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, 2020
☐
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
|
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 has
filed a report on and attestation to its management’s
assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
☐
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 30, 2020, 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 $2,910,200. 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
April 15, 2021 was
1,545,884.
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"). Any
statement in this report other than statements of historical fact
may be a forward-looking statement for purposes of these
provisions, including any statements of the Company’s plans
and objectives for future operations, the Company’s future
financial condition 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," “projected,” “intends,”
“believes,” 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 approval by the Bankruptcy Court of various first day motions
that are intended to enable the Company to continue existing
operations without interruption during the pendency of its
bankruptcy proceedings;
●
the Company’s ability to construct and gain approval from the
Bankruptcy Court of its proposed plan of
reorganization;
●
the expected timing with respect to the Company’s exit from
the bankruptcy process;
●
the resolution of the Drake Indebtedness (as defined below) through
the conduct of an auction sale within the bankruptcy process for
the collateral securing such indebtedness;
●
the sufficiency of available cash required to fund the
Company’s bankruptcy proceeding along with its other ongoing
operational costs;
●
the Company’s use of the PPP Loan proceeds and the potential
forgiveness of principal due under such loans;
●
the availability of debt or equity financing to fund the restart of
the Company’s aircraft leasing business upon exit from
bankruptcy;
●
the impact of certain industry trends on the Company and its
performance;
●
the
ability of the Company and its customers to comply 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 any 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 others, the factors that could
cause such differences include: the Company’s ability to
obtain the Bankruptcy Court approvals for motions necessary for the
Company to continue its business and execute its reorganization
plan; the ongoing effects on the airline industry and global
economy of the COVID-19 pandemic or any other public health
emergencies; the impact on the industry from a terrorist attack
involving air travel; the ability of the Company to raise debt or
equity financing when needed on acceptable terms and in desired
amounts, or at all; the Company’s ability to execute its
reorganization plan successfully if approved; any noncompliance by
the Company's lessees with respect to their obligations under their
respective leases, including payment obligations; any economic
downturn or other financial crisis; any inability to compete
effectively with the Company’s better capitalized
competitors; 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. We urge you to consider the limitations on, and risks
associated with, forward-looking statements and not unduly rely on
the accuracy of forward-looking statements. 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.
Table of Contents
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.
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 passive investor interest in aircraft
assets has increased, there has been increasing demand from such
individual passive investors, or investment fund managers, for
professional third-party aircraft leasing and portfolio management.
The Company has begun to explore third-party management service
contracts as an additional source of revenue that takes advantage
of the Company’s reputation, experience and expertise in this
area.
As of December 31, 2020, the Company’s aircraft portfolio
consisted of (i) six aircraft held for lease, (ii) seven aircraft
held for sale and (iii) two aircraft being sold in parts
(“Part-out Assets”). Three of the held-for-sale
aircraft were sold in March 2021. Most of the Company’s
aircraft are mid-life regional aircraft, and its customer base
consists of six airlines operating in four countries. The Company
also has sales-type finance lease receivables collateralized by two
aircraft.
Bankruptcy.
As previously
reported in our Report on Form 8-K filed with the Securities
Exchange Commission on March 30, 2021, the Company and its
subsidiaries, JetFleet Holding Corp. and JetFleet Management Corp.,
filed on March 29, 2021 a voluntary petition for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. The filing
was made in the U.S. Bankruptcy Court for the District of Delaware
(the “Bankruptcy Court”) (Case No. 21-10636 (the
“Chapter 11 Case”). The Company also filed motions with
the Bankruptcy Court seeking authorization to continue to operate
its business as “debtor-in-possession” under the
jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court. The Company expects to continue its existing
operations without interruption during the pendency of the Chapter
11 Case. To maintain and continue uninterrupted ordinary course
operations during the Chapter 11 Case, the Company has filed a
variety of “first day” motions seeking approval from
the Court for various forms of customary relief. These motions are
designed primarily to minimize the effect of bankruptcy on the
Company’s operations, customers and employees, copies of
which were described in the Company’s Report on Form 8-K
filed with the SEC on March 30, 2021. One of the first day orders
requested of the Bankruptcy Court was approval of an auction sale
(“Auction Sale”) process of the aircraft collateral
(the “Drake Collateral”) that secures the indebtedness
(the “Drake Indebtedness”) owed by the Company to its
single secured creditor, Drake Asset Management Jersey Limited
(“Drake”). The Drake Collateral comprises all of the
aircraft assets currently owned by the Company, other than two
DHC-8 turboprop aircraft on lease to Kenyan lessees, and the
Part-out Assets. If completed, the Auction Sale of the Drake
Collateral is expected to resolve in full the Company’s
obligations under the Drake Indebtedness.
Impact of COVID-19
. In March 2020, the World Health
Organization (“WHO”) declared the novel strain of
coronavirus (“COVID-19”) a pandemic, and since such
time the pandemic has continued to have wide-ranging impacts on
business activities, social behaviors, government functions and the
global economy more broadly. The ongoing pandemic 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 shifting 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. This has led to
significant cash flow issues for airlines, including some of the
Company’s customers.
Furthermore,
for the duration of the pandemic and a period of financial recovery
thereafter, sale and acquisition transactions in the industry have
been curtailed entirely or delayed while the industry returns to
financial stability. The widespread financial effects of the
COVID-19 pandemic on the commercial passenger aviation industry has
been a major factor in the Company’s need to seek Chapter 11
bankruptcy protection, as this protection provides the Company the
time and means to reorganize its business and enable it to continue
as a result of executing its recapitalization and restructuring
plan. While the Company’s current intention is that its
business model will not significantly change in any
recapitalization and restructuring plan, it is possible that upon
exit from reorganization there could be substantial revisions to
the Company’s business model and changes in the
Company’s focus within the aviation leasing or finance
industries.
Asset Selection and Acquisition
. The Company does not
anticipate it will have any acquisition activity during the
pendency of the Chapter 11 Case. If the Company exits from the
Chapter 11 Case as an operating enterprise, the Company would
require a new source of acquisition financing in order to commence
rebuilding a new portfolio of assets.
The
Company has historically acquired assets in one of three ways. The
Company purchased an asset already subject to a lease and assumed
the rights and obligations of the seller, as lessor under the
existing lease. Additionally, the Company has purchased assets from
an air carrier and leased them back to the air carrier. Finally,
the Company has occasionally purchased an asset from a seller and
then immediately entered into a new lease for the aircraft with a
third-party lessee. In this last instance, the Company typically
would not purchase an asset unless a potential lessee has been
identified and has committed to lease the asset.
In the
past, the Company has located customers through marketing efforts
utilizing website listings, attendance at industry conferences,
referrals from existing industry contacts and current customers, as
well as focused advertising.
The
Company generally targeted 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 has
primarily consisted of regional commercial aircraft operators
located in globally diverse markets and seeking to access aircraft
under operating leases. Once it exits bankruptcy, the Company
expects to continue to target these customer markets for the
foreseeable future. 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 does not anticipate
that any acquisition financing will be available to it during the
pendency of the Chapter 11 proceedings. See Item 7 of this
report for more information about trends in and expectations about
the Company’s performance and liquidity.
Competition
. As an aircraft lessor, 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 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.
Prior
to the COVID-19 pandemic, competition was intense as competitors
who have traditionally neglected the regional air carrier market
began to focus on this market. The industry also experienced new
entrants to the market, as well as a number of consolidations of
smaller leasing companies, creating a handful of very large
companies operating in this market. The entry of traditional large
aircraft lessors into the regional aircraft niche, particularly
those with greater access to capital than the Company, led to fewer
acquisition opportunities for the Company and lower lease yields to
the Company, as well as fewer renewals of existing leases or new
leases of existing aircraft.
The COVID-19 pandemic has disrupted the airline industry, as many
airline customers have grounded aircraft and are seeking rent
holidays or terminating leases, and in the absence of such lessor
accommodations are defaulting on lease obligations. Many of the
Company’s aircraft leasing competitors have left the market,
been acquired, or, like the Company, are shedding assets in order
to raise cash to resolve debt non-compliance. In the near and
medium term, those lessors with substantial cash reserves and/or
available acquisition financing for speedy closings will have
opportunities for profitable transactions and will have a
significant competitive advantage in the market.
The Company believes that if it can successfully and expeditiously
complete its Chapter 11 restructuring process, which would require
the resolution of its debt obligations to its single remaining
secured creditor, and if the Company is successful in obtaining
committed acquisition financing upon its exit from Chapter 11, it
may be able to capture some of the opportunities created by the
financial fallout from the pandemic, and leverage the
Company’s experience and operational efficiency in financing
transactions of the size and structure that are often overlooked by
larger competitors.
Dependence on Significant Customers
For the
year ended December 31, 2020, the Company’s five largest
customers accounted for 27%, 23%, 19%, 15%, and 14% of operating
lease revenue. 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. If the Auction Sale of the
Drake Collateral is completed, the Company’s sole customers
would be located in Kenya, for which the Company has not received
payments due under the two sales-type finance leases since early
2020. Unless and until the Company acquires a significant number of
assets with a diverse range of lessees, the Company’s
portfolio will carry a high risk of customer and geographic
concentration.
Regulations
The
Company is subject to compliance with federal, state and local
government regulations. Among these, as a company engaged in
international trade, these include the Foreign Corrupt Practices
Act, and various export control, money laundering, and
anti-terrorism laws and regulations promulgated by the U.S.
Department of Commerce and the Department of Treasury. Furthermore,
as an owner of aircraft, 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 may
become applicable to the Company. To date, the cost of compliance
with these laws 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.
Human Capital
As of
December 31, 2020, the Company had 9 total employees,
including 8 full-time employees. Nearly all of the employees of the
Company have substantial tenure with the Company and are viewed as
a valuable resource for the Company. Therefore, employee retention
is an important goal for management, particularly as the Company
seeks to restructure and reorganize. Until the acquisition of its
management company, JetFleet Management Corp., (“JMC”)
in 2018, the Company did not have employees, as management of the
Company was provided by employees of JMC. Since acquiring JMC, the
Company, under the guidance of the Compensation Committee of the
Board of Directors, has adopted annual cash-based discretionary
bonus incentive programs, and may adopt a cash program or possibly
add a stock-based incentive program to promote employee retention,
when and if the Company’s financial circumstances
permit.
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.
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.
None.
As of
December 31, 2020, 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 January 31, 2023.
For
information regarding the aircraft assets 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.
Voluntary Bankruptcy Filing.
See Item 8 - Financial
Statements and Supplementary Data – Note 1(e) to Financial
Statements.
Ordinary Course Litigation
. 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.
Not
applicable.
Item 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 1,700 stockholders of record as of April 15, 2021.
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.
Disclosure
under this item has been omitted pursuant to the rules of the SEC
that permit smaller reporting companies to omit this
information.
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 has historically provided leasing and finance services to
regional airlines worldwide and has been principally engaged in
leasing mid-life regional aircraft to customers worldwide under
operating leases and finance leases. In addition to leasing
activities, the Company has also sold 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.
The
COVID-19 pandemic has led to significant cash flow issues for many
lessors. Some of the Company’s customers were unable to
timely meet their obligations under their lease obligations with
the Company during 2020. This in turn has caused those lessees to
make requests for lease payment concessions and/or deferrals from
the Company, which in turn impacted the Company’s cash flow.
The onset of the COVID-19 pandemic substantially impeded the
Company’s ability to regain compliance with its debt
covenants under its credit facility with lenders led by agent bank
MUFG Union Bank (the “MUFG Lenders”), which credit
facility was in default prior to the COVID-19 pandemic due to the
failure of the Company’s largest customer, a European
regional carrier.
Average
portfolio utilization was approximately 88% and 95% during 2020 and
2019, respectively. The year-to-year decrease was due to aircraft
sales during 2020 and aircraft that were on lease in 2019, but off
lease in 2020.
Net
loss for 2020 and 2019 was $42.2 million and $16.7 million,
respectively, resulting in basic and diluted loss per share of
$(27.33) and $(10.78), respectively. Pre-tax profit margin (which
the Company calculates as its (loss)/income before income tax
(benefit)/provision as a percentage of its revenues and other
income) was (284%) and (49%) in 2020 and 2019,
respectively.
Due to
the Company’s default under its indebtedness, the Company was
unable to purchase any aircraft during 2020. During 2020, the
Company sold one aircraft that been held for sale and two aircraft
that had been held under operating leases. A customer that financed
an aircraft that had been held under a sales-type lease and a
customer that financed three aircraft under direct financing leases
exercised purchase options during 2020. The Company ended the year
with a total of six aircraft held for lease, with a net book value
of approximately $46 million. This represents a 58% decrease
compared to the net book value of the Company’s aircraft and
engines held for lease at December 31, 2019. In addition to the
aircraft held for lease at year-end, the Company held two aircraft
subject to finance leases and held seven aircraft and airframe
parts from two aircraft held for sale.
Since
September 2019, the Company has been primarily occupied with the
workout of its debt with the MUFG Lenders and with the special
purpose debt on six aircraft financed with NordDeutsche Landesbank
Girozentrale, New York Branch (“Nord LB”).
The
workout with the MUFG Lenders culminated in the sale of the MUFG
indebtedness to Drake in October 2020, which consisted of $87.9
million loan indebtedness to the MUFG Lenders, including
deferred interest, and approximately $3.1 million owed to MUFG
Bank, Ltd for termination of interest rate swaps entered into with
respect to the Drake Indebtedness (collectively, the “MUFG
Indebtedness”).
The
Company’s special purpose financing debt owed to Nord LB
related to three of the Company’s assets was repaid in full
as a result of dispositions of the three aircraft over the course
of the last two years. In March 2021, the Company sold its
membership interest in ACY E-175 LLC (“ACY E-175”), and
the buyer assumed the last refinancing debt owed to Nord
LB.
On
March 29, 2021, the Company and its subsidiaries, JetFleet Holding
Corp. and JetFleet Management Corp. (“the Debtors”)
filed a voluntary petition for bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
District of Delaware. The Company also filed motions with the
Bankruptcy Court seeking authorization to continue to operate its
businesses as “debtors-in-possession” under the
jurisdiction of the Court and in accordance with the applicable
provisions of the Bankruptcy Code and orders of the Court. The
Company expects to continue existing operations without
interruption during the pendency of the Chapter 11 Case. To
maintain and continue uninterrupted ordinary course operations
during the Chapter 11 Case, the Debtors have filed a variety of
“first day” motions seeking approval from the Court for
various forms of customary relief. These motions are designed
primarily to minimize the effect of bankruptcy on the
Company’s operations, customers and employees. The Company
intends to conduct an Auction Sale of the collateral securing the
Drake Indebtedness, which comprises nearly all of the aircraft
assets currently owned by the Company, as part of its Chapter 11
proceeding in order to satisfy the Company’s obligations
pursuant to the Drake Indebtedness to Drake, the Company’s
sole secured lender. The Company has entered into a stalking horse
agreement with an affiliate of Drake for the sale of the Drake
Collateral to Drake in full satisfaction of the Company’s
obligations under the Drake Indebtedness. If the Auction Sale is
completed, the Company would be left with only the
Part-out Assets and sales-type
finance lease receivables from two customers in Kenya
, for
which the Company has not received payments since early
2020.
Fleet Summary
(a) Assets Held for Lease
Key portfolio
metrics of the Company’s aircraft held for lease as of
December 31,
2020 and December
31, 2019 were as follows:
|
|
December 31
,
2020
|
December 31
,
2019
|
|
Number of aircraft
and engines held for lease
|
6
|
11
|
|
|
|
|
|
Weighted average
fleet age
|
14.4
years
|
11.8
years
|
|
Weighted average
remaining lease term
|
29
months
|
41
months
|
|
Aggregate fleet net
book value
|
$
45,763,100
|
$
108,368,600
|
|
|
For
the Years Ended
December 31
,
|
|
|
|
2020
|
2019
|
|
Average portfolio
utilization
|
88
%
|
95
%
|
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, 2020
and December
31, 2019:
|
|
December 31
, 2020
|
December 31
, 2019
|
||
|
Type
|
Number
owned
|
% of
net
book
value
|
Number
owned
|
% of
net
book
value
|
|
Regional jet
aircraft:
|
|
|
|
|
|
Canadair
700
|
3
|
38
%
|
3
|
20
%
|
|
Canadair
900
|
1
|
29
%
|
1
|
13
%
|
|
Embraer
175
|
-
|
-
%
|
3
|
26
%
|
|
Canadair
1000
|
-
|
-
%
|
2
|
21
%
|
|
Turboprop
aircraft:
|
|
|
|
|
|
Bombardier
Dash-8-400
|
2
|
33
%
|
2
|
20
%
|
The Company did not
purchase any aircraft during 2020 and sold one aircraft that been
held for sale, one aircraft that had been held under a sales-type
lease, three aircraft that had been held under direct financing
leases and two aircraft that had been held under operating leases,
as well as certain aircraft parts.
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.
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, 2020
and December
31, 2019 in the indicated regions (based on the domicile of the
lessee):
|
|
December
31, 2020
|
December 31,
2019
|
||
|
Region
|
Net
book
value
|
% of
net
book
value
|
Net
book value
|
% of
net
book
value
|
|
North
America
|
$
30,433,100
|
67
%
|
$
63,799,600
|
59
%
|
|
Europe
and United Kingdom
|
15,330,000
|
33
%
|
44,569,000
|
41
%
|
|
|
$
45,763,100
|
100
%
|
$
108,368,600
|
100
%
|
For the year ended
December
31, 2020,
approximately 50%, 19%, 15% and 14% of the Company’s
operating lease revenue was derived from customers in the United
States, Spain, Canada and Croatia, respectively. 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. 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,
|
|||
|
|
2020
|
2019
|
||
|
Region
|
Number
of
lessees
|
% of
operating
lease
revenue
|
Number
of
lessees
|
% of
operating
lease
revenue
|
|
Europe
|
3
|
35%
|
4
|
59%
|
|
North
America
|
3
|
65%
|
3
|
40%
|
|
Asia
|
-
|
-%
|
1
|
1%
|
At
December 31
, 2020 and December 31, 2019,
the Company also had two aircraft and six finance lease
receivables, respectively, collateralized by aircraft. For the year
ended December 31, 2020, 100% of the Company’s finance lease
revenue was derived from a customer in Europe. 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.
(b) Assets Held for Sale
Assets held for
sale at
December 31
, 2020
consisted of three Canadair 900 aircraft, three Embraer 175
aircraft, one Bombardier Dash-8-300 aircraft and airframe parts
from two turboprop aircraft. The three Embraer 175 aircraft were
owned by a special-purpose subsidiary of the Company. The aircraft,
restricted cash and debt obligations, including derivative
liability, of the subsidiary were classified as held for sale at
December 31, 2020, and the subsidiary was sold during March
2021.
Results of Operations
(i) Revenues and Other Income
Revenues and other
income decreased by 63% to $16.2 million in 2020 from $43.6 million
in 2019. The decrease was primarily a result of decreased operating
lease, maintenance reserves and finance lease revenues in
2020.
Operating lease
revenue decreased by 40% to $15.5 million in 2020 from $25.6
million in 2019, primarily due to reduced rent income resulting
from the early termination of four aircraft leases with one of the
Company’s customers in the third quarter of
2019.
Maintenance
reserves that are retained by the Company at lease end are recorded
as revenue at that time and decreased by 99% in 2020 from 2019. The
Company recorded $0.2 million of such revenue during 2020 when an
aircraft that had been on lease was returned to the Company and the
lease was terminated. 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.
Finance lease
revenue decreased by 93% to $0.1 million in 2020 from $0.9 million
in 2019 as a result of the exercise of purchase options by the
customer for three aircraft during the first quarter of 2020 that
had been subject to direct finance leases. The Company is
accounting for its two sales-type leases on a non-accrual basis as
payments are received.
(ii) Expenses
Total expenses
decreased by 4% to $62.0 million in 2020 from $64.8 million in
2019. The decrease was primarily a result of decreases in
depreciation, asset impairment losses and bad debt expense, the
effects of which were partially offset by increases in interest
expense and professional fees and general and administrative and
other expenses.
Depreciation
expense decreased 39% to $7.0 million in 2020 from $11.6 million in
2019 primarily as a result of the reclassification of four aircraft
from held for lease to held for sale during the third quarter of
2019, as well as a decrease in depreciation for two aircraft that
were written down to their estimated sale values during the second
quarter of 2020 and were sold during the fourth
quarter.
