MEGA MATRIX CORP.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark
One)
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended March 31, 2021
☐
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)
|
Delaware
|
|
94-3263974
|
|
(State or Other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S. Employer Identification No.)
|
1440 Chapin Avenue, Suite 310
Burlingame, California 94010
(Address
of Principal Executive Offices)
(650) 340-1888
(Registrant’s
Telephone Number Including Area Code)
None
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock
|
ACY
|
NYSE American
|
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer
☐
Accelerated filer
☐
Non-accelerated
filer
☒
Smaller reporting
company
☒
Emerging growth
company
☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
No
☒
The number of shares of the registrant’s common stock
outstanding a
s of May 21, 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.
Forward-Looking Statements
This
Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All
statements in this report other than statements of historical fact
are forward-looking statements for purposes of these provisions,
including any statements of the Company’s plans and
objectives for future operations, the Company’s future
financial or economic performance (including known or anticipated
trends), and the assumptions underlying or related to the
foregoing. Statements that include the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates,"
"potential," or "continue," or the negative thereof, or other
comparable terminology, are forward-looking
statements.
Forward-looking
statements in this report include statements about the following
matters, although this list is not exhaustive:
● the Company’s ability to construct and gain approval
from the Bankruptcy Court for motions necessary for the Company to
continue to conduct its operations, for the consummation of a sale
of assets necessary to resolve the Drake Indebtedness (as defined
below);
● 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, and in particular
those that relate to the COVID pandemic, 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, conduct an auction sale of its
assets, 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 2 of
this report. In addition, the Company operates in a competitive and
evolving industry in which new risks emerge from time to time, and
it is not possible for the Company to predict all of the risks it
may face, nor can it assess the impact of all factors on its
business or the extent to which any factor or combination of
factors could cause actual results to differ from expectations. As
a result of these and other potential risks and uncertainties, the
Company’s forward-looking statements should not be relied on
or viewed as predictions of future events.
This
cautionary statement should be read as qualifying all
forward-looking statements included in this report, wherever they
appear. All forward-looking statements and descriptions of risks
included in this report are made as of the date hereof based on
information available to the Company as of the date hereof, and
except as required by applicable law, the Company assumes no
obligation to update any such forward-looking statement or risk for
any reason. You should, however, consult the risks and other
disclosures described in the reports the Company files from time to
time with the United States Securities and Exchange Commission
(“SEC”) after the date of this report for updated
information.
Table of Contents
AeroCentury
Corp.
(Debtor-In-Possession)
Condensed Consolidated Balance Sheets
(Unaudited)
|
ASSETS
|
||
|
|
March
31,
|
December
31,
|
|
|
2021
|
2020
|
|
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
4,224,900
|
$
2,408,700
|
|
Cash
and cash equivalents held for sale
|
-
|
345,900
|
|
Restricted
cash held for sale
|
-
|
2,346,300
|
|
Accounts
receivable
|
310,300
|
256,600
|
|
Finance leases receivable, net of allowance for
doubtful accounts of $2,324,000 and $1,503,000 at March 31
,
2021
and December 31, 2020,
respectively
|
1,626,000
|
2,547,000
|
|
Aircraft
held for lease, net of accumulated depreciation of $21,699,000 and
$21,001,300 at March 31, 2021 and December 31, 2020,
respectively
|
56,085,400
|
45,763,100
|
|
Assets
held for sale
|
347,400
|
38,146,700
|
|
Property, equipment and furnishings, net of
accumulated depreciation of $12,300 and $16,400 at March 31
,
2021
and December 31, 2020,
respectively
|
11,700
|
14,900
|
|
Office lease right of use, net of accumulated
amortization of $43,900 and $27,400 at March 31
, 2021 and
December 31, 2020, respectively
|
125,900
|
142,400
|
|
Deferred
tax asset
|
3,400
|
1,150,900
|
|
Taxes
receivable
|
1,160,700
|
-
|
|
Prepaid
expenses and other assets
|
539,100
|
255,300
|
|
Total
assets
|
$
64,434,800
|
$
93,377,800
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||
|
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$
215,300
|
$
367,700
|
|
Accrued
payroll
|
222,200
|
190,100
|
|
Notes
payable and accrued interest, net of unamortized debt issuance
costs of $780,900
|
-
|
88,793,200
|
|
Notes
payable and accrued interest held for sale, net of unamortized debt
issuance costs of $313,400
|
-
|
13,836,900
|
|
Derivative
liability held for sale
|
-
|
767,900
|
|
Derivative
termination liability
|
-
|
3,075,300
|
|
Lease
liability
|
151,000
|
172,000
|
|
Maintenance
reserves
|
2,099,900
|
2,000,600
|
|
Accrued
maintenance costs
|
-
|
46,100
|
|
Security
deposits
|
466,000
|
716,000
|
|
Unearned
revenues
|
549,000
|
1,027,400
|
|
Income
taxes payable
|
1,200
|
900
|
|
Total
liabilities not subject to compromise
|
3,704,600
|
110,994,100
|
|
Liabilities
subject to compromise
|
83,754,800
|
-
|
|
Total
liabilities
|
87,459,400
|
110,994,100
|
|
Commitments
and contingencies (Note 10)
|
|
|
|
Stockholders’
deficit:
|
|
|
|
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 March 31
, 2021
and December 31,
2020
|
1,800
|
1,800
|
|
Paid-in
capital
|
16,782,800
|
16,782,800
|
|
Accumulated
deficit
|
(36,771,900
)
|
(31,361,600
)
|
|
Accumulated
other comprehensive loss
|
-
|
(2,000
)
|
|
|
(19,987,300
)
|
(14,579,000
)
|
|
Treasury stock at cost, 213,332 shares at March
31
, 2021
and December 31,
2020
|
(3,037,300
)
|
(3,037,300
)
|
|
Total
stockholders’ deficit
|
(23,024,600
)
|
(17,616,300
)
|
|
Total
liabilities and stockholders’ deficit
|
$
64,434,800
|
$
93,377,800
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
AeroCentury Corp.
(Debtor-In-Possession)
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For the
Three Months Ended
March
31,
|
|
|
|
2021
|
2020
|
|
Revenues
and other income:
|
|
|
|
Operating
lease revenue
|
$
2,737,200
|
$
4,768,300
|
|
Finance
lease revenue
|
-
|
56,300
|
|
Net
loss on disposal of assets
|
(201,700
)
|
(24,200
)
|
|
Other
loss
|
(1,300
)
|
(23,200
)
|
|
|
2,534,200
|
4,777,200
|
|
Expenses:
|
|
|
|
Impairment in value
of aircraft
|
1,940,400
|
6,654,900
|
|
Interest
|
1,914,700
|
6,012,900
|
|
Professional fees,
general and administrative and other
|
1,595,100
|
850,300
|
|
Bad debt
expense
|
821,000
|
1,170,000
|
|
Depreciation
|
699,300
|
2,170,300
|
|
Salaries and
employee benefits
|
506,300
|
516,900
|
|
Insurance
|
247,900
|
186,900
|
|
Maintenance
|
145,000
|
80,200
|
|
Other
taxes
|
25,600
|
25,600
|
|
|
7,895,300
|
17,668,000
|
|
Loss
before income tax provision/(benefit)
|
(5,361,100
)
|
(12,890,800
)
|
|
Income
tax provision/(benefit)
|
49,200
|
(2,712,400
)
|
|
Net
loss
|
$
(5,410,300
)
|
$
(10,178,400
)
|
|
Loss per
share:
|
|
|
|
Basic
|
$
(3.50
)
|
$
(6.58
)
|
|
Diluted
|
$
(3.50
)
|
$
(6.58
)
|
|
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 condensed
consolidated financial statements.
