Delaware
|
|
94-3263974
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(I.R.S.
Employer Identification No.)
|
Title
of each class
|
Trading
Symbol(s)
|
Name
of each exchange on which registered
|
Common
Stock
|
ACY
|
NYSE
American
|
Large
accelerated filer ☐
|
|
Accelerated filer
☐
|
Non-accelerated
filer ☒
|
|
Smaller
reporting company ☒
|
|
|
Emerging growth
company ☐
|
ASSETS
|
||
|
June 30,
|
December 31,
|
|
2019
|
2018
|
Assets:
|
|
|
Cash
and cash equivalents
|
$3,356,700
|
$1,542,500
|
Securities
|
-
|
121,000
|
Accounts
receivable, including deferred rent of $926,100 and $869,600 at
June 30, 2019 and December 31, 2018, respectively
|
5,633,400
|
3,967,200
|
Finance
leases receivable
|
16,589,200
|
15,250,900
|
Aircraft and aircraft engines held for lease, net
of accumulated depreciation of $38,084,900 and $36,675,500 at June
30, 2019 and December 31, 2018,
respectively
|
168,381,900
|
184,019,900
|
Assets
held for sale
|
9,682,700
|
10,223,300
|
Property,
equipment and furnishings, net of accumulated depreciation of
$5,900 and $2,200 at June 30, 2019 and December 31, 2018,
respectively
|
66,600
|
69,100
|
Lease
right of use, net of accumulated amortization of $201,300 at June
30, 2019
|
1,271,500
|
-
|
Favorable
lease acquired, net of accumulated amortization of $61,700 at
December 31, 2018
|
-
|
863,300
|
Deferred
tax asset
|
393,700
|
254,900
|
Prepaid
expenses and other assets
|
286,400
|
840,100
|
Total
assets
|
$205,662,100
|
$217,152,200
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||
Liabilities:
|
|
|
Accounts
payable and accrued expenses
|
$333,200
|
$1,025,600
|
Accrued
payroll
|
99,700
|
78,600
|
Notes
payable and accrued interest, net of unamortized debt issuance
costs of $5,036,500 and $674,300 at June 30, 2019 and December 31,
2018, respectively
|
123,416,800
|
131,092,200
|
Derivative
liability
|
2,229,100
|
-
|
Lease
liability
|
536,100
|
-
|
Maintenance
reserves
|
26,301,900
|
28,527,500
|
Accrued
maintenance costs
|
252,000
|
463,300
|
Security
deposits
|
3,052,800
|
3,367,800
|
Unearned
revenues
|
4,107,200
|
3,274,800
|
Deferred
income taxes
|
6,686,000
|
7,537,100
|
Income
taxes payable
|
184,300
|
497,400
|
Total
liabilities
|
167,199,100
|
175,864,300
|
Commitments
and contingencies (Note 9)
|
|
|
Stockholders’
equity:
|
|
|
Preferred
stock, $0.001 par value, 2,000,000 shares authorized, no shares
issued and outstanding
|
-
|
-
|
Common
stock, $0.001 par value, 10,000,000 shares authorized, 1,759,216
shares issued and 1,545,884 shares outstanding at June 30, 2019 and
December 31, 2018
|
1,800
|
1,800
|
Paid-in
capital
|
16,782,800
|
16,782,800
|
Retained
earnings
|
26,154,800
|
27,540,600
|
Accumulated
other comprehensive income
|
(1,439,100)
|
-
|
|
41,500,300
|
44,325,200
|
Treasury
stock at cost, 213,332 shares at June 30, 2019 and December 31,
2018, respectively
|
(3,037,300)
|
(3,037,300)
|
Total
stockholders’ equity
|
38,463,000
|
41,287,900
|
Total
liabilities and stockholders’ equity
|
$205,662,100
|
$217,152,200
|
|
For the Six Months Ended
June 30,
|
For the Three Months Ended June 30,
|
||
|
2019
|
2018
|
2019
|
2018
|
Revenues
and other income:
|
|
|
|
|
Operating
lease revenue
|
$14,114,200
|
$13,286,800
|
$6,966,000
|
$6,823,900
|
Maintenance
reserves revenue, net
|
-
|
1,629,000
|
-
|
579,000
|
Finance
lease revenue
|
496,200
|
740,400
|
260,100
|
361,300
|
Net
loss on sales-type finance leases
|
(170,600)
|
-
|
(170,600)
|
-
|
Net
gain on disposal of assets
|
277,900
|
9,900
|
99,600
|
18,100
|
Other
income
|
10,800
|
2,600
|
6,600
|
1,200
|
|
14,728,500
|
15,668,700
|
7,161,700
|
7,783,500
|
Expenses:
|
|
|
|
|
Depreciation
|
6,170,700
|
6,092,300
|
2,970,000
|
3,150,400
|
Interest
|
5,397,500
|
4,619,400
|
2,485,000
|
2,365,100
|
Provision for
impairment in value of aircraft
|
1,568,400
|
298,200
|
160,000
|
298,200
|
Professional fees,
general and administrative and other
|
1,681,900
|
954,000
|
856,700
|
376,900
|
Salaries and
employee benefits
|
1,219,800
|
-
|
620,900
|
-
|
Management
fees
|
-
|
2,948,800
|
-
|
1,502,100
|
Maintenance
|
117,400
|
160,200
|
10,000
|
68,900
|
Insurance
|
279,500
|
157,700
|
139,000
|
78,000
|
Other
taxes
|
63,200
|
45,100
|
25,600
|
22,500
|
|
16,498,400
|
15,275,700
|
7,267,200
|
7,862,100
|
(Loss)/income
before income tax benefit
|
(1,769,900)
|
393,000
|
(105,500)
|
(78,600)
|
Income
tax (benefit)/provision
|
(384,100)
|
156,800
|
(27,900)
|
2,500
|
Net
(loss)/income
|
$(1,385,800)
|
$236,200
|
$(77,600)
|
$(81,100)
|
(Loss)/earnings per
share:
|
|
|
|
|
Basic
|
$(0.90)
|
$0.17
|
$(0.05)
|
$(0.06)
|
Diluted
|
$(0.90)
|
$0.17
|
$(0.05)
|
$(0.06)
|
Weighted
average shares used in
(loss)/earnings
per share computations:
|
|
|
|
|
Basic
|
1,545,884
|
1,416,699
|
1,545,884
|
1,416,699
|
Diluted
|
1,545,884
|
1,416,699
|
1,545,884
|
1,416,699
|
|
For the Six Months Ended
June 30,
|
For the Three Months Ended
June 30,
|
||
|
2019
|
2018
|
2019
|
2018
|
Net
(loss)/income
|
$(1,385,800)
|
$236,200
|
$(77,600)
|
$(81,100)
|
Other
comprehensive loss:
|
|
|
|
|
Unrealized
losses on derivative instruments
|
(1,832,700)
|
-
|
(1,287,900)
|
-
|
Tax
benefit related to items of other comprehensive loss
|
393,600
|
-
|
276,600
|
-
|
Other
comprehensive loss
|
(1,439,100)
|
-
|
(1,011,300)
|
-
|
Total
comprehensive (loss)/income
|
$(2,824,900)
|
$236,200
|
$(1,088,900)
|
$(81,100)
|
|
Number of Common
Stock Shares Outstanding
|
Common
Stock
|
Paid-in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other Comprehensive Income
|
Total
|
Balance, December
31, 2017
|
1,416,699
|
$1,600
|
$14,780,100
|
$35,621,800
|
$(3,036,800)
|
$-
|
$47,366,700
|
Net
income
|
-
|
-
|
-
|
317,300
|
-
|
-
|
317,300
|
Balance, March 31,
2018
|
1,416,699
|
1,600
|
14,780,100
|
35,939,100
|
(3,036,800)
|
-
|
47,684,000
|
Net
loss
|
-
|
-
|
-
|
(81,100)
|
-
|
-
|
(81,100)
|
Balance, June 30,
2018
|
1,416,699
|
$1,600
|
$14,780,100
|
$35,858,000
|
$(3,036,800)
|
$-
|
$47,602,900
|
|
|
|
|
|
|
|
|
Balance, December
31, 2018
|
1,545,884
|
$1,800
|
$16,782,800
|
$27,540,600
|
$(3,037,300)
|
$-
|
$41,287,900
|
Net
loss
|
-
|
-
|
-
|
(1,308,200)
|
-
|
-
|
(1,308,200)
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
(427,800)
|
(427,800)
|
Balance, March 31,
2019
|
1,545,884
|
1,800
|
16,782,800
|
26,232,400
|
(3,037,300)
|
(427,800)
|
39,551,900
|
Net
loss
|
-
|
-
|
-
|
(77,600)
|
-
|
-
|
(77,600)
|
Accumulated other
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
(1,011,300)
|
(1,011,300)
|
Balance, June 30,
2019
|
1,545,884
|
$1,800
|
$16,782,800
|
$26,154,800
|
$(3,037,300)
|
$(1,439,100)
|
$38,463,000
|
|
For the Six
Months Ended
June
30,
|
|
|
2019
|
2018
|
Net cash provided
by operating activities
|
$6,419,900
|
$11,191,500
|