During 2020, the Company recorded impairment
losses totaling $14,639,900 for seven of its aircraft held for
lease, comprised of (i) $7,006,600 for two aircraft that were
written down to their sales prices, less cost of sale and (ii)
$7,633,300 for five aircraft that were written down based on
third-party appraisals. The Company also recorded losses of
$11,337,200 for a turboprop aircraft and three regional jet
aircraft that are held for sale and that were written down based on
third-party appraisals and $2,774,700 for three regional jet
aircraft and two turboprop aircraft that are being sold in parts
based on estimated sales prices, less cost of sale, provided by the
part-out vendors.
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 2019, 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 2019, as a result of payment delinquencies
by two customers that financed three of the Company’s
aircraft under finance leases, one of which was paid in full by the
customer in early 2020, the Company recorded a bad debt expense of
$
2.9 million
. During 2020, the
Company recorded an additional bad debt expense of $1.5 million
related to the finance leases of the two remaining aircraft to
these customers.
The Company’s
interest expense increased by 49% to $16.8 million in 2020 from
$11.3 million in 2019, primarily as a result of a higher average
interest rate and interest expense related to the termination of
the Company’s two MUFG Swaps in 2020, the effects of which
were partially offset by a lower average debt balance.
Professional fees,
general and administrative and other expenses increased 15% to $4.6
million in 2020 from $4.0 million in 2019, primarily due to
increased legal fees related to the May 2020 MUFG Indebtedness
amendment and litigation relating to an activist shareholder, which
was completed in 2020, consulting fees related to the May 2020 MUFG
Indebtedness amendment and increased amortization related to the
Company’s office lease right of use, the effects of which
were partially offset by decreased travel expenses.
The Company had a
tax benefit of $3.6 million for the year ended December 31, 2020
compared to tax benefit of $4.5 million for the year ended December
31, 2019. The effective tax rate for the year ended December 31,
2020 was a 7.8% tax benefit compared to a 21.3% tax benefit for the
year ended December 31, 2019. The difference in the effective
income tax rate from the normal statutory rate was primarily
related to recording a $7.5 million valuation allowance in the
current period on the Company’s U.S. and foreign deferred tax
assets after concluding that the Company’s net U.S. and
foreign deferred tax assets are not supported by either future
taxable income or availability of future reversals of existing
taxable temporary differences, or available refunds from carryback
of foreign operating losses.
In March of 2020,
the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) became law. The CARES Act included tax
provisions under which net operating losses from 2018, 2019 and
2020 can be carried back for five years, modifying the law that had
previously not permitted any carryback, and also increased the
amount of deductible interest from 30% to 50% of adjusted taxable
income for the 2019 and 2020 years. These changes have not had any
effect on the Company’s expected cash tax expenditures or
income tax expense. The CARES Act also accelerated the ability to
receive refunds of alternative minimum tax credits from prior
years, which allowed the Company to accelerate $11,400 of the
refund of such credit into its 2019 return.
Liquidity and Capital Resources
At December 31, 2020, the Company had total book assets of
approximately $93.4 million and liabilities of $111 million,
resulting in a negative book equity of $17.6 million. The largest
portion, $92.4 million, of the Company’s debt is owed to
Drake and was payable with accrued interest on March 31,
2021.
The
Company did not have the resources to meet its obligations to repay
the Drake debt when due on March 31, 2021, which is a principal
reason for its decision to file for protection under Chapter 11 of
the bankruptcy code, as discussed in Note 1(e). Management has also
recognized that the Company requires additional funding to continue
its operations and has not identified a source for such funding to
date. Although management plans include securing additional
funding, it cannot conclude that it is probable that such plan will
be achieved and mitigate the conditions that led to substantial
doubt about the Company’s ability to continue as a going
concern.
The
Company’s poor financial position, including its poor
short-term liquidity given the impending maturity of the Drake
debt, the amount of liability under the Drake debt in relation to
the fair value of the Company’s assets and the uncertainty of
generating sufficient funds over the year after publication of its
financial statements to continue operations
have led the
Company to conclude that there is substantial doubt about its
ability to continue as a going concern.
The accompanying audited consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern and contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company’s ability to continue as a going concern is
contingent upon its ability to successfully implement a plan of
reorganization, among other factors, and the realization of assets
and the satisfaction of liabilities are subject to
uncertainty. Further, any plan of reorganization could materially
change the amounts of assets and liabilities reported in the
accompanying consolidated financial statements. 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 or as a
consequence of its Chapter 11 filing.
(a)
MUFG Credit Facility and Drake
Indebtedness
On May 1, 2020, the Company and the MUFG Lenders
entered into a Fourth Amended and Restated Loan and Security
Agreement (the "MUFG Loan Agreement") that amended and restated the
existing agreement regarding the Company's indebtedness to the MUFG
Lenders and granted
forbearances of the existing defaults
and events of default under the MUFG Loan Agreement. On October 30,
2020, Drake purchased all of the indebtedness of the Company under
the MUFG Loan, totaling approximately $87.9 million as well as
all of the Company's indebtedness to MUFG Bank, Ltd. of
approximately $3.1 million for termination of interest rate swaps
entered into with respect to such MUFG Loan Agreement
indebtedness. The purchase and sale was consented to by
the Company pursuant to a Consent and Release Agreement of Borrower
Parties, entered into by the Company and its
subsidiaries.
On the same day,
the Company entered into an Amendment No. 1 to the MUFG Loan
Agreement (“Amendment No. 1”) with Drake and UMB Bank,
N.A., the replacement Administrative Agent under the MUFG Loan
Agreement, to amend the MUFG Loan Agreement to: (i) defer the cash
component of any monthly interest payments due under the MUFG Loan
Agreement, commencing with the payments due for March 2020, and
capitalize and add such deferred interest to the principal balance
of the indebtedness until such time as the indebtedness is repaid;
(ii) require lender approval for any material changes in lease
terms with respect to the collateral; and (iii) delete certain
financial reporting requirements and change required frequency of
certain other surviving reporting requirements. The indebtedness
continues to be secured by a first priority lien on all of the
Company's assets, including the Company’s aircraft
portfolio.
The Company and Drake have entered into an Asset Purchase Agreement
(“Stalking Horse Agreement”) for the sale of the
Drake Collateral, subject to better and higher
offers. The Stalking Horse Agreement was entered into in
conjunction with the filing by the Company of its Chapter 11 Case.
The Company has requested the Court approve
certain bidding procedures with respect to the Auction Sale for the
Drake Collateral and other Company’s assets, in order to fund
repayment of its indebtedness to Drake, as its sole secured
lender. The consummation of a sale of Drake Collateral in the
Auction Sale on terms as set forth in the Stalking Horse Agreement,
or pursuant to higher and better offers, is expected to resolve in
full the Company’s obligations owed pursuant to the Drake
Indebtedness.
Following is a summary of the principal terms and conditions of the
Stalking Horse Agreement:
●
Assets
Covered
. The Stalking Horse
Agreement covers the Drake Collateral, consisting of ten
aircraft assets and related leases (“Assumed Leases”)
over which Drake holds a first priority lien that secures the Drake
Indebtedness.
●
Purchase
Price
. The aggregate
consideration for the purchase of the Drake Collateral is an amount
equal to the amount of the outstanding secured
obligations.
●
Sale Order Approval
Required.
The mutual
obligations for the purchase and sale of the Drake Collateral is
subject to the entry of an order by the Bankruptcy Court
authorizing the purchase transaction as the best and highest offer
available with respect to such assets.
●
Excluded
Assets
. Certain assets are not
being sold to Drake pursuant to the Stalking Horse Agreement
(“Excluded Assets”), including two aircraft on lease to
Kenyan lessees, and certain aircraft and an engine that are being
parted out under consignment arrangements, which Excluded Assets
shall remain free and clear of Drake claims, if and when the sale
of the Drake Collateral pursuant to the Stalking Horse Agreement or
to another higher and better offer is
consummated.
●
Economic Closing Date
Allocation.
Lease revenue
received with respect to the Drake Collateral shall be allocated
based on a February 1, 2021 economic closing date (the
“ECD”). Any lease revenue received by the Company for
periods prior to the ECD shall be the property of the Company. Any
lease revenue received that relates to any period after the ECD
(“Post-ECD Proceeds”) shall be held by the Company for
the benefit of Drake and remitted to Drake pursuant to terms of the
cash collateral order entered into in connection with the Company's
Chapter 11 Case.
●
Assumed
Liabilities.
Drake shall
assume liability for (a) any amounts required to be paid by the
Company pursuant to section 365 of the Bankruptcy Code in
connection with the assumption and assignment of the Assumed
Leases; (b) all costs of obtaining necessary consents to assignment
of the Assumed Leases (to the extent not assignable pursuant to
contract or applicable law); (c) all of the legal fees payable to
lessees under the Assumed Leases incurred in connection with legal
review and negotiation of the lease novation or assignment
documents for the Assumed Leases, and 50% of the Company’s
legal fees for such legal review and negotiation; (d) sales, use,
documentary, transfer, property, bulk, stamp, ad valorem or similar
tax imposed on the assignment and transfer of the Drake Collateral,
and any related penalties, or interest incurred; (e) reimbursements
payable to a lessee upon completion of specific qualified
maintenance projects, as defined and specified under any Assumed
Lease; and (f) any unsatisfied liabilities with respect to certain
programs that the Company maintains in connection with its leasing
business in respect of the Assumed Leases.
●
Release of Secured Lender
Claims on Company Assets.
On the date that the transfer of title to
all Drake Collateral shall have been completed, the Drake
Indebtedness shall be deemed satisfied in full and canceled, and
Drake shall release any claims it may otherwise have in: (a) any
cash held in the Company’s bank accounts that are not
Post-ECD Proceeds; (b) any proceeds received by the Company under
any consignment contract with respect to Excluded Assets; (c) all
assets of the Company other than the Drake Collateral; and (d) any
proceeds of sale or other funds received in respect of the
foregoing items listed in (a)-(c).
(b)
Special-purpose Financing and Nord
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 Loans, which were made to two other
special-purpose subsidiaries of AeroCentury (the “LLC
Borrowers”). Under the Nord 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 Loans. The
Nord Loans 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 had a notional
amount that mirrored the amortization under the corresponding Nord
Loan entered into by the LLC Borrowers, effectively converting each
of the six Nord Loans from a variable to a fixed interest rate.
Each of these six interest rate swaps extend for the length of the
corresponding Nord Loan, with maturities from 2020 through 2025.
One of the aircraft that was subject to Nord Loan financing was
sold during the fourth quarter of 2019 and the related Nord Loan
and interest rate swap were terminated. Accumulated other
comprehensive loss of $896,800 related to the Nord Swaps was
recognized as an expense in the 2020.
In
October 2020, the Company sold two regional jet aircraft to the
lessee, and fully repaid the indebtedness on such aircraft with the
sale proceeds. The excess proceeds from the sale were held as
restricted cash by another special-purpose subsidiary of the
Company and were retained by the special purpose entity holding the
remaining three aircraft subject to the Nord Loans upon its sale in
March 2021.
On March 16, 2021,
the Company sold ACY E-175, the debtor under the Nord Loans secured
by the three remaining E-175 aircraft that were refinanced through
the Nord Loans, which were assumed by the buyer. The Company
received a $2.1 million cash payment, the balance of the sales
proceeds were used to reduce the Drake Indebtedness and the Company
was released from all obligations with respect to the Nord Loan
indebtedness and the related interest swaps. In December 2020, the
Company determined that it was probable that the remaining interest
payments subject to the ACY E-175 LLC swaps occurring after January
2021 would not occur, and accumulated other comprehensive income
related to such payments was recognized in ordinary income in
December 2020.
(c) Paycheck Protection Program Loan
On May 20, 2020,
JetFleet Management Corp. (the “PPP Borrower”), a
subsidiary of AeroCentury Corp., was granted a loan (the “PPP
Loan”) from American Express National Bank in the aggregate
amount of $276,353, pursuant to the Paycheck Protection Program
(the “PPP”) under Division A, Title I of the CARES Act,
which was enacted on March 27, 2020. The application for these
funds required the Company to, in good faith, certify that the
current economic uncertainty made the loan request necessary to
support the ongoing operations of the Company. This certification
further required the Company to take into account its current
business activity and its ability to access other sources of
liquidity sufficient to support ongoing operations in a manner not
significantly detrimental to the business. The forgiveness of the
related loan is dependent on the Company having initially qualified
for the loan and then qualifying for loan forgiveness based on its
future adherence to the forgiveness criteria.
The PPP Loan, which
was in the form of a Note dated May 18, 2020 issued by the PPP
Borrower, matures on April 22, 2022 and bears interest at a rate of
1.00% per annum, payable in 18 monthly payments commencing on
October 19, 2021.
In February 2021,
the Company was granted a second PPP Loan (“Second PPP
Loan”) (collectively, with the initial PPP Loan, the
“PPP Loans”) in the aggregate amount of $170,002. The
Second PPP Loan, in the form of a Note dated February 11, 2021,
matures on February 11, 2026 and bears interest at a rate of 1.00%
per annum, payable in monthly payments commencing 30 days after the
Small Business Administration has made its final determination that
any part of the loan will not be forgiven.
The PPP Loans may
be prepaid by the PPP Borrower at any time prior to maturity with
no prepayment penalties. Funds from the PPP Loans may only be used
for payroll costs and any payments of certain covered interest,
lease and utility payments. The Company intends to use the entire
PPP Loans for qualifying expenses. Under the terms of the PPP,
certain amounts of the PPP Loans may be forgiven if they are used
for qualifying expenses as described in the CARES Act. Although the
Company expects that all or a significant portion of the PPP Loans
will be forgiven, no assurance can be provided that the Company
will obtain such forgiveness.
(d) 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) salaries, employee benefits and
general and administrative expenses, (ii) professional fees and
legal expenses with respect to the Company’s Chapter 11 Case
and restructuring and recapitalization effort; (iii) maintenance
expense and (iv) reimbursement to lessees from collected
maintenance reserves. The Company’s cash flow is subject to a
cash collateral order issued by the Bankruptcy Court.
During 2019, the
Company engaged B. Riley Securities, Inc. as an investment banking
advisor to help (i) negotiate with the Company’ stakeholders
and formulate and analyze the Company’s various strategic
financial alternatives with respect to its plan of reorganization
and (ii) locate and negotiate with potential lenders, investors or
transaction partners who would play a role in recapitalization of
the Company.
The Company’s
ability to develop and obtain approval for its plan of
reorganization is subject to a variety of factors, as discussed
under
Factors that May Affect
Future Results and Liquidity – Risks Related to Chapter 11
Case.
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.
Though the
Company’s maintenance payments typically constitute a large
portion of its cash outflow, this is not likely to be the case in
the near term. Only three lessees of the Company’s aircraft
pay maintenance reserves under their leases. One lessee has agreed
with the Company that if the Company is unable or unwilling to
repay its maintenance reimbursement obligations to the lessee, the
reimbursement obligation will be offset against the lessee’s
monthly rental obligations to the Company until such maintenance
reimbursement obligations are repaid in full. The two other lessees
that pay maintenance reserves are currently in arrearage under
their leases and will not be eligible to submit maintenance reserve
claims until they have cured their arrearages. When and if the
Auction Sale of the Company’s aircraft portfolio is
consummated, any existing reimbursement obligations under the
Company’s leases sold at the Auction Sale will be assumed by
the asset buyer.
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) MUFG Credit Facility
and
Drake Indebtedness
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 $4.2 million in 2020
compared to 2019. As discussed below, the decrease in cash flow was
primarily a result of decreases in payments received for rent,
maintenance reserves and finance lease interest, the effects of
which were partially offset by decreases in payments made for
interest and maintenance.
(A)
Payments
for rent
Receipts from
lessees for rent decreased by $7.5 million in 2020 compared to
2019, primarily due to delinquencies related to one of the
Company’s customers, the repossession of four aircraft during
the third quarter of 2019, the sale of an aircraft during each of
the first and fourth quarters of 2019 and the sale of two aircraft
in the fourth quarter of 2020.
(B)
Payments
for maintenance reserves
Receipts from
lessees for maintenance reserves decreased by $2.4 million in 2020
compared to 2019, primarily due to the repossession of four
aircraft during the third quarter of 2019.
(C)
Payments
for finance lease interest
Payments received
for finance lease interest decreased by $0.7 million in 2020
compared to 2019 as a result of the sale during the first quarter
of 2020 of four aircraft that were subject to finance leases and a
decrease in payments received from two lessees which have been
impacted by the COVID 19 pandemic.
(D)
Payments
for interest
Payments made for
interest decreased by $4.7 million in 2020 compared to 2019 as a
result the deferral of a portion of the interest due on the
Company’s MUFG Indebtedness and Drake
Indebtedness.
(E)
Payments
for maintenance
Payments made for
maintenance decreased by $1.6 million in 2020 compared to 2019 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 2020.
(ii) Investing activities
The
Company did not acquire any aircraft during 2020 or 2019. During
2020 and 2019, the Company received net cash of $17.1 million and
$16.8 million, respectively, from asset sales.
(iii) Financing activities
During
2020, the Company borrowed $5.6 million, in the form of
paid-in-kind interest that was added to the outstanding principal
balance under the MUFG Indebtedness and Drake Indebtedness. During
2019, the Company borrowed $6.0 million under the MUFG Credit
Facility. In 2020 and 2019, the Company repaid $1.2 million and
$44.3 million, respectively, of its total outstanding debt under
the MUFG Indebtedness and Drake Indebtedness. 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 Loans.
During 2020 and 2019, the Company’s special-purpose entities
repaid $16.8 million and $13.4 million, respectively, of the Nord
Loans. During 2019, the Company also repaid $9.2 million of UK LLC
SPE Financing. During 2020 and 2019, the Company paid approximately
$1.7 million and $6.5 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 consolidated financial statements in Item 8 of
this Annual Report on Form 10-K.
Outlook
Bankruptcy Process.
The Company filed
for protection under Chapter 11 of Title 11 of the U.S. Code on
March 29, 2021, in the U.S. Bankruptcy Court for the District of
Delaware, (Case No. 21-10636). Immediately prior to the filing, the
Company completed the sale of its ACY E-175 LLC subsidiary, thereby
resolving $13.4 million in financing debt that was remaining due
under the Nord Loans, and also generated $2.1 million in cash
proceeds for the Company. As part of the bankruptcy proceedings,
the Company intends to conduct an Auction Sale of the Drake
Collateral to generate proceeds to be applied to the satisfaction
of the Drake Indebtedness. The Company has in place a stalking
horse agreement with Drake that provides that if Drake prevails at
the Auction Sale as the approved buyer for the Drake Collateral,
the purchase would fully resolve the Company’s obligations
under the Drake Indebtedness, or, in the alternative, if the
Bankruptcy Court and Drake approve a more favorable bid than
Drake’s bid, then Drake would waive any deficiency between
the winning bid and the amount of the Drake Indebtedness. If the
Auction Sale is approved by the Bankruptcy Court and consummated,
the Company anticipates that this will fully resolve the Drake
Indebtedness, but it will also result in the Company’s
disposition the Drake Collateral as revenue-generating assets of
the Company, and would leave the Company with minimal
cash-generating assets, and the Company’s only source of cash
would be the remainder of the Company’s cash on hand upon the
conclusion of the Chapter 11 Case.
Based on the
Company’s current projections, the Company anticipates that
the Company’s current cash position should be sufficient to
fund the Company through a planned exit from its bankruptcy process
sometime in the late second or early third quarter of 2021,
assuming no significant unexpected expenses are incurred during the
bankruptcy process. The Company is currently developing its plan of
reorganization and is seeking debt or equity investors to provide
capital to the Company to fund its business plan to restart its
aircraft leasing business upon exit from bankruptcy. If the Company
is unsuccessful in timely exiting its Chapter 11 proceeding, or has
insufficient cash to complete its reorganization, or is unable to
find post-exit funding, the Company will likely be forced to cease
operations and liquidate and distribute any remaining assets toward
satisfaction of the Company’s creditors.
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.
●
Risks related to the Chapter 11 Case
Chapter 11 Effect on Common
Stock Value.