AeroCentury Corp.
(Debtor-In-Possession)
Condensed Consolidated Statements of Comprehensive
Loss
(Unaudited)
|
|
For the
Three Months Ended
March
31,
|
|
|
|
2021
|
2020
|
|
Net
loss
|
$
(5,410,300
)
|
$
(10,178,400
)
|
|
Other
comprehensive loss:
|
|
|
|
Unrealized
losses on derivative instruments
|
-
|
(575,000
)
|
|
Reclassification
of net unrealized losses on derivative instruments to interest
expense
|
2,600
|
1,318,400
|
|
Tax
expense related to items of other comprehensive loss
|
(600
)
|
(159,700
)
|
|
Other
comprehensive income
|
2,000
|
583,700
|
|
Total
comprehensive loss
|
$
(5,408,300
)
|
$
(9,594,700
)
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
AeroCentury Corp.
(Debtor-In-Possession)
Condensed Consolidated Statements of Stockholders’
Equity/(Deficit)
For the Three Months Ended March 31, 2020 and March 31,
2021
(Unaudited)
|
|
Number of Common
Stock Shares Outstanding
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings/
(Deficit)
|
Treasury
Stock
|
Accumulated Other
Comprehensive Loss
|
Total
|
|
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
|
-
|
-
|
-
|
(10,178,400
)
|
-
|
-
|
(10,178,400
)
|
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
583,700
|
583,700
|
|
Balance,
March 31,
2020
|
1,545,884
|
$
1,800
|
$
16,782,800
|
$
703,700
|
$
(3,037,300
)
|
$
(787,100
)
|
$
13,663,900
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31,
2020
|
1,545,884
|
$
1,800
|
$
16,782,800
|
$
(31,361,600
)
|
$
(3,037,300
)
|
$
(2,000
)
|
$
(17,616,300
)
|
|
Net
loss
|
-
|
-
|
-
|
(5,410,300
)
|
-
|
-
|
(5,410,300
)
|
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
2,000
|
2,000
|
|
Balance,
March 31,
2021
|
1,545,884
|
$
1,800
|
$
16,782,800
|
$
(36,771,900
)
|
$
(3,037,300
)
|
$
-
|
$
(23,024,600
)
|
The accompanying notes are an integral part of these
condensed
consolidated financial
statements.
AeroCentury Corp.
(Debtor-In-Possession)
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
the Three Months Ended
March
31,
|
|
|
|
2021
|
2020
|
|
Net cash used in
operating activities
|
$
(176,700
)
|
$
(624,500
)
|
|
Investing
activities:
|
|
|
|
Proceeds from sale
of aircraft and aircraft engines held for lease, net of re-sale
fees
|
10,850,700
|
-
|
|
Proceeds from sale
of assets held for sale, net of re-sale fees
|
-
|
3,104,800
|
|
Net cash provided
by investing activities
|
10,850,700
|
3,104,800
|
|
Financing
activities:
|
|
|
|
Repayment of notes
payable – MUFG Credit Facility and Drake Loan
|
(11,011,700
)
|
(1,165,000
)
|
|
Repayment of notes
payable – Nord Loans
|
(703,100
)
|
(664,000
)
|
|
Issuance of notes
payable – PPP Loan
|
170,000
|
-
|
|
Debt issuance
costs
|
(5,200
)
|
(80,300
)
|
|
Net cash used in
financing activities
|
(11,550,000
)
|
(1,909,300
)
|
|
Net
(decrease)/increase in cash, cash equivalents and restricted
cash
|
(876,000
)
|
571,000
|
|
Cash, cash
equivalents and restricted cash, beginning of period
|
5,100,900
|
3,427,100
|
|
Cash, cash
equivalents and restricted cash, end of period
|
$
4,224,900
|
$
3,998,100
|
The
components of cash and cash equivalents and restricted cash at the
end of each of the periods presented consisted of:
|
|
March
31,
|
|
|
|
2021
|
2020
|
|
Cash and cash
equivalents
|
$
4,224,900
|
$
1,746,200
|
|
Restricted
cash
|
-
|
2,251,900
|
|
Total cash, cash
equivalents and restricted cash shown in the statement of cash
flows
|
$
4,224,900
|
$
3,998,100
|
During
the three months ended
March
31, 2021 and 2020, the Company paid interest totaling $186,500 and
$1,722,500, respectively. The Company paid income taxes of $4,000
and $110,500 during the three months ended
March 31
, 2021 and 2020,
respectively.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
AeroCentury
Corp.
(Debtor-In-Possession)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2021
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 4(b) for more information about the Nord
Loans. As discussed in Note 3(a), the Company sold its membership
interest in ACY E-175 in March 2021.
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”) for interim financial information,
the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period
ended March 31, 2021 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2021 or for
any other period. All intercompany balances and transactions have
been eliminated in consolidation.
As discussed below, on March 29, 2021 (the “Petition
Date”), AeroCentury 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
.
Effective on the Petition date, the Company applied accounting
standards applicable to reorganizations, Accounting Standards
Codification 852 -
Reorganizations,
in preparing the accompanying
condensed consolidated financial statements, which requires the
financial statements, for periods subsequent to the commencement of
the Chapter 11 Cases, to distinguish transactions and events that
are directly associated with the reorganization from the ongoing
operations of the business. Accordingly, obligations of the Debtors
incurred prior to the Petition Date (“Pre-petition”)
that may be impacted by the Chapter 11 Cases have been classified
as liabilities subject to compromise in the accompanying unaudited
condensed consolidated balance sheet as of March 31, 2021. These
liabilities are reported at the amounts the Company anticipates
will be allowed by the Bankruptcy Court, even if they may be
settled for lesser amounts. See Note 8, "Liabilities Subject to
Compromise," for additional information.
(b)
Company Indebtedness
As
discussed in Note 4, on October 30, 2020, the lenders (“MUFG
Lenders”) under the Company’s previous term loan
facility (the “MUFG Loan”) sold the MUFG Loan and the
$3.1 million obligation of the Company from termination of the two
swaps (the “MUFG Swaps”) related to the MUFG Loan 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 was capitalized.
The
Drake Loan Agreement had a stated maturity date of March 31, 2021
and is secured by a lien on substantially all of the
Company’s assets but collection on or exercise or rights or
remedies with the Drake Loan Agreement were stayed due to the
Company’s Chapter 11 filing, as discussed below in Note 1(e),
“
Automatic
Stay.
”
(c) Voluntary Petitions for Bankruptcy
In
connection with the impending maturity of the Company’s
indebtedness owed to Drake (“Drake Indebtedness”) and
the continuing economic impact from COVID-19, on March 29, 2021,
the Debtors filed voluntary petitions for relief (collectively, the
"Petitions") under Chapter 11 in the Bankruptcy Court. The Chapter
11 Cases are being jointly administered under the
caption
In re: AeroCentury
Corp., et al., Case No. 21-10636
.
The
Bankruptcy Court 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. Pursuant
to orders entered by the Bankruptcy Court, the Debtors are
authorized to conduct their business activities in the ordinary
course, and 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.
On April 22, 2021, the Bankruptcy Court entered an order
authorizing and approving the funding of the Company’s
Chapter 11 bankruptcy cases on a final basis. This final order
authorizes the Company’s continued access to funding for its
business operations and restructuring process, to the extent that
such funding is available. On the same date, the Bankruptcy Court
entered an order authorizing and approving marketing and sale
procedures with respect to the sale of some or all of the
Company’s assets. The Company’s court-supervised sale
process requires any bids for its assets to be submitted by 5:00
p.m. on May 17.
