Expense by $1,023,000 of management fees and $494,000 of
acquisition fees. Notwithstanding the Waiver and Reimbursement
Agreement, until the closing or termination of the Merger
Agreement, the Company accrued as an expense the total Contract
Fees that would have been due under the Management Agreement.
Because the Merger closed on October 1, 2018, the Waiver and
Reimbursement Agreement for the period from April 1, 2018 through
September 30, 2018 was considered in the acquisition accounting for
the calculation of the settlement loss recognized by the Company
when the Merger was consummated.
The Company
incurred management fees and acquisition fees of $4,482,800 and
$494,400, respectively, during 2018.
47
15
. Subsequent Events
Effective January
1, 2020, the Company reduced both the size of the office space
leased and the amount of rent payable in the future. As such, in
2020 the Company will recognize a reduction in both the capitalized
amount related to the surrendered office space and a proportionate
amount of the liability associated with its future lease
obligations. In January 2020, the Company recorded a loss of
$160,000 related to the reduction in its ROU Asset, net of the
reduction in its operating lease liability, and will recognize
amortization of $308,100, $317,600 and $162,600 in 2020, 2021 and
the first half of 2022, respectively.
In January 2020,
the Company amended the leases for three of its assets that are
subject to sales-type finance leases. The amendments provided for
(i) the sale of one aircraft to the customer in January 2020, (ii)
application of collected maintenance reserves and a security
deposit held by the Company to past due amounts for the other two
aircraft, (iii) required payments totaling $585,000 in January for
two of the leases and (iv) reduced the amount of future payments
due under the two leases.
In January 2020,
the lessee for an aircraft leased pursuant to a
direct financing lease notified the Company of its
intention to exercise the lease-end purchase option for the
aircraft in March 2020. In February 2020, the Company and the same
lessee agreed to the early exercise of lease-end purchase options
for direct financing leases that were to expire in March 2021 and
March 2022.
All three aircraft were sold to the lessee in
March 2020.
In March 2019, the
Company entered into two interest rate derivative instruments in
connection with the MUFG Credit Facility. In March 2020, the
counterparties to the MUFG Swaps terminated the MUFG Swaps and the
Company became obligated to pay $3.1 million to the
counterparties.
In January 2020,
the World Health Organization (“WHO”) announced a
global health emergency because of a new strain of coronavirus and
the risks to the international community as the virus spreads
globally (the “COVID-19 Outbreak”). In March 2020, the
WHO classified the COVID-19 Outbreak as a pandemic, based on the
rapid increase in exposure globally. The ongoing COVID-19 Outbreak
has had an overwhelming effect on all forms of transportation
globally, but most acutely for the airline industry. The combined
effect of fear of infection during air travel and international and
domestic travel restrictions has caused a dramatic decrease in
passenger loads in all areas of the world, not just in those
countries with active clusters of COVID-19, but in airline ticket
net bookings (i.e. bookings made less bookings canceled) of flights
as well. This has led to significant cash flow issues for airlines,
including some of the Company’s customers, and some airlines
may be unable to timely meet their obligations under their lease
obligations with the Company unless government financial support is
received, of which there can be no assurance. Any significant
nonpayment or late payment of lease payments by a significant
lessee or combination of lessees could in turn impose limits on the
Company’s ability to fund its ongoing operations as well as
cause new defaults under the Company’s debt obligations,
which in turn could lead to an immediate acceleration of debt and
foreclosure upon the Company’s assets. Furthermore, for the
duration of the pandemic and a period of financial recovery
thereafter, sale and acquisition transactions are likely to be
curtailed entirely or delayed while the industry returns to
financial stability, which could impact the Company’s ability
to implement its Recapitalization Plan. No impairments were
recorded as of the balance sheet date as no triggering events or
changes in circumstances had occurred as of year-end; however, due
to significant uncertainty surrounding the situation, management's
judgment regarding this could change in the future. In addition,
while the Company’s results of operations, cash flows and
financial condition could be negatively impacted, the extent of the
impact cannot be reasonably estimated at this time.