As previously disclosed, on March 29, 2021, the
Company and its subsidiaries filed voluntary petitions under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court, thereby
commencing the Chapter 11 Case. The price of the Company’s
common stock has been volatile following the commencement of the
Chapter 11 Case and the Company’s common stock may decrease
in value or become worthless. Accordingly, any trading in the
Company’s common stock during the pendency of the
Company’s Chapter 11 Case is highly speculative and poses
substantial risks to purchasers of the Company’s common
stock. As discussed below, recoveries in the Chapter 11 Case for
holders of common stock, if any, will depend upon the
Company’s ability to negotiate and confirm a plan, the terms
of such plan, the recovery of the Company’s business from its
loan default and the COVID-19 pandemic, if any, and the value of
the Company’s assets. Although the Company cannot predict how
its common stock will be treated under a plan, the Company expects
that common stockholders would not receive a recovery through any
plan unless the holders of more senior claims and interests, such
as secured indebtedness, are paid in full, which would require a
significant, rapid and currently unanticipated improvement in
business conditions to pre-COVID-19 or close to pre-COVID-19
levels. Consequently, there is a significant risk that the holders
of the Company’s common stock will receive no recovery under
the Chapter 11 Case and that the Company’s common stock will
be worthless.
Impact of Chapter 11 on
Business Strategy.
For the
duration of the Chapter 11 Case, the Company’s operations and
ability to execute its business strategy will be subject to the
risks and uncertainties associated with bankruptcy. These risks
include:
●
the
ability to obtain Bankruptcy Court approval with respect to motions
filed in the Chapter 11 Case from time to time;
●
the ability to
comply with and operate under the requirements and constraints of
the Bankruptcy Code and under any cash management, adequate
protection, or other orders entered by the Bankruptcy Court from
time to time;
●
the
ability to fund operations from cash on hand;
●
the
ability to negotiate and consummate a Chapter 11 plan;
and
●
the
ability to develop, fund, and execute a business
plan.
These
risks and uncertainties could affect the Company’s business
and operations in various ways. For example, negative events or
publicity associated with the Chapter 11 Case could adversely
affect the Company’s relationships with its suppliers,
customers and employees. In particular, critical vendors,
suppliers, and/or customers may determine not to do business with
the Company due to the Chapter 11 Case and the Company may not be
successful in securing alternative sources or relationships. Also,
transactions outside the ordinary course of business are subject to
the prior approval of the Bankruptcy Court, which may limit the
Company’s ability to respond timely to certain events or take
advantage of opportunities. Because of the risks and uncertainties
associated with the Chapter 11 Case, the Company cannot predict or
quantify the ultimate impact that events occurring during the
Chapter 11 process may have on the Company’s business,
financial condition and results of operations.
Adverse Impact of Chapter 11
Case on Business and Human Resources.
While the Chapter 11 Case continues, the
Company’s management will be required to spend a significant
amount of time and effort focusing on the case. This diversion of
attention may materially adversely affect the conduct of the
Company’s business, and, as a result, the Company’s
financial condition and results of operations, particularly if the
Chapter 11 Case becomes protracted. During the Chapter 11 Case, the
Company’s employees will face considerable distraction and
uncertainty and the Company may experience increased levels of
employee attrition. A loss of key personnel or material erosion of
employee morale could have a materially adverse effect on the
Company’s ability to meet customer expectations, thereby
adversely affecting its business and results of operations. The
failure to retain or attract members of the Company’s
management team and other key personnel could impair its ability to
execute its strategy and implement operational initiatives and the
Company’s reorganization plan, thereby having a material
adverse effect on its financial condition and results of
operations.
Inability to Confirm Chapter
11 Plan of Reorganization; Conversion to Chapter
7.
As
part of the Chapter 11 process, the Company will need to negotiate
a plan of reorganization with its creditors. If the Company is
unable to negotiate a plan of reorganization that will result in it
remaining a going concern, upon a showing of cause, the Bankruptcy
Court may convert the Chapter 11 Case to a case under Chapter 7
proceeding. In such event, a Chapter 7 trustee would be appointed
or elected to liquidate the Company’s assets for distribution
to creditors in accordance with the priorities established by the
Bankruptcy Code. Holders of the Company’s common stock could
lose their entire investment in a Chapter 7
bankruptcy.
Change in Capital Structure
Upon Bankruptcy Exit.
The
Company’s post-bankruptcy capital structure has yet to be
determined and will be set pursuant to the reorganization plan
(“Reorganization Plan”) that requires Bankruptcy Court
approval. The reorganization of the Company’s capital
structure may include exchanges or new issuances of new debt or
equity securities for existing securities, debt or claims against
the Company. Existing equity securities are subject to risk of
being cancelled. The success of a reorganization through any
such exchanges or modifications will depend on approval by the
Bankruptcy Court and the willingness of existing stakeholders to
agree to the exchange or modification, subject to the provisions of
the Bankruptcy Code, and there can be no guarantee of success. If
such exchanges or modifications are successful, holders of the
Company’s debt or of claims against it may find their
holdings no longer have any value or are materially reduced in
value, or they may be converted to equity and be diluted or may be
modified or replaced by debt with a principal amount that is less
than the outstanding principal amount, longer maturities and
reduced interest rates. Holders of common stock may also find that
their holdings no longer have any value and face highly uncertain
or no recoveries under a Reorganization Plan.
There
can be no assurance that any newly issued debt or equity securities
issued for existing securities will maintain their value at the
time of issuance. If existing debt or equity holders are adversely
affected by a reorganization, it may adversely affect the
Company’s ability to issue new debt or equity in the future.
Although the Company cannot predict how the claims and interests of
stakeholders in the Chapter 11 Case, including holders of common
stock, will ultimately be resolved, the Company expects that common
stockholders will not receive a recovery through any Reorganization
Plan unless the holders of more senior claims and interests, such
as secured and unsecured indebtedness, are paid in full.
Consequently, there is a significant risk that the holders of the
Company’s common stock would receive no recovery under the
Chapter 11 Case and that the Company’s common stock will
be worthless.
Plan Assumptions May Prove
Inaccurate.
Any Chapter 11
Reorganization Plan that the Company may implement will affect both
its capital structure and the ownership, structure and operation of
its business and will likely reflect assumptions and analyses based
on its experience and perception of historical trends, current
conditions and expected future developments, as well as other
factors that the Company considers appropriate under the
circumstances. Whether actual future results and developments will
be consistent with management’s expectations and assumptions
depends on a number of factors, including but not limited to
(i) the Company’s ability to substantially change its
capital structure; and (ii) the overall strength and stability
of general economic conditions, both in the U.S. and in global
markets. The failure of any of these factors could materially
adversely affect the successful reorganization of the
Company’s businesses.
In
addition, any Reorganization Plan will likely rely upon financial
projections, including with respect to revenues, consolidated
adjusted EBITDA, capital expenditures, debt service and cash flow.
Financial forecasts are necessarily speculative, and it is likely
that one or more of the assumptions and estimates that are the
basis of these financial forecasts will not be accurate. In the
Company’s case, the forecasts will be even more speculative
than normal, because they may involve fundamental changes in the
nature of the Company’s capital structure. Additionally, the
impact of the COVID-19 pandemic on the aviation and travel industry
in general, and on the Company, make it even more challenging than
usual to develop business forecasts. Accordingly, the Company
expects that its actual financial condition and results of
operations will differ, perhaps materially, from what is
anticipated. Consequently, there can be no assurance that the
results or developments contemplated by any Reorganization Plan
will occur or, even if they do occur, that they will have the
anticipated effects on the Company’s businesses or
operations. The failure of any such results or developments to
materialize as anticipated could materially adversely affect the
successful execution of any Reorganization Plan.
Non-dischargeable
Claims.
The Bankruptcy Code
provides that the confirmation of a debtor’s Reorganization
Plan by the Bankruptcy Court discharges a debtor from substantially
all debts arising prior to confirmation. With few exceptions, all
claims that arose prior to confirmation of the Reorganization Plan
(i) would be subject to compromise and/or treatment under the
Reorganization Plan and (ii) would be discharged in accordance
with the Bankruptcy Code and the terms of the Reorganization Plan.
Any claims not ultimately discharged through the Company’s
Chapter 11 Reorganization Plan could be asserted against the
reorganized entities and may have an adverse effect on the
Company’s financial condition and results of operations on a
post-reorganization basis.
Protracted Chapter 11 Case
Adverse to Business.
A long
period of operations under Bankruptcy Court protection could have a
material adverse effect on the Company’s business, financial
condition, results of operations, and liquidity. So long as the
Chapter 11 Case continues, senior management will be required to
spend a significant amount of time and effort dealing with the
reorganization instead of focusing exclusively on business
operations. A prolonged period of operating under Bankruptcy Court
protection also may make it more difficult to retain management and
other key personnel necessary to the success of the Company’s
business. In addition, the longer the Chapter 11 Case continues,
the more likely it is that customers and suppliers will lose
confidence in the Company’s ability to reorganize its
business successfully and will seek to establish alternative
commercial relationships.
So
long as the Chapter 11 Case continues, the Company will be required
to incur substantial costs for professional fees and other expenses
associated with the administration of the Chapter 11 Case,
including potentially the cost of litigation. In general,
litigation can be expensive and time consuming to bring or defend
against. Such litigation could result in settlements or damages
that could significantly affect the Company’s financial
results. It is also possible that certain parties will commence
litigation with respect to the treatment of their claims under a
Reorganization Plan. It is not possible to predict the potential
litigation that the Company may become party to, nor the final
resolution of such litigation. The impact of any such litigation on
the Company’s business and financial stability, however,
could be material. Should the Chapter 11 Case be protracted,
the Company may also need to seek new financing to fund operations.
If the Company is unable to obtain such financing on favorable
terms or at all, the chances of confirming a Reorganization Plan
may be seriously jeopardized and the likelihood that we will
instead be required to liquidate the Company’s assets may
increase.
Court-ordered Restrictions on
Trading Common Stock.
In
connection with the Chapter 11 Case, the Bankruptcy Court entered
an order that, among other things, imposes certain trading
restrictions on holders of greater than 4.9% of the Company’s
common stock. The restrictions in this order are intended to
preserve certain of the Company’s tax attributes, including
tax losses and carryforwards. There can be no assurance that the
existing restrictions will remain in place or that additional or
modified trading restrictions will not be implemented with respect
to the Company’s common stock, nor can there be any assurance
of the Company’s ability to use its tax
attributes.
Impact of Further Equity
Financings on Existing Stockholders and Market
Price.
In
order to raise additional capital to execute its Reorganization
Plan, the Company may in the future issue additional shares of its
common stock or other securities convertible into or exchangeable
for its common stock at prices that may not be the same as quoted
on the NYSE American Stock Exchange at the time of issuance.
Investors acquiring shares or other securities in the future could
have rights superior to existing stockholders.
Sales
of a substantial number of shares of the Company’s common
stock, whether in a private placement or in the public markets, or
the perception that such sales could occur, could depress the
market price of the Company’s common stock and impair the
Company’s ability to raise capital through the sale of
additional equity securities. The Company cannot predict the effect
that future sales of its common stock would have on the market
price of its common stock.
No Committed Operating Capital or Acquisition
Financing.
The Company has no current and no committed
capital financings available to it. If the Company succeeds in
exiting the Chapter 11 Case, it is unlikely to have available cash
to fund long term operations and new aircraft acquisitions. The
Company will need to obtain new capital to fund its reorganization
and the restart of its aircraft leasing business. 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.
If it is unable to find suitable post-exit funding, the Company
will likely be forced to cease operations and liquidate and
distribute any remaining assets toward satisfaction of the
Company’s creditors.
●
Leasing Industry and Aviation Related Risks.
Impact of COVID-19
Pandemic
. The ongoing COVID-19
pandemic has had an overwhelming adverse effect on the Company, as
it has had on all forms of transportation globally, but most
acutely for the airline industry. The combined effect of fear of
infection during air travel, quarantines, and shifting
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. This has
led to significant cash flow issues for airlines, including some of
the Company’s customers, and some airlines have been unable
to timely meet their obligations under their lease obligations with
the Company. 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. Furthermore, for the duration of the pandemic
and a period of financial recovery thereafter, sale transactions
and financing availability could be curtailed entirely or delayed
while the industry returns to financial stability, which could
impact the Company’s ability to implement any restart of its
leasing business following exit from its Chapter 11
Case.
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 has 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. According to current reports,
scheduled airline flights have been significantly reduced. 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.
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 developing countries, including in some of the markets
in which the Company 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 if another major
flu or new pandemic occurs, air travel could be severely 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.
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. 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.
Lack of Portfolio Diversification.
Because of the diminished size of the Company’s portfolio
relative to its historical size, the Company’s current
portfolio lacks diversification and any default by a lessee would
have a significant impact on the Company’s financial results.
If the Auction Sale of the Drake Collateral is consummated, the
Company’s portfolio of leased aircraft will shrink even
further and be limited to two lessees located in one country. This
risk of non-diversification is likely to last for a considerable
time through and after the Company’s exit from its Chapter 11
Case as it may take a number of years for the Company, if and when
it is able to continue its aircraft leasing business, to rebuild
its portfolio to a size that reflects diversification in terms of
lessees and geographic location.
Concentration of Aircraft Type.
The
Company’s aircraft portfolio is likely to remain focused on a
small number of aircraft types and models relative to the variety
of aircraft used in the commercial air carrier market, most of
these types are used extensively by regional airlines. 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.
Prior to the COVID
pandemic, competition was intense as competitors who have
traditionally neglected the regional air carrier market began to
focus on this market. The industry 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. The entry of traditional large aircraft
lessors into the regional aircraft niche, particularly those with
greater access to capital than the Company, led to fewer
acquisition opportunities for the Company and lower lease yields to
the Company, as well as fewer renewals of existing leases or new
leases of existing aircraft.
The
current COVID pandemic has disrupted the airline industry and many
of its competitors, as many airline customers have grounded
aircraft and are seeking rent holidays or terminating leases, and
in the absence of such lessor accommodations are defaulting on
lease obligations. Many of the Company’s aircraft leasing
competitors have left the market, been acquired, or, like the
Company, are shedding assets in order to raise cash to resolve debt
non-compliance. In the near and medium term, those lessors with
substantial cash reserves and/or available acquisition financing
for speedy closings will have opportunities for profitable
transactions and will have a significant competitive advantage in
the market that the Company cannot currently match unless and until
it obtains readily drawable acquisition financing. There is no
assurance that the Company will be able to find such
financing.
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
some assets in overseas markets. Leases with foreign lessees,
however, may present different risks than those with domestic
lessees.
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.
Significant
changes in U.S. trade policy 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 could have
a financial impact on the Company. Such changes in U.S. trade
policy could 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.
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 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.
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 as recently as the fourth
quarter of 2020 and may be required to record asset impairment
charges in the future as a result of the Auction Sale of the Drake
Collateral, the impact of COVID-19 on the aviation industry,
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.
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 to date the Company has not
experienced a material cyber-attack and 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.
●
Risks Related to the Company’s Common Stock
Listing Compliance Deficiency Notice from NYSE
American
. On September 11, 2020, the Company received a
deficiency letter from NYSE American Stock Exchange notifying that
the Company was not in compliance with the continued listing
standards as set forth in Section 1003(a)(i) – (iii) of the
NYSE American Company Guide (the “Company Guide”). The
noncompliance arose from the Company’s financial statement
showing a stockholders’ equity deficiency as of June 30, 2020
combined with net losses for the most recent fiscal years ended
December 31, 2018 and December 31, 2019.
The Company Guide
requires a minimum stockholders’ equity of $2.0 million or
more if it has reported losses from continuing operations and/or
net losses in two of its three most recent fiscal years;
Stockholders’ equity of $4.0 million or more if it has
reported losses from continuing operations and/or net losses in
three of its four most recent fiscal years (Section 1003(a)(ii));
and Stockholders’ equity of $6.0 million or more if it has
reported losses from continuing operations and/or net losses in its
five most recent fiscal years (Section 1003(a)(iii)).
The letter had no
immediate effect on the listing of the Company’s common stock
on the NYSE American and the Company’s common stock will
continue to trade on the NYSE American while the Company takes
measures to regain compliance with the continued listing standards.
As required by Company Guide, the Company has submitted a detailed
plan of compliance to the NYSE American, advising the NYSE American
of the actions the Company has taken, or plans to take, that would
bring it into compliance with the continued listing standards
within 18 months of receipt of the Deficiency Letter and must
periodically report on its progress or any deviation from its
plan.
If the Company
fails to return to compliance by the end of that eighteen-month
period, the NYSE American exchange could de-list the
Company’s stock. If that occurs, liquidity of common stock
held by the shareholders of the Company could be significantly
impacted, as any trading in the Company’s securities would no
longer be executed over the NYSE American Exchange but would have
to be transacted through over-the-counter exchanges or pink sheets.
This could depress the Company’s market price substantially.
De-listing may also make further equity financing of the Company
more difficult by eliminating as potential investors those who are
seeking immediate liquidity in their investment.
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, including changes in investor perception on
competitor’s stock prices and operating results, or arising
from other investor sentiment unknown to the Company.
The Chapter 11 Case may also contribute
significantly to market price volatility of the Company’s
common stock due to investors’ perceptions of the
Company’s equity value in light of the Chapter 11 Case and
speculation on the impact of the plan of reorganization that will
be proposed and the Court’s decision on such plan.
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.
Disclosure under
this item has been omitted pursuant to the rules of the SEC that
permit smaller reporting companies to omit this
information.
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, 2020 and 2019
Consolidated
Statements of Operations for the Years Ended December 31, 2020 and
2019
Consolidated
Statements of Comprehensive Loss for the Years Ended December 31,
2020 and 2019
Consolidated
Statements of Stockholders’ (Deficit)/Equity for the Years
Ended December 31, 2020 and 2019
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2020 and
2019
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.
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, 2020 and 2019, the related consolidated statements
of operations, comprehensive loss, stockholders’
equity/(deficit), 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, 2020 and 2019,
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 has suffered recurring losses from operations, is in
default of its debt obligations under the credit facility, has a
net capital deficiency and has filed for protection under the
bankruptcy code that raise 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.
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.
Critical Audit Matter
The critical audit
matter communicated below is a matter arising from the current
period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The
communication of critical audit matter does not alter in any way
our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matter
below, providing separate opinions on the critical audit matter or
on the accounts or disclosures to which it relates.
Valuation
of Aircraft for Aircraft Held for Sale, Aircraft Held for Lease,
and Finance Lease Receivable
●
Testing the
existence, completeness, and accuracy of the underlying data used
to determine the fair value of the
aircraft.
●
Utilizing personnel
with specialized knowledge and skills in asset valuation
to assist in assessing the reasonableness of the adjustments to
comparable assets effecting the valuations.
/s/
BDO USA, LLP
We have served as the Company's auditor since 2006.
San
Francisco, California
April
15, 2021
AeroCentury
Corp.
