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Basis of Presentation and Recent Accounting Pronouncement

6 Months Ended

Jun. 30, 2020

New Accounting Pronouncements or Change in Accounting Principle [Line Items]

Basis of Presentation and Recent Accounting Pronouncement

(a) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.

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. 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. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, as well as pension and retiree medical and other postretirement benefits.

(b) Impact of Coronavirus (COVID-19)

COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, closing of borders, “shelter in place” orders and business closures. As a result, we have experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in our revenues. While our business performed largely as expected in January and February of 2020, a severe reduction in air travel starting in March 2020 resulted in our total operating revenues decreasing approximately 20% in the first quarter of 2020 and 86% in the second quarter of 2020 as compared to the first and second quarter of 2019, respectively. While the length and severity of the reduction in demand due to COVID-19 is uncertain, we expect our results of operations for the remainder of 2020 to be severely impacted.

We have taken aggressive actions to mitigate the effect of COVID-19 on our business including deep capacity reductions, structural changes to our fleet, cost reductions, and steps to preserve cash and improve our overall liquidity position. We remain extremely focused on taking all self-help measures available to manage our business during this unprecedented time, consistent with the terms of the financial assistance we have received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, among other things, includes obligations regarding minimum air service and restrictions on involuntary workforce actions.

Capacity Reductions

We have significantly reduced our capacity (as measured by available seat miles), with the second quarter of 2020 flying decreased by 76% year-over-year and third quarter of 2020 flying expected to decrease by approximately 60% year-over-year. The demand environment continues to be uncertain as COVID-19 cases have increased and new travel restrictions have been put into place. Due to this uncertainty, we will continue to adjust our future capacity to match developing trends in bookings for future travel and make further adjustments to our capacity as needed.

Fleet

To better align our network with lower passenger demand, we accelerated the retirement of Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. These retirements remove complexity from our operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types. See Note 13 for further information on the accounting for our fleet retirements. Due to the inherent uncertainties of the current operating environment, we will continue to evaluate our current fleet and may decide to permanently retire additional aircraft. In addition, we have placed a significant number of aircraft, including our A330-200 fleet and a number of Boeing 737-800 and certain regional aircraft, into temporary storage.

Cost Reductions

We are moving quickly to better align our costs with our reduced schedule. In aggregate, we estimate that we have reduced our 2020 operating and capital expenditures by more than $15.0 billion. These savings have been achieved primarily through capacity reductions. In addition, we have implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing all non-critical facility investments and information technology projects. We have also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs and decreased our management and support staff team, including officers, by approximately 5,100 positions, or 30%, to reduce our labor costs consistent with our obligations under the CARES Act. In total, more than 41,000 team members have opted for an early retirement, a reduced work schedule or partially paid leave. Additionally, we have made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.

Liquidity

At June 30, 2020, we had $10.2 billion in total available liquidity, consisting of $9.8 billion in unrestricted cash and short-term investments and $400 million in an undrawn short-term revolving facility.

During the first six months of 2020, we completed the following financing transactions (see Note 6 for further information):


•	refinanced the $1.2 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;


•	issued $500 million in aggregate principal amount of 3.75% unsecured senior notes due 2025 and repaid $500 million of 4.625% unsecured senior notes that matured in March 2020;


•	borrowed $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility;


•	issued $1.0 billion in aggregate principal amount of 6.50% convertible senior notes due 2025;


•	issued 85.2 million shares of AAG common stock at a price of $13.50 per share pursuant to a public offering of common stock for net proceeds of $1.1 billion;


•	issued $2.5 billion in aggregate principal amount of 11.75% senior secured notes due 2025 and repaid the $1.0 billion senior secured delayed draw term loan credit facility that we borrowed in March 2020;


•	issued approximately $360 million in special facility revenue bonds, of which $47 million was used to fund the redemption of certain outstanding bonds;


•	raised $336 million from aircraft sale-leaseback transactions; and


•	raised $197 million from aircraft financings, of which $17 million was used to repay existing indebtedness.

We have also been approved to receive an aggregate of $5.8 billion in financial assistance to be paid in installments through the payroll support program (Payroll Support Program) under the CARES Act. As of June 30, 2020, we had received $5.2 billion of such financial assistance and we had issued a promissory note (the PSP Promissory Note) to the U.S. Department of the Treasury (Treasury) for $1.5 billion in aggregate principal amount as well as warrants to purchase up to an aggregate of approximately 12.3 million shares (the Warrant Shares) of AAG common stock. See below for further discussion on the Payroll Support Program. Separately, American has signed a term sheet with Treasury for a $4.75 billion secured loan under the CARES Act.

Also, we are permitted to, and will, defer payment of the employer portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This deferral is expected to provide approximately $300 million in additional liquidity during 2020. Additionally, we have suspended our capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act are applicable.

We continue to evaluate future financing opportunities and have engaged third-party appraisers to evaluate some of our unencumbered assets. We expect to pledge a portion of these unencumbered assets as collateral for future financings,

including as part of the approximately $4.75 billion secured loan under the CARES Act for which American has signed a term sheet with Treasury.

Certain of our debt financing agreements contain covenants requiring us to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value ratio covenants.

Given the above actions and our assumptions about the future impact of COVID-19 on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our existing financing agreements for the next 12 months based on our current level of unrestricted cash and short-term investments, our anticipated access to liquidity (including via proceeds from financings and funds from government assistance to be provided pursuant to the CARES Act) and projected cash flows from operations.

Payroll Support Program

On April 20, 2020 (the PSP Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), each our wholly-owned subsidiary, entered into a Payroll Support Program Agreement (the PSP Agreement) with Treasury, with respect to the Payroll Support Program provided pursuant to the CARES Act. In connection with our entry into the PSP Agreement, on the PSP Closing Date, we also entered into a warrant agreement (the PSP Warrant Agreement) with Treasury, and we issued the PSP Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).

Payroll Support Program Agreement

In connection with the Payroll Support Program, we are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the continuation of payment of employee wages, salaries and benefits, the requirement against involuntary furloughs and reductions in employee pay rates and benefits through September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock, and the payment of common stock dividends through September 30, 2021, as well as those that restrict the payment of certain executive compensation until March 24, 2022. The PSP Agreement also imposes substantial reporting obligations on us. If we receive a secured loan from Treasury under the loan program, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after such secured loan is fully repaid.

Pursuant to the PSP Agreement, Treasury is to provide us financial assistance to be paid in installments (each, an Installment) expected to total in the aggregate approximately $5.8 billion, of which $5.2 billion has been received as of June 30, 2020 (representing 90% of the current expected total). We currently anticipate receiving one additional Installment in July 2020. As partial compensation to the U.S. Government for the provision of financial assistance under the Payroll Support Program, we expect to issue a total aggregate principal amount of approximately $1.7 billion under the PSP Promissory Note and issue warrants (each a PSP Warrant and, collectively, the PSP Warrants) to Treasury to purchase up to an aggregate of approximately 13.7 million shares of AAG common stock. See Note 6 for further information on the PSP Promissory Note and below for more information on the PSP Warrant Agreement and the PSP Warrants.

For accounting purposes, the $5.8 billion of aggregate financial assistance pursuant to the PSP Agreement is allocated to the PSP Promissory Note, the PSP Warrants and other Payroll Support Program financial assistance (the PSP Financial Assistance). The aggregate principal amount of approximately $1.7 billion of PSP Promissory Note will be recorded as unsecured long-term debt, and the total fair value of the PSP Warrants, estimated using a Black-Scholes option pricing model, will be recorded in stockholders' equity in the condensed consolidated balance sheet. The remaining amount of approximately $4.0 billion of PSP Financial Assistance will be recognized as a credit to special items, net in the condensed consolidated statement of operations in the second and third quarters of 2020, the period over which the continuation of payment of employee wages, salaries and benefits is required. At June 30, 2020, approximately $1.7 billion of the PSP Financial Assistance was deferred in other accrued liabilities in the condensed consolidated balance sheet and approximately $2.0 billion was recognized as a credit to special items, net in the condensed consolidated statement of operations.

We also applied for a secured loan from Treasury of approximately $4.75 billion under the CARES Act, which if granted will involve the issuance of additional warrants to purchase approximately 38.0 million shares of AAG common stock. As of the date of this report, American has signed a term sheet with Treasury for this secured loan. However, we have not yet finalized a definitive agreement for this secured loan, and thus final terms and conditions and closing remain subject to ongoing negotiation, entry by the parties into definitive documentation and satisfaction of closing conditions.

PSP Warrant Agreement and Warrants

As partial compensation to the U.S. Government for the provision of financial assistance under the PSP Agreement, and pursuant to the PSP Warrant Agreement, we have agreed to issue warrants to Treasury to purchase up to an aggregate of approximately 13.7 million Warrant Shares of AAG common stock. The exercise price of the Warrant Shares is $12.51 per share (which was the closing price of AAG common stock on The Nasdaq Global Select Market on April 9, 2020) (the Exercise Price) subject to certain anti-dilution provisions provided for in the PSP Warrant.

Pursuant to the PSP Warrant Agreement, on the PSP Closing Date, May 29, 2020 and June 30, 2020, we issued to Treasury a PSP Warrant to purchase up to an aggregate of approximately 6.7 million shares, 2.8 million shares and 2.8 million shares, respectively, of AAG common stock based on the terms described herein. We anticipate issuing the final PSP Warrant for approximately 1.4 million shares of AAG common stock on or about July 30, 2020.

The PSP Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP Warrant expires on the fifth anniversary of the date of issuance of such PSP Warrant. The PSP Warrants will be exercisable either through net share settlement or cash, at our option. The PSP Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP Warrants or will be received upon exercise thereof.

Accounting Standards Update (ASU) 2016-13: Financial Instruments – Credit Losses (Topic 326)

This ASU requires the use of an expected loss model for 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, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. We adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on our condensed consolidated financial statements.

American Airlines, Inc. [Member]

New Accounting Pronouncements or Change in Accounting Principle [Line Items]

Basis of Presentation and Recent Accounting Pronouncement

(a) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines, Inc. (American) should be read in conjunction with the consolidated financial statements contained in American’s Annual Report on Form 10-K for the year ended December 31, 2019. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

(b) Impact of Coronavirus (COVID-19)

COVID-19 has been declared a global health pandemic by the World Health Organization. COVID-19 has surfaced in nearly all regions of the world, which has driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, closing of borders, “shelter in place” orders and business closures. As a result, American has experienced an unprecedented decline in the demand for air travel, which has resulted in a material deterioration in its revenues. While American's business performed largely as expected in January and February of 2020, a severe reduction in air travel starting in March 2020 resulted in its total operating revenues decreasing approximately 20% in the first quarter of 2020 and 86% in the second quarter of 2020 as compared to the first and second quarter of 2019, respectively. While the length and severity of the reduction in demand due to COVID-19 is uncertain, American expects its results of operations for the remainder of 2020 to be severely impacted.

American has taken aggressive actions to mitigate the effect of COVID-19 on its business including deep capacity reductions, structural changes to its fleet, cost reductions, and steps to preserve cash and improve its overall liquidity position. American remains extremely focused on taking all self-help measures available to manage its business during this unprecedented time, consistent with the terms of the financial assistance it has received from the U.S. Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act which, among other things, includes obligations regarding minimum air service and restrictions on involuntary workforce actions.

Capacity Reductions

American has significantly reduced its capacity (as measured by available seat miles), with the second quarter of 2020 flying decreased by 76% year-over-year and third quarter of 2020 flying expected to decrease by approximately 60% year-over-year. The demand environment continues to be uncertain as COVID-19 cases have increased and new travel restrictions have been put into place. Due to this uncertainty, American will continue to adjust its future capacity to match developing trends in bookings for future travel and make further adjustments to its capacity as needed.

Fleet

To better align American’s network with lower passenger demand, American accelerated the retirement of Boeing 757, Boeing 767, Airbus A330-300 and Embraer 190 fleets as well as certain regional aircraft, including certain Embraer 140 and Bombardier CRJ200 aircraft. These retirements remove complexity from its operation and bring forward cost savings and efficiencies associated with operating fewer aircraft types. See Note 12 for further information on the accounting for American's fleet retirements. Due to the inherent uncertainties of the current operating environment, American will continue to evaluate its current fleet and may decide to permanently retire additional aircraft. In addition, American has placed a significant number of aircraft, including its A330-200 fleet and a number of Boeing 737-800 and certain regional aircraft, into temporary storage.

Cost Reductions

American is moving quickly to better align its costs with its reduced schedule. In aggregate, American estimates that it has reduced its 2020 operating and capital expenditures by more than $15.0 billion. These savings have been achieved primarily through capacity reductions. In addition, American has implemented a series of actions, including the accelerated fleet retirements discussed above as well as reductions in maintenance expense and non-aircraft capital expenditures through less fleet modification work, the elimination of ground service equipment purchases and pausing all non-critical facility investments and information technology projects. American has also suspended all non-essential hiring, paused non-contractual pay rate increases, reduced executive and board of director compensation, implemented voluntary leave and early retirement programs and decreased its management and support staff team, including officers, by approximately 5,100 positions, or 30%, to reduce its labor costs consistent with its obligations under the CARES Act. In total, more than 41,000 team members have opted for an early retirement, a reduced work schedule or partially paid leave. Additionally, American has made reductions in marketing, contractor, event and training expenses as well as consolidated space at airport facilities.

Liquidity

At June 30, 2020, American had $10.2 billion in total available liquidity, consisting of $9.8 billion in unrestricted cash and short-term investments and $400 million in an undrawn short-term revolving facility.

During the first six months of 2020, American completed the following financing transactions (see Note 4 for further information):


•	refinanced the $1.2 billion 2014 Term Loan Facility at a lower interest rate and extended the maturity from 2021 to 2027;


•	borrowed $750 million under the 2013 Revolving Facility, $1.6 billion under the 2014 Revolving Facility and $450 million under the April 2016 Revolving Facility;


•	issued $2.5 billion in aggregate principal amount of 11.75% senior secured notes due 2025 and repaid the $1.0 billion senior secured delayed draw term loan credit facility that American borrowed in March 2020;


•	issued approximately $360 million in special facility revenue bonds, of which $47 million was used to fund the redemption of certain outstanding bonds;


•	raised $336 million from aircraft sale-leaseback transactions; and


•	raised $197 million from aircraft financings, of which $17 million was used to repay existing indebtedness.

AAG and the Subsidiaries (as defined below) have also been approved to receive an aggregate of $5.8 billion in financial assistance to be paid in installments through the payroll support program (Payroll Support Program) under the CARES Act. As of June 30, 2020, AAG and the Subsidiaries had received $5.2 billion of such financial assistance and AAG had issued a promissory note (the PSP Promissory Note) to the U.S. Department of the Treasury (Treasury) for $1.5 billion in aggregate principal amount as well as warrants to purchase up to an aggregate of approximately 12.3 million shares (the Warrant Shares) of AAG common stock. See below for further discussion on the Payroll Support Program. Separately, American has signed a term sheet with Treasury for a $4.75 billion secured loan under the CARES Act.

Also, American is permitted to, and will, defer payment of the employer portion of Social Security taxes through the end of 2020 (with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022). This deferral is expected to provide approximately $300 million in additional liquidity during 2020. Additionally, AAG has suspended its capital return program, including share repurchases and the payment of future dividends for at least the period that the restrictions imposed by the CARES Act are applicable.

American continues to evaluate future financing opportunities and has engaged third-party appraisers to evaluate some of its unencumbered assets. American expects to pledge a portion of these unencumbered assets as collateral for future financings, including as part of the approximately $4.75 billion secured loan under the CARES Act for which American has signed a term sheet with Treasury.

Certain of American’s debt financing agreements contain covenants requiring it to maintain an aggregate of at least $2.0 billion of unrestricted cash and cash equivalents and amounts available to be drawn under revolving credit facilities and/or contain loan to value ratio covenants.

Given the above actions and American’s assumptions about the future impact of COVID-19 on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, American expects to meet its cash obligations as well as remain in compliance with the debt covenants in its existing financing agreements for the next 12 months based on its current level of unrestricted cash and short-term investments, its anticipated access to liquidity (including via proceeds from financings and funds from government assistance to be provided pursuant to the CARES Act) and projected cash flows from operations.

Payroll Support Program

On April 20, 2020 (the PSP Closing Date), American, Envoy Air Inc. (Envoy), Piedmont Airlines, Inc. (Piedmont) and PSA Airlines, Inc. (PSA and together with American, Envoy and Piedmont, the Subsidiaries), each a wholly-owned subsidiary, entered into a Payroll Support Program Agreement (the PSP Agreement) with Treasury, with respect to the Payroll Support Program provided pursuant to the CARES Act. In connection with the Subsidiaries' entry into the PSP Agreement, on the PSP Closing Date, AAG also entered into a warrant agreement (the PSP Warrant Agreement) with Treasury, and AAG issued the PSP Promissory Note to Treasury, with the Subsidiaries as guarantors (the Guarantors).

Payroll Support Program Agreement

In connection with the Payroll Support Program, AAG and the Subsidiaries are required to comply with the relevant provisions of the CARES Act, including the requirement that funds provided pursuant to the PSP Agreement be used exclusively for the continuation of payment of employee wages, salaries and benefits, the requirement against involuntary furloughs and reductions in employee pay rates and benefits through September 30, 2020, the requirement that certain levels of commercial air service be maintained and the provisions that prohibit the repurchase of AAG common stock, and the payment of common stock dividends through September 30, 2021, as well as those that restrict the payment of certain executive compensation until March 24, 2022. The PSP Agreement also imposes substantial reporting obligations on AAG and the Subsidiaries. If AAG and the Subsidiaries receive a secured loan from Treasury under the loan program, the stock repurchase, dividend and executive compensation restrictions will remain in place through the date that is one year after such secured loan is fully repaid.

Pursuant to the PSP Agreement, Treasury is to provide to AAG and the Subsidiaries financial assistance to be paid in installments (each, an Installment) expected to total in the aggregate approximately $5.8 billion, of which $5.2 billion has been received as of June 30, 2020 (representing 90% of the current expected total). AAG currently anticipates receiving one additional Installment in July 2020. As partial compensation to the U.S. Government for the provision of financial assistance under the Payroll Support Program, AAG is expected to issue a total aggregate principal amount of approximately $1.7 billion under the PSP Promissory Note and issue warrants (each a PSP Warrant and, collectively, the PSP Warrants) to Treasury to purchase up to an aggregate of approximately 13.7 million shares of AAG common stock. See Note 6 to AAG’s Condensed Consolidated Financial Statements in Part I, Item 1A for further information on the PSP Promissory Note and below for more information on the PSP Warrant Agreement and the PSP Warrants.

For accounting purposes, the $5.8 billion of aggregate financial assistance pursuant to the PSP Agreement is allocated to the PSP Promissory Note, the PSP Warrants and other Payroll Support Program financial assistance (the PSP Financial Assistance). The aggregate principal amount of approximately $1.7 billion of PSP Promissory Note will be recorded as unsecured long-term debt, and the total fair value of the PSP Warrants, estimated using a Black-Scholes option pricing model, will be recorded in stockholders' equity in AAG's condensed consolidated balance sheet. The remaining amount of approximately $4.0 billion of PSP Financial Assistance will be recognized as a credit to special items, net in the condensed consolidated statement of operations in the second and third quarters of 2020, the period over which the continuation of payment of employee wages, salaries and benefits is required. At June 30, 2020, approximately $1.5 billion of the PSP Financial Assistance was deferred in other accrued liabilities in the condensed consolidated balance sheet and approximately $2.0 billion was recognized as a credit to special items, net in the condensed consolidated statement of operations.

AAG and the Subsidiaries also applied for a secured loan from Treasury of approximately $4.75 billion under the CARES Act, which if granted will involve the issuance of additional warrants to purchase approximately 38.0 million shares of AAG common stock. As of the date of this report, American has signed a term sheet with Treasury for this secured loan. However, American has not yet finalized a definitive agreement for this secured loan, and thus final terms and conditions and closing remain subject to ongoing negotiation, entry by the parties into definitive documentation and satisfaction of closing conditions.

PSP Warrant Agreement and Warrants

As partial compensation to the U.S. Government for the provision of financial assistance under the PSP Agreement, and pursuant to the PSP Warrant Agreement, AAG has agreed to issue warrants to Treasury to purchase up to an aggregate of

approximately 13.7 million Warrant Shares of AAG common stock. The exercise price of the Warrant Shares is $12.51 per share (which was the closing price of AAG common stock on The Nasdaq Global Select Market on April 9, 2020) (the Exercise Price) subject to certain anti-dilution provisions provided for in the PSP Warrant.

Pursuant to the PSP Warrant Agreement, on the PSP Closing Date, May 29, 2020 and June 30, 2020, AAG issued to Treasury a PSP Warrant to purchase up to an aggregate of approximately 6.7 million shares, 2.8 million shares and 2.8 million shares, respectively, of AAG common stock based on the terms described herein. AAG anticipates issuing the final PSP Warrant for approximately 1.4 million shares of AAG common stock on or about July 30, 2020.

The PSP Warrants do not have any voting rights and are freely transferrable, with registration rights. Each PSP Warrant expires on the fifth anniversary of the date of issuance of such PSP Warrant. The PSP Warrants will be exercisable either through net share settlement or cash, at AAG's option. The PSP Warrants were issued solely as compensation to the U.S. Government related to entry into the PSP Agreement. No separate proceeds (apart from the financial assistance described above) were received upon issuance of the PSP Warrants or will be received upon exercise thereof.

Accounting Standards Update (ASU) 2016-13: Financial Instruments – Credit Losses (Topic 326)

This ASU requires the use of an expected loss model for 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, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. American adopted this accounting standard prospectively as of January 1, 2020, and it did not have a material impact on American's condensed consolidated financial statements.