No third party qualified bids were received
for the Company’s assets in the Court-approved marketing
and sale process, so the proposed auction for assets will
not be conducted, and the Company anticipates that the
sale of the Drake Collateral will proceed under the terms of
the stalking horse agreement. There
were non-qualified third party bids received by the
Company for certain subsets of the
Company’s aircraft assets, and the
Company is currently reviewing and evaluating those offers.
With respect to any asset purchases proposed in such
non-qualified bids that include Drake Collateral, the
Company is consulting with Drake.
(d)
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.
(e)
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
Pre-petition obligations of the Debtors. Absent an order from the
Bankruptcy Court, substantially all of the Debtors’
Pre-petition liabilities are subject to settlement under the
Bankruptcy Code.
(f)
Borrowing Capacity and
Availability
At March 31, 2021, 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 3(a), in March 2021, the Company sold its
ownership interest in ACY E-175 to Drake, and Drake assumed ACY
E-175’s indebtedness under its Nord Loan.
(g)
Going Concern
At March 31, 2021, the Company had total book assets of
approximately $64.4 million and total liabilities of $87.4 million,
resulting in a negative book equity of $23.0 million. The largest
portion, $83.3 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. 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 Drake debt, and has a net capital deficiency.
The Company’s poor financial position, including its poor
short-term liquidity given the 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 condensed 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 condensed consolidated financial statements. The
condensed consolidated financial statements presented in this
Quarterly Report on Form 10-Q 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.
(h) 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. The Company
permitted one of its customers, which leases two regional turboprop
aircraft, to make reduced payments totaling approximately $0.3
million in the second and fourth quarters of 2020 as well as $0.4
million in the first quarter of 2021 and the customer paid the
reduced amounts.
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 in 2020 and $0.9 million in the first
quarter of 2021, and the Company and the customers are discussing
remedies regarding the non-payment. As discussed in Note 2, the
Company recorded a bad debt allowance of $821,000 related to one of
the two sales-type finance leases during first quarter of 2021 as a
result of its May 2021 agreement to sell the aircraft to the
customer, which requires the approval of the Bankruptcy Court and
which the Company expects to occur in the second quarter of
2021.
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 4 and 5, 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.
(i)
Use of Estimates
The Company’s condensed 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 condensed
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 condensed
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) Finance Leases
As of
March 31, 2021, the Company had two sales-type leases secured by
aircraft. Both 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 two 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 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.
(l) Taxes
As part
of the process of preparing the Company’s condensed
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 Company’s recent filing
for protection under Chapter 11 of the bankruptcy code.
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 $1,126,100
for the three months ended March 31, 2021. Additionally, the
Company has concluded that based on its analysis, some of its
foreign net operating loss carrybacks are not expected to be
realized based on limitations on the utilization of its foreign net
operating losses, and therefore recorded a foreign tax expense of
$54,300 for the reduced tax refund for the three months ended March
31, 2021.
The
Company accrues non-income based sales, use, value added and
franchise taxes as other tax expense in the condensed consolidated
statement of operations.
(m) Revenue Recognition, Accounts Receivable and Allowance for
Doubtful Accounts
Revenue
from leasing of aircraft assets pursuant to operating leases is
recognized on a straight-line basis over the terms of the
applicable lease agreements. Deferred payments are recorded as
accrued rent when the cash rent received is lower than the
straight-line revenue recognized. Such receivables decrease over
the term of the applicable leases. Interest income is recognized on
finance leases based on the interest rate implicit in the lease and
the outstanding balance of the lease receivable.
Maintenance
reserves retained by the Company at lease-end are recognized as
maintenance reserves revenue.
In
instances where collectability is not reasonably assured, the
Company recognizes revenue as cash payments are received. The
Company estimates and charges to income a provision for bad debts
based on its experience with each specific customer, the amount and
length of payment arrearages, and its analysis of the
lessee’s overall financial condition. If the financial
condition of any of the Company’s customers deteriorates, it
could result in actual losses exceeding any estimated
allowances.
The
Company had an allowance for doubtful accounts of $2,324,000 and
$1,503,000 at March 31, 2021 and December 31, 2020,
respectively.
(n) 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 5, 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 $1,167,700
related to the MUFG Swaps was recognized as interest expense in the
first quarter of 2020.
In
March 2020, the Company determined that the future hedged interest
payments related to its five remaining Nord Loan interest rate
hedges (the “Nord Swaps”) 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.
(o)
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.
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’s adoption of ASU 2019-12 did not 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.
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.
(a)
Assets Held for Lease
At
March 31, 2021
and December 31,
2020, the Company’s aircraft held for lease consisted of the
following:
|
|
March
31, 2021
|
December
31, 2020
|
||
|
Type
|
Number
owned
|
% of
net book value
|
Number
owned
|
% of
net book value
|
|
Regional jet
aircraft
|
7
|
70
%
|
4
|
67
%
|
|
Turboprop
aircraft
|
3
|
30
%
|
2
|
33
%
|
|
|
March 31
, 2021
|
December 31
, 2020
|
||||||
|
Type
|
Cost
|
Accumulated
depreciation
|
Impairment
losses
|
Net
|
Cost
|
Accumulated
depreciation
|
Impairment
losses
|
Net
|
|
Aircraft under
operating leases
|
$
74,397,700
|
$
(21,699,000
)
|
$
(7,633,300
)
|
$
45,065,400
|
$
74,397,700
|
$
(21,001,300
)
|
$
(7,633,300
)
|
$
45,763,100
|
|
Off-lease
aircraft
|
56,364,200
|
(9,454,200
)
|
(35,890,000
)
|
11,020,000
|
-
|
-
|
-
|
-
|
|
|
$
130,761,900
|
$
(31,153,200
)
|
$
(43,523,300
)
|
$
56,085,400
|
$
74,397,700
|
$
(21,001,300
)
|
$
(7,633,300
)
|
$
45,763,100
|
The
Company did not purchase or sell any aircraft held for lease during
the first quarter of 2021. As a result of its Chapter 11 filing in
March 2021 and the Company’s consequent lack of authority to
sell certain assets without the approval of the Bankruptcy Court,
the Company reclassified four off-lease aircraft, comprised of
three regional jet aircraft and one turboprop aircraft, from held
for sale to held for lease. As discussed below, the Company has two
turboprop aircraft that are being sold in parts and are held for
sale in the ordinary course of its business.
As of
March
31
, 2021
, minimum future lease revenue
payments receivable under non-cancelable operating leases were as
follows:
|
Years ending
December 31
|
|
|
|
|
|
2021
|
$
5,832,000
|
|
2022
|
7,320,100
|
|
2023
|
7,320,100
|
|
2024
|
5,843,800
|
|
2025
|
2,978,200
|
|
Thereafter
|
3,066,000
|
|
|
$
32,360,200
|
The remaining weighted average lease term of the Company’s
assets under operating leases was 26 months and 29 months at March
31, 2021 and December 31, 2020, respectively.
(b)
Sales-Type and Finance Leases
The
Company has two sales-type leases, which were substantially
modified in January 2020 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 bad debt allowances of
$1,170,000 and $333,000 during the first and second quarters of
2020, respectively. During the first quarter of 2021, the Company
recorded a bad debt allowance of $821,000 related to one of the two
sales-type finance leases as a result of its May 2021 agreement to
sell the aircraft to the customer, which requires the approval of
the Bankruptcy Court and which the Company expects to occur in the
second quarter of 2021. The two leases remain treated as sales-type
leases.
