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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-40217

Sun Country Airlines Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

82-4092570

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

2005 Cargo Road

Minneapolis, Minnesota

55450

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (651) 681-3900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SNCY

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer    

    

Accelerated filer    

    

Non-accelerated filer    

Smaller reporting company    

Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Number of shares outstanding by each class of common stock, as of March 31, 2021:

Common Stock, $0.01 par value – 57,153,467 shares outstanding

Table of Contents

Sun Country Airlines Holdings, Inc.

Form 10-Q

Table of Contents

    

Page

Part I. Financial Information

Item 1. Financial Statements

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to the Condensed Consolidated Financial Statements

8

1

Company Background

8

2

Basis of Presentation

9

3

Impact of the COVID-19 Pandemic

10

4

Revenue

12

5

Earnings per Share

14

6

Aircraft

15

7

Debt

17

8

Fuel Derivatives and Risk Management

19

9

Fair Value Measurements

20

10

Income Taxes

21

11

Special Items, net

22

12

Commitments and Contingencies

22

13

Operating Segments

22

14

Subsequent Events

23

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

44

Item 4. Controls and Procedures

44

Part II. Other Information

Item 1. Legal Proceedings

44

Item 1A. Risk Factors

45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3. Defaults Upon Senior Securities

45

Item 4. Mine Safety Disclosures

46

Item 5. Other Information

46

Item 6. Exhibits

46

Signatures

48

- 2 -

Table of Contents

PART I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

March 31, 2021

    

December 31, 2020

(Unaudited)

ASSETS

  

  

Current Assets:

 

  

 

  

Cash and Equivalents

$

269,599

$

62,028

Restricted Cash

 

6,019

 

8,335

Investments

 

5,777

 

5,624

Accounts Receivable, net of an allowance for credit losses of $293 and $224, respectively

 

25,897

 

28,690

Short-term Lessor Maintenance Deposits

 

1,723

 

3,101

Inventory, net of a reserve for obsolescence of $1,089 and $996, respectively

 

5,457

 

5,407

Prepaid Expenses

 

11,678

 

8,002

Derivative Assets

 

1,205

 

Other Current Assets

 

804

 

5,553

Total Current Assets

 

328,159

 

126,740

Property & Equipment, net:

 

  

 

  

Aircraft and Flight Equipment

 

384,950

 

331,685

Leasehold Improvements and Ground Equipment

 

13,856

 

13,526

Computer Hardware and Software

 

7,949

 

7,845

Finance Lease Assets

 

117,833

 

117,833

Rotable Parts

 

8,808

 

8,691

Property & Equipment

 

533,396

 

479,580

Accumulated Depreciation & Amortization

 

(76,467)

 

(65,065)

Total Property & Equipment, net

 

456,929

 

414,515

Other Assets:

 

  

 

  

Goodwill

 

222,223

 

222,223

Other Intangible Assets, net

 

92,110

 

93,110

Operating Lease Right-of-use Assets

 

80,587

 

121,269

Aircraft Lease Deposits

 

8,027

 

10,253

Long-term Lessor Maintenance Deposits

 

18,855

 

22,584

Deferred Tax Asset

 

30,810

 

36,216

Other Assets

 

6,502

 

6,357

Total Other Assets

 

459,114

 

512,012

Total Assets

$

1,244,202

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

- 3 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

    

March 31, 2021

    

December 31, 2020

(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

 

  

 

  

Accounts Payable

$

34,171

$

34,035

Accrued Salaries, Wages, and Benefits

 

16,870

 

16,368

Accrued Transportation Taxes

 

10,402

 

5,883

Air Traffic Liabilities

 

94,733

 

101,075

Derivative Liabilities

 

 

1,174

Over-market Liabilities

 

5,487

 

9,281

Finance Lease Obligations

 

9,995

 

11,460

Loyalty Program Liabilities

 

7,115

 

7,016

Operating Lease Obligations

 

20,672

 

34,492

Current Maturities of Long-term Debt

 

29,232

 

26,118

Other Current Liabilities

 

8,963

 

6,841

Total Current Liabilities

 

237,640

 

253,743

Long-term Liabilities:

 

  

 

  

Over-market Liabilities

 

16,113

 

28,128

Finance Lease Obligations

 

93,293

 

95,710

Loyalty Program Liabilities

 

13,659

 

15,053

Operating Lease Obligations

 

77,840

 

112,707

Long-term Debt

 

274,109

 

256,345

Income Tax Receivable Agreement Liability

 

115,200

 

Other Long-term Liabilities

 

6,388

 

7,764

Total Long-term Liabilities

 

596,602

 

515,707

Total Liabilities

 

834,242

 

769,450

Commitments and Contingencies

 

  

 

  

Stockholders' Equity:

 

  

 

  

Common Stock

 

572

 

468

Common stock with $0.01 par value, 995,000,000 shares authorized, 57,153,467 and 46,839,659 issued at March 31, 2021 and December 31, 2020, respectively.

