In December 2019, COVID-19 was first reported in China and has since spread to most other regions of the world. In March 2020, COVID-19 was determined to be a global pandemic by the World Health Organization. During 2020, this public health crisis disrupted global manufacturing, supply chains, passenger travel and consumer spending, resulting in flight cancellations by certain of our ACMI customers and lower AMC passenger flying as the military took precautionary measures to limit the movement of personnel. A reduction of available cargo capacity provided by passenger airlines and increased demand for transporting goods due to the COVID-19 pandemic also resulted in increased commercial charter cargo yields, net of fuel, during 2020. We have incurred and expect to incur significant additional costs, including premium pay for pilots operating in certain areas significantly impacted by COVID-19; other operational costs, including costs for continuing to provide a safe working environment for our employees; and higher crew costs related to increased pay rates resulting from our interim agreement with our pilots beginning in May 2020. In addition, the availability of hotels and restaurants; evolving COVID-19-related travel restrictions and health screenings; and cancellations of passenger flights by other airlines globally or airport closures have impacted and could further impact our ability to position employees to operate our aircraft.

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significantly reduced nonessential employee travel;

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reduced the use of contractors;

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limited ground staff hiring;

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secured vendor pricing discounts for engine overhauls and other maintenance;

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implemented a number of other cost reduction initiatives;

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taken other actions, such as the sale of certain nonessential assets;

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entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the U.S. Department of the Treasury (the “U.S. Treasury”), with respect to payroll support funding (the “Payroll Support Program”) available to cargo air carriers under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (see discussion below); and

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deferred payment of the employer portion of social security taxes as provided for under the CARES Act through the end of 2020.

As of May 29, 2020 (the “PSP Closing Date”), Atlas and Southern Air (the “PSP Recipients”) entered into a PSP Agreement with the U.S. Treasury. As of the PSP Closing Date, AAWW also entered into a Warrant Agreement (the “Warrant Agreement”) with the U.S. Treasury, and AAWW issued a senior unsecured promissory note to the U.S. Treasury (the “Promissory Note”), with Atlas and Southern Air as guarantors.

In connection with the Payroll Support Program, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the payment of certain employee wages, salaries and benefits of the PSP Recipients. The Payroll Support Program subjects the PSP Recipients and certain of their affiliates to a number of restrictions, including prohibitions against repurchasing shares in the open market of, or making dividend payments with respect to, our common stock through September 30, 2021, as well as certain limitations on executive compensation until March 24, 2022. Under the PSP Agreement, we must also maintain certain internal controls and records relating to the payroll support funding and we are subject to additional reporting obligations.

Pursuant to the PSP Agreement, the U.S. Treasury provided us with payroll support funding in three installments totaling $406.8 million. The first installment of $203.4 million was received on June 1, 2020, the second installment of $101.7 million was received on June 29, 2020 and the third installment of $101.7 million was received on July 30, 2020.

As compensation for payroll support funding under the PSP Agreement, we issued the Promissory Note to the U.S. Treasury, which provides for our unconditional promise to pay to the U.S. Treasury $199.8 million.

The Promissory Note bears interest on the outstanding principal amount at a rate of 1.00% per annum until the fifth anniversary of the PSP Closing Date and the applicable Secured Overnight Financing Rate (“SOFR”) plus 2.00% per annum thereafter, and interest accrued thereon is payable in arrears on the last business day of March and September of each year. The aggregate principal amount outstanding under the Promissory Note, together with all accrued and unpaid interest thereon and all other amounts payable under the Promissory Note, will be due and payable in May 2030. The Promissory Note contains customary representations and warranties, covenants and events of default provisions. Interest expense is recognized using the effective interest method over the term of the Promissory Note.

We may, at any time and from time to time, voluntarily prepay amounts outstanding under the Promissory Note, in whole or in part, without penalty or premium. If certain change of control triggering events occur, we would be required to prepay the aggregate outstanding principal amount of the Promissory Note within 30 days, together with any accrued interest or other amounts owing under the Promissory Note.

As compensation for payroll support funding under the PSP Agreement, we also entered into a Warrant Agreement pursuant to which we granted the U.S. Treasury warrants to acquire shares of our common stock. In connection with the three payroll support funding installments from the U.S. Treasury, we issued warrants to acquire up to 625,452 shares of our common stock.

The Warrant Agreement provides the U.S. Treasury certain registration rights with respect to each warrant and the underlying common stock. Each warrant is exercisable at an exercise price of $31.95 per share of common stock (which was the closing price of our common stock on the Nasdaq Global Select Market on May 1, 2020) and will expire on the fifth anniversary of the issue date of such warrant. Each warrant may be settled through net share settlement or net cash settlement, at our option. Each warrant includes customary antidilution provisions and is freely transferable with registration rights. The U.S. Treasury is not permitted to vote any shares it acquires upon exercise of each warrant. The grant date fair value, as determined using the Black-Scholes model, of each warrant was recognized as Additional paid-in capital and totaled $14.4 million. Each warrant will not be remeasured as long as it continues to meet the conditions for equity classification. As of December 31, 2020, no portion of the warrants have been exercised.

We recognized deferred grant income within Accrued liabilities for the difference between the PSP proceeds received and the amounts recognized for the Promissory Note and the Warrant Agreement for each installment. Grant income is subsequently recognized within Other income, net in the consolidated statement of operations on a pro-rata basis over the periods that the qualifying employee wages, salaries and benefits are paid. For 2020, we recognized grant income of $151.6 million. We expect to recognize the remainder of the grant income through the first quarter of 2021.