At
March 31, 2021
and December 31,
2020, the net investment included in sales-type leases and direct
financing leases receivable were as follows:
|
|
March 31
,
2021
|
December 31
,
2020
|
|
Gross minimum lease
payments receivable
|
$
4,038,000
|
$
4,138,000
|
|
Less unearned
interest
|
(88,000
)
|
(88,000
)
|
|
Allowance for
doubtful accounts
|
(2,324,000
)
|
(1,503,000
)
|
|
Difference between
minimum lease payments receivable and collateral value of
leases
|
-
|
-
|
|
Finance leases
receivable
|
$
1,626,000
|
$
2,547,000
|
As of
March 31, 2021
, minimum future
payments receivable under finance leases were as
follows:
|
Years ending
December 31
|
|
|
|
|
|
2021
|
$
2,197,000
|
|
2022
|
1,284,000
|
|
2023
|
557,000
|
|
|
$
4,038,000
|
The remaining weighted average lease term of the Company’s
assets under sales-type and finance leases was 21 months and 25
months at March 31, 2021 and December 31, 2020,
respectively.
The
following is a roll forward of the Company’s finance lease
receivable allowance for doubtful accounts from December 31, 2020
to
March 31
, 2021:
|
Balance, December
31, 2020
|
$
1,503,000
|
|
Additions charged
to expense
|
821,000
|
|
Balance,
March 31
, 2021
|
$
2,324,000
|
3.
Assets and Liabilities Held for
Sale
As a
result of its Chapter 11 filing in March 2021 and the
Company’s consequent lack of authority to sell certain assets
without the approval of the Bankruptcy Court, the Company
reclassified four off-lease aircraft, comprised of three regional
jet aircraft and one turboprop aircraft, from held for sale to held
for lease. The Company has two turboprop aircraft that are being
sold in parts and are held for sale in the ordinary course of its
business.
(a)
ACY E-175 LLC
I
n March 2021, the Company sold its 100% 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 was $1,976,200 and $2,950,300 for the
year ended December 31, 2020 and quarter ended March 31, 2021,
respectively.
(b)
Part-out Assets
The
Company owns two aircraft being sold in parts (“Part-out
Assets”)
.
During the
first quarter of 2021, the Company received $34,400 in cash and
accrued $44,200 in receivables related to the Part-out Assets.
These amounts were accounted for as follows: $34,400 reduced
accounts receivable for parts sales accrued in the fourth quarter
of 2020; $38,900 reduced the carrying value of the parts; and
$5,300 was recorded as gains in excess of the carrying value of the
parts. During the first quarter of 2020, the Company received
$175,500 in cash and accrued $77,300 in receivables for parts
sales. These amounts were accounted for as follows: $117,400
reduced accounts receivable for parts sales accrued in the fourth
quarter of 2019; $117,800 reduced the carrying value of the parts;
and $17,600 was recorded as gains in excess of the carrying value
of the parts.
In May
2021, the Company agreed to sell most of the Part-out Assets for
$290,000, and recorded an impairment loss of $1,940,400 in the
first quarter of 2021.
4.
Notes Payable and Accrued
Interest
At March 31, 2021 and December 31, 2020, the Company’s notes
payable and accrued interest consisted of the following. The Drake
Loan and PPP Loan are included in liabilities subject to compromise
at March 31, 2021 in the accompanying condensed consolidated
balance sheet.
|
|
March 31
,
2021
|
December 31
,
2020
|
|
Drake Loan, subject
to compromise at March 31, 2021:
|
|
|
|
Principal
|
$
79,439,900
|
$
88,557,000
|
|
Unamortized
debt issuance costs
|
-
|
(780,900
)
|
|
Accrued
interest
|
744,500
|
739,000
|
|
Paycheck Protection
Program Loans, subject to compromise at March 31,
2021:
|
|
|
|
Principal
|
446,400
|
276,400
|
|
Accrued
interest
|
2,600
|
1,700
|
|
|
$
80,633,400
|
$
88,793,200
|
|
Nord Loans held for
sale:
|
|
|
|
Principal
|
$
-
|
$
14,091,300
|
|
Unamortized
debt issuance costs
|
-
|
(313,400
)
|
|
Accrued
interest
|
-
|
59,000
|
|
|
$
-
|
$
13,836,900
|
(a) Drake Loan
On
October 30, 2020, the MUFG Lenders under the Company’s MUFG
Loan sold the MUFG Loan and the $3.1 million obligation of the
Company from termination of the MUFG Swaps to Drake, and the
Company and Drake entered into 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.
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, other than two aircraft leased to Kenyan lessees and
certain part-out assets. The Drake Indebtedness had a stated
maturity date of March 31, 2021, but collection on or exercise of
rights or remedies with the Drake Loan Agreement were stayed due to
the Company’s Chapter 11 filing, as discussed in Note 1(e),
“
Automatic
Stay.
”
(b)
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 provided 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.
The
interest rates payable under the Nord Loans varied by aircraft and
were based on a fixed margin above either 30-day or 3-month LIBOR.
The maturity of each Nord Loan varied 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 was 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 included 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. The
Company was in compliance with all covenants under the Nord Loans
at December 31, 2020.
One of
the Nord Loan Collateral Aircraft was sold in 2019 and two Nord
Loan Collateral Aircraft were sold in 2020.
The excess proceeds from the 2020 sales 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.
During March 2021, the Company sold its interest
in ACY E-175 and was released from any remaining guarantee
obligations under the Nord Loan and interest swap obligations of
the special-purpose subsidiary.
(c) Paycheck Protection Program Loans
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 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.
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
applications for the PPP Loans 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 loans
attendant to these funds, is dependent on the Company having
initially qualified for the loans and qualifying for the
forgiveness of such loans based on its future adherence to the
forgiveness criteria.
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.
5. 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.
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 upon entering into the swaps. Changes in the fair value of
the hedged swaps were included in other comprehensive
income/(loss), which amounts are reclassified into earnings in the
period in which the transaction being hedged affected 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.
(a) MUFG Swaps
The two
interest rate swaps entered into by AeroCentury (the “MUFG
Swaps”) were intended to protect against the exposure to
interest rate increases on $50 million of the Company’s MUFG
Credit Facility debt prior to its sale to Drake during the fourth
quarter of 2020. The MUFG Swaps 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 $1,167,700 related to the MUFG Swaps was
recognized as interest expense in the first quarter of 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.
(b) Nord Swaps
With
respect to the interest rate swaps entered into by the LLC
Borrowers (“the Nord Swaps”), 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
Nord Swaps were entered into by the LLC Borrowers and provided for
reduced notional amounts that mirrored the amortization under the
Nord Loans entered into by the LLC Borrowers, effectively
converting each of the related Nord Loans from a variable to a
fixed interest rate, ranging from 5.38% to 6.30%. Each of Nord
Swaps extended for the duration of the corresponding Nord Loan. Two
of the swaps had maturities in the four quarter of 2020 and were
terminated when the associated assets were sold and the related
debt was paid off. The other three LLC Swaps had maturities in
2025, but were sold in March 2021 as part of the Company’s
sale of its membership interest in ACY E-175.
As
discussed in Note 4, in March 2020, the Company determined that the
future hedged interest payments related to its Nord Swaps 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
Nord Swaps as hedges because the lease payments were used to
service the Nord Loans associated with the swaps. As a result of
de-designation, future changes in market value were recognized in
ordinary income and AOCI was reclassified to ordinary income as the
forecasted transactions occurred. 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. Accumulated other comprehensive income
of $2,600 and $48,100 related to the Nord Swaps was recognized as
an expense in the first quarters of 2021 and 2020,
respectively.