 

  

 

  

Loans to Stockholders

 

 

(3,500)

Additional Paid In Capital

 

473,848

 

248,525

Retained Earnings / (Deficit)

 

(64,460)

 

38,324

Total Stockholders' Equity

 

409,960

 

283,817

Total Liabilities and Stockholders' Equity

$

1,244,202

$

1,053,267

See accompanying Notes to Condensed Consolidated Financial Statements

- 4 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

    

Three Months Ended March 31, 

    

2021

    

2020

Operating Revenues:

 

  

 

  

Passenger

$

104,195

$

178,486

Cargo

 

21,585

 

Other

 

1,831

 

1,844

Total Operating Revenue

 

127,611

 

180,330

Operating Expenses:

 

  

 

  

Aircraft Fuel

 

24,274

 

55,561

Salaries, Wages, and Benefits

 

44,075

 

38,091

Aircraft Rent

 

5,599

 

11,032

Maintenance

 

9,210

 

6,478

Sales and Marketing

 

5,110

 

8,572

Depreciation and Amortization

 

12,615

 

10,527

Ground Handling

 

5,230

 

9,292

Landing Fees and Airport Rent

 

8,785

 

11,114

Special Items, net

 

(26,871)

 

Other Operating, net

 

14,651

 

14,433

Total Operating Expenses

 

102,678

 

165,100

Operating Income

 

24,933

 

15,230

Non-operating Income (Expense):

 

  

 

  

Interest Income

 

15

 

251

Interest Expense

 

(7,121)

 

(5,616)

Other, net

 

(5)

 

(169)

Total Non-operating Expense, net

 

(7,111)

 

(5,534)

Income before Income Tax

 

17,822

 

9,696

Income Tax Expense

 

5,406

 

2,445

Net Income

$

12,416

$

7,251

Net Income per share to common stockholders:

 

  

 

  

Basic

$

0.26

$

0.16

Diluted

$

0.24

$

0.15

Shares used for computation:

 

  

 

  

Basic

 

48,496,077

 

46,805,951

Diluted

 

52,508,186

 

48,225,603

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)

(Unaudited)

Three Months Ended March 31, 2020

Common Stock

Loans to

Additional

Retained

    

Warrants

    

Shares

    

Amount

    

Stockholders

    

Paid-In Capital

    

Earnings

    

Total

December 31, 2019

 

40,005,885

 

6,800,065

$

68

$

(3,500)

$

244,928

$

42,228

$

283,724

Exercise of Apollo Warrants

 

(40,005,885)

 

40,005,885

 

400

 

 

(379)

 

 

21

Net Income

 

 

 

 

 

 

7,251

 

7,251

Stock-based Compensation

 

 

 

 

 

369

 

 

369

March 31, 2020

 

 

46,805,950

$

468

$

(3,500)

$

244,918

$

49,479

$

291,365

Three Months Ended March 31, 2021

Common Stock

Loans to

Additional

Retained

    

Warrants

    

Shares

    

Amount

    

Stockholders

    

Paid-In Capital

    

Earnings

    

Total

December 31, 2020

 

 

46,839,659

$

468

$

(3,500)

$

248,525

$

38,324

$

283,817

Shares Surrendered by Stockholders

 

 

(140,737)

 

(1)

 

3,500

 

(3,499)

 

 

Initial Public Offering

 

 

10,454,545

 

105

 

 

224,552

 

 

224,657

Net Income

 

 

 

 

 

 

12,416

 

12,416

Income Tax Receivable Agreement

 

 

 

 

 

 

(115,200)

 

(115,200)

Amazon Warrants

 

 

 

 

 

1,400

 

 

1,400

Stock-based Compensation

 

 

 

 

 

2,870

 

 

2,870

March 31, 2021

 

 

57,153,467

$

572

$

$

473,848

$

(64,460)

$

409,960

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

    

Three Months Ended March 31, 

    

2021

    

2020

Net Income

$

12,416

$

7,251

Adjustments to reconcile Net Income to Cash from Operating Activities:

 

  

 

  

Depreciation and Amortization

 

12,615

 

10,527

Reduction in Operating Lease Right-of-use Assets

 

5,401

 

6,951

Non-Cash Loss on Asset Transactions, net

 

(8,729)

 

72

Unrealized Loss (Gain) on Fuel Derivatives

 

(2,386)

 

21,752

Amortization of Over-market Liabilities

 

(2,004)

 

(2,913)

Deferred Income Taxes

 

5,406

 

2,471

Amazon Warrants Vested

 

1,400

 

Stock-based Compensation Expense

 

2,870

 

369

Amortization of Debt Issuance Costs

 

1,496

 

708

Changes in Operating Assets and Liabilities:

 