Investing
activities:
|
|
|
Proceeds from sale
of aircraft and aircraft engines held for lease, net of re-sale
fees
|
1,710,500
|
3,186,800
|
Proceeds from sale
of assets held for sale, net of re-sale fees
|
2,181,600
|
2,644,900
|
Investment in
aircraft parts and acquisition costs
|
-
|
(22,606,000)
|
Net cash provided
by/(used in) investing activities
|
3,892,100
|
(16,774,300)
|
Financing
activities:
|
|
|
Issuance of notes
payable – Credit Facility
|
5,100,000
|
21,000,000
|
Repayment of notes
payable – Credit Facility
|
(40,100,000)
|
(17,500,000)
|
Issuance of notes
payable – Term Loans
|
44,310,000
|
-
|
Repayment of notes
payable – UK LLC SPE Financing
|
(9,211,100)
|
(2,127,000)
|
Repayment of notes
payable – Term Loans
|
(3,533,600)
|
-
|
Debt issuance
costs
|
(5,063,100)
|
(70,000)
|
Net cash (used
in)/provided by financing activities
|
(8,497,800)
|
1,303,000
|
Net
increase/(decrease) in cash and cash equivalents
|
1,814,200
|
(4,279,800)
|
Cash and cash
equivalents, beginning of period
|
1,542,500
|
8,657,800
|
Cash and cash
equivalents, end of period
|
$3,356,700
|
$4,378,000
|
|
June 30,
2019
|
December 31,
2018
|
||
Type
|
Number
Owned
|
% of net book
value
|
Number
owned
|
% of net book
value
|
Regional jet
aircraft
|
13
|
86%
|
13
|
81%
|
Turboprop
aircraft
|
2
|
14%
|
4
|
18%
|
Engines
|
-
|
-%
|
1
|
1%
|
Years ending
December 31
|
|
|
|
Remainder of
2019
|
$13,717,000
|
2020
|
25,749,600
|
2021
|
18,648,200
|
2022
|
16,690,600
|
2023
|
13,007,800
|
Thereafter
|
21,589,500
|
|
$109,402,700
|
|
June
30,
2019
|
December
31,
2018
|
Gross minimum lease
payments receivable
|
$18,153,300
|
$17,107,100
|
Less unearned
interest
|
(1,564,100)
|
(1,856,200)
|
Finance leases
receivable
|
$16,589,200
|
$15,250,900
|
Years ending
December 31
|
|
|
|
Remainder of
2019
|
$6,146,600
|
2020
|
4,708,200
|
2021
|
5,085,400
|
2022
|
2,213,100
|
|
$18,153,300
|
|
June
30,
2019
|
December
31,
2018
|
Credit
Facility:
|
|
|
Principal
|
$87,400,000
|
$122,400,000
|
Unamortized
debt issuance costs
|
(3,849,900)
|
(674,300)
|
Accrued
interest
|
164,500
|
139,300
|
Special purpose
financing:
|
|
|
Principal:
|
|
|
UK
SPE Financing
|
-
|
9,211,200
|
Term
Loans
|
40,776,400
|
-
|
Unamortized
debt issuance costs
|
(1,186,600)
|
-
|
Accrued
interest
|
112,400
|
16,000
|
|
$123,416,800
|
$131,092,200
|
|
For the Six
Months
Ended June
30,
|
For the
Three Months
Ended June
30,
|
||
|
2019
|
2018
|
2019
|
2018
|
Change in value of
Swaps
|
$451,400
|
$-
|
$43,000
|
$-
|
Other
items
|
(22,100)
|
-
|
(20,800)
|
-
|
Included in
interest expense
|
$429,300
|
$-
|
$22,200
|
$-
|
The following
amount was included in other comprehensive income, before
tax:
|
|
|
|
|
|
|
|
|
|
Change in value of
hedged Swaps
|
$(1,832,700)
|
-
|
$(1,287,900)
|
$-
|
Designated interest
rate hedges fair value
|
$(2,147,700)
|
Other interest rate
swap
|
(81,400)
|
Total derivative
(liability)
|
$(2,229,100)
|
|
June
30,
2019
|
December
31,
2018
|
2019
|
$98,200
|
$193,500
|
2020
|
196,400
|
196,400
|
2021
|
199,300
|
199,300
|
2022
|
101,100
|
101,100
|
|
595,000
|
$690,300
|
Discount
|
(58,900)
|
|
Lease liability at
June 30, 2019
|
$536,100
|
|
Fixed rental
expense during the quarter
|
$110,900
|
Variable lease
expense
|
32,000
|
Total lease expense
during the quarter
|
$142,900
|
|
June 30, 2019
|
December 31, 2018
|
||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Money
market funds
|
$659,100
|
$659,100
|
$-
|
$-
|
$656,400
|
$656,400
|
$-
|
$-
|
Derivatives
|
(2,229,100)
|
-
|
(2,229,100)
|
-
|
-
|
-
|
-
|
-
|
Total
|
$(1,570,000)
|
$659,100
|
$(2,229,100)
|
$-
|
$656,400
|
$656,400
|
$-
|
$-
|
|
Assets Written Down to Fair Value
|
Total Losses
|
||||||||
|
June 30, 2019
|
December 31, 2018
|
For the Six Months Ended June 30,
|
|||||||
|
Total
|
Level 1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
2019
|
2018
|
Assets
held for sale
|
$5,703,000
|
$-
|
$-
|
$5,703,000
|
$5,800,000
|
$-
|
$-
|
$5,800,000
|
$1,568,400
|
$-
|
|
For the
Six Months
Ended June
30,
|
For the
Three Months
Ended June
30,
|
||
|
2019
|
2018
|
2019
|
2018
|
Net
(loss)/income
|
$(1,385,800)
|
$236,200
|
$(77,600)
|
$(81,100)
|
Weighted average
shares outstanding for the period
|
1,545,884
|
1,416,699
|
1,545,884
|
1,416,699
|
Basic
(loss)/earnings per share
|
$(0.90)
|
$0.17
|
$(0.05)
|
$(0.06)
|
Diluted
(loss)/earnings per share
|
$(0.90)
|
$0.17
|
$(0.05)
|
$(0.06)
|
|
June
30,
2019
|
December
31,
2018
|
Number of aircraft
and engines held for lease
|
15
|
18
|
|
|
|
Weighted average
fleet age
|
11.0 years
|
11.1 years
|
Weighted average
remaining lease term
|
55 months
|
58 months
|
Aggregate fleet net
book value
|
$168,381,900
|
$184,019,900
|
|
For the Six
Months
Ended
June
30,
|
For the Three
Months
Ended
June
30,
|
||
|
2019
|
2018
|
2019
|
2018
|
Average portfolio
utilization
|
98%
|
90%
|
99%
|
91%
|
|
June 30,
2019
|
December 31,
2018
|
||
Type
|
Number
owned
|
% of net book
value
|
Number
owned
|
% of net book
value
|
Turboprop
aircraft:
|
|
|
|
|
Bombardier
Dash-8-400
|
2
|
14%
|
2
|
13%
|
Bombardier
Dash-8-300
|
-
|
-%
|
2
|
5%
|
|
|
|
|
|
Regional jet
aircraft:
|
|
|
|
|
Canadair
900
|
5
|
41%
|
5
|
39%
|
Embraer
175
|
3
|
18%
|
3
|
16%
|
Canadair
1000
|
2
|
14%
|
2
|
14%
|
Canadair
700
|
3
|
13%
|
3
|
12%
|
|
|
|
|
|
Engines:
|
|
|
|
|
Pratt
& Whitney 150A
|
-
|
-%
|
1
|
1%
|
|
June 30,
2019
|
December 31,
2018
|
||
Region
|
Net book
value
|
%
of
net book
value
|
Net book
value
|
%
of
net book
value
|
Europe
|
$102,877,100
|
61%
|
$110,069,000
|
60%
|
North
America
|
65,504,800
|
39%
|
68,485,400
|
37%
|
Asia
|
-
|
-%
|
5,465,500
|
3%
|
|
$168,381,900
|
100%
|
$184,019,900
|
100%
|
|
For the Six
Months Ended June 30,
|
For the Three
Months Ended June
30,
|
||||||
|
2019
|
2018
|
2019
|
2018
|
||||
Region
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Number
of
lessees
|
%
of
operating
lease
revenue
|
Europe
|
4
|
62%
|
4
|
57%
|
4
|
64%
|
3
|
56%
|
North
America
|
4
|
36%
|
4
|
38%
|
3
|
36%
|
4
|
39%
|
Asia
|
1
|
2%
|
1
|
5%
|
-
|
-%
|
1
|
5%
|
Exhibit
Number
|
Description
|
Certification of
Michael G. Magnusson, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
Certification of
Toni M. Perazzo, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certification of
Michael G. Magnusson, Chief Executive Officer, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
32.2*
|
Certification of
Toni M. Perazzo, Chief Financial Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
101.INS
|
XBRL Instance
Document
|
101.SCH
|
XBRL Schema
Document
|
101.CAL
|
XBRL Calculation
Linkbase Document
|
101.LAB
|
XBRL Label Linkbase
Document
|
101.PRE
|
XBRL Presentation
Linkbase Document
|
101.DEF
|
XBRL Definition
Linkbase Document
|
|
AEROCENTURY CORP.