The
Company has reflected the following amounts in its net
loss:
|
|
For the Three
Months Ended
March
31,
|
|
|
|
2021
|
2020
|
|
Change in value of
undesignated interest rate swaps
|
$
(48,700
)
|
$
1,908,300
|
|
Reclassification
from other comprehensive income to interest expense
|
2,600
|
150,700
|
|
Reclassification
from other comprehensive income to interest expense
–
forecasted
transaction probable not to occur
|
-
|
1,167,700
|
|
Included in
interest expense
|
$
46,100
|
$
3,226,700
|
|
|
|
|
|
The
following amount was included in other comprehensive income/(loss),
before tax:
|
||
|
|
|
|
|
Loss on derivative
instruments deferred into other comprehensive
income/(loss)
|
$
-
|
$
(575,000
)
|
|
Reclassification
from other comprehensive income to interest expense
|
2,600
|
150,700
|
|
Reclassification
from other comprehensive income to interest expense
–
forecasted
transaction probable not to occur
|
-
|
1,167,700
|
|
Change in
accumulated other comprehensive income
|
$
2,600
|
$
743,400
|
6. 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 condensed 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 March 31, 2021, the
weighted average discount rate was 3% and the weighted average
remaining lease term was 22 months.
The
Company estimates that the maturities of operating lease base rent
of its office space were as follows as of
March
31, 2021 and
December 31
, 2020:
|
|
March
31,
2021
|
December
31,
2020
|
|
2021
|
$
59,100
|
$
81,300
|
|
2022
|
88,700
|
88,700
|
|
2023
|
7,400
|
7,400
|
|
|
155,200
|
177,400
|
|
Discount
|
(4,200
)
|
(5,400
)
|
|
Lease
liability
|
$
151,000
|
$
172,000
|
During
the quarter ended
March 31
,
2021, the Company recognized amortization, finance costs and other
expense related to the office lease as follows:
|
Fixed rental
expense during the quarter
|
$
17,700
|
|
Variable lease
expense
|
6,500
|
|
Total lease expense
during the quarter
|
$
24,200
|
7. 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
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.
As of
March 31, 2021, the Company had no interest rate swaps. In the
quarter ended March 31, 2021, $48,700 was realized through the
income statement as a decrease in interest expense.
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
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.
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
March 31
,
2021 and December 31, 2020:
|
|
March
31, 2021
|
December
31, 2020
|
||||||
|
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|
Derivatives
|
$
-
|
-
|
$
-
|
-
|
$
(767,900
)
|
$
-
|
$
(767,900
)
|
$
-
|
|
Total
|
$
-
|
$
-
|
$
-
|
$
-
|
$
(767,900
)
|
$
-
|
$
(767,900
)
|
$
-
|
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 the first quarter of 2021, the Company recorded
an impairment loss of $1,940,400 on its two assets held for sale,
based on expected sales proceeds, which had an aggregate fair value
of $347,400. Based on expected sales proceeds, the Company recorded
impairment losses totaling $6,654,900 on four of its assets held
for sale in the first quarter of 2020, which had an aggregate fair
value of $15,828,200.
The
following table shows, by level within the fair value hierarchy,
the Company’s assets at fair value on a nonrecurring basis as
of March 31, 2021 and December 31, 2020:
|
|
Assets
Written Down to Fair Value
|
Total
Losses
|
||||||||
|
|
March
31, 2021
|
December
31, 2020
|
For the
Three Months Ended March 31,
|
|||||||
|
|
|
Level
|
|
Level
|
|
|||||
|
Total
|
1
|
2
|
3
|
Total
|
1
|
2
|
3
|
2021
|
2020
|
|
|
Assets
held for lease
|
$
43,124,000
|
$
-
|
$
-
|
$
43,124,000
|
$
32,650,000
|
$
-
|
$
-
|
$
32,650,000
|
$
-
|
$
-
|
|
Assets
held for sale
|
347,400
|
-
|
-
|
347,400
|
38,041,600
|
-
|
-
|
38,041,600
|
1,940,400
|
6,654,900
|
|
Total
|
$
43,471,400
|
$
-
|
$
-
|
$
43,471,400
|
$
70,691,600
|
$
-
|
$
-
|
$
70,691,600
|
$
1,940,400
|
$
6,654,900
|
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 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(
k)
. The fair value of the
Company’s derivative instruments is discussed in Note 5 and
in this note above in “Assets and Liabilities Measured and
Recorded at Fair Value on a Recurring Basis.”
Borrowings
under the Company’s Drake Loan bear floating rates of
interest that reset periodically to a market benchmark rate plus a
credit margin. The Company believes the effective interest rate
under the Drake Loan approximates current market rates, and
therefore that the outstanding principal and accrued interest of
$89,296,000 at December 31, 2020 approximates its fair values on
such date. The fair value of the Company’s outstanding
balance of its Drake Loan is categorized as a Level 3 input under
the GAAP fair value hierarchy. Pursuant to rules related to its
bankruptcy filing, the Company reported the liability of the Drake
Loan as subject to compromise at the amount expected to be
allowed.
The
Company believes the effective interest rate under the Nord Loans
approximated current market rates for such indebtedness at the
dates of the condensed consolidated balance sheets, and therefore
that the outstanding principal and accrued interest of $0 and
$14,150,300 approximate their fair values at
March 31
, 2021 and December 31, 2020,
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
$821,000 during the first quarter of 2021. The finance lease
receivable for one of its finance leases is valued at its
collateral value under the practical expedient alternative, and the
second is valued at the expected cash flow from the expected sale
during the second quarter of 2021.
There
were no transfers in or out of assets or liabilities measured at
fair value under Level 3 during the three months ended March 31,
2021 or 2020.
8. Liabilities Subject to Compromise
The
accompanying unaudited condensed consolidated balance sheet as of
March 31, 2021 includes amounts classified as liabilities subject
to compromise, which represents pre-petition liabilities the
Company anticipates will be allowed as claims in the Chapter 11
Cases. These amounts represent the Debtors’ current estimate
of known or potential obligations to be resolved in connection with
the Chapter 11 Cases and may differ from actual settlement amounts.
The Company will continue to evaluate these liabilities throughout
the Chapter 11 process and adjust amounts as necessary. Such
adjustments could be material and will be recorded in
reorganization items, net in the accompanying unaudited condensed
statements of operations.
The
following table summarizes liabilities subject to compromise at
March 31, 2021:
|
Accrued maintenance
costs
|
$
46,100
|
|
Drake
Loan:
|
|
|
Principal
|
79,439,900
|
|
Accrued
interest
|
744,500
|
|
Paycheck Protection
Program Loan:
|
|
|
Principal
|
446,400
|
|
Accrued
interest
|
2,600
|
|
Derivative
termination liability
|
3,075,300
|
|
|
$
83,754,800
|
9. Reorganization Items, Net
The
Debtors will incur costs associated with the reorganization,
including professional and consulting fees. Charges associated with
the Chapter 11 Cases will be recorded as reorganization items in
the Company’s condensed consolidated statements of
operations. The Company incurred no such expenses during the three
months ended March 31, 2021.
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
Company recorded income tax expense of $49,200 in the first quarter
of 2021, or negative 0.92% of pre-tax loss, compared to $2.7
million income tax benefit, or 21.0% of pre-tax loss in the first
quarter of 2020. The difference in the effective federal income tax
rate from the normal statutory rate in the first quarter of 2021
was primarily related to the recording of a valuation on U.S.
deferred tax assets.
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 five-year cumulative loss through March 31, 2021,
the impacts of COVID-19 pandemic on the worldwide airline industry
and the Company’s recent filing for protection under Chapter
11 of the bankruptcy code. Based on this 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 $1,126,100
for the three months ended March 31, 2021. Additionally, the
Company has concluded that based on its analysis, some of its
foreign net operating loss carrybacks are not expected to be
realized based on limitations on the utilization of its foreign net
operating losses, and therefore recorded a foreign tax expense of
$54,300 for the reduced tax refund for the three months ended March
31, 2021.