  

 

  

Accounts Receivable

 

2,358

 

5,322

Inventory

 

(173)

 

(367)

Prepaid Expenses

 

(3,676)

 

(403)

Lessor Maintenance Deposits

 

(2,219)

 

(5,476)

Aircraft Lease Deposits

 

2,226

 

600

Other Assets

 

233

 

(2,313)

Accounts Payable

 

626

 

7,107

Accrued Transportation Taxes

 

4,519

 

(10,539)

Air Traffic Liabilities

 

(6,343)

 

(21,903)

Loyalty Program Liabilities

 

(1,295)

 

(570)

Reduction in Operating Lease Obligations

 

(10,722)

 

(7,803)

Other Liabilities

 

1,820

 

3,015

Net Cash Provided by Operating Activities

 

15,839

 

13,858

Cash Flows from Investing Activities:

 

  

 

  

Purchases of Property & Equipment

 

(54,399)

 

(75,250)

Purchase of Investments

 

(337)

 

Proceeds from the Sale of Investments

 

184

 

202

Net Cash Used in Investing Activities

 

(54,552)

 

(75,048)

Cash Flows from Financing Activities:

 

  

 

  

Cash Received from Stock Offering

 

235,894

 

Costs of Stock Offering

 

(7,226)

 

Proceeds Received from Exercise of Apollo Warrants

 

 

21

Proceeds from Borrowings

 

68,000

 

108,777

Repayment of Finance Lease Obligations

 

(3,911)

 

(4,256)

Repayment of Borrowings

 

(46,068)

 

(47,255)

Debt Issuance Costs

 

(2,721)

 

(2,432)

Net Cash Provided by Financing Activities

 

243,968

 

54,855

Net Increase / (Decrease) in Cash, Cash Equivalents and Restricted Cash

 

205,255

 

(6,335)

Cash, Cash Equivalents and Restricted Cash--Beginning of the Period

 

70,363

 

64,478

Cash, Cash Equivalents and Restricted Cash--End of the Period

$

275,618

$

58,143

Supplemental information:

 

  

 

  

Cash Payments for Interest

$

2,728

$

3,278

Cash Payments (Receipts) for Income Taxes, net

$

(7)

$

(55)

Non-cash transactions:

 

  

 

  

Lease Deposits Applied Against the Purchase of Aircraft

$

2,766

$

Purchases of Property & Equipment in Accounts Payable

$

243

$

1,186

Costs of Stock Offering in Accounts Payable

$

1,829

$

The following provides a reconciliation of Cash, Cash Equivalents and Restricted Cash to the amounts reported on the Consolidated Balance Sheets:

March 31, 2021

March 31, 2020

Cash and Equivalents

$

269,599

$

53,112

Restricted Cash

 

6,019

 

5,031

Total Cash, Cash Equivalents and Restricted Cash

$

275,618

$

58,143

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

1.

COMPANY BACKGROUND

Sun Country Airlines Holdings, Inc. is the parent company of Sun Country, Inc., which is a certificated air carrier providing scheduled passenger service, cargo customers, charter air transportation and related services. Services are provided to the general public, Amazon, military branches, wholesale tour operators, individual entities, schools and companies for air transportation to various U.S. and international destinations. Except as otherwise stated, the financial information, accounting policies, and activities of Sun Country Airlines Holdings, Inc. are referred to as those of the Company (the “Company” or “Sun Country”).

Stock Split

In March 2021, the Company effected an approximately 18.8886 for 1 stock split of its common stock (the “Stock Split”), with exercise prices for outstanding warrants and options adjusted accordingly by dividing such prices by the Stock Split ratio. The par value of the common stock was not adjusted as a result of the Stock Split. As a result of the Stock Split, the Company issued an additional 44,226,587 shares of common stock. All references to common stock, warrants to purchase common stock, stock options, per share amounts and related information contained in the accompanying Condensed Consolidated Financial Statements and applicable disclosures have been retroactively adjusted to reflect the effect of the Stock Split for all periods.

Initial Public Offering of Common Stock and Concurrent Private Placements

On March 16, 2021, the Company priced its initial public offering of 9,090,909 shares of common stock to the public at $24.00 per share. The stock began trading on the NASDAQ on March 17, 2021 under the symbol SNCY. The underwriters had an option to purchase an additional 1,363,636 shares from the Company at the public offering price, which they exercised. In total, all 10,454,545 shares were issued on March 19, 2021 and the net proceeds to the Company were $224,657 after deducting underwriting discounts and commissions, and other offering expenses.

Concurrently with the closing of the initial public offering, SCA Horus Holdings, LLC, an affiliate of investment funds managed by affiliates of Apollo Global Management (the “Apollo Stockholder”), also completed a concurrent private placement in which the Apollo Stockholder sold 2,216,312 and 2,216,308 shares of common stock to PAR Investment Partners, L.P. and certain funds or accounts managed by an investment adviser subsidiary of Blackrock, Inc., respectively. Each of the two sales was based on an aggregate purchase price of $50,000 and a price per share equal to 94% of the initial public offering price of $24.00 per share.

