AEROCENTURY CORP Discussion and analysis by management of the financial position and results of operations. (form 10-Q)

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The following discussion and analysis should be read together with the Company's
annual report on Form 10-K for the fiscal year ended December 31, 2020 and the
audited consolidated financial statements and notes included therein
(collectively, the "2020 Annual Report"), as well as the Company's unaudited
condensed consolidated financial statements and the related notes included in
this report. Pursuant to Instruction 2 to paragraph (b) of Item 303 of
Regulation S-K promulgated by the SEC, in preparing this discussion and
analysis, the Company has presumed that readers have access to and have read the
disclosure under the same heading contained in the 2020 Annual Report. This
discussion and analysis contains forward-looking statements. Please see the
cautionary note regarding these statements at the beginning of this report.


Overview



The Company has historically provided leasing and finance services to regional
airlines worldwide and has been principally engaged in leasing mid-life regional
aircraft to customers worldwide under operating leases and finance leases. In
addition to leasing activities, the Company has also sold aircraft from its
operating lease portfolio to third parties, including other leasing companies,
financial services companies, and airlines. Its operating performance is driven
by the composition of its aircraft portfolio, the terms of its leases, and the
interest rate of its debt, as well as asset sales.



At September 30, 2021, we emerged from bankruptcy with a restructured balance sheet, a new management team and a new focus to focus on new lines of business other than aircraft leasing.




On September 30, 2021 ("Effective Date") and pursuant to the Plan Sponsor
Agreement, the Company entered into and consummated (the "Closing") the
transactions contemplated by a Securities Purchase Agreement (the "Securities
Purchase Agreement") with the Plan Sponsor, and Yucheng Hu, in the capacity as
the representative for the Plan Sponsor  thereunder, pursuant to which the
Company issued and sold, and the Plan Sponsor purchased, 2,870,927 shares of
common stock, par value $0.001 per share, of the Company (the "ACY Common
Stock") at $3.85 for each share of Common Stock, for an aggregate purchase price
of approximately $11,053,100 (the "Purchase Price"). The Securities Purchase
Agreement contained customary representations, warranties and covenants by
the
parties to such agreement.


The main terms of the plan sponsor agreement are below:

? Plan sponsor equity investment. The plan sponsor agreement provides for the

broadcast by AeroCentury Corp. 2,857,143 ordinary shares (“new ACY shares”)

at a purchase price equal to $ 3.85 per share, for a global purchase price

of $ 11 million. The issuance of New ACY Shares would result in

pro forma ownership percentages of AeroCentury ordinary shares of (a) 64.89%

owned by the plan sponsor, and (b) 35.11% owned by existing shareholders of

AeroCentury on the effective date (the “inherited ACY shareholders”).

? Refundability of the deposit. In the event of the purchase of New ACY Shares

does not close due to plan sponsor failure to meet conditions

of the plan sponsor agreement, the deposit will be forfeited to the benefit of the AeroCentury. In

in the event that the purchase of the New ACY Shares is not completed due to

Failure by debtors to comply with the terms of the plan sponsor agreement or

failure to comply with the conditions precedent set out in the plan sponsor agreement,

the deposit will be refunded to the plan sponsor. Yes Bankruptcy court or all of it

regulatory authority with the power to block the consumption of

the purchase of the New ACY Shares does not approve the purchase of the New ACY

Shares, the deposit will be refunded to the plan sponsor.

? Breakage fees. If the Bankruptcy court accepts and approves exit funding

operation for AeroCentury with a party other than the plan sponsor (a

“Alternative transaction”) then AeroCentury pay the plan sponsor, at the

closing of this Alternative Transaction, in addition to the return of

    Deposit, a breakup fee equal to US$1,000,000.