Consolidated Balance Sheets
|
ASSETS
|
||
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
2,408,700
|
$
2,350,200
|
|
Cash
and cash equivalents held for sale
|
345,900
|
-
|
|
Restricted
cash
|
-
|
1,076,900
|
|
Restricted
cash held for sale
|
2,346,300
|
-
|
|
Accounts
receivable, including deferred rent of $0 and $828,000
at
December 31
,
2020
and December 31, 2019,
respectively
|
256,600
|
1,139,700
|
|
Finance leases receivable, net of allowance for
doubtful accounts of $1,503,000 and $2,908,600 at December
31
, 2020
and December 31, 2019,
respectively
|
2,547,000
|
8,802,100
|
|
Aircraft held for lease, net of accumulated
depreciation of $21,001,300 and $31,338,700 at December 31
,
2020
and December 31, 2019,
respectively
|
45,763,100
|
108,368,600
|
|
Assets
held for sale
|
38,146,700
|
26,036,600
|
|
Property, equipment and furnishings, net of
accumulated depreciation of $16,400 and $9,600 at December
31
, 2020
and December 31, 2019,
respectively
|
14,900
|
62,900
|
|
Office lease right of use, net of accumulated
amortization of $27,400 and $524,500 at December 31
, 2020
and December 31, 2019, respectively
|
142,400
|
948,300
|
|
Deferred
tax asset
|
1,150,900
|
517,700
|
|
Prepaid
expenses and other assets
|
255,300
|
292,800
|
|
Total
assets
|
$
93,377,800
|
$
149,595,800
|
|
LIABILITIES
AND STOCKHOLDERS’ (DEFICIT)/EQUITY
|
||
|
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$
367,700
|
$
736,000
|
|
Accrued
payroll
|
190,100
|
164,200
|
|
Notes payable and accrued interest, net of
unamortized debt issuance costs of $780,900 and $3,825,700 at
December 31
, 2020
and December
31, 2019, respectively
|
88,793,200
|
111,638,400
|
|
Notes
payable and accrued interest held for sale, net of unamortized debt
issuance costs of $313,400 at December 31, 2020
|
13,836,900
|
-
|
|
Derivative
liability
|
-
|
1,824,500
|
|
Derivative
liability held for sale
|
767,900
|
-
|
|
Derivative
termination liability
|
3,075,300
|
-
|
|
Lease
liability
|
172,000
|
336,400
|
|
Maintenance
reserves
|
2,000,600
|
4,413,100
|
|
Accrued
maintenance costs
|
46,100
|
446,300
|
|
Security
deposits
|
716,000
|
1,034,300
|
|
Unearned
revenues
|
1,027,400
|
3,039,200
|
|
Deferred
income taxes
|
-
|
2,529,800
|
|
Income
taxes payable
|
900
|
175,000
|
|
Total
liabilities
|
110,994,100
|
126,337,200
|
|
Commitments
and contingencies (Note 10)
|
|
|
|
Stockholders’
(deficit)/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 shares outstanding at December 31
,
2020
and December 31,
2019
|
1,800
|
1,800
|
|
Paid-in
capital
|
16,782,800
|
16,782,800
|
|
(Accumulated
deficit)/retained earnings
|
(31,361,600
)
|
10,882,100
|
|
Accumulated
other comprehensive loss
|
(2,000
)
|
(1,370,800
)
|
|
|
(14,579,000
)
|
26,295,900
|
|
Treasury stock at cost, 213,332 shares at December
31
, 2020
and December 31,
2019
|
(3,037,300
)
|
(3,037,300
)
|
|
Total
stockholders’ (deficit)/equity
|
(17,616,300
)
|
23,258,600
|
|
Total
liabilities and stockholders’ (deficit)/equity
|
$
93,377,800
|
$
149,595,800
|
The accompanying notes are an integral part of these consolidated
financial statements.
AeroCentury Corp.
Consolidated Statements of Operations
|
|
For the
Years Ended
December
31,
|
|
|
|
2020
|
2019
|
|
Revenues
and other income:
|
|
|
|
Operating
lease revenue
|
$
15,468,100
|
$
25,609,000
|
|
Maintenance
reserves revenue, net
|
221,400
|
16,968,400
|
|
Finance
lease revenue
|
56,200
|
852,600
|
|
Net
gain on disposal of assets
|
133,000
|
326,900
|
|
Net
loss on sales-type leases
|
-
|
(170,600
)
|
|
Other
income
|
278,000
|
12,800
|
|
|
16,156,700
|
43,599,100
|
|
Expenses:
|
|
|
|
Interest
|
16,819,300
|
11,302,900
|
|
Impairment in value
of aircraft
|
28,751,800
|
31,007,400
|
|
Depreciation
|
7,027,200
|
11,587,500
|
|
Professional fees,
general and administrative and other
|
4,617,300
|
4,005,100
|
|
Bad debt
expense
|
1,503,000
|
2,908,600
|
|
Salaries and
employee benefits
|
2,043,700
|
2,367,500
|
|
Insurance
|
797,600
|
621,300
|
|
Maintenance
|
302,000
|
850,800
|
|
Other
taxes
|
103,200
|
114,300
|
|
|
61,965,100
|
64,765,400
|
|
Loss
before income tax benefit
|
(45,808,400
)
|
(21,166,300
)
|
|
Income
tax benefit
|
(3,564,700
)
|
(4,507,800
)
|
|
Net
loss
|
$
(42,243,700
)
|
$
(16,658,500
)
|
|
Loss per
share:
|
|
|
|
Basic
|
$
(27.33
)
|
$
(10.78
)
|
|
Diluted
|
$
(27.33
)
|
$
(10.78
)
|
|
Weighted
average shares used in loss per share computations:
|
|
|
|
Basic
|
1,545,884
|
1,545,884
|
|
Diluted
|
1,545,884
|
1,545,884
|
The
accompanying notes are an integral part of these consolidated
financial statements.
AeroCentury Corp.
Consolidated Statements of Comprehensive Loss
|
|
For the
Years Ended
December
31,
|
|
|
|
2020
|
2019
|
|
Net
loss
|
$
(42,243,700
)
|
$
(16,658,500
)
|
|
Other
comprehensive loss:
|
|
|
|
Unrealized
losses on derivative instruments
|
(575,000
)
|
(1,887,900
)
|
|
Reclassification
of net unrealized losses on derivative instruments to interest
expense
|
2,318,600
|
142,200
|
|
Tax
benefit/(expense) related to items of other comprehensive
loss
|
(374,800
)
|
374,900
|
|
Other
comprehensive income/(loss)
|
1,368,800
|
(1,370,800
)
|
|
Total
comprehensive loss
|
$
(40,874,900
)
|
$
(18,029,300
)
|
The accompanying notes are an integral part of these consolidated
financial statements.
AeroCentury Corp.
Consolidated Statements of Stockholders’
Equity/(Deficit)
For the Years Ended December 31, 2019 and 2020
|
|
Number of Common
Stock Shares Outstanding
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings/
(Deficit)
|
Treasury
Stock
|
Accumulated Other
Comprehensive Loss
|
Total
|
|
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
|
|
Net
loss
|
-
|
-
|
-
|
(42,243,700
)
|
-
|
-
|
(42,243,700
)
|
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
1,368,800
|
1,368,800
|
|
Balance,
December 31,
2020
|
1,545,884
|
$
1,800
|
$
16,782,800
|
$
(31,361,600
)
|
$
(3,037,300
)
|
$
(2,000
)
|
$
(17,616,300
)
|
The accompanying notes are an integral part of these
consolidated financial
statements.
AeroCentury Corp.
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
2019
|
|
Operating
activities:
|
|
|
|
Net
loss
|
$
(42,243,700
)
|
$
(16,658,500
)
|
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Net
(gain) on disposal of assets
|
(133,000
)
|
(326,900
)
|
|
Net
loss on sales-type finance leases
|
-
|
170,600
|
|
Depreciation
|
7,027,200
|
11,587,500
|
|
Provision
for impairment in value of aircraft
|
28,751,800
|
31,007,400
|
|
Provision
for bad debts
|
1,503,000
|
2,908,600
|
|
Non-cash
interest
|
4,583,500
|
3,376,300
|
|
Deferred
income taxes
|
(3,537,300
)
|
(4,895,200
)
|
|
Derivative
valuations
|
1,743,100
|
154,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
800,100
|
(5,962,800
)
|
|
Finance
leases receivable
|
(12,100
)
|
263,400
|
|
Office
lease right of use
|
805,900
|
(948,300
)
|
|
Favorable
office lease acquired
|
-
|
863,300
|
|
Prepaid
expenses and other
|
(12,400
)
|
551,700
|
|
Taxes
receivable
|
(53,800
)
|
(5,600
)
|
|
Accounts
payable and accrued expenses
|
(360,400
)
|
(277,300
)
|
|
Accrued
payroll
|
25,900
|
85,600
|
|
Accrued
interest on notes payable
|
5,971,900
|
310,200
|
|
Derivative
liability
|
(1,056,600
)
|
-
|
|
Swap
termination liability
|
3,075,300
|
-
|
|
Office
lease liability
|
(164,400
)
|
336,400
|
|
Maintenance
reserves and accrued costs
|
(752,600
)
|
(14,016,200
)
|
|
Security
deposits
|
200,000
|
-
|
|
Unearned
revenue
|
(2,011,800
)
|
(32,100
)
|
|
Income
taxes payable
|
(174,100
)
|
(322,400
)
|
|
Net cash provided
by operating activities
|
3,975,500
|
8,169,700
|
|
Investing
activities:
|
|
|
|
Proceeds from sale
of aircraft held for lease, net of re-sale fees
|
13,851,800
|
1,702,400
|
|
Proceeds from sale
of assets held for sale, net of re-sale fees
|
3,265,200
|
15,107,000
|
|
Proceeds from sale
of securities
|
-
|
121,000
|
|
Net cash provided
by investing activities
|
17,117,000
|
16,930,400
|
|
Financing
activities:
|
|
|
|
Issuance of notes
payable – MUFG Credit Facility
|
-
|
5,984,100
|
|
Repayment of notes
payable – MUFG Credit Facility
|
(1,165,000
)
|
(44,300,000
)
|
|
Issuance of notes
payable – Nord Term Loans
|
-
|
44,310,000
|
|
Repayment of notes
payable – Nord Term Loans
|
(16,823,100
)
|
(13,395,600
)
|
|
Repayment of notes
payable – UK LLC SPE Financing
|
-
|
(9,211,100
)
|
|
Issuance of notes
payable – PPP Loan
|
276,400
|
-
|
|
Debt issuance
costs
|
(1,707,000
)
|
(6,527,700
)
|
|
Settlement of
interest rate swap
|
-
|
(75,200
)
|
|
Net cash used in
financing activities
|
(19,418,700
)
|
(23,215,500
)
|
|
Net increase in
cash, cash equivalents and restricted cash
|
1,673,800
|
1,884,600
|
|
Cash, cash
equivalents and restricted cash, beginning of year
|
3,427,100
|
1,542,500
|
|
Cash, cash
equivalents and restricted cash, end of year
|
$
5,100,900
|
$
3,427,100
|
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,
|
|
|
|
2020
|
2019
|
|
Cash and cash
equivalents
|
$
2,408,700
|
$
2,350,200
|
|
Cash and cash
equivalents held for sale
|
345,900
|
-
|
|
Restricted
cash
|
-
|
1,076,900
|
|
Restricted cash
held for sale
|
2,346,300
|
-
|
|
Total cash, cash
equivalents and restricted cash shown in the statement of cash
flows
|
$
5,100,900
|
$
3,427,100
|
During
the years ended December 31, 2020 and 2019, the Company paid
interest totaling $3,514,100 and $8,123,100, respectively. The
Company paid income taxes of $222,900 and $617,600 in 2020 and
2019, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
AeroCentury
Corp.
Notes to Consolidated Financial Statements
December 31, 2020
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 Loans”) made to ACY 19002, ACY 19003,
and two other newly formed special-purpose subsidiaries of
AeroCentury, ACY SN 15129 LLC (“ACY 15129”) and ACY
E-175 LLC (“ACY E-175”), which were formed for the
purpose of refinancing four of the Company’s aircraft using
the Nord Loans. See Note 6(c) for more information about the Nord
Loans.
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
At December 31, 2020, the Company had total book assets of
approximately $93.4 million and total liabilities of $111.0
million, resulting in a negative book equity of $17.6 million. The
largest portion, $92.4 million, of the Company’s debt is owed
to Drake Asset Management Jersey Limited (“Drake”) and
was payable with accrued interest on March 31, 2021.
The
Company did not have the resources to meet its obligations to repay
the Drake debt when due on March 31, 2021, which is a principal
reason for its decision to file for protection under Chapter 11 of
the bankruptcy code, as discussed in Note 1(e). It has also
recognized that it requires additional funding to continue its
operations, and that it has not identified a source for such
funding to date. Although management plans include securing
additional funding, it cannot conclude that it is probable that
such plan will be achieved and mitigate the conditions that led to
substantial doubt about the Company’s ability to continue as
a going concern. The Company has suffered recurring losses from
operations, is in default of its debt obligations under the credit
facility, and has a net capital deficiency.
The Company’s poor financial
position, including its poor short-term liquidity given the
impending maturity of the Drake debt, the amount of liability under
the Drake debt in relation to the fair value of the Company’s
assets and the uncertainty of generating sufficient funds over the
year after publication of its financial statements to continue
operations
have led the Company to conclude that there is
substantial doubt about its ability to continue as a going
concern.
The accompanying audited consolidated financial statements have
been prepared assuming that the Company will continue as a going
concern and contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company’s ability to continue as a going concern is
contingent upon its ability to successfully implement a plan of
reorganization, among other factors, and the realization of assets
and the satisfaction of liabilities are subject to
uncertainty. Further, any plan of reorganization could materially
change the amounts of assets and liabilities reported in the
accompanying consolidated financial statements. 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 or as a
consequence of its Chapter 11 filing.
(c) Impact of COVID-19
In
March 2020, the World Health Organization (“WHO”)
declared the novel strain of coronavirus (“COVID-19”) a
pandemic, and COVID-19 has continued to have wide-ranging impacts
as the virus spreads globally (the “COVID-19
Pandemic”). The ongoing COVID-19 Pandemic 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. Two of the
Company’s eight customers did not make operating lease rent
payments that were due in March, April, May and June 2020, totaling
approximately $3.5 million. As discussed in Note 6(c), one of the
customers paid the deferred rent in September 2020 and purchased
the aircraft in October 2020. The Company permitted the second
customer, which leases two regional turboprop aircraft, to make
reduced payments totaling approximately $0.3 million in April, May,
June, November and December 2020 and the customer paid the reduced
amounts. As discussed in Notes 2 and 3, the Company recorded
impairments totaling $28.8 million during 2020.
In
addition, two other customers, each of which leases an aircraft
subject to a sales-type lease, did not make lease payments totaling
approximately $1.0 million, and the Company and the customers are
discussing remedies regarding the non-payment. As discussed in Note
2, the Company recorded bad debt allowances totaling $1,503,000
related to the two sales-type finance leases during
2020.
The
impact of the COVID-19 Pandemic has also led the Company to
determine that there is uncertainty related to rent, interest and
debt payments such that, as disclosed in Notes 6 and 7, the Company
de-designated its interest rate swaps as hedges in March 2020 since
the payments related to the swaps were deemed not probable to
occur. Additionally, in December 2020, the Company determined that
it was probable that certain future cash flows under its interest
rate swaps would not occur, and the Company consequently
reclassified accumulated other comprehensive income
(“AOCI”) associated with such cash flows into interest
expense.
(d)
Company Indebtedness
As
discussed in Note 6, the Company was in default under its MUFG
Credit Facility as of December 31, 2019. On May 1, 2020, the
Company and the MUFG Credit Facility Lenders (“MUFG
Lenders”) executed an amendment to the MUFG Credit Facility
(as amended, the “MUFG Loan Agreement”) to convert the
MUFG Credit Facility into a term loan facility (as converted, the
“MUFG Loan”). The amendment included certain
requirements and establishment of deadlines for achievement of
milestones toward execution of Company strategic alternatives for
the Company and/or its assets acceptable to the MUFG Lenders. The
amendment cured the December default, but the Company was in
default under the MUFG Loan Agreement due to non-payment of
interest due on July 1, 2020, August 3, 2020, September 1, 2020 and
October 1, 2020. As discussed in Notes 6 and 7, the Company was
also obligated to pay $3.1 million related to the termination of
the MUFG Swaps in March 2020. On October 30, 2020, the MUFG Lenders
sold the MUFG Loan and the obligation of the Company from
termination of the MUFG Swaps to Drake Asset Management Jersey
Limited (“Drake”), and the Company and Drake entered
into an amendment of the loan (as amended, the “Drake Loan
Agreement”) under which, among other things, the cash
component of interest due for March 2020 and thereafter for the
term of the loan will be capitalized and the requirement for
execution of a Strategic Alternative and related milestones was
deleted.
Drake
has the right to exercise any and all remedies for default under
the Drake Loan Agreement, which had a maturity date of March 31,
2021. 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 indebtedness under
the Drake Loan Agreement (the “Drake Loan”) and the
indebtedness for the terminated swaps (together, the “Drake
Indebtedness”), which consist of substantially all of the
Company’s assets except for certain assets held in the
Company’s single asset special-purpose financing
subsidiaries.
As
discussed in Note 6, the Company also defaulted on payment under
two of the Nord Loans, but that default has since been remedied and
those Nord Loans were repaid in full.
(e) Voluntary Petitions for Bankruptcy
As
discussed in Note 12(c), in connection with the impending maturity
of the Drake Indebtedness and the continuing economic impact from
COVID-19, on March 29, 2021 (the "Petition Date"), the Company and
certain of its subsidiaries in the U.S. (collectively the "Debtors"
and the "Debtors- in-Possession") filed voluntary petitions for
relief (collectively, the "Petitions") under Chapter 11 of Title 11
("Chapter 11") of the U.S. Bankruptcy Code (the "Bankruptcy Code")
in the U.S. Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The Chapter 11 cases (the "Chapter 11 Case")
are being jointly administered under the caption
In re: AeroCentury Corp., et al., Case No.
21-10636
.
The
Bankruptcy Court has approved motions filed by the Debtors that
were designed primarily to mitigate the impact of the Chapter 11
Case on the Company’s operations, customers and employees.
The Debtors are authorized to conduct their business activities in
the ordinary course, and pursuant to orders entered by the
Bankruptcy Court, the Debtors are authorized to, among other things
and subject to the terms and conditions of such orders: (i) pay
employees’ wages and related obligations; (ii) pay certain
taxes; (iii) continue to maintain certain customer programs; (iv)
maintain their insurance program; (v) use cash collateral on an
interim basis; and (vi) continue their cash management
system.
(f) Debtors-In-Possession
The Debtors are currently operating as debtors-in-possession under
the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court. In general, as debtors-in-possession under the
Bankruptcy Code, the Debtors are authorized to continue to operate
as an ongoing business but may not engage in transactions outside
the ordinary course of business without the prior approval of the
Bankruptcy Court.
(g)
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code,
the Petitions automatically stayed most judicial or administrative
actions against the Debtors and efforts by creditors to collect on
or otherwise exercise rights or remedies with respect to
obligations of the Debtors incurred prior to the Petition Date
("Pre-petition"). Absent an order from the Bankruptcy Court,
substantially all of the Debtors’ Pre-petition liabilities
are subject to settlement under the Bankruptcy
Code.
(h)
Borrowing Capacity and
Availability
At December 31, 2020, the Company had no borrowing capacity or
availability under the Drake Loan Agreement. The filing of the
Chapter 11 Case constituted a default, termination events and/or
amortization event with respect to the Drake Indebtedness. As
discussed in Note 12, in March 2021, the Company sold its ownership
interest in ACY E-175 and the buyer assumed ACY E-175’s
indebtedness to Nord.
(i)
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 current value of the
Company’s assets held for sale, 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.
(j) Comprehensive Income/(Loss)
The
Company accounts for former interest rate cash flow hedges by
reclassifying accumulated other comprehensive income into earnings
in the periods in which the expected transactions occur or when it
is probable that the hedged transactions will no longer occur, and
are included in interest expense.
(k) 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 at December 31, 2020 was held
for sale and was held in an account with the agent for the
Company’s Nord Loans and disbursements from the account are
subject to the control and discretion of the agent for payment of
principal on the Nord Loans.
(l) 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.
ASC 842
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 on the adoption date.
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.
(m)
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.
(n)
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.
(o) 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 $28.8 million and $31.0 million in 2020 and 2019,
respectively, as a result of the Company’s determination that
the carrying values for certain aircraft were not
recoverable.
The 2020 impairment losses consisted of (i) $14.6 million for seven
of its aircraft held for lease, comprised of $7.0 million for two
aircraft that were written down to their sales prices, less cost of
sale, and $7.6 million for five aircraft that were written down
based on third-party appraisals, (ii) $11.3 million for a turboprop
aircraft and three regional jet aircraft that are held for sale and
that were written down based on third-party appraisals and (iii)
$2.8 million for three regional jet aircraft and two turboprop
aircraft that are being sold in parts based on their estimated
sales prices, less cost of sale, provided by the part-out
vendors.
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 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 and one of
which was sold in 2020.
(p) Deferred Financing Costs and Commitment Fees
Costs
incurred in connection with debt financing are deferred and
amortized over the term of the debt. Costs incurred in connection
with the MUFG Credit Facility were deferred and amortized using the
straight-line method until the MUFG Credit Facility debt converted
to a term loan in May 2020, after which costs are amortized using
the effective interest method. Costs incurred in connection with
the Nord Loans are amortized using the effective interest method.