However, as a
result of the COVID-19 Outbreak, in March 2020, one of the
Company’s customers, which leases two regional jet aircraft
subject to Nord Term Loan financing, did not make its quarterly
rent payment of approximately $1.4 million. The nonpayment led to a
corresponding Nord Term Loan financing payment event of default
under the Nord Term Loans for each of those subsidiaries. The
Company is currently reviewing its options for remedies against the
lessee. It has also entered into negotiations with Nord regarding a
workout for the corresponding overdue Nord Term Loan payments.
As a result of the non-payment on the two regional jets by the
Company’s customer and potential consequent uncertainty
concerning future interest payments under the related Nord Term
Loans, as well as potential uncertainty related to rent payments
and related debt payments on the other three Nord Term Loans, the
Company is reevaluating its hedge accounting for the five interest
rate derivatives associated with those loans.
48
I
tem 9. Changes in and Disagreements With
Accountants
on Accounting and
Financial Disclosure.
None.
I
tem 9A. Controls and Procedures.
CEO and CFO
Certifications.
Attached as
exhibits to this Annual Report on Form 10-K are certifications of
the Company’s Chief Executive Officer (the “CEO”)
and the Company’s Chief Financial Officer(the
“CFO”), which are required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (the “Section 302
Certifications”). This Item 9A includes information
concerning the evaluation of disclosure controls and procedures
referred to in the Section 302 Certifications and should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
Evaluation of the
Company’s Disclosure Controls and Procedures.
Disclosure controls and procedures
(“Disclosure Controls”) are controls and other
procedures that are designed to ensure that information required to
be disclosed in the Company’s reports filed or submitted
under the Exchange Act, such as this
report
, is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of
the
SEC
and that such
information is accumulated and communicated to the Company’s
management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
In the course of
the review of the consolidated financial results of the Company for
the three months and nine months ended September 30, 2018, the
Company identified a material weakness in its internal control over
financial reporting (“Internal Control”) at June 30,
2018 related to the Company’s incorrect accounting for
management fees and acquisition fees associated with the Management
Agreement between JHC and the Company.
A material weakness
is a deficiency, or 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.
Although the Company
implemented controls over identifying the proper accounting
treatment for the JHC acquisition and those controls operated as of
December 31, 2018, the Company’s tax review control did not
identify a complex component of the acquisition accounting,
resulting in an adjustment to the Company’s tax expense in
2018. Management has determined that this deficiency continues to
constitute a material weakness as of December 31, 2019. Management
is in the process of enhancing the tax review control related to
unusual transactions the Company may encounter.
The
Company’s management, with the participation of the CEO and
CFO, evaluated the effectiveness of the Company’s Disclosure
Controls as of December 31, 2019. Based on this evaluation, the CEO
and CFO concluded that the Company’s Disclosure Controls were
not effective as of December 31, 2019 due to the material weakness
described above.
Changes in Internal
Control.
No change in the
Company’s Internal Control occurred during the fiscal quarter
ended
December
31
, 2019
that has materially
affected, or is reasonably likely to materially affect, the
Company’s Internal Control.
Inherent Limitations of
Disclosure Controls and Internal Control.
In designing its Disclosure Controls and Internal
Control, the Company’s management recognizes that any
controls and procedures, no matter how well-designed and operated,
can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of the Company’s
controls and procedures must reflect the fact that there are
resource constraints, and management necessarily applies its
judgment in evaluating the benefits of possible controls and
procedures relative to their costs. Because of these inherent
limitations, the Company’s Disclosure Controls and Internal
Control may not prevent or detect all instances of fraud,
misstatements or other control issues. In addition, projections of
any evaluation of the effectiveness of disclosure or internal
controls to future periods are subject to risks, including, among
others, that controls may become inadequate because of changes in
conditions or that compliance with policies or procedures may
deteriorate.
Management’s Annual Report on
the Company’s
Internal
Control
Internal
Control 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 and
includes 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 are being
made only in accordance with authorizations of management and
directors; 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.
The Company's management is responsible for
establishing and maintaining adequate Internal Control. Management
evaluated the Company's Internal Control based on the framework set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission in
Internal Control –
Integrated Framework (2013)
.