|
|
Date: August 8,
2019
|
By:
|
/s/ Toni M. Perazzo
|
|
|
Name: Toni M. Perazzo
|
|
|
Title: Senior Vice President-Finance and
|
|
|
Chief Financial Officer
|
|
I, Michael G.
Magnusson, certify that:
|
|
1. I have
reviewed this quarterly report on Form 10-Q of AeroCentury
Corp.;
|
|
2. Based on
my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
|
|
3. Based on
my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
|
|
4. The
registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
|
|
(b) Designed
such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
|
|
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
|
|
(d) Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
|
|
5. The
registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
|
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
|
Date: August ,
2019
|
/s/ Michael G.
Magnusson
|
|
Michael G.
Magnusson
|
|
President and Chief
Executive Officer
|
|
|
|
I, Toni M. Perazzo,
certify that:
|
|
1. I have
reviewed this quarterly report on Form 10-Q of AeroCentury
Corp.;
|
|
2. Based on
my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this report;
|
|
3. Based on
my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
|
|
4. The
registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this report is being prepared;
|
|
(b) Designed
such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
|
|
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
|
|
(d) Disclosed
in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
|
|
5. The
registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
|
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s
internal control over financial reporting.
|
Date: August 8,
2019
|
/s/ Toni M.
Perazzo
|
|
Toni M.
Perazzo
|
|
Sr. Vice President
- Finance and Chief Financial Officer
|
|
|
|
(1) the Report
fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934,
and
|
|
(2) the information
contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company at
the dates and for the periods indicated.
|
Date: August 8,
2019
|
/s/ Toni M.
Perazzo
|
|
Toni M.
Perazzo
|
|
Sr. Vice
President - Finance and Chief
Financial Officer
|
|
|
|
(1) the Report
fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934,
and
|
|
(2) the information
contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company at
the dates and for the periods indicated.
|
Date: August 8,
2019
|
/s/ Michael G.
Magnusson
|
|
Michael G.
Magnusson
|
|
President and Chief
Executive Officer
|
|
|
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Aug. 08, 2019 |
|
Document And Entity Information | ||
Entity Registrant Name | AEROCENTURY CORP | |
Entity Central Index Key | 0001036848 | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2019 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity's Reporting Status Current? | Yes | |
Is Entity Emerging Growth Company? | false | |
Entity Filer Category | Non-accelerated Filer | |
Entity Small Business | true | |
Entity Shell Company | false | |
Entity Common Stock, Shares Outstanding | 1,545,884 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2019 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
ASSETS | ||
Accounts receivable, deferred rent | $ 926,100 | $ 869,600 |
Aircraft and aircraft engines held for lease, accumulated depreciation | 38,084,900 | 36,675,500 |
Accumulated depreciation | 5,900 | 2,200 |
Accumulated amortization, lease right of use | 201,300 | 0 |
Accumulated amortization, favorable lease acquired | 0 | 61,700 |
Liabilities: | ||
Unamortized debt issuance costs | $ 5,036,500 | $ 674,300 |
Stockholders' equity: | ||
Preferred stock, par value | $ .001 | $ .001 |
Preferred stock, authorized | 2,000,000 | 2,000,000 |
Preferred stock, issued | 0 | 0 |
Preferred stock, outstanding | 0 | 0 |
Common stock, par value | $ .001 | $ 0.001 |
Common stock, authorized | 10,000,000 | 10,000,000 |
Common stock, issued | 1,759,216 | 1,759,216 |
Common stock, outstanding | 1,545,884 | 1,545,884 |
Treasury stock | 213,332 | 213,332 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Revenues and other income: | ||||
Operating lease revenue | $ 6,966,000 | $ 6,823,900 | $ 14,114,200 | $ 13,286,800 |
Maintenance reserves revenue, net | 0 | 579,000 | 0 | 1,629,000 |
Finance lease revenue | 260,100 | 361,300 | 496,200 | 740,400 |
Net loss on sales-type finance leases | (170,600) | 0 | (170,600) | 0 |
Net gain on disposal of assets | 99,600 | 18,100 | 277,900 | 9,900 |
Other income | 6,600 | 1,200 | 10,800 | 2,600 |
Total Income | 7,161,700 | 7,783,500 | 14,728,500 | 15,668,700 |
Expenses: | ||||
Depreciation | 2,970,000 | 3,150,400 | 6,170,700 | 6,092,300 |
Interest | 2,485,000 | 2,365,100 | 5,397,500 | 4,619,400 |
Provision for impairment in value of aircraft | 160,000 | 298,200 | 1,568,400 | 298,200 |
Professional fees, general and administrative and other | 856,700 | 376,900 | 1,681,900 | 954,000 |
Salaries and employee benefits | 620,900 | 0 | 1,219,800 | 0 |
Management fees | 0 | 1,502,100 | 0 | 2,948,800 |
Maintenance | 10,000 | 68,900 | 117,400 | 160,200 |
Insurance | 139,000 | 78,000 | 279,500 | 157,700 |
Other taxes | 25,600 | 22,500 | 63,200 | 45,100 |
Total expenses | 7,267,200 | 7,862,100 | 16,498,400 | 15,275,700 |
(Loss)/income before income tax benefit | (105,500) | (78,600) | (1,769,900) | 393,000 |
Income tax (benefit)/provision | (27,900) | 2,500 | (384,100) | 156,800 |
Net (loss)/income | $ (77,600) | $ (81,100) | $ (1,385,800) | $ 236,200 |
(Loss)/earnings per share: | ||||
Basic | $ (0.05) | $ (0.06) | $ (0.90) | $ 0.17 |
Diluted | $ (0.05) | $ (0.06) | $ (0.90) | $ 0.17 |
Weighted average shares used in (loss)/earnings per share computations: | ||||
Basic | 1,545,884 | 1,416,699 | 1,545,884 | 1,416,699 |
Diluted | 1,545,884 | 1,416,699 | 1,545,884 | 1,416,699 |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Statement of Comprehensive Income [Abstract] | ||||
Net (loss)/income | $ (77,600) | $ (81,100) | $ (1,385,800) | $ 236,200 |
Other comprehensive loss: | ||||
Unrealized losses on derivative instruments | (1,287,900) | 0 | (1,832,700) | 0 |
Tax benefit related to items of other comprehensive loss | 276,600 | 0 | 393,600 | 0 |
Other comprehensive loss | (1,011,300) | 0 | (1,439,100) | 0 |
Total comprehensive (loss)/income | $ (1,088,900) | $ (81,100) | $ (2,824,900) | $ 236,200 |
Condensed Consolidated Statements of Cash Flows (Parenthetical) - USD ($) |
6 Months Ended | |
---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Statement of Cash Flows [Abstract] | ||
Interest paid | $ 4,119,300 | $ 3,942,500 |
Income taxes paid | $ 427,000 | $ 1,600 |
Organization and Summary of Significant Accounting Policies |
6 Months Ended |
---|---|
Jun. 30, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
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 “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 (“Term Loans”) made to ACY 19002, ACY 19003, and two other newly formed special purpose subsidiaries of AeroCentury. See Note 4(b) for more information about the Term Loans.