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? New capital structure for JetFleet Holding Corp. (“JHC”). On the effective

    Date, the following transactions relating to JHC equity ownership shall be
    executed:



a) Cancellation of ACY’s participation in JHC. All outstanding stock of JetFleet Holding

Corp. (“JHC”) currently 100% owned by its parent company, AeroCentury, must be

canceled.

b) Issuance of common shares of JHC to the plan sponsor and management of JHC. Plan sponsor

will acquire 35,000 common shares of JHC, and certain employees of

JHC (“JHC Management”) who will be appointed to continue the traditional aircraft

rental company AeroCentury through JHC acquires 65,000 shares of

common shares of JHC. All common shares of JHC will be purchased from a

price of $ 1 per share.

c) Issuance of Series A preferred shares of JHC to AeroCentury Corp. AeroCentury will

use $ 2 million of its proceeds from the purchase of the new CYA by the plan sponsor

Shares to purchase new JHC Series A preferred shares from JHC. JHC series

A preferred share will carry a dividend rate of 7.5% per annum, will be

non-convertible and non-transferable, will be refundable by JHC at any time,

but will only be refundable by AeroCentury after 7 years. The JHC A Series

The Preferred Shareholders will constitute a total of 51% of the voting rights

equity of JHC, voting as a single class with the JHC outstanding

Ordinary actions.

(d) Distribution of the Trust’s interest in JHC Series B to inherited ACY shareholders. A

confidence (“Inherited trust“) will be established for the benefit of the CYA Legacy

Shareholders, and JHC will issue new JHC Series B preferred shares as of

Inherited trust. JHC Series B preferred shares issued on Inherited trust

will have an overall liquidation preference of $ 1, not convertible,

non-transferable, non-voting, will not pay a dividend and will contain a

mandatory and refundable provision. JHC Series B Preferred Shares will be

refundable for a total amount equal to (i) $ 1,000,000, if the JHC series

The B preference shares are redeemed after the first financial year for which JHC

declares positive EBITDA for the previous 12-month period, or (ii) $ 0.001 through

share, if the JHC Series B preferred shares are redeemed before the first fiscal year

year for which JHC reports positive EBITDA for the previous 12 month period.





Fleet Summary



(a) Assets Held for Lease



Key indicators of the Company’s aircraft portfolio held for lease at September 30, 2021 and December 31, 2020 were as follows:



                                                 September 30,      December 31,
                                                     2021               2020
Number of aircraft and engines held for lease                 -            

6

Weighted average fleet age                                    -        14.4

years

Weighted average remaining lease term                         -         29

month

Aggregate fleet net book value                                -     $  45,763,100



The following table sets forth the net book value and percentage of the net book
value, by type, of the Company's assets that were held for lease as of September
30, 2021 and December 31, 2020:



                              September 30, 2021               December 31, 2020
                          Number           % of net       Number           % of net
Type                       owned          book value       owned          book value
Regional jet aircraft:
Canadair 700                     -                  -           3                  38 %
Canadair 900                     -                  -           1                  29 %
Turboprop aircraft:
Bombardier Dash-8-400            -                  -           2                  33 %




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The Company did not purchase any aircraft during the quarter ended September 30,
2021. As a result of its Chapter 11 filing in March 2021 and the Company's
emergence from bankruptcy on September 30, 2021, the Company reclassified all of
its aircraft, comprised of three regional jet aircraft and two turboprop
aircraft, from held for lease to held for sale, and used these assets held for
sale to repay the liabilities subject to compromise.



The following table sets forth the net book value and percentage of the net book
value of the Company's assets that were held for lease as of September 30, 2021
and December 31, 2020 in the indicated regions (based on the domicile of the
lessee):



                                 September 30, 2021                December 31, 2020
                            Net book          % of net         Net book         % of net
Region                        value          book value         value          book value
North America               $       -                  -     $ 30,433,100               67 %
Europe and United Kingdom           -                  -       15,330,000  
            33 %
Off lease                           -                  -                -                -
                            $       -                  -     $ 45,763,100              100 %




For the three months ended September 30, 2021, approximately 45%, 37% and 18% of
the Company's operating lease revenue was derived from customers in Croatia, the
United States and Canada, respectively. Operating lease revenue does not include
interest income from the Company's finance leases. The following table sets
forth geographic information about the Company's operating lease revenue for
leased aircraft and aircraft equipment, grouped by domicile of the lessee:



                                              For the Nine Months Ended September 30,                                         For the Three Months Ended September 30,
                                           2021                                      2020                                  2021                                       2020
                              Number                % of                 Number              % of             Number                % of                 Number                % of
                                of                operating                of              operating            of                operating                of                operating
Region                       lessees            lease revenue           lessees          lease revenue       lessees            lease revenue           lessees            lease revenue
Europe and United Kingdom            1                      29 %                3                    39 %            1                      45 %                4                      62 %
North America                        3                      71 %                3                    61 %            2                      55 %                3                      38 %




As of September 30, 2021 and December 31, 2020, the Company also had one and two
finance lease receivables collateralized by aircraft, respectively. The Company
did not record any finance lease revenue during the quarter ended September
30,
2021.



(b) Assets Held for Sale



As a result of its Chapter 11 filing in March 2021 and the Company's emergence
from bankruptcy on September 30, 2021, the Company net off the assets held for
sale against notes payable which were included in the liabilities subject to
compromise. As a part of the plan of reorganization, the Company used the
aircrafts to settle these liabilities.



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Results of Operations



Because our consolidated financial statements reflected fresh start reporting
adjustments following emergence from bankruptcy, as well as any effects of the
transactions contemplated by the Plan and Plan Sponsor Agreement, financial
information relating to results of operations, the Company cannot adequately
benchmark the operating results of the 1-day period ended September 30, 2021
against any of the previous periods reported in its Condensed Consolidated
Financial Statements and does not believe that reviewing the results of this
period in isolation would be useful in identifying any trends in or reaching any
conclusions regarding the Company's overall operating performance. Accordingly,
the below discussion is based on the period from July 1, 2021 through September
29, 2021 ("Quarter ended September 29, 2021") compared to the three months
ended
September 30, 2020.


(a) Quarter ended September 29, 2021 compared to the quarter ended September 30, 2020




(i) Revenues and Other Income



Revenues and other income decreased by 54% to $1.6 million in the quarter ended
September 29, 2021 from $3.5 million in the third quarter of 2020. The decrease
was primarily a result of (i) a 52% decrease in operating lease revenues to $1.5
million in the third quarter of 2021 from $3.2 million in the third quarter of
2020 as a result of reduced rent income from the sale of aircraft during the
fourth quarter of 2020 and first quarter of 2021, and (ii) reduced rent for
three assets in the 2021 as a result of lease extensions and related rent
reductions, the effects of which were partially offset by reduced rent for two
assets in the 2020 period as a result of lease amendments related to the
COVID-19 Pandemic.



(ii) Expenses


For the quarter ended September 29, 2021, the Company had total operating expenses of $ 2.7 million, which consisted of professional and administrative fees as well as salaries and benefits. For three months ended
September 30, 2020, the Company had operating expenses of $ 7.0 million.




During the quarter ended September 29, 2021, the Company did not record
impairment charges as these assets have been used to settle the liabilities
subject to compromise as a part of the reorganization plan. During the third
quarter of 2020, the Company recorded impairment charges of $0.4 million,
consisting of (i) $0.3 million on two assets held for lease, based on estimated
future cash flow, and (ii) $0.1 million on an asset held for sale, based on
expected net sales proceeds.



The Company's interest expense decreased by 100% to $1,500 in the quarter ended
September 29, 2021 from $3.0 million in the third quarter of 2020, as a result
of the Company's Chapter 11 filing in late March 2021, after which the Company
did not accrue interest on the Drake Indebtedness.



Depreciation expense decreased 99% to $0.01 million in the quarter ended
September 29, 2021 from $1.3 million in the third quarter of 2020, primarily as
a result of the reclassification of aircraft from held for lease to held for
sale during the fourth quarter of 2020 and second quarter of 2021, as well as a
decrease in depreciation for two aircraft that were written down to their
estimated sale values during the second quarter of 2020 and were sold during the
fourth quarter.


During the third quarter of 2021, the Company recorded $ 28.7 million reorganization gains.