Commitment fees for unused funds under the MUFG Credit Facility
were expensed as incurred.
(q) 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.
(r) 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. In
assessing the valuation of deferred tax assets, the Company
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income or availability to carryback the losses to
taxable income during periods in which those temporary differences
become deductible. The Company considered several factors when
analyzing the need for a valuation allowance including the
Company's current three-year cumulative loss through December 31,
2020, the impacts of COVID-19 pandemic on the worldwide airline
industry and the need to rapidly refinance its debt or sell its
assets in accordance with the provisions of its Drake Indebtedness.
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. Based on its analysis, the Company has
concluded that a valuation allowance is necessary for its U.S.
deferred tax assets not supported by either future taxable income
or availability of future reversals of existing taxable temporary
differences and has recorded a valuation allowance of $7,493,800
for the year ended December 31, 2020, including some of its foreign
deferred tax assets that are not expected to be realized based on
limitations on the utilization of its foreign net operating losses
of $718,000 for the year ended December 31, 2020.
The
Company accrues non-income based sales, use, value added and
franchise taxes as other tax expense in the consolidated statement
of operations.
(s) 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 $1,503,000 and
$2,908,600 at December 31, 2020 and 2019,
respectively.
(t) Finance Leases
As of
December 31, 2019, the Company had three sales-type leases and
three direct financing leases secured by aircraft. All six leases
contain lessee bargain purchase options at prices substantially
below the subject asset’s estimated residual value at the
exercise date for the option. Consequently, the Company classified
each of these six leases as finance leases for financial accounting
purposes. For such finance leases, the Company reports the
discounted present value of (i) future minimum lease payments
(including the bargain purchase option) and (ii) any residual value
not subject to a bargain purchase option, as a finance lease
receivable on its balance sheet, and accrues interest on the
balance of the finance lease receivable based on the interest rate
inherent in the applicable lease over the term of the lease. For
each of the three sales-type leases, the Company recognized as a
gain or loss the amount equal to (i) the net investment in the
sales-type lease plus any initial direct costs and lease incentives
less (ii) the net book value of the subject aircraft at inception
of the applicable lease.
In
2020, the customer under one of the Company’s sales-type
leases exercised a purchase option for $215,000, resulting in a
gain of $12,700. Another customer exercised purchase options
totaling $3,536,500 under the Company’s three direct finance
leases. A total of $2,734,600, representing security deposits and
maintenance reserves paid by the customer during the lease terms
was applied to the amounts due under the purchase options. Losses
totaling $60,600 were recorded at the time the purchase options
were exercised.
The
Company’s remaining two sales-type leases were substantially
modified to reduce the amount of monthly payments and purchase
option amounts due under the leases. Although the modifications
would ordinarily have given rise to income or loss resulting from
the changed term of the agreements, the lessee’s poor
compliance with the lease terms has led the Company to value the
sales-type leases at the fair value of the collateral and, as such,
the modifications did not give rise to any effect on income other
than that related to the collateral value of the financed aircraft.
As a result of payment delinquencies by the two customers, the
Company recorded a bad debt allowance of $1,503,000 during 2020.
The two leases remain treated as sales-type leases.
(u) 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.
(v) 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 Nord Loan debt and a portion of the MUFG
Indebtedness. 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 “de-designated.” After
de-designation, 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 de-designation 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 were no longer probable of occurring
and, hence, those swaps were de-designated from hedge accounting at
that time. 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, payment of which
was due no later than the March 31, 2021 maturity of the Drake
Loan. As a result of the forecasted transaction being not probable
to occur, accumulated other comprehensive loss of $1,421,800
related to the MUFG Swaps was recognized as interest expense in
2020.
In
March 2020, the Company determined that the future hedged interest
payments related to its five remaining Nord Loan interest rate
hedges were no longer probable of occurring, and consequently
de-designated all five swaps from hedge accounting. Additionally,
in December 2020, the Company determined that the interest cash
flows that were associated with its three remaining swaps were
probable of not occurring after February 2021, and consequently
reclassified $600,400 of accumulated other comprehensive income
into interest expense.
(w)
Recent Accounting
Pronouncements
ASU 2016-13
The
FASB issued ASU 2016-13,
Financial
Instruments – Credit Losses (Topic 326)
, in June 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),
to simplify
the accounting for income taxes. The new guidance removes certain
exceptions for recognizing deferred taxes for investments,
performing intra-period 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,
2020. The Company does not expect that adoption of ASU 2019-12 will
have a material impact on its consolidated financial
statements.
FASB Staff Guidance on Effects of COVID-19
In
April 2020, the FASB staff provided some relief from the
unprecedented effect of the COVID-19 pandemic. Under this guidance,
lessors may elect to treat lease concessions due to COVID-19 as if
they arose from enforceable rights and obligations that existed in
the lease contract, with the consequent effect that the concessions
would not be treated as a lease modification which could require
reclassification and remeasurement of the lease and to either
recognize income during the deferral period or to treat deferred
rent as variable rent during the period. Other guidance released in
April 2020 provides that when hedge accounting is discontinued and
it is probable that the forecasted transaction that had been hedged
will occur beyond two months after its originally expected date as
a result of the effects of COVID-19, the reporting entity may still
defer recognizing related AOCI immediately and should defer
recognition of such amounts until the forecasted transactions
actually occur. The Company has elected to treat certain lease
concessions to lessees as if they arose from rights initially in
the lease contracts and so did not give rise to modifications of
the leases, and to treat deferrals as variable rent during the
period of the deferral, reducing income during such
period.
(x)
Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period presentation. These reclassifications had no
impact on previously reported net income or cash
flows.
2.
Aircraft Lease Assets
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 leases 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. 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.
Three
of the Company’s operating lease assets
are subject to manufacturer residual value
guarantees totaling approximately $13.7 million at the end of their
lease terms in the second quarter of 2027.
The Company
considers the best market for re-leasing and/or selling its assets
at the end of its leases, although it does not expect to retain
ownership of the assets under sales-type leases given the
lessees’ bargain purchase options or required
purchase.
During 2020, the Company recorded impairment losses totaling
$14,639,900 for seven of its aircraft held for lease, comprised of
(i) $7,006,600 for two aircraft that were written down to their
sales prices, less cost of sale and (ii) $7,633,300 for five
aircraft that were written down based on third-party
appraisals.
(a)
Assets Held for Lease
At
December 31, 2020
and December
31, 2019, the Company’s aircraft held for lease consisted of
the following:
|
|
December
31, 2020
|
December
31, 2019
|
||
|
Type
|
Number
owned
|
% of
net book value
|
Number
owned
|
% of
net book value
|
|
Regional jet
aircraft
|
4
|
67
%
|
9
|
80
%
|
|
Turboprop
aircraft
|
2
|
33
%
|
2
|
20
%
|
The
Company did not purchase any aircraft held for lease during 2020
and sold two aircraft that had been held for lease, resulting in a
gain of $118,500.
None of
the Company’s aircraft held for lease were off lease at
December 31
, 2020. As discussed
below, the Company has nine aircraft that are held for sale: (i)
three regional jet aircraft that are on lease and were sold in
March 2021; (ii) three off-lease regional jet aircraft; (iii) one
off-lease turboprop aircraft and (iv) two turboprop aircraft that
are being sold in parts.
As of
December
31
, 2020
, minimum future lease revenue
payments receivable under non-cancelable operating leases were as
follows:
|
Years ending
December 31
|
|
|
|
|
|
2021
|
$
14,262,600
|
|
2022
|
12,510,200
|
|
2023
|
12,510,200
|
|
2024
|
10,850,300
|
|
2025
|
4,696,600
|
|
Thereafter
|
2,160,000
|
|
|
$
56,989,900
|
The remaining weighted average lease term of the Company’s
assets under operating leases was 29 months and 41 months at
December 31, 2020 and December 31, 2019, respectively.
(b)
Sales-Type and Finance Leases
In
January 2020, the Company amended the leases for three of its
assets that were subject to sales-type leases with two customers.
The amendments provided for (i) the exercise of a purchase option
of one aircraft to the customer in January 2020, which resulted in
a gain of $12,700, (ii) application of collected maintenance
reserves and a security deposit held by the Company to past due
amounts for the other two aircraft, (iii) payments totaling
$585,000 in January 2020 for two of the leases and (iv) the
reduction of future payments due under the two finance leases.
Because of the uncertainty of
collection of amounts receivable under the finance leases, the
Company does not recognize interest income on the finance lease
receivables (i.e., they are accounted for on a non-accrual basis)
and their asset value is based on the collateral value of the
aircraft that secure the finance leases, net of projected sales
costs. The Company recorded bad debt allowances totaling $1,503,000
related to the two sales-type leases during
2020.
In
January 2020, the customer 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 customer 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 purchase options were
exercised in March 2020, resulting in a loss of
$60,600.
At
December 31, 2020
and December
31, 2019, the net investment included in sales-type leases and
direct financing leases receivable were as follows:
|
|
December 31
,
2020
|
December 31
,
2019
|
|
Gross minimum lease
payments receivable
|
$
4,138,000
|
$
12,772,300
|
|
Less unearned
interest
|
(88,000
)
|
(1,053,900
)
|
|
Allowance for
doubtful accounts
|
(1,503,000
)
|
(2,908,600
)
|
|
Difference between
minimum lease payments receivable and collateral value of
leases
|
-
|
(7,700
)
|
|
Finance leases
receivable
|
$
2,547,000
|
$
8,802,100
|
As of
December 31, 2020
, minimum
future payments receivable under finance leases were as
follows:
|
Years ending
December 31
|
|
|
|
|
|
2021
|
$
2,297,000
|
|
2022
|
1,284,000
|
|
2023
|
557,000
|
|
|
$
4,138,000
|
The remaining weighted average lease term of the Company’s
assets under sales-type and finance leases was 25 months and 20
months at December 31, 2020 and December 31, 2019,
respectively.
The
following is a roll forward of the Company’s finance lease
receivable allowance for doubtful accounts from December 31, 2019
to
December 31
,
2020:
|
Balance, December
31, 2019
|
$
2,908,600
|
|
Deductions upon
sale of assets
|
(735,200
)
|
|
Deductions upon
lease amendments
|
(2,173,400
)
|
|
Additions charged
to expense
|
1,503,000
|
|
Balance,
December 31
, 2020
|
$
1,503,000
|
3.
Assets and Liabilities Held for
Sale
Assets
held for sale at
December 31
,
2020 included (i) three regional jet aircraft owned by ACY E-175
LLC, (ii) three off-lease regional jet aircraft, (iii) one
off-lease turboprop aircraft and (iv) airframe parts from two
turboprop aircraft.
(a)
ACY E-175 LLC
As discussed in Note 12(a),
in March 2021, the Company sold
its 100% percent membership interest in ACY E-175 LLC, which owned
three Embraer E-175 aircraft on lease to a U.S. regional airline.
At December 31, 2020, the Company classified the assets and
liabilities of ACY E-175 LLC as held for sale and recorded an
impairment loss of $2,649,800. The table below sets for the assets
and liabilities that were classified as held for sale at December
31, 2020:
|
Cash and cash
equivalents
|
$
345,900
|
|
Restricted
cash
|
2,346,300
|
|
Aircraft
|
24,550,000
|
|
Notes payable and
accrued interest, net of unamortized debt issuance costs of
$313,400
|
13,836,900
|
|
Derivative
liability
|
767,900
|
The
pre-tax loss of ACY E-175 LLC for the year ended December 31, 2020
was $1,976,200.
(b)
Off-lease aircraft
During 2020, the Company recorded impairment losses of $11,337,200
for an off-lease turboprop aircraft and three off-lease regional
jet aircraft that are held for sale and that were written down
based on third-party appraisals and $124,900 for a turboprop
aircraft that is being sold in parts based on estimated sales
proceeds, less cost of sale, provided by the part-out
vendors.
(c)
Part-out Assets
The Company owns two aircraft being sold in parts (“Part-out
Assets”)
.
During
2020, the Company received $391,800 in cash and accrued $34,400 in
receivables related to the Part-out Assets. These amounts were
accounted for as follows: $117,400 reduced accounts receivable for
parts sales accrued in the fourth quarter of 2019; $239,900 reduced
the carrying value of the parts; and $68,900 was recorded as gains
in excess of the carrying value of the parts. 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.
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 50% and 30% of the Company’s operating lease
revenue was derived from lessees domiciled in the United States
during 2020 and 2019, 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
|
2020
|
2019
|
|
|
|
|
|
North
America
|
$
10,119,100
|
$
10,119,100
|
|
Europe
|
5,349,000
|
15,174,900
|
|
Asia
|
-
|
315,000
|
|
|
$
15,468,100
|
$
25,609,000
|
|
|
December
31,
|
|
|
Net
Book Value of Aircraft and Aircraft Engines Held for
Lease
|
2020
|
2019
|
|
|
|
|
|
North
America
|
$
30,433,100
|
$
63,799,600
|
|
Europe and United
Kingdom
|
15,330,000
|
44,569,000
|
|
|
$
45,763,100
|
$
108,368,600
|
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
|
2020
|
2019
|
|
|
|
|
|
Europe and United
Kingdom
|
$
56,200
|
$
365,600
|
|
Africa
|
-
|
487,000
|
|
|
$
56,200
|
$
852,600
|
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, 2020, the Company had six significant
customers, five of which individually accounted for 27%, 23%, 19%,
15% and 14%, respectively, of operating lease revenue and one of
which accounted for 100% of finance lease revenue. 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.
At December 31, 2020, the Company had receivables from two
customers totaling $179,700 related to maintenance reserves for
2020, representing 70% of the Company’s total accounts
receivable. 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.
6.
Notes Payable and Accrued
Interest
At December 31, 2020 and December 31, 2019, the Company’s
notes payable and accrued interest consisted of the
following:
|
|
December 31
,
2020
|
December 31
,
2019
|
|
MUFG Credit
Facility/Drake Loan:
|
|
|
|
Principal
|
$
88,557,000
|
$
84,084,100
|
|
Unamortized
debt issuance costs
|
(780,900
)
|
(3,084,200
)
|
|
Accrued
interest
|
739,000
|
376,200
|
|
Nord
Loans:
|
|
|
|
Principal
|
-
|
30,914,500
|
|
Unamortized
debt issuance costs
|
-
|
(741,500
)
|
|
Accrued
interest
|
-
|
89,300
|
|
Paycheck Protection
Program Loan:
|
|
|
|
Principal
|
276,400
|
-
|
|
Accrued
interest
|
1,700
|
-
|
|
|
$
88,793,200
|
$
111,638,400
|
|
Nord Loans held for
sale:
|
|
|
|
Principal
|
$
14,091,300
|
$
-
|
|
Unamortized
debt issuance costs
|
(313,400
)
|
-
|
|
Accrued
interest
|
59,000
|
-
|
|
|
$
13,836,900
|
$
-
|
(a)
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 Loans”) with an aggregate principal of
$44.3 million.
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 contained 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.
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, beginning
in the third quarter of 2019.
On October 15, 2019, the agent bank for the MUFG 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 MUFG 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 MUFG 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 MUFG 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 MUFG Lenders agreed not to further amend
the Forbearance Agreement. On February 12, 2020, the agent bank for
the MUFG 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
unused amount of the MUFG Credit Facility was $915,900 as of
December 31, 2019.
The weighted
average interest rate on the
MUFG
Credit Facility was 10.23% at
December
31, 2019.
On May 1, 2020, the Company and the MUFG Lenders entered into a
Fourth Amended and Restated Loan and Security Agreement, which
amended and restated the existing agreement regarding the Company's
indebtedness to the MUFG Lenders and effected the following changes
to the terms and provisions of such indebtedness:
●
A forbearance of
the existing defaults and events of default under the MUFG Loan
Agreement until May 10, 2020, with a provision to extend such
forbearance to July 1, 2020 and August 15, 2020, if the Company is
still in compliance with the agreement at May 10, 2020 and July 1,
2020, respectively;
●
Elimination of the
borrowing base collateral value covenant under the MUFG Loan
Agreement, and of the existing event of default under the MUFG Loan
Agreement for a borrowing base deficiency, along with cessation of
the default interest accrual on the outstanding loan
amount;
●
Conversion of the
revolving MUFG Credit Facility structure to a term loan structure
with an initial principal balance of $83,689,900.86 and a final
maturity date of March 31, 2021;
●
Interest accrual on
the indebtedness based on the Base Rate (defined as the greater of
(i) the rate of interest most recently announced by MUFG as to its
U.S. dollar “Reference Rate”, or (ii) the Federal Funds
Rate plus one-half of one percent (0.50%)), according to the
following schedule: (a) Base Rate + 525 bps (0 bps as cash interest
and 525 bps as payment in kind ("PIK")) until June 30, 2020, and
(b) Base Rate + 525 bps (100 bps as cash interest and 425 bps as
PIK) from and after July 1, 2020, subject to a Base Rate floor at
325 bps for both time periods;
●
Deferral of the
cash component of the interest payments (on the loan indebtedness
and swap termination payment obligation) that was due on April 1,
2020 and May 1, 2020, until the earlier of (i) the date of receipt
of net proceeds into the Company's restricted account held at MUFG
to hold sales proceeds (the "Restricted Account") from the sale of
certain enumerated aircraft assets and (ii) July 1,
2020;
●
Required sweep of
any unrestricted cash in the Company’s bank accounts in
excess of $1,000,000 at the end of each fiscal
quarter;
●
Addition of certain
default provisions triggered by certain defaults or other events
with respect to the Company’s aircraft leases for the
Company's aircraft that are collateral for the MUFG Loan Agreement
("Aircraft Collateral");
●
Provision for
certain payments from the Restricted Account to (i) the
Company’s investment banking advisor; (ii) payments due under
the agreement and for interest on the swap termination indebtedness
owed by the Company; and (iii) Lenders’ outside counsel and
consultants;
●
Addition of a
requirement for the Company's engagement of a Financial
Advisor/Consultant, at the Company’s expense, with a specific
scope of work as prescribed by the MUFG Loan
Agreement;
●
Revisions to the
Company’s required appraisal process for the Aircraft
Collateral; and
●
Establishment of
deadlines for achievement of milestones toward execution of Company
strategic alternatives for the Company and/or its assets with
respect to the MUFG Loan Agreement indebtedness ("Strategic
Alternatives") as follows: (a) obtaining indications of
interest for Strategic Alternatives by May 6, 2020, which was
subsequently extended to May 20, 2020 and was met by the Company at
that time; (b) obtaining a fully-executed (tentative or generally
non-binding) agreement on the terms and conditions for a Strategic
Alternative by June 29, 2020, which milestone has been met, and (c)
consummation of the selected strategic Alternative by August 15,
2020.
On July
8, 2020, the agent bank for the MUFG Lenders delivered a
Reservation of Rights Letter to the Company which contained notice
of defaults with respect to failure to deliver a lessee
acknowledgment of the MUFG Lender’s mortgage from one of the
Company’s lessees (which was delayed due to extended
negotiations between MUFG and the lessee relating to form of such
acknowledgment) and (ii) the failure to make a deferred interest
payment as required under the Loan Agreement that was due and
payable on the earlier of July 1, 2020 or the date of the sale of a
certain aircraft scheduled to be sold upon its return from its
lessee (the closing of which sale was delayed beyond July 1,
2020).
(b) MUFG’s Sale of Indebtedness to Drake
On
October 30, 2020, Drake purchased from the MUFG Lenders all of the
outstanding indebtedness of the Company under such loan, totaling
approximately $87.9 million as well as all of the Company's
indebtedness to MUFG Bank, Ltd. of approximately $3.1 million for
termination of interest rate swaps entered into with respect to
such Loan Agreement indebtedness (such total indebtedness with
Drake as Lender referred to as the “Drake
Indebtedness”). The purchase and sale was consented to
by the Company pursuant to a Consent and Release Agreement of
Borrower Parties, entered into by the Company and its
subsidiaries. The closing of this debt purchase
transaction satisfied the requirement under the Loan Agreement for
execution of a Strategic Alternative with respect to the MUFG Loan
indebtedness satisfactory to the MUFG Lenders.
