Consolidated Financial Statements and Report of Independent Certified Public Accountants Million Air One, LLC
Contents Page Report of Independent Certified Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Members' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 3 5 6 7 8 9
Grant Thornton REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Members Million Air One, LLC Grant Thornton LLP 700 Milam Street, SUite 300 Houston, TX 77002-2848 T 832-476.3600 F 713.655.8741 GrantThornton.com linkd.in/grantthorntonus twnter.com/grantlhorntonuô We have audited the accompanying consolidated financial statements of Million Air One, LLC (a Delaware corporation) and subsidiaries, which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, changes in members' equity, and cash flows for the years then ended, and the related notes to the financial statements. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of signiücant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Grant Thornton llp U.S. member firm of Grant Thornton International Ltd
Grant Thornton We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Million Air One, LLC and subsidiaries as of, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Houston, Texas July 15, 2016 Grant Thornton LLP U. S. member firm of Grant Thornton tnternatronal Ltd
CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS 2015 2014 CURRENT ASSETS: Cash and cash equivalents $ 44 $ 44 Accounts receivable, net of allowance for doubtful accounts of $492 and $449 1,905 1,458 Affiliate receivables 27,851 22,880 Inventories 1,158 838 Other current assets 709 568 Total current assets 31,667 25,788 PROPERTY AND EQUIPMENT, net 46,895 48,818 GOODWILL, net 2,393 2,735 INTANGIBLE ASSETS, net 2,502 2,760 RESTRICTED CASH 6,787 7,574 NOTE RECEIVABLE 383 383 DEFERRED FINANCING COSTS, net 2,384 2,490 Total assets $ 93,011 $ 90,548 LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,149 $ 2,302 Accrued liabilities 2,679 2,579 Income taxes payable 33 33 Affiliate payables 28,946 23,685 Current portion of long term debt 337 299 Current portion of capital lease obligations 162 162 Total current liabilities 34,306 29,060 LONG TERM DEBT, less current portion 48,071 48,420 CAPITAL LEASE OBLIGATIONS, less current portion 22,587 22,357 Total liabilities 104,964 99,837 COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY (11,953) (9,289) Total liabilities and members' equity $ 93,011 $ 90,548 The accompanying notes are an integral part of these consolidated financial statements. 5
CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended (in thousands) 2015 2014 Revenues $ 29,364 $ 36,385 Cost of sales 15,644 22,927 Gross profit 13,720 13,458 Selling, general and administrative expenses 11,113 11,536 Operating income 2,607 1,922 Other expenses: Interest and finance charges 5,231 4,919 Total other expenses 5,231 4,919 Loss before income taxes (2,624) (2,997) Income tax expense 40 40 Net loss $ (2,664) $ (3,037) The accompanying notes are an integral part of these consolidated financial statements. 6
CONSOLIDATED STATEMENTS OF CI-LANGES IN MEMBERS' EQUI1Y For the years ended (in thousands) Additional Class A Class B Class C Class D paid-in Retained Units Amount Units "-\mount Units Amount Units.-\mount capital earnings Total Member's capital, December 31,2013 1,000 $ 1,000 $ 1,000 $ 1,000 $ $ 2,000 $ (8,252) $ (6,252) Net loss (3,037) (3,037) Member's capital, December 31,2014 1,000 1,000 1,000 1,000 2,000 (11,289) (9,289) Net loss (2,664) (2,664) Member's capital, December 31,2015 1,000 $ 1,000 $ 1,000 $ 1,000 $ $ 2,000 $ (13,953) $ (11,953) The accompanying notes are an integral part of these consolidated financial statements. 7
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended (in thousands) 2015 2014 Cash flows from operating activities: Net loss $ (2,664) $ (3,037) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,958 2,899 Bad debt expense 47 292 Changes in assets and liabilities: Accounts receivable (494) (972) Affùiate receivables (4,971) (6,022) Inventories (320) 285 Other assets (141) 13 Accounts payable and accrued liabilities (134) (535) Affùiate payables 5,261 5,807 N et cash used in operating activities (458) (1,270) Cash flows from investing activities: Purchases of property and equipment (329) (3,260) N et cash used in inves ting activities (329) (3,260) Cash flows from financing activities: Repayment of long term debt (311) (333) Change in restricted cash 787 4,224 Change in bank overdraft 81 87 Payment on capital lease obligations (162) (142) Increase in capital lease obligation 392 738 N et cash provided by financing activities 787 4,574 N et increase in cash and cash equivalents 44 Cash and cash equivalents, beginning of year 44 Cash and cash equivalents, end of year $ 44 $ 44 Supplemental information: Cash paid for interest and finance charges $ 5,049 $ 5,044 Cash paid for income taxes $ $ The accompanying notes are an integral part of these consolidated financial statements. 