The Company had a tax expense of $0.07 million in the third quarter of 2021
compared to tax expense of $0.6 million in the third quarter of 2020. The
effective tax rate for the third quarter of 2021 was a 0.3% tax expense compared
to a negative 17.4% tax expense for the third quarter of 2020. The difference in
the effective income tax rate from the normal statutory rate in the third
quarter of 2021 was primarily related to nontaxable cancellation of debt income
that is excluded from the Company's taxable income. In addition, the Company
recorded a valuation allowance in the current period on the Company's U.S.
deferred tax assets. In assessing the valuation of deferred tax assets, the
Company considered whether it is more likely than not that some portion or all
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income or
availability to carryback the losses to taxable income during periods in which
those temporary differences become deductible. The Company considered several
factors when analyzing the need for a valuation allowance, including the
Company's current five-year cumulative loss through December 31, 2020, the
impacts of the COVID-19 Outbreak on the worldwide airline industry and the
Company's recent filing for protection under Chapter 11 of the bankruptcy code.
Based on this analysis, the Company concluded that a valuation allowance is
necessary for the Company's net U.S. deferred tax assets not supported by either
future taxable income or availability of future reversals of existing taxable
temporary differences and has recorded a valuation allowance of $0.1 million in
the third quarter of 2021 compared to a valuation allowance of $1.4 million
in
the third quarter of 2020.



                                       25


The discussion below is based on the period of January 1, 2021 through
September 29, 2021 (“nine months ended September 29, 2021“) compared to the nine months ended September 30, 2020.

(b) Nine months ended September 29, 2021 compared to the nine months ended
September 30, 2020




(i) Revenues and Other Income



Revenues and other income decreased by 56% to $5.6 million in the nine months
ended September 29, 2021 from $12.7 million in the same period of 2020. The
decrease was primarily a result of (i) a 54% decrease in operating lease
revenues to $5.8 million in the first nine months of 2021 from $12.4 million in
the same period of 2020 as a result of reduced rent income from the sale of
aircraft during the fourth quarter of 2020, and (ii) first quarter of 2021 and
reduced rent for three assets in the first quarter of 2021 as a result of lease
extensions and related rent reductions.



(ii) Expenses



For the nine months ended September 29, 2021, the Company had operating expenses
of $14.3 million, which was comprised of impairment in value of aircrafts,
interest expense, professional fees and administrative expenses and salary and
employee benefits. For the first nine months of 2020, the Company had operating
expenses of $43.8 million.



During the nine months ended September 29, 2021, the Company recorded impairment
charges totaling $4.2 million on seven assets held for sale, based on appraised
values or expected sales proceeds. During the same period of 2020, the Company
recorded impairment charges of $16.8 million, consisting of (i) $7.0 million on
two assets held for lease, based on estimated future cash flow and (ii) $9.8
million on five assets held for sale, based on appraised values or expected
sales proceeds.



The Company's interest expense decreased by 85% to $2.0 million in the nine
months ended September 29, 2021 from $13.5 million in the same period of 2020,
as a result of the Company's Chapter 11 filing in late March 2021, after which
the Company did not accrue interest on the Drake Indebtedness. In addition, the
Company sold five aircraft in August 2021 and the proceeds, totaling $41.6
million, were used to pay down the Drake Indebtedness. The first nine months of
2020 included $2.0 million of valuation charges related to the Company's
interest rate swaps and a $2.0 million write-off of a portion of the Company
unamortized debt issuance costs related to the MUFG Credit Facility.



Professional fees, general and administrative and other expenses decreased 16%
to $3.7 million in the nine months ended September 29, 2021 from $4.4 million in
the first nine months of 2020, primarily as a result of decreases in legal fees
related to the May 2020 MUFG Indebtedness amendment and litigation brought by an
activist shareholder, consulting fees related to the May 2020 MUFG Indebtedness
amendment and amortization related to the Company's office lease right of use.



Depreciation expense decreased 79% to $1.2 million in the nine months ended
September 29, 2021 from $5.5 million in the nine months ended September 30, 2020
primarily as a result of the reclassification of aircraft from held for lease to
held for sale during the fourth quarter of 2020 and second quarter of 2021, as
well as a decrease in depreciation for two aircraft that were written down to
their estimated sale values during the second quarter of 2020 and were sold
during the fourth quarter.