On the
same day, the Company entered into an Amendment No. 1 to the Loan
Agreement (“Amendment No. 1”) with Drake and UMB Bank,
N.A., the replacement Administrative Agent under the Loan
Agreement, to amend the Loan Agreement (such Loan Agreement as
amended, with Drake as Lender thereunder, referred to as the
“Drake Loan Agreement”) as follows:
●
Deferral of the
cash component of the interest payments due under the Drake Loan
Agreement, commencing with the payments due for March 2020, and
continuing on each consecutive month thereafter, which deferred
interest is to be capitalized and added to the principal balance of
the indebtedness on each respective interest payment due date,
until such time as the indebtedness is
repaid.
●
Deletion of the
requirement for the Company's execution of a Strategic Alternative
and of the milestones therefor;
●
Deletion of the
requirement for the Company's maintenance of a restricted account
held with an MUFG Lender to hold aircraft sales proceeds pending
application toward the Drake Indebtedness;
●
Replacement of
references to “MUFG Union Bank, N.A.,” with “UMB,
Bank, N.A.”, the new Administrative Agent under the Loan
Agreement;
●
Requirement
of approval by Drake for any “Material
Amendments” to leases for the collateral, defined as any
amendment of, or waiver or consent under, any lease involving a
modification of lease payments, any reduction in, or waiver or
deferral of, Rent, a modification to any residual value guaranty,
any modification that adversely affects the collateral or the
rights and interests of the lender and/or administrative agent in
the collateral, any reduction of any amounts payable to any lender
or Agent under any indemnity, or any change to the state of
registration of aircraft collateral; and
●
Deletion of certain
financial reporting requirements and changes to required frequency
of certain other surviving reporting requirements.
The
Drake Indebtedness is secured by a first priority lien held by
Drake, which lien is documented in an amended and restated mortgage
and security agreement assigned to Drake, on all of the
Company's assets, including the Company’s entire aircraft
portfolio, except for two aircraft on lease to Kenyan lessees and
five aircraft, two of which were sold in October 2020 and three of
which were sold in March 2021, that were subject to special purpose
financing held by subsidiaries of the Company.
The
Company and Drake are currently engaged in discussions regarding
the satisfaction and discharge of the Drake
Indebtedness.
During
2019, the Company engaged B. Riley Securities, Inc. as 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 the Company’s lenders,
potential new 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 Drake
Indebtedness or raise sufficient capital to repay all amounts owed
under the Drake Indebtedness, the Company’s financial
condition and liquidity would be materially adversely affected and
its ability to continue operations could be materially
jeopardized.
(c)
Nord
Loans
On
February 8, 2019, the Company, through four wholly-owned subsidiary
limited liability companies (“LLC Borrowers”), entered
into a term loan agreement NordDeutsche Landesbank Girozentrale,
New York Branch (“Nord”) that provides for six separate
term loans (“Nord Loans”) with an aggregate principal
amount of $44.3 million. Each of the Nord Loans is secured by a
first priority security interest in a specific aircraft
(“Nord 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 among the LLC Borrowers and a security
trustee, and certain pledge agreements. Two of the Nord Loan
Collateral Aircraft that were owned by the Company’s two UK
special-purpose entities and were sold in October 2020 were
previously financed using special-purpose financing. The interest
rates payable under the Nord Loans vary by aircraft, and are based
on a fixed margin above either 30-day or 3-month LIBOR. The
proceeds of the Nord Loans were used to pay down the MUFG Credit
Facility and pay off the UK LLC SPE Financing. The maturity of each
Nord Loan varies by aircraft, with the first Nord Loan maturing in
October 2020 and the last Nord Loan maturing in May 2025. The debt
under the Nord Loans is expected to be fully amortized by rental
payments received by the LLC Borrowers from the lessees of the Nord
Loan Collateral Aircraft during the terms of their respective
leases and remarketing proceeds.
The
Nord Loans include covenants that impose various restrictions and
obligations on the LLC Borrowers, including covenants that require
the LLC Borrowers to obtain Nord 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, Nord would have the right to terminate
its obligations under the Nord Loans, declare all or any portion of
the amounts then outstanding under the Nord 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 Loans. The Company was
in compliance with all covenants under the Nord Loans at December
31, 2019 but, as discussed below, was in default of its obligation
to make its quarterly payments due on March 24, 2020 and June 24,
2020.
As a
result of the COVID-19 Pandemic, in March and June 2020, one of the
Company’s customers, which leases two regional jet aircraft
subject to Nord Loan financing, did not make its quarterly rent
payments totaling approximately $2.8 million. The nonpayment led to
corresponding Nord Loan financing payment events of default under
the Nord Loans for each of the LLC Borrowers
. In May
2020, with Nord’s consent,
the Company collected on the customer’s security letters of
credit and paid a portion of the March and June financing payments
due under the Nord Loans, and entered into an agreement with the
customer to defer payment of the remaining balance of the March
rent to June 2020. In June 2020, the Company agreed with the
customer to defer payment of the March and June rent to September
2020, and entered into an agreement with Nord to defer until
September 24, 2020 (i) payment of the principal amount due under
the respective Nord Loans for the two aircraft due in March and
June 2020 and (ii) payment of past due interest at the default
interest rate on the March and June 2020 overdue payments.
The lease arrearage was repaid by the
lessee in late September, which permitted the special-purpose
subsidiaries to come back into compliance with their Nord Loan
indebtedness. In October 2020, the Company sold the two aircraft to
the lessee, and fully repaid the indebtedness on such aircraft with
the proceeds of the sale. The excess proceeds from the sale were
held as restricted cash by ACY E-175. The restricted cash, the
three aircraft held by ACY E-175 and ACY E-175’s Nord Loans
and derivative liability were classified as held for sale at
December 31, 2020.
As discussed in Note 12, in March 2021,
the Company sold its interest in the special-purpose subsidiary and
was released from any remaining guarantee obligations under the
Nord Loan and interest swap obligations of the special-purpose
subsidiary.
As a
result of the customer’s non-payments in March and June 2020
and potential consequent uncertainty concerning future interest
payments under the related Nord Loans, the Company de-designated
the two related derivative instruments from hedge accounting during
the first quarter of 2020 since the swapped interest was not deemed
as probable to occur. After discussions with the lessee for the
remaining three swaps related to the Nord Loans, the Company
determined that there was sufficient uncertainty related to rent
payments and related debt payments, and that the Company could not
conclude that the payments related to the swaps were probable of
occurring, so that the Company de-designated those swaps from hedge
accounting in March 2020 as well. In December 2020, the Company
determined that the payments after February 2021 for the three
remaining swaps were probable not to occur as a result of the
Company’s agreement to sell its interest in ACY E-175 during
the first quarter of 2021, and recognized the accumulated other
comprehensive income related to such payments as interest
expense.
(d) Paycheck Protection Program Loan
On May
20, 2020, JetFleet Management Corp. (the “PPP
Borrower”), a subsidiary of AeroCentury Corp., was granted a
loan (the “PPP Loan”) from American Express National
Bank in the aggregate amount of $276,353, pursuant to the Paycheck
Protection Program (the “PPP”) under Division A, Title
I of the CARES Act, which was enacted March 27, 2020. The
application for these funds required the Company to, in good faith,
certify that the current economic uncertainty made the loan request
necessary to support the ongoing operations of the Company. This
certification further required the Company to take into account its
current business activity and its ability to access other sources
of liquidity sufficient to support ongoing operations in a manner
that is not significantly detrimental to the business. The receipt
of these funds, and the forgiveness of the loan attendant to these
funds, is dependent on the Company having initially qualified for
the loan and qualifying for the forgiveness of such loan based on
its future adherence to the forgiveness criteria.
The PPP
Loan, which was in the form of a Note dated May 18, 2020 issued by
the PPP Borrower and is included in
the Company's notes payable and accrued
interest
, matures on April 22, 2022 and bears interest at a
rate of 1.00% per annum, payable in 18 monthly payments commencing
on October 19, 2021. The Note may be prepaid by the PPP Borrower at
any time prior to maturity with no prepayment penalties. Funds from
the PPP Loan may only be used for payroll costs and any payments of
certain covered interest, lease and utility payments. The Company
intends to use the entire PPP Loan amount for qualifying expenses.
Under the terms of the PPP, certain amounts of the Loan may be
forgiven if they are used for qualifying expenses as described in
the CARES Act. Although the Company has applied for forgiveness and
expects that all or a significant portion of the PPP loan will be
forgiven, no assurance can be provided that the Company will obtain
such forgiveness. As discussed in Note 12, the Company was granted
a second PPP Loan in February 2021.
7. Derivative Instruments
In the
first quarter of 2019, the Company entered into eight fixed
pay/receive variable interest rate 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 Nord 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.
Six of
the interest rate swaps were entered into by the LLC Borrowers and
provided for reduced notional amounts that mirror the amortization
under the Nord Loans entered into by the LLC Borrowers, effectively
converting each of the six Nord 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
Nord Loan. Two of the swaps have maturities in 2020 and three have
maturities in 2025. The sixth swap was terminated in the fourth
quarter of 2019 in connection with the sale of the related
aircraft,
As
discussed in Note 6, in March 2020, the Company determined that the
future hedged interest payments related to its five remaining Nord
Loan interest rate hedges were no longer probable of occurring, as
a result of lease payment defaults for the aircraft owned by ACY
19002 and ACY 19003 and conversations with the lessee for the three
aircraft owned by ACY E-175 regarding likely rent concessions, and
consequently de-designated all five swaps as hedges because the
lease payments are used to service the Nord Loans associated with
the swaps. As a result of de-designation, future changes in market
value will be recognized in ordinary income and AOCI will be
reclassified to ordinary income as the forecasted transactions
occur. Accumulated other comprehensive loss of $321,800 related to
the Nord Swaps was recognized as an expense in 2020. In December
2020, the Company determined that the payments after February 2021
for the three remaining swaps were probable not to occur as a
result of the Company’s agreement to sell its interest in ACY
E-175 during the first quarter of 2021, and recognized $600,400 of
accumulated other comprehensive income related to such payments as
interest expense.
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.
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 a result of the forecasted
transaction being not probable to occur, accumulated other
comprehensive loss of $1,421,800 related to the MUFG Swaps was
recognized as interest expense in 2020. The two swaps related to
the MUFG Credit Facility were terminated in March 2020 and the
Company incurred a $3.1 million obligation, recorded as interest
expense and derivative termination liability, in connection with
such termination, payment of which was due no later than the March
31, 2021 maturity of the Drake Indebtedness.
The
Company has reflected the following amounts in its net
loss:
|
|
For the Years
Ended
December
31,
|
|
|
|
2020
|
2019
|
|
Change in value of
undesignated interest rate swaps
|
$
1,979,800
|
$
255,200
|
|
Reclassification
from other comprehensive income to interest expense
|
1,150,900
|
142,200
|
|
Reclassification
from other comprehensive income to interest expense
–
forecasted
transaction probable not to occur
|
1,167,700
|
-
|
|
Included in
interest expense
|
$
4,298,400
|
$
397,400
|
|
|
|
|
|
The
following amount was included in other comprehensive income/(loss),
before tax:
|
||
|
|
|
|
|
Gain/(loss) on
derivative instruments deferred into other comprehensive
income/(loss)
|
$
(575,000
)
|
$
(1,887,900
)
|
|
Reclassification
from other comprehensive income to interest expense
|
1,150,900
|
142,200
|
|
Reclassification
from other comprehensive income to interest expense
–
forecasted
transaction probable not to occur
|
1,167,700
|
-
|
|
Change in
accumulated other comprehensive income
|
$
1,743,600
|
$
(1,745,700
)
|
Approximately
$2,600 of the current balance of accumulated other comprehensive
loss is expected to be reclassified in the first quarter of
2021.
At
December 31,
2020, the fair
value of the Company’s interest rate swaps was
$767,900.
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 was a lessee under a lease of the office space it occupies
in Burlingame, California, which expired in
June
2020. The lease also provided for two,
successive one-year lease extension options for amounts that were
substantially below the market rent for the property. The lease
provided 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, 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
included 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 were not allocated as a component of
the lease.
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,
the Company recognized 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.
In
March 2020, the Company elected not to exercise the extension
options for its office lease. The lease liability associated with
the office lease was calculated at March 31, 2020 and December 31,
2019 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. As a
result of non-exercise of its extension option, the Company reduced
the lease liability to reflect only the three remaining rent
payments in the second quarter of 2020.
In July
2020, the lease for the Company’s office lease was extended
for one month to July 31, 2020 at a rate of $10,000. The Company
signed a lease for a smaller office suite in the same building
effective August 1, 2020. The lease provides for a term of 30
months expiring on January 31, 2023, at a monthly base rate of
approximately $7,400, with no rent due during the first six months.
The Company recognized an ROU asset and lease liability of
$169,800, both of which were non-cash items and are not reflected
in the consolidated statement of cash flows. No cash was paid at
the inception of the lease, and a discount rate of 3% was used,
based on the interest rates available on secured commercial real
estate loans available at the time. At December 31, 2020, the
weighted average discount rate was 3% and the weighted average
remaining lease term was 25 months.
The
Company estimates that the maturities of operating lease base rent
of its office space were as follows as of
December
31, 2020 and
December 31
, 2019:
|
|
December
31,
2020
|
|
2021
|
$
81,300
|
|
2022
|
88,700
|
|
2023
|
7,400
|
|
|
177,400
|
|
Discount
|
(5,400
)
|
|
Lease
liability
|
$
172,000
|
During
the years ended
December 31
,
2020 and 2019, the Company recognized amortization, finance costs
and other expense related to the office lease as
follows:
|
|
For the Years
Ended
December
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Fixed rental
expense during the year
|
$
552,200
|
$
443,500
|
|
Variable lease
expense
|
23,100
|
116,000
|
|
Total lease expense
during the year
|
$
575,300
|
$
559,500
|
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
, 2020, the Company
measured the fair value of its interest rate swaps of $14,091,300
(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 $767,900
as of
December 31
, 2020. In the
year ended
December 31
, 2020,
$1,979,800 was realized through the income statement as an increase
in interest expense.
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
, 2020 and December 31, 2019:
|
|
December
31, 2020
|
December
31, 2019
|
||||||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Money
market
funds
|
$
-
|
$
-
|
$
-
|
$
-
|
$
400
|
$
400
|
$
-
|
$
-
|
|
Derivatives
|
(767,900
)
|
-
|
(767,900
)
|
-
|
(1,824,500
)
|
-
|
(1,824,500
)
|
-
|
|
Total
|
$
(767,900
)
|
$
-
|
$
(767,900
)
|
$
-
|
$
(1,824,100
)
|
$
400
|
$
(1,824,500
)
|
$
-
|
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.
The independent
appraisals utilized the market approach which uses recent sales of
comparable assets, making appropriate adjustments to reflect
differences between them and the subject
property being
analyzed.
Certain
assumptions are
used in the management’s estimate of
the fair value of aircraft including the adjustments
made to
comparable
assets, identifying
market data of similar assets, and estimating cost to sell. 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.
During 2020, the Company
recorded impairment losses totaling $28,751,800. Of this total,
$14,639,900 was for seven of its aircraft held for lease, comprised
of (i) $7,006,600 for two aircraft that were written down to their
estimated sales prices, less cost of sale and were sold in 2020 and
(ii) $7,633,300 for five aircraft that were written down based on
third-party appraisals. The Company also recorded losses of
$11,337,200 for a turboprop aircraft and three regional jet
aircraft that are held for sale and that were written down based on
third-party appraisals and $2,774,700 for two turboprop aircraft
that are being sold in parts and three regional jet aircraft based
on their estimated sales prices, less cost of sale.
The
Company recorded impairment charges totaling $31,007,400 on nine of
its assets held for sale in 2019 (of which $5,351,300 was related
to assets sold 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
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, 2020
and
December 31, 2019:
|
|
Assets
Written Down to Fair Value
|
Total
Losses
|
||||||||
|
|
December
31, 2020
|
December
31, 2019
|
For the
Years Ended December 31,
|
|||||||
|
|
|
Level
|
|
Level
|
|
|||||
|
Total
|
1
|
2
|
3
|
Total
|
1
|
2
|
3
|
2020
|
2019
|
|
|
Assets
held for lease
|
$
32,650,000
|
$
-
|
$
-
|
$
32,650,000
|
$
-
|
$
-
|
$
-
|
$
-
|
$
7,633,300
|
$
-
|
|
Assets
held for sale
|
38,041,600
|
-
|
-
|
38,041,600
|
25,880,700
|
-
|
$
-
|
25,880,700
|
14,111,900
|
25,656,100
|
|
Total
|
$
70,691,600
|
$
-
|
$
-
|
$
70,691,600
|
$
25,880,700
|
$
-
|
$
-
|
$
25,880,700
|
$
21,745,200
|
$
25,656,100
|
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 and Drake Loan,
notes payable under special-purpose financing, its derivative
termination liability 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(
t)
. 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 bore floating rates
of interest that reset periodically to a market benchmark rate plus
a credit margin. The same is true of the Drake Loan. The Company
believes the effective interest rate under the MUFG Credit Facility
approximated then current market rates for such indebtedness at
December 31, 2019 and, under the Drake Loan, approximates current
market rates, and therefore that the outstanding principal and
accrued interest of $89,296,000 and $84,460,300 at
December 31
, 2020 and December 31, 2019,
respectively, approximate their fair values on such dates. The fair
value of the Company’s outstanding balance of its MUFG Credit
Facility and MUFG Loan are categorized as a Level 3 input under the
GAAP fair value hierarchy.
Before
their repayment in February 2019 in connection with the Nord 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
Nord 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 $14,150,300 and $31,003,800 approximate their fair
values at
December 31
, 2020 and
December 31, 2019, respectively. Such fair value is categorized as
a Level 3 input under the GAAP fair value hierarchy.
As discussed in Note 2(b), as a result of payment delinquencies by
the Company’s two customers of aircraft subject to sales-type
finance leases, the Company recorded a bad debt allowance of
$1,503,000 during 2020. The finance lease receivables are valued at
their collateral value under the practical expedient
alternative.
There
were no transfers in or out of assets or liabilities measured at
fair value under Level 3 during 2020 or 2019.
10. 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.
11. Income Taxes
The items comprising the income tax provision are as
follows:
|
|
For the
Years Ended December 31,
|
|
|
|
2020
|
2019
|
|
Current
tax provision:
|
|
|
|
Federal
|
$
(11,400
)
|
$
(34,100
)
|
|
State
|
4,000
|
3,300
|
|
Foreign
|
(20,100
)
|
418,200
|
|
Current
tax provision
|
(27,500
)
|
387,400
|
|
Deferred
tax benefit:
|
|
|
|
Federal
|
(9,589,200
)
|
(4,553,700
)
|
|
State
|
(90,700
)
|
(78,800
)
|
|
Foreign
|
(1,351,100
)
|
(262,700
)
|
|
Valuation
allowance
|
7,493,800
|
-
|
|
Deferred tax
benefit
|
(3,537,200
)
|
(4,895,200
)
|
|
Total
income tax benefit
|
$
(3,564,700
)
|
$
(4,507,800
)
|
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,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Income
tax benefit at statutory federal income tax rate
|
$
(9,619,800
)
|
$
(4,444,900
)
|
|
State
tax benefit, net of federal benefit
|
(67,200
)
|
(75,900
)
|
|
Foreign
tax expenses
|
(1,375,000
)
|
-
|
|
Non-deductible
management and acquisition fees
|
-
|
7,600
|
|
Other
non-deductible expenses
|
3,500
|
5,400
|
|
Valuation
allowance
|
7,493,800
|
-
|
|
Total
income tax benefit
|
$
(3,564,700
)
|
$
(4,507,800
)
|
Temporary differences and carry-forwards that give rise to a
significant portion of deferred tax assets and liabilities as of
December 31, 2020 and 2019 were as follows:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Current and prior
year tax losses
|
$
9,616,600
|
$
4,980,100
|
|
Deferred interest
expense
|
3,631,600
|
269,800
|
|
Foreign tax
credit
|
573,900
|
758,400
|
|
Maintenance
reserves
|
390,500
|
470,000
|
|
Deferred derivative
losses
|
81,100
|
452,100
|
|
Deferred
maintenance, bad debt allowance and other
|
59,900
|
19,800
|
|
Alternative minimum
tax credit
|
-
|
11,400
|
|
Total
deferred tax assets
|
14,353,600
|
6,961,600
|
|
Valuation
allowance
|
(7,493,800
)
|
-
|
|
Deferred
tax assets, net of valuation allowance
|
6,859,800
|
6,961,600
|
|
Deferred tax
liabilities:
|
|
|
|
Accumulated
depreciation on aircraft and aircraft engines
|
(5,654,700
)
|
(8,666,700
)
|
|
Deferred
income
|
(58,000
)
|
(175,600
)
|
|
Leasehold
interest
|
3,800
|
(131,400
)
|
|
Total deferred tax
liabilities
|
(5,708,900
)
|
(8,973,700
)
|
|
Net deferred tax
assets/(liabilities), net of valuation allowance and deferred tax
liabilities
|
$
1,150,900
|
$
(2,012,100
)
|
|
|
December
31,
|
|
|
Reported
as:
|
2020
|
2019
|
|
Deferred
tax asset
|
$
8,644,700
|
$
517,700
|
|
Deferred
income taxes (liability)
|
-
|
(2,529,800
)
|
|
Valuation
allowance
|
(7,493,800
)
|
-
|
|
Net
deferred tax assets/(liabilities)
|
$
1,150,900
|
$
(2,012,100
)
|
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, 2020 and December 31, 2019.