12. Condensed Combined Debtor-in-Possession Financial
Information
The
following financial statements represent the unaudited condensed
combined financial statements of the Debtors. The results of the
non-debtor entities are not included in these financial statements.
Intercompany transactions among the Debtors have been eliminated in
the following financial statements. Intercompany transactions among
the Debtor and non-debtor entities have not been eliminated in the
following financial statements.
The
Debtors
Condensed Combined Balance Sheet
March 31, 2021
(Unaudited)
|
Assets:
|
|
|
Cash
and cash equivalents
|
$
3,755,000
|
|
Accounts
receivable
|
286,100
|
|
Due
from non-debtor affiliates
|
350,900
|
|
Finance
leases receivable, net of allowance for doubtful accounts of
$2,324,000
|
1,626,000
|
|
Aircraft
held for lease, net of accumulated depreciation of
$21,699,000
|
56,085,400
|
|
Assets
held for sale
|
347,400
|
|
Property,
equipment and furnishings, net of accumulated depreciation of
$12,300
|
11,700
|
|
Office
lease right of use, net of accumulated amortization of
$43,900
|
125,900
|
|
Investment
in non-debtor subsidiaries
|
3,610,600
|
|
Prepaid
expenses and other assets
|
562,000
|
|
Total
assets
|
$
66,761,000
|
|
Liabilities:
|
|
|
Accounts
payable
|
$
133,500
|
|
Payable
to non-debtor subsidiaries
|
2,422,000
|
|
Accrued
payroll
|
209,400
|
|
Lease
liability
|
151,000
|
|
Maintenance
reserves
|
2,099,900
|
|
Security
deposits
|
466,000
|
|
Unearned
revenues
|
549,000
|
|
Total
liabilities not subject to compromise
|
6,030,800
|
|
Liabilities
subject to compromise
|
83,754,800
|
|
Total
liabilities
|
89,785,600
|
|
Total
stockholders’ deficit attributable to the
Debtors
|
(23,024,600
)
|
|
Total
liabilities and stockholders’ deficit
|
$
66,761,000
|
The Debtors
Condensed Combined Statements of Operations
For the Three Months Ended March 31, 2021
(Unaudited)
|
Revenues
and other income:
|
|
|
Operating
lease revenue
|
$
1,987,200
|
|
Net
loss on disposal of assets
|
(2,473,200
)
|
|
Other
loss
|
(1,700
)
|
|
|
(487,700
)
|
|
Expenses:
|
|
|
Impairment in value
of aircraft
|
1,940,400
|
|
Interest
|
1,844,700
|
|
Professional fees,
general and administrative and other
|
1,632,100
|
|
Bad debt
expense
|
821,000
|
|
Depreciation
|
699,300
|
|
Salaries and
employee benefits
|
464,300
|
|
Insurance
|
247,900
|
|
Maintenance
|
145,000
|
|
Other
taxes
|
25,600
|
|
|
7,820,300
|
|
Loss
before income taxes and equity in earnings of non-debtor
entities
|
(8,308,000
)
|
|
Income
tax provision
|
49,200
|
|
Equity
in earnings of non-debtor entities
|
2,946,900
|
|
Net
loss
|
$
(5,410,300
)
|
The Debtors
Condensed
Combined Statements of Cash Flows
For the
Three Months Ended March 31, 2021
(Unaudited)
|
Net cash used in
operating activities
|
$
(577,200
)
|
|
Investing
activity-
|
|
|
Proceeds from sale
of aircraft and aircraft engines held for lease, net of re-sale
fees
|
13,246,000
|
|
Net cash provided
by investing activity
|
13,246,000
|
|
Financing
activities:
|
|
|
Repayment of notes
payable – MUFG Credit Facility and Drake Loan
|
(11,011,700
)
|
|
Issuance of notes
payable – PPP Loan
|
170,000
|
|
Net cash used in
financing activities
|
(10,841,700
)
|
|
Net increase in
cash, cash equivalents and restricted cash
|
1,827,100
|
|
Cash, cash
equivalents and restricted cash, beginning of period
|
1,927,900
|
|
Cash, cash
equivalents and restricted cash, end of period
|
$
3,755,000
|
13
. Subsequent Events
The Company’s court-supervised sale process required any bids
for its assets to be submitted by 5:00 p.m. on May 17.
No
third party qualified bids were received for the
Company’s assets in the Court-approved marketing and
sale process, so the proposed auction for assets will
not be conducted, and the Company anticipates that the
sale of the Drake Collateral will proceed under the terms of
the stalking horse agreement. There
were non-qualified third party bids received by the
Company for certain subsets of the
Company’s aircraft assets, and the
Company is currently reviewing and evaluating those offers.
With respect to any asset purchases proposed in such
non-qualified bids that include Drake Collateral, the
Company is consulting with Drake.
In May
2021, the Company agreed to sell most of the Part-out Assets for
$290,000, and recorded an impairment loss of $1,940,400 in the
first quarter of 2021.
The following discussion and analysis
should be read together with
the Company’s annual
report on Form 10-K for the fiscal year ended December 31, 2020 and
the audited consolidated financial statements and notes included
therein (collectively, the “2020 Annual Report”), as
well as
the Company’s unaudited
condensed consolidated financial statements and the related notes
included in this report.
Pursuant to Instruction 2 to
paragraph (b) of Item 303 of Regulation S-K promulgated by the SEC,
in preparing this discussion and analysis, the Company has presumed
that readers have access to and have read the disclosure under the
same heading contained in the 2020 Annual 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 the same during the first
quarters of 2021 and 2020 at 86% and 85%,
respectively.
Net
loss for the first quarters of 2021 and 2020 was $5.4 million and
$10.2 million, respectively, resulting in basic and diluted loss
per share of $(3.50) and $(6.58), 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 (212%) and (270%) in the first quarters of 2021
and 2020, respectively.
The
Company ended the first quarter of 2021 with a total of ten
aircraft held for lease, with a net book value of approximately $56
million. This represents an increase compared to the net book value
of the Company’s aircraft and engines held for lease at
December 31, 2020, mostly related to reclassification of four
off-lease aircraft previously classified as held for sale to held
for lease. In addition to the aircraft held for lease at
quarter-end, the Company held two aircraft subject to finance
leases and held airframe parts from two aircraft held for
sale.
In
October 2020, the Company’s MUFG indebtedness, 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”) was sold to
Drake.
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.
AeroCentury
and two of 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 on March 29, 2021. After the
bankruptcy filing, the Company has continued to operate
its businesses in the ordinary course as
“debtors-in-possession” under the jurisdiction of the
Court and in accordance with the applicable provisions of the
Bankruptcy Code. The Bankruptcy Court has granted the
Company’s motions designed primarily to minimize the
effect of bankruptcy on the Company’s operations,
customers and employees and make it possible for the Company
to continue existing operations without interruption during
the pendency of the Chapter 11 Case.
The
Bankruptcy Court also approved the conduct of a process to
market and sell the Company’s assets as part of the
Chapter 11 proceeding in order to permit the Company to satisfy
the Company’s obligations to its creditors,
including its sole secured creditor, Drake Asset Management
Jersey Limited (“Drake”). The Company entered
into a stalking horse agreement with Drake for the sale
of certain of the aircraft assets securing the Drake
Indebtedness (the “Drake Collateral”), which if
approved by the Bankruptcy Court as the best and/or highest
offer for the Drake Collateral, will, upon consummation,
lead to full satisfaction of the Company’s
obligations to Drake under the Drake Indebtedness.
