UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to section 12(g) of the Act:
None
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of January 29, 2021, the registrant had
TABLE OF CONTENTS
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects", "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to, those discussed in Part I, Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors." Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended September 30 and the associated quarters, months, and periods of those fiscal years. Each of the terms the "Company," "Mesa Airlines," "we," "us" and "our" as used herein refers collectively to Mesa Air Group, Inc. and its wholly owned subsidiaries, unless otherwise stated. We do not assume any obligation to revise or update any forward-looking statements.
The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
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public health epidemics or pandemics such as COVID-19; |
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the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of business’ and governments’ responses to the pandemic on our operations and personnel, and on demand for air travel; |
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the supply and retention of qualified airline pilots; |
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the volatility of pilot attrition; |
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dependence on, and changes to, or non-renewal of, our capacity purchase agreements; |
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increases in our labor costs; |
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reduced utilization (the percentage derived from dividing (i) the number of block hours actually flown during a given month under a particular capacity purchase agreement by (ii) the maximum number of block hours that could be flown during such month under the particular capacity purchase agreement) under our capacity purchase agreements; |
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the direct operation of regional jets by our major airline partners; |
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the financial strength of our major airline partners and their ability to successfully manage their businesses through the unprecedented decline in air travel attributable to the COVID-19 pandemic or any other public health epidemic; |
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limitations on our ability to expand regional flying within the flight systems of our major airline partners' and those of other major airlines; |
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our significant amount of debt and other contractual obligations; |
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our compliance with ongoing financial covenants under our credit facilities; and |
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our ability to keep costs low and execute our growth strategies. |
Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.
1
Part I – Financial Information
Item 1. Financial Statements
MESA AIR GROUP, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts) (Unaudited)
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December 31, |
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September 30, |
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2020 |
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2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Receivables, net |
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Expendable parts and supplies, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Intangibles, net |
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Lease and equipment deposits |
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Operating lease right-of-use assets |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt and financing leases |
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$ |
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$ |
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Current portion of deferred revenue |
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Current maturities of operating leases |
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Accounts payable |
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Accrued compensation |
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Other accrued expenses |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt and financing leases, excluding current portion |
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Noncurrent operating lease liabilities |
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Deferred credits |
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Deferred income taxes |
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Deferred revenue, net of current portion |
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Other noncurrent liabilities |
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Total noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 14 and Note 15) |
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Stockholders' equity: |
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Preferred stock of no par value, |
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Common stock of no par value and additional paid-in capital, (2020) shares issued and outstanding, |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
2
MESA AIR GROUP, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(In thousands, except per share amounts) (Unaudited)
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Three Months Ended December 31, |
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2020 |
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2019 |
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Operating revenues: |
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Contract revenue |
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$ |
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$ |
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Pass-through and other |
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Total operating revenues |
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Operating expenses: |
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Flight operations |
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Fuel |
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Maintenance |
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Aircraft rent |
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Aircraft and traffic servicing |
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General and administrative |
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Depreciation and amortization |
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CARES Act grant recognition |
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— |
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Total operating expenses |
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Operating income |
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Other (expenses) income, net: |
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Interest expense |
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Interest income |
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Other (expense) income, net |
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Total other (expense), net |
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Income before taxes |
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Income tax expense |
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Net income and comprehensive income |
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$ |
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$ |
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Net income per share attributable to |
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common shareholders |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average common shares outstanding |
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Basic |
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Diluted |
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See accompanying notes to these condensed consolidated financial statements.
3
MESA AIR GROUP, INC.
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts) (Unaudited)
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Three Months Ended December 31, 2019 |
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Common |
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Stock and |
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Additional |
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Number of |
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Number of |
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Paid-In |
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Retained |
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Shares |
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Warrants |
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Capital |
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Earnings |
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Total |
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Balance at September 30, 2019 |
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$ |
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$ |
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$ |
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Adoption ASU 2018-09 Stock compensation- income taxes |
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— |
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— |
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— |
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Stock compensation expense |
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— |
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— |
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— |
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Repurchased shares and warrants |
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— |
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— |
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Warrants converted to common stock |
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— |
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— |
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— |
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Restricted shares issued |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
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MESA AIR GROUP, INC.
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts) (Unaudited)
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Three Months Ended December 31, 2020 |
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Common |
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Stock and |
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Additional |
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Number of |
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Number of |
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Paid-In |
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Retained |
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Shares |
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Warrants |
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Capital |
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Earnings |
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Total |
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Balance at September 30, 2020 |
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— |
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$ |
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$ |
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$ |
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Stock compensation expense |
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— |
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— |
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— |
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Repurchased shares |
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( |
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— |
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( |
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— |
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Restricted shares issued |
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— |
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— |
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— |
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— |
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Issuance of warrants, net of issuance costs |
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— |
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— |
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Net income |
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— |
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— |
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— |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
4
MESA AIR GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
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Three Months Ended December 31, |
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2020 |
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2019 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash flows provided by operating activities: |
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Depreciation and amortization |
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Stock compensation expense |
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Deferred income taxes |
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Amortization of deferred credits |
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( |
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Amortization of debt discount and issuance costs |
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Gain on extinguishment of debt |
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Loss on disposal of assets |
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Provision for obsolete expendable parts and supplies |
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( |
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Changes in assets and liabilities: |
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Receivables |
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( |
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( |
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Expendable parts and supplies |
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( |
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Prepaid expenses and other current assets |
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Accounts payable |
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( |
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( |
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Deferred revenue |
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— |
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Accrued liabilities |
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( |
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Change in operating lease right-of- use assets |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
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( |
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( |
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Net returns (payments) on equipment & other deposits |
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— |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from long-term debt |
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— |
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Principal payments on long-term debt and financing leases |
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( |
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( |
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Payments of debt and warrant issuance |
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( |
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( |
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Repurchase of stock |
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( |
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( |
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Net cash provided by financing activities |
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( |
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Net change in cash, cash equivalents and restricted cash |
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( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
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$ |
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Supplemental cash flow information |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net |
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$ |
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$ |
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Operating lease payments in operating cash flows |
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$ |
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$ |
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Supplemental non-cash operating activities |
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Right-of-use assets obtained in exchange of lease liabilities |
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$ |
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$ |
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Supplemental non-cash financing activities |
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Debt issuance cost related to loan agreement with US Department of Treasury |
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$ |
( |
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$ |
— |
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Accrued capital expenditures |
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$ |
— |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
5
MESA AIR GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. |
Organization and Operations |
About Mesa Air Group, Inc.
Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), operates as a regional air carrier providing scheduled flight service to
The financial arrangements between the Company and its major airline partners involve a revenue-guarantee arrangement (i.e. a "capacity purchase agreement") whereby the major airline pays a monthly guaranteed amount for each aircraft under contract, a fixed fee for each block hour (the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination) and flight flown and reimbursement of certain direct operating expenses in exchange for providing regional flying. The major airline partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these capacity purchase agreements, the major airline controls route selection, pricing and seat inventories, thereby reducing the Company's exposure to fluctuations in passenger traffic, fare levels, and fuel prices.
American Capacity Purchase Agreement
As of December 31, 2020, the Company operated
Our American Capacity Purchase Agreement establishes utilization credits which are required to be paid if the Company does not operate at minimum levels of flight operations. In prior periods, the FAA Qualification Standards (as defined below) have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels, and, as a result, we have issued credits to American pursuant to the terms of our American Capacity Purchase Agreement.
On November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement (the “Amended and Restated American Capacity Purchase Agreement”) with American which is effective as of January 1, 2021 and amends and restates the Code Share and Revenue Sharing Agreement, dated as of March 20, 2001 (as theretofore amended, supplemented and modified, the “Existing CPA”), between Mesa Airlines and American. The Amended and Restated American Purchase Agreement included the following amendments to the Existing CPA:
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A |
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Establishes new compensation payable to Mesa Airlines during the new term; |
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Grants American the option in its sole discretion to withdraw up to: (a) |
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Also grants American the right to withdraw a limited number of aircraft in connection with the failure to meet certain performance objectives for the fleet over consecutive monthly periods, or failure to satisfactorily complete established cabin interior program requirements by certain deadlines; and |
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Provides American with additional termination rights, subject to certain cure periods, including the occurrence of a force majeure event (as defined in the American CPA) that lasts for a specified number of consecutive days (including but not limited to a future epidemic or pandemic), the occurrence of a labor dispute that affects Mesa’s ability to operate over a specified number of days, and operating in violation of any existing American collective bargaining agreement. |
Our existing American Capacity Purchase Agreement is subject to following termination prior to its expiration on December 31,2025, subject to the Company’s right to cure, in various circumstances including:
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If either American or the Company become insolvent, file for bankruptcy or fail to pay the debts as they become due, the non-defaulting party may terminate the agreement; |
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Failure by the Company or American to perform the covenants, conditions or provisions of the American Capacity Purchase Agreement, subject to 15 days' notice and cure rights; |
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If we are required by the FAA or the DOT to suspend operations and we have not resumed operations within three business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft, American may terminate the agreement; |
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If our controllable flight completion factor falls below certain levels for a specified period of time, subject to our right to cure, or; |
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Upon the occurrence of a force majeure event (as defined in the Capacity Purchase Agreement) that lasts for a specified period of consecutive days and affects our ability to operate scheduled flights, including a future epidemic or pandemic; |
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If a labor dispute affects our ability to operate over a specified number of days or we operate in violation of any existing American collective bargaining agreement; or |
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Upon a change in our ownership or control without the written approval of American |
On December 22, 2020, we entered into Amendment No. 1 (“Amendment No. 1”) to the Amended and Restated American Capacity Purchase Agreement. The amendments in Amendment No. 1 reflect the following:
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The addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) |
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United Capacity Purchase Agreement
As of December 31, 2020, we operated
7
Under our United Capacity Purchase Agreement, United owns
On November 26, 2019, we amended and restated our United Capacity Purchase Agreement to, among other things, incorporate the terms of the 14 prior amendments to that Agreement and to extend the term thereof through the addition of
In addition to adding the 20 new E175LL aircraft to the amended and restated United Capacity Purchase Agreement, we extended the term of our
On November 4, 2020, we amended and restated our United Capacity Purchase Agreement to, among other things, amend the ownership by United, in lieu of the Company, of
We also agreed to a one-time provision for United to prepay $
DHL Flight Services
On December 20, 2019, the Company entered into a Flight Services Agreement with DHL Network Operations (USA), Inc. Under the terms of this agreement, Mesa operates
In connection with the Flight Services Agreement, the Company also entered into an Aircraft Sublease Agreement with DHL for the two Boeing 737-400F aircraft at no cost. The leases are not considered embedded leases within the contract and are excluded from the Company’s right-of-use assets and operating lease liabilities under ASC 842.
8
2. |
Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications of certain immaterial prior period amounts have been made to conform to the current period presentation.
These condensed consolidated financial statements should be read in conjunction with, the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 2020 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2020 on file with the U.S. Securities and Exchange Commission (the "SEC"). Information and footnote disclosures normally included in financial statements have been condensed or omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and GAAP. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented.
The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act,") and may remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of the Company’s initial public offer (“IPO”), subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Contract revenue and Pass- through and other
The Company recognizes contract revenue when the service is provided under its capacity purchase agreements. Under the capacity purchase agreements, our major airline partners generally pay for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partners also directly pay for or reimburses the Company for certain direct expenses incurred under the capacity purchase agreement, such as fuel and airport landing fees. The Company’s performance obligation is met when each flight is completed, and revenue is recognized and reflected in contract revenue. The directly reimbursed expenses, earned as flights are completed over the agreement term, are recognized and reflected in pass-through revenue. The Company records deferred revenue when cash payments are received or are due from our airline partners in advance of the Company’s performance, including amounts that are refundable.
We received an $
The deferred revenue balance as of December 31, 2020 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (In thousands):
Periods Ending December 31, |
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Total Maturities |
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Remainder of 2021 |
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$ |
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2022 |
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2023 |
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2024 |
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2025 |
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Thereafter |
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Total |
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$ |
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9
A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations. The Company recognized $
Aircraft Lease
In addition to the aircraft we receive from United as nominal leases under our United Capacity Purchase Agreement, approximately
The majority of the Company's leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which the Company does not participate, the Company is not at risk for losses and is not considered the primary beneficiary. Management believes that the Company's maximum exposure under these leases is the remaining lease payments.
Contract Liabilities
Contract liabilities consist of deferred credits for cost reimbursements from major airline partners related to aircraft modifications associated with capacity purchase agreements and pilot training. The deferred credits are recognized over time depicting the pattern of transfer of control of services resulting in ratable recognition of revenue over the remaining term of the capacity purchase agreements.
Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. The Company's total current and non-current deferred credit balances at December 31, 2020 and September 30, 2020 are $
Contract Assets
The Company recognizes assets from the costs incurred to fulfill a contract including aircraft painting and reconfiguration and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the condensed consolidated balance sheets. The Company's contract assets balances at December 31, 2020 and September 30, 2020 are $
Use of Estimates
The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.
Maintenance Expense
The Company operates under a Federal Aviation Administration ("FAA") approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein the Company recognizes the expense when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. For leased aircraft, the Company is subject to lease return provisions that require a minimum portion of the "life" of an overhaul be remaining on the engine at the lease return date. The Company estimates the cost of maintenance lease return obligations and accrues such costs over the remaining lease term when the expense is probable and can be reasonably estimated.
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Under the Company's aircraft operating lease agreements and FAA operating regulations, it is obligated to perform all required maintenance activities on its fleet, including component repairs, scheduled air frame checks and major engine restoration events. The Company estimates the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on estimates, which can be impacted by changes in utilization of its aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events consist of overhauls to major components.
Engine overhaul expense totaled $
3. |
Recent Accounting Pronouncements |
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). This ASU provides optional expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued. Optional expedients can be applied from March 12, 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In June 2016, the FASB issued new guidance requiring all expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial instruments measured at amortized cost and also applies to some off-balance sheet credit exposures. Our adoption of this guidance on a modified retrospective basis on October 1, 2020 did not have a material impact as credit losses have not been, and are not expected to be, significant based on historical collection trends, the financial condition of our airline partners and external market factors.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The Company adopted Topic 842 effective October 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s contracts are or contain leases, (2) lease classification and (3) initial direct costs. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." The Company did not elect the hindsight practical expedient. This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company elected this adoption method on October 1, 2019.There was
Additionally, the Company’s adoption of Topic 842 did not have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the consolidated statements of operations or the consolidated statements of cash flows. The Company’s adoption of Topic 842 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor. The Company’s prepaid aircraft rents, accrued aircraft rents and deferred rent credits that were separately stated in the Company’s September 30, 2019 balance sheet have been classified as a component of the Company’s right-of-use assets effective October 1, 2019. The consolidated financial statements for the year ended September 30, 2020 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. See Note 14 and 15, "Leases and Commitments” and “Contingencies," for more information.
We determine if an arrangement is a lease at inception. Our current lease activities are recorded in operating lease right-of-use (“ROU”) assets, current maturities of operating lease and noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and financing leases, long-term debt and financing leases, excluding current portion.
11
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).
As a lessor, our capacity purchase agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the compensation in the capacity purchase agreements are designed to reimburse the Company for certain aircraft ownership costs of these aircraft. We account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing our estimate of the stand-alone selling prices.
4. |
Concentrations |
At December 31, 2020, the Company had capacity purchase agreements with American and United and a Flight Services Agreement with DHL Network Operations (USA). All of the Company's condensed consolidated revenue for the three months ended December 31, 2020 and 2019 and accounts receivable at December 31, 2020 and September 30, 2019 was derived from these agreements.
Amounts billed by the Company under capacity purchase agreements are subject to the Company's interpretation of the applicable capacity purchase agreement and are subject to audit by the Company's major airline partners. Periodically, the Company's major airline partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major airline partner. As such, the Company periodically reviews amounts due based on historical collection trends, the financial condition of airline partners and external market factors and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $
American accounted for approximately
5. |
Intangible Assets |
Information about the intangible assets of the Company as of December 31, 2020 and September 30, 2020, is as follows (in thousands):
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December 31, |
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September 30, |
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2020 |
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2020 |
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Customer relationship |
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$ |
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$ |
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Accumulated amortization |
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( |
) |
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( |
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$ |
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$ |
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12
Total amortization expense recognized was approximately $
6. |
Balance Sheet Information |
Certain significant amounts included in the Company's condensed consolidated balance sheet as of December 31, 2020 and September 30, 2020, consisted of the following (in thousands):
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December 31, |
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September 30, |
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2020 |
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2020 |
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Expendable parts and supplies, net: |
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Expendable parts and supplies |
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$ |
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$ |
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Less: obsolescence and other |
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( |
) |
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( |
) |
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$ |
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$ |
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Prepaid expenses and other current assets: |
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Deferred offering and reimbursed costs |
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$ |
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$ |
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Other |
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$ |
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$ |
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Property and equipment, net: |
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Aircraft and other flight equipment substantially pledged |
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$ |
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$ |
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Other equipment |
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Leasehold improvements |
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Vehicles |
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Building |
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Furniture and fixtures |
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Total property and equipment |
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Less: accumulated depreciation |
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( |
) |
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( |
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$ |
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$ |
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Other accrued expenses: |
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Accrued property taxes |
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$ |
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$ |
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Accrued interest |
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Accrued vacation |
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Other |
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$ |
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$ |
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The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. The Company has assessed whether any impairment of its long-lived assets existed and has determined that no charges were deemed necessary under applicable accounting standards as of December 31, 2020. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
Depreciation expense totaled approximately $
7. |
Fair Value Measurements |
The carrying values reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.
13
The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions):
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December 31, 2020 |
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September 30, 2020 |
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Carrying |
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Fair |
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Carrying |
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Fair |
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Value |
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Value |
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Value |
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Value |
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Long-term debt and financing leases, including current maturities(1) |
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$ |
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$ |
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$ |
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$ |
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(1) |
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs. |
8. |
Long-Term Debt, Financing Leases and Other Borrowings |
Long-term debt as of December 31, 2020 and September 30, 2020, consisted of the following (in thousands):
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December 31, |
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September 30, |
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2020 |
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2020 |
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Notes payable to financial institution, collateralized by the underlying |
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aircraft, due |
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$ |
— |
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$ |
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Notes payable to financial institution, collateralized by the underlying |
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aircraft, due |
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— |
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Senior and subordinated notes payable to secured parties, collateralized |
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by the underlying aircraft, due |
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Notes payable to secured parties, collateralized by the underlying |
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aircraft, due |
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Senior and subordinated notes payable to secured parties, collateralized |
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by the underlying aircraft, due |
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Senior and subordinated notes payable to secured parties, collateralized |
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by the underlying aircraft, due |
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— |
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Senior and subordinated notes payable to secured parties, collateralized |
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by the underlying aircraft, due |
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— |
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Notes payable to financial institution due |
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Notes payable to financial institution, collateralized by the underlying |
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equipment, due |
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— |
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Other obligations due to financial institution, collateralized by the underlying |
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equipment, due |
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Notes payable to financial institution, collateralized by the underlying |
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equipment, due |
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Notes payable to financial institution, collateralized by the underlying |
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aircraft, due |
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Notes payable to financial institution due |
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Revolving Credit Facility (16) |
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Notes payable to financial institution due |
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— |
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Gross long-term debt, including current maturities |
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Less unamortized debt issuance costs |
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( |
) |
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— |
|
Less Notes payable warrants |
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( |
) |
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( |
) |
Net long-term debt, including current maturities |
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Less current portion |
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|
( |
) |
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( |
) |
Net long-term debt |
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$ |
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|
$ |
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|
14
(1) |
In fiscal 2007, the Company financed |
(2) |
In fiscal 2014, the Company financed |
(3) |
In fiscal 2014, the Company financed |
(4) |
In fiscal 2015, the Company financed |
(5) |
In fiscal 2016, the Company financed |
(6) |
In fiscal 2016, the Company financed |
(7) |
In June 2018, the Company refinanced |
(8) |
In December 2017, the Company refinanced |
(10) |
In fiscal 2015 and 2016, the Company financed certain flight equipment maintenance costs with $ |
(11) |
In fiscal 2016-2019, the Company financed certain flight equipment maintenance costs with $ |
12) |
In February 2018, the Company leased |
(13) |
In January 2019, the Company financed certain flight equipment with $ |
(14) |
In June 2019, the Company financed |
(15) |
On September 27,2019, the Company financed certain flight equipment for $ |
(16) |
On September 25, 2019, the Company extended the term on their $ |
(17) On October 30, 2020, the Company entered into a loan and guarantee agreement with United States Department of Treasury for a secured loan facility of up to $
15
Principal maturities of long-term debt as of December 31, 2020, and for each of the next five years are as follows (in thousands):
Periods Ending December 31, |
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Total Principal |
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Remainder of 2021 |
|
$ |
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2022 |
|
|
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2023 |
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2024 |
|
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2025 |
|
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Thereafter |
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$ |
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The net book value of collateralized aircraft and equipment as of December 31, 2020 was $
Enhanced Equipment Trust Certificate ("EETC")
In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. At December 31, 2020 Mesa has $
The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds.
Mesa evaluated whether the pass-through trust formed for its EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated. The pass-through trust was determined to be a VIE, however, the Company has determined that it does not have a variable interest in the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements.
CIT Revolving Credit Facility
On September 25, 2019, the Company extended the term on their $
Loan agreement with United States Department of Treasury
On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with United States Department of Treasury (the “U.S. Treasury”) for a secured loan facility of up to $
The Loan and Guarantee Agreement bear interest at a variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b)
All principal amounts outstanding under the Loan and Guarantee Agreement are due and payable in a single installment on
16
extent permitted by the CARES Act. Voluntary prepayments of loans under the Loan Agreement may be made, in whole or in part, by Mesa Airlines, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed. Mandatory prepayments of loans under the Loan Agreement are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and certain insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Loan Agreement) occurs with respect to Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Loan Agreement.
The Loan Agreement requires the Company, under certain circumstances, including within ten (10) business days prior to the last business day of March and September of each year, beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than
The Loan Agreement contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Loan Agreement also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service.
In connection with the Loan and Guarantee Agreement and as partial compensation to Treasury for the provision of financial assistance under the Loan and Guarantee Agreement, the Company issued to Treasury warrants to purchase an aggregate of
The Company incurred $
Debt Repayment
Prior to the November 13, 2020 funding of the $152M Treasury Loan, the Company repaid $
As of December 31, 2020, the Company is in compliance will all debt covenants.
17
9. |
Earnings Per Share and Equity |
Calculations of net income per common share attributable to Mesa Air Group were as follows (in thousands, except per share data):
|
|
Three Months Ended December 31, |
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
||
Net income attributable to Mesa Air Group |
|
$ |
|
|
|
$ |
|
|
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
Add: Incremental shares for: |
|
|
|
|
|
|
|
|
|
Dilutive share adjustment - UST Warrant |
|
|
|
|
|
|
— |
|
|
Dilutive share adjustment - Restricted Shares |
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
Net income per common share attributable to Mesa Air Group: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
Basic income per common share is computed by dividing net income attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period.
The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants (excluding warrants with a nominal conversion price) is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income or loss per share calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested restricted stock and warrants would have an anti-dilutive effect. There were
10. |
Common Stock |
The Company previously issued warrants to third parties, which had a
In July 2018, the Company's Board of Directors and Compensation Committee approved the issuance of shares of restricted common stock under its 2018 Equity Incentive Plan (the "2018 Plan") immediately following completion of the Company's IPO to certain of its employees and directors in exchange for the cancellation of existing restricted phantom stock units, unvested restricted shares and SARs. The shares of restricted common stock issued under the 2018 Plan in exchange for the cancellation of restricted phantom stock units, unvested restricted shares and SARs are subject to vesting on the same terms set forth in the prior vesting schedules and are not subject to acceleration in connection with the 2018 Plan issuances.
On April 9, 2019, and pursuant to Section 4.4 of the 2018 Plan in connection with the
On October 30, 2020 and November 13, 2020, the Company entered into the Loan and Guarantee Agreement with the United States Department of the Treasury (the “Treasury”) and the Bank of New York Mellon, as Administrative and Collateral Agent, under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
In connection with the Loan and Guarantee Agreement and as partial compensation to the Treasury for the provision of financial assistance under the Loan and Guarantee Agreement, the Company issued warrants to the Treasury to purchase shares of the Company’s common stock, no par value, at an exercise price of $
18
dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. The warrants will be accounted for within equity at a grant date fair value determined under the Black Scholes Option Pricing Model. As of December 31, 2020,
The Company has not historically paid dividends on shares of its common stock. Additionally, the Loan and Guarantee Agreement and the Company's aircraft lease facility (the "RASPRO" Lease Facility) with RASPRO Trust 2005, a pass-through trust, contain restrictions that limit the Company's ability to or prohibit it from paying dividends to holders of its common stock.
11. |
Income Taxes |
The Company’s effective tax rate (ETR) from continuing operations was
The Company's current year effective tax rate increased compared to the prior year tax rate as a result of a decrease to the forecast for the current fiscal year, as the Company's permanent differences between book and taxable income therefore have a larger impact on the Company's effective tax rate. In addition, the Company's rate varied from the prior year's as a result of the state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates.
As of September 30, 2020, the Company had aggregate federal and state net operating loss carryovers of approximately $
12. |
Share-Based Compensation and Stock Repurchases |
Restricted Stock
The restricted share activity for the three months ended December 31, 2020 were summarized as follows:
|
|
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|
|
Weighted- |
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|
|
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|
|
|
|
Average |
|
|
|
|
Number |
|
|
Grant Date |
|
||
|
|
of Shares |
|
|
Fair Value |
|
||
Restricted shares unvested at September 30, 2020 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Restricted shares unvested at December 31, 2020 |
|
|
|
|
|
$ |
|
|
As of December 31, 2020, there was $
Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. Share-based compensation expense for the three months ended December 31, 2020 and 2019 was $
The Company repurchased
The Company has granted restricted stock units (“RSUs”) as part of its long-term incentive compensation to employees and non-employee members of the Board of Directors. RSAs and RSUs generally vest over a period of 3 to
19
employees and over
13. |
Employee Stock Purchase Plan |
2019 ESPP
The Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan (the "2019 ESPP") is a nonqualified plan that provides eligible employees of Mesa Air Group, Inc. with an opportunity to purchase Mesa Air Group, Inc. ordinary shares through payroll deductions. Under the 2019 ESPP, eligible employees may purchase Mesa Air Group, Inc. ordinary shares through the Employee Stock Purchase Plan. Under the 2019 ESPP, eligible employees may elect to contribute
A maximum of
14. |
Leases and Commitments |
Effective October 1, 2019, the Company adopted Topic 842 and recorded ROU assets and lease liabilities of $
As of December 31, 2020, the Company leased
As of December 31, 2020, the Company’s operating lease right-of-use assets were $
The Company’s operating lease payments in operating cash flows for the three months ended December 31, 2020 and 2019 are $
The table below presents lease related terms and discount rates as of December 31, 2020:
As of December 31,2020 |
|
|
|
|
Weighted average remaining lease term Operating leases |
|
|
|
|
Weighted average discount rate Operating leases |
|
|
|
% |
The Table below represents lease expense recorded during three months ended December 31, 2020 and 2019.
|
|
Three Months Ended December 31, |
|
|||||||||||||
|
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
|
( |
)% |
20
The following table summarizes future minimum rental payments primarily related to leased aircraft required under operating leases that had initial or remaining non-cancelable lease terms as of December 31, 2020 (in thousands):
Periods Ending December 31, |
|
Total Maturities |
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Less: Interest |
|
$ |
( |
) |
Amounts recorded in the Consolidated Balance Sheet |
|
$ |
|
|
The following represents future minimum lease obligations under non-cancelable operating leases as of September 30, 2019 (in thousands):
Periods Ending September 30, |
|
Total Payments |
|
|
2020 |
|
|
|
|
2021 |
|
|
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Engine Purchase Commitments
On October 8, 2020, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13, which deferred the initial delivery and payment dates of the
If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.
15. |
Contingencies |
The Company is involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings that the Company does not believe will have a material adverse effect upon its business, financial condition, or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.
16. |
Subsequent Events |
In February 2021, the Company was granted $
21
The relief payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through March 31, 2021. Other conditions include prohibitions on share repurchases and dividends through March 31, 2022, continuing essential air service as directed by the U.S. Department of Transportation and certain limitations on executive compensation.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward‑looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections titled "Cautionary Notes Regarding Forward-Looking Statements" above and "Risk Factors" below.
Overview
Mesa Airlines is a regional air carrier providing scheduled flight service to 116 cities in 42 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either American Eagle, United Express, or DHL Express flights pursuant to the terms of capacity purchase agreements entered into with American Airlines, Inc. (“American”), United Airlines, Inc. (“United”), and DHL (each, our "major airline partner"). We have a significant presence in several of our major airline partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.
As of December 31, 2020, we operated a fleet of 159 aircraft with approximately 420 daily departures. We operate 54 CRJ-900 aircraft under our capacity purchase agreement with American (our "American Capacity Purchase Agreement") and 20 CRJ-700, 60 E-175 and 12 E-175LL aircraft under our capacity purchase agreement with United (our "United Capacity Purchase Agreement"). We operate 2 Boeing 737- F400 aircraft under the Flight Services Agreement with DHL Network Operations. For the three months ended December 31, 2020, approximately 53% of our aircraft in scheduled service were operated for United, approximately 46% were operated for American and 1% were operated for DHL. All of our operating revenue in our three months ended December 31, 2020 was derived from operations associated with our American and United Capacity Purchase Agreements and DHL Flight Services Agreement.
Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour (the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination) and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase agreements also shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our capacity purchase agreements, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major airline partners. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access.
Impact of the COVID-19 Pandemic
On January 30, 2020 the World Health Organization declared an outbreak of a highly contagious form of an upper respiratory infection caused by COVID-19, a novel coronavirus strain commonly referred to as “coronavirus”. In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread, including in all of the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; “shelter in place” and other governmental regulations; reduced spending due to both job losses and other effects attributable to COVID-19; and an unprecedented decline in air travel.
The rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel. This reduction in demand has had an unprecedented and materially adverse impact on our revenues and financial position. During the three months ended December 31, 2020, we experienced a decrease in contract revenue primarily related to lower flying on our CRJ-900, CRJ-700, and E-175 fleets due to the impact of COVID-19. The funds the Company received under the Payroll Support Program and its Loan and Guarantee Agreement with the Treasury, coupled with the Company’s diligent cost saving, has helped to partially offset the negative impacts of COVID-19 on the Company’s business. While we are planning for a modest demand recovery in fiscal 2021, the exact timing and pace of the recovery back to pre-COVID 19 is uncertain given the significant impact of the pandemic on the overall U.S. and global economy. Since a portion of our revenue is fixed due to the structure of our capacity purchase agreements, the impact to Mesa has been and will likely continue to be less severe notwithstanding the significant reduction in our scheduled flying. In addition, we have limited exposure to fluctuations in passenger traffic, ticket and fuel prices. The initiatives and measures put in place to limit the spread of the virus has and will continue to have a material adverse impact on our business, financial position and results of operations.
23
Balance Sheet, Cash Flow and Liquidity. As of December 31, 2020, our cash and cash equivalents balance was $181.3 million.
Components of Results of Operations
The following discussion summarizes the key components of our condensed consolidated statements of operations.
Operating Revenues
Our condensed consolidated operating revenues consist primarily of contract revenue flight services as well as pass-through and other revenues.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our capacity purchase agreements with our major airline partners, along with the additional amounts received based on the number of flights and block hours flown. Contract revenues we receive from our major airline partners are paid and recognized by us on a weekly basis.
Pass-Through and Other. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, and certain maintenance costs related to our E-175 aircraft.
Operating Expenses
Our operating expenses consist of the following items:
Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews and pilot training expenses.
Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our capacity purchase agreements and flight service agreement, including aircraft repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our capacity purchase agreements were directly paid and supplied by our major airline partners. The fuel and related cost for flying under our FSA were directly paid and supplied by DHL. We do not record an expense or the related revenue for fuel supplied by American and United for flying under our capacity purchase agreements and DHL under our flight services agreement.
Maintenance. Maintenance includes costs related to engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-through maintenance costs related to our E-175 aircraft, as well as maintenance lease return obligations on our leased aircraft when the expense is probable and can be reasonably estimated. We record these expenses using the direct expense method of accounting, wherein the expense is recognized when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary significantly period to period.
Aircraft Rent. Aircraft rent includes costs related to leased engines and aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing includes expenses related to our capacity purchase agreements, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major airline partners.
General and Administrative. General and administrative expense includes insurance and taxes, the majority of which are pass-through costs, non-operational administrative employee wages and related expenses, building rents, real property leases, utilities, legal, audit and other administrative expenses.
Depreciation and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and equipment depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.
Other (Expense) Income, Net
Interest Expense. Interest expense is interest on our debt incurred to finance purchases of aircraft, engines, equipment as well as debt financing costs amortization.
24
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Other Expense. Other expense includes expense derived from activities not classified in any other area of the condensed consolidated statements of income, including write-offs of miscellaneous third-party fees.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280, "Segment Reporting," we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flight services in accordance with our capacity purchase agreements.
While we operate under two separate capacity purchase agreements and one flight services agreement, we do not manage our business based on any performance measure at the individual contract level. Additionally, our chief operating decision maker (“CODM”) uses condensed consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. The CODM bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.
Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR in this Quarterly Report on Form 10-Q, which are not recognized financial measures under GAAP, as supplemental disclosures because our senior management believes that they are well recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts and other interested parties in comparing companies in our industry.
Adjusted EBITDA. We define Adjusted EBITDA as net income or loss before interest, income taxes, and depreciation and amortization, adjusted for the impact of revaluation of liability awards, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
Adjusted EBITDAR. We define Adjusted EBITDAR as net income or loss before interest, income taxes, depreciation and amortization, and aircraft rent, adjusted for the impact of revaluation of liability awards, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: (i) Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; (ii) Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (iii) Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and (vi) Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements and other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted EBITDA and Adjusted EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.
Results of Operations
Three Months Ended December 31, 2020 Compared to Three Months Ended December 31, 2019
We had operating income of $27.0 million in our three months ended December 31, 2020 compared to operating income of $27.2 million in our three months ended December 31, 2019. In our three months ended December 31, 2020, we had net income of $14.1 million compared to net income of $10.8 million in our three months ended December 31, 2019. Our operating results for the three months ended December 31, 2020 reflected a decrease in contract revenue primarily related to lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19 and an increase in pass-through and other revenues primarily due to an increase in maintenance pass-through expense.
25
Flight operations expense decreased in the three months ended December 31, 2020 due to lower pilot and flight attendant wages and pilot training expenses. Our maintenance expense decreased primarily due to fewer airframe C-checks and engine heavy maintenance events and lower component contracts, parts, and labor expense offset by higher pass-through maintenance. Our aircraft rent decreased in the three months ended December 31, 2020 compared to the same period in 2019 primarily as a result of a decrease in engine rent.
Operating Revenues
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||||||
Operating revenues ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
$ |
127,158 |
|
|
$ |
171,800 |
|
|
$ |
(44,642 |
) |
|
|
(26.0 |
)% |
Pass-through and other |
|
|
23,213 |
|
|
|
12,236 |
|
|
|
10,977 |
|
|
|
89.7 |
% |
Total operating revenues |
|
$ |
150,371 |
|
|
$ |
184,036 |
|
|
$ |
(33,665 |
) |
|
|
(18.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles—ASMs (thousands) |
|
|
1,670,943 |
|
|
|
2,735,386 |
|
|
|
(1,064,443 |
) |
|
|
(38.9 |
)% |
Block hours |
|
|
69,247 |
|
|
|
115,562 |
|
|
|
(46,315 |
) |
|
|
(40.1 |
)% |
Revenue passenger miles—RPMs (thousands) |
|
|
1,171,411 |
|
|
|
2,151,593 |
|
|
|
(980,182 |
) |
|
|
(45.6 |
)% |
Average stage length (miles) |
|
|
637 |
|
|
|
573 |
|
|
|
64 |
|
|
|
11.2 |
% |
Contract revenue per available seat mile—CRASM (in cents) |
|
¢7.61 |
|
|
¢ 6.28 |
|
|
¢ 1.33 |
|
|
|
21.2 |
% |
|||
Passengers |
|
|
1,829,714 |
|
|
|
3,697,138 |
|
|
|
(1,867,424 |
) |
|
|
(50.5 |
)% |
"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown.
"Average stage length" means the average number of statute miles flown per flight segment.
“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.
"CRASM" means contract revenue divided by ASMs.
"RPM" means the number of miles traveled by paying passengers.
Total operating revenue decreased by $33.7 million, or 18.3%, to $150.4 million for our three months ended December 31, 2020 as compared to our three months ended December 31, 2019. Contract revenue decreased by $44.6 million, or 26.0%, to $127.2 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleet. Our block hours flown during our three months ended December 31, 2020 decreased 40.1% compared to the three months ended December 31, 2019 due to decreased flying on all our fleets. Our pass-through and other revenue increased during our three months ended December 31, 2020 by $11.0 million, or 89.7%, to $23.2 million primarily due to pass-through maintenance revenue related to our E-175 fleet.
26
Operating Expenses
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||||||
Operating expenses ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations |
|
$ |
36,964 |
|
|
$ |
52,644 |
|
|
$ |
(15,680 |
) |
|
|
(29.8 |
)% |
Fuel |
|
|
390 |
|
|
|
169 |
|
|
|
221 |
|
|
|
130.8 |
% |
Maintenance |
|
|
52,864 |
|
|
|
58,095 |
|
|
|
(5,231 |
) |
|
|
(9.0 |
)% |
Aircraft rent |
|
|
10,048 |
|
|
|
11,329 |
|
|
|
(1,281 |
) |
|
|
(11.3 |
)% |
Aircraft and traffic servicing |
|
|
901 |
|
|
|
1,064 |
|
|
|
(163 |
) |
|
|
(15.3 |
)% |
General and administrative |
|
|
13,073 |
|
|
|
12,996 |
|
|
|
77 |
|
|
|
0.6 |
% |
Depreciation and amortization |
|
|
20,470 |
|
|
|
20,552 |
|
|
|
(82 |
) |
|
|
(0.4 |
)% |
CARES Act grant recognition |
|
|
(11,311 |
) |
|
|
— |
|
|
|
(11,311 |
) |
|
|
100.0 |
% |
Total operating expenses |
|
$ |
123,399 |
|
|
$ |
156,849 |
|
|
$ |
(33,450 |
) |
|
|
(21.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles—ASMs (thousands) |
|
|
1,670,943 |
|
|
|
2,735,386 |
|
|
|
(1,064,443 |
) |
|
|
(38.9 |
)% |
Block hours |
|
|
69,247 |
|
|
|
115,562 |
|
|
|
(46,315 |
) |
|
|
(40.1 |
)% |
Average stage length (miles) |
|
|
637 |
|
|
|
573 |
|
|
|
64 |
|
|
|
11.2 |
% |
Departures |
|
|
35,344 |
|
|
|
62,725 |
|
|
|
(27,381 |
) |
|
|
(43.7 |
)% |
Flight Operations. Flight operations expense decreased $15.7 million, or 29.8%, to $37.0 million for our three months ended December 31, 2020 compared to the same period in 2019. The decrease was primarily driven by a decrease in pilot and flight attendant wages as well as pilot training related costs.
Fuel. Fuel expense increased $0.2 million, or 130.8%, to $0.4 million for our three months ended December 31, 2020 compared to the same period in 2019. The increase was primarily driven by fuel expense related to the delivery of 12 new E-175 aircraft. All fuel costs related to flying under our capacity purchase agreements during our three months ended December 31, 2020 and 2019 were directly paid to suppliers by our major airline partners.
Maintenance. Aircraft maintenance costs decreased $5.2 million, or 9.0%, to $52.9 million for our three months ended December 31, 2020 compared to the same period in 2019. This decrease was primarily driven by a decrease in engine overhaul, airframe C-Check, component contracts, parts, and labor and other expense. This increase was partially offset by an increase in pass-through c-check and engine overhaul expense. Total pass-through maintenance expenses reimbursed by our major airline partners increased by $12.5 million during our three months ended December 31, 2020.
The following table presents information regarding our maintenance costs during the three months ended December 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||||||
Engine overhaul |
|
$ |
4,753 |
|
|
$ |
8,751 |
|
|
$ |
(3,998 |
) |
|
|
(45.7 |
)% |
Pass-through engine overhaul |
|
|
9,633 |
|
|
|
1,851 |
|
|
|
7,782 |
|
|
|
420.4 |
% |
C-check |
|
|
2,958 |
|
|
|
6,051 |
|
|
|
(3,093 |
) |
|
|
(51.1 |
)% |
Pass-through C-check |
|
|
7,138 |
|
|
|
1,220 |
|
|
|
5,918 |
|
|
|
485.1 |
% |
Component contracts |
|
|
5,787 |
|
|
|
9,687 |
|
|
|
(3,900 |
) |
|
|
(40.3 |
)% |
Rotable and expendable parts |
|
|
5,318 |
|
|
|
7,405 |
|
|
|
(2,087 |
) |
|
|
(28.2 |
)% |
Other pass-through |
|
|
3,112 |
|
|
|
4,337 |
|
|
|
(1,225 |
) |
|
|
(28.2 |
)% |
Labor and other |
|
|
14,165 |
|
|
|
18,793 |
|
|
|
(4,628 |
) |
|
|
(24.6 |
)% |
Total |
|
$ |
52,864 |
|
|
$ |
58,095 |
|
|
$ |
(5,231 |
) |
|
|
(9.0 |
)% |
27
Aircraft Rent. Aircraft rent expense decreased $1.3 million, or 11.3%, to $10.0 million for our three months ended December 31, 2020 compared to the same period in 2019. The decrease is attributable a $1.3 million decrease in engine rent due to fewer leased engines.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased $0.2 million, or 15.3%, to $0.9 million for our three months ended December 31, 2020 compared to the same period in 2019. The decrease is primarily due to a decrease in interrupted trip expense and pass-through regulatory charges, and was partially offset by an increase in reimbursable fuel expense related to the delivery of new E-175s. For our three months ended December 31, 2020 and 2019, 58.7% and 42.2%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major airline partners.
General and Administrative. General and administrative expense increased $0.08 million, or 0.6%, to $13.1 million for our three months ended December 31, 2020 compared to the same period in 2019. The increase is primarily due to an increase in pass-through property tax, legal, and insurance expense, offset by lower wage expense. For our three months ended December 31, 2020 and 2021, $4.5 million and $4.4 million, respectively, of our insurance and property tax expenses were reimbursed by our major airline partners.
Depreciation and Amortization. Depreciation and amortization expense decreased $0.08 million, or 0.4%, to $20.5 million for our three months ended December 31, 2020 compared to the same period in 2019. The decrease is primarily attributable to a decrease in rotable inventory depreciation expense, partially offset by an increase in aircraft enhancement and spare engine depreciation.
CARES Act grant recognition. Payroll Support Government Plan funds increased $11.3 million, or 100.0%, to $11.3 million for our three months ended December 31, 2020 compared to the same period in 2019. Under the CARES Act, the government provided the Company with a grant of $95.2 million in payroll support for the period of April through October 2020, of which $11.3 million was recognized as of December 31, 2020.
Other Expense
Other expense decreased $4.6 million, or 35.4%, to $8.3 million for our three months ended December 31, 2020, compared to the same period in 2019. The decrease is primarily a result of a decrease in interest expense due to lower interest rates on our loan agreement with United States Department of Treasury and a decrease in outstanding aircraft principal balances. Additionally, in the three months ended December 31, 2020, we had a gain on extinguishment of debt of $1.0 million, due to a $3.5 million benefit related to paying off Export Development Canada aircraft debt early and a $2.6 million write-off of financing fees
Income Taxes
The Company's effective tax rate (ETR) from continuing operations was 25.5% for the three months ended December 31, 2020 and 24.7% for the three months ended December 31, 2019. The Company's current year effective tax rate increased compared to the prior year tax rate as a result of a decrease to the forecast for the current fiscal year, as the Company's permanent differences between book and taxable income therefore have a larger impact on the Company's effective tax rate. In addition, the Company's rate varied from the prior year's as a result of the vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates.
The income tax provision for the three months ended December 31, 2020 results in an effective tax rate of 25.5% which differs from the U.S. federal statutory rate of 21% primarily due to permanent book and tax deductible expense differences, state taxes, changes in the valuation allowance against state net operating losses, routine stock vestings and exercises, and changes in state apportionment and state statutory rates. We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As of September 30, 2020, the Company had aggregate federal and state net operating loss carryforwards of $512.4 million and $223.9 million, respectively, which expire in 2027-2038 and 2021-2040, respectively. Approximately $3.1 million of state net operating loss carryforwards expired in 2020.
28
Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net income to estimated Adjusted EBITDA and Adjusted EBITDAR for the period presented (in thousands):
|
|
Three Months Ended December 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Reconciliation: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,118 |
|
|
$ |
10,785 |
|
Income tax expense |
|
|
4,821 |
|
|
|
3,535 |
|
Income before taxes |
|
$ |
18,939 |
|
|
$ |
14,320 |
|
Adjustments(1) |
|
|
(950 |
) |
|
|
— |
|
Adjusted income before taxes |
|
|
17,989 |
|
|
|
14,320 |
|
Interest expense |
|
|
9,082 |
|
|
|
12,628 |
|
Interest income |
|
|
(126 |
) |
|
|
(58 |
) |
Depreciation and amortization |
|
|
20,470 |
|
|
|
20,552 |
|
Adjusted EBITDA |
|
$ |
47,415 |
|
|
$ |
47,442 |
|
Aircraft rent |
|
|
10,048 |
|
|
|
11,329 |
|
Adjusted EBITDAR |
|
$ |
57,463 |
|
|
$ |
58,771 |
|
|
(1) |
Includes adjustment for gain on extinguishment of debt of $1.0 million related to repayment of the Company’s Aircraft debts. |
Liquidity and Capital Resources
As a result of the COVID-19 pandemic, we have taken, and are continuing to take, certain actions to increase liquidity and strengthen our financial position. These actions include:
Working with major partners and original equipment manufacturers ("OEM") to delay the timing of our future aircraft and spare engine deliveries.
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft pre-delivery payments, maintenance, aircraft rent and to pay debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. Our principal sources of liquidity are the cash grant we received under the payroll support program and the Loan and Guarantee Agreement we entered into with the Treasury (the “US Treasury Loan Agreement”), each under the CARES Act, cash on hand, cash generated from operations and funds from external borrowings. During the three months ended December 31, 2020, the Company secured a $195 million five-year interest only loan from the US Treasury and received a prepayment of $81.5 million from our major airline partner United Airlines, which were used to pay down existing long-term debts.
We believe that the key factors that could affect our internal and external sources of cash include:
|
▪ |
Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our services, competitive pricing pressures, and our ability to achieve further reductions in operating expenses; and |
|
▪ |
Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt agreements in effect from time to time. |
29
Our ability to service our long-term debt obligations, including our equipment notes, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to other factors, some of which may be beyond our control.
If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.
We believe that cash flow from operating activities coupled with existing cash and cash equivalents, short-term investments, existing credit facilities, financing arrangements and government assistance from the CARES Act, will be adequate to fund our operating and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect the current market conditions and our projected demand. Our capital expenditures are primarily directed toward our aircraft fleet and flight equipment. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for three months ending December 31,2020 is approximately 0.3% of annual revenue, which is lower compared to our historical expense as the Company is focusing on cost savings due to COVID 19 pandemic impact on the airline industry. We expect to incur capital expenditures to support our business activities. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
As of December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $181.3 million. In addition, we had restricted cash of $3.6 million as of December 31, 2020. As of December 31, 2020, we also had $738.7 million in secured indebtedness incurred in connection with our financing of 35 total aircraft. As of December 31, 2020, we had $146.1 million of short-term debt, excluding capital leases, and $620.1 million of long-term debt excluding capital leases.
Restricted Cash
As of December 31, 2020, we had $3.6 million in restricted cash. We have an agreement with a financial institution for letter of credit facility and to issue letters of credit for particular airport authorities, worker's compensation insurance, property and casualty insurance and other business needs as required in certain lease agreements. Pursuant to the term of this agreement, $3.6 million of outstanding letters of credit are required to be collateralized by amounts on deposit.
Cash Flows
The following table presents information regarding our cash flows for each of the three months ended December 31, 2020 and 2019 (in thousands):
|
|
Three Months Ended December 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Net cash provided by operating activities |
|
$ |
79,273 |
|
|
$ |
38,230 |
|
Net cash used in investing activities |
|
|
(1,773 |
) |
|
|
(12,828 |
) |
Net cash provided by financing activities |
|
|
4,593 |
|
|
|
(36,692 |
) |
Net increase/(decrease) in cash and cash equivalents |
|
|
82,093 |
|
|
|
(11,290 |
) |
Cash and cash equivalents at beginning of period |
|
|
102,841 |
|
|
|
72,501 |
|
Cash and cash equivalents at end of period |
|
$ |
184,934 |
|
|
$ |
61,211 |
|
Net Cash Flow Provided by Operating Activities
During our three months ended December 31, 2020, we had cash flow provided by operating activities of $79.3 million. We had net income of $14.1 million adjusted for the following significant non-cash items: depreciation and amortization of $20.5 million, stock-based compensation of $0.9 million, deferred income taxes of $4.8 million, deferred revenue of $5.8 million, amortization of deferred credits of $(0.8) million, amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $1.9 million, gain on extinguishment of debt of $(1.0) million. We had a net change of $33.1 million within other net operating assets and liabilities largely driven by an increase in current portion of deferred revenue during our three months ended December 31, 2020.
30
Net Cash Flows Used in Investing Activities
During our three months ended December 31, 2020, net cash flow used in investing activities totaled $1.8 million. We invested $1.8 million in tools and equipment.
Net Cash Flows Provided by Financing Activities
During our three months ended December 31, 2020, net cash flow provided by financing activities was $4.6 million. We received $195.0 million of proceeds from our US Treasury Loan Agreement. We made $(189.1) million of principal repayments on long-term debt during the period. We incurred $(1.3) million of costs related to debt financing.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development arrangements with the Company.
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission (the "SEC").
A majority of our leased aircraft are leased through trusts formed for the sole purpose of purchasing, financing and leasing aircraft to us. Because these are single-owner trusts in which we do not participate, we are not at risk for losses and we are not considered the primary beneficiary. We believe that our maximum exposure under the leases are the remaining lease payments and any return condition obligations.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.
The accompanying discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated interim financial statements included elsewhere in this Form 10-Q. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in Part 1, Item 7 of the 2020 Form 10-K under the heading "Critical Accounting Policies."
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2: "Summary of Significant Accounting Policies" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the ordinary course of our business. These risks include interest rate risk and, on a limited basis, commodity price risk with respect to foreign exchange transactions. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
Interest Rate Risk. We are subject to market risk associated with changing interest rates on our variable rate long-term debt; the variable interest rates are based on LIBOR. The interest rates applicable to variable rate notes may rise and increase the amount of interest expense on our variable rate long-term debt. We do not purchase or hold any derivative instruments to protect against the effects of changes in interest rates.
31
As of December 31, 2020, we had $545.8 million of variable-rate debt including current maturities. A hypothetical 50 basis point change in market interest rates would have affected interest expense by approximately $2.7 million in the three months ended December 31, 2020.
As of December 31, 2020, we had $203.1 million of fixed-rate debt, including current maturities. A hypothetical 50 basis point change in market interest rates would not impact interest expense or have a material effect on the fair value of our fixed-rate debt instruments as of December 31, 2020.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by Treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.
We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As of December 31, 2020, we had $545.8 million of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.
Foreign Currency Risk. We have de minimis foreign currency risks related to our station operating expenses denominated in currencies other than the U.S. dollar, primarily the Canadian dollar. Our revenue is U.S. dollar denominated. To date, foreign currency transaction gains and losses have not been material to our financial statements and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results.
Fuel Price Risk. Unlike other airlines, our capacity purchase agreements largely shelter us from volatility related to fuel prices, which are directly paid and supplied by our major airline partners.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
32
Inherent Limitations on Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
33
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to two putative class action lawsuits alleging federal securities law violations in connection with our IPO— one in the Superior Court of the State of Arizona and one in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief.
In addition, we are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2020, our management believed, after consultation with legal counsel, that the ultimate outcome of the two putative class action lawsuits and such other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity or results of operations.
Item 1A. Risk Factors
We refer you to documents filed by us with the SEC, specifically "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled "Cautionary Statements Regarding Forward-looking Statements" of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and herein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company repurchased 2,256 shares of its common stock for $0.02 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the three months ended December 31, 2020
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
34
EXHIBIT INDEX
Exhibit No. |
|
Exhibit Description |
|
|
|
10.1.1** |
|
|
|
|
|
10.1.2** |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1* |
|
|
|
|
|
32.2* |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* |
This certification will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing. |
** |
Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed. |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MESA AIR GROUP, INC. |
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Date: February 9, 2021 |
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By: |
/s/ Michael J. Lotz |
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Michael J. Lotz President and Chief Financial Officer (Principal Financial Officer) |
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