During the nine months ended September 29, 2021, the Company recorded $ 27.7 million that the reorganization wins.




The Company had a tax expense of $0.1 million for the nine months ended
September 30, 2021 compared to tax benefit of $3.4 million for the nine months
ended September 30, 2020. The effective tax rate for the nine months ended
September 30, 2021, was a 0.7% tax expense compared to a 10.9% tax benefit for
the nine months ended September 30, 2020. The difference in the effective income
tax rate from the normal statutory rate for the nine months ended September 30,
2021, was primarily related to nontaxable cancellation of debt income that was
excluded from the Company's taxable income. In addition, the Company recorded a
valuation allowance in the current period on the Company's U.S. deferred tax
assets. In assessing the valuation of deferred tax assets, the Company
considered whether it is more likely than not that some portion or all the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income or
availability to carryback the losses to taxable income during periods in which
those temporary differences become deductible. The Company considered several
factors when analyzing the need for a valuation allowance, including the
Company's current five-year cumulative loss through December 31, 2020, the
impacts of the COVID-19 Outbreak on the worldwide airline industry and the
Company's recent filing for protection under Chapter 11 of the bankruptcy code.
Based on this analysis, the Company concluded that a valuation allowance is
necessary for the Company's net U.S. deferred tax assets not supported by either
future taxable income or availability of future reversals of existing taxable
temporary differences and has recorded a valuation allowance of $1.8 million for
the nine months ended September 30, 2021, compared to a valuation allowance of
$4.6 million for the nine months ended September 30, 2020. Additionally, the
Company has concluded that based on its analysis, some of its foreign net
operating loss carrybacks are not expected to be realized based on limitations
on the utilization of its foreign net operating losses, and therefore recorded a
foreign tax expense of $0.05 million for the reduced tax refund for the nine
months ended September 30, 2021.



                                       26


Liquidity and capital resources




On September 30, 2021, the Company emerged from bankruptcy with a restructured
balance sheet. As of September 30, 2021, the Company had total net assets of
approximately $18.9 million.



As the Company disclosed in Note 3 to the unaudited condensed financial statements, the Company expects to settle liabilities subject to compromise with aircraft included in assets held for sale.




On September 30, 2021 ("Effective Date") and pursuant to the Plan Sponsor
Agreement, the Company closed the transactions with the Plan Sponsor, pursuant
to which the Company issued and sold, and the Plan Sponsor purchased, 2,870,927
shares of common stock, par value $0.001 per share, of the Company (the "ACY
Common Stock") at $3.85 for each share of Common Stock, for an aggregate
purchase price of approximately $11,053,100. The Plan Sponsor made the payments
before the Effective Date.


The preparation of our interim financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities at the date of the financial
statements, (ii) the disclosure of contingent assets and liabilities, and (iii)
the reported amounts of revenue and expenses during the reporting period. Actual
results may differ from those estimates. Estimates and judgments are used when
accounting for the application of fresh start accounting, allowance for credit
losses, asset impairments, indefinite-lived intangibles, depreciation and
amortization, income taxes, and pension and other postretirement benefits,
among
others.



Cash Flow


Because the Company just emerged from bankruptcy on September 30, 2021, the cash
flow for nine months ended September 30, 2021 were attributable to provision and
usage by the predecessor of the Company. The discussion about the cash flow in
below paragraphs are related to the cash flow provided or used by the
predecessor of the Company.



The Company's primary sources of cash from operations are payments due under the
Company's operating and finance leases, maintenance reserves, which are billed
monthly to lessees based on asset usage, and proceeds from the sale of aircraft
and engines.


The Company's primary uses of cash are for (i) salaries, employee benefits and
general and administrative expenses, (ii) professional fees and legal expenses
with respect to the Company's Chapter 11 Cases and restructuring and
recapitalization effort; (iii) maintenance expense and (iv) reimbursement to
lessees from collected maintenance reserves.



During 2019, the Company engaged B. Riley Securities, Inc. as an investment
banking advisor to help (i) negotiate with the Company's stakeholders and
formulate and analyze the Company's various strategic financial alternatives
with respect to its plan of reorganization and (ii) locate and negotiate with
potential lenders, investors or transaction partners who would play a role in
recapitalization of the Company.



The Company's payments for maintenance consist of reimbursements to lessees for
eligible maintenance costs under their leases and maintenance incurred directly
by the Company for preparation of off-lease assets for re-lease to new
customers. The timing and amount of such payments may vary widely between
quarterly and annual periods, as the required maintenance events can vary
greatly in magnitude and cost, and the performance of the required maintenance
events by the lessee or the Company, as applicable, are not regularly scheduled
calendar events and do not occur at uniform intervals.



                                       27



Though the Company's maintenance payments typically constitute a large portion
of its cash outflow, this is not likely to be the case in the near term. One of
the Company's lessees that pays maintenance reserves has agreed with the Company
that if the Company is unable or unwilling to repay its maintenance
reimbursement obligations to the lessee, the reimbursement obligation will be
offset against the lessee's monthly rental obligations to the Company until such
maintenance reimbursement obligations are repaid in full. The one lessee that
pays maintenance reserves under its sales-type lease is currently in arrearage
under the lease and will not be eligible to submit maintenance reserve claims
until it has cured its arrearages. When and if the sale of the Company's
aircraft portfolio pursuant to the Stalking Horse Agreement, or any successor
agreement, is consummated, any existing reimbursement obligations under the
Company's leases sold at such sale will be assumed by the asset buyer.



Actual results could deviate substantially from the assumptions management has
made in forecasting the Company's future cash flow. As discussed in Liquidity
and Capital Resources, there are a number of factors that may cause actual
results to deviate from these forecasts. If these assumptions prove to be
incorrect and the Company's cash requirements exceed its cash flow, the Company
would need to pursue additional sources of financing to satisfy these
requirements, which may not be available when needed, on acceptable terms or at
all. See Factors that May Affect Future Results and Liquidity for more
information about financing risks and limitations.



(i) Operating activities



The Company's cash outflow from operations was $2.6 million in the nine months
ended September 29, 2021, which was mainly attributable to payment of $2.4
million for professional fees and legal expenses with respect to the Company's
Chapter 11 Cases and restructuring and recapitalization effort. The Company's
cash inflow from operations was $6.0 million in the first nine months of 2020,
which was mainly attributable to receipt of security deposits of $3.4 million
and receipts from lessees for maintenance reserves.



(ii) Investing activities




The Company did not acquire any aircraft during the nine months ended September
29, 2021 or the first nine months of 2020. During the same periods, the Company
received net cash of $11.8 million and $3.2 million, respectively, from asset
sales.



(iii) Financing activities


During the nine months ended September 29, 2021, the plan sponsor contributed
$ 11.0 million the Company to subscribe for 2,870,927 ordinary shares.




During the same periods, the Company repaid $14.2 and $1.2 million,
respectively, of its total outstanding debt under the Drake Indebtedness and
MUFG Indebtedness, respectively. Such repayments were funded by the sale of
assets and, in the 2021 period, rent and reserves received and used to pay down
the Drake Indebtedness. During the nine months ended September 29, 2021 and the
first nine months ended 2020, the Company's special-purpose entities repaid $0.7
million and $5.1 million, respectively, of the Nord Loans. During the first nine
months of 2021 and 2020, the Company paid approximately $5,000 and $1.7 million,
respectively, for debt issuance and amendment fees.



(iv) Off-balance sheet arrangements

The Company does not have any material off-balance sheet arrangements.

Critical accounting policies, judgments and estimates




The Company's discussion and analysis of its financial condition and results of
operations are based upon the condensed consolidated financial statements
included in this report, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and the related disclosure of contingent assets and liabilities at
the date of the financial statements or during the applicable reporting period.
In the event that actual results differ from these estimates or the Company
adjusts these estimates in future periods, the Company's operating results and
financial position could be materially affected. For a further discussion of
Critical Accounting Policies, Judgments and Estimates, refer to Note 1 to the
Company's condensed consolidated financial statements in this report and the
Company's consolidated financial statements in the 2020 Annual Report.



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