Based on such evaluation, management concluded that the Company's
Internal Control was not effective as of December 31, 2019 due
to the material weakness described under “
Evaluation of the
Company’s Disclosure Controls and
Procedures.
”
49
This
report does not include an attestation report on Internal Control
by the Company's independent registered public accounting firm
because such an attestation report is not required for smaller
reporting companies pursuant to the rules of the SEC.
Changes in Internal
Control.
No change in the
Company’s Internal Control occurred during the fiscal quarter
ended
December
31
, 2019
that has materially
affected, or is reasonably likely to materially affect, the
Company’s Internal Control.
I
tem 9B. Other Information.
None.
50
P
ART III
I
tem 10. Directors, Executive Officers and
Corporate Governance.
The information
required by this item is included in the Company’s definitive
proxy statement (“Proxy Statement”) to be filed in
connection with the Company’s 2020 Annual Meeting of
Stockholders, under (i) “Proposal 1: Election of
Directors,” “Information Regarding the
Company’s Directors and Executive Officers—Current
Board of Directors,” “Information Regarding the
Company’s Directors and Executive Officers—Key
Employees” and “Information Regarding the
Company’s Directors and Executive Officers—Family
Relationships” as it relates to the information about the
Company’s directors, executive officers and certain key
employees required by Item 401 of Regulation S-K,
(ii) “Delinquent Section 16(a) Reports” as it
relates to the information concerning Section 16(a) beneficial
ownership reporting compliance required by Item 405 of
Regulation S-K, (iii) “Information Regarding the
Company’s Directors and Executive Officers—Board
Meetings and Committees—Audit Committee” as it relates
to the information about the Audit Committee of the Board of
Directors and the “audit committee financial expert”
required by Item 407(d)(4) and (d)(5) of Regulation S-K, and
(iv) “Information Regarding the Company’s
Directors and Executive Officers—Director Nominations”
as it relates to any changes to procedures by which security
holders may recommend nominees to the Board of Directors as
required by Item 407(c)(3) of Regulation S-K, and all such
information is incorporated herein by reference.
The Company has adopted a code of business conduct
and ethics, or the “code of conduct.” The code of
conduct applies to all of the Company’s employees, including
its executive officers, and non-employee directors, and it
qualifies as a “code of ethics” within the meaning of
Section 406 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated
thereunder. A copy of the code of conduct is
available on the Company’s website at
http://www.aerocentury.com/code-of-conduct.php
or upon
written request to the
Investor Relations Department, 1440 Chapin Avenue, Suite 310,
Burlingame, California 94010. To the extent required by law, any
amendments to, or waivers from, any provision of the code of
conduct will be promptly disclosed publicly. To the extent
permitted by such requirements, the Company intends to make such
public disclosure on its website in accordance with SEC
rules.
I
tem 11. Executive Compensation.
The information
required by this item is included in
the Proxy Statement under “Information
Regarding the Company’s Directors and Officers—Director
Compensation” and “Information Regarding the
Company’s Directors and Officers—Executive
Compensation” and is incorporated herein by
reference.
I
tem 12. Security Ownership of Certain
Beneficial Owners and Management and
Related
Stockholder Matters.
The information
required by this item is included in
the Proxy Statement under “Security
Ownership of Certain Beneficial Owners and Management” and is
incorporated herein by reference.
I
tem 13. Certain Relationships and Related
Transactions, and Director Independence.
The information
required by this item is included in
the Proxy Statement under “Related Party
Transactions” and “Information Regarding the
Company’s Directors and Officers—Board
Independence” and is incorporated herein by
reference.
I
tem 14. Principal Accountant Fees and
Services.
The information
required by this item is included in
the Proxy Statement under “Information
Regarding Auditor” and is incorporated herein by
reference.
51
P
ART IV
I
t
em 15. Exhibits, Financial Statements
Schedules.