Amazon Agreement

On December 13, 2019, the Company signed a six-year contract (with two, two-year extension options, for a maximum term of 10 years) with Amazon.com Services, Inc. (together with its affiliates, “Amazon”) to provide cargo services under an Air Transportation Services Agreement (the “ATSA”). The agreement is structured for the Company to provide crew, maintenance, and insurance (“CMI”) services to Amazon. Sun Country began flying for Amazon in May 2020.  On June 27, 2020, Amazon and the Company signed an amendment to the December 2019 agreement that increased the aircraft Sun Country operates from 10 to 12.

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

In December 2019, in connection with the ATSA, the Company issued warrants to Amazon to purchase an aggregate of up to 9,482,606 shares of common stock at an exercise price of approximately $15.17 per share. The exercise period of these warrants is through the eighth anniversary of the issue date. Of the 9,482,606 total Amazon warrants issued, 632,183 vested upon execution of the ATSA in December 2019.  Thereafter, an additional 63,217 warrants will vest for each milestone of $8,000 in qualifying payments made by Amazon to the Company.  During the three months ended March 31, 2021, 189,652 warrants vested and the cumulative warrants vested as of March 31, 2021 were 1,074,704. No warrants vested during the three months ended March 31, 2020.

2.

BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Sun Country Airlines Holdings, Inc. should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report for the year ended December 31, 2020, which is included in the Company’s Final Prospectus dated March 16, 2021. During the three months ended March 31, 2021, there were no significant changes to the Company’s critical accounting policies.

Certain prior period Stockholders’ Equity amounts were reclassified to conform to the current period presentation. This involved reducing the Common Stock values to $0.01 times the Shares outstanding and reclassifying those dollars to Additional Paid-In Capital. These reclasses were $238,694 as of December 31, 2020 and March 31, 2020. The reclass as of December 31, 2019 was $239,073. Also, historical shares of common stock have been adjusted to reflect the March 2021 approximately 18.8886 for 1 stock split.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. All material intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Significant areas of judgment relate to passenger revenue recognition, maintenance under the built-in overhaul method, equity-based compensation, tax receivable agreement, impairment of goodwill, impairment of long-lived and intangible assets, air traffic liabilities, the loyalty program, as well as the valuation of Amazon warrants.

Due to severe impacts from the global coronavirus (“COVID-19”) pandemic, seasonal variations in the demand for air travel, the volatility of aircraft fuel prices and other factors, operating results for the three months ended March 31, 2021 are not necessarily indicative of operating results for future quarters or for the year ended December 31, 2021. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, unemployment levels, corporate travel budgets, extreme or severe weather and natural disasters, disease outbreaks, fears of terrorism or war, and other factors beyond the Company’s control.

The Company operates its fiscal year on a calendar year basis.

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Recently Adopted Accounting Standards

Income Taxes-Simplifying the Accounting for Income Taxes - In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions related to the approach for intraperiod tax allocation, recognizing deferred tax liabilities for outside basis differences, and calculating income taxes in interim periods. The guidance also reduces complexity in certain areas, including franchise taxes that are partially based on income and accounting for tax law changes in interim periods. The standard was adopted prospectively effective January 1, 2021 and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

Simplifying the Test for Goodwill Impairment - In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, Simplifying the Test for Goodwill Impairment. The new standard eliminates Step 2 from the goodwill impairment test. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard was adopted and applied prospectively by the Company on April 1, 2020, and it did not have an impact on the Company’s Condensed Consolidated Financial Statements.

Financial Instruments—Credit Losses - In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update requires the use of an expected loss model on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, entities are required to estimate lifetime expected credit losses. This accounting standard was adopted prospectively on April 1, 2020, and it did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

3.

IMPACT OF THE COVID-19 PANDEMIC

All major U.S. passenger airlines were negatively impacted by the declining demand environment resulting from the COVID-19 pandemic. The U.S. Department of State has issued international travel advisories and restrictions and the U.S. federal government has also implemented enhanced screenings and quarantine requirements in connection with the outbreak. State and local governments may have additional restrictions that adversely impact travel. In addition, the U.S. Centers for Disease Control has issued travel advisories for domestic travel within the United States. Certain Latin American countries where the Company operates scheduled passenger service have also restricted travel to residents only. Accordingly, the Company experienced a dramatic decline in flight bookings and an increase in cancellations beginning in March 2020, as a result of the outbreak. In addition, the federal government has encouraged social distancing efforts and limits on gathering size. Many popular tourist destinations have been closed, or operations are being curtailed, reducing the demand for leisure air travel.