On October 1, 2018, AeroCentury acquired JetFleet Holding Corp. (“JHC”) in a reverse triangular merger (“Merger”) for consideration of approximately $2.9 million in cash and 129,217 shares of common stock of AeroCentury, as determined pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into by AeroCentury, JHC and certain other parties in October 2017. JHC is the parent company of JetFleet Management Corp. (“JMC”), which is an integrated aircraft management, marketing and financing business and the manager of the Company’s assets. Upon completion of the Merger, JHC became a wholly-owned subsidiary of the Company, and as a result, JHC's results are included in the Company's consolidated financial statements beginning on October 1, 2018.
In November 2018, AeroCentury formed two wholly-owned subsidiaries, ACY SN 15129 LLC (“ACY 15129”) and ACY E-175 LLC (“ACY E-175”), for the purpose of refinancing four of the Company’s aircraft using the Term Loans. Because the Term Loans did not close until February 2019, the subject aircraft remained as collateral under the Credit Facility as of December 31, 2018, and ACY 15129 and ACY E-175 had no activity in 2018.
Financial information for AeroCentury and its consolidated subsidiaries is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 and six-month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other period. All intercompany balances and transactions have been eliminated in consolidation.
(b) 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 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.
(c) Comprehensive Income
The Company reflects changes in the fair value of its interest rate swap derivatives that are designated as hedges in other comprehensive income. Such amounts are reclassified into earnings in the periods in which the hedged transaction occurs, and are included in interest expense.
(d) Finance Leases
As of June 30, 2019, the Company had four aircraft subject to sales-type finance leases and three aircraft subject to direct financing leases. All seven 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 has classified each of these seven 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 four sales-type finance leases, the Company recognized as a gain or loss the amount equal to (i) the net investment in the sales-type finance 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.
The Company recognized interest earned on finance leases in the amount of $260,100 and $361,300 in the quarters ended June 30, 2019 and 2018, respectively and $496,200 and $740,400 in the six-month periods ended June 30, 2019 and 2018, respectively.
(e) Interest Rate Hedging
During the first quarter of 2019, the Company entered into certain derivative instruments to mitigate its exposure to variable interest rates under the Term Loans debt and a portion of the Credit Facility debt. Hedge accounting is applied to such a transaction only if specific criteria have been met, the transaction is deemed to be “highly effective” and the transaction has been designated as a hedge at its inception. Under hedge accounting treatment, generally, the effects of derivative transactions are recorded in earnings for the period in which the hedge transaction affects earnings. A change in value of a hedging instrument is reported as a component of other comprehensive income and is reclassified into earnings in the period in which the transaction being hedged affects earnings.
(f) Recent Accounting Pronouncements
Topic 842
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”) in the Accounting Standards Codification (“ASC”). Topic 842 substantially modifies lessee accounting for leases, requiring that lessees recognize lease assets and liabilities for leases extending beyond one year. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company adopted Topic 842 on January 1, 2019, electing to apply its provisions on the date of adoption and to record the cumulative effect as an adjustment to retained earnings. Lessor accounting under Topic 842 is similar to the prior accounting standard and the Company has elected to apply practical expedients under which the Company will not have to reevaluate whether a contract is a lease, the classification of its existing leases or its capitalized initial direct costs. In addition, the Company, as lessor, has elected the practical expedient to combine lease and non-lease components as one combined component for its leased aircraft for purposes of determining whether that combined component should be accounted for under Topic 606 or Topic 842.
The new standard requires a lessor to classify leases as sales-type, finance, or operating. A lease is treated as sales-type if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a finance lease. If the lessor does not convey risks and rewards or control, an operating lease results. As a result of application of the practical expedients, the Company was not required to alter the classification or carrying value of its leased or finance lease assets.
Lessee reporting was changed by the new standard, requiring that the balance sheet reflect a liability for most operating lease obligations as well as a “right of use” asset. As such, the Company was required to record a lease obligation of approximately $600,000 in connection with the lease of its headquarters office, and to increase the capitalized leasehold interest / right of use asset by a similar amount upon adoption, as discussed in Note 6. There was no effect on retained earnings recorded as a result of adoption of the standard. The Company did not elect the lessee practical expedient to combine the lease and non-lease components.
ASU 2016-13
The FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), in June of 2016 (“ASU 2016-13”). ASU 2016-13 provides that financial assets measured at amortized cost are to be presented as a net amount, reflecting a reduction for a valuation allowance to present the amount expected to be collected (the “current expected credit loss” model of reporting). As such, expected credit losses will be reflected in the carrying value of assets and losses will be recognized before they become probable, as is required under the Company’s present accounting practice. In the case of assets held as available for sale, the amount of the valuation allowance will be limited to an amount that reflects the marketable value of the debt instrument. This amendment to GAAP is effective for fiscal years beginning after December 15, 2019 (for the Company, its fiscal year ending December 31, 2020) unless elected earlier, and adoption is to be reflected as a cumulative effect on the first date of adoption. The Company does not expect to early adopt ASU 2016-13 and is evaluating the impact of the adoption of ASU 2016-13 on its condensed consolidated financial statements and related disclosures.
ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 was effective for public companies for years beginning after December 15, 2018, and the Company therefore adopted it on January 1, 2019. The revised guidance includes reduced limitations on items that can be hedged in order to more closely align hedge accounting with entities’ risk management activities through changes to designation and measurement guidance as well as new disclosure requirements of balance sheet and income statement information designed to increase the transparency of the impact of hedging. Because the Company was not a party to any derivative transactions during 2018, there was no effect on its financial statements upon adoption. Derivatives entered into after adoption are accounted for under the new standards.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 was promulgated for the purpose of simplifying disclosures related to fair values by eliminating certain disclosures previously required (including, with respect to public companies, the amount of and reasons for transfers between Level 1 and Level 2 of the hierarchy, the policy for timing of the transfers between levels, and the valuation process for Level 3 fair value measurements and by modifying others), as well as modifying other disclosure requirements. Additional disclosures are also required by ASU 2018-13, including (i) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (although disclosure of other quantitative information in lieu of weighted average is permitted if it is determined that such would be a more reasonable and rational method to reflect distribution of unobservable inputs). Adoption is required for years beginning after December 31, 2019, although early adoption is permitted. The Company has chosen to early adopt ASU 2018-13 and there was no effect on the Company’s financial statements.
|
Aircraft Lease Assets |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aircraft Lease Assets [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aircraft Lease Assets | As discussed in Note 1, the Company adopted Topic 842 on January 1, 2019, and elected to use certain practical expedients that resulted in continuing the classification of capitalized indirect cost associated with its operating and finance leases. As such, there was no adjustment to its accounts related to the carrying value of its sales-type and finance leases, assets held for lease or capitalized initial direct costs, and its leases continue to be accounted for the same as they had been before adoption of the new accounting standard.
The Company’s leases are normally “triple net leases” under which the lessee is obligated to bear all costs, including tax, maintenance and insurance, on the leased assets during the term of the lease. In most cases, the lessee is obligated to provide a security deposit or letter of credit to secure its performance obligations under the lease, and in some cases is required to pay maintenance reserves based on utilization of the aircraft, which reserves are available for qualified maintenance costs during the lease term and may or may not be refundable at the end of the lease. Typically, the leases also contain minimum return conditions, as well as an economic adjustment payable by the lessee (and in some instances by the lessor) for amounts by which the various aircraft or engine components are worse or better than a targeted condition set forth in the lease. Some leases contain renewal or purchase options, although the Company’s sales-type and finance leases all contain a bargain purchase option at lease end which the Company expects the lessees to exercise.
Because all of the Company’s leases transfer use and possession of the asset to the lessee and contain no other substantial undertakings by the Company, the Company has concluded that all of its lease contracts qualify for lease accounting under Topic 842. Certain lessee payments of what would otherwise be lessor costs (such as insurance and property taxes) are excluded from both revenue and expense.
The Company evaluates the expected return on its leased assets by considering both the rents receivable over the lease term, any expected additional consideration at lease end, and the residual value of the asset at the end of the lease. In some cases, the Company depreciates the asset to the expected residual value because it expects to sell the asset at lease end; in other cases, it may expect to re-lease the asset to the same or another lessee and the depreciation term and related residual value will differ from the initial lease term and residual value. Residual value is estimated by considering future estimates provided by independent appraisers, although it may be adjusted by the Company based on expected return conditions or location, specific lessee considerations, or other market information.
Two of the Company’s operating lease assets are subject to manufacturer residual value guarantees at the end of their lease terms in the fourth quarter of 2020 and totaling approximately $20 million. Three additional aircraft are subject to residual value guarantees, but the Company expects to retain the aircraft after the date of such guarantees and re-lease them to the current or other lessees. The Company considers the best market for managing and/or selling its assets at the end of its leases, although it does not expect to retain ownership of the assets under finance leases given the lessees’ bargain purchase options.
