UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-34584
HARBOR DIVERSIFIED, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 13-3697002 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| W6390 Challenger Drive, Suite 203 Appleton, WI |
54914-9120 | |
| (Address of principal executive offices) | (Zip Code) | |
(920) 749-4188
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.). Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, the last business day of the registrant’s second fiscal quarter for the year ended December 31, 2020, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing price of the registrant’s common stock as reported on the OTC Market, was approximately $1,743,000. The determination of affiliate status for this purpose does not reflect a determination that any of such persons shall be deemed to be an affiliate of the registrant for any other purpose.
As of March 26, 2021, the registrant had 54,863,305 shares of common stock outstanding and 4,000,000 shares of Series C Convertible Redeemable Preferred Stock outstanding. The registrant does not have any class of securities registered pursuant to Section 12(b) or Section 12(g) of the Act.
Documents Incorporated by Reference
None
HARBOR DIVERSIFIED, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2020
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (this “Annual Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements relate to matters such as our industry, business plans and strategies, material contracts, key relationships, consumer behavior, flight schedules, revenue, expenses, margins, profitability, capital expenditures, liquidity, capital resources and other operating information, include all statements that are not statements of historical facts, and can be identified by words such as “anticipate,” “approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases in this Annual Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting, and are subject to considerable risks and uncertainties, including without limitation:
| • | the dependence of the business of our subsidiary, Air Wisconsin Airlines LLC (“Air Wisconsin”), on a capacity purchase agreement (the “United capacity purchase agreement”) with United Airlines, Inc. (“United”), given United is currently Air Wisconsin’s sole airline partner, particularly given the risks and uncertainties associated with the novel coronavirus (“COVID-19”) pandemic; |
| • | the duration and spread of the ongoing global COVID-19 pandemic and its impact on the business, results of operations, financial condition and liquidity of Air Wisconsin, including the material decline in passenger demand for air travel; |
| • | the possibility that United could continue to provide Air Wisconsin with inefficient flight schedules or change the expected utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement or not extend the United capacity purchase agreement beyond its current expiration date; |
| • | the amounts Air Wisconsin is paid or reimbursed under the United capacity purchase agreement; |
| • | the extent to which Air Wisconsin’s current growth opportunities and strategic operating plan are restricted based on the United capacity purchase agreement or factors impacting the airline industry, including the COVID-19 pandemic; |
| • | Air Wisconsin’s reliance on only one aircraft type, aircraft manufacturer and engine manufacturer, and the potential issuance of operating restrictions on this aircraft or engine type; |
| • | Air Wisconsin’s significant amount of debt and other contractual obligations; |
| • | the significant portion of Air Wisconsin’s workforce that is represented by labor unions and the terms of its collective bargaining agreements; |
| • | aircraft and engine maintenance costs; and |
| • | the supply of qualified pilots to the airline industry and pilot attrition. |
The forward-looking statements contained in this Annual Report are based on management’s current plans, estimates and expectations in light of information currently available to us, and they are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors” within this Annual Report and in the other reports we file with the Securities and Exchange Commission (“SEC”).
Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions or estimates prove to be incorrect, our actual results may be different from, and potentially materially worse than, what we may have expressed or implied by these forward-looking statements. Investors should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Annual Report speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.
1
| ITEM 1. | BUSINESS |
General
Harbor Diversified, Inc. (“Harbor”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a non-operating entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, for purposes of this Annual Report on Form 10-K for the year ended December 31, 2020 (this “Annual Report”), disclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations, operations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as “we,” “us,” or “our.” Where reference is intended to refer only to Harbor, it is referred to as the “Company.”
For the year ended December 31, 2020, Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenue for the years ended December 31, 2020 and 2019 was derived from operations associated with the United capacity purchase agreement.
Subject to certain limited exceptions, the United capacity purchase agreement provides Air Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement has the effect of protecting Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access. In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the United capacity purchase agreement.
Regional jets provide short and medium-haul scheduled flights that connect outlying communities with larger cities and act as “feeders” for domestic and international hubs. The lower trip costs and the operating efficiencies of regional jets, along with the competitive nature of capacity purchase agreement bidding processes, provide significant value to major airlines. Regional airlines play a daily, essential role in the U.S. air travel system. According to the 2020 Regional Airline Association Annual Report, in 2019 (i) 40% of all scheduled passenger flights in the United States were operated by regional airlines, (ii) of all the U.S. airports with scheduled passenger service, 66% were served exclusively by regional airlines and (iii) Air Wisconsin was the 12th largest regional airline in the United States, as measured by passenger enplanements, and its flights accounted for approximately 2.5% of all passengers carried on U.S. regional airlines.
Impact of COVID-19 on Our Business and Industry
In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a global pandemic, and, in response, federal, state, local, and foreign governments implemented “shelter-in-place” and “stay-at-home” orders and guidelines, quarantine orders, travel restrictions, and other similar restrictions in an attempt to control the spread and mitigate the impact of COVID-19. As of the date of this Annual Report, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which Air Wisconsin operates.
2
The sharp decline in airline travel demand due to the COVID-19 pandemic had a material, negative impact on the airline industry in the year ended December 31, 2020, affecting United, and in turn, our revenue and results of operations. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic demand related to the COVID-19 pandemic during the first quarter of 2020 and, as of the date of this filing, has stated that it expects demand will remain suppressed in 2021. In response to lower demand for air travel, in the months of April through December 2020, United cut its scheduled capacity by between approximately 50% and 90%. As a result, beginning in March 2020, United significantly reduced Air Wisconsin’s scheduled departures and block hours actually flown, and temporarily ceased Air Wisconsin’s operations at Washington-Dulles from May 2020 through August 2020. As of December 31, 2020, Air Wisconsin provided scheduled passenger service to 69 cities in 28 states and provinces as compared to 81 cities in 31 states as of December 31, 2019. While the continued severity and duration of the impacts of the COVID-19 pandemic are difficult to predict, the COVID-19 pandemic has continued to impact our financial condition and results of operations through the date of this Annual Report, which we expect to continue in the near term and result in a material impact on our financial condition, liquidity, and results of operations in future periods. Air Wisconsin has taken a number of measures to mitigate the health risks and economic impact of the COVID-19 pandemic. In addition, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations. For additional information, refer to the sections entitled “Management’s Discussion and Analysis – Overview” and “– Economic Conditions, Challenges and Risks Impacting Financial Results” and “Risk Factors” within this Annual Report.
Our Business Strategy
Our business strategy consists primarily of serving United and its customers through Air Wisconsin’s provision of regional airline services. We strive to serve as an efficient and reliable provider of flight services to United and to provide a high level of service to United and its customers in accordance with the United capacity purchase agreement.
We also seek to maintain a competitive cost structure. We focus on a disciplined cost control approach through responsible outsourcing of certain operating functions and diligent control of corporate and administrative costs, implementing company-wide efforts to improve our cost position.
Finally, we strive to provide our employees competitive pay and benefit packages and to offer a positive and supportive work environment to make Air Wisconsin an attractive place to work and build a career.
Aircraft Fleet
As of December 31, 2020, Air Wisconsin owned 64 CRJ-200 regional jets, all of which were manufactured by Bombardier, Inc. (“Bombardier”). The CRJ-200 regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.
United Capacity Purchase Agreement
United and Air Wisconsin entered into the United capacity purchase agreement in February 2017, which was amended in October 2020. Pursuant to the United capacity purchase agreement, United has agreed to purchase the capacity of the Air Wisconsin CRJ-200 regional jets covered under the agreement. Air Wisconsin commenced flying under the United capacity purchase agreement in September 2017. As of December 31, 2020, all of Air Wisconsin’s regional jets were available to support Air Wisconsin’s obligations under the United capacity purchase agreement.
3
United sets the flight schedules for covered aircraft. In setting the flight schedules, United is required to comply with certain reasonable operating constraints. United also establishes all fares, controls route selection, pricing, seat inventories, and marketing, collects all revenue, and provides airport landing slots, terminal facilities and ground handling services for any flights operated by Air Wisconsin pursuant to the agreement. Air Wisconsin provides the flight and cabin crew and is responsible for dispatch and operational control of each covered aircraft as well as any required maintenance. When providing the flight services under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks and aircraft paint scheme. In exchange for providing the flight services under the United capacity purchase agreement, Air Wisconsin receives a fixed payment for 63 covered aircraft and a fixed payment for each departure and block hour flown. In addition, the amendment to the United capacity purchase agreement provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks.
United also reimburses Air Wisconsin for certain costs on an actual basis, including aviation insurance, aircraft property tax per aircraft and air navigation fees. Costs relating to fuel and certain landing fees owed by Air Wisconsin are directly paid to suppliers by United. Air Wisconsin can also earn incentive payments, and is subject to penalty rebates, based upon its operational performance and the results of customer satisfaction surveys (provided that no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The United capacity purchase agreement previously constrained Air Wisconsin from flying for another air carrier or from permitting a change of control (as defined in the agreement) to occur; however, while a change of control still constitutes a potential termination event, these restrictions were removed in the amendment to the United capacity purchase agreement.
The United capacity purchase agreement prohibits Air Wisconsin from paying dividends or making other distributions of its earnings, in each case in excess of an amount that would result in Air Wisconsin’s available cash balance being less than a specified amount, other than dividends or distributions made for certain specified purposes.
The United capacity purchase agreement expires in February 2023 unless United elects to exercise its option to extend the agreement for an additional period of no less than two years, but up to three years, in its discretion, in which case it expires between February 2025 and February 2026, unless United elects to exercise its second option to extend the agreement for a second additional two-year period, subject to mutual agreement on certain economic terms, in which case it expires between February 2027 and February 2028. During any extension of the term of the United capacity purchase agreement, Air Wisconsin has the right, in its discretion, to reduce the number of aircraft covered under the agreement to no fewer than 50 covered aircraft.
The United capacity purchase agreement is subject to early termination under various circumstances, which include, among others, the occurrence of the following events:
| • | certain operational performance factors fall below a specified percentage for a specified period of time, subject to notice under certain circumstances, or if Air Wisconsin is subject to certain aircraft groundings or to loss of authority to operate, in which case the agreement is subject to early termination by United; |
| • | a party fails to perform the material covenants, agreements, terms or conditions of the United capacity purchase agreement or related agreements, subject to certain notice and cure rights in which case, the agreement is subject to early termination by the other party; or |
| • | Air Wisconsin engages in, or is subject to, various change of control events enumerated in the agreement, in which case the agreement is subject to early termination by United. |
Pursuant to the original United capacity purchase agreement, the Company and AWAC (the sole member of Air Wisconsin) had provided a limited guarantee of Air Wisconsin’s monetary obligations under the United capacity purchase agreement, but that guarantee was terminated pursuant to the amendment to the United capacity purchase agreement.
4
The following table summarizes Air Wisconsin’s available seat miles (“ASMs”) flown and contract revenue recognized under the United capacity purchase agreement for the years ended December 31, 2020 and 2019, respectively:
| Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
|||||||
| (dollars in thousands) | ||||||||
| Available Seat Miles |
864,494 | 1,925,371 | ||||||
| Contract Revenue |
$ | 185,866 | $ | 263,495 | ||||
Maintenance and Repairs
Airlines are subject to extensive regulation. Air Wisconsin has a Federal Aviation Administration (“FAA”)-mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance and component service. Air Wisconsin also outsources certain aircraft, engine and other component maintenance functions. To procure these services, Air Wisconsin uses competitive bidding among qualified vendors.
Line maintenance consists of routine daily and weekly scheduled maintenance checks on Air Wisconsin’s aircraft. Line maintenance is performed at certain locations throughout Air Wisconsin’s operation and represents the majority of the maintenance Air Wisconsin performs. Heavy maintenance consists of a series of major airframe maintenance checks that can take from one to six weeks to accomplish, on average, across Air Wisconsin’s fleet. Component service includes engine overhauls and engine performance restoration events, which are quite extensive and can take several months. We maintain an inventory of spare engines at both Air Wisconsin and Lotus to provide for continued operations during scheduled and unscheduled engine maintenance events. Air Wisconsin provides maintenance services for its CRJ-200 regional jets and for its owned and leased engines and equipment.
Competition
The airline industry is highly competitive. We consider Air Wisconsin’s primary competition to be those U.S. regional airlines that currently have or compete for capacity purchase agreements with major airlines. Air Wisconsin’s competition includes nearly every other domestic regional airline, including CommutAir; Endeavor, Inc. (owned by Delta); Envoy Air, Inc., PSA Airlines, Inc. and Piedmont Airlines, Inc. (Envoy, PSA and Piedmont are owned by American); GoJet Airlines, LLC; Horizon Air Industries, Inc. (owned by Alaska Air Group, Inc.); Mesa Airlines, Inc.; Republic Airways Holdings Inc.; and SkyWest Inc.
We believe that major airlines typically select regional airline partners based on the following criteria: aircraft type, ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors.
Certain Air Wisconsin competitors are larger and have significantly greater financial and other resources than Air Wisconsin. In addition, certain of these competitors may have capacity purchase agreement terms that are more favorable than the United capacity purchase agreement. Moreover, economic downturns, including as a result of the COVID-19 pandemic, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional carriers which has resulted in changes to the competitive landscape. The effect of economic downturns on our results of operations is currently somewhat mitigated by the terms of the United capacity purchase agreement, but an extension of Air Wisconsin’s partnership with United beyond the current term is not certain.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year because the airline industry is subject to seasonal fluctuations and general economic conditions. While Air Wisconsin’s operations can be negatively impacted by factors outside of its control, including inclement weather, the United capacity purchase agreement mitigates some of the risks associated with seasonal fluctuations.
5
Aircraft Fuel
The United capacity purchase agreement provides that United sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the agreement.
Insurance
Air Wisconsin maintains insurance policies we believe are of types customary for the airline industry and as required by the United States Department of Transportation (“DOT”), lessors and other financing parties, and United under the terms of the United capacity purchase agreement. The policies principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors’ and officers’ liability; fiduciary liability; workers’ compensation and employer’s liability; and war risk (terrorism). Although we currently believe Air Wisconsin’s insurance coverage is adequate, we cannot be certain that the amount of such coverage will not change or that Air Wisconsin will not bear substantial losses from incidents or accidents.
Employees
Our continued success is partly dependent on Air Wisconsin’s ability to continue to attract and retain qualified personnel. As of December 31, 2020, Air Wisconsin employed 1,042 full-time employees and 21 part-time employees, of whom 841 were represented by unions, and the remainder were not.
| Union Groups |
Number of Union Employees |
Representative |
Collective Bargaining Agreement Amendable Date | |||
| Pilots |
420 | Air Line Pilots Association, International | November 21, 2022 | |||
| Flight Attendants |
235 | Association of Flight Attendants | October 1, 2022 | |||
| Dispatchers |
23 | Transport Workers Union of America | November 1, 2020 | |||
| Mechanics and Aircraft Cleaners |
135 | International Association of Machinists and Aerospace Workers AFL-CIO | October 7, 2015 | |||
| Technical Stores Clerks |
28 | International Association of Machinists and Aerospace Workers AFL-CIO | September 20, 2022 |
Air Wisconsin has never been the subject of a labor strike or labor action that materially impacted its operations.
FAA regulations require pilots to have an Airline Transport Pilot license with specific ratings for the aircraft to be flown and to be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance, and aircraft inspection must also meet experience standards prescribed by FAA regulations. All employees performing a safety-sensitive function are subject to pre-employment, random, and post-accident drug testing. While, historically, the airline industry has experienced periodic shortages of qualified personnel, particularly with respect to pilots and maintenance technicians, as a result of the COVID-19 pandemic, Air Wisconsin has experienced a dramatic reduction in demand for pilots, and has not had difficulty retaining employees.
6
Air Wisconsin maintains relationships with various flight and maintenance institutions across the country that are focused on developing the next generation of aviation professionals. It typically recruits pilots and maintenance technicians who have completed required coursework from accredited flight or maintenance programs and have obtained applicable certifications. Air Wisconsin also provides internship opportunities to individuals in the process of completing their coursework and training for aviation maintenance. These roles provide hands-on experience for the students and prepares them for other opportunities within Air Wisconsin.
The Railway Labor Act (“RLA”) governs Air Wisconsin’s relations with labor organizations. Under the RLA, collective bargaining agreements generally do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, they must notify the other party in the manner agreed to by the parties. Under the RLA, after receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (“NMB”) to appoint a federal mediator. The RLA prescribes no set timetable for the direct negotiation and mediation process. It is not unusual for those processes to last for many months, and even several years. If no agreement is reached in mediation, the NMB, in its discretion, may declare at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 30-day “cooling off” period commences. During that period (or after), a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another “cooling off” period of 30 days. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may strike and the airline may resort to “self-help,” including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the authority to prevent “self-help” by enacting legislation that, among other things, imposes a settlement on the parties. The table above sets forth Air Wisconsin’s employee groups and status of the collective bargaining agreements. Air Wisconsin’s collective bargaining agreement with its mechanics and related employees, represented by the International Association of Machinists and Aerospace Workers, is amendable and is in mediated negotiations.
Our approach is to hire the best qualified individuals, regardless of race, religion, gender, national origin, disability, sexual orientation or similar classifications. We believe every employee brings unique education, skills and life experiences to Air Wisconsin that supplement our ability to achieve our commitment to excellence to our customers and passengers. As part of our commitment to diversity, we have created ongoing opportunities to highlight employees from different cultures on internal and external websites, and we have participated in events and provided sponsorships for diversity organizations focused on aviation.
Safety and Security
We are committed to the safety and security of Air Wisconsin’s passengers and employees and to complying with safety and security requirements. Air Wisconsin has taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety of its operations. Some of the safety and security measures Air Wisconsin has taken with United include aircraft security and surveillance and securing of cockpit doors. Additionally, both on its own and in coordination with United, Air Wisconsin has increased its aircraft cleaning procedures both between flights and overnight. Enhanced cleaning measures are intended to ensure that frequently touched surfaces, such as armrests, tray tables and seatbelts, are routinely and comprehensively cleaned utilizing disinfectants to prevent transmission of COVID-19 and other contagions. An increased supply of sanitizing wipes onboard Air Wisconsin’s aircraft is available to aid its crewmembers in efforts to keep the aircraft clean and disinfected.
Air Wisconsin’s ongoing focus on safety relies on training Air Wisconsin’s employees to proper standards and providing them with the tools and equipment they need to perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of Air Wisconsin’s operation, including dispatch, flight operations, ground operations, maintenance and sanitization.
7
Air Wisconsin aims to achieve the highest degree of safety and security within its industry through the implementation of a corporate-wide Safety Management System supporting its organizational culture that holds safety as an essential core value. Air Wisconsin continually works to create and foster a culture of safety, security and compliance that proactively identifies and manages risks to the operation and workplace before they can become injuries, incidents or accidents. All Air Wisconsin employees are required to maintain the highest levels of safety and security throughout its operation and organization and to proactively identify and immediately report hazards, safety concerns and incidents as well as any behavior that violates Air Wisconsin’s policies, regulatory requirements, laws and industry standards. Air Wisconsin is committed to:
| • | establishing and annually reviewing specific safety objectives that are published and communicated to all employees and ensuring that the safety objectives are attained; |
| • | establishing and promoting safety programs and reporting processes that allow all employees to report hazards, safety concerns and incidents; |
| • | creating and maintaining a proactive reporting culture and ensuring that no disciplinary action will be taken against any employee for reporting through established non-punitive safety reporting methods; |
| • | continuously identifying and managing risk through open collaboration, dedication of resources and the systematic development and continuous improvement of formal controls; and |
| • | establishing, maintaining and periodically exercising an emergency response plan and procedures to ensure a safe transition from normal operations to emergency operations. |
The Transportation Security Administration (“TSA”) is responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports. Air Wisconsin is currently in compliance with the directives issued by the TSA and maintains active, open lines of communication with the TSA to ensure proper standards for security of its personnel, equipment and facilities are exercised throughout its operation.
Government Regulation
Aviation Regulation
The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required for airlines to provide domestic and foreign air transportation. International routes and international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline’s ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the foreign country and the carrier’s ability to obtain the necessary authority from the DOT and the applicable foreign government.
The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. Air Wisconsin currently holds an air carrier certificate with Federal Aviation Regulation Part-121 operation specifications.
Foreign Ownership
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled directly and indirectly by citizens of the United States. The restrictions imposed by federal law and regulations currently require that at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States, as defined in the Federal Aviation Act and interpreted by the DOT, that the Company’s Chief Executive Officer, Air Wisconsin’s President and Chief Executive Officer, and at least two-thirds of the members of Air Wisconsin’s board of managers and the Company’s board of directors and other managing officers be citizens of the United States, and that Air Wisconsin and the Company be under the actual control of citizens of the United States. In addition, at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled, directly and indirectly, by citizens of the United States and no more than 49% of its equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country. No more than 25% of Air Wisconsin’s equity securities may be held,
8
directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have not entered into an “open skies” air transport agreement with the U.S. We are currently in compliance with these ownership provisions. In addition, the Company’s amended and restated certificate of incorporation and the Company’s amended and restated bylaws currently prohibit the transfer of any shares of the Company’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation Section 1.382-2T(g)) of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of our then-outstanding capital stock. These restrictions on the transfer of the Company’s capital stock inhibit the acquisition of control of Air Wisconsin by any foreign citizen.
Consumer Protection Regulation
The DOT also has jurisdiction over certain consumer protection matters related to air transportation. This covers unfair or deceptive practices, unfair methods of competition, advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints and transportation of passengers with disabilities. The DOT has adopted consumer protection rules regulating lengthy tarmac delays, chronically delayed flights, codeshare disclosure and undisclosed display bias. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and wet-leasing agreements (where one airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions. In the future, the DOT may adopt additional regulations that increase the costs of Air Wisconsin’s operations or otherwise adversely impact our financial performance.
Environmental Regulation
We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
The Environmental Protection Agency regulates operations, including air carrier operations, which affect the quality of air in the United States. Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.
Federal law recognizes the right of airport operators with special noise problems to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport.
Air Wisconsin remains committed to lowering its environmental footprint while continuing to offer safe and reliable service to its customers and the communities it serves. Through the use of software and training, Air Wisconsin manages its fuel usage in an effort to conserve fuel and reduce emissions. When possible, Air Wisconsin mitigates fuel usage by taxiing with the use of a single engine, improving the efficiency of aircraft routing, and using ground power when an aircraft is parked at the gate. Air Wisconsin has also implemented recycling initiatives and has worked aggressively to reduce its reliance on paper manuals and logs.
Other Regulations
Air Wisconsin is also subject to various other federal, state, local and foreign laws and regulations. For example, the U.S. Department of Justice has jurisdiction over certain airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. As discussed above, labor relations in the airline industry are generally governed by the RLA. The privacy and security of passenger and employee data is regulated by various domestic and foreign laws and regulations.
9
The U.S. government and foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
Corporate Information
The Company was originally formed in November 1992 as Initial Acquisition Corp. In March 1997, Initial Acquisition Corp. was merged with Hollis-Eden, Inc., becoming Hollis-Eden Pharmaceuticals, Inc. In February 2010, Hollis-Eden Pharmaceuticals, Inc. was merged with its wholly owned subsidiary and renamed Harbor BioSciences, Inc. In January 2012, the Company acquired 80% of the issued and outstanding capital stock of AWAC from Amun LLC (“Amun”), and in January 2016 the Company acquired the remaining 20% of the issued and outstanding capital stock of AWAC from Amun. AWAC owns all of the equity interests of Air Wisconsin. In February 2012, Harbor BioSciences, Inc. was merged with its wholly owned subsidiary and renamed Harbor Diversified, Inc.
Organizational Structure
The Company is a non-operating holding company that is the parent of a consolidated group of five subsidiaries: AWAC, Air Wisconsin, Lotus, AWF, and Therapeutics. In addition to Air Wisconsin, each of the subsidiaries is described below:
AWAC Aviation, Inc.
AWAC is a holding company and the sole member of Air Wisconsin. Air Wisconsin’s business and operations are described in detail throughout this Annual Report.
Lotus Aviation Leasing, LLC
Lotus was established to acquire and lease flight equipment to Air Wisconsin to support its flight operations. As of December 31, 2020, Lotus owned 47 engines. Lotus has no other material assets or operations.
Air Wisconsin Funding LLC
AWF was established to provide flight equipment financing to Air Wisconsin. As of December 31, 2020, Air Wisconsin had an outstanding balance of approximately $8.45 million, under a $35.0 million credit facility with AWF. AWF has a first priority security interest in the flight equipment purchased with the loan proceeds. AWF has no other material assets or operations.
Harbor Therapeutics, Inc.
Therapeutics is a non-operating entity with no material assets.
Trademarks
Air Wisconsin, the Air Wisconsin logo, and its other registered or common law trade names, trademarks, or service marks appearing in this Annual Report are Air Wisconsin’s intellectual property. This Annual Report contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report.
10
Public Reporting Obligation
In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. For the year ended December 31, 2020, the Company no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result, the Company determined that it is currently required to file reports and other information with the SEC pursuant to Section 15(d) of the Exchange Act. This Annual Report is being filed pursuant to these requirements.
Notwithstanding that the Company is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, the Company does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, the Company is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. If the Company becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which could result in the Company no longer being required to file SEC reports.
Publicly Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports, filed pursuant to Section 15(d) of the Exchange Act will be filed with the SEC. The SEC maintains a website that contains reports and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company does not currently maintain a separate website, so the reports and other information provided by the Company pursuant to Section 15(d) of the Exchange Act will be available at www.sec.gov.
11
| ITEM 1A. | RISK FACTORS |
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in the Company’s common stock involves substantial risk. The Company’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of the Company’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business, particularly in light of the fast-changing nature of the COVID-19 pandemic containment measures, the potential for future waves of outbreaks and the related impacts to the travel industry and on United, Air Wisconsin’s sole airline partner. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report.
Risks Related to Our Business
Our current business is highly dependent on the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner.
We derive nearly all of our operating revenue from the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner. United accounted for approximately 99.9% of our operating revenue for the years ended December 31, 2020 and 2019. The termination of the United capacity purchase agreement would have a material adverse effect on our business, financial condition and results of operations.
The United capacity purchase agreement expires in February 2023, unless United elects to exercise its option to extend the agreement. United is also permitted, subject to certain conditions, to terminate the agreement early in the event of Air Wisconsin’s material breach of the agreement. The United capacity purchase agreement is also subject to termination prior to expiration in various circumstances, including if Air Wisconsin’s controllable flight completion factor or departure performance falls below certain pre-determined levels, and in the event of a non-carrier-specific grounding of at least a specified number of Air Wisconsin’s aircraft, in each case for a specified period of time. Disputes between United and Air Wisconsin have arisen in the past, and, while the prior disputes have been resolved, it is possible that new disputes may arise in the future. New disputes or disagreements with United could result in Air Wisconsin incurring negotiation or resolution costs or entering into litigation or other proceedings. Even if resolved in Air Wisconsin’s favor, the existence of a dispute could harm Air Wisconsin’s relationship with United.
Air Wisconsin currently uses the systems, facilities and services of United to support a significant portion of its operations. If United were to cease to maintain any of these systems, close any of these facilities, or no longer provide these services to Air Wisconsin, whether due to termination of the United capacity purchase agreement, a strike or other labor interruption by United personnel, bankruptcy or other financial hardship experienced by United, or for any other reason, Air Wisconsin may not be able to obtain access to alternative systems, facilities or services on terms and conditions as favorable as those it currently receives, or at all. Upon certain termination events described in the United capacity purchase agreement, United could require Air Wisconsin to sell or assign to United certain facilities and assets that Air Wisconsin uses in connection with the services it provides. As a result, in order to offer airline service after termination of the United capacity purchase agreement, Air Wisconsin may have to replace these facilities, assets and services. Air Wisconsin may be unable to arrange such replacements on satisfactory terms, or at all.
Delta Airlines has announced that it intends to retire the CRJ-200 aircraft in its fleet by 2023. If the United capacity purchase agreement were to be terminated, or if United chose to remove 50-seat aircraft, such as Air Wisconsin’s CRJ-200 aircraft, from its fleet, or otherwise decided not to extend the agreement, our business would be significantly impacted, and it is unlikely we would have an immediate source of revenue or earnings to offset the financial impact. United is not under any obligation to extend the term of the United capacity purchase agreement, whether on similar terms or at all.
12
The United capacity purchase agreement permits United to terminate the agreement upon certain changes of control of Air Wisconsin, which could limit Air Wisconsin’s ability to pursue certain corporate transactions. A termination or expiration of this agreement would likely have a material adverse effect on our financial condition, results of operations, liquidity and ability to satisfy debt obligations, unless we are able to enter into satisfactory substitute arrangements for the utilization of Air Wisconsin’s aircraft and spare engines. We may not be able to enter into substitute arrangements, and any arrangements we are able to secure may not be as favorable to us as the current agreement.
The COVID-19 pandemic has had a material adverse impact on the business, operating results, financial condition and liquidity of United, which is Air Wisconsin’s sole airline partner, and the duration and spread of the pandemic could result in additional adverse impacts to United, or cause it to declare bankruptcy, which may cause our business, financial condition and results of operations to be negatively impacted.
We may be directly affected by the financial and operating performance of United, which is Air Wisconsin’s sole airline partner. Any events that negatively impact the financial or operating performance of United, including the impact of the reduction in passenger flight demand due to the COVID-19 pandemic or other widespread outbreaks of communicable diseases, may have a material adverse effect on our business, financial condition and results of operations. During the year ended December 31, 2020, United experienced a significant decline in flight demand related to COVID-19 and a resulting material deterioration in its revenue. While there has been a modest demand recovery, this reduction in demand is expected to continue. United has indicated that it expects its results of operations to continue to be materially impacted through 2021.
As a result of the impact of the COVID-19 pandemic on global passenger flight demand and United’s financial and operational performance, United may be unable to make payments due to Air Wisconsin under the United capacity purchase agreement in a timely manner or at all. Any failure by United to make timely payments due to Air Wisconsin may negatively impact our business, financial condition and results of operations. In addition, if United were to become bankrupt, the United capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations. The full extent of the impact of the COVID-19 pandemic on United’s operational and financial performance (and, therefore, on our operational and financial performance) will depend on future developments, many of which are outside of Air Wisconsin’s control, including the effectiveness of United’s mitigation strategies, the duration and spread of COVID-19 and resulting impact on the financial health and operations of United’s and Air Wisconsin’s business partners, changes in global and regional passenger flight demand, and future governmental actions in respect of the COVID-19 pandemic, all of which are highly uncertain and cannot be predicted with certainty.
If United provides Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, our business, financial condition and results of operations may be adversely affected.
Under the terms of the United capacity purchase agreement, United has the ability to schedule Air Wisconsin’s flights in any manner that serves United’s purposes, subject to certain reasonable operating constraints which do not prevent United from scheduling Air Wisconsin’s flights in a manner Air Wisconsin deems inefficient. From time to time, United schedules Air Wisconsin’s flights in a manner which creates operational inefficiencies for Air Wisconsin, such as by building in long crew layovers or overnights, or by providing Air Wisconsin with flight schedules that are inconsistent with Air Wisconsin’s existing operational footprint. These actions have had and may continue to have a material adverse effect on our business, financial condition and results of operations.
Certain factors, such as the COVID-19 pandemic, have led, and may in the future lead, United to modify the anticipated utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, some of which are beyond Air Wisconsin’s control. Any factors that continue to cause United to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results. United has stated publicly that it does not expect recovery from COVID-19 to follow a linear path and, as such, the actual number of flights United schedules under the United capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated or which United initially communicated for the period.
13
The amounts Air Wisconsin receives under the United capacity purchase agreement may be less than the corresponding costs Air Wisconsin incurs.
Under the United capacity purchase agreement, a portion of the revenue Air Wisconsin receives is based upon predetermined rates calculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. The primary operating costs intended to be compensated by the predetermined rates include salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid at the rates set in the agreement, our financial position and operating results will be negatively affected.
Air Wisconsin’s current growth opportunities, strategic operating plan and future growth opportunities may be limited by the United capacity purchase agreement or a number of factors impacting the airline industry, including the COVID-19 pandemic.
Growth opportunities within United’s current flight network may be limited by various factors, including “scope” clauses in United’s current collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. Although United has significant room under its scope clauses with respect to 50-seat aircraft, which comprise Air Wisconsin’s fleet, these clauses could limit Air Wisconsin’s ability to operate larger aircraft for United which would limit Air Wisconsin’s expansion opportunities. United is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.
Further, Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including access to airport terminals and facilities, terms of United’s collective bargaining agreements limiting the usage of regional carriers, capital expenditures required to maintain or expand fleet operations, significant changes in variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, and the excess capacity in the industry due to the significantly depressed passenger demand for air travel due to the COVID-19 pandemic, we believe limited growth opportunities exist. To take advantage of these opportunities, to the extent and in the event that passenger demand for air travel rebounds, Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities. Due to the significant decline in passenger demand for air travel and the resulting economic disruption, there may not be any new or additional flying opportunities available to Air Wisconsin. In addition, even if Air Wisconsin is offered these growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.
Air Wisconsin currently operates only one aircraft type, and relies on one aircraft manufacturer and one engine manufacturer, and any operating restrictions or safety concerns applicable to this aircraft or engine type, or any failure to receive sufficient maintenance and support services from these manufacturers, would negatively impact our business and financial condition.
Air Wisconsin currently relies on a single aircraft type, the CRJ-200 regional jet, and a single engine type, the General Electric (“GE”) CF34-3B1 engine. The issuance of Federal Aviation Administration (“FAA”) or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type, or Air Wisconsin’s inability to obtain necessary goods and services related to this aircraft type or engine type, would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of the CRJ-200 regional jet or the GE CF34-3B1 engine, whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.
Air Wisconsin has been highly dependent upon Bombardier, Inc. (“Bombardier”), as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts or related maintenance and support services to it in a timely manner. In June 2020, Bombardier consummated an agreement with Mitsubishi Heavy Industries, Ltd (“Mitsubishi”), pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of the CRJ-200 regional jet, such as type certificates, maintenance, support,
14
refurbishment, marketing and sales activities. We cannot predict what effect, if any, the closing of this transaction may have on Mitsubishi’s continued support of the CRJ-200 regional jet or Air Wisconsin’s continued ability to obtain required parts and services. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE to provide required maintenance or support services, or the interruption of Air Wisconsin’s operations as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines.
Air Wisconsin has a significant amount of debt and other contractual obligations that could impair its liquidity and ability to obtain additional financing and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.
The airline business is capital intensive and, as a result, Air Wisconsin is highly leveraged. As of December 31, 2020, Air Wisconsin had approximately $117.8 million (including capitalized interest of $10.9 million) in total third-party debt, which was incurred primarily in connection with the acquisition of aircraft, and most of which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts.
Air Wisconsin is subject to various covenants under its financing agreements. Air Wisconsin’s failure to comply with obligations under these credit facilities, which may be affected by factors beyond Air Wisconsin’s control, could result in an event of default under the facilities. A default, if not cured or waived, could permit the lender to accelerate payment of the loans. In addition, the lender would have the right to proceed against the collateral security granted to a trustee for its benefit, which consists of substantially all of the aircraft, engines and parts owned by Air Wisconsin. If this debt is accelerated, we cannot be certain that Air Wisconsin will have funds available to pay the debt or that it will have the ability to refinance the debt on terms favorable to it, or at all. If Air Wisconsin could not repay or refinance the accelerated debt, it could be insolvent and could seek to file for bankruptcy protection.
In addition, the Payroll Support Program Agreement (the “PSP-1 Agreement”) that Air Wisconsin entered into in April 2020 with the U.S. Department of the Treasury (“Treasury”) pursuant to the federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Payroll Support Program Extension Agreement (the “PSP-2 Agreement”) that Air Wisconsin entered into in March 2021 with the Treasury pursuant to Subtitle A of Title IV of Division N of the federal Consolidated Appropriations Act of 2021 (the “PSP Extension Law”) contain various covenants. If Air Wisconsin fails to comply with its obligations under those agreements or other agreements Air Wisconsin may enter into with the Treasury for additional payroll support, it may be required to repay the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.
We cannot be certain Air Wisconsin’s operations will generate sufficient cash flow to make its required payments under its debt and other contractual arrangements. Air Wisconsin does not have sufficient liquidity to repay all of its outstanding debt in full if such debt were accelerated. If Air Wisconsin is unable to pay its debts as they come due, or is unable to obtain waivers or extensions of time for such payments, its secured lenders could foreclose on any of Air Wisconsin’s assets securing such debt. Additionally, a failure to pay Air Wisconsin’s property leases, debt or other fixed cost obligations, or a breach of its other contractual obligations, could result in a variety of further adverse consequences, including the exercise of remedies by its creditors and lessors, such as acceleration. In such a situation, Air Wisconsin may not be able to cure its breach, fulfill its contractual obligations, make required lease payments or otherwise cover its fixed costs, which could have a material adverse effect on our business, results of operations and financial condition.
If Air Wisconsin is unable to source financing on acceptable terms, or at all, our business could be materially adversely affected. To the extent Air Wisconsin finances its activities with additional debt, it would become subject to additional debt service obligations, as well as additional covenants that may restrict its ability to pursue its business strategy or otherwise constrain its growth and operations. Air Wisconsin’s ability to pay the high level of fixed costs associated with operating a regional airline will therefore depend on its operating performance, cash flows and ability to secure adequate financing, which will in turn depend on, among other things, the success of its current business strategy, availability and cost of financing, as well as general economic and political conditions and other factors that may be beyond its control.
15
A significant portion of Air Wisconsin’s workforce is represented by labor unions and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.
As of December 31, 2020, 841 of Air Wisconsin’s employees were represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers AFL-CIO (“IAMAW”), and the Transport Workers Union of America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which may result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.
Maintenance costs will likely increase as the age of Air Wisconsin’s fleet increases.
The average age of Air Wisconsin’s CRJ-200 regional jets as of December 31, 2020 was more than 18 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of its operating expenses, and may result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under the United capacity purchase agreement. Any unexpected increase in Air Wisconsin’s maintenance costs as its fleet ages, or decreased revenue resulting from out-of-service periods, could have an adverse effect on our financial condition and operating results.
The loss of key personnel upon whom Air Wisconsin depends to operate its business or the inability to attract additional qualified personnel could adversely affect our business.
Our future success depends on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Among other things, the agreements that Air Wisconsin has entered into, and expects to enter into, with the Treasury in connection with the Treasury provided payroll support impose significant restrictions on Air Wisconsin’s executive compensation. Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries, which may present retention challenges in the case of executives presented with alternative, non-airline opportunities. Any inability to attract or retain qualified management personnel and other employees would have a material adverse effect on our business, results of operations and financial condition.
Should the passenger demand for air travel rebound following the COVID-19 pandemic, Air Wisconsin may experience difficulty hiring, training and retaining a sufficient number of qualified pilots, which may negatively affect our operations and financial condition.
Historically, the supply of qualified pilots to the airline industry has been limited, which created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the FAA issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations as they existed prior to the COVID-19 pandemic and correspondingly increasing Air Wisconsin’s labor costs. As a result of the significant decline in passenger demand due to the COVID-19 pandemic, there is no current shortage of qualified pilots in the airline industry. But if passenger demand for air travel increases following the COVID-19 pandemic, Air Wisconsin may again experience challenges in hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from the hiring needs of other airlines. Air Wisconsin has historically also experienced increases in time and resources required to train pilots due to several factors, including limited availability of flight simulators and instructors. If future pilot attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots, Air Wisconsin may be unable to fly the number of flights required under the United capacity purchase agreement, which may result in penalties under the agreement that would negatively impact our operations and financial condition.
16
Information technology security breaches, hardware or software failures or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.
The performance and reliability of Air Wisconsin’s technology, the technology of United, and the technology of our third-party service providers, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United or our third-party service providers, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs. Air Wisconsin’s technological systems, software and related data, those of United, and those supplied by our third party service providers, may be vulnerable to a variety of sources of interruption or exploitation due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and stores sensitive data, including personal information of its employees and information of United. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations, any or all of which could adversely affect our business and financial condition.
Risks Related to Our Industry
The duration and spread of the ongoing COVID-19 pandemic, and the outbreak of any other disease or similar public health threat that we may face in the future, could result in additional adverse effects on the business, operating results, financial condition and liquidity of Air Wisconsin and United.
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and the U.S. Department of State issued a Level 4 “do not travel” advisory for all international travel due to the global impact of COVID-19. Air Wisconsin’s amount of flying remains significantly impacted by the COVID-19 pandemic. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic and international demand related to the COVID-19 pandemic, during the first quarter of 2020, resulting in a first quarter net loss. As of the date of filing of this Annual Report, United expects demand will remain suppressed in 2021. As a result of lowered demand, United has made significant cuts to its scheduled capacity since June 2020.
Since March 2020, United has significantly reduced the number of Air Wisconsin’s scheduled departures and block hours flown, and United may impose continued reductions.
The severity and duration of the COVID-19 pandemic on global and financial health are difficult to predict; thus, the magnitude and scope of the impact of the COVID-19 pandemic on our business and future results of operations are highly uncertain and subject to change.
The full extent of the impact of the COVID-19 pandemic on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, including the effectiveness of the mitigation strategies employed by United, the duration and spread of COVID-19, the impact of COVID-19 on overall long-term demand for air travel, the impact of the COVID-19 pandemic on our financial health and operations and those of United, United’s compliance with the United capacity purchase agreement, and future governmental actions, all of
17
which are highly uncertain and cannot be predicted. A long-term continuation of reduced passenger demand for air travel could have a material adverse effect on our business, operating results, financial condition and liquidity. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth herein.
Worldwide, several regional and larger carriers have ceased operations as a direct result of the COVID-19 pandemic. In July 2020, United announced that it was terminating its flying agreement with ExpressJet Airlines, Inc. (“ExpressJet”). In September 2020, ExpressJet ceased operations. As of the date of this filing, in addition to ExpressJet, Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased operations as a result, at least in part, due to the COVID-19 pandemic’s impact on their business. In addition, a further outbreak of COVID-19, an outbreak of another disease or similar public health threat, or any other event that would affect travel demand, travel behavior or travel restrictions, including the material decline in passenger demand for air travel, and the significant risks and disruptions caused by the COVID-19 pandemic, could have a material adverse impact on our business, financial condition and operating results and those of United.
The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.
The business of airlines is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, facility disruptions, acts of war or terrorism, increased security measures, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers and increase operating costs and decrease revenue, which in turn could adversely affect profitability. Because Air Wisconsin’s revenue (other than the portion of its revenue based on the number of aircraft covered under the United capacity purchase agreement) depends primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays, any of these factors could have a material adverse effect on our business, results of operations and financial condition.
In addition to the factors noted above, while Air Wisconsin is to some extent protected from certain market conditions under the United capacity purchase agreement, its operations and our financial condition are currently affected, and may in the future be affected, by many other industry factors and conditions beyond Air Wisconsin’s control, including, among others:
| • | actual or potential changes in economic conditions, including disruptions in the credit markets, recession, inflation, increased interest rates or fluctuations in currency exchange rates; |
| • | actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism or other political instability; |
| • | changes in demand for airline travel or tourism and changes in consumer preferences, perceptions, discretionary spending or demographic trends; |
| • | changes in the competitive environment due to pricing, industry consolidation or other factors; and |
| • | labor disputes, strikes, work stoppages, or similar matters impacting employees. |
The effect of any of the foregoing factors or conditions on Air Wisconsin’s operations is difficult to forecast; however, the occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.
18
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.
The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America, American Airlines and US Airways, Southwest and AirTran Airways, United and Continental Airlines and Delta and Northwest Airlines. Any additional consolidation or significant alliance activity within the airline industry could further limit the number of potential partners with whom Air Wisconsin could enter into capacity purchase agreements. In addition, any further consolidation activity involving United, or reduction in the size of its network, could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to provide additional service to United. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs could negatively impact Air Wisconsin’s future growth opportunities.
In the course of consolidation, major airlines may also make other strategic changes, such as relocating or consolidating hubs. For example, in May 2020, United temporarily ceased Air Wisconsin’s operations at Washington-Dulles and significantly reduced Air Wisconsin’s average daily scheduled departures. Air Wisconsin resumed operations at Washington-Dulles in August, but we cannot be certain United will not make future changes to Air Wisconsin’s operations. If United were to make changes such as these in its strategy and operations, or otherwise decide to reduce the size of its network, Air Wisconsin’s operations and our financial results could be adversely impacted.
Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath negatively impacted the airline industry in general. If additional terrorist attacks are launched, there may be lasting consequences, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry, and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs. A terrorist attack, whether or not involving Air Wisconsin’s aircraft, could have a material adverse impact on our business and operations.
The occurrence of an aviation accident or incident involving Air Wisconsin or its aircraft type could negatively impact our financial condition and operating results.
An accident or incident involving Air Wisconsin’s aircraft could result in significant potential claims of injured passengers and others, as well as negative impacts on its operations resulting from the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. If substantial claims resulting from an accident are made in excess of our related liability insurance coverage, then our operational and financial results would be harmed. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Air Wisconsin’s operations are less safe or reliable than other airlines, which could negatively impact our business, financial condition and operating results.
Furthermore, given that Air Wisconsin currently operates a single aircraft type, any accident or incident involving the CRJ-200 regional jet aircraft type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United, and our financial results. In addition, any accident or incident involving a CRJ-200 regional jet, regardless of the operator or geographic location of the incident, could cause a public perception that the aircraft type is less safe and reliable than other aircraft types, which could negatively impact our business, financial condition and operating results.
Air Wisconsin is subject to significant governmental regulation and potential regulatory changes.
All air carriers, including Air Wisconsin, are subject to regulation by the U.S. Department of Transportation (“DOT”), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. We cannot predict whether the cost of continued compliance with all applicable legal and regulatory requirements will have a material adverse effect on our operations. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsin’s aircraft for
19
any reason may have a material adverse effect on our operations. Air Wisconsin incurs substantial costs complying with applicable governmental regulations, and Air Wisconsin’s business may also be subject to additional costs as a result of potential regulatory changes, which additional costs could have an adverse effect on Air Wisconsin’s operations and our financial results. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations and require that it incur substantial ongoing costs.
Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.
Air Wisconsin is subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require Air Wisconsin to reduce its emissions, secure carbon offset credits or otherwise pay for emissions, or make capital investments to modify certain aspects of its operations to reduce emissions. Future policy, legal, and regulatory developments relating to the protection of the environment could have a direct effect on its operations (or an indirect effect through its third-party providers of goods or services or airport facilities at which it operates) and increase its costs and have a material adverse effect on its operations. Any such laws and regulations could have an adverse impact on our business, results of operations and financial condition.
Air Wisconsin is also subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.
The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of the Company’s common stock.
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled by citizens of the United States as that term is defined in the Federal Aviation Act and interpreted by the DOT. The restrictions imposed by federal law and regulations limit who can purchase Air Wisconsin’s equity securities in the following ways:
| • | at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States; |
| • | at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled by U.S. citizens and no more than 49% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country; and |
| • | citizens of foreign countries that have not entered into “open skies” air transport agreements with the U.S. may hold no more than 25% of Air Wisconsin’s total outstanding equity securities. |
The restrictions on foreign ownership of Air Wisconsin’s equity securities may impair or prevent a sale of common stock by a stockholder of the Company and may adversely affect the price at which a stockholder can sell the Company’s common stock.
20
General Risk Factors
Because there is no active trading market for the Company’s common stock, the common stock may continue to be illiquid.
Although the Company’s common stock is traded under the symbol “HRBR” on the OTC Market, the trading volume for the common stock has historically been very limited. The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.
The price of the Company’s common stock has been and may continue to be volatile.
The trading price of the Company’s common stock has been volatile. We believe the Company’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:
| • | the impact of the COVID-19 pandemic or other pandemics and widespread outbreaks of communicable diseases on passenger demand for air travel, tourism, discretionary spending, consumer behavior and economic conditions; |
| • | actual or anticipated fluctuations in our financial and operating results from period to period; |
| • | the repayment, restructuring or refinancing of Air Wisconsin’s debt obligations and our actual or perceived need for additional capital; |
| • | the illiquidity of the Company’s common stock and the lack of publicly available historical financial information regarding the Company and its subsidiaries; |
| • | market perceptions about our financial stability generally, and relative to our competitors, and perceptions about the financial stability of Air Wisconsin’s business partners; |
| • | market perceptions regarding Air Wisconsin’s operating performance, reliability and customer service, and the operating performance, reliability and customer service of its partners and competitors; |
| • | factors and perceptions impacting the airline industry generally, including future passenger demand for air travel; |
| • | announcements of significant contracts, acquisitions or divestitures by us or Air Wisconsin’s competitors, including any new or amended capacity purchase agreement with United; |
| • | bankruptcies or other financial issues impacting Air Wisconsin’s partners or competitors; |
| • | purchases or sales of shares of the Company’s common stock by the Company or its principal stockholders pursuant to the Company’s publicly announced stock repurchase program or otherwise; |
| • | threatened or actual litigation and government investigations; |
| • | changes in the regulatory environment impacting Air Wisconsin’s business and industry; |
| • | speculative trading practices of the Company’s stockholders and other market participants; |
| • | perceptions about securities that are traded on the OTC Market; |
| • | the impact of the application of accounting guidance; and |
| • | general political or economic conditions. |
21
In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies across many industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of the Company’s common stock could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations could materially reduce the trading price of the Company’s common stock.
The concentration of ownership of the Company’s capital stock among a small number of stockholders could allow such stockholders to exert significant influence over the Company’s business plans and strategic objectives, control all matters submitted to the Company’s stockholders for approval, or deter a change in control transaction, any of which could negatively affect the trading price or trading volume of the Company’s common stock.
As of December 31, 2020, the Company had 54,863,305 shares of common stock outstanding. As of the same date, Amun LLC (“Amun”) held 20,000,000 shares of the Company’s common stock, representing approximately 28.0% of the fully diluted shares of capital stock of the Company, and Southshore Aircraft Holdings, LLC, through its affiliates (together, “Southshore”), held shares of the Company’s Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), which were convertible into 16,500,000 shares of common stock, representing approximately 23.1% of the fully diluted shares of capital stock of the Company (in each case assuming the full conversion of the Series C Preferred into common stock). Following the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, pursuant to limitations set forth in the Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”), the Series C Preferred remains convertible into an aggregate of 16,500,000 shares of common stock as of the date of filing this Annual Report.
The shares of Series C Preferred are generally authorized to vote with the Company’s common stock. As a result, Amun and Southshore collectively control a majority of the voting power of the Company’s outstanding capital stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Company’s business plans and strategic objectives, as well as to control all matters submitted to the Company’s stockholders for approval. These stockholders may manage the Company’s business in ways in which certain investors disagree and may be adverse to their interests. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control transaction, depriving the Company’s stockholders of an opportunity to receive a premium for their capital stock, or otherwise negatively affecting the trading price or trading volume of the Company’s common stock.
Mr. Bartlett, one of the Company’s directors, may be deemed to be the beneficial owner of the shares of the Company’s common stock held by Amun due to his status as a member of the board of managers of Amun, and his indirect ownership of 19.6% of the outstanding equity of Amun. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore, and his direct or indirect ownership of 19.6% of the outstanding equity of Southshore. Accordingly, Mr. Bartlett may be able to exercise influence over decisions involving the voting or disposition of shares of the Company’s capital stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.
The Company may suspend its obligation to comply with SEC filing requirements in future periods, and thereby cease filing reports and other information with the SEC, which could have the effect of reducing the trading volume and trading price of the Company’s common stock.
In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, the last periodic report filed by the Company was the Annual Report on Form 10-K for the year ended December 31, 2011. As of January 1, 2020, the Company no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act, requiring the Company to resume filing reports and other information with the SEC pursuant to the Exchange Act.
22
The Company has incurred significant direct and indirect costs, and diversion of management time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the audit of the financial statements contained within our 2019 Annual Report and this Annual Report in accordance with SEC rules and the Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002. The Company expects to incur significant additional costs relating to its public reporting obligations, which could have a negative impact on the Company’s results of operations.
The Company would again become eligible to suspend its public reporting obligations if it (i) determines in accordance with applicable SEC rules it has fewer than 300 stockholders of record as of certain points in time, (ii) does not file registration statements pursuant to the Securities Act, and (iii) meets certain other requirements under applicable SEC rules. If the Company becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which would result in the Company no longer being required to file SEC reports. If the Company ceases filing reports and other information with the SEC, it would significantly reduce the amount of publicly available information about the Company and its subsidiaries, which could have the effect of reducing the trading volume and price of the Company’s common stock.
In addition, notwithstanding that the Company is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, the Company does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, the Company is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. Accordingly, there may be significantly less information available about the Company, including its governance policies and ownership structure, than is available for other public reporting companies, which could have the effect of further reducing demand for the Company’s common stock and the trading price.
Provisions in the Company’s charter documents and the United capacity purchase agreement might deter acquisition bids, which could adversely affect the value of the Company’s common stock.
The Company’s amended and restated certificate of incorporation and amended and restated bylaws contain provisions that, among other things:
| • | prohibit the transfer of any shares of the Company’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation Section 1.382-T(g)) of the Company’s then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of the Company’s then-outstanding capital stock; |
| • | authorize the Board of Directors, without stockholder approval, to authorize and issue preferred stock with powers, preferences and rights that may be senior to the Company’s common stock, that could dilute the interest of, or impair the voting power of, holders of the Company’s common stock and could also have the effect of discouraging, delaying or preventing a change of control; |
| • | establish advance notice procedures that stockholders must comply with in order to nominate candidates to the Board of Directors and propose matters to be brought before an annual or special meeting of the Company’s stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company; |
| • | give the Board of Directors exclusive authority to set the number of directors and increase or decrease the number of directors by one or more resolutions, which may prevent stockholders from being able to fill vacancies on the Board of Directors; |
| • | authorize a majority of the Board of Directors to appoint a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which may prevent stockholders from being able to fill vacancies on the Board of Directors; and |
| • | restrict the ability of stockholders to call special meetings of stockholders. |
23
In addition, the United capacity purchase agreement provides that a change of control of Air Wisconsin results in a termination event under the agreement, pursuant to which United may terminate its relationship with Air Wisconsin.
These provisions may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial, any of which could also adversely affect the trading price of the Company’s common stock.
The Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, limit certain transfers of the Company’s stock in order to preserve the Company’s ability to use its net operating loss carryforwards, which could have an effect on the value and liquidity of the Company’s common stock.
To reduce the risk of a potential adverse effect on the Company’s ability to use its net operating loss carryforwards for federal income tax purposes, the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of the Company’s capital stock that could result in adverse tax consequences by impairing the Company’s ability to utilize its net operating loss carryforwards. These transfer restrictions are subject to a number of rules and exceptions, and generally may only be repealed or amended by the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Company’s capital stock. These transfer restrictions apply to the beneficial owners of the shares of the Company’s capital stock. The Board of Directors also has the ability to grant certain waivers and to modify certain terms with respect to transfers of the Company’s stock that would otherwise be prohibited. The transfer restrictions contained in the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for the Company’s common stock, which may adversely affect the price at which a stockholder can sell the Company’s common stock. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial, any of which could also adversely affect the trading price of the Company’s common stock.
The Company currently does not intend to pay dividends on its common stock and, consequently, the only opportunity to achieve a return on an investment in the Company’s common stock may be the appreciation in value of the Company’s common stock.
The Company has not historically paid dividends on shares of its common stock and does not expect to pay dividends on such shares in the foreseeable future. The United capacity purchase agreement, Air Wisconsin’s credit agreements and the agreements with the Treasury for payroll support all contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. Thus, the source of any future dividends may be limited to cash available from the Company’s other subsidiaries. Any future determination to pay dividends will be at the discretion of the Board of Directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements, business prospects and such other factors as the Board of Directors deems relevant. Consequently, investors should consider that their only opportunity to achieve a positive return on their investment in the Company’s common stock may be the appreciation in value of the Company’s common stock. However, as a result of numerous risks and uncertainties described in this Annual Report, the trading price of the Company’s common stock may not appreciate and may decline significantly.
As a “smaller reporting company,” the Company may avail itself of reduced disclosure requirements, which may make the Company’s common stock less attractive to investors.
The Company is a “smaller reporting company” under applicable SEC rules and regulations, and it will continue to be a “smaller reporting company” for so long as either (i) the market value of the Company’s common stock held by non-affiliates as of the end of its most recently completed second quarter is less than $250 million or (ii) the market value of the Company’s common stock held by non-affiliates is less than $700 million and the annual revenue of the Company is less than $100 million during the most recently completed fiscal year. As a “smaller reporting company,” the Company has relied on exemptions from certain disclosure requirements that are applicable to other public reporting companies. These exemptions include reduced financial disclosure and disclosure regarding executive compensation. Investors may find the Company’s common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for the Company’s common stock and negatively impact the trading price.
24
Complying with the requirements of public reporting companies under the Exchange Act, including the requirement for management to assess our disclosure controls and procedures and internal control over financial reporting, will increase our operating costs and divert management’s attention from executing our business strategy.
We are subject to the reporting requirements of Section 15(d) of the Exchange Act, which requires, among other things, that we file annual, quarterly, and current reports with the SEC with respect to our business, financial condition and results of operations. In addition, pursuant to the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our disclosure controls and procedures and our internal control over financial reporting. Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs, made some of our business activities more difficult or costly, and increased demand on our management team. Significant additional resources and management oversight may be required to maintain and, as required, enhance our disclosure controls and procedures and internal control over financial reporting.
Further, the Company’s status as a public reporting company has significantly increased the cost of its director and officer liability insurance, and the Company may be required to accept reduced coverage or incur substantially higher costs in the future to obtain similar coverage. These factors, or other risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the Board of Directors and executive officers, and it may increase the cost of their services.
We have previously identified material weaknesses in our internal control over financial reporting and we could identify additional material weaknesses or significant deficiencies in future periods.
In connection with the audit of our consolidated financial statements included within the 2019 Annual Report, we identified multiple material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
While we have remediated the previously identified material weaknesses, we may identify additional material weaknesses in future periods, and we cannot be certain that we will be successful in preventing or remediating future significant deficiencies or material weaknesses in internal control over financial reporting. We expect to continue to incur significant costs and diversion of management resources in an effort to enhance our controls and procedures. In addition, these efforts may divert management’s attention from other business concerns, which could harm our results of operations. Any newly identified material weaknesses could result in material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of the Company’s common stock.
25
Share repurchases could increase the volatility of the trading price of our common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.
The Company’s board of directors has adopted a stock repurchase program pursuant to which the Company may repurchase shares of its common stock from time to time. Although the Company’s board of directors has authorized the repurchase program, it does not obligate us to repurchase any specific dollar amount or number of shares, and the program may be modified, suspended or terminated at any time and for any reason. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Our ability to repurchase shares may also be limited by restrictive covenants in future borrowing arrangements we may enter into from time to time.
Repurchases of the Company’s common stock could increase the volatility of the trading price, which could have a negative impact on the trading price. Similarly, the future announcement of the termination or suspension of the repurchase program, or our decision not to utilize the full authorized repurchase amount under the repurchase program, could result in a decrease in the trading price. There can be no assurance that any repurchases we do elect to make will enhance stockholder value because the market price of the Company’s common stock may decline below the levels at which we repurchased shares. Although the repurchase program is intended to enhance long-term stockholder value, we cannot guarantee that it will do so.
The Company may be at increased risk of securities class action and other litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If the Company faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations.
As a result of our compliance with Exchange Act reporting obligations, a significant amount of information regarding our business and operations, including our financial condition and operating results, will become publicly available, which may result in threatened or actual litigation or other disputes with our key constituents. If such claims are successful, our business and results of operations could suffer and, even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.
If securities or industry analysts do not publish reports about our business, an active trading market for the Company’s common stock may not develop.
The extent of any trading market for the Company’s common stock will depend, in part, on any research and reports that securities or industry analysts publish about us or our business. We are not currently aware of any analysts who cover the Company nor do we expect any analysts to commence coverage in the foreseeable future. Investors should not purchase the Company’s common stock with the expectation that we will have analyst coverage, or that an active trading market for the Company’s common stock will be developed or sustained.
26
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Aircraft Fleet
As of December 31, 2020, Air Wisconsin owned 64 CRJ-200 regional jets. The CRJ-200 regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.
The following table summarizes Air Wisconsin’s ASMs flown and contract revenue recognized under the United capacity purchase agreement for the years ended December 31, 2020 and 2019, respectively.
| Year Ended December 31, 2020 |
Year Ended December 31, 2019 | |||||||||
| Available Seat Miles |
Contract Revenue |
Contract Revenue per ASM |
Available Seat Miles |
Contract Revenue |
Contract Revenue per ASM | |||||
| (in thousands, except in cents) | (in thousands, except in cents) | |||||||||
| 864,494 | $ 185,866 | ¢ 21.50 | 1,925,371 | $ 263,495 | ¢ 13.69 | |||||
|
|
|
|
|
|
| |||||
In addition to aircraft, Air Wisconsin has offices, crew bases and maintenance facilities to support its operations. All of Air Wisconsin’s material facilities held as of December 31, 2020 are summarized in the following table:
| Type |
Location |
Ownership |
Approximate Square Footage |
|||||
| Corporate Headquarters |
Appleton, Wisconsin | Leased | 20,140 | |||||
| Maintenance Hangar |
Appleton, Wisconsin | Leased | 37,200 | |||||
| Disaster Recovery Center |
Appleton, Wisconsin | Leased | 2,610 | |||||
| Maintenance Hangar |
Dayton, Ohio | Leased | 21,500 | |||||
| Maintenance Hangar |
Milwaukee, Wisconsin | Leased | 60,000 | |||||
All leases above are long term and expire between May 2022 and November 2033.
In July 2003, Air Wisconsin financed the Milwaukee maintenance hangar through the issuance of approximately $4.3 million principal amount of City of Milwaukee, Wisconsin variable rate industrial development bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest was payable semiannually. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the balance sheets. The hangar is accounted for as a right-of-use asset.
We believe Air Wisconsin’s facilities are suitable and adequate for its current and anticipated needs.
| ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we are involved in various investigative inquiries, legal proceedings and other disputes arising from or related to matters incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, regulatory and contractual matters. Although the results of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we believe that we are not currently a party to any matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our
27
business, operating results, financial condition or cash flows. However, regardless of the merit of any matters raised or the ultimate outcome, investigative inquiries, legal proceedings and other disputes may generally have an adverse impact on us as a result of defense and settlement costs, diversion of management resources, and other factors. As of December 31, 2020, our management believed, after consultation with legal counsel, that the ultimate outcome of any investigative inquiries, legal proceedings and other disputes then outstanding, was not likely to have a material adverse effect on our financial position, liquidity or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
The disclosure required by this item is not applicable.
28
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s common stock is currently traded on the OTC Market under the symbol “HRBR.” The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the Company’s common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the Company’s common stock may never develop or be sustained.
Holders of Record
As of January 1, 2021, there were approximately 403 holders of record of the Company’s common stock. Because many of the Company’s shares of common stock are held by brokers and other institutions on behalf of stockholders, not all of which are known to the Company, the Company is unable to provide the exact number of stockholders represented by these record holders.
The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company, LLC.
Dividends
The Company has not declared or paid any cash dividends on its capital stock. The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. In addition, the PSP-1 Agreement that Air Wisconsin entered into in April 2020 with the Treasury pursuant to the CARES Act and the PSP-2 Agreement that Air Wisconsin entered into in March 2021 with the Treasury pursuant to the PSP Extension Law contain various covenants, that, respectively, prevent the Company from paying dividends prior to October 1, 2021 and March 31, 2022, respectively. As a result, the source of any future dividends may be limited to existing cash available at the Company and from its other subsidiaries. Any future determination to pay dividends will be at the discretion of the Company’s board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements, business prospects and such other factors as the Company’s board of directors deems relevant.
Unregistered Sales of Equity Securities
On January 17, 2020, the Company completed the acquisition from Southshore of three CRJ-200 regional jets, each having two GE engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of the Series C Preferred. This sale of securities was made pursuant to the exemption from the registration provisions of the Securities Act for issuances not involving a public offering provided by Rule 506 of Regulation D promulgated under the Securities Act. There were no other unregistered sales of the Company’s equity securities during the year ended December 31, 2020.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither the Company nor any “affiliated purchaser” of the Company acquired any shares of the Company’s equity securities during the fiscal year ended December 31, 2020.
On March 30, 2020, the Company’s board of directors adopted a stock repurchase program pursuant to which the Company may initially repurchase up to $1.0 million of shares of its common stock from time to time during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.
| ITEM 6. | SELECTED FINANCIAL DATA. |
As a “smaller reporting company,” the Company is not required to provide the information required by this Item.
29
| ITEM 7. | 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 consolidated financial statements, the accompanying notes, and the other financial information included within this Annual Report on Form 10-K (this “Annual Report”). 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 those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Annual Report, particularly in the section entitled “Cautionary Note Regarding Forward-Looking Statements” and the Item entitled “Risk Factors.”
Overview
Harbor Diversified, Inc. (the “Company”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. The Company is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is a non-operating entity with no material assets. Because the Company consolidates Air Wisconsin for financial statement purposes, disclosures relating to activities of Air Wisconsin also apply to the Company, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include the Company and its consolidated subsidiaries, they may be jointly referred to as “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as the “Company.”
For the year ended December 31, 2020, Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenue for the years ended December 31, 2020 and 2019, was derived from operations associated with the United capacity purchase agreement.
Subject to certain limited exceptions, the United capacity purchase agreement provides Air Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement also has the effect of protecting Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access. In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the United capacity purchase agreement.
Impact of the COVID-19 Pandemic on Our Business and Industry
In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a global pandemic, and, in response, federal, state, local, and foreign governments implemented “shelter-in-place” and “stay-at-home” orders and guidelines, quarantine orders, travel restrictions, and other similar restrictions in an attempt to control the spread and mitigate the impact of COVID-19. As of the date of this Annual Report, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which Air Wisconsin operates.
30
Focus on Safety for Employees and Passengers
The safety and well-being of our employees and passengers are our priority. Throughout the COVID-19 pandemic, Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by the Centers for Disease Control and Prevention, including working with United to:
| • | Enhance Air Wisconsin’s aircraft cleaning and sanitation procedures; |
| • | Provide gloves, masks and other personal protective equipment for crewmembers; |
| • | Provide options to Air Wisconsin’s employees who are diagnosed with COVID-19, including pay protection and extended leave options; |
| • | Implement workforce social distancing, mask requirements and other protection measures, and enhanced cleaning of our facilities; |
| • | Add work-from-home flexibility for administrative employees; and |
| • | Provide regular, ongoing communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures. |
Reduction in Demand for Air Travel
Governmental restrictions, orders and guidelines have resulted in the mandatory closure of “non-essential” businesses in some jurisdictions, led to the cancellation of many public events, including conferences, sporting events and concerts, led to an unprecedented and sustained material decline in passenger demand for air travel, and resulted in significant disruptions to regional and global economies.
This decline in passenger demand for air travel led to a material reduction in seat capacity in April 2020, during which month the International Air Transport Association (“IATA”) reported that seat capacity in the United States was 60% lower than in the same period in April 2019. Roughly two-thirds of the global commercial fleet was grounded by the end of April. In May 2020, the Transportation Security Administration reported that 87% fewer people passed through U.S. airport checkpoints than on the same day in the previous year. Since April 2020, industry-wide capacity contraction has shown modest improvements; however, the pace of improvement has remained slow, with new spikes in COVID-19 cases slowing or reversing recoveries. In December 2020, IATA reported that domestic seat capacity was 42.9% lower than the same period in December 2019, with industry-wide passenger load factor (a measure of capacity utilization of airlines) on average 17.8 percentage points lower than 2019. While some indicators of business activity, such as retail sales, suggest that the ease of lockdowns and resumption of business may steady the decline of passenger demand, IATA has reported that fresh outbreaks of COVID-19 and government reliance on travel restrictions and quarantine orders may continue to subdue consumer confidence in air travel.
Air Wisconsin’s recent and anticipated levels of flying remain significantly impacted by the unprecedented material decline in passenger demand for air travel resulting from the COVID-19 pandemic. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic and international demand related to the pandemic during the first quarter of 2020 and has stated that it expects demand will remain suppressed in 2021. As a result of lowered demand, United cut approximately 80% of its scheduled capacity for April 2020, 90% for May and June 2020, 75% for July 2020, 70% for August 2020, 60% for September 2020, 55% for October 2020, 50% for November 2020, and 55% for December 2020.
In response to lower demand for air travel, in the months of April through December 2020, United cut its scheduled capacity by between approximately 50% and 90%. As a result, beginning in March 2020, United significantly reduced Air Wisconsin’s scheduled departures and block hours actually flown, and temporarily ceased Air Wisconsin’s operations at Washington-Dulles from May 2020 through August 2020. While the continued severity and duration of the impacts of the COVID-19 pandemic are difficult to predict, the COVID-19 pandemic has continued to impact our financial condition and results of operations through the date of this Annual Report, which we expect to continue in the near term and result in a material impact on our financial condition, liquidity, and results of operations in future periods. Thus, the magnitude and scope of the effects on our business, including
31
the number of daily flights operated by us, and future results of operations, are highly uncertain and subject to change. Our forecasted expense reduction and liquidity management measures discussed below may be modified as we more clearly understand the timing of the recovery of passenger demand for air travel, and the scope of the broader economic impacts of the pandemic. However, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations.
Impact on Competitive Environment
Worldwide, several regional and larger carriers have ceased operations as a direct result of the COVID-19 pandemic. In July 2020, United announced that it was terminating its flying agreement with ExpressJet Airlines, Inc. (“ExpressJet”). ExpressJet ceased operations in September 2020. As of the date of this filing, in addition to ExpressJet, Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased operations.
Expense Management
We have taken a number of actions in response to the financial uncertainty and health concerns raised by the COVID-19 pandemic. During 2020, we implemented cost-reduction initiatives to mitigate the impact on our operations and financial condition, while also protecting the safety of our customers and employees. Air Wisconsin delayed certain planned capital and operating expenditures, through actions it took such as delaying non-essential planned heavy airframe maintenance events, delaying non-essential maintenance events associated with engines and rotable parts, seeking concessions from third-party suppliers, offering voluntary short-term unpaid leave to employees, deferring the payment of the employer’s portion of employees’ social security tax payments, and furloughing certain employees. Air Wisconsin has been able to responsibly delay certain non-essential maintenance events primarily as a result of its reduced flight schedules.
In July 2020, Air Wisconsin informed approximately 871 employees that they might be furloughed or laid off as of October 1, 2020, through notices given pursuant to the federal Worker Adjustment and Retraining Notification (“WARN”) Act; and on October 1, 2020, Air Wisconsin furloughed or laid off approximately 305 employees, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, 116 of those employees who were furloughed have been recalled, accepted the recall offer and remain employed by Air Wisconsin. Through notices given in January 2021 pursuant to the WARN Act, Air Wisconsin informed approximately 150 pilots, each of whom had received the October 2020 WARN Act notices, that they might be furloughed on April 1, 2021, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, no furloughs have yet been issued pursuant to these notices. The necessity and scope of any additional furloughs are highly uncertain and will be impacted by a number of factors, including the demand for air travel generally, the actual or estimated block hours for which Air Wisconsin is scheduled under the United capacity purchase agreement, and the timing and extent of any additional governmental assistance provided under the CARES Act, the PSP Extension Law and the American Rescue Plan (each described below) or otherwise.
Paycheck Protection Program
In April 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), intended to provide economic relief to United States businesses affected by the COVID-19 pandemic, was signed into law. In April 2020, Air Wisconsin received a $10.0 million loan (“SBA Loan”) under the small business Paycheck Protection Program (“PPP”) established under the CARES Act and administered by the Small Business Administration (“SBA”). The loan is forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, leave payments and utility payments. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the filing of this Annual Report, the loan has not been forgiven.
32
Payroll Support Program
In April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (“PSP-1 Agreement”) with respect to payroll support from the U.S. Department of the Treasury (“Treasury”) under the payroll support program (“Payroll Support Program”) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $42.2 million in 2020. These funds have been used to pay for the salaries and benefits of Air Wisconsin’s employees. The PSP-1 Agreement contains various covenants, including that the Payroll Support Program proceeds must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin could not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin could not reduce any employee’s pay rates or benefits prior to October 1, 2020 without that employee’s consent. Through September 30, 2021, the PSP-1 Agreement also prohibits: (i) Air Wisconsin or any of its affiliates from purchasing an equity security of Air Wisconsin or any direct or indirect parent company of Air Wisconsin that is listed on a national securities exchange and (ii) Air Wisconsin from paying dividends, or making any other capital distributions, with respect to the common stock (or equivalent equity interest) of Air Wisconsin. If Air Wisconsin fails to comply with its obligations under the PSP-1 Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. In addition, the CARES Act authorizes the Secretary of the Department of Transportation to impose certain air service obligations on recipients of payroll support under the CARES Act until March 1, 2022. To date, no such service obligation has been imposed on Air Wisconsin. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the agreement. For additional information, refer to Note 8, Commitments and Contingencies, in our audited consolidated financial statements included in this Annual Report.
In December 2020, Congress adopted, and the President signed, the federal Consolidated Appropriations Act of 2021 (the “PSP Extension Law”), Subtitle A of Title IV of Division N of which provides for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement (the “PSP-2 Agreement”), which is substantially similar to the PSP-1 Agreement. Air Wisconsin expects to receive approximately $28.3 million pursuant to the PSP-2 Agreement, approximately $15.5 million of which was received in March 2021 and the balance of which is expected to be received in April 2021.
In March 2021, Congress adopted, and the President signed, the federal American Rescue Plan Act of 2021, Subtitle C of Title VII (the “American Rescue Plan”) of which provides further payroll support to eligible air carriers. Air Wisconsin expects to apply for payroll support under the American Rescue Plan and expects that it will be required to enter into an agreement substantially similar to the PSP-1 Agreement and the PSP-2 Agreement, if it receives payroll support under the American Rescue Plan.
For additional information related to the COVID-19 pandemic, refer to the sections entitled “Business – Impact of COVID-19 on Our Business and Industry,” and “Risk Factors” within this Annual Report within this Annual Report.
2020 Financial Highlights
For the year ended December 31, 2020, we had total operating revenue of $185.9 million, a 29.5% decrease, compared to $263.6 million for the year ended December 31, 2019. Net income for the year ended December 31, 2020 was $39.8 million, or net income of $0.71 per basic share and $0.56 per diluted share, compared to a net loss of $19.2 million, or $0.35 per basic and diluted share, for the year ended December 31, 2019. For additional information, refer to Note 12, Earnings per Share, and Note 13, Stock Options, in our audited consolidated financial statements included in this Annual Report.
Revenue
The number of aircraft we have in scheduled service and the block hours and departures we generate from our flights are primary drivers of our revenue under the United capacity purchase agreement. As a result of lower passenger demand from the COVID-19 pandemic, block hours decreased from 161,566 during the year ended December 31, 2019 to 74,438 during the year ended December 31, 2020, or by 53.9%, and the number of departures decreased from 105,360 in 2019 to 52,405 in 2020, or by 50.3%.
33
Primarily as a result of the reduced flight schedules during the year ended December 31, 2020 compared to the year ended December 31, 2019, revenue from the United capacity purchase agreement decreased by 29.5% to $186.0 million. Furthermore, we deferred recognizing revenue of $43.2 million related to fixed payments received under the United capacity purchase agreement during the year ended December 31, 2020 as a result of significant reductions to our flight schedules. For additional information, refer to the section entitled “–Revenue Recognition.”
However, as a result of the October 2020 amendment to the United capacity purchase agreement, we recognized $28.7 million of revenue during the year ended December 31, 2020, resulting from the payment or accrual by United to Air Wisconsin based on certain scheduling benchmarks. For additional information, refer to Note 1 to Consolidated Financial Statements “–Contract and Other Revenues.”
Operating Expenses
Our total operating expenses decreased $141.9 million, or 49.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease was due to a number of factors including a significant reduction in the number of flights we operated as a result of the COVID-19 pandemic. Further, due to the acquisitions of formerly leased aircraft in 2019 and 2020 aircraft rent decreased by $36.4 million in 2020 when compared to 2019, partially offset by an increase in depreciation of $8.9 million in 2020. Additionally, we recorded $42.2 million in payroll support grants received from the Treasury under the CARES Act as an offset to our operating expenses during the year ended December 31, 2020. For additional information, refer to the section entitled “–Results of Operations—Operating Expenses.”
Stock Repurchase Program
The Company’s board of directors has adopted a stock repurchase program pursuant to which the Company may initially repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.
Economic Conditions, Challenges and Risks Impacting Financial Results
We believe that, although the United capacity purchase agreement reduces Air Wisconsin’s exposure to certain risks, its operating and business performance is driven by various factors that typically affect regional airlines and their markets, including factors that affect the broader airline and travel industries. The following key factors, in addition to the impact of the COVID-19 pandemic, may materially affect our future performance.
Contract Disputes. More than 99% of our operating revenues for the year ended December 31, 2020 were derived from operations associated with the United capacity purchase agreement. Agreements such as the United capacity purchase agreement are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements.
Market Volatility. The airline industry is volatile and affected by economic cycles and other factors, such as tourist activity, consumer confidence, discretionary spending, fear of terrorism or war, global pandemics, as well as economic conditions, fare initiatives, fuel prices, labor actions, changes in governmental regulations, changes in taxes and fees, and weather. These factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. The effect of economic cycles and these other factors may be somewhat mitigated by Air Wisconsin’s reliance on the United capacity purchase agreement. If, however, United experiences a prolonged decline in passenger demand, or is negatively affected by low ticket prices or high fuel cost, it may materially reduce or inefficiently schedule Air Wisconsin’s scheduled flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the utilization of Air Wisconsin’s aircraft or operating efficiency of the flights scheduled under the United capacity purchase agreement.
Competition. The airline industry is highly competitive. Air Wisconsin competes principally with other regional airlines. We believe that major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: aircraft fleet type; ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors. The extension of the United capacity purchase agreement and Air Wisconsin’s ability to earn additional flying opportunities in the future will depend, in significant part, on its ability to maintain a low-cost structure competitive with other regional air carriers.
34
Maintenance Contracts, Costs and Timing. Air Wisconsin’s employees perform routine airframe and engine maintenance along with periodic inspections of equipment at its maintenance facilities. It also uses third-party vendors for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for Air Wisconsin’s aircraft. As of December 31, 2020, the average age of Air Wisconsin’s CRJ-200 regional jets was more than 18 years. We expect that maintenance costs will increase as its fleet continues to age.
We use the direct expense method of accounting for Air Wisconsin’s maintenance of airframes, rotable parts, and normal recurring maintenance and for Lotus’ maintenance of engines, pursuant to which we recognize the expense when the maintenance work is completed. We use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit.
While Air Wisconsin keeps a record of expected maintenance events, the actual timing and costs of maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs.
Aircraft Leases. As of December 31, 2019, Air Wisconsin had thirteen aircraft in its fleet under lease. During the year ended December 31, 2020, in three different transactions, Air Wisconsin acquired all of the remaining aircraft that were under various lease agreements. Therefore, as of December 31, 2020, Air Wisconsin no longer had any operational aircraft under lease. In order to determine the proper classification of its leased aircraft as either operating leases or finance leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of the aircraft, as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management to assess whether the lease is classified as an operating lease or a finance lease under existing accounting standards. All of Air Wisconsin’s aircraft leases are classified as operating leases. In accordance with the new accounting standard Accounting Standards Codification (“ASC”) Topic 842, which the Company adopted in 2019, these leases have been included on the Balance Sheet under Other Assets as operating lease right-of-use assets. For additional information, refer to Note 4, Property and Equipment, in our audited consolidated financial statements included in this Annual Report.
Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of December 31, 2020, Air Wisconsin had 1,042 full-time employees and 21 part-time employees, for a total of 1,063 employees, of which 841 were represented by unions. Air Wisconsin’s pilots, represented by the Airline Pilots Association, ratified a three-year extension to their collective bargaining agreement with Air Wisconsin in November 2019, and the agreement now becomes amendable in November 2022. Air Wisconsin’s collective bargaining agreement with its mechanics and related employees, represented by the International Association of Machinists and Aerospace Workers is amendable and is in mediated negotiations. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with Air Wisconsin’s unionized employees may adversely affect Air Wisconsin’s ability to conduct business.
Availability and Training of Qualified Pilots. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. These changes dramatically reduced the supply of qualified pilot candidates eligible for hiring by the airline industry and, in response, regional airlines implemented significant pilot wage and bonus increases. In recent years, Air Wisconsin experienced a significant increase in pilot attrition, and our results of operations may be negatively impacted if Air Wisconsin is unable to hire and train pilots in a timely manner; however, as a result of the reduction in scheduled flights due to the COVID-19 pandemic, the airline industry is currently experiencing a surplus of pilots.
Refer to the section entitled “Risk Factors” within this Annual Report for a discussion of certain risks and uncertainties applicable to our business and operations.
35
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year because the airline industry is subject to seasonal fluctuations and general economic conditions. While Air Wisconsin’s operations can be negatively impacted by factors outside of its control, including inclement weather, the United capacity purchase agreement mitigates some of the risks associated with seasonal fluctuations.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations.
Operating Revenue
Our consolidated operating revenue consists primarily of contract revenue from flight services.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to the United capacity purchase agreement, along with the additional amounts received based on the number of flights and block hours flown. The United capacity purchase agreement includes provisional cash payments four times a month based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. In addition, contract revenue in 2020 includes the impact of the amendment to the United capacity purchase agreement that Air Wisconsin entered into in October 2020 which, among other things, settled certain disputes that had existed between United and Air Wisconsin regarding amounts owed to Air Wisconsin under the United capacity purchase agreement and provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The accruals are evidenced by notes receivable from United to Air Wisconsin.
Contract Services and Other. Contract services and other revenue are not material and primarily consist of the sale of parts.
Operating Expenses
Our operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related expenses primarily relate to wages, benefits and payroll taxes for all Air Wisconsin’s employees, as well as costs related to lodging of our flight crews and crew training expenses.
Aircraft Fuel and Oil. Substantially all aircraft fuel and related fueling costs for flying under the United capacity purchase agreement are directly paid and supplied by United; we do not record any revenue or expense for such fuel. We include the cost of aircraft oil, which we are responsible for under the United capacity purchase agreement, although that expense is not material.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs include costs related to airframe and rotable overhauls, normal recurring maintenance and the cost of aircraft materials and parts related to Air Wisconsin’s CRJ-200 regional jets and the cost of engine maintenance by Lotus. With the exception of engine overhauls by Air Wisconsin, we record these costs using the direct expense method of accounting, pursuant to which the expense is recognized when the maintenance work is completed. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary from period to period. We capitalize Air Wisconsin’s engine overhaul costs, and the amortization expense is included in aircraft maintenance, materials and repairs using the deferral method of accounting; Air Wisconsin’s engine overhaul costs are amortized over the estimated useful life of the overhaul measured in engine cycles remaining until the next scheduled shop visit.
Aircraft Rent. Aircraft rent includes costs related to leased aircraft, including any lease termination expenses related to aircraft acquired prior to the end of their lease term.
36
Other Rents. Other rents include expenses related to leased engines, costs related to leased flight simulators used to train Air Wisconsin’s pilots, and building rents such as crew and maintenance bases and corporate office space.
Depreciation, Amortization and Obsolescence. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and rotable parts depreciation. Obsolescence expense is a periodic non-cash charge primarily related to the provision for obsolescence on our expendable aircraft parts.
Purchased Services and Other. Purchased services and other expense primarily includes third-party aircraft line maintenance support in Chicago (O’Hare) and Washington (Dulles), information technology systems, legal fees, professional and technical fees, insurance and property taxes and other administrative expenses. The majority of insurance and property taxes are pass-through costs to United.
Other (Expense) Income, Net
Interest Expense. Interest expense is interest primarily relating to Air Wisconsin’s debt under the Aircraft Credit Agreements and the Other Credit Agreements.
Interest Income. Interest income includes interest income earned on our cash and cash equivalent balance and notes receivable due from United.
Other. Other income (expense) includes income (expense) derived from activities not classified in any other area of the consolidated statements of income.
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 the United capacity purchase agreement.
Our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which she communicates our results and performance to the Company’s board of directors. She 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.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
We had operating income of $43.4 million in the year ended December 31, 2020, compared to an operating loss of $20.9 million in the year ended December 31, 2019. In the year ended December 31, 2020, we had net income of $39.8 million compared to a net loss of $19.2 million in the year ended December 31, 2019.
37
Operating Revenue
| Year Ended December 31, |
||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||
| Operating Revenue ($ in thousands): |
||||||||||||||||
| Contract Revenue |
$ | 185,866 | $ | 263,495 | $ | (77,629 | ) | (29.5 | )% | |||||||
| Contract Services and Other |
83 | 110 | (27 | ) | (24.5 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total Operating Revenue |
$ | 185,949 | $ | 263,605 | $ | (77,656 | ) | (29.5 | )% | |||||||
|
|
|
|
|
|
|
|||||||||||
| Operating Data: |
||||||||||||||||
| Available Seat Miles (ASMs) (in thousands) |
864,494 | 1,925,371 | (1,060,877 | ) | (55.1 | )% | ||||||||||
| Block Hours |
74,438 | 161,566 | (87,128 | ) | (53.9 | )% | ||||||||||
| Departures |
52,405 | 105,360 | (52,955 | ) | (50.3 | )% | ||||||||||
| Revenue Passenger Miles (RPMs) (in thousands) |
501,636 | 1,548,728 | (1,047,092 | ) | (67.6 | )% | ||||||||||
| Average Stage Length (in miles) |
335 | 373 | (38 | ) | (10.2 | )% | ||||||||||
| Contract Revenue Per Available Seat Mile (CRASM) (in cents) |
21.50 | ¢ | 13.69 | ¢ | 7.81 | ¢ | 57.0 | % | ||||||||
| Passengers |
1,444,274 | 4,109,788 | (2,665,514 | ) | (64.9 | )% | ||||||||||
Total operating revenue decreased by $77.7 million, or 29.5%, during the year ended December 31, 2020, compared to the year ended December 31, 2019. Contract revenue in the year ended December 31, 2020 decreased by $77.6 million, or 29.5%, primarily due to a decrease in flying as a result of the COVID-19 pandemic. Air Wisconsin’s block hours flown during the year ended December 31, 2020 decreased 53.9%, compared to the year ended December 31, 2019, also due to the COVID-19 pandemic.
38
Operating Expenses
| Year Ended December 31, |
||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||
| Operating Expenses ($ in thousands): |
||||||||||||||||
| Payroll and Related Costs |
$ | 99,100 | $ | 126,505 | $ | (27,405 | ) | (21.7 | )% | |||||||
| Aircraft Fuel and Oil |
55 | 172 | (117 | ) | (68.0 | )% | ||||||||||
| Aircraft Maintenance, Materials and Repairs |
27,350 | 57,827 | (30,477 | ) | (52.7 | )% | ||||||||||
| Aircraft Rent |
6,713 | 43,118 | (36,405 | ) | (84.4 | )% | ||||||||||
| Other Rents |
4,580 | 8,372 | (3,792 | ) | (45.3 | )% | ||||||||||
| Depreciation, Amortization and Obsolescence |
27,222 | 25,238 | 1,984 | 7.9 | % | |||||||||||
| CARES Act Payroll Support Program |
(42,185 | ) | — | (42,185 | ) | (100.0 | )% | |||||||||
| Purchased Services and Other |
19,764 | 23,235 | (3,471 | ) | (14.9 | )% | ||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total Operating Expenses |
$ | 142,599 | $ | 284,467 | $ | (141,868 | ) | (49.9 | )% | |||||||
|
|
|
|
|
|
|
|||||||||||
| Operating Data: |
||||||||||||||||
| Available Seat Miles (ASMs) (in thousands) |
864,494 | 1,925,371 | (1,060,877 | ) | (55.1 | )% | ||||||||||
| Block Hours |
74,438 | 161,566 | (87,128 | ) | (53.9 | )% | ||||||||||
| Average Stage Length (in miles) |
335 | 373 | (38 | ) | (10.2 | )% | ||||||||||
| Departures |
52,405 | 105,360 | (52,955 | ) | (50.3 | )% | ||||||||||
Payroll and Related Costs. Payroll and related costs decreased $27.4 million, or 21.7%, to $99.1 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was primarily driven by a decrease in pilot wages, bonuses and training expenses of $11.8 million. Other wages, taxes and benefits decreased by $9.0 million, and personnel expenses decreased by $6.6 million.
Aircraft Fuel and Oil. Substantially all fuel costs related to flying under Air Wisconsin’s capacity purchase agreement with United during the years ended December 31, 2020 and 2019 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. This decrease was primarily due to a significant reduction in the number of flights we operated as a result of the COVID-19 pandemic.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs decreased $30.5 million, or 52.7%, to $27.4 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. This decrease was primarily driven a by a decrease in required maintenance due to a reduction in flying attributable to reduced passenger demand for air transportation.
Aircraft Rent. Aircraft rent expense decreased $36.4 million, or 84.4%, to $6.7 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was partly attributable to Air Wisconsin’s acquisition of 14 CRJ-200 aircraft in July 2019 resulting in aircraft lease termination costs in the amount of $19.4 million that was recorded as rent expense in September 2019. Comparable rent expense for these 14 aircraft in 2019 was $8.7 million. The Company’s acquisition from an affiliate of aircraft and engines in January 2020 resulted in reduced rent expense of $1.8 million for 2020 compared to 2019. In May 2020, Air Wisconsin purchased eight additional aircraft that it had previously leased resulting in a decrease of $6.9 million in aircraft rent, net of a lease termination fee of $0.8 million in 2020 when compared to 2019. In September 2020, Air Wisconsin purchased the remaining two leased aircraft that resulted in aircraft lease termination costs in the amount of $0.5 million that was recorded as rent expense in September 2020. Rent for these two aircraft in 2020 was $1.8 million compared to $2.7 million in 2019. For additional information, refer to Note 4, Property and Equipment, in our audited consolidated financial statements included in this Annual Report.
Other Rents. Other rents expense decreased $3.8 million, or 45.3%, to $4.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was primarily due to a decrease of $1.6 million in engine rents resulting from the Company’s acquisition from an affiliate of engines in January 2020 and a decrease of $2.2 million in flight training simulator rental expense.
39
Depreciation, Amortization and Obsolescence. Depreciation, amortization and obsolescence expense increased $2.0 million, or 7.9%, to $27.2 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase was primarily attributable to the acquisitions in July 2019, January 2020, May 2020 and September 2020 of aircraft and engines previously leased by Air Wisconsin. For additional information, refer to Note 4, Property and Equipment, in our audited consolidated financial statements included in this Annual Report.
CARES Act Payroll Support Program. In April 2020, Air Wisconsin entered into the PSP-1 Agreement to receive emergency relief through the Payroll Support Program in the form of payroll support paid in installments through October 2020. Air Wisconsin received approximately $42.2 million under the PSP-1 Agreement all of which was recognized during 2020 as a reduction in expense over the periods the payroll support was intended to offset payroll expenses.
Purchased Services and Other. Purchased services and other expense decreased $3.5 million, or 14.9%, to $19.8 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease is primarily due to a $0.5 million decrease in uncollectible accounts and a $1.4 million decrease in on call maintenance expense, line maintenance and charters, this is offset by a $0.5 million increase in professional, legal expenses, and other in 2020 compared to 2019, and $2.1 million more in losses on the sale and retirement of assets in 2019 when compared to 2020.
Other Income (Expense)
Interest Income. Interest income decreased $0.6 million, or 50.6%, to $0.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was primarily due to a decrease in interest earned on short-term investments offset by interest earned on notes receivable from United in the amount of $0.3 million.
Interest Expense. Interest expense decreased $0.07 million, or 3.9%, to $1.7 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. This decrease was due primarily to a decrease in the principal amount outstanding under Air Wisconsin’s credit agreements with its lender. For additional information, refer to the subsection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities” within this Annual Report.
Other Income (Expense). Other income (expense) decreased $2.5 million, or 100.8%, to $0.02 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease was attributable to the receipt of periodic payments in the year ended December 31, 2019 relating to the termination of residual value agreements on 35 owned aircraft.
Income Taxes
In the year ended December 31, 2020, our effective tax rate was 5.8%, compared to 1.8% in the year ended December 31, 2019. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our federal and state net operating losses.
We recorded an income tax provision of $2.5 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.
The income tax provision for the year ended December 31, 2020 resulted in an effective tax rate of 5.8%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income and changes in federal and state valuation allowances against deferred tax assets. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.
40
The income tax provision for the year ended December 31, 2019 resulted in an effective tax rate of 1.8%, which differed from the U.S. federal statutory rate of 21% primarily due to the impact of state taxes and permanent differences between financial statement and taxable income and changes in federal and state valuation allowances against deferred tax assets. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.
The Tax Cuts and Jobs Act, signed into law on December 22, 2017, decreased the federal statutory rate to 21% and also allowed for federal net operating losses to have an indefinite life with certain limitations. The Company’s net operating losses incurred in the year ended December 31, 2019 may be used to offset up to 80% of taxable income in a given year.
As of December 31, 2020, we had aggregate federal and state net operating loss carryforwards of approximately $27.6 million and $9.1 million. The federal net operating losses do not have an expiration date while the state net operating losses expire beginning in 2024, with some states having either longer expiration periods or none at all.
Refer to Note 5, Income Taxes, in our audited consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
The COVID-19 pandemic continues to evolve. As such, the ongoing impact that the pandemic will have on our financial condition, liquidity, and results of operations is highly uncertain. Management is actively monitoring the impact on our operations, suppliers, industry, and workforce. We are taking actions based on currently available information to address the changing business environment; however, we cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on our results of operations, financial condition, or liquidity. The travel restrictions and other initiatives adopted to limit the spread of the virus have had, and will continue to have, a material adverse impact on the demand for air travel.
Sources and Uses of Cash
Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, 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 cash on hand, and cash generated from operations. In the near term, Air Wisconsin expects to fund its primary cash requirements through cash generated from operations and cash and cash equivalents balances.
Air Wisconsin’s ability to service its long-term debt obligations and to fund working capital, capital expenditures and business development efforts will depend on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. If Air Wisconsin fails to generate sufficient cash from operations, it may need to obtain debt financing to achieve its longer-term objectives, which may not be available on acceptable terms.
We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this Annual Report. 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 typically used to acquire or maintain aircraft and flight equipment for Air Wisconsin. During the year ended December 31, 2020, we paid $8.7 million in capital expenditures primarily related to purchases of aircraft and, rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
41
As of December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $130.4 million, inclusive of the $50.8 million in cash and cash equivalents held by Air Wisconsin. The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibits it from paying, dividends or distributions to the Company. In addition, the PSP-1 Agreement and the PSP-2 Agreement prevent it from paying dividends prior to March 31, 2022.
Furthermore, as of December 31, 2020, Air Wisconsin had $107.8 million (including capitalized interest of $10.9 million) in secured indebtedness incurred in connection with the Aircraft Credit Agreements. In April 2020, Air Wisconsin also received $10.0 million under the PPP. Air Wisconsin’s primary uses of liquidity are capital expenditures and debt repayments. As of December 31, 2020, Air Wisconsin had $23.6 million of short-term debt, and $94.2 million of long-term debt.
Sources of cash for the year ended December 31, 2020 were primarily cash flow from operations of $73.2 million.
Restricted Cash
As of December 31, 2020, in addition to the cash and cash equivalents of $130.4 million, Air Wisconsin had $0.8 million in restricted cash which primarily relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program and landing fees at certain airports. Restricted cash includes amounts escrowed in an interest-bearing account that secure the credit facility.
Cash Flow
The following table presents information regarding our cash flow for each of the years ended December 31, 2020 and 2019:
| Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
Change | ||||||||||||||
| Net Cash Provided by Operating Activities |
$ | 73,178 | $ | 25,546 | $ | 47,632 | 186.5 | % | ||||||||
| Net Cash Used in Investing Activities |
(8,654 | ) | (20,936 | ) | 12,282 | (58.7 | )% | |||||||||
| Net Cash Used/Provided by Financing Activities |
(3,604 | ) | 4,592 | (8,196 | ) | (178.5 | )% | |||||||||
|
|
|
|
|
|
|
|||||||||||
| Net Increase in Cash, Cash Equivalents and Restricted Cash |
60,920 | 9,202 | 51,718 | 562.0 | % | |||||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Year |
70,273 | 61,071 | 9,202 | 15.1 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Year |
$ | 131,193 | $ | 70,273 | $ | 60,920 | 86.7 | % | ||||||||
|
|
|
|
|
|
|
|||||||||||
Net Cash Flow Provided by Operating Activities
During the year ended December 31, 2020, our cash flow provided by operating activities was $73.2 million. We had net income of $39.8 million which primarily resulted from lower expenses as a result of payroll support received under the PSP-1 Agreement, and lower expenses related to reduced flying activity, further adjusted for increases in cash primarily related to long-term deferred revenue of $30.7 million under the United capacity purchase agreement, depreciation and engine overhaul amortization of $28.5 million, $2.5 million related to operating lease right of use assets, contract liabilities of $12.3 million and deferred income taxes of $3.6 million, partially offset by decreases in cash primarily related to notes receivable of $32.4 million, accounts payable of $7.8 million, amortization of contract costs of $2.5 million, prepaid expenses of $1.9 million and accounts receivable of $2.4 million.
During the year ended December 31, 2019, our cash flow provided by operating activities of $25.5 million reflected Air Wisconsin’s improved block hour and departure production. We had a net loss of $19.2 million adjusted for the following significant non-cash items: depreciation, amortization and obsolescence of $25.2 million, lease termination costs of $19.4 million, amortization of engine overhauls of $4.1 million and amortization of contract costs of $3.7 million. We had a net change of $(3.7) million within other net operating assets and liabilities largely driven by accounts payable during the year ended December 31, 2019.
42
Net Cash Flow Used in Investing Activities
During the year ended December 31, 2020, our net cash flow used in investing activities was $8.7 million resulting primarily from the purchase of aircraft and an investment in rotable parts and engine overhauls to support Air Wisconsin’s fleet under the United capacity purchase agreement. During the year ended December 31, 2019, our net cash flow used in investing activities was $20.9 million. We invested $21.5 million in new and used aircraft engines to support Air Wisconsin’s fleet under the United capacity purchase agreement, offset by $0.6 million from proceeds on disposition of property and equipment.
Net Cash Flow (Used in) Provided by Financing Activities
During the year ended December 31, 2020, our net cash used in financing activities was $3.6 million, reflecting Air Wisconsin’s receipt of a $10.0 million loan under the PPP established pursuant to the CARES Act, partially offset by a dividend payment of $0.8 million on the Series C Preferred and payments of long-term debt of $12.8 million. During the year ended December 31, 2019, our net cash flow provided by financing activities was $4.6 million. Air Wisconsin received $11.8 million in proceeds from a note payable further described in the section entitled “– Other Credit Agreements” within this Annual Report. Air Wisconsin made $7.2 million of principal repayments on long-term debt during the period under those same agreements.
Commitments and Contractual Obligations
As of December 31, 2020, Air Wisconsin had $126.8 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of $97.0 million in long-term notes payable related to owned aircraft used in continuing operations and a long-term note payable in the amount of $10.0 million under the PPP. As of December 31, 2020, Air Wisconsin also had $7.1 million of operating lease obligations primarily related to facilities. Air Wisconsin’s debt obligations set forth below include an aggregate of $12.7 million in projected interest costs through 2025 and beyond.
The following table sets forth our cash obligations as of December 31, 2020:
| Payment Due for Year Ended December 31, (in thousands) |
||||||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||
| Aircraft Notes Principal |
$ | 70,000 | $ | 7,000 | $ | 7,000 | $ | 7,000 | $ | 7,000 | $ | 42,000 | $ | — | ||||||||||||||
| Aircraft Notes Interest |
$ | 10,850 | $ | 2,730 | $ | 2,450 | $ | 2,170 | $ | 1,890 | $ | 1,610 | $ | — | ||||||||||||||
| Other Loans Principal |
$ | 36,988 | $ | 13,922 | $ | 16,660 | $ | 2,727 | $ | 2,754 | $ | 925 | $ | — | ||||||||||||||
| Other Loans Interest |
$ | 1,853 | $ | 1,262 | $ | 378 | $ | 51 | $ | 24 | $ | 138 | $ | — | ||||||||||||||
| Operating Lease Obligations |
$ | 7,129 | $ | 1,766 | $ | 1,778 | $ | 1,513 | $ | 1,103 | $ | 390 | $ | 579 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 126,820 | $ | 26,680 | $ | 28,266 | $ | 13,461 | $ | 12,771 | $ | 45,063 | $ | 579 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million commencing June 30, 2021, with certain additional amounts payable based on excess cash flow. No excess cash flow payments are anticipated in the above table. As of December 31, 2020, all of our long-term debt was subject to fixed interest rates. For additional information, refer to Note 6, Debt, included in our audited consolidated financial statements included in this Annual Report.
Series C Convertible Redeemable Preferred Stock Financing
In January 2020, the Company completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of the Company’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred”) with an aggregate value of $13.2 million, or $3.30 per share (the “Series C Issue Price”). Air Wisconsin had leased each of these CRJ-200 regional jets and GE engines from Southshore under lease arrangements described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Economic Conditions, Challenges and Risks Impacting Results – Aircraft Leases” contained within our 2019 Annual Report.
43
In November 2019, the Board of Directors formed a special committee to evaluate this acquisition from Southshore. Messrs. Bederman and Degen, each of whom was a “disinterested director” for purposes of the transaction, were appointed to serve as members of the special committee. The committee retained special committee counsel, a financial advisor, and an independent valuation firm to advise it on the acquisition. The special committee met frequently, including with its advisors, throughout the process of analyzing, negotiating and completing the transaction, with both members present for all meetings. The special committee’s financial advisor delivered to the special committee its opinion as to the fairness, from a financial point of view, to the Company and its stockholders of the consideration to be paid by the Company in the acquisition. The Company completed the acquisition following the approval of the special committee. In January 2020, the Company filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.
Series C Convertible Redeemable Preferred Stock
The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors (the “Preferential Dividends”). From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the “Dividend Ratchet”). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the “PIK Dividends”).
Each share of Series C Preferred is initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (the “Conversion Price”). One of the requirements of the Certificate of Designations is that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The “Reporting Adjustment Period” is the first 90-trading day period commencing on or after August 28, 2020 (which is the first trading day following the day that is 45 days following the date on which the Company provided notice to its stockholders of the filing of its 2019 Annual Report) during which an aggregate of at least 5.0% of the outstanding shares of common stock are traded. The Conversion Price has been adjusted as of January 7, 2021 to be $0.15091.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, (the “Conversion Cap”) plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of the date of the adjustment to the Conversion Price, effective as of January 7, 2021, the Conversion Cap equaled 16,500,000 shares of common stock, and 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares.
In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the “Series C Liquidation Amount”).
44
At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800,000 shares of Series C Preferred are outstanding, and (d) December 31, 2024, the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (the “Redemption Price”). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price.
In January 2020, the Company also entered into an Investors’ Rights Agreement with Southshore, pursuant to which the Company agreed, if requested by Southshore at any time following the 180-day period after the Company became subject to the reporting requirements under the Exchange Act, to file with the SEC a registration statement on a Form S-1 with respect to at least 40% of the common stock issuable upon conversion of the Series C Preferred then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $10 million), along with other registration rights. All reasonable expenses related to any such registration shall be borne by the Company. The Investors’ Rights Agreement further provides that, whenever the members of the Board of Directors are to be elected, Southshore will vote to elect a majority of directors comprising the Board of Directors that qualify as independent directors.
On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively.
Based on the applicable accounting guidance, the Company is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
The number of shares of common stock into which the Series C Preferred is convertible, as determined for purposes of calculating the net income (loss) per share of common stock, may not be consistent with the actual number of shares into which the Series C Preferred is convertible pursuant to the Certificate of Designations on any particular date.
As of December 31, 2020, pursuant to the Certificate of Designations, the Series C Preferred was convertible into an aggregate of 16,500,000 shares of common stock. Following the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, the Series C Preferred is convertible into an aggregate of 16,500,000 shares of common stock, representing approximately 23.1% of the fully diluted shares of capital stock of the Company (assuming the full conversion of the Series C Preferred into common stock). Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, the Series C Preferred remains convertible into an aggregate of 16,500,000 shares of common stock as of the date of filing this Annual Report.
45
The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.
Aircraft Operating Leases
As of December 31, 2020, Air Wisconsin had no operating aircraft remaining on lease. As of December 31, 2019, Air Wisconsin had 13 aircraft remaining on lease with lease terms ending within 12 months. Future minimum lease payments due under these aircraft operating leases were approximately $2.7 million as of December 31, 2019.
Debt and Credit Facilities
Aircraft Credit Agreements
In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of senior aircraft notes to a loan trustee on behalf of a senior lender (the “Lender”) and subordinated aircraft notes to the loan trustee on behalf of a subordinated lender (the “Subordinated Lender”). The senior aircraft notes and the subordinated aircraft notes were governed by seven credit agreements. Prior to December 2018, the Lender acquired all of the subordinated aircraft notes from the subordinated lender.
On December 24, 2018, Air Wisconsin entered into a debt restructuring arrangement with the Lender, as holder of all of the senior aircraft notes and subordinated aircraft notes, and a loan trustee for the Lender (the “Loan Trustee”). The seven original credit agreements were amended and restated as part of that restructuring, and those seven amended and restated credit agreements (the “Aircraft Credit Agreements”) remain in effect. Prior to the restructuring, the aggregate outstanding principal amount of the senior aircraft notes and the subordinated aircraft notes was approximately $246.8 million. Pursuant to the restructuring, the outstanding principal and accrued interest on the subordinated aircraft notes were forgiven and deemed paid in full, and the senior aircraft notes outstanding under the original credit agreements were cancelled and exchanged for notes in an outstanding principal amount of $70.0 million. All principal on the senior aircraft notes in excess of $70.0 million and all interest accrued on the senior aircraft notes prior to December 24, 2018 was forgiven and deemed paid in full. The notes issued under the Aircraft Credit Agreements (the “Aircraft Notes”) bear interest at the rate of 4% per annum and mature on December 31, 2025. Interest on the Aircraft Notes is paid quarterly. The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million commencing June 30, 2021, with certain additional amounts payable based on excess cash flow. Each Aircraft Note issued pursuant to an Aircraft Credit Agreement is secured by each aircraft acquired with the proceeds of any of the original seven credit agreements and by certain spare aircraft, spare engines and spare parts.
The Aircraft Credit Agreements contain covenants that, subject to exceptions described in the Aircraft Credit Agreements, include, without limitation, (i) require Air Wisconsin to provide certain financial and other information, (ii) provide certain inspection rights to the Loan Trustee, (iii) restrict Air Wisconsin’s ability to consolidate with or merge into any other person or sell, convey, lease or otherwise transfer all or substantially all of its assets to any other person, (iv) restrict Air Wisconsin’s ability to make payments to its affiliates, and (v) grant to the Loan Trustee security interests in certain after-acquired aircraft, spare engines and spare parts. The Aircraft Credit Agreements also contain customary events of default, including, without limitation: (a) payment defaults, (b) breach of covenants, (c) breach of representations and warranties, (d) cross-defaults, (e) certain bankruptcy-related defaults, (f) the occurrence of certain judgments, and (g) loss of first priority security interest in certain collateral. As of December 31, 2020, Air Wisconsin was in compliance with the covenants under the Aircraft Credit Agreements, and no event of default existed under the Aircraft Credit Agreements. Neither the Company nor any of its other subsidiaries has guaranteed or provided any other credit support with respect to the Aircraft Notes or other obligations of Air Wisconsin under the Aircraft Credit Agreements.
46
Other Credit Agreements
Air Wisconsin entered into a credit agreement with the Lender in June 2017 in the amount of approximately $14.4 million. This loan bore interest at a rate of 5% per annum. Principal and interest were paid quarterly, provided that the Lender on March 30, 2020 agreed to a deferral until September 30, 2020, of all interest and principal payments due between March 31, 2020 and September 29, 2020. This loan was secured by certain aircraft, spare engines and spare parts and was paid in full in December 2020.
In January 2018, Air Wisconsin entered into a second credit agreement with the Lender to borrow approximately $15.2 million in the year ended December 31, 2018. On December 24, 2018, the Lender and Air Wisconsin entered into a first amendment to that credit agreement in which the Lender agreed to make an additional loan in the amount of $5.8 million on April 30, 2019. In April 2019, Air Wisconsin entered into a second amendment with respect to the 2018 credit agreement that extended the due date of one of the payments due in the amount of $7.3 million from July 2019 to July 2020. In June 2019, Air Wisconsin entered into a third amendment to the 2018 credit agreement that changed the due date of the installment payment of $7.3 million, due July 2020, to December 2021. The amendment also provided Air Wisconsin the option to make the March 2020 and June 2020 payments under the 2017 credit agreement, totaling $7.2 million, in December 2019, in return for allowing the deferral of the December 2019 payment under the 2018 credit agreement, in the amount of $7.9 million, to be made into two installments of $4.0 million due in March and June of 2022. Air Wisconsin exercised this option. The June 2019 amendment also increased the loan amount of the 2018 credit agreement by $6.0 million, to a total of $27.0 million, and the amendment extended the maturity date to June 30, 2022, at which time the $6.0 million is also due. The loans under the 2018 credit agreement have an interest rate of 5% and a maturity date of June 30, 2022, and are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. Air Wisconsin concluded that the amendments discussed above should be classified as a troubled debt restructuring due to the Lender granting changes to the amortization schedule and extending the loan maturity dates in the amendments. The 2017 credit agreement and the 2018 credit agreement with the Lender may be referred to herein as the “Other Credit Agreements.”
SBA Loan and Treasury Payroll Support
In April 2020, Air Wisconsin entered into an agreement with a lender for a $10.0 million loan under the small business Paycheck Protection Program established under the CARES Act and administered by the SBA to promote continued employment, which loan is forgivable subject to certain conditions, such as that the proceeds be used primarily for payroll purposes. Air Wisconsin has received the full amount of that loan. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the date of filing this Annual Report, the loan has not been forgiven.
In April 2020, Air Wisconsin also entered into the PSP-1 Agreement with the Treasury for payroll support under the CARES Act in the amount of approximately $42.2 million, which was paid in several installments through October 2020. The PSP-1 Agreement contains various covenants, including that the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin could not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin could not reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent. As of December 31, 2020, Air Wisconsin has expended the amounts received and believes it has done so in accordance with the requirements of the PSP-1 Agreement.
Maintenance Commitments
Air Wisconsin has entered into three non-exclusive heavy maintenance services agreements for certain maintenance, repair and modification services with respect to airframes owned or operated by Air Wisconsin, and one exclusive engine maintenance agreement to perform certain maintenance, repair, restoration, overhaul, modification and other services on aircraft engines owned or operated by Air Wisconsin, with four maintenance and repair organizations, based on fixed pricing schedules. Two of the non-exclusive heavy maintenance services agreements are subject to certain escalation of labor rates, and have an initial term through September 2022 and December 2022, but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions as during the initial terms. The third non-exclusive heavy maintenance service agreement is for a one-year term expiring on September 11, 2021. The exclusive engine maintenance agreement is subject to an annual escalation and has an initial term through May 2021, but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions, including pricing, as during the initial term. Air Wisconsin has extended the term of this agreement for one year through May 2022. Due to reduced flying caused by the COVID-19 pandemic, Air Wisconsin’s expenditures under these agreements were significantly less in 2020 than in 2019.
47
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 us, or that engages in leasing, hedging or research and development arrangements with us.
We have no off-balance sheet arrangements of the types described in the four categories above that we believe may have material current or future effect on financial condition, liquidity or results of operations.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with generally accepted accounting principles. 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.
We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies, in our audited consolidated financial statements included in this Annual Report.
Revenue Recognition
Because our flights are distinct services that have the same pattern of transfer to the customer, satisfied over time with the measure of progress for each flight deemed to be substantially the same, the flight services promised in the capacity purchase agreement represent a series of services that are accounted for as a single performance obligation. Therefore, our contract revenues are recognized when service is provided and our performance obligation is determined on a per completed flight basis. The performance obligation of each completed flight is measured using departures.
Additionally, under the United capacity purchase agreement, we receive a fixed payment based on a daily rate for each aircraft covered by the agreement over the agreement term (“Fixed Payments”). We recognize revenue attributed to the Fixed Payments proportionate to the number of departures completed during each reporting period, relative to the estimated number of departures we anticipate completing over the remaining contract term. Due to the material decrease in completed departures in 2020 from historical levels and from anticipated future levels over the remaining contract term, we determined the amount of Fixed Payments we received in 2020 was disproportionately high relative to the number of departures we completed during 2020. As of December 31, 2020, we deferred recognizing revenue of $43.2 million in Fixed Payments we received during the 2020 calendar year. We deferred recognizing revenue of $22.5 million during the second quarter of 2020 when we had 4,663 departures, $15.4 million during the third quarter of 2020 when we had 8,527 departures, and $5.3 million during the fourth quarter of 2020 when we had 13,799 departures. The amount of deferred revenue from Fixed Payments we recognize will increase or decrease in future reporting periods depending on the number of departures we complete during such reporting period and our then-current forecast of departures we anticipate completing over the remaining contract term based on information available to us as that time. We anticipate we will continue to defer recognizing revenue in 2021 and may begin recognizing previously deferred amounts as revenue by the middle of 2021, depending upon actual and expected future departures.
48
Our revenues could be impacted by a number of factors, such as our flight schedules, terminations, weather, our estimates used to determine the amount of revenue we defer under the United capacity purchase agreement, and our ability to earn incentive payments. Under the United capacity purchase agreement, Air Wisconsin is eligible to receive incentive compensation upon the achievement of certain performance criteria (provided that, pursuant to the amendment to the United capacity purchase agreement, no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The incentives are defined in the agreement and are measured and determined on a monthly basis. At the end of each month, Air Wisconsin calculates the incentives achieved during that period and recognizes revenue attributable to the agreement accordingly, subject to the variable constraint guidance under Topic 606.
The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis.
Other revenue is immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts occurs at fair market value.
Long-Lived Assets
As of December 31, 2020, we had approximately $149.4 million of property and equipment and related assets net of accumulated depreciation. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. When considering whether or not impairment of long-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Factors that may impact our estimates used for depreciation include anticipated useful lives and estimated residual values. Estimates may be impacted by future economic uncertainties. At December 31, 2020, we had 64 aircraft in service under the United capacity purchase agreement.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2017. With few exceptions, the Company is no longer subject to state, and local income tax examinations for the years prior to 2016. As of December 31, 2020, the Company had no outstanding tax examinations.
49
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of December 31, 2020, the Company had no indebtedness, and Air Wisconsin had $107.8 million in secured indebtedness and the $10.0 SBA Loan under the Paycheck Protection Program. This includes $23.6 million of short-term indebtedness, and $94.2 million of long-term indebtedness. As of December 31, 2020 and December 31, 2019, all of Air Wisconsin’s indebtedness was subject to fixed interest rates. As a result, a hypothetical change in market interest rates would have no impact on the interest expense incurred by Air Wisconsin.
We have not generated or incurred, and do not expect to generate or incur, revenue or expenses in foreign currencies. As a result, we have not been, and do not expect to be, subject to foreign currency exchange risk.
Although airplane fuel is typically a material cost incurred by airlines, other than regional airlines, pursuant to the United capacity purchase agreement, United sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the agreement. As a result, the effect of the United capacity purchase agreement is to insulate Air Wisconsin from volatility related to changes in fuel prices.
50
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Company’s consolidated financial statements as of and for the years ended December 31, 2020 and 2019, and the Reports of Independent Registered Public Accounting Firm, are included in this Annual Report as set forth in the index.
Index to Consolidated Financial Statements
| 52-55 | ||||
| 56-57 | ||||
| 58 | ||||
| 59 | ||||
| 60 | ||||
| 61-80 |
51
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders Harbor Diversified, Inc. and Subsidiaries
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Harbor Diversified, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. |
52
| Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Deferred Revenue
As described further in Note 1 to the financial statements, under the capacity purchase agreement between the Company and United Airlines, the Company is paid a fixed amount per aircraft per day for each month during the term of the agreement. The Company recognizes revenue related to the fixed payment on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Due to the material decrease in completed flights for the year ended December 31, 2020 from historical levels and anticipated future levels in periods within the remaining contract term, Air Wisconsin determined that the amount of the fixed payment it received was disproportionately high relative to anticipated fixed revenue for future periods due to fewer flights completed. Accordingly, Air Wisconsin deferred recognizing revenue in the amount of $43.2 million in the year ended December 31, 2020. We identified the determination of the deferred revenue as a critical audit matter.
The principal considerations for our determination that the deferred revenue is a critical audit matter are that auditing the deferred revenue calculation required extensive audit effort due to the estimation uncertainty of the forecasted flights over the term of the contract resulting from the COVID-19 pandemic.
Our audit procedures related to the deferred revenue included the following, among others:
• We obtained an understanding of and evaluated the design of controls over the Company’s calculation of deferred revenue
• We assessed the methodology and assumptions used by the Company in the deferred revenue calculation;
• We tested the forecasted departures and validating the completeness and accuracy of the of the underlying data;
• We compared management’s forecasted departures to the historical activity, existing flight schedules with United Airlines and industry trends. We evaluated management’s ability to accurately forecast flight activity by performing hindsight analysis comparing actual historical flights to past flights, including forecast developed during the COVID-19 pandemic; and
• We recalculated the deferred revenue balance as of December 31, 2020. |
53
| Series C Convertible Redeemable Preferred Stock
As described further in Note 12 to the financial statements, in January 2020, the Company completed an acquisition of three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of the Company’s Series C Convertible Redeemable Preferred Stock with an aggregate value of $13.2 million. The Company accounts for its Series C Convertible Preferred in accordance with the guidance in Accounting Standards Codification Topic 480, Distinguishing Liabilities from Equity Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption and conversion rights, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets. We identified the accounting for the Series C Convertible Preferred Stock as a critical audit matter.
The principal considerations for our determination that the accounting for the Series C Convertible Preferred Stock is a critical audit matter included the significant complexity of the relevant accounting guidance, as well as the extent of management judgments involved in the application of that guidance.
Our audit procedures related to the Series C Convertible Preferred Stock transaction included the following, among others.
• We obtained an understanding of and evaluated the design of controls over the Company’s application of accounting treatment for complex and non-routine transactions.
• We obtained and read the Investors’ Rights Agreement and the Purchase Agreement and compared the relevant terms to management’s assessment memo of the accounting for the Series C Convertible Stock transaction.
• In consultation with national office resources, we evaluated the reasonableness of management’s accounting treatment of the Series C Convertible Stock transaction, specifically, its classification in mezzanine equity; and
• We utilized our valuation specialists to test the fair value assessment of the three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines by using the market approach method.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Milwaukee, Wisconsin April 1, 2021 |
54
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Harbor Diversified, Inc. and Subsidiaries
Appleton, Wisconsin
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Harbor Diversified, Inc. and Subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Emphasis of Matter
As discussed in Notes 2 to the consolidated financial statements, the Company has been materially impacted by the outbreak of a novel coronavirus (COVID-19), which was declared a global pandemic by the World Health Organization in March 2020. On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Securities (CARES) Act, which provides certain relief as a result of the COVID-19 outbreak. The Company is currently evaluating how the CARES Act will impact its financial position, results of operations, and cash flows. Our opinion is not modified with respect to these matters.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor from 2012 to 2020.
Madison, Wisconsin
July 10, 2020
55
Harbor Diversified, Inc. and Subsidiaries
Consolidated Balance Sheets (in thousands)
|
December 31, |
2020 | 2019 | ||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 130,373 | $ | 69,454 | ||||
| Restricted cash |
820 | 819 | ||||||
| Accounts receivable, less allowance of $59 as of December 31, 2020 and $129 as of December 31, 2019 |
7,977 | 5,525 | ||||||
| Spare parts and supplies, less allowances of $9,649 as of December 31, 2020 and $8,389 as of December 31, 2019 |
5,937 | 7,819 | ||||||
| Contract costs |
433 | 400 | ||||||
| Prepaid expenses and other |
2,310 | 1,003 | ||||||
|
|
|
|
|
|||||
| Total Current Assets |
147,850 | 85,020 | ||||||
|
|
|
|
|
|||||
| Property and Equipment |
||||||||
| Flight property and equipment |
258,981 | 242,613 | ||||||
| Ground property and equipment |
8,127 | 8,305 | ||||||
| Less accumulated depreciation |
(117,717 | ) | (99,680 | ) | ||||
|
|
|
|
|
|||||
| Net Property and Equipment |
149,391 | 151,238 | ||||||
|
|
|
|
|
|||||
| Other Assets |
||||||||
| Operating lease right of use asset |
8,582 | 24,026 | ||||||
| Intangibles |
5,300 | 5,300 | ||||||
| Long-term investments |
4,275 | 4,275 | ||||||
| Long-term contract costs |
566 | 867 | ||||||
| Long-term note receivable |
32,440 | — | ||||||
| Other |
2,049 | 1,906 | ||||||
|
|
|
|
|
|||||
| Total Other Assets |
53,212 | 36,374 | ||||||
|
|
|
|
|
|||||
| Total Assets |
$ | 350,453 | $ | 272,632 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
56
Harbor Diversified, Inc. and Subsidiaries
Consolidated Balance Sheets (in thousands)
|
December 31, |
2020 | 2019 | ||||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current Liabilities |
||||||||
| Accounts payable |
$ | 11,773 | $ | 16,608 | ||||
| Accrued payroll and employee benefits |
14,761 | 15,474 | ||||||
| Current portion of operating lease liability |
1,361 | 6,311 | ||||||
| Other accrued expenses |
345 | 327 | ||||||
| Contract liabilities |
18,443 | 8,342 | ||||||
| Income taxes payable |
107 | 213 | ||||||
| Current portion of long-term debt (stated principal amount of $20,922 as of December 31, 2020 and $7,198 as of December 31, 2019) |
23,652 | 12,845 | ||||||
|
|
|
|
|
|||||
| Total Current Liabilities |
70,442 | 60,120 | ||||||
|
|
|
|
|
|||||
| Other Liabilities |
||||||||
| Long-term debt (stated principal amount of $86,066 as of December 31, 2020 and $96,988 as of December 31, 2019) |
94,186 | 107,838 | ||||||
| Long-term promissory note |
4,275 | 4,275 | ||||||
| Deferred tax liability |
6,200 | 2,599 | ||||||
| Long-term operating lease liability |
4,351 | 10,538 | ||||||
| Long-term contract liabilities |
7,780 | 8,086 | ||||||
| Deferred revenue, net of current portion |
30,720 | — | ||||||
| Other |
2,774 | 1,655 | ||||||
|
|
|
|
|
|||||
| Total Long-Term Liabilities |
150,286 | 134,991 | ||||||
|
|
|
|
|
|||||
| Commitments and Contingencies (Note 8) |
||||||||
| Mezzanine Equity |
||||||||
| Series C Convertible Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at December 31, 2020 and none at December 31, 2019 |
13,200 | — | ||||||
| Stockholders’ Equity |
||||||||
| Common Stock, $0.01 par value, 100,000,000 shares authorized, 55,481,140 shares issued and 54,863,305 shares outstanding at December 31, 2020 and December 31, 2019 |
555 | 555 | ||||||
| Additional paid-in capital |
288,221 | 288,980 | ||||||
| Retained deficit |
(171,770 | ) | (211,533 | ) | ||||
| Treasury stock |
(481 | ) | (481 | ) | ||||
|
|
|
|
|
|||||
| Total Stockholders’ Equity |
116,525 | 77,521 | ||||||
|
|
|
|
|
|||||
| Total Liabilities and Stockholders’ Equity |
$ | 350,453 | $ | 272,632 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
57
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except share values)
| Year ended December 31, |
2020 | 2019 | ||||||
| Operating Revenues |
||||||||
| Contract revenues |
$ | 185,866 | $ | 263,495 | ||||
| Contract services and other |
83 | 110 | ||||||
|
|
|
|
|
|||||
| Total Operating Revenues |
185,949 | 263,605 | ||||||
|
|
|
|
|
|||||
| Operating Expenses |
||||||||
| Payroll and related costs |
99,100 | 126,505 | ||||||
| Aircraft fuel and oil |
55 | 172 | ||||||
| Aircraft maintenance, materials and repairs |
27,350 | 57,827 | ||||||
| Aircraft rent |
6,713 | 43,118 | ||||||
| Other rents |
4,580 | 8,372 | ||||||
| Depreciation, amortization and obsolescence |
27,222 | 25,238 | ||||||
| CARES Act payroll support program |
(42,185 | ) | — | |||||
| Purchased services and other |
19,764 | 23,235 | ||||||
|
|
|
|
|
|||||
| Total Operating Expenses |
142,599 | 284,467 | ||||||
|
|
|
|
|
|||||
| Income (Loss) From Operations |
43,350 | (20,862 | ) | |||||
|
|
|
|
|
|||||
| Other Income (Expense) |
||||||||
| Interest income |
628 | 1,271 | ||||||
| Interest expense |
(1,736 | ) | (1,806 | ) | ||||
| Other |
(19 | ) | 2,505 | |||||
|
|
|
|
|
|||||
| Total Other Income (Expense) |
(1,127 | ) | 1,970 | |||||
|
|
|
|
|
|||||
| Net Income (Loss) Before Taxes |
42,223 | (18,892 | ) | |||||
| Income Tax Expense |
2,460 | 322 | ||||||
|
|
|
|
|
|||||
| Net Income (Loss) |
$ | 39,763 | $ | (19,214 | ) | |||
| Preferred Stock Dividends |
$ | 759 | $ | — | ||||
|
|
|
|
|
|||||
| Net Income (Loss) available to Common Stockholders |
$ | 39,004 | (19,214 | ) | ||||
|
|
|
|
|
|||||
| Basic earnings (loss) per share |
$ | 0.71 | $ | (0.35 | ) | |||
| Diluted earnings (loss) per share |
$ | 0.56 | $ | (0.35 | ) | |||
| Weighted average common shares: |
||||||||
| Basic |
54,863 | 54,863 | ||||||
| Diluted |
71,199 | 54,863 | ||||||
See accompanying notes to consolidated financial statements.
58
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (in thousands)
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock |
Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Repurchased Stock |
Amount | Additional Paid-In Capital |
Retained Deficit |
Cost of Repurchased Stock |
Total Stockholders’ Equity |
||||||||||||||||||||||||||||
| Balance, December 31, 2018 |
— | $ | — | 54,863 | 618 | $ | 555 | $ | 288,980 | $ | (192,319 | ) | $ | (481 | ) | $ | 96,735 | |||||||||||||||||||
| Net Loss |
— | — | — | — | — | — | (19,214 | ) | — | (19,214 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2019 |
— | — | 54,863 | 618 | $ | 555 | $ | 288,980 | $ | (211,533 | ) | $ | (481 | ) | $ | 77,521 | ||||||||||||||||||||
| Net income |
— | — | — | — | — | — | 39,763 | — | 39,763 | |||||||||||||||||||||||||||
| Dividend |
— | — | — | — | — | (759 | ) | — | — | (759 | ) | |||||||||||||||||||||||||
| Preferred Stock |
4,000 | 13,200 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Balance, December 31, 2020 |
4,000 | $ | 13,200 | 54,863 | 618 | $ | 555 | $ | 288,221 | $ | (171,770 | ) | $ | (481 | ) | $ | 116,525 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
See accompanying notes to consolidated financial statements.
59
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
| Year ended December 31, |
2020 | 2019 | ||||||
| Cash Flows From Operating Activities |
||||||||
| Net income (loss) |
$ | 39,763 | $ | (19,214 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation, amortization and obsolescence allowance |
27,222 | 25,238 | ||||||
| Aircraft lease termination costs |
1,263 | 19,353 | ||||||
| Amortization of contract costs |
(2,502 | ) | (3,725 | ) | ||||
| Amortization of engine overhauls |
1,265 | 4,067 | ||||||
| Deferred income taxes |
3,601 | 744 | ||||||
| Loss on disposition of property |
648 | 2,528 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(2,444 | ) | 3,989 | |||||
| Notes Receivable |
(32,440 | ) | — | |||||
| Spare parts and supplies |
622 | (402 | ) | |||||
| Prepaid expenses and other |
(1,885 | ) | 2,466 | |||||
| Operating lease right of use asset |
2,520 | (1,987 | ) | |||||
| Accounts payable |
(7,790 | ) | (7,706 | ) | ||||
| Accrued payroll and employee benefits |
(713 | ) | (372 | ) | ||||
| Other accrued expenses |
18 | (996 | ) | |||||
| Long-term deferred revenue |
30,720 | — | ||||||
| Contract liabilities |
12,297 | 1,417 | ||||||
| Income taxes payable |
(106 | ) | (100 | ) | ||||
| Other long-term liabilities |
1,119 | 246 | ||||||
|
|
|
|
|
|||||
| Net Cash Provided by Operating Activities |
73,178 | 25,546 | ||||||
|
|
|
|
|
|||||
| Cash Flows From Investing Activities |
||||||||
| Additions to property and equipment |
(8,749 | ) | (21,498 | ) | ||||
| Proceeds on disposition of property and equipment |
95 | 562 | ||||||
|
|
|
|
|
|||||
| Net Cash Used in Investing Activities |
(8,654 | ) | (20,936 | ) | ||||
|
|
|
|
|
|||||
| Cash Flows From Financing Activities |
||||||||
| Repayments of long-term debt |
(12,845 | ) | (7,198 | ) | ||||
| Proceeds from note payable |
10,000 | 11,790 | ||||||
| Dividends paid |
(759 | ) | — | |||||
|
|
|
|
|
|||||
| Net Cash (Used in) Provided by Financing Activities |
(3,604 | ) | 4,592 | |||||
|
|
|
|
|
|||||
| Increase in Cash, Cash Equivalents and Restricted Cash |
60,920 | 9,202 | ||||||
| Cash, Cash Equivalents and Restricted Cash, beginning of year |
70,273 | 61,071 | ||||||
|
|
|
|
|
|||||
| Cash, Cash Equivalents and Restricted Cash, end of year |
$ | 131,193 | $ | 70,273 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
See Note 14 for supplemental cash flow information.
60
Harbor Diversified, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in thousands)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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 Harbor Diversified, Inc. and subsidiaries (collectively, the Company).
Harbor Diversified, Inc. is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), which is the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. The Company is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which is a non-operating entity with no material assets.
Description of Operations
The Company has principal lines of business focused on (1) providing air transportation through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin and (3) providing flight equipment financing to Air Wisconsin.
The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement (the United capacity purchase agreement) with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020. For additional information, refer to Note 3, Capacity Purchase Agreement with United.
Air Wisconsin operates as a United Express carrier with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs.
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 Accounting Standards Codification (ASC) 280, “Segment Reporting,” we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flying services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the Board of Directors. The chief operating decision maker 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 operate as one operating and reportable segment.
As further discussed below, substantially all of our operating revenue in 2020 and 2019 was derived from operations associated with United.
Contract and Other Revenues
The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. United pays the Company a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with additional incentives primarily based on flight completion, on-time performance, and customer satisfaction ratings. Under this agreement, the Company’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues.
61
The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. The Company and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis.
Under the United capacity purchase agreement, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria (provided that, pursuant to the amendment to the United capacity purchase agreement, no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The incentives are defined in the agreement and are determined and measured on a monthly basis. At the end of each month during the term of the agreement, the Company calculates the incentives achieved during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).
As discussed above, under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Due to the material decrease in completed flights for the year ended December 31, 2020 from historical levels and anticipated future levels in periods within the remaining contract term, Air Wisconsin determined that the amount of the fixed payments it received was disproportionately high relative to anticipated fixed revenue for future periods due to fewer flights completed in the year ended December 31, 2020. Air Wisconsin anticipates the future number of flights it will complete over the remainder of the agreement will significantly increase from 2020 levels. Accordingly, Air Wisconsin deferred recognizing revenue of $43,220 in the year ended December 31, 2020. Air Wisconsin’s deferred revenue related to the fixed portion will adjust over the remaining contract term based on the number of flights completed each reporting period relative to the number of flights anticipated over the remaining contract term. The current portion of the deferred revenue, in the amount of $12,500, is recorded as part of contract liabilities, and the long-term portion of the deferred revenue, in the amount of $30,720, is recorded as deferred revenue on the consolidated balance sheets. Due to fewer flights during the year ended December 31, 2020, Air Wisconsin also recognized less non-refundable upfront fee revenue, as well as lower fulfillment costs, both of which are being amortized over the remaining term of the agreement in proportion to flights flown. During the year ended December 31, 2020, Air Wisconsin recorded $2,504 of revenue from upfront fees and $269 of fulfillment costs, compared to $3,725 and $400 for the year ended December 31, 2019, respectively. The timing of the recognition of these items in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown in the same period.
The amount of revenue recognized for the year ended December 31, 2020 that was previously recorded as a contract liability is $7,116.
In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement (CPA amendment), which, among other things, provided for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours caused by the COVID-19 pandemic, and as a result of the CPA amendment, management determined, using a significant amount of judgement, that from an accounting perspective, a new performance obligation was created by United requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United stand ready rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation will be recognized over time on a straight line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined by the CPA amendment. For the year ending December 31, 2020, Air Wisconsin recorded $21,392 in revenue related to this performance obligation. This amount was recorded in tong-term notes receivable on the balance sheet as of December 31, 2020.
As part of the CPA amendment, Air Wisconsin also settled outstanding issues, including the opening and closing of maintenance bases. United agreed to accrue a liability to Air Wisconsin in the amount of $11,048 along with a cash settlement of $670. These amounts were recognized using a cumulative catchup adjustment based on prior and future expected departures. In total, Air Wisconsin recognized revenue of $7,307 and deferred the remaining portion which will be recognized in proportion to future departures.
These accrued amounts contain a significant financing component and any interest income is separately reported in the statement of operations. Further, the accrued amounts are evidenced by notes receivable payable by United to Air Wisconsin. As of December 31, 2020, these notes totaled $32,440, bore interest at the rate of 4.5%, and had a maturity date of February 28, 2023. As of December 31,
2020, interest receivable on these notes totaled $309.
United makes provisional cash payments to the Company during each month of service based on monthly flight schedules. These provisional cash payments are reconciled based on actual completed flights after each month’s flight activity is completed. As of December 31, 2020, United owed Air Wisconsin $1,180 which is recorded in “Accounts receivable less allowances” on the balance sheet.
Other revenues are immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts generally is fair market value.
Cash and Cash Equivalents
Investments and deposits with a maturity of three months or less when acquired and money market funds are considered cash and cash equivalents.
62
Restricted Cash
Restricted cash represents amounts escrowed in an interest-bearing account relating to the Company’s letters of credit.
Spare Parts and Supplies
Expendable parts are stated at average cost less an obsolescence allowance. The Company provides for an allowance for obsolescence after considering the useful life of the aircraft fleet, the estimated cost of expendable parts expected to be on hand at the end of the useful life and the estimated salvage value of the parts. This allowance is based on management estimates and is subject to change. Expendable parts are charged to expense when used. Expendable parts that are repairable are returned to inventory at the average cost of comparable parts, less a reserve for scrap. Supplies are stated at average cost.
Property and Equipment and Depreciation
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
| Assets |
Depreciable Life | Current Residual Value | ||||
| Aircraft |
7 years | $ | 50,000 | |||
| Rotable parts |
7 years | 10 | % | |||
| Spare engines |
7 years | $ | 25,000 | |||
| Ground equipment |
up to 10 years | 0 | % | |||
| Office equipment |
up to 10 years | 0 | % | |||
| Leasehold improvements |
Shorter of asset or lease life | 0 | % | |||
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop event. Lotus’ engine maintenance costs are expensed.
Depreciation expense in 2020 and 2019 was $25,719 and $23,578, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for potential impairment and records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and determined that no quantitative impairment tests were needed as of December 31, 2020.
Impairment of Intangible Assets
Indefinite-lived intangible assets are not subject to amortization but are subject to an annual assessment for impairment by applying a fair-value-based test. Since Air Wisconsin’s trade names and air carrier certificate have indefinite lives, there is no amortization. The Company evaluated these assets for impairment and determined that no impairment existed as of December 31, 2020 or 2019.
63
Maintenance
The Company operates its aircraft under a continuous inspection and maintenance program. The normal cost of recurring maintenance is expensed when incurred except for planned major maintenance activities for engines where the deferral method of accounting is applied.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2017. With a few exceptions, the Company is no longer subject to state or local income tax examinations for the years prior to 2016. As of December 31, 2020, the Company had no outstanding tax examinations.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company had accrued $99 and $121 for the payment of interest and penalties at December 31, 2020 and 2019, respectively.
Comprehensive Income
The Company does not have any components of comprehensive income and, as of December 31, 2020 and 2019, comprehensive income is equal to net income reported in the consolidated statements of operations.
Concentration of Credit Risk
The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.
Concentration of Customer Risk
Substantially all the Company’s revenues in the years ended December 31, 2020 and 2019 were derived from the United capacity purchase agreement. Refer to Note 3 for additional information.
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
64
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, notes receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Long-term investments are held-to-maturity debt securities and are reported at amortized cost.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations annually, and it is possible that an asset or liability may be classified differently from year to year. However, the Company expects that changes in classifications between levels will be rare. The Company classifies money market funds and deposits as Level 1 and long-term investments as Level 2.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (Topic 842). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the balance sheet. The accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted Topic 842 effective January 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).” This update provides an optional approach that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years as 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, however, an adjustment was not necessary to opening retained earnings.
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 financial statements of operations and statement of cash flows. The Company’s prepaid aircraft rents and accrued aircraft rents that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019.
As a result of the adoption of the new lease accounting guidance, the Company recognized the following ROU assets and lease liabilities as of January 1, 2019:
| Right-of-use assets – operating leases |
$ | 70,892 | ||
| Lease liabilities – operating leases |
$ | 40,921 |
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The Company adopted ASU 2018-13 as of January 1, 2020. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company’s results of operations, financial position, or related disclosures.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 introduces a new accounting model known as Current Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivable. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt (Subtopic 470-20); Debt with Conversion and Other Options and Derivatives and Hedging (Subtopic 815-40); Contracts in Entity’s Own Equity (ASU 2020-06). ASU 2020-06 amends the guidance on convertible instruments and the derivatives scope exception for contracts and convertible instruments on an entity’s own equity. This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2020. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.
65
Reclassification
In accordance with ASU 2016-18, restricted cash on the statement of cash flows for the period ended December 31, 2019, has been reclassified to be included in the beginning and ending balances of Cash and Cash Equivalents. The restricted cash was previously reported in the Cash Flows from Investing Activities section of the statement.
2. Liquidity
The Company’s ability to meet its liquidity needs is dependent upon generating cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company’s operations will be sufficiently profitable, or that additional funds will be available, to meet its future liquidity needs.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and, in response, federal, state, local, and foreign governments implemented “shelter-in-place” and “stay-at-home” orders and guidelines, quarantine orders, travel restrictions, and other similar restrictions in an attempt to control the spread and mitigate the impact of COVID-19. As of the date of this Annual Report, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which Air Wisconsin operates.
The sharp decline in airline travel demand due to the COVID-19 pandemic had a material, negative impact on the airline industry in the year ended December 31, 2020, affecting United, and in turn, Air Wisconsin’s revenue and results of operations. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic demand related to the COVID-19 pandemic during the first quarter of 2020 and, as of the date of this filing, has stated that it expects demand will remain suppressed in 2021. In response to lower demand for air travel, in the months of April through December 2020, United cut its scheduled capacity by between approximately 50% and 90%. As a result, beginning in March 2020, United significantly reduced Air Wisconsin’s scheduled departures and block hours actually flown, and temporarily ceased Air Wisconsin’s operations at Washington-Dulles from May 2020 through August 2020. As of December 31, 2020, Air Wisconsin provided scheduled passenger service to 69 cities in 28 states and provinces as compared to 81 cities in 31 states as of December 31, 2019. In July 2020, Air Wisconsin informed approximately 871 employees that they might be furloughed or laid off as of October 1, 2020, through notices given pursuant to the federal Worker Adjustment and Retraining Notification (WARN) Act; and on October 1, 2020, Air Wisconsin furloughed or laid off approximately 305 employees, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, 116 of those employees who were furloughed have been recalled, accepted the recall offer and remain employed by Air Wisconsin. Through notices given in January 2021 pursuant to the WARN Act, Air Wisconsin informed approximately 150 pilots, each of whom had received the October 2020 WARN Act notices, that they might be furloughed on April 1, 2021, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, no furloughs have yet been issued pursuant to these notices.
While the continued severity and duration of the impacts of the COVID-19 pandemic are difficult to predict, the COVID-19 pandemic has continued to impact the Company’s financial condition and results of operations through the date of this Annual Report, which the Company expects to continue in the near term and result in a material impact on our financial condition, liquidity, and results of operations in future periods. Air Wisconsin has taken a number of measures to mitigate the health risks and economic impact of the COVID-19 pandemic. In addition, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations. The Company is taking actions based on currently available information to address the changing business environment; however, it cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on its results of operations, financial condition, or liquidity.
66
Since a portion of the Company’s revenue is fixed due to the structure of the United capacity purchase agreement, the impact of the COVID-19 pandemic on the Company’s financial position may be partially mitigated or offset. However, if United ceases to pay the full amount required under the agreement, whether due to its own financial disruption resulting from the COVID-19 pandemic, as a result of a dispute with the Company, or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition, and liquidity. The fixed amount received is based on a fixed contractual rate and number of covered aircraft, while variable revenue earned is based on the number of block hours and departures. Variable revenues have been significantly reduced, due to the lower number of flights. In addition, a certain portion of the fixed amount received has been deferred based on future expected flight activity, since fixed revenue is allocated over current and expected future departures through the end of the contract term. The Company may continue to experience ongoing or further reductions in revenues.
The travel restrictions, guidelines and other initiatives adopted to limit the spread of the virus have had, and will continue to have, a material adverse impact on passenger demand for air travel. As a result of this decline in demand, and the subsequent capacity reductions by United, the Company’s approximately 1,271 departures and 1,759 scheduled block hours in June 2020 were approximately 86% and 88% less than its departures and scheduled block hours in June 2019, respectively. While the Company’s monthly departures and scheduled block hours have been gradually increasing on an absolute basis since June, the Company expects to continue to experience significantly fewer departures and block hours on a comparative basis relative to historical levels for the foreseeable future.
Cost Reduction Initiatives
In response to these developments, during the year ended December 31, 2020 the Company implemented cost reduction initiatives seeking to mitigate the impact of the COVID-19 pandemic on the Company’s operations, financial condition and liquidity, while also protecting the safety of the Company’s customers and employees. These measures have included, but are not limited to, the following:
(1) Reducing or deferring employee-related costs, including:
(i) Offering voluntary short-term unpaid leaves to employees and furloughing certain employees, and
(ii) Deferring the employer’s portion of employees’ social security tax payments.
(2) Reducing other non-employee costs in the current fiscal year, including:
(i) Delaying planned non-essential heavy airframe maintenance events primarily as a result of reduced flight schedules,
(ii) Delaying non-essential maintenance events associated with engines and rotable parts primarily as a result of reduced flight schedules,
(iii) Seeking concessions from third-party suppliers, and
(iv) Reducing or suspending certain discretionary spending.
Payroll Support
In March 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
In addition to the cost reduction measures discussed above, in April 2020, Air Wisconsin applied to a lender for a $10,000 loan (SBA Loan) under the small business Paycheck Protection Program (PPP) established under the CARES Act and administered by the Small Business Administration (SBA). The entire loan amount was received by Air Wisconsin on April 13, 2020. The application for these funds required Air Wisconsin to certify in good faith that current economic uncertainty made the loan request necessary to support the ongoing operations of Air Wisconsin. Air Wisconsin was also required to certify that the loan funds would be used to retain workers and maintain payroll, or to make mortgage payments, lease payments, and utility payments. The SBA Loan bears interest at a rate of 1.0% per annum. The SBA Loan originally had a two-year term, and monthly principal and interest payments were originally deferred for six months after the date of the loan. Pursuant to the Flexibility Act signed into law in June 2020 (Flexibility Act), the maturity date may be, but has not yet been, extended to 2025, and the interest deferral has been extended to 2021. The SBA Loan may be prepaid at
67
any time without penalty. Under the CARES Act, Air Wisconsin can apply for and be granted forgiveness for all or a portion of the SBA Loan. Such forgiveness, if any, will be determined, subject to limitations, based on the use of the loan proceeds for specified purposes, provided that not more than 40% of the forgiven amount may be for non-payroll costs. While Air Wisconsin believes that its use of the loan proceeds will meet the conditions for forgiveness of the SBA Loan, there can be no assurance that Air Wisconsin will obtain forgiveness of the loan in whole or in part. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the filing of this Annual Report, the loan has not been forgiven. Air Wisconsin is in compliance with the terms of the SBA Loan.
In addition, in April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (PSP-1 Agreement) with respect to payroll support (Treasury Payroll Support) from the U.S. Department of Treasury (Treasury) under the payroll support program (Payroll Support Program) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $42,185 in the twelve month period ended December 31, 2020. Air Wisconsin believes that in the year ended December 31, 2020, it expended the amount received in compliance with the PSP-1 Agreement. The PSP-1 Agreement contains various covenants, including that the proceeds from the Payroll Support Program must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin could not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin could not reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent. Further, the United capacity purchase agreement, Air Wisconsin’s credit agreements and the agreements with the Treasury for payroll support all contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. If Air Wisconsin fails to comply with its obligations under the PSP-1 Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the agreement. Subject to the outcome of the audit, Air Wisconsin believes it is in compliance with the terms of the PSP-1 Agreement. For additional information, refer to Note 8.
In December 2020, Congress adopted, and the President signed, the federal Consolidated Appropriations Act of 2021 (PSP Extension Law), Subtitle A of Title IV of Division N of which provides for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement (the “PSP-2 Agreement”), which is substantially similar to the PSP-1 Agreement. Air Wisconsin expects to receive approximately $28,326 pursuant to the PSP-2 Agreement, approximately $15,536 of which was received in March 2021 and the balance of which is expected to be received in April 2021.
In March 2021, Congress adopted, and the President signed, the federal American Rescue Plan Act of 2021 (the American Rescue Plan), Subtitle C of Title VII of which provides further payroll support to eligible air carriers. Air Wisconsin expects to apply for payroll support under the American Rescue Plan and expects that it will be required to enter into an agreement substantially similar to the PSP-1 Agreement and the PSP-2 Agreement, if it receives payroll support under the American Rescue Plan.
The proceeds of the Treasury Payroll Support under the CARES Act are recorded in cash and cash equivalents when received and were recognized as a reduction in expense under “CARES Act Payroll Support Program” in the Company’s consolidated statements of operations over the periods that the funds are intended to offset payroll expenses. In 2020 Air Wisconsin received and recognized approximately $42,185 under the Payroll Support Program.
In light of the measures discussed above that the Company has implemented to mitigate the impact of the COVID-19 pandemic on its operations, financial condition and liquidity, the Company currently believes its available working capital and anticipated cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months from the date of filing this Annual Report.
68
3. Capacity Purchase Agreement with United
In February 2017, Air Wisconsin entered into the United capacity purchase agreement with United Airlines, Inc. to operate up to 65 CRJ-200 regional jet aircraft. In October 2020, Air Wisconsin entered into an amendment to the agreement, which, among other things, (i) set the number of aircraft covered by the agreement at 63; (ii) settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the agreement; (iii) provided a process for determining the circumstances under which, and the amount for which, United would pay or reimburse Air Wisconsin for costs incurred in connection with the opening and closing of maintenance and crew bases in response to alterations to Air Wisconsin’s operating schedule made at United’s direction; (iv) provided for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks; (v) modified the minimum and maximum daily block hour scheduling parameters; (vi) provided that no incentive compensation would be paid for the period from April 1, 2020 through September 30, 2020; (vii) terminated the limited guarantee by the Company and AWAC of the monetary obligations of Air Wisconsin under the United capacity purchase agreement; (viii) terminated certain provisions in the United capacity purchase agreement that were previously waived by United in March 2020, which constrained Air Wisconsin from flying for another air carrier; and (ix) amended United’s option to extend the term of the agreement such that United now has an option to extend the term for a period of no less than two years (and up to three years, in its discretion), and a second option to extend for an additional two-year period, subject to mutual agreement by Air Wisconsin and United as to compensation.
4. Property and Equipment
The following presents Air Wisconsin’s aircraft as of December 31, 2020 and 2019.
| December 31, 2020 |
Owned | Leased | ||||||
| CRJ-200 |
64 | 0 | ||||||
|
|
|
|
|
|||||
| December 31, 2019 |
Owned | Leased | ||||||
| CRJ-200 |
51 | 13 | ||||||
|
|
|
|
|
|||||
As part of an agreement reached in January 2018 Bombardier Inc. (BBD) agreed to pay Air Wisconsin $25,192 in installments through September 2019, provided that BBD had the right to deliver to Air Wisconsin the unencumbered title to certain CRJ-200 aircraft in satisfaction of any installment payments that remained at the time of such delivery. Under the agreement, Air Wisconsin and BBD also agreed to terminate all residual value guarantee agreements (RVG’s) on 35 owned aircraft and to terminate certain other agreements that limited BBD’s obligations under such guarantee agreements.
On July 1, 2019, BBD exercised its right under the agreement and delivered to Air Wisconsin 14 CRJ-200 aircraft which had previously been leased to Air Wisconsin. The delivery of the aircraft was in lieu of remaining installment payments due to Air Wisconsin totaling $8,212. All installment payments received from BBD prior to July 1, 2019, were recorded as “Other income” in the statements of operations and amounted to $2,537 for the year ended December 31, 2019.
69
Air Wisconsin recorded the 14 CRJ-200 aircraft as “Flight property and equipment” on the Balance Sheet at their fair market value based on recent asset valuations completed around that time. Fair market value was determined to be $15,832 based on one hundred and forty dollars per remaining engine cycle with a minimum value of $50 per engine, and each of the aircraft airframes was assigned a fair market value of $100. The airframes and engines were then depreciated in accordance with the table under “Property and Equipment and Depreciation” as set forth in Note 1. The transaction resulted in a lease termination expense of $19,539 which is included as part of “Aircraft rent” on the 2019 statement of operations. The lease termination expense, net of the recording of the assets at fair market value as noted above, included a charge for the following Balance Sheet items at the time the aircraft were acquired in July 2019:
| • | Right-of-use assets in the amount of $26,275, offset by lease liabilities of $1,182. |
| • | Unamortized engine overhauls of $9,535, recorded under “Flight property and equipment” on the Balance Sheet, related to the 28 engines acquired as part of the transaction. |
| • | Leasehold improvements with a remaining book value of $738 and included on the Balance Sheet as “Flight property and equipment,” related to the 14 acquired aircraft. |
| • | Other lease and financing costs incurred at the inception of the aircraft leases and recorded on the Balance Sheet as “Other assets,” had a remaining net book value of $184 at the acquisition date. |
In January 2020, the Company completed an asset acquisition from Southshore Leasing, LLC (Southshore Leasing), through its affiliates (the Southshore Affiliates and, together with Southshore Leasing, Southshore), of three CRJ-200 regional jets, each having two General Electric (GE) engines, plus five additional GE engines, in exchange for the issuance of shares of the Company’s Series C Convertible Redeemable Preferred Stock (Series C Preferred). The Company had leased each of these regional jets and engines prior to the acquisition. Refer to Note 12 for additional information.
In May 2020, Air Wisconsin completed an acquisition of eight CRJ-200 regional jets, each having two GE engines, for $3,000. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition.
In September 2020, Air Wisconsin completed an acquisition of two CRJ-200 regional jets, each having two GE engines, for $818. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition.
5. Income Taxes
The income tax provision consists of the following:
| Year ended December 31, |
2020 | 2019 | ||||||
| Current Benefit |
||||||||
| Federal |
$ | (1,061 | ) | $ | (247 | ) | ||
| State |
(80 | ) | (174 | ) | ||||
|
|
|
|
|
|||||
| Total Current Benefit |
(1,141 | ) | (421 | ) | ||||
|