(a)(1)
The following
financial statements of the Company are filed in Item 8 of this
report:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2019 and 2018
Consolidated
Statements of Operations for the Years Ended December 31, 2019 and
2018
Consolidated
Statements of Comprehensive Loss for the Years Ended December 31,
2019 and 2018
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2019 and 2018
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2019 and
2018
Notes to
Consolidated Financial Statements
(a)(2)
All financial
statement schedules have been omitted because the required
information is presented in the consolidated financial statements
or is not applicable.
(a)(3)
The following
exhibits are filed with or incorporated by reference in this
report:
|
Exhibit
Number
|
Description
|
|
2.1§
|
|
|
3.1.1^
|
|
|
3.1.2^
|
|
|
3.1.3
|
|
|
3.1.4
|
|
|
3.2
|
|
|
4.1
|
Reference
is made to Exhibit 3.1.4.
|
52
53
|
10.11
|
Second Amendment to Forbearance Agreement and Fourth Amendment to
Credit Agreement between and among AeroCentury Corp.;
JetFleet Holding Corp.; JetFleet Management Corp.; MUFG Union
Bank, N.A., as Administrative Agent and Lender; MUFG Bank, Ltd., as
swap counterparty; and
Zions
Bancorporation, N.A. (fka ZB, N.A.) dba California Bank and Trust,
Umpqua Bank, U.S. Bank National Association, and Columbia State
Bank, as Lenders; dated as of December
12,
2019,
incorporated by
reference to Exhibit 10.1 to registrant’s report on Form 8-K
filed with the SEC on December 16, 2019
|
|
21.1
|
|
|
24.1
|
Power
of Attorney (included on the signature page hereto)
|
|
31.1
|
|
|
31.2
|
|
|
32.1*
|
|
|
32.2*
|
|
|
101.INS
|
XBRL
Instance Document
|
|
101.SCH
|
XBRL
Schema Document
|
|
101.CAL
|
XBRL
Calculation Linkbase Document
|
|
101.LAB
|
XBRL
Label Linkbase Document
|
|
101.PRE
|
XBRL
Presentation Linkbase Document
|
|
101.DEF
|
XBRL
Definition Linkbase Document
|
* These certificates are furnished to, but shall not be deemed to
be filed with, the SEC.
§
Schedules and other similar attachments have been
omitted pursuant to Item 601(b)(2) of Regulation S-K promulgated by
the SEC. The signatory hereby undertakes to furnish supplemental
copies of any of the omitted schedules and attachments upon request
by the SEC.
+
Management contract or compensatory plan or
arrangement.
^
Originally filed in paper
format.
I
tem 16. Form 10-K Summary.
The Company has
elected not to provide summary information.
54
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its
behalf by the
undersigned, thereunto duly authorized.
AEROCENTURY
CORP.
By
:
/s/ Harold
M. Lyons
Harold
M. Lyons
Senior
Vice President-Finance and
Chief
Financial Officer
Date
March 30,
2020
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Harold M. Lyons, or his
attorneys-in-fact, with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the
registrant and in the
capacities indicated.
|
Signature
|
Title
|
Dated
|
|
|
|
|
|
/s/
Michael G. Magnusson
|
Director
and President of the Registrant (Principal Executive
Officer)
|
March
30, 2020
|
|
Michael
G. Magnusson
|
|
|
|
|
|
|
|
/s/
Harold M. Lyons
|
Senior
Vice President-Finance and Secretary of the Registrant (Principal
Financial and Accounting Officer)
|
March
30, 2020
|
|
Harold
M. Lyons
|
|
|
|
|
|
|
|
/s/
Evan M. Wallach
|
Director
and Chairman of the Board of Directors of the
Registrant
|
March
30, 2020
|
|
Evan M.
Wallach
|
|
|
|
|
|
|
|
/s/ Roy
E. Hahn
|
Director
|
March
30, 2020
|
|
Roy E.
Hahn
|
|
|
|
|
|
|
|
/s/
Toni M. Perazzo
|
Director
|
March
30, 2020
|
|
Toni M.
Perazzo
|
|
|
|
/s/
David P. Wilson
|
Director
|
March
30, 2020
|
|
David
P. Wilson
|
|
|
55
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management andItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statements SchedulesItem 16. Form 10-k Summary