(a) Assets Held for Lease
At June 30, 2019 and December 31, 2018, the Company’s aircraft and aircraft engines held for lease consisted of the following:
The Company did not purchase or sell any aircraft held for lease during the second quarter of 2019.
None of the Company’s aircraft and engines held for lease were off lease at June 30, 2019. As discussed below, the Company has three off-lease aircraft that were reclassified in 2018 as held for sale and an engine that was reclassified in the first quarter of 2019 as held for sale.
As of June 30, 2019, minimum future lease revenue payments receivable under non-cancelable operating leases were as follows:
The remaining, weighted average lease term of the Company’s assets under operating leases was 55 months and 58 months at June 30, 2019 and December 31, 2018, respectively.
(b) Sales-Type and Finance Leases
As a result of a lease amendment containing a purchase option at lease end, during the second quarter of 2019, the Company reclassified an asset that was previously held for lease to a sales-type finance lease receivable and recorded a loss of $170,600.
During the second quarter of 2019, the Company also amended the sales-type leases for two aircraft to accommodate the lessee’s request to transfer a portion of future lease payment obligations from one of the leases to the other, as well as to assign one of the leases and related aircraft to a different lessee. Payments for both leases were also amended to reflect a higher implicit interest rate, such that the fair value of the leases after amendment equaled the carrying value of the leases before the amendment. No gain or loss was recognized as a result of these lease modifications.
At June 30, 2019 and December 31, 2018, the net investment included in sales-type finance leases and direct financing leases receivable were as follows:
As of June 30, 2019, minimum future payments receivable under finance leases were as follows:
The remaining, weighted average lease term of the Company’s assets under sales-type and finance leases was 23 months and 32 months at June 30, 2019 and December 31, 2018, respectively.
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Assets Held for Sale |
6 Months Ended |
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Jun. 30, 2019 | |
Property, Plant and Equipment Assets Held-for-sale Disclosure [Abstract] | |
Assets Held for Sale | During the second quarter of 2019, based on its appraised value, the Company recorded an impairment provision of $160,000 for one turboprop aircraft.
Assets held for sale at June 30, 2019 included two turboprop aircraft and a spare engine, as well as a turboprop aircraft for which a short-term operating lease was entered into during the first quarter and airframe parts from two turboprop aircraft.
During the second quarter of 2019, the Company received $252,700 in cash and accrued $142,200 in receivables for parts sales. These amounts were accounted for as follows: $94,400 reduced accounts receivable for parts sales accrued in the first quarter of 2019; $292,200 reduced the carrying value of the parts; and $8,300 was recorded as gains in excess of the carrying value of the parts. During the second quarter of 2018, the Company received $73,400 in cash and accrued $41,000 in receivables for parts sales. These amounts were accounted for as follows: $10,600 reduced accounts receivable for parts sales accrued in the first quarter of 2018, $85,700 reduced the carrying value of the parts, and $18,100 was recorded as gains in excess of the carrying value of the parts.
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Notes Payable and Accrued Interest |
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Notes Payable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes Payable and Accrued Interest | At June 30, 2019 and December 31, 2018, the Company’s notes payable and accrued interest consisted of the following:
(a) Credit Facility
Before modification, the Company’s Credit Facility was provided by a syndicate of banks and was secured by all of the assets of the Company except for the two aircraft in the UK LLC SPE Financing. In February 2019, the Company entered into a Third Amended and Restated Loan and Security Agreement to the Credit Facility (the “Restated Loan Agreement”) which, among other things, extended the maturity date of the Credit Facility with the lenders thereunder from May 31, 2019 to February 19, 2023; decreased the maximum availability thereunder from $170 million (with the ability for the Company to request an increase up to $180 million) to $145 million (with the ability for the Company to request an increase to up to $160 million); and modified certain of the Company’s financial ratio covenants. Borrowings under the Credit Facility will continue to bear interest at floating rates that reset periodically to a market benchmark rate plus a credit margin, and the Company will also continue to be obligated to pay a quarterly fee on any unused portion of the Credit Facility at a rate of 0.50%. The Credit Facility required that within 30 days after closing of the financing, the Company enter into an interest rate protection derivative instrument with respect to a minimum of $50 million of the outstanding loan balance at closing. Accordingly, in March 2019, the Company entered into interest rate protection instruments with respect to $50 million of its Credit Facility debt.
The borrowings under the Restated Loan Agreement are secured by a first priority lien on all of the Company's assets, including the Company’s aircraft portfolio, except those aircraft that are subject to the Term Loans. The Restated Loan Agreement requires the Company to comply with certain covenants relating to payment of taxes, preservation of existence, maintenance of property and insurance, and periodic financial reporting, as well as compliance with several financial ratio covenants. The Restated Loan Agreement restricts the Company with respect to certain corporate level transactions and transactions with affiliates or subsidiaries without consent of the lenders. Events of default under the Restated Loan Agreement include failure to make a required payment within three business days of a due date or to comply with other obligations (subject to specified cure periods for certain events of default), a default under other indebtedness of the Company, and a change in control of the Company. Remedies for default include acceleration of the outstanding debt and exercise of any remedies available under applicable law, including foreclosure on the collateral securing the borrowings under the Credit Facility.
As of December 31, 2018, the Company was not in compliance with the interest coverage, debt service coverage, no-net-loss and revenue concentration covenants under the Credit Facility. The noncompliance resulted primarily from the Company recording aircraft impairment charges and losses on sale of aircraft totaling $3,408,700 during 2018. The amendments included in the Restated Loan Agreement in February 2019 discussed above cured the December 31, 2018 noncompliance and revised the compliance requirements through the extended maturity date of the Credit Facility.
The unused amount of the Credit Facility was $57,600,000 and $47,600,000 as of June 30, 2019 and December 31, 2018, respectively. The weighted average interest rate on the Credit Facility was 6.19% and 5.92% at June 30, 2019 and December 31, 2018 respectively.
(b) Term Loans
On February 8, 2019, the Company, through four wholly-owned subsidiary limited liability companies (“LLC Borrowers”), each entered into a Term Loan Agreement with the U.S. branch of a German bank (“Term Loan Lender”) that provides for six separate term loans with an aggregate principal amount of $44.3 million. Each of the Term Loans is secured by a first priority security interest in a specific aircraft (“Term Loan Collateral Aircraft”) owned by an LLC Borrower, the lease for such aircraft, and a pledge by the Company of its membership interest in each of the LLC Borrowers, pursuant to a Security Agreement (the “Security Agreement”) among the LLC Borrowers and a security trustee, and certain pledge agreements. Two of the Term Loan Collateral Aircraft that are owned by the Company’s two UK special purpose entities were previously financed using special purpose financing. The interest rates payable under the Term Loans vary by aircraft, and are based on a fixed margin above either 30-day or 3-month LIBOR. The proceeds of the Term Loans were used to pay down the Credit Facility and pay off the UK LLC SPE Financing. The maturity of each Term Loan varies by aircraft, with the first Term Loan maturing in October 2020 and the last Term Loan maturing in May 2025. The debt under the Term Loans is expected to be fully amortized by rental payments received by the LLC Borrowers from the lessees of the Term Loan Collateral Aircraft during the terms of their respective leases and remarketing proceeds.
The Term Loans include covenants that impose various restrictions and obligations on the LLC Borrowers, including covenants that require the LLC Borrowers to obtain the Term Loan Lender’s consent before they can take certain specified actions and certain events of default. If such an event of default occurs, subject to certain cure periods for certain events of default, the Term Loan Lender would have the right to terminate its obligations under the Term Loans, declare all or any portion of the amounts then outstanding under the Term Loans to be accelerated and due and payable, and/or exercise any other rights or remedies it may have under applicable law, including foreclosing on the assets that serve as security for the Term Loans.
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Derivative Instruments |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments | The Company was not party to any derivative instruments in 2018.
In the first quarter of 2019, the Company entered into eight fixed pay/receive variable interest rate swaps (the “Swaps”).
Six of the Swaps were entered into by the LLC Borrowers and have reduced notional amounts that mirror the amortization under the six Term Loans entered into by the LLC Borrowers, effectively converting each of the six Term Loans from variable to fixed rate, ranging from 5.38% to 6.30%. Each of these six Swaps extend for the duration of the corresponding Term Loan, with maturities from 2020 through 2025.
The other two Swaps were entered into by the Company and have notional amounts that total $50 million and extend through the maturity of the Credit Facility in February of 2023.