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31,2015 and 2014 NOTE A - ORGANIZATION IvIillion Air One, LLC, (the "Company") a Delaware corporation was established in conjunction with entering into an arrangement with the Capital Trust Agency ("Capital Trust"), a legal entity duly created under Chapter 163, Part I, and Chapter 617, Florida Statues, pursuant to which Capital Trust issued $48,385,000 aggregate principal amount of its revenue bonds, Series 2011. The transaction was consummated in August 2011. Million Air One consists of three wholly-owned individual subsidiaries, each of which is operated as an FBO doing business under the name Million Air-Houston, Million Air-Tallahassee and Million Air-Gulfport-Biloxi. The Company, through its subsidiaries, provides a full suite of services to private aviation. Since the Company is a limited liability company, no member, manager, agent or employee of the Company shall be personally liable for the debts, obligations or liabilities of the Company, whether arising in contract, tort or otherwise, or for the acts or omission of any other member, director, manager, agent, or employee of the Company, unless the individual has signed a specific personal guarantee. The duration of the Company is perpetual. NOTE B - LIQUIDITY The proceeds of the Capital Trust issuance were designed to finance the cost of acquiring, rehabilitating and improving leasehold facilities at each of the three local airports. The terms of the arrangement are set forth in and pursuant to a Loan Agreement and Trust Indenture both dated August 2011. The terms, among other requirements, consist of semi-annual payments and interest (paid to a Trustee monthly) over the 30-year maturity (2041) with a coupon of 7.75% tax-exempt interest rate. In conjunction with entering into this transaction, the Company has assumed additional cash expenses in the form of associated interest and other related debt service requirements. Consequently, the Company has undertaken a number of strategically designed steps and programs to assist in its working capital management that include operating cost reductions and enhanced terms with certain major vendors. Management believes these measures will ensure effective and efficient operations of its business currently and into the future. NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The Company maintains their accounts in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries; Houston Aviation Partners, LLC; Gulfport Aviation Partners, LLC; and Tallahassee Aviation Partners, LLC. All significant intercompany transactions and balances have been eliminated in consolidation. 9
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Cash and Cash Equivalents Management considers time deposits, certificates of deposit and highly liquid investments with original maturities of three months or less to be cash and cash equivalents. The Company has classified bank overdrafts of$220,000 and $139,000 for the years ended, respectively. Restricted Cash Cash restricted due to a stipulation in the bond agreement is classified as "Restricted cash" and not included in "Cash and cash equivalents" in the consolidated balance sheet. The restricted cash can only be used for the purpose provided for in the bond agreement which is to purchase, build, and improve the FBO's operated by the Company. Funds can only be released upon the presentation of disbursement requests to the bond trustee. Concentration of credit risk The Company maintains amounts on deposit with various financial institutions, which may at times exceed federally insured limits. Management periodically evaluates the credit worthiness of those institutions and has not experienced any losses on such deposits to date. Revenue Recognition Most of the Company's revenues are generated by the sale of jet fuel and other ancillary aviation services. Revenue is recognized upon the delivery of fuel or as the service is provided and collectability is reasonably assured. Accounts Receivable Accounts receivable consist primarily of amounts due from customers for the sale of fuel and other aviation related services and maintenance projects. The carrying value of the Company's receivables, net of the allowance for doubtful accounts, represents their net realizable value. Allowance for Doubtful Accounts The Company performs ongoing evaluations of customers and adjusts credit limits based upon payment history and the customer's current credit worthiness. The Company regularly monitors collections from customers and maintains a provision for estimated uncollectable accounts based upon reviews of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors. Provisions for bad debts and recoveries of accounts previously charged off are adjusted to the allowance account. 10
December 31,2015 and 2014 NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Inventories The Company's inventories consist primarily of fuels, oils, additives and airplane spare parts. The Company's inventory is carried at lower of cost or market. Cost is determined by utilizing the weighted average cost method, which includes transportation costs. Fixed Assets Fixed assets are stated at cost, net of accumulated depreciation. Fixed assets are depreciated over the estimated useful lives of the respective asset. Depreciation is computed using the straight line method with lives as follows: Building & leasehold improvements Line service equipment Maintenance shop equipment Furniture & equipment Signs Computer software 3 to 30 years 3 to 30 years 3 to 10 years 3 to 10 years 10 years 3 to 5 years Upon a sale 01' other disposition of these assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in other income 01' expense. Expenditures for maintenance and repairs are expensed as incurred. Expenditures for renewals and improvements are capitalized if they extend the life, increase the capacity, 01' improve the efficiency of the asset. Capitalized Interest Costs Direct incremental costs are capitalized for major development projects and are amortized over the lives of the related assets. The Company capitalizes interest on borrowings applicable to construction in progress. Capitalized interest costs were approximately $0 and $323,000 for 2015 and 2014, respectively. Deferred Financing Costs Deferred financing costs associated with long-term debt are carried at cost net of accumulated amortization. These costs are amortized to interest expense using methodology consistent with the effective interest method over the life of the related debt instrument. \V'hen the related debt instrument is retired, any remaining unamortized costs are included in the determination of the gain or loss on the extinguishment of the debt. Amortization expense for deferred financing costs were $94,000 and $94,000 for the years ended, respectively. 11
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, realizability of fixed assets and intangible assets, goodwill, and the depreciable lives of fixed assets and intangibles. These estimates have the potential to have a significant impact on the financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. Actual results could differ from those estimates. Advertising Costs Advertising costs are expensed as incurred and totaled approximately $65,000 and $82,000 for the years ended, respectively. Goodwill and Intangibles Pursuant to Accounting Standards Update ("ASU") 2014-02, the Company has elected to amortize goodwill on a straight-line basis over 10 years and recognized amortization expense of $342,000 and $342,000 for the years ended December 31,2015 and 2014, respectively. Under ASU 2014-02, impairment testing is performed upon the occurrence of a triggering event indicating that the fair value of the entity might be less than its carrying amount, and there is no annual impairment test. Management concluded that there were no triggering events that required impairment testing. Intangible assets that have definite lives, which principally consist oflicense agreements, non-compete agreements, and customer relationships, continue to be subject to amortization. In addition, the Company must evaluate the remaining useful life in each reporting period to determine whether events and circumstances warrant a revision of the remaining period of amortization. If the estimate of an intangible asset's remaining life is changed, the remaining carrying amount of such asset is amortized over that revised remaining useful life. Amortization is computed using the straight line method over the following estimated useful lives; Non-compete agreements Airport FBO license Customer relationship Fuel Farm use agreement 7 years 30 years 30 years 30 years 12
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Impairment of Long-Lived Assets Long-lived assets with definite lives, including intangible assets, are evaluated for impairment whenever conditions indicate that the carrying value of the assets may not be recoverable. In determining if impairment exists, assets are grouped at the lowest level for which there is identifiable cash flows that are largely dependent of cash flows from other groups of assets. If impairment exists, the amount of the impairment is measured as the difference between the carrying value and the estimated fair value of the assets. There were no events or conditions that indicated an impairment of an asset in 2015 or 2014. Income Taxes The Company is treated as a partnership for federal and most state tax purposes and, accordingly, the taxable income, losses and credits of the entity are included on the income tax returns of its members. The Company is subject to Texas franchise tax. Deferred taxes are provided under the liability method on differences between the reported amount of an asset or liability in the financial statements and its franchise tax reporting basis. As of, the Company did not have deferred taxes associated with the Texas franchise tax. The Company applies the provisions of Accounting Standards Codifications ("ASC") 740, Income Taxes. Previously, the Company had accounted for tax contingencies in accordance with ASC 450, COl1til1genâeJ. As required by the uncertain tax position guidance in ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied the uncertain tax position guidance in ASC 740 to all tax positions for which the statute of limitations remained open. There were no uncertain tax positions recognized for the years ended. 13
NOTE D - PROPERTY AND EQUIPMENT Property and equipment at consists of the following (in thousands): 2015 2014 Building and leasehold improvements $ 54,499 $ 53,681 Line service equipment 4,649 4,642 Maintenance shop equipment 406 398 Furniture and equipment 1,000 992 Signs 76 76 Computer software 33 33 Construction in progress 533 60,663 60,355 Less: Accumulated depreciation 13,768 11,537 $ 46,895 $ 48,818 Depreciation expense, including capital lease amortization, for the year ended December 31,2015 and 2014 was $2,265 and $2,189, respectively. NOTE E - INTANGIBLE ASSETS, INCLUDING GOODWILL The information below summarizes the gross carrying amount and accumulated amortization of the Company's intangible assets as of (in thousands): 2015 2014 Non-compete agreements $ 1,100 $ 1,100 Airport FBO license 1,000 1,000 Customer relationship 1,750 1,750 Fuel farm use agreement 250 250 Goodwill 3,419 3,419 7,519 7,519 Less: Accumulated amortization 2,624 2,024 $ 4,895 $ 5,495 Goodwill, net $ 2,393 $ 2,735 Intangible assets, net 2,502 2,760 $ 4,895 s 5,495 14
NOTE E - INTANGIBLE ASSETS, INCLUDING GOODWILL - Continued Amortization expense related to the acquired intangible assets and goodwill was $599,000 and $617,000 for the years ended December 31,2015 and 2014, respectively. The estimated amortization expense for the remaining balance is as follows (in thousands): Years ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 572 442 442 442 442 2,555 Total $ 4,895 NOTE F - LONG TERM DEBT At, long term debt consisted of the following: 2015 2014 Series 2011 bond issue, maturing January 1,2041, bearing interest at 7.75%, with bi-annual interest payments starting on January 1, 2012 and annual principal payments starting January 1, 2015, with varying payments through the course of the issue. The bond proceeds are being used to acquire, build, and renovate FBO buildings of the subsidiaries of the Company. 48,185 s 48,385 Promissory note, maturing on December 22, 2015, bearing interest at 4.25%, with monthly equal installments of $804. The note is secured by the equipment subject to the note. Promissory note, maturing on July 25, 2017 bearing interest at 5.50%, with monthly equal installments of $5,474. The note is secured by the equipment subject to the note. Note, maturing December 30, 2017, bearing interest at 5.50% with monthly equal installments of $3,820. The note is secured by the equipment subject to the note. Less: Current portion Long-term debt 123 160 100 165 48,408 337 9 48,719 299 $ 48,071 s 48,420 15
NOTE F - LONG TERM DEBT - Continued The Series 2011 bonds have loan covenants, including requirements that the Company comply with a net revenue coverage ratio, as well as requirements to deliver quarterly financial statements within 45 days after quarter. At December 31,2015 and 2014 and through the date of this report, the Company was in compliance with all its covenants. Below is a summary of the scheduled maturities as follows (in thousands): Year Amount 2016 $ 337 2017 349 2018 342 2019 400 2020 440 Thereafter 46,540 $ 48,408 NOTE G - CAPITAL LEASE OBLIGATIONS The Company has entered into leases for a fuel farm and various maintenance equipment which are classified as capital leases. These capital leases are included in property and equipment in the accompanying consolidated balance sheets. The aggregate annual scheduled payments on capital leases are as follows (in thousands): Year Amount 2016 2017 2018 2019 2020 Thereafter $ 1,293 1,348 1,348 1,348 1,348 51,103 57,788 Less: Amounts pertaining to interest 35,039 $ 22,749 16
NOTE G - CAPITAL LEASE OBLIGATIONS - Continued Assets under capital lease at December 31,2015 and 2014 are summarized below (in thousands): 2015 2014, Assets under capital leases $ 21,544 $ 21,544 Less: Accumulated depreciation 3,215 2,482 $ 18,329 $ 19,062 The Company's expenses recognized for the airport capital leases include depreciation expense of approximately $0.5 million and interest expense of approximately $1.2 million for each of the years ended December 31,2015 and 2014. NOTE H - COMMITMENTS AND CONTINGENCIES Lease Commitments The Company has entered into various operating lease agreements that expire at various times through 2020. Lease expense was approximately $319,000 and $345,000 for the twelve-month periods ended December 31, 2015 and 2014, respectively. Future minimum lease payments are as follows (in thousands): 2016 2017 2018 2019 2020 Total Year Amount $ 70 70 70 70 70 $ 350 Other Contingencies The Company records an estimated loss from a contingency when information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. The Company is, from time to time, subject to disputes and the potential for litigation incidental to its business. The Company is not aware of any disputes or litigation that would have a material future adverse effect on its business, financial condition, results of operations, or liquidity. 17
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued Accounting for contingencies such as legal and income tax matters requires the use of judgment. If the actual loss from a loss contingency is significantly different than the estimated loss, results of operations may be adversely impacted. NOTE I - MEMBERS' EQUITY The members' equity of the Company consists of four classes of units, A, B, C and D. Class A unit holders are entitled to pro-rata distributions based on their respective holding of units as a percentage of total units issued. Class A unit holders are entitled to cash flow distributions generated by the Houston FBO. Class A unit holders do not have voting rights. There have been no changes in the number of units during the years ended. Class B unit holders are entitled to pro-rata distributions based on their respective holding of units as a percentage of total units issued. Class B unit holders are entitled to cash flow distributions generated by the Tallahassee FBO. Class B unit holders do not have voting rights. There have been no changes in the number of units during the years ended. Class C unit holders are entitled to pro-rata distributions based on their respective holding of units as a percentage of total units issued. Class C unit holders are entitled to cash flow distributions generated by the Gulfport Biloxi FBO. Class C unit holders do not have voting rights. There have been no changes in the number of units during the years ended. Class D unit holders are entitled to pro-rata voting rights based on their respective holding of units as a percentage of total units issued. Class D unit holders are not entitled to any cash flow distributions. There have been no changes in the number of units during the years ended. REW Investments, Inc. (parent company of Million Air One, LLC), being the majority holder of all classes of units, retains voting and management control of the Company. There have been no changes in the number of units during the years ended December 31,2015 and 2014. NOTE J- 401(k) PLAN The Company has an employee benefit plan under section 401 (k) of the Internal Revenue Code for all eligible employees who are permitted to defer compensation up to a maximum of 100% on their income subject to limitations imposed by the Internal Revenue Code ("IRC"). The Company may make matching contributions or discretionary contributions. The Company did not make any matching contribution under this plan for the twelve-month periods ended. 18
NOTE K-TRANSACTIONS WITH RELATED PARTIES During the years ended, the Company recorded revenues of approximately $2.8 million and $3.5 million from an affiliate charter operation representing the sale of fuel and maintenance work performed on the charter company's fleet of aircraft. This revenue is included in the receivable from affiliate on the balance sheet. The remainder of the receivable balance represents various advances to other affiliates. Pursuant to a shared services agreement, the Company incurred approximately $1.6 million and $1.8 million for the years ended December 31,2015 and 2014 in fees with an affiliate for the Company's allocated general and administrative services costs. This fee is included in the payable to affiliate in the balance sheets. The remainder of the payable balance represents various advances from other affiliates. NOTE L - SUBSEQUENT EVENTS The Company evaluated its December 31, 2015 financial statements for subsequent events through July 15, 2016, the date the financials were available to be issued. The Company is not aware of any subsequent events that would require recognition or disclosure in the financial statements. 19