The continued distribution of effective vaccines and the easing of travel advisories and restrictions has lead to growing customer confidence and increased demand. There have been fluctuations in the rate of infections during 2021 and the U.S. Food and Drug Administration has issued an emergency use authorization for COVID-19 vaccines.

The timing and pace of the recovery from the COVID-19 pandemic are uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others,

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

particularly international markets, remain closed or are enforcing extended quarantines for most U.S. residents. Federal, state, and local authorities have at various times instituted measures such as imposing self-quarantine requirements, issuing directives forcing businesses to temporarily close, restricting international air travel, and issuing shelter-in-place and similar orders limiting the movement of individuals. Additionally, certain businesses have restricted non-essential travel for their employees.

The Company’s charter air transportation services have also been impacted due to a decline in international military charter service, the suspension or cancellation of major U.S. professional and college sports, and the voluntary or mandated closing of casinos. In addition, the Company has experienced increased competition for domestic charters as competitors are now offering charter services with otherwise grounded aircraft due to a decline in their passenger service.

As the COVID-19 pandemic continues to evolve, the Company’s financial and operational outlook remains subject to change. Despite the pandemic’s impact on the Company’s passenger segment, the Company has continued to provide air cargo service under the ATSA as planned.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020, the CARES Act was passed by the U.S. Government. The provisions in the act provide for economic relief to eligible individuals and businesses affected by COVID-19. As a provider of scheduled passenger service, air cargo service, charter air transportation and related services, the Company is eligible for and has received certain benefits outlined in the CARES Act including but not limited to payroll tax breaks, government grants and government loans.

The grant amount recognized under the CARES Act Payroll Support Program for the year ended December 31, 2020 was $62,312 and was recorded in Special Items, net. During the first quarter of 2021, the Company received and recognized as income $32,208 from the Treasury under the Payroll Support Program Extension (“PSP2”). Subsequent to the first quarter of 2021, on April 22, 2021, the Company received an additional $4,831 from the Treasury as a top-off grant under PSP2.

The CARES Act provides an employee retention credit (“CARES Employee Retention Credit”) which is a refundable tax credit against certain employment taxes. During the year ended December 31, 2020, the Company recorded $2,328 related to the CARES Employee Retention Credit within Special Items, net and an additional $334 was recognized in the first quarter of 2021.

Under the CARES Act Loan Program, the Company received a $45,000 loan (the “CARES Act Loan”) from the Treasury on October 26, 2020, which was repaid in full on March 24, 2021.

Further, the Company was notified on April 15, 2021 that it will receive a grant of approximately $34,547 under the American Rescue Plan Act of 2021 (“PSP3”) enacted on March 11, 2021, in which the Treasury is authorized to provide additional assistance to passenger air carriers and contractors that received financial assistance under the CARES Act. Of this grant amount, $17,274 was received on April 29, 2021.

In accordance with any grants and/or loans received under the CARES Act, the Company is required to comply with the relevant provisions of the CARES Act and the related implementing agreements which, among other things, include the following: the requirement to use the Payroll Support Payments exclusively for the continuation of payment of crewmember and employee wages, salaries and benefits; the

- 11 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

requirement that certain levels of commercial air service be maintained until March 1, 2021, or if ordered by the DOT, March 1, 2022; the prohibitions on share repurchases of listed securities and the payment of common stock (or equivalent) dividends until the later of March 31, which was extended to September 30, 2022 under PSP3; and restrictions on the payment of certain executive compensation until the October 1, 2022, which was extended to April 1, 2023 under PSP3.

4.

REVENUE

Sun Country is a certificated air carrier generating Operating Revenues from Scheduled service, Charter service, Ancillary, Cargo and Other revenue. Scheduled service revenue mainly consists of base fares. Charter service revenue is primarily generated through service provided to the U.S. Department of Defense, collegiate and professional sports teams and casinos. Ancillary revenues consist of revenue earned from air travel-related services such as baggage fees, seat selection fees and on-board sales. Cargo consists of revenue earned from flying cargo aircraft under the ATSA. Other revenue consists primarily of revenue from services in connection with Sun Country Vacation products.

The significant categories comprising Operating Revenues are as follows:

    

Three Months Ended March 31, 

    

2021

    

2020

Scheduled service

$

54,620

$

114,228

Charter service

 

25,805

 

29,227

Ancillary

 

23,770

 

35,031

Passenger

 

104,195

 

178,486

Cargo

 

21,585

 

Other

 

1,831

 

1,844

Total Operating Revenue

$

127,611

$

180,330

The Company attributes and measures its Operating Revenue by geographic region as defined by the Department of Transportation for airline reporting based upon the origin of each passenger and cargo flight segment.

The Company’s operations are highly concentrated in the U.S. but include service to many international locations, primarily based on scheduled service to Latin America during the winter season and on military charter services.