The Company entered into the Swaps in order to reduce its exposure to the risk of increased interest rates. With respect to the six Swaps entered into by the LLC Borrowers, it was 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 loan principal and interest payments, thereby preventing default so long as the lessees met their lease rent obligations. The two Swaps entered into by the Company protect against the exposure to interest rate increases on $50 million of the Company’s Credit Facility debt.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and uses creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period.
The Company has designated seven of the Swaps as cash flow hedges. Changes in the fair value of the hedged swaps are included in other comprehensive income, which amounts are reclassified into earnings in the period in which the transaction being hedged affects earnings, i.e. with future settlements of the Swaps. One of the Swaps is not eligible under its terms for hedge treatment. Changes in fair value of non-hedge derivatives are reflected in earnings in the periods in which they occur. As such, the Company has reflected the following amounts in its income and other comprehensive income amounts:
Approximately $416,000 of the current balance of accumulated other comprehensive income is expected to be reclassified in the next twelve months.
At June 30, 2019, the fair value of the Company’s Swaps was as follows:
The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The swap counterparties for the Swaps are large financial institutions in the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparties are creditworthy and that their continuing performance under the hedging agreements is probable.
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Lease Right of Use Asset and Liability |
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Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease Right of Use Asset and Liability | The Company is a lessee under a lease of the office space it occupies in Burlingame, California, which expires in June of 2020, but also provides for two, successive one-year lease extension options for amounts that are substantially below the market rent for the property. The lease provides for monthly rental payments according to a fixed schedule of increasing rent payments. As a result of the below-market extension options, the Company has determined that it is reasonably certain that it will extend the lease and has, therefore, included such extended term in its calculation of the right of use asset (“ROU Asset”) and lease liability recognized in connection with the lease.
In addition to a fixed monthly payment schedule, the office lease also includes an obligation for the Company to make future variable payments for certain common areas and building operating and lessor costs, which have been and will be recognized as expense in the periods in which they are incurred. As a direct pass-through of applicable expense, such costs have not been allocated as a component of the lease.
The ROU Asset includes the amortized value of both the amount of liability recognized at January 1, 2019 upon adoption of Topic 842 and the amount attributable to the below market lease component recognized upon acquisition of JHC on October 1, 2018.
The lease liability associated with the office lease was calculated by discounting the fixed, minimum lease payments over the remaining lease term, including the below-market extension periods, at a discount rate of 7.25%, which represents the Company’s estimate of the incremental borrowing rate for a collateralized loan for the type of underlying asset that was the subject of the office lease at the time the lease liability was evaluated. The Company estimates that the future minimum lease commitments for base rent of its office space were as follows as of June 30, 2019 and December 31, 2018:
During the quarter ended June 30, 2019, the Company recognized amortization, finance costs and other expense related to the office lease as follows:
The Company expects that the variable lease expense will total approximately $10,700 per month through the end of the lease, including the two extension periods.
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Fair Value Measurements |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible. The fair value hierarchy under GAAP is based on three levels of inputs.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
As of June 30, 2019, the Company measured the fair value of its interest rate swaps of $90,776,400 (notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The Swaps had a net fair value of negative $2,229,100 as of June 30, 2019. In the quarter and six months ended June 30, 2019, $43,000 and $451,400 respectively, 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 June 30, 2019 and December 31, 2018:
There were no transfers between Level 1 and Level 2 in either the second quarters or six months ended June 30, 2019 or 2018, and there were no transfers into or out of Level 3 during the same periods.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of long-lived assets held and used, such as aircraft and aircraft engines held for lease and these and other assets held for sale, by reference to independent appraisals, quoted market prices (e.g., offers to purchase) and other factors. These are considered Level 3 within the fair value hierarchy. An impairment charge is recorded when the Company believes that the carrying value of an asset will not be recovered through future net cash flows and that the asset’s carrying value exceeds its fair value. The Company recorded impairment charges totaling $160,000 on one of its assets held for sale in the second quarter of 2019, which had a fair value of $2,340,000. The Company recorded an impairment charge of $298,200 on one of its aircraft held for lease in the second quarter of 2018.
The following table shows, by level within the fair value hierarchy, the Company’s assets at fair value on a nonrecurring basis as of June 30, 2019 and December 31, 2018:
During the six months ended June 30, 2019, the Company recorded impairment provisions of (i) $1,408,400 based on estimated sales amounts and (ii) $160,000 based on third-party appraisals.
There were no transfers between Level 1 and Level 2 in either the second quarters or six months ended June 30, 2019, and there were no transfers into or out of Level 3 during the same periods.
Fair Value of Other Financial Instruments
The Company’s financial instruments, other than cash and cash equivalents, consist principally of finance leases receivable, amounts borrowed under the Credit Facility, notes payable under special purpose financing and its derivative instruments. The fair value of accounts receivable, accounts payable and the Company’s maintenance reserves and accrued maintenance costs approximates the carrying value of these financial instruments because of their short-term maturities. The fair value of finance lease receivables approximates the carrying value as discussed in Note 1(d). 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 Credit Facility bear floating rates of interest that reset periodically to a market benchmark rate plus a credit margin. The Company believes the effective interest rate under the Credit Facility approximates 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 $87,564,500 and $122,539,300 at June 30, 2019 and December 31, 2018, respectively, approximate their fair values on such dates. The fair value of the Company’s outstanding balance of its Credit Facility is categorized as a Level 3 input under the GAAP fair value hierarchy.
Before their repayment in February 2019 in connection with the Term Loans refinancing, the amounts payable under the UK LLC SPE Financing were payable through the fourth quarter of 2020 and bore a fixed rate of interest, as described in Note 4(b). As discussed above, during February 2019, the UK LLC SPE Financing and four assets that previously served as collateral under the Credit Facility were refinanced using the Term Loans. The Company believes the effective interest rate under the special purpose financings approximates current market rates for such indebtedness at the dates of the condensed consolidated balance sheets, and therefore that the outstanding principal and accrued interest of $40,888,800 and $9,227,200 approximate their fair values at June 30, 2019 and December 31, 2018, respectively. Such fair value is categorized as a Level 3 input under the GAAP fair value hierarchy.
There were no transfers in or out of assets or liabilities measured at fair value under Level 3 during the six months ended June 30, 2019 and 2018.
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Acquisition of Management Company |
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Jun. 30, 2019 | |
Business Combinations [Abstract] | |
Acquisition of Management Company | In October 2017, AeroCentury, JHC and certain other parties entered into the Merger Agreement for the acquisition of JHC by AeroCentury for consideration of approximately $2.9 million in cash and 129,217 shares of common stock of AeroCentury, as determined pursuant to the Merger Agreement. JHC is the parent company of JMC, which is the manager of the Company’s assets as described in Note 11 below. The Merger was consummated on October 1, 2018. AeroCentury’s common stock issued as consideration in the Merger was offered and issued pursuant to an exemption from registration under Section 3(a)(10) of the Securities Act of 1933.
As a result of the Merger, the Company indirectly assumed all of JHC’s assets, comprised primarily of securities, prepaid expenses and an office lease, as well as liabilities of approximately $0.9 million. As a subsidiary of the Company, JHC’s results are included in the Company’s condensed consolidated financial statements beginning on October 1, 2018.
During the quarter and six months ended June 30, 2019, the Company accrued no expenses related to the Merger transaction. During the quarter and six months ended June 30, 2018, the Company accrued $64,300 and $264,200 of expenses related to the Merger transaction. Such expenses are included in professional fees, general and administrative and other in the Company’s condensed consolidated statements of operations.
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Commitments and Contingencies |
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Commitments and Contingencies Disclosure [Abstract] | |
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.
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Computation of (Loss)/Earnings Per Share |
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Computation of (Loss)/Earnings Per Share | Basic and diluted earnings per share are calculated as follows:
Basic (loss)/earnings per common share is computed using net (loss)/income and the weighted average number of common shares outstanding during the period. Diluted (loss)/earnings per common share is computed using net (loss)/income and the weighted average number of common shares outstanding, assuming dilution. Weighted average common shares outstanding, assuming dilution, include potentially dilutive common shares outstanding during the period.
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Related Party Transactions |
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Jun. 30, 2019 | |
Related Party Transactions [Abstract] | |
Related Party Transactions | See the description of the Merger Agreement between the Company and JHC in Note 8 above, pursuant to which the Company acquired JHC in the Merger and JHC became a wholly-owned subsidiary of the Company on October 1, 2018.
