2. Liquidity and Management’s Plan, COVID-19

The Company’s ability to meet its liquidity needs is dependent upon generating cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company’s operations will be sufficiently profitable to meet its liquidity needs.

During 2019, the Company’s operations reflected the full effect of operating its fleet entirely under the United CPA compared to 2018; with the substantial growth in its pilot workforce, together with scheduling enhancements which improved crew productivity, the Company’s 2019 block hours increased year-over-year approximately 10 percent.

The Company in 2019 also implemented a number of cost reduction measures and liquidity management actions, including decreasing expenses with third party vendors through competitive bidding processes, strategically reviewing whether to eliminate employee positions caused by attrition, and creating efficiencies through a realignment of its crew domiciles and maintenance bases.

On January 30, 2020, the World Health Organization WHO announced a global health emergency because of a new strain of a novel coronavirus (COVID-19) in Wuhan, China and warned of the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak a pandemic, based on the rapid increase in exposure globally.

In response to the reduction in flying demand due to the COVID-19 pandemic, United has announced and implemented large scale reductions in its domestic flight schedules and the flight schedules of its regional airline partners, such as the Company, and the Company expects reduced demand to continue. Given the fluid nature of the pandemic, the extent of any future reduction in demand and the length of these impacts is unknown. The COVID-19 pandemic has also led local, municipal, county and state governments in the United States to adopt “shelter-in-place” and “stay-at-home” orders, which may be disruptive to the economy and further depress passenger demand for air travel. The Company has experienced, and continues to experience, a significant reduction in revenues as a result of the reduction in its flight schedule. If the decline in air passenger demand and reduced utilization of the Company’s aircraft require it to furlough employees, it may be challenging to recommence operations at the level of such operations prior to the COVID-19 pandemic. If passenger traffic does not return to pre-COVID-19 levels, there may be excess capacity in the airline industry which could lead to long-term reduced utilization or inefficient scheduling of the Company’s aircraft, which may have an adverse effect on its business and results of operations.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of this global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is taking actions based on currently available information to address the changing business environment; however, it cannot predict what changes in circumstances and future developments that are beyond its control may occur or what effect those changes in circumstances and future developments may have on its results of operations, financial condition, or liquidity for fiscal year 2020.

Since a portion of the Company’s revenue is fixed due to the structure of its United CPA, the impact to the Company from the COVID-19 outbreak will be partially mitigated or offset; however, if United ceased to pay the full fixed amount due under the CPA, whether due to its own financial stress resulting from the COVID-19 outbreak or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition, or liquidity for the year ending December 31, 2020. The Company has very limited exposure to fluctuations in passenger traffic, ticket and fuel prices. While the fixed revenue remains mostly unchanged as it is based on a fixed contractual rate and number of aircraft, the variable revenue based on number of block hours and departures has been significantly reduced, and the Company may experience further reductions. The initiatives and measures put in place to limit the spread of the virus have and will continue to have a materially adverse impact on the Company’s business. As a result of this decline in demand and the subsequent capacity reductions by United, the Company operated approximately 1,860 block hours in May 2020, or approximately 85% less than in May 2019. While the length and severity of the reduction in demand due to COVID-19 is uncertain, the Company anticipates similar schedule reductions will likely continue throughout the remainder of 2020 and into 2021.

In response to these developments, the Company has implemented cost saving initiatives seeking to mitigate the impact of the COVID-19 outbreak on the Company’s financial position and operations while also protecting the safety of the Company’s customers. These measures include, but are not limited to, the following:

(1)

Reducing employee-related costs, including:

(i)

Offering voluntary short-term unpaid leaves to employees,

(ii)

Suspending all pay increases and bonuses for salaried employees, and

(iii)

Instituting a company-wide hiring freeze.

(2)

Reducing other non-employee costs in the current fiscal year, including:

(i)

Delaying planned heavy airframe maintenance events,

(ii)

Delaying maintenance events associated with engines and rotable parts,

(iii)

Reducing or suspending certain discretionary spending, and

(iv)

Reducing rent payments on certain leased engines.

The Company’s primary lender (see Note 6) has agreed to defer approximately $5,000 of interest payments otherwise due in the period from March 31, 2020, through September 29, 2020. All deferred amounts are due in a lump sum payment on September 30, 2020, per the letter agreement dated March 30, 2020. Although the agreement is to pay the full amount back on September 30, 2020, the Company may seek more favorable repayment terms from the lender. There is no certainty as to whether the repayment terms will be able to be modified.

On March 27, 2020, President Trump signed into law the CARES Act. The Company is examining the impact that the CARES Act may have on its business.

In addition to the cost saving measures outlined above, on April 6, 2020, the Company applied to a lender for a $10,000 loan under the small business Paycheck Protection Program (PPP) established under the CARES Act and administered by the SBA (SBA Loan). The application was processed and approved through the SBA system, and the full loan amount of $10,000 was received by the Company on April 13, 2020. The application for these funds required the Company to certify in good faith that current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. The Company was also required to certify that the loan funds would be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. The SBA Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of the loan. The SBA Loan may be prepaid at any time without penalty. The note evidencing the SBA Loan contains events of default that are customary for a loan of this type. Under the terms of the CARES Act and the note, the Company can apply for and be granted forgiveness for all or a portion of the SBA Loan. Such forgiveness, if any, will be determined, subject to limitations, based on the use of loan proceeds for payroll costs, rent and utility costs, provided that the application for the SBA Loan stated that not more than 25% of the forgiven amount may be for non-payroll costs. While the Company believes that its use of the loan proceeds will meet the conditions for forgiveness of the SBA Loan, there can be no assurance that the Company will obtain forgiveness of the loan in whole or in part.

In addition, on April 20, 2020, the Company entered into a Payroll Support Program Agreement (PSP Agreement) with respect to payroll support (Treasury Payroll Support) from the U.S. Department of Treasury (Treasury) with respect to the payroll support program (Payroll Support Program) under the CARES Act, pursuant to which the Company expects to receive approximately $41,000 in the aggregate, of which approximately $20,499 has been received. The remaining amount is expected to be paid to the Company in three equal payments of $6,833 each from July to September 2020. The payments are subject to adjustment in Treasury’s sole discretion. The PSP Agreement contains various covenants, including that the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, that the Company cannot involuntarily terminate or furlough any employee prior to October 1, 2020, and that the Company cannot reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent.

Given the measures discussed above that the Company has implemented to address its historical net losses from operations and to mitigate the impact of the COVID-19 pandemic on its financial position and operations and its assumptions about its future impact on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, the Company believes the working capital currently available to it and cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months after the report issuance date.