Total Operating Revenue by geographic region are as follows:

    

Three Months Ended March 31, 

    

2021

    

2020

Domestic

$

119,312

 

$

163,038

Latin America

 

7,877

 

17,076

Other

 

422

 

216

Total Operating Revenue

$

127,611

 

$

180,330

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Contract Balances

The Company’s contract assets primarily relate to costs incurred to get the 12 Amazon cargo aircraft ready for service. The balances are included in Other Current Assets and Other Assets on the Condensed Consolidated Balance Sheets. The amount expensed during the three months ended March 31, 2021 was $138 and is included in Maintenance expense. There was nothing expensed in the three months ended March 31, 2020, since the Amazon cargo services had not started yet.

The Company’s significant contract liabilities are comprised of 1) ticket sales for transportation that has not yet been provided (reported as Air Traffic Liabilities on the Condensed Consolidated Balance Sheets), 2) outstanding loyalty points that may be redeemed for future travel and other non-air travel awards (reported as Loyalty Program Liabilities on the Condensed Consolidated Balance Sheets) and 3) Amazon Deferred Up-front Payment received (reported within Other Liabilities on the Condensed Consolidated Balance Sheets).

Contract Assets and Liabilities are as follows:

    

March 31, 2021

    

December 31, 2020

Contract Assets

  

  

Costs to fulfill contract with Amazon

$

3,312

$

3,614

Air Traffic Liabilities

$

94,733

$

101,075

Loyalty Program Liabilities

 

20,774

 

22,068

Amazon Deferred Up-front Payment

 

5,010

 

5,240

Total Contract Liabilities

$

120,517

$

128,383

The balance in the Air Traffic Liabilities fluctuates with seasonal travel patterns. Most tickets can be purchased no more than twelve months in advance, therefore any revenue associated with tickets sold for future travel will be recognized within that timeframe. For the period ended March 31, 2021, $60,039 of revenue was recognized in Passenger revenue that was included in the Air Traffic Liabilities as of December 31, 2020.

As part of the ATSA executed in December 2019, Amazon paid the Company $10,300 toward start-up costs. Upon signing the ATSA, Amazon received 632,183 fully vested warrants to purchase the Company’s common stock, with a fair value of $4,667. This fair value was assigned to a portion of the $10,300 cash received from Amazon and the remaining $5,633 is being amortized into revenue on a pro-rata basis over the initial six years of the ATSA. For the three months ended March 31, 2021, $231 was amortized into Cargo revenue. Nothing was amortized for the three months ended March 31, 2020 as services did not begin until the second quarter of 2020.

Loyalty Program

The Sun Country Rewards program provides loyalty awards to program members based on accumulated loyalty points. Loyalty points are earned as a result of travel and purchases using the Company’s co- branded credit card. The balance of the Loyalty Program Liabilities fluctuates based on seasonal

- 13 -

Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

patterns, which impact the volume of loyalty points awarded through travel or issued to co-branded credit card and other partners (deferral of revenue) and loyalty points redeemed (recognition of revenue).

Changes in the Loyalty Program Liabilities are as follows:

    

2021

    

2020

Balance - January 1

$

22,069

$

22,892

Loyalty Points Earned

 

857

 

1,635

Loyalty Points Redeemed(1)

 

(2,152)

 

(2,206)

Balance - March 31

$

20,774

$

22,321

(1)Principally relates to revenue recognized from the redemption of loyalty points for both air and non-air travel awards. Loyalty points are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of points that were part of the loyalty program deferred revenue balance at the beginning of the period, as well as points that were earned during the period.

The timing of loyalty point redemptions can vary significantly, however most new points, that are not left to expire, are redeemed within two years. Given the inherent uncertainty of the current operating environment due to COVID-19, the Company will continue to monitor redemption patterns and will adjust estimates in the future, which could be material.

5.

EARNINGS PER SHARE

Basic earnings per share, which excludes dilution, is computed by dividing Net Income available to common stockholders by the weighted average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The number of incremental shares from the assumed issuance of shares relating to share based awards is calculated by applying the treasury stock method.

The following table shows the computation of basic and diluted earnings per share:

Three Months Ended March 31, 

    

2021

    

2020

Numerator:

 

  

 

  

Net Income

$

12,416

$

7,251

Denominator:

  

  

Weighted Average Common Shares Outstanding - Basic

48,496,077

46,805,951

Dilutive effect of Stock Options and Warrants (1)

4,012,109

1,419,652

Weighted Average Common Shares Outstanding - Diluted

52,508,186

48,225,603

Basic earnings per share

$

0.26

$

0.16

Diluted earnings per share

$

0.24

$

0.15

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Table of Contents

SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

(1)There were 3,557,432 and 3,646,690 performance-based stock options outstanding at March 31, 2021 and 2020, respectively. As a result of the Company’s initial public offering, 75 percent of these options are expected to meet the performance conditions and are included in dilutive options at March 31, 2021. At March 31, 2020, these options were excluded from the calculation of diluted EPS since the performance conditions were not considered likely to be met.