Before completion of the Merger, the Company’s portfolio of aircraft assets was managed and administered under the terms of a management agreement with JMC (the “Management Agreement”). Certain officers of the Company were also officers of JHC and JMC and held significant ownership positions in both JHC and the Company, and JHC was also a significant stockholder of AeroCentury. Under the Management Agreement, JMC received a monthly management fee based on the net asset value of the Company’s assets under management. JMC also received an acquisition fee for locating assets for the Company. Acquisition fees were included in the cost basis of the asset purchased. JMC also received a remarketing fee in connection with the re-lease or sale of the Company’s assets. Remarketing fees were amortized over the applicable lease term or included in the gain or loss on sale.
In April 2018, subsequent to the execution of the Merger Agreement for the acquisition of JHC, JHC agreed to waive its right to receive management and acquisition fees (“Contract Fees”) otherwise owed by the Company to JHC pursuant to the Management Agreement for all periods after March 31, 2018 and until the earlier of the consummation of the Merger or August 15, 2018. In return, the Company agreed to reimburse JMC for expenses (“Management Expense”) incurred in providing management services set forth under the Management Agreement. In July 2018, JHC agreed to extend the expiration of this agreement (the “Waiver and Reimbursement Agreement”) through October 15, 2018. Thus, if the Merger Agreement was terminated on or before October 15, 2018 or the Merger did not close by October 15, 2018, the Company would have become obligated to pay JMC any excess (the “JMC Margin”) of (i) the Contract Fees that would have been paid to JMC since April 1, 2018 in the absence of the Waiver and Reimbursement Agreement over (ii) the Management Expenses actually paid by the Company to JMC since April 1, 2018. For the quarter and six months ended June 30, 2018, contractual fees exceeded the reimbursed management fees by $497,200 of management fees and $494,400 of acquisition fees. Notwithstanding the Waiver and Reimbursement Agreement, until the closing or termination of the Merger Agreement, the Company accrued as an expense the total Contract Fees that would have been due under the Management Agreement. Because the Merger closed on October 1, 2018, the Waiver and Reimbursement Agreement for the period April 1, 2018 through September 30, 2018 was considered in the acquisition accounting for the calculation of the settlement loss recognized by the Company when the Merger was consummated.
The Company incurred management fees of $1,502,100 and $2,948,800 during the three months and six months ended June 30, 2018, respectively. Acquisition fees incurred during the same periods totaled $494,400.
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Subsequent Events |
6 Months Ended |
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Jun. 30, 2019 | |
Subsequent Events [Abstract] | |
Subsequent Events | The Company has a signed purchase agreement for the sale of two turboprop aircraft that are currently off lease and classified as held for sale, and the Company expects the sales to occur in the third quarter of 2019. |
Organization and Summary of Significant Accounting Policies (Policies) |
6 Months Ended |
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Jun. 30, 2019 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
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 “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 (“Term Loans”) made to ACY 19002, ACY 19003, and two other newly formed special purpose subsidiaries of AeroCentury. See Note 4(b) for more information about the Term Loans.
On October 1, 2018, AeroCentury acquired JetFleet Holding Corp. (“JHC”) in a reverse triangular merger (“Merger”) for consideration of approximately $2.9 million in cash and 129,217 shares of common stock of AeroCentury, as determined pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) entered into by AeroCentury, JHC and certain other parties in October 2017. JHC is the parent company of JetFleet Management Corp. (“JMC”), which is an integrated aircraft management, marketing and financing business and the manager of the Company’s assets. Upon completion of the Merger, JHC became a wholly-owned subsidiary of the Company, and as a result, JHC's results are included in the Company's consolidated financial statements beginning on October 1, 2018.
In November 2018, AeroCentury formed two wholly-owned subsidiaries, ACY SN 15129 LLC (“ACY 15129”) and ACY E-175 LLC (“ACY E-175”), for the purpose of refinancing four of the Company’s aircraft using the Term Loans. Because the Term Loans did not close until February 2019, the subject aircraft remained as collateral under the Credit Facility as of December 31, 2018, and ACY 15129 and ACY E-175 had no activity in 2018.
Financial information for AeroCentury and its consolidated subsidiaries is presented on a consolidated basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 and six-month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other period. All intercompany balances and transactions have been eliminated in consolidation.
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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 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.
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Comprehensive Income | The Company reflects changes in the fair value of its interest rate swap derivatives that are designated as hedges in other comprehensive income. Such amounts are reclassified into earnings in the periods in which the hedged transaction occurs, and are included in interest expense.
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Finance Leases | As of June 30, 2019, the Company had four aircraft subject to sales-type finance leases and three aircraft subject to direct financing leases. All seven 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 has classified each of these seven 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 four sales-type finance leases, the Company recognized as a gain or loss the amount equal to (i) the net investment in the sales-type finance 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.
The Company recognized interest earned on finance leases in the amount of $260,100 and $361,300 in the quarters ended June 30, 2019 and 2018, respectively and $496,200 and $740,400 in the six-month periods ended June 30, 2019 and 2018, respectively.
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Interest Rate Hedging | During the first quarter of 2019, the Company entered into certain derivative instruments to mitigate its exposure to variable interest rates under the Term Loans debt and a portion of the Credit Facility debt. Hedge accounting is applied to such a transaction only if specific criteria have been met, the transaction is deemed to be “highly effective” and the transaction has been designated as a hedge at its inception. Under hedge accounting treatment, generally, the effects of derivative transactions are recorded in earnings for the period in which the hedge transaction affects earnings. A change in value of a hedging instrument is reported as a component of other comprehensive income and is reclassified into earnings in the period in which the transaction being hedged affects earnings.
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Recent Accounting Pronouncements | Topic 842
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”) in the Accounting Standards Codification (“ASC”). Topic 842 substantially modifies lessee accounting for leases, requiring that lessees recognize lease assets and liabilities for leases extending beyond one year. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company adopted Topic 842 on January 1, 2019, electing to apply its provisions on the date of adoption and to record the cumulative effect as an adjustment to retained earnings. Lessor accounting under Topic 842 is similar to the prior accounting standard and the Company has elected to apply practical expedients under which the Company will not have to reevaluate whether a contract is a lease, the classification of its existing leases or its capitalized initial direct costs. In addition, the Company, as lessor, has elected the practical expedient to combine lease and non-lease components as one combined component for its leased aircraft for purposes of determining whether that combined component should be accounted for under Topic 606 or Topic 842.
The new standard requires a lessor to classify leases as sales-type, finance, or operating. A lease is treated as sales-type if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a finance lease. If the lessor does not convey risks and rewards or control, an operating lease results. As a result of application of the practical expedients, the Company was not required to alter the classification or carrying value of its leased or finance lease assets.
Lessee reporting was changed by the new standard, requiring that the balance sheet reflect a liability for most operating lease obligations as well as a “right of use” asset. As such, the Company was required to record a lease obligation of approximately $600,000 in connection with the lease of its headquarters office, and to increase the capitalized leasehold interest / right of use asset by a similar amount upon adoption, as discussed in Note 6. There was no effect on retained earnings recorded as a result of adoption of the standard. The Company did not elect the lessee practical expedient to combine the lease and non-lease components.
ASU 2016-13
The FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), in June of 2016 (“ASU 2016-13”). ASU 2016-13 provides that financial assets measured at amortized cost are to be presented as a net amount, reflecting a reduction for a valuation allowance to present the amount expected to be collected (the “current expected credit loss” model of reporting). As such, expected credit losses will be reflected in the carrying value of assets and losses will be recognized before they become probable, as is required under the Company’s present accounting practice. In the case of assets held as available for sale, the amount of the valuation allowance will be limited to an amount that reflects the marketable value of the debt instrument. This amendment to GAAP is effective for fiscal years beginning after December 15, 2019 (for the Company, its fiscal year ending December 31, 2020) unless elected earlier, and adoption is to be reflected as a cumulative effect on the first date of adoption. The Company does not expect to early adopt ASU 2016-13 and is evaluating the impact of the adoption of ASU 2016-13 on its condensed consolidated financial statements and related disclosures.
ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 was effective for public companies for years beginning after December 15, 2018, and the Company therefore adopted it on January 1, 2019. The revised guidance includes reduced limitations on items that can be hedged in order to more closely align hedge accounting with entities’ risk management activities through changes to designation and measurement guidance as well as new disclosure requirements of balance sheet and income statement information designed to increase the transparency of the impact of hedging. Because the Company was not a party to any derivative transactions during 2018, there was no effect on its financial statements upon adoption. Derivatives entered into after adoption are accounted for under the new standards.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 was promulgated for the purpose of simplifying disclosures related to fair values by eliminating certain disclosures previously required (including, with respect to public companies, the amount of and reasons for transfers between Level 1 and Level 2 of the hierarchy, the policy for timing of the transfers between levels, and the valuation process for Level 3 fair value measurements and by modifying others), as well as modifying other disclosure requirements. Additional disclosures are also required by ASU 2018-13, including (i) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period, and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (although disclosure of other quantitative information in lieu of weighted average is permitted if it is determined that such would be a more reasonable and rational method to reflect distribution of unobservable inputs). Adoption is required for years beginning after December 31, 2019, although early adoption is permitted. The Company has chosen to early adopt ASU 2018-13 and there was no effect on the Company’s financial statements.
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Aircraft Lease Assets (Tables) |
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Aircraft and aircraft engines held for lease |
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Minimum future lease revenue payments receivable |
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Net investment included in finance leases and direct financing leases receivable |
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Minimum future payments receivable under finance leases |
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Notes Payable and Accrued Interest (Tables) |
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Notes Payable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable and accrued interest |
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Derivative Instruments (Tables) |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts in income and other comprehensive income amounts |
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Fair value of swaps |
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Lease Right of Use Asset and Liability (Tables) |
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Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated future minimum lease commitments |
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Amortization, finance costs and other expenses |
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Fair Value Measurements (Tables) |
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Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets (liabilities) measured and recorded at fair value on a recurring basis |
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Assets measured and recorded at fair value on a nonrecurring basis |
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Computation of (Loss)/Earnings Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Basic and diluted earnings per share |
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Organization and Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||
Interest earned on finance leases | $ 260,100 | $ 361,300 | $ 496,200 | $ 740,400 |
Aircraft Lease Assets (Details) - Unit |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Regional Jet Aircraft | ||
Number owned | 13 | 13 |
Percentage of net book value | 86.00% | 81.00% |
Turboprop Aircraft | ||
Number owned | 2 | 4 |
Percentage of net book value | 14.00% | 18.00% |
Engines | ||
Number owned | 0 | 1 |
Percentage of net book value | 0.00% | 1.00% |
Aircraft Lease Assets (Details 1) |
Jun. 30, 2019
USD ($)
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Aircraft Lease Assets [Abstract] | |
Remainder of 2019 | $ 13,717,000 |
2020 | 25,749,600 |
2021 | 18,648,200 |
2022 | 16,690,600 |
2023 | 13,007,800 |
Thereafter | 21,589,500 |
Total | $ 109,402,700 |
Aircraft Lease Assets (Details 2) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Aircraft Lease Assets [Abstract] | ||
Gross minimum lease payments receivable | $ 18,153,300 | $ 17,107,100 |
Less unearned interest | (1,564,100) | (1,856,200) |
Finance leases receivable | $ 16,589,200 | $ 15,250,900 |
Aircraft Lease Assets (Details 3) |
Jun. 30, 2019
USD ($)
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Aircraft Lease Assets [Abstract] | |
Remainder of 2019 | $ 6,146,600 |
2020 | 4,708,200 |
2021 | 5,085,400 |
2022 | 2,213,100 |
Total | $ 18,153,300 |
Notes Payable and Accrued Interest (Details) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Unamortized debt issuance costs | $ (5,036,500) | $ (674,300) |
Notes payable and accrued interest | 123,416,800 | 131,092,200 |
Special Purpose Financing | ||
Unamortized debt issuance costs | (1,186,600) | 0 |
Accrued interest | 112,400 | 16,000 |
Credit Facility | ||
Principal | 87,400,000 | 122,400,000 |
Unamortized debt issuance costs | (3,849,900) | (674,300) |
Accrued interest | 164,500 | 139,300 |
UK SPE Financing | Special Purpose Financing | ||
Principal | 0 | 9,211,200 |
Term Loans | Special Purpose Financing | ||
Principal | $ 40,776,400 | $ 0 |
Notes Payable and Accrued Interest (Details Narrative) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Notes Payable [Abstract] | ||
Unused amount of the credit facility | $ 57,600,000 | $ 47,600,000 |
Weighted average interest rate on credit facility | 6.19% | 5.92% |
Derivative Instruments (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||
Change in value of Swaps | $ 43,000 | $ 0 | $ 451,400 | $ 0 |
Other items | (20,800) | 0 | (22,100) | 0 |
Included in interest expense | 22,200 | 0 | 429,300 | 0 |
Change in value of hedged Swaps | $ (1,287,900) | $ 0 | $ (1,832,700) | $ 0 |
Derivative Instruments (Details 1) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
---|---|---|
Total derivative (liability) | $ (2,229,100) | $ 0 |
Designated Interest Rate Hedges Fair Value | ||
Total derivative (liability) | (2,147,700) | |
Other Interest Rate Swap | ||
Total derivative (liability) | $ (81,400) |
Lease Right of Use Asset and Liability (Details) - USD ($) |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Leases [Abstract] | ||
2019 | $ 98,200 | $ 193,500 |
2020 | 196,400 | 196,400 |
2021 | 199,300 | 199,300 |
2022 | 101,100 | 101,100 |
Total lease liability | 595,000 | 690,300 |
Discount | (58,900) | |
Lease liability at June 30, 2019 | $ 536,100 | $ 0 |
Lease Right of Use Asset and Liability (Details 1) |
6 Months Ended |
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Jun. 30, 2019
USD ($)
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Leases [Abstract] | |
Fixed rental expense during the quarter | $ 110,900 |
Variable lease expense | 32,000 |
Total lease expense during the quarter | $ 142,900 |
Fair Value Measurements (Details) - USD ($) |
Mar. 31, 2019 |
Dec. 31, 2018 |
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Assets at fair value | $ (1,570,000) | $ 656,400 |
Level 1 | ||
Assets at fair value | 659,100 | 656,400 |
Level 2 | ||
Assets at fair value | (2,229,100) | 0 |
Level 3 | ||
Assets at fair value | 0 | 0 |
Money Market Funds | ||
Assets at fair value | 659,100 | 656,400 |
Money Market Funds | Level 1 | ||
Assets at fair value | 659,100 | 656,400 |
Money Market Funds | Level 2 | ||
Assets at fair value | 0 | 0 |
Money Market Funds | Level 3 | ||
Assets at fair value | 0 | 0 |
Derivative | ||
Assets at fair value | (2,229,100) | 0 |
Derivative | Level 1 | ||
Assets at fair value | 0 | 0 |
Derivative | Level 2 | ||
Assets at fair value | (2,229,100) | 0 |
Derivative | Level 3 | ||
Assets at fair value | $ 0 | $ 0 |
Fair Value Measurements (Details 1) - USD ($) |
6 Months Ended | ||
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Jun. 30, 2019 |
Jun. 30, 2018 |
Dec. 31, 2018 |
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Assets held for sale | $ 5,703,000 | $ 5,800,000 | |
Total losses | 1,568,400 | $ 0 | |
Level 1 | |||
Assets held for sale | 0 | 0 | |
Level 2 | |||
Assets held for sale | 0 | 0 | |
Level 3 | |||
Assets held for sale | $ 5,703,000 | $ 5,800,000 |
Fair Value Measurements (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2019 |
Dec. 31, 2018 |
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Notional amount of interest rate swaps | $ 90,776,400 | $ 90,776,400 | |
Derivative liability | (2,229,100) | (2,229,100) | $ 0 |
Increase in interest expense | 43,000 | 451,400 | |
Credit Facility 1 | |||
Principal and accrued interest | 87,564,500 | 87,564,500 | 122,539,300 |
Credit Facility 2 | |||
Principal and accrued interest | $ 40,888,800 | $ 40,888,800 | $ 9,227,200 |
Acquisition of Management Company (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Business Combinations [Abstract] | ||||
Merger transaction expenses | $ 0 | $ 64,300 | $ 0 | $ 264,200 |
Computation of (Loss)/Earnings Per Share (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2019 |
Mar. 31, 2019 |
Jun. 30, 2018 |
Mar. 31, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
(Loss)/earnings per share: | ||||||
Net (loss)/income | $ (77,600) | $ (1,308,200) | $ (81,100) | $ 317,300 | $ (1,385,800) | $ 236,200 |
Weighted average shares outstanding for the period | 1,545,884 | 1,416,699 | 1,545,884 | 1,416,699 | ||
Basic (loss)/earnings per share | $ (0.05) | $ (0.06) | $ (0.90) | $ 0.17 | ||
Diluted (loss)/earnings per share | $ (0.05) | $ (0.06) | $ (0.90) | $ 0.17 |
Related Party Transactions (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2019 |
Jun. 30, 2018 |
Jun. 30, 2019 |
Jun. 30, 2018 |
|
Related Party Transactions [Abstract] | ||||
Mangement fees incurred | $ 0 | $ 1,502,100 | $ 0 | $ 2,948,800 |
Acquisition fees | $ 0 | $ 494,400 | $ 0 | $ 494,400 |
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