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 March of 2020, the
Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) became law. The CARES Act included tax
provisions that accelerated the ability to receive refunds of AMT
credits from prior year, which allowed the Company to accelerate
$11,400 of the refund of such credit into its 2019 tax
return.
The
CARES Act included provisions under which the amount of deductible
interest increased from 30% to 50% of adjusted taxable income for
the 2019 and 2020 years. 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, 2020 and 2019, of $16.8 million and $0, respectively.
The cumulative deferred interest expense of $16.8 million may be
carried forward indefinitely until the Company has excess positive
adjusted taxable income against which it can deduct the deferred
interest balance.
The
CARES Act also included provisions under which net operating losses
from 2018, 2019 and 2020 can be carried back for five years,
modifying the law that had previously not permitted any carryback.
The current year federal operating loss carryovers of approximately
$36.7 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 $20.7 million federal net operating loss
carryovers may be carried forward indefinitely. The current year
state operating loss carryovers of approximately $392,400 will be
available to offset taxable income in the two preceding years and
in future years through 2040. As discussed below, the Company
does not expect to utilize the net operating loss carryovers
remaining at December 31, 2020 in future years.
During
the year ended December 31, 2020, the Company had pre-tax loss from
domestic sources of approximately $6.8 million and pre-tax loss
from foreign sources of approximately $39 million. 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
for the year ended December 31, 2019. The Company’s foreign
tax credit carryover will be available to offset federal tax
expense in future years through 2029.
As of
December 31, 2020, the Company has a valuation allowance of
approximately $7.5 million against its net domestic deferred tax
assets not supported by either future taxable income or
availability of future reversals of existing taxable temporary
differences, for which realization cannot be considered more likely
than not at this time. In assessing the need for a valuation
allowance, the Company considered all positive and negative
evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning
strategies, and past financial performance. The worldwide pandemic
and its impact on the travel industry has created uncertainty on
the Company’s future profitability. Recent negative operating
results and default on its credit facility has caused the Company
to be in a cumulative loss position as of December 31, 2020. The
uncertain impact of the coronavirus on the travel industry recovery
and recent declines in aircraft values has contributed to near-term
industry uncertainty.
The net deferred
tax asset of $1.15 million at December 31, 2020, represents
expected future refunds for taxes previously paid and recoverable
from net operating loss carrybacks of foreign subsidiaries that are
not parties to the U.S. bankruptcy proceedings.
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 2016. At December 31, 2020, the
Company had a balance of accrued tax, penalties and interest
totaling $74,000 related to unrecognized tax benefits on its
non-U.S. operations included in the Company’s accounts and
taxes payable. The Company anticipates decreases of approximately
$4,000 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,
|
||
|
|
2020
|
2019
|
|
Balance at January
1
|
$
94,400
|
$
85,400
|
|
Additions for prior
years’ tax positions
|
5,100
|
9,000
|
|
Reductions from
expiration of statute of limitations
|
(25,500
)
|
-
|
|
Balance at December
31
|
$
74,000
|
$
94,400
|
The
Company accounts for interest related to uncertain tax positions as
interest expense, and for income tax penalties as tax
expense.
12
. Subsequent Events
(a) Sale of Special-purpose Subsidiary
On
March 16, 2021, the Company sold its 100% percent membership
interest (the “LLC Interest”) in ACY E-175 LLC, which
owned three Embraer E-175 aircraft (the “Leased
Aircraft”) on lease to a U.S. regional airline. ACY E-175 LLC
was the sole obligor under refinancing debt for the Leased Aircraft
owed to Nord. The Nord debt was non-recourse to the Company, but
was secured by a pledge of the LLC Interest, as well as a lien on
the assets of ACY E-175 LLC, including the Leased Aircraft.
The sale was consummated pursuant to a Membership Interest Purchase
Agreement (the “Sale Agreement”), between the Company
and an affiliate of Drake, Drake Jet Leasing 10 LLC, a Delaware
limited liability company (“Buyer”), and the purchase
price for the LLC Interest was $26,500,000, paid in the form of the
Buyer’s assumption of the entire debt of approximately $13.3
million owed to Nord by ACY E-175 LLC, and a cash payment by the
Buyer to the Company of approximately $13.1 million. The
purchase price was determined by negotiations between the Company
and the Buyer following a Request for Proposal bid solicitation for
the assets. The transfer of the LLC Interest was
consented to by Nord, as secured lender, and Nord released the
Company from any remaining guaranty obligations under Nord’s
refinancing debt and interest swap obligations owed by ACY E-175
LLC, pursuant to a Borrower Parent Transfer Agreement between the
Company, LLC, Buyer, Nord, Norddeutsche Landesbank Girozentrale, as
swap counterparty, and Wilmington Trust Company, as security
trustee.
Pursuant
to a Side Letter No. 1 among the Company, Buyer and UMB Bank, N.A.,
the security agent, the Company applied approximately $11.0 million
of the LLC Interest cash sales proceeds toward repayment of the
Company’s indebtedness to Drake under the Drake Loan
Agreement, and the Company retained the remaining $2.1 million of
cash sales proceeds.
(b) Second Paycheck Protection Program Loan
In February 2021,
the Company was granted a second PPP Loan (“Second PPP
Loan”) (collectively, with the initial PPP Loan, the
“PPP Loans”) in the aggregate amount of $170,002. The
Second PPP Loan, in the form of a Note dated February 11, 2021,
matures on February 11, 2026 and bears interest at a rate of 1.00%
per annum, payable in monthly payments commencing 30 days after the
Small Business Administration has made its final determination that
any part of the loan will not be forgiven.
The PPP Loans may
be prepaid by the PPP Borrower at any time prior to maturity with
no prepayment penalties. Funds from the PPP Loans may only be used
for payroll costs and any payments of certain covered interest,
lease and utility payments. The Company intends to use the entire
PPP Loans for qualifying expenses. Under the terms of the PPP,
certain amounts of the PPP Loans may be forgiven if they are used
for qualifying expenses as described in the CARES Act. Although the
Company expects that all or a significant portion of the PPP Loans
will be forgiven, no assurance can be provided that the Company
will obtain such forgiveness.
(c) Chapter 11 Bankruptcy Filing
In
connection with the impending maturity of the Drake Indebtedness
and the continuing economic impact from COVID-19, on March 29, 2021
(the "Petition Date"), the Company and certain of its subsidiaries
in the U.S. (collectively the "Debtors" and the "Debtors-
in-Possession") filed voluntary petitions for relief (collectively,
the "Petitions") under Chapter 11 of Title 11 ("Chapter 11") of the
U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The
Chapter 11 cases (the "Chapter 11 Case") are being jointly
administered under the caption
In re: AeroCentury Corp., et al., Case No.
21-10636
.
The
Bankruptcy Court has approved motions filed by the Debtors that
were designed primarily to mitigate the impact of the Chapter 11
Case on the Company’s operations, customers and employees.
The Debtors are authorized to conduct their business activities in
the ordinary course, and pursuant to orders entered by the
Bankruptcy Court, the Debtors are authorized to, among other things
and subject to the terms and conditions of such orders: (i) pay
employees’ wages and related obligations; (ii) pay certain
taxes; (iii) continue to maintain certain customer programs; (iv)
maintain their insurance program; (v) use cash collateral on an
interim basis; and (vi) continue their cash management
system.
The Debtors are currently operating as debtors-in-possession under
the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court. In general, as debtors-in-possession under the
Bankruptcy Code, the Debtors are authorized to continue to operate
as an ongoing business but may not engage in transactions outside
the ordinary course of business without the prior approval of the
Bankruptcy Court.
Subject to certain specific exceptions under the Bankruptcy Code,
the Petitions automatically stayed most judicial or administrative
actions against the Debtors and efforts by creditors to collect on
or otherwise exercise rights or remedies with respect to
obligations of the Debtors incurred prior to the Petition Date
("Pre-petition"). Absent an order from the Bankruptcy Court,
substantially all of the Debtors’ Pre-petition liabilities
are subject to settlement under the Bankruptcy
Code.
None.
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.
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, 2020. Based on this evaluation, the CEO
and CFO concluded that the Company’s Disclosure Controls were
not effective as of December 31, 2020 due to the material weakness
described below.
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
previously identified a material weakness in its internal control
over financial reporting (“Internal Control”) relating
to its tax review control for complex transactions. 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. Management is in the
process of enhancing its tax review control related to unusual
transactions the Company may encounter but, that control has not
operated for a sufficient time to determine if the control is
effective as of December 31, 2020.
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, 2020 due
to the material weakness described above
.
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, 2020
that
has materially affected, or is reasonably likely to materially
affect, the Company’s Internal Control.
None.
Board
of Directors
Ms. Toni M.
Perazzo
,
age 74. Ms.
Perazzo is a member of the Executive Committee of the Board of
Directors and has served on the Board since the Company’s
inception in 1997. In June 2020, she was elected as Chair of the
Board of Directors. Prior to her retirement in December 2019, she
was the Company’s Chief Financial Officer, Treasurer, Senior
Vice President-Finance, and Secretary and also President and Chief
Financial Officer of JetFleet Management Corp. (“JMC”),
a subsidiary of the Company, where she had been an officer in
various capacities since 1997. Her prior positions include
Assistant Vice President for a savings and loan company, controller
of an oil and gas syndicator and a senior auditor with Arthur Young
& Co., Certified Public Accountants. She received her
Bachelor’s Degree from the University of California at
Berkeley, and her Master’s Degree in Business Administration
from the University of Southern California. Ms. Perazzo is a
certified public accountant and member of the California Society of
Certified Public Accountants and the American Institute of
Certified Public Accountants. The Board of Directors concluded that
Ms. Perazzo should serve as a director of the Company because of
her knowledge of the Company’s business, history,
capitalization structure and finances, her accounting and audit
experience, as well as her many years of experience with
JMC.
Mr. Michael G.
Magnusson
,
age 63.
Since 2016, Mr. Magnusson has been the President and a director of
the Company and the Managing Director of JMC. Prior to joining the
Company and JMC, he was a principal of SAL Solutions, an aircraft
leasing consulting firm that he co-founded in 2015. Before that he
was with Saab Aircraft, which he joined in 1982 and where he held
positions of increasing responsibility culminating in tenure as
Chief Executive Officer of Saab Aircraft Leasing from 2001 until
2015. Mr. Magnusson received a Master’s Degree in
Aeronautical Engineering in 1982 from KTH Royal Institute of
Technology in Stockholm, Sweden. The Board of Directors concluded
that Mr. Magnusson should serve as a director of the Company
because of his knowledge of the aircraft leasing
industry.
Mr. Roy E. Hahn
,
age
69. Mr. Hahn is the Chair of the Audit Committee and a member of
the Compensation Committee and has served on the Board since 2007.
Mr. Hahn is currently
Managing
Director of Marbridge Group, LLC, an alternative investment
management firm he founded in 2004. Prior to his founding of
Marbridge Group, LLC, he was Managing Director of Chenery
Associates, an investment management firm. Mr. Hahn was a Director
at Coopers & Lybrand from 1987 to 1988, and a tax partner with
that firm from 1989 to 2003. Prior to Coopers & Lybrand, he was
a partner at Arthur Young & Co.
His educational background includes a Bachelor's
Degree in Accounting from San Francisco State University. Mr. Hahn
is a certified public accountant and a member of the American
Institute of Certified Public Accountants and the California
Society of Certified Public Accountants.
The
Board of Directors concluded that Mr. Hahn should serve as a
director of the Company because of his knowledge of the
Company’s business and history, his status as an “audit
committee financial expert,” and his overall expertise in
accounting and finance principles and international finance
transactions.
Mr. Evan M.
Wallach
,
age 66. Mr.
Wallach is President and Chief Executive Officer of Global
Airfinance Services, Inc., an aviation consulting business he
founded in 1998 and returned to in June 2012. Mr. Wallach was the
Chair of the Board of Directors of the Company from 2016 until June
2020, and is a member of the Audit Committee, the Compensation
Committee, and the Executive Committee. He has served on the Board
since 1997. From December 2009 until June 2012, Mr. Wallach was
Managing Director, Aviation/Transportation Markets at Jefferies
& Company, Inc. From 2005 to 2009, Mr. Wallach was a Managing
Director, Airline/Aircraft Securities Sales at Guggenheim Capital
Markets, LLC, a securities broker/dealer. From 2001 to 2005, he
served as Managing Director, Fixed Income Institutional Sales, at
Piper Jaffray LLC, and from 1998 to 2001 he served as Vice
President, Finance of C-S Aviation Inc., an aviation consulting
firm. Mr. Wallach has specialized in aircraft and airline financing
for over thirty years, having held senior level positions with The
CIT Group, Bankers Trust Company, Kendall Capital Partners, Drexel
Burnham Lambert, and American Express Aircraft Leasing. Mr. Wallach
received a Bachelor’s Degree in Political Science from State
University of New York at Stony Brook and a Master’s Degree
in Business Administration from the University of Michigan. The
Board of Directors concluded that Mr. Wallach should serve as a
director of the Company because of his knowledge of the
Company’s business and history and his expertise in aircraft
finance.
Mr. David P.
Wilson
,
age 66. Mr.
Wilson has been a member of the Company’s Board of Directors
and the Audit Committee since February 2015. He also serves as
Chair of the Compensation Committee. Mr. Wilson is currently a
member of the Board of Directors of Einn Volant Aircraft Leasing
LLC. Mr. Wilson retired in 2014 from General Electric Capital
Aviation Services (“GECAS”), where he was most recently
a Senior Vice President, concentrating on asset sales and aircraft
securitizations to a worldwide investor base. Prior to his 21-year
career at GECAS, Mr. Wilson spent 8 years at Citicorp's Equipment
Finance and Leasing Division as a product specialist in aircraft
finance marketing and working on several airline bankruptcies and
restructurings. Prior to joining Citicorp in 1985, he held various
financial positions at De Lage Landen (formerly Master Lease Corp.)
and Air Products and Chemicals at their headquarters. Mr. Wilson
started his career at Ernst & Ernst in 1977. He received his
Bachelor's Degree in Accounting and Finance from Boston College in
1977 and a MS/MBA in Finance from Drexel University in Philadelphia
in 1983. The Board of Directors concluded that Mr. Wilson should
serve as a director of the Company because of his knowledge of the
aircraft leasing and finance industry.
Executive
Officers
Mr. Michael G.
Magnusson
, age 63, President
& CEO
. See above listing under “Board of
Directors.”
Mr. Harold M. Lyons,
age 62, Senior Vice President,
Finance & CFO
. Mr. Lyons was promoted to the executive
officer position of Sr. Vice President, Finance on January 1, 2020.
Prior to that, while serving as Vice President, Finance since 2003,
he was responsible for overseeing tax accounting and tax analysis
as well as Sarbanes-Oxley internal controls compliance review for
the Company. Mr. Lyons has been employed by JMC and JMC affiliated
companies since 1992. Mr. Lyons was previously a Manager in the Tax
Department of Coopers & Lybrand, Certified Public Accountants
and, before that, Mr. Lyons was a Manager in the Tax Department of
Arthur Young & Co., Certified Public Accountants. He received a
Bachelor’s Degree in Business Administration (specializing in
Accounting and Applied Economics) and a Master’s Degree in
Business Administration (specializing in finance and management
science) from the University of California, Berkeley. Mr. Lyons is
a certified public accountant and is a member of the American
Institute of Certified Public Accountants (and a member of the Tax
Section) and of the California Society of Public
Accountants.
DIRECTOR COMPENSATION TABLE
The table below
provides the compensation of the Company’s non-employee
directors for the fiscal year ended December 31, 2020. The
compensation of the Company’s directors who also serve as
executive officers of the Company is set forth under
“Executive Compensation—Summary Compensation
Table” below.
|
Name
(1)
|
Fees
Earned or Paid in Cash ($)
|
Total
($)
|
|
Roy E.
Hahn
|
$
75,500
|
$
75,500
|
|
Toni M.
Perazzo
|
81,500
|
81,500
|
|
Evan M.
Wallach
|
87,500
|
87,500
|
|
David P.
Wilson
|
75,500
|
75,500
|
(1) Michael G. Magnusson was an officer of the Company and JMC
during 2020 and therefore did not receive compensation for service
as a member of the Company’s Board of Directors or any
committee thereof, in accordance with the Company’s director
compensation policy.
Board Meetings and Committees.
The Board
of Directors of the Company held 24 full board meetings during the
fiscal year ended December 31, 2020. During that year, no incumbent
director attended fewer than 75% of the meetings of the Board of
Directors and its committees on which he or she served that were
held during the period in which he or she was a director. The
Company has an Audit Committee, a Compensation Committee and an
Executive Committee of the Board of Directors, each of which is
discussed below.
Audit Committee.
The Audit Committee
operates under a charter adopted and approved by the Board of
Directors, which is available on the Company’s website at
http://www.aerocentury.com/audit.php. The Audit Committee meets
with the Company's management and its independent registered public
accounting firm to review internal financial information, audit
plans and results, and financial reporting procedures. This
committee currently consists of Roy E. Hahn (Chair), Evan M.
Wallach and David P. Wilson. The Board has determined that Messrs.
Hahn, Wallach, and Wilson are independent within the meaning of
Sections 803A and 803B(2) of the NYSE American Company
Guide.
The Board of
Directors has determined that at least one member of the Audit
Committee, Mr. Hahn, is an “audit committee financial
expert” within the meaning of Item 407(d)(5) of Regulation
S-K promulgated by the SEC. In the course of his career, as
described under “Current Board of Directors” above, Mr.
Hahn acquired: (i) an understanding of generally accepted
accounting principles and financial statements, (ii) the ability to
assess the general application of such principles in connection
with the accounting for estimates, accruals and reserves, (iii)
experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised
by the Company’s financial statements, (iv) an understanding
of internal control over financial reporting, and (v) an
understanding of audit committee functions.
The Audit Committee
held nine meetings during the fiscal year ended December 31,
2020.
Compensation Committee
. The
Compensation Committee assists the Board in discharging its
responsibilities relating to compensation of the Company’s
directors and officers and complying with disclosure requirements
regarding such compensation, if and when required and in accordance
with applicable SEC and stock exchange rules and regulations. The
Compensation Committee operates under a charter adopted and
approved by the Board of Directors, which is available on the
Company’s
website at
http://www.aerocentury.com/compensation_committee.php
.
The Compensation Committee currently consists of
David P.
Wilson (Chair), Roy E. Hahn, and Evan M. Wallach. The Board has
determined that Messrs. Wilson, Hahn, and Wallach are independent
within the meaning of Sections 803A and 805(c) of the NYSE American
Company Guide and Rule 10C-1(b)(1) under the Securities Exchange
Act of 1934. The Compensation Committee held five meetings during
the fiscal year ended December 31, 2020.
Executive Committee
. The Executive
Committee has the authority to acquire, dispose of and finance
investments for the Company and execute contracts and agreements,
including those related to the borrowing of money by the Company,
and generally exercises all other powers of the Board of Directors
except for those which require action by all of the directors or
the independent directors under the Certificate of Incorporation or
the Bylaws of the Company, or under applicable law or stock
exchange requirements. The Executive Committee currently consists
of only two directors, Toni M. Perazzo and Evan M. Wallach, and did
not hold any meetings during the fiscal year ended December 31,
2020.