No
third party qualified bids were received for the
Company’s assets in the Court-approved marketing and
sale process, so the proposed auction for assets will
not be conducted, and the Company anticipates that the
sale of the Drake Collateral will proceed under the terms of
the stalking horse agreement. There
were non-qualified third party bids received by the
Company for certain subsets of the
Company’s aircraft assets, and the
Company is currently reviewing and evaluating those offers.
With respect to any asset purchases proposed in such
non-qualified bids that include Drake Collateral, the
Company is consulting with Drake.
Finally,
the Company has not received payments for one of its two
sales-type finance lease receivables since early
2020. During the first quarter of 2021, the Company
entered into negotiations for the sale of an
aircraft securing the second sales-type finance lease
receivable to the customer and recorded a bad debt
allowance of $821,000. The Company entered into an
agreement to sell such aircraft to the current lessee in May
of 2021 for a purchase price of $700,000, subject to
Bankruptcy Court approval, and expects the sale to occur in the
second quarter of 2021. The Company
has received $200,000 from such lessee, $100,000 in each of
March and April 2021, which reduced the carrying value of
the finance lease receivable.
Fleet Summary
(a) Assets Held for Lease
Key
portfolio metrics of the Company’s aircraft held for lease as
of
March 31,
2021 and December
31, 2020 were as follows:
|
|
March 31
,
2021
|
December 31
,
2020
|
|
Number of aircraft
and engines held for lease
|
10
|
6
|
|
|
|
|
|
Weighted average
fleet age
|
14.7
years
|
14.4
years
|
|
Weighted average
remaining lease term
|
26
months
|
29
months
|
|
Aggregate fleet net
book value
|
$
56,085,400
|
$
45,763,100
|
|
|
For
the Three Months Ended
March 31
,
|
|
|
|
2021
|
2020
|
|
Average portfolio
utilization
|
86
%
|
85
%
|
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
March 31,
2021
and December 31, 2020:
|
|
March 31
, 2021
|
December 31
, 2020
|
||
|
Type
|
Number
owned
|
% of
net
book
value
|
Number
owned
|
% of
net
book
value
|
|
Regional jet
aircraft:
|
|
|
|
|
|
Canadair
700
|
3
|
30
%
|
3
|
38
%
|
|
Canadair
900
|
4
|
39
%
|
1
|
29
%
|
|
Turboprop
aircraft:
|
|
|
|
|
|
Bombardier
Dash-8-400
|
2
|
27
%
|
2
|
33
%
|
|
Bombardier
Dash-8-300
|
1
|
4
%
|
-
|
--
|
The
Company did not purchase any aircraft during the quarter ended
March 31, 2021 and did not sell any of its aircraft that are held
for lease. As a result of its Chapter 11 filing in March 2021, the
Company reclassified four off-lease aircraft, comprised of three
regional jet aircraft and one turboprop aircraft, from held for
sale to held for lease.
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
March 31, 2021
and
December 31, 2020 in the indicated regions (based on the domicile
of the lessee):
|
|
March
31, 2021
|
December 31,
2020
|
||
|
Region
|
Net
book
value
|
% of
net
book
value
|
Net
book
value
|
% of
net
book
value
|
|
North
America
|
$
29,979,500
|
53
%
|
$
30,433,100
|
67
%
|
|
Europe and United
Kingdom
|
15,085,900
|
27
%
|
15,330,000
|
33
%
|
|
Off
lease
|
11,020,000
|
20
%
|
-
|
-
|
|
|
$
56,085,400
|
100
%
|
$
45,763,100
|
100
%
|
For the
three months ended
March
31,
2021, approximately 66%, 21% and 13% of the Company’s
operating lease revenue was derived from customers in the United
States, Canada 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 Three Months Ended
March
31,
|
|||
|
|
2021
|
2020
|
||
|
Region
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
|
North
America
|
3
|
87
%
|
3
|
53
%
|
|
Europe and United
Kingdom
|
1
|
13
%
|
3
|
47
%
|
At
March 31
, 2021 and December 31,
2020, the Company also had two finance lease receivables
collateralized by aircraft. The Company did not record any finance
lease revenue during the quarter ended
March 31
, 2021.
(b) Assets Held for Sale
Assets
held for sale at
March 31
, 2021
consisted of airframe parts from two turboprop aircraft. During the
three months ended March 31, 2021, the Company sold its membership
interest in ACY E-175 and the three Embraer 175 aircraft,
restricted cash and debt obligations, including derivative
liability, that were classified as held for sale at December 31,
2020. Additionally, four aircraft previously held for sale were
reclassified as held for lease because the Company no longer has
the authority to sell them without the approval of the Bankruptcy
Court.
In May
2021, the Company agreed to sell the Part-out Assets for $290,000,
and recorded an impairment loss of $1,940,400 in the first quarter
of 2021.
Results of Operations
(i) Revenues and Other Income
Revenues and other
income decreased by 47% to $2.5 million in the first quarter of
2021 from $4.8 million in the first quarter of 2020. The decrease
was primarily a result of a 43% decrease in operating lease
revenues to $2.7 million in the first quarter of 2021 from $4.8
million in the first quarter of 2020 as a result of reduced rent
income from the sale of aircraft during the fourth quarter of 2020
and first quarter of 2021 and reduced rent for two assets in the
2021 quarter as a result of lease amendments related to the
COVID-19 Outbreak
(ii) Expenses
Total
expenses decreased by 55% to $7.9 million in the first quarter of
2021 from $17.7 million in the first quarter of 2020. The decrease
was primarily a result of decreases in depreciation, asset
impairment losses, interest and bad debt expense, the effects of
which were partially offset by an increase in professional fees and
general and administrative and other expenses.
Depreciation
expense decreased 68% to $0.7 million in the first quarter of 2021
from $2.2 million in the first quarter of 2020, primarily as a
result of the reclassification of three aircraft from held for
lease to held for sale during the fourth quarter of 2020, 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
the first quarter of 2021, the Company recorded impairment charges
totaling $1.9 million on two assets held for sale, based on
expected sales proceeds. During the first quarter of 2020, the
Company recorded impairment charges totaling $6.7 million on four
assets held for sale, based on expected sales
proceeds.
As a result of payment delinquencies during the first quarter of
2020 by two of the Company’s customers under its two
sales-type leases and decreases in the appraised values of the
underlying assets, the Company recorded a bad debt expense of $1.2
million. During the first quarter of 2021, based on an agreement to
sell one of the aircraft to the lessee, the Company recorded a bad
debt expense of $0.8 million.
The
Company’s interest expense decreased by 68% to $1.9 million
in the first quarter of 2021 from $6.0 million in the first quarter
of 2020, primarily as a result of a lower average interest rate and
lower interest expense related to the Company’s interest rate
swaps in the 2021 period.
Professional fees,
general and administrative and other expenses increased 88% to $1.6
million in the first quarter of 2021 from $0.9 million in the first
quarter of 2020, primarily due to increased amortization of legal
fees related to the Company’s Drake Indebtedness and legal
fees related to the Company’s Chapter 11 filing.
The
Company had a tax expense of $49,200 in the first quarter of 2021
compared to tax benefit of $2.7 million in the first quarter of
2020. The effective tax rate for the first quarter of 2021 was a
negative 0.92% tax expense compared to a 21.0% tax benefit in the
first quarter of 2020. The difference in the effective income tax
rate from the normal statutory rate in the first quarter of 2021
was primarily related to the recording of a valuation allowance in
the current period on the Company’s U.S. and foreign deferred
tax assets. In assessing the valuation of deferred tax assets, the
Company considered 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 five-year cumulative loss
through March 31, 2021, the impacts of the COVID-19 Outbreak on the
worldwide airline industry and the Company’s recent filing
for protection under Chapter 11 of the bankruptcy code. Based on
this analysis, the Company concluded that a valuation allowance is
necessary for the Company’s net 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 $1,126,100 for the three months
ended March 31, 2021. Additionally, the Company has concluded that
based on its analysis, some of its foreign net operating loss
carrybacks are not expected to be realized based on limitations on
the utilization of its foreign net operating losses, and therefore
recorded a foreign tax expense of $54,300 for the reduced tax
refund for the three months ended March 31, 2021.