Prior to their exercise on January 31, 2020, all 40,005,885 warrants held by the Apollo Stockholder were included in basic and diluted weighted average shares outstanding as they were equity classified, had an exercise price of approximately $0.0005, and all necessary conditions for issuance were met.

Warrants held by Amazon are included in dilutive weighted average shares outstanding as of the date the warrants vest. The unvested warrants held by Amazon have not been included in dilutive shares as their performance condition had not been satisfied.

6.

AIRCRAFT – Owned and Leased

Aircraft Fleet

The following tables summarize the Company’s aircraft fleet activity for the three months ended March 31, 2021 and 2020, respectively:

    

December 31, 2020

    

Additions

    

Removals

    

March 31, 2021

Passenger:

Owned

 

14

 

5

 

 

19

Finance leases

 

5

 

 

 

5

Operating leases

 

12

 

 

(5)

 

7

Sun Country Airlines' Fleet

 

31

 

5

 

(5)

 

31

Cargo:

Aircraft Operated for Amazon

 

12

 

 

 

12

Total Aircraft Operated

 

43

 

5

 

(5)

 

43

The five aircraft purchased during the three months ended March 31, 2021 were financed through the Delayed Draw Term Loan Facility (see Note 7). All five of these were previously under operating leases.

    

December 31, 2019

    

Additions

    

Removals

    

March 31, 2020

Passenger:

Owned

 

5

 

3

 

 

8

Finance leases

 

10

 

 

 

10

Operating leases

 

14

 

 

(1)

 

13

Seasonal leases

 

2

 

 

(1)

 

1

Sun Country Airlines' Fleet

 

31

 

3

 

(2)

 

32

The three aircraft purchased during the three months ended March 31, 2020 were financed through equipment trust certificates (see Note 7). One of these aircraft was previously under an operating lease and the other two aircraft were new to the Company’s fleet. In addition, the Company refinanced three previously owned and financed aircraft in January 2020 utilizing equipment trust certificates (see Note 7).

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

The Accumulated Depreciation on owned assets was $57,950 and $52,048 as of March 31, 2021 and December 31, 2020, respectively. Depreciation expense was $8,800 and $5,121 for the three months ended March 31, 2021 and 2020, respectively.

The Accumulated Amortization on Finance Lease Assets was $18,517 and $13,018 as of March 31, 2021 and December 31, 2020, respectively. Amortization Expense was $2,692 and $4,290 for the three months ended March 31, 2021 and 2020, respectively.

Depreciation expense on owned assets and amortization expense on Finance Lease Assets are each classified in Depreciation and Amortization on the Condensed Consolidated Statements of Operations.

Aircraft Lease Payment Deferrals

During the year ended December 31, 2020 the Company negotiated rent payment deferrals with a majority of its aircraft lessors due to COVID-19 cash flow impacts. The amount deferred as of March 31, 2021 was $975, consisting of $533 under finance leases and $442 under operating leases. The amount deferred as of December 31, 2020 was $7,569, consisting of $2,133 under finance leases and $5,436 under operating leases. These deferrals are classified within the current portion of the respective lease liabilities on the Condensed Consolidated Balance Sheets.

Aircraft Maintenance Deposits Contra-Assets

At April 11, 2018 (the “Acquisition Date”), the Company established a deposit contra-asset to represent the Company’s obligation to perform planned maintenance events on leased aircraft held as of the Acquisition Date. As of March 31, 2021 and December 31, 2020, the remaining balance of the contra-asset was $26,512 and $36,729, respectively. Of the $10,217 reduction in the contra-asset during the three months ended March 31, 2021, $9,880 related to the purchase of five aircrafts previously leased, whereupon the contra-assets and related maintenance deposits were written-off concurrently to Aircraft lease buy-out expense in Special Items, net (see Note 11). For the three months ended March 31, 2021 and 2020, the Company recognized none and $425, respectively, of the contra-asset as a reduction to Maintenance expense on the accompanying Condensed Consolidated Statements of Operations.

Over-market Liabilities

At the Acquisition Date, the Company acquired liabilities related to its over-market lease rates and over-market maintenance reserve payments.

As of the Acquisition Date, the Company recognized a liability representing lease terms which are unfavorable compared with market terms of similar leases. The remaining balance of this contra-asset as of March 31, 2021 and December 31, 2020 was $12,891 and $16,501, respectively and is recorded within Operating Lease Right-of-Use Assets. The purchase of five aircraft in March 2021 contributed $2,858 of the decrease.

As of the Acquisition Date, Sun Country’s existing leases included payments for maintenance reserves in addition to the stated aircraft lease payments. For a substantial portion of these maintenance reserve payments, the Company does not expect to be reimbursed by the lessor. Therefore, a liability was established representing over-market maintenance reserve lease terms compared to market terms of

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

similar leases. The remaining balance of this liability at March 31, 2021 and December 31, 2020 was $21,600 and $37,409, respectively. Of the $15,809 reduction in the over-market maintenance reserve liabilities during the three months ended March 31, 2021, $13,805 related to the purchase of five aircrafts previously leased, whereupon the over-market liabilities for those aircraft are included in Aircraft lease buy-out expense in Special Items, net (see Note 11).

Aircraft Rent expense for the three months ended March 31, 2021 and 2020, includes credits of $2,755 and $4,103, respectively, for the amortization of over-market liabilities established at the Acquisition Date  related to lease rates and maintenance reserves.

7.

DEBT

Lines of Credit – On February 10, 2021, the Company executed a new five-year credit agreement with a group of lenders that replaced the Company’s prior $25,000 asset-based revolving credit facility (the “ABL Facility”). The new agreement provides for a $25,000 Revolving Credit Facility and a $90,000 Delayed Draw Term Loan Facility, which are collectively referred to as the “Credit Facilities.” The interest rate on borrowings is based on the greatest of various alternative base rates, with a minimum of 2%, plus an applicable margin of 4% to 5%. There is a commitment fee on the unused Revolving Credit Facility of 0.5%. The proceeds from the Revolving Credit Facility can be used for general corporate purposes. The proceeds from the Delayed Draw Term Loan Facility are to be used solely to finance the acquisition of aircraft or engines to be registered in the U.S. During the three months ended March 31, 2021, the Company drew $68,000 on the Delayed Draw Term Loan Facility to purchase five aircrafts. On April 6, 2021, the Company drew an additional $12,500 for the purchase of an additional aircraft, which was under operating lease as of March 31, 2021. The Credit Facilities have financial covenants that require a minimum EBITDAR (ranging from $62,100 to $87,700) and a minimum liquidity of $30,000 at the close of any business day.

Long-term Debt – In December 2019, the Company arranged for the issuance of Class A, Class B and Class C pass-through trust certificates Series 2019-1 (the “2019-1 EETC”), in an aggregate face amount of $248,587 for the purpose of financing or refinancing 13 used aircraft, which was completed in 2020.

Under the CARES Act Loan Program, on October 26, 2020, the Company was awarded a $45,000 loan, which was secured by the Company’s loyalty program and certain cash deposit accounts. The loan bore interest at a rate per annum equal to the Adjusted LIBO Rate plus 6.50% and was due to be repaid on the earlier of (i) October 24, 2025 or (ii) six months prior to the expiration date of any material loyalty program securing the loan. On March 24, 2021, the CARES Act Loan was repaid in full, including outstanding principal and accrued interest for a total repayment amount of $46,260.

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company was in compliance with all covenants in its debt agreements at March 31, 2021.

Long-term Debt included the following:

    

March 31, 2021

    

December 31, 2020

Notes payable under the Company's 2019-1 EETC agreement dated December 2019, with original loan amounts of $248,587 payable in bi-annual installments through December 2027. These notes bear interest at an annual rate of between 4.13% and 6.95% and are secured by the equipment for which the loan was used.

$

227,347

$

227,347

Delayed Draw Term Loan Facility

 

68,000

 

(see terms and conditions above)

 

  

 

  

U. S. Department of the Treasury CARES Act Loan

 

 

45,419

(see terms and conditions above)

 

  

 

  

Notes payable to Wilmington Trust Company. Notes bear interest at an annual rate of 8.45% and mature Nov. 2023 to Feb. 2024.

 

11,880

 

12,506

Other Notes payable. These notes bear interest at an annual rate of approximately 5.0% and mature March 2029.

 

505

 

529

Total Debt

 

307,732

 

285,801

Less: Unamortized debt issuance costs

 

(4,391)

 

(3,338)

Less: Current Maturities of Long-term Debt

 

(29,232)

 

(26,118)

Total Long-term Debt

$

274,109

$

256,345

Future maturities of the outstanding Debt are as follows:

    

Debt Principal 

    

Amortization of Debt

    

March 31, 2021

Payments

 Issuance Costs

Net Debt

Remainder of 2021

$

28,799

$

(775)

$

28,024

2022

 

32,059

 

(983)

 

31,076

2023

 

44,900

 

(908)

 

43,992

2024

 

43,962

 

(785)

 

43,177

2025

 

45,062

 

(670)

 

44,392

Thereafter

 

112,950

 

(270)

 

112,680

Total

$

307,732

$

(4,391)

$

303,341

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SUN COUNTRY AIRLINES HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

The table below presents the Company’s debt measured at fair value:

    

March 31, 2021

    

December 31, 2020

Carrying Amount

$

307,732

$

285,801