Delinquent Section 16
Filings.
Section 16(a) of the Exchange Act requires the
Company's directors and officers and persons who own more than ten
percent of a registered class of the Company's equity securities to
file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely upon a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, the Company
believes the Company's officers, directors and greater than ten
percent beneficial owners complied with all Section 16(a) filing
requirements applicable to them in the fiscal year ended December
31, 2020.
Code of
Ethics.
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.
The
following table reports the total compensation for 2020 and 2019
paid by JMC and/or the Company to (1) all individuals serving as
the Company’s principal executive officer during 2020
(consisting solely of the Company’s President, Mr.
Magnusson), and (2) all other individuals who served as executive
officers of the Company at any time in 2020 (consisting solely of
the Company’s CFO, Treasurer, Senior VP - Finance &
Secretary, Mr. Lyons in 2020). These two individuals are referred
to as the Company’s “named executive
officers.”
SUMMARY COMPENSATION TABLE
|
Name
and Position
|
Year
|
Salary($)
|
Bonus($)
|
All Other Compensation
($)(1)
|
Total($)
|
|
Michael
G. Magnusson, President of the Company; Managing Director of
JMC
|
2020
|
375,000
|
18,188
|
3,732
|
396,920
|
|
|
2019
|
366,462
|
75,000(3)
|
3,720
|
445,182
|
|
Harold
M. Lyons, CFO, Treasurer, Senior VP - Finance & Secretary of
the Company; SVP Finance and CFO of JMC(2)
|
2020
|
225,000
|
11,986
|
3,732
|
240,718
|
(1) Consists of a matching contribution under employees’
401(k) plan and life insurance premiums paid by the Company for
each employee.
(2) Mr. Lyons was appointed to this position on January 1,
2020
(3) Amount includes bonus stipulated in employment
agreement.
Narrative Disclosure to Summary Compensation Table
The
compensation paid to our named executive officers consists solely
of base salary plus cash bonus payments, if any. No named executive
officer of the Company receives equity compensation.
In
April of 2019, the Board approved a Bonus Plan for which all
employees of the Company were eligible. A bonus pool of $294,500
was established as the maximum potential bonus pool available. The
amount to be actually awarded under the Plan was determined based
on the Company’s 2019 performance against four target metrics
for Company revenue, income, asset on-lease percentage and volume
of acquisitions, and a discretionary piece, each weighted at 20%.
The metric for revenue growth was fully met and the metric for
on-lease percentage of assets surpassed the minimum floor but did
not reach the target metric for 2019, and no discretionary amount
was added to the pool. Thus, the total bonus pool for 2019 was
approximately 24% of the maximum pool bonus amount, or $71,416. The
bonus pool allocated to each employee participated in the bonus
pool based on a predetermined percentage set by management and
approved by the Compensation Committee. Mr. Magnusson and Mr. Lyons
were paid bonuses under this plan in February of 2020, in the
amounts of $18,188 and $11,986, respectively.
Role of Compensation Consultant
. The Compensation Committee
engaged McLagan, an Aon Company, in December 2017 to perform a
benchmarking study of the executive officer and director
compensation practices of the Company’s peers. The
Compensation Committee did not engage McLagan for its determination
of the compensation of its named executive officers in 2020;
rather, in 2020 and
going forward, the
Compensation Committee, which consists entirely of non-employee
directors, will exclusively determine annual compensation for the
Board of Directors and named executive officers, as well as
incentive targets and long
‑
term
incentive compensation for the named executive officers and other
employees, and, when and if other incentive or other bonus plans
are adopted, any bonus or other benefits granted to the named
executive officers.
The
Compensation Committee considered benchmarking information received
from McLagan, including compensation data from a sampling of
equipment and aircraft leasing companies, to review its executive
compensation practices for fiscal year 2020.
In determining the level of salary and incentive
compensation, the Compensation Committee will not seek to
mechanically tie compensation levels to a formula based upon the
chosen sample of companies reviewed or employ any other formulaic
process in making compensation decisions. Rather, the Compensation
Committee intends to use its subjective judgment based upon a
review of all information, including an annual review for each
officer of his or her level of responsibility, contributions to the
Company’s financial results, adherence to the Company’s
business plan, and the Company’s overall performance. The
Compensation Committee makes a generalized assessment of these
factors and this information is not weighted in any specific
manner.
In 2019, using benchmarking information received from McLagan
including compensation data from a sampling of equipment and
aircraft leasing companies, the Compensation Committee reviewed
named executive officer compensation paid by the Company, and based
on the recommendations of the Compensation Committee, the current
named executive officer compensation was deemed
appropriate.
Named Executive Officer Employment Agreements.
Michael G. Magnusson.
On May 9, 2019, AeroCentury Corp. (the
“Company”) entered into an Employment Agreement
(“Agreement”) with Michael G. Magnusson, its current
President and Chief Executive Officer. The Agreement supersedes and
replaces Mr. Magnusson’s prior employment agreement with
JetFleet Management Corp. (“JMC”), the management
company for the Company. JMC became a wholly-owned second tier
subsidiary of the Company on October 1, 2018, when the Company
acquired JetFleet Holding Corp., the parent corporation of JMC.
Following is a summary of the terms of the Agreement with Mr.
Magnusson, which does not purport to be complete and is qualified
in its entirety by reference to the complete text of the Employment
Agreement, a copy of which is filed as Exhibit 10.1 to the Company
Form 8-K report filed with the SEC on May 13, 2019:
|
Term:
|
The
initial term of the Agreement expires on December 31, 2021, and is
automatically renewable for additional one-year renewal terms
unless one party gives the other at least 90 days’ notice
prior to scheduled expiration of the Agreement that it will not be
renewed.
|
|
Termination:
|
Termination
. The Company may terminate the Agreement at any
time for “Cause,” defined as (1) a material breach by
Mr. Magnusson of his duties and responsibilities as set forth under
this Agreement, resulting from other than Mr. Magnusson's complete
or partial incapacity due to Disability (2) gross misconduct, (3) a
breach of the Agreement, the Company’s employment standards
of conduct or employee manual, (4) neglect of duties under the
Agreement, or (5) violation of a federal or state law or regulation
applicable to the business of the Company. The Company may
terminate Mr. Magnusson's employment for Disability, defined as
“any physical or mental incapacitation that results in Mr.
Magnusson's inability to perform his duties and responsibilities
for the Company for a period in excess of 90 consecutive days or
for more than 120 days during any consecutive 12 month period. Mr.
Magnusson may terminate his employment with the Company for Good
Reason, defined as one of the following events: (i) a material and
adverse change in Mr. Magnusson's position, duties,
responsibilities, or status; (ii) a material reduction in Mr.
Magnusson's salary or benefits then in effect, other than a
reduction comparable to reductions generally applicable to
similarly situated employees of the Company or (iii) the Company
materially breaches this Agreement.
|
|
Annual Compensation/Signing Bonus:
|
Mr.
Magnusson’s annual base salary for Fiscal Year 2019 is
$375,000, with subsequent year base salary rates to be determined
at the sole discretion of the Compensation Committee of the Board
of Directors, but in no event less than $375,000. Mr. Magnusson
received a $75,000 bonus upon signing of the
Agreement.
|
|
Bonus Compensation:
|
Mr.
Magnusson shall be entitled to participate in all executive cash
bonus/long term incentive compensation plan approved by the Board
of Directors for executive officers and key executives of the
Company, when and if established by the Compensation Committee, as
determined by good faith negotiation with the Compensation
Committee.
|
|
Severance:
|
In the
event the Company terminates the Agreement for any reason other
than Cause or Disability, or in the event that Mr. Magnusson
terminates the Agreement for Good Reason, Mr. Magnusson will be
entitled to severance payments equal to his then effective base
salary payable on a semi-monthly basis until the date that is the
earlier of (i) the scheduled expiration date of the Employment
Agreement or (ii) twenty-four months after such event of
termination. If Mr. Magnusson commences subsequent employment
during such payment period, the payment amounts during such period
shall be reduced by an amount equal to 75% of the base compensation
received by Mr. Magnusson from his successor employer during the
overlapping period of the severance payment period and Mr.
Magnusson’s new employment.
|
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth information regarding the beneficial
ownership of the Company's common stock as of April 15, 2021, by:
(i) each person or entity that is known to the Company to own
beneficially more than five percent of the outstanding shares of
the Company's common stock; (ii) each director and nominee of the
Company; (iii) each named executive officer; and (iv) all directors
and executive officers of the Company as a group.
|
Name
|
No. of Shares (1)
|
Percentage of Common Stock
(2)
|
|
Michael G. Magnusson,
Director,
President
|
15,000
|
*
|
|
Harold M. Lyons,
CFO, Treasurer, Sr.
Vice President, Finance and Secretary
|
3,946
|
*
|
|
Toni M. Perazzo,
Director, Principal
Stockholder (3)
|
327,374
|
21.2
%
|
|
Evan M. Wallach
, Director
|
1,770
|
*
|
|
Roy E. Hahn,
Director
|
0
|
*
|
|
David P. Wilson
, Director
|
1,215
|
*
|
|
All
directors and executive officers as a group
|
349,305
|
22.6
%
|
* Less
than 1%
(1)
Except as indicated in
the footnotes to this table, the stockholders named in the table
are known to the Company to have sole voting and investment power
with respect to all shares of common stock shown as beneficially
owned by them, subject to community property laws where applicable.
Beneficial ownership of shares is determined in accordance with the
rules of the SEC and generally includes any shares over which a
person exercises sole or shared voting or investment power, or of
which a person has the right to acquire ownership within 60 days
after March 15, 2021.
(2)
For purposes of
calculating percentages, 1,545,884 shares, consisting of all of the
outstanding shares of common stock (excluding Company treasury
stock) outstanding as of March 15, 2021, was
used.
(3)
Includes (i) 16,007
shares of common stock held directly by Ms. Perazzo or as
beneficiary of a 401(k) custodial account, (ii) 152,433 shares held
by an irrevocable trust of which Ms. Perazzo is a beneficial owner;
(iii) 152,434 shares held by an irrevocable trust of which a child
of Ms. Perazzo is the beneficiary; and (iv) 6,500 shares held in a
joint tenancy account with such child. Ms. Perazzo’s mailing
address is c/o AeroCentury Corp., 1440 Chapin Avenue Suite 310,
Burlingame, California 94010.
Board Independence
. A majority of the Board of Directors of
the Company, consisting of Messrs. Hahn, Wallach, and Wilson, will
be independent directors, as defined in Section 803A of the NYSE
American Company Guide. Mr. Magnusson and Ms.
Perazzo are not considered independent directors
due to their employment by the Company within the previous three
years.
Item
14. Principal Accountant Fees and Services.
Audit Fees.
The aggregate fees accrued by the Company as
payable to BDO USA, LLP (the “Auditor”) for
professional services rendered for the audit of the Company's
financial statements for the fiscal year ended December 31, 2020,
and for the review of the financial statements included in the
Company's Forms 10-Q during the 2020 fiscal year were $374,950. The
Company did not pay the Auditor for any Sarbanes-Oxley internal
controls compliance review.
The
aggregate fees accrued by the Company as payable to the Auditor for
professional services rendered for the audit of the Company's
financial statements for the fiscal year ended December 31, 2019,
and for the review of the financial statements included in the
Company's Forms 10-Q during the 2019 fiscal year were $400,550. The
Company did not pay the Auditor for any Sarbanes-Oxley internal
controls compliance review.
Audit-Related Fees.
The Company made no payments to the
Auditor for assurance or related services that are reasonably
related to the performance of the audit or review of the
Company’s financial statements and are not reported under
“Audit Fees” in the fiscal years ended December 31,
2020 and 2019.
Tax Fees.
The Company made no payments to the Auditor for
tax-related services, including tax compliance, tax advice, tax
planning and preparation of returns, in the fiscal years ended
December 31, 2020 and 2019.
All Other Fees
.
No
other fees were paid to the Auditor in the fiscal years ended
December 31, 2020 and 2019.
Audit Committee Pre-Approval Policies and
Procedures
. The
retainer agreements between the Company and the Auditor setting
forth the terms and conditions of and estimated fees to be paid to
the Auditor for audit and tax return preparation services were
pre-approved by the Audit Committee at the beginning of the
respective engagements. Pursuant to its charter, the Audit
Committee’s policy is to pre-approve all audit and non-audit
services provided by the Auditor, except as may be permitted by
applicable law. These services may include audit services,
audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category
of services and is generally subject to a specific budget. The
Audit Committee has delegated pre-approval authority to its Chair
when expedition of services is necessary. The Auditor and
management are required to periodically report to the full Audit
Committee regarding the extent of services provided by the Auditor
in accordance with this pre-approval, and the fees for the services
performed to date. None of the services rendered by the Auditor in
2019 or 2020 were rendered pursuant to the
de minimis
exception established by the
SEC, and all such services were pre-approved by the Audit
Committee.
(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, 2020 and 2019
Consolidated
Statements of Operations for the Years Ended December 31, 2020 and
2019
Consolidated
Statements of Comprehensive Loss for the Years Ended December 31,
2020 and 2019
Consolidated
Statements of Stockholders’ Equity/(Deficit) for the Years
Ended December 31, 2020 and 2019
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2020 and
2019
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§
|
Agreement
and Plan of Merger, dated as of October 26, 2017, by and among the
AeroCentury Corp., Falcon Landing, Inc., JHC Holding Corp., and
Fortis Advisors LLC, incorporated herein by reference to Exhibit
2.1 to the registrant’s Report on Form 8-K filed with the SEC
on October 30, 2017
|
|
3.1.1^
|
Certificate
of Incorporation of AeroCentury Corp., incorporated by reference to
Exhibit 3.08 to the registrant’s registration statement on
Form S-4/A filed with the SEC on July 24, 1997 (SEC File No.
333-24743, Film No. 97644740)
|
|
3.1.2^
|
Form of
Certificate of Amendment of Certificate of Incorporation of
AeroCentury Corp., incorporated by reference to Exhibit 3.07 to the
registrant’s registration statement on Form S-4/A filed with
the SEC on June 10, 1997 (SEC File No. 333-24743, Film No.
97622056)
|
|
3.1.3
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
of AeroCentury Corp., dated May 6, 2008, incorporated by reference
to Exhibit 99.1 to the registrant’s Report on Form 8-K filed
with the SEC on May 7, 2008
|
|
3.1.4
|
Amended
and Restated Certificate of Designation of AeroCentury Corp. dated
December 1, 2009, incorporated by reference to Exhibit 3.1 to the
registrant’s Report on Form 8-K filed with the SEC on
December 7, 2009
|
|
3.2
|
Amended
and Restated Bylaws of AeroCentury Corp., incorporated herein by
reference to Exhibit 3.1 of the registrant’s Report on Form
8-K filed with the SEC on November 22, 2016
|
|
4.1
|
Reference
is made to Exhibit 3.1.4.
|
|
4.2
|
Description
of Registrant’s Securities, incorporated by reference to
Exhibit 4.2 to the registrant’s Annual Report on Form 10-K
filed with the SEC on March 30, 2020.
|
|
10.1+
|
Employment
Agreement dated May 9. 2019 between Michael G. Magnusson,
AeroCentury Corp. and JetFleet Management Corp., incorporated by
reference to Exhibit 10.1 to the registrant’s Report on Form
8-K filed with the SEC on May 13, 2019
|
|
10.2
|
Fourth
Amended and Restated Loan and Security Agreement dated May 1, 2020,
between the Company and MUFG Union Bank, N.A., as administrative
agent, and MUFG Union Bank, N.A. (“MUFG”), U.S. Bank
National Association (“U.S. Bank”), Umpqua Bank,
Columbia State Bank, and Zions Bancorporation, N.A.(fka ZB, N.A.)
dba California Bank & Trust (“CB&T”),
incorporated herein by reference to Exhibit 10.1 to the
registrant’s Report on Form 8-K filed with the SEC on May 5,
2020
|
|
10.3
|
Fourth
Amended and Restated Mortgage and Security Agreement, dated as of
May 1, 2020 between the Company, MUFG as administrative agent,
MUFG, U.S. Bank, Umpqua Bank, Columbia State Bank, and CB&T,
incorporated herein by reference to Exhibit 10.2 to the
registrant’s Report on Form 8-K filed with the SEC on May 5,
2020
|
|
10.4
|
Deferral
Agreement (MSNs 19002 and 19003) dated June 23, 2020 among ACY SN
19002 Limited, ACY SN 19003 Limited, and ACY E-175 LLC,
Norddeutsche Landesbank Girozentrale, as swap counterparty (the
“Swap Counterparty”), Norddeutsche Landesbank
Girozentrale, New York Branch, as agent and participant and
Wilmington Trust Company, as security trustee, incorporated by
reference to Exhibit 10.1 to the registrant’s Report on Form
8-K filed with the SEC on June 26, 2020
|
|
10.5
|
Consent
and Release Agreement of Borrower Parties, entered into by the
Company and its subsidiaries, JetFleet Holding Corp. and JetFleet
Management Corp, incorporated by reference to Exhibit 10.1 to the
registrant’s Report on Form 8-K filed with the SEC on
November 2, 2020
|
|
10.6
|
First
Amendment to Fourth Amended and Restated Loan and Security
Agreement, dated as of October 30, 2020, by and between the
Company, Drake Asset Management Jersey Limited, and UMB Bank, N.A.,
incorporated by reference to Exhibit 10.2 to the registrant’s
Report on Form 8-K filed with the SEC on November 2,
2020
|
|
10.7
|
Membership Interest Purchase Agreement, dated March 16, 2021,
between the Company and Drake Jet Leasing 10 LLC, incorporated
herein by reference to that certain Exhibit 10.1 Report on Form 8-K
filed by the Company with the SEC on March 22, 2021
|
|
10.8
|
Borrower Parent Transfer Agreement, made as of March 16, 2021 among
the Company, Drake Jet Leasing 10 LLC; ACY E-175 LLC; Norddeutsche
Landesbank Girozentrale, New York Branch, Norddeutsche Landesbank
Girozentrale, and Wilmington Trust Company, a Delaware Trust
Company, incorporated herein by reference to that certain Exhibit
10.2 Report on Form 8-K filed by the Company with the SEC on March
22, 2021
|
|
10.9
|
Side Letter No. 1, dated as of March 16, 2021, by and between the
Company, Drake Asset Management Jersey Limited, Drake Jet Leasing
10 LLC and UMB Bank, N.A, incorporated herein by reference to
that certain Exhibit 10.3 to the Report on Form 8-K filed by the
Company with the SEC on March 22, 2021
|
|
10.10
|
Asset Purchase Agreement dated as of March 29, 2021, by and between
the Company and Drake Asset Management Jersey Limited, incorporated
herein by reference to that certain Exhibit 10.1 to the Report on
Form 8-K filed by the Company with the SEC on March 30,
2021
|
|
21.1
|
Subsidiaries
of the AeroCentury Corp.
|
|
24.1
|
Power
of Attorney (included on the signature page hereto)
|
|
31.1
|
Certification
of Michael G. Magnusson, Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Harold M. Lyons, Chief Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certification
of Michael G. Magnusson, Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2*
|
Certification
of Harold M. Lyons, Chief Financial Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
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.
The
Company has elected not to provide summary
information.
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
April 15,
2021
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 her 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)
|
April
15, 2021
|
|
Michael
G. Magnusson
|
|
|
|
/s/
Harold M. Lyons
|
Senior
Vice President-Finance and Secretary of the Registrant (Principal
Financial and Accounting Officer)
|
April
15,
2021
|
|
Harold
M. Lyons
|
|
|
|
/s/
Toni M. Perazzo
|
Director
and Chair of the Board of Directors of the Registrant
|
April
15, 2021
|
|
Toni M.
Perazzo
|
|
|
|
/s/ Roy
E. Hahn
|
Director
|
April
15,
2021
|
|
Roy E.
Hahn
|
|
|
|
/s/
Evan M. Wallach
|
Director
|
April
15,
2021
|
|
Evan M.
Wallach
|
|
|
|
/s/
David P. Wilson
|
Director
|
April
15,
2021
|
|
David
P. Wilson
|
|
|
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 and Related Stockholder MattersItem 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