Liquidity and Capital Resources
At March 31, 2021, the Company had total book assets of
approximately $64.4 million and total liabilities of $87.4 million,
resulting in a negative book equity of $23.0 million. The largest
portion, $83.3 million, of the Company’s debt is owed to
Drake Asset Management Jersey Limited (“Drake”). The
maturity date of the Drake Indebtedness was 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 on March 29, 2021, as discussed in Note 1(c).
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 condensed 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 condensed consolidated financial statements. The
condensed consolidated financial statements presented in this
Quarterly Report on Form 10-Q 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
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 Court has approved the Company’s proposed bidding
procedures with respect to the Auction Sale for the Drake
Collateral and other Company aircraft 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 received through the
Auction Sale, is expected to resolve in full the Company’s
obligations owed pursuant to the Drake Indebtedness.
No
third party qualified bids were received for the
Company’s assets in the Court-approved marketing and
sale process, so the proposed auction for assets will
not be conducted, and the Company anticipates that the
sale of the Drake Collateral will proceed under the terms of
the Stalking Horse Agreement. There
were non-qualified third party bids received by the
Company for certain subsets of the
Company’s aircraft assets, and the
Company is currently reviewing and evaluating those offers.
With respect to any asset purchases proposed in such
non-qualified bids that include Drake Collateral, the
Company is consulting with Drake.
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 being sold
to Kenyan lessees under sales-type finance leases, 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
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 provided 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.
The
interest rates payable under the Nord Loans varied by aircraft, and
were based on a fixed margin above either 30-day or 3-month LIBOR.
The maturity of each Nord Loan varied 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 was 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.
One of
the Nord Loan Collateral Aircraft was sold in 2019 and two Nord
Loan Collateral Aircraft were sold in 2020.
The excess proceeds from the 2020 sales 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.
During March 2021, the Company sold its interest
in ACY E-175 and was released from any remaining guarantee
obligations under the Nord Loan and interest swap obligations of
the special-purpose subsidiary.
(c) Paycheck Protection Program Loans
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. One of the Company’s lessees that pays
maintenance reserves 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 lessees that pay
maintenance reserves under their sales-type leases 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 increased by $0.4 million
in the first quarter of 2021 compared to the first quarter of 2020.
As discussed below, the increase in cash flow was primarily a
result of decreases in payments made for interest and maintenance,
the effects of which were partially offset by decreases in payments
received for rent and maintenance reserves and an increase in
payments made for professional fees, general and administrative
expenses.
(A)
Payments
for interest
Payments made for
interest decreased by $1.5 million in the first quarter of 2021
compared to the same period of 2020 as a result of the deferral of
the interest due on the Company’s Drake Indebtedness in the
2021 period.
(B)
Payments
for maintenance
Payments
made for maintenance decreased by $0.3 million in the first quarter
of 2021 compared to the first quarter of 2020 as a result of
maintenance performed by the Company on an off-lease aircraft that
was sold during the 2020 period.
(C)
Payments
for rent
Receipts from
lessees for rent decreased by $0.6 million in the first quarter of
2021 compared to the same period of 2020, primarily due to rent
concessions granted to one of the Company’s customers during
the fourth quarter of 2020 and decreased revenue from an asset that
was on lease during the 2020 period but off lease in
2021.
(D)
Payments
for maintenance reserves
Receipts from
lessees for maintenance reserves decreased by $0.3 million in the
first quarter of 2021 compared to the same period of 2020,
primarily due to reduced usage of the aircraft for which the
Company collects maintenance reserves and decreased maintenance
reserves from an aircraft that was on lease during the 2020 period
but off lease in 2021.
(E)
Payments
for professional fees, general and administrative
expenses
Payments made for
professional fees, general and administrative expenses increased by
$0.6 million in the first quarter of 2021 compared to the same
period of 2020, primarily as a result of costs associated with
preparing the Company’s Chapter 11 filing in the 2021
period.
(ii) Investing activities
The
Company did not acquire any aircraft during the first quarters of
2021 or 2020. During the same periods, the Company received net
cash of $10.9 million and $3.1 million, respectively, from asset
sales.
(iii) Financing activities
During
the first quarters of 2021 and 2020, the Company borrowed $1.9
million and $0.4 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 the same periods, the
Company repaid $11.0 and $1.2 million, respectively, of its total
outstanding debt under the Drake Indebtedness and MUFG
Indebtedness, respectively. Such repayments were funded by the sale
of assets. During each of the first quarters of 2021 and 2020, the
Company’s special-purpose entities repaid $0.7 million of the
Nord Loans. During the first quarters of 2021 and 2020, the Company
paid approximately $5,000 and $80,000, 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 condensed 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
condensed consolidated financial statements in this report and the
Company’s consolidated financial statements in the 2020
Annual Report.
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. The Company has proposed and the Court has approved the
conduct of an Auction Sale of the Company’s assets to
generate proceeds to be applied to the satisfaction of the Drake
Indebtedness. The Company has in place a stalking horse agreement
with an affiliate of 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. No third
party qualified bids were received for the
Company’s assets in the Court-approved marketing and
sale process, so the proposed auction for assets will
not be conducted, and the Company anticipates that the
sale of the Drake Collateral will proceed under the terms of
the Stalking Horse Agreement.
If the
sale to Drake pursuant to the Stalking Horse Agreement is
consummated, the Company anticipates that this will fully resolve
the Drake Indebtedness, but it will also result in the
Company’s disposition of 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 and future proceeds from the Part-out Assets.
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
AeroCentury and two of 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 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, resulting in continued global
economic uncertainty and the effects of which may endure well
beyond the current pandemic’s ultimate 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. Further, while the increasing
availability of vaccines and various treatments for COVID-19 are
expected to have an overall positive impact on business conditions
including travel, there remain uncertainties as to the logistics
and the overall efficacy of any treatment program, including with
regard to new strains or variants of the virus.
A
downturn in the Chinese domestic or export economy that reduces
demand for imported raw materials, such as further economic
volatility or future periods 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 sales-type finance leases with
customers located in Kenya. 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.
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 first
quarter of 2021 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 such
information.
CEO and CFO Certifications.
Attached as exhibits to this
report
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 4
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 March 31, 2021. Based on this evaluation,
the CEO and CFO concluded that the Company’s Disclosure
Controls were not effective as of March 31, 2021 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.
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 March 31, 2021.
Changes in Internal Control.
No
change in the Company’s Internal Control occurred during the
fiscal quarter ended March
31, 2021
that has materially affected, or is reasonably
likely to materially affect, the Company’s Internal
Control.
Under
the Drake Loan agreement, the Company is not permitted to pay
dividends on any shares of its capital stock without the consent of
Drake.
|
Exhibit
Number
|
Description
|
|
10.1
|
|
|
10.2
|
|
|
10.3
|
|
|
10.4
|
|
|
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
|
|
AEROCENTURY CORP.
|
|
|
Date: May 21, 2021
|
By:
|
/s/ Harold M. Lyons
|
|
|
|
Name: Harold M. Lyons
|
|
|
|
Title: Senior Vice President-Finance and
|
|
|
|
Chief Financial Officer
|
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits