
markdown PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Q1 2020 financials show significant deterioration, with a **$10.2 million net loss** and sharp equity decline, raising going concern doubts [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of March 31, 2020, total assets decreased and stockholders' equity sharply declined, driven by a large net loss Condensed Consolidated Balance Sheets (Unaudited) | | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total assets** | **$135,922,900** | **$149,595,800** | | **Total liabilities** | **$122,259,000** | **$126,337,200** | | **Total stockholders' equity** | **$13,663,900** | **$23,258,600** | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Q1 2020 net loss widened to **$10.2 million** due to decreased revenues and surging expenses from impairment and bad debt Condensed Consolidated Statements of Operations (Unaudited) | | For the Three Months Ended March 31, | | :--- | :--- | :--- | | | **2020** | **2019** | | **Total Revenues and other income** | $4,777,200 | $7,566,900 | | **Total Expenses** | $17,668,000 | $9,231,500 | | **Impairment in value of aircraft** | $6,654,900 | $1,408,400 | | **Interest Expense** | $6,012,900 | $2,912,400 | | **Bad debt expense** | $1,170,000 | - | | **Net loss** | **$(10,178,400)** | **$(1,308,200)** | | **Loss per share (Basic & Diluted)** | **$(6.58)** | **$(0.85)** | [Condensed Consolidated Statements of Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Total comprehensive loss for Q1 2020 was **$9.6 million**, significantly higher than **$1.7 million** in Q1 2019, due to net loss Condensed Consolidated Statements of Comprehensive Loss (Unaudited) | | For the Three Months Ended March 31, | | :--- | :--- | :--- | | | **2020** | **2019** | | **Net loss** | $(10,178,400) | $(1,308,200) | | **Other comprehensive income/(loss)** | $583,700 | $(427,800) | | **Total comprehensive loss** | **$(9,594,700)** | **$(1,736,000)** | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity decreased from **$23.3 million** to **$13.7 million** by March 31, 2020, due to the net loss - The balance of stockholders' equity fell from **$23,258,600** at the end of 2019 to **$13,663,900** at the end of Q1 2020, with the change primarily attributed to the net loss of **$10,178,400**[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow turned negative in Q1 2020, a sharp reversal from prior year, with overall cash increasing slightly Condensed Consolidated Statements of Cash Flows (Unaudited) | | For the Three Months Ended March 31, | | :--- | :--- | :--- | | | **2020** | **2019** | | **Net cash (used)/provided by operating activities** | $(624,500) | $3,957,200 | | **Net cash provided by investing activities** | $3,104,800 | $2,790,500 | | **Net cash used in financing activities** | $(1,909,300) | $(245,000) | | **Cash, cash equivalents and restricted cash, end of period** | $3,998,100 | $8,045,200 | [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20%28Unaudited%29) Notes detail critical issues, including a 'Going Concern' warning due to debt defaults, COVID-19 impact, and MUFG facility conversion to term loan - There is substantial doubt regarding the Company's ability to continue as a going concern due to defaults under its MUFG Credit Facility, a **$3.1 million** derivative termination liability, and defaults on Nord Loans. The COVID-19 pandemic has caused significant cash flow issues for its airline customers, further straining the Company's ability to meet its obligations[28](index=28&type=chunk)[29](index=29&type=chunk)[31](index=31&type=chunk) - The COVID-19 pandemic has severely impacted the airline industry, leading to non-payment of rent by four of the company's eight customers. This has led to lease concessions and uncertainty regarding future payments[32](index=32&type=chunk)[33](index=33&type=chunk) - The company recorded a **$6.7 million** impairment loss on four assets held for sale, writing them down to fair value, which was significantly affected by the COVID-19 outbreak[52](index=52&type=chunk)[59](index=59&type=chunk) - The company was not in compliance with various covenants under its MUFG Credit Facility as of March 31, 2020. Subsequently, on May 1, 2020, the facility was converted into a term loan, which is no longer a source of acquisition financing[64](index=64&type=chunk)[68](index=68&type=chunk) - In March 2020, the company terminated its MUFG interest rate swaps and incurred a **$3.1 million** liability, payable by March 31, 2021. The company also dedesignated its five remaining Nord Loan interest rate swaps as hedges because future hedged interest payments were no longer probable[42](index=42&type=chunk)[43](index=43&type=chunk)[80](index=80&type=chunk) - Subsequent to the quarter end, on May 1, 2020, the MUFG Credit Facility was amended into a term loan with a maturity date of March 31, 2021. The agreement establishes deadlines for achieving milestones toward a strategic alternative to enable repayment of the debt, with a final consummation date of August 15, 2020[103](index=103&type=chunk)[105](index=105&type=chunk) - On May 20, 2020, a subsidiary of the company was granted a **$276,353** loan under the Paycheck Protection Program (PPP)[107](index=107&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses severe operational and financial challenges, focusing on substantial doubt about going concern due to debt defaults, COVID-19 impact, and a significant net loss [Overview](index=24&type=section&id=Overview) Overview highlights dire financial situation, with a significant net loss in Q1 2020, substantial doubt about going concern due to debt defaults and COVID-19 impact - The COVID-19 pandemic has led to significant cash flow issues for the Company's airline customers, resulting in requests for lease payment concessions and deferrals[111](index=111&type=chunk) - Net loss for Q1 2020 was **$10.2 million**, compared to **$1.3 million** in Q1 2019, resulting in a loss per share of **$(6.58)** versus **$(0.85)**[114](index=114&type=chunk) - The company has engaged B. Riley FBR to help formulate a Recapitalization Plan to address its capital structure and financing needs following the restructuring of its MUFG debt[115](index=115&type=chunk) - Due to debt defaults, customer non-payments, and liquidity issues, there is substantial doubt regarding the Company's ability to continue as a going concern[118](index=118&type=chunk) [Fleet Summary](index=25&type=section&id=Fleet%20Summary) As of March 31, 2020, the company held 11 aircraft for lease with a net book value of **$106.2 million**, with portfolio utilization dropping to **85%** Key Portfolio Metrics (Assets Held for Lease) | | March 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Number of aircraft | 11 | 11 | | Weighted average fleet age | 12.0 years | 11.8 years | | Weighted average remaining lease term | 38 months | 41 months | | Aggregate fleet net book value | $106,200,000 | $108,368,600 | | **For the Three Months Ended March 31,** | **2020** | **2019** | | Average portfolio utilization | 85% | 98% | - The operating lease portfolio is geographically concentrated, with **53%** of Q1 2020 operating lease revenue from 3 lessees in North America and **47%** from 3 lessees in Europe[121](index=121&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) Q1 2020 revenues decreased significantly while expenses surged due to asset impairment, increased interest, and bad debt, leading to a wider net loss - Revenues and other income decreased by **37%** to **$4.8 million** in Q1 2020 from **$7.6 million** in Q1 2019, primarily due to a **33%** decrease in operating lease revenue[124](index=124&type=chunk)[125](index=125&type=chunk) - Total expenses increased by **91%** to **$17.7 million** in Q1 2020, primarily due to higher asset impairment losses (**$6.7M** vs **$1.4M**), interest expense (**$6.0M** vs **$2.9M**), and bad debt expense (**$1.2M** vs **$0**)[127](index=127&type=chunk)[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is severely constrained, raising substantial doubt about going concern, due to debt restructuring, defaults, and negative operating cash flow - On May 1, 2020, the MUFG Credit Facility was converted into a term loan with a final maturity of March 31, 2021. The agreement requires the company to meet milestones for a strategic alternative to repay the debt, with a consummation deadline of August 15, 2020[135](index=135&type=chunk)[137](index=137&type=chunk) - In March 2020, a customer leasing two aircraft under Nord Loan financing did not make its rent payment, leading to a payment default by the company's special-purpose subsidiaries on the Nord Loans[146](index=146&type=chunk) - Cash flow from operations decreased by **$4.6 million**, becoming a **$0.6 million** use of cash in Q1 2020 compared to a **$4.0 million** source of cash in Q1 2019. The decrease was primarily due to a **$4.3 million** reduction in rent receipts from lessees[158](index=158&type=chunk)[159](index=159&type=chunk) - The company's ability to meet cash obligations may be wholly dependent on obtaining approval from MUFG Lenders to access its restricted cash account, as any unrestricted cash over **$1 million** is swept to pay down the MUFG loan[116](index=116&type=chunk)[150](index=150&type=chunk) [Critical Accounting Policies, Judgments and Estimates](index=33&type=section&id=Critical%20Accounting%20Policies%20%2C%20Judgments%20and%20Estimates) Financial statements are based on GAAP, requiring management estimates and judgments, with further details in Note 1 and 2019 Annual Report - The preparation of financial statements requires management to make significant estimates and judgments, including those related to asset residual values, impairment, and allowances for doubtful accounts. Actual results could differ materially[169](index=169&type=chunk) [Outlook](index=33&type=section&id=Outlook) Outlook is highly uncertain, dependent on complying with MUFG term loan, securing new capital, and managing Nord Loan defaults amid severe COVID-19 impact - The company's future is almost wholly dependent on its ability to comply with the MUFG term loan, achieve the required milestones to repay the debt by August 15, 2020, and obtain new capital[170](index=170&type=chunk)[171](index=171&type=chunk) - The company is managing an event of default under its Nord Loans, which was caused by a lessee's non-payment due to the COVID-19 pandemic[172](index=172&type=chunk) - The COVID-19 pandemic has caused four of the company's eight customers to request lease payment concessions or deferrals. The long-term effects are expected to include lowered demand for aircraft capacity and depressed asset valuations[173](index=173&type=chunk) [Factors that May Affect Future Results and Liquidity](index=34&type=section&id=Factors%20that%20May%20Affect%20Future%20Results%20and%20Liquidity) This section details numerous significant risks, including COVID-19 impact, MUFG term loan compliance, Nord Loan default, financing availability, and lessee concentration - **COVID-19 Pandemic:** The pandemic has led to significant cash flow issues for airline customers, resulting in non-payment and requests for deferrals. A significant nonpayment could cause new defaults under the company's own debt obligations, leading to acceleration of debt and foreclosure[175](index=175&type=chunk) - **MUFG Indebtedness:** Failure to comply with the new MUFG term loan requirements, including achieving milestones for a strategic alternative by the required deadlines, could result in the lenders declaring a default, accelerating the debt, and foreclosing on the company's assets[176](index=176&type=chunk) - **Nord Loan Default:** An event of default has occurred on the Nord Loans due to a lessee's non-payment. Failure to cure this default could lead to repossession of all five aircraft financed under the Nord Loans, which would also trigger a default under the MUFG loan[177](index=177&type=chunk) - **Availability of Financing:** The MUFG facility is no longer available for acquisitions. The company will need to find new sources of capital to acquire assets, and there is no assurance it can be obtained on favorable terms, if at all[178](index=178&type=chunk) - **Lessee Concentration:** The company's two largest customers accounted for approximately **30%** and **22%** of its monthly operating lease revenue for Q1 2020, making it highly sensitive to any negative developments with these customers[195](index=195&type=chunk) - **LIBOR Transition:** The potential discontinuation of LIBOR after 2021 could affect the company's Nord Loans. Failure to agree on a suitable replacement index could increase costs or even cause an acceleration of the debt[216](index=216&type=chunk)[219](index=219&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Disclosures under this item have been omitted, as permitted by SEC rules for smaller reporting companies - Disclosure under this item has been omitted pursuant to the rules of the SEC that permit smaller reporting companies to omit such information[229](index=229&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were not effective as of March 31, 2020, due to identified material weaknesses in internal control over financial reporting - A material weakness in internal control over financial reporting was identified related to the incorrect accounting for management and acquisition fees and a deficient tax review control for complex transactions[232](index=232&type=chunk) - Based on their evaluation, the CEO and CFO concluded that the Company's Disclosure Controls were not effective as of March 31, 2020, due to the identified material weakness[233](index=233&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[234](index=234&type=chunk) PART II – OTHER INFORMATION [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company is not permitted to pay dividends on capital stock without MUFG Lenders' consent, as stipulated by the Credit Facility agreement - Under the Credit Facility agreement, the Company is not permitted to pay dividends on any shares of its capital stock without the consent of the MUFG Lenders[237](index=237&type=chunk) [Item 6. Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with Form 10-Q, including amended MUFG Loan Agreement and CEO/CFO certifications - Key exhibits filed include the amended loan and security agreements with MUFG dated May 1, 2020, and CEO/CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act[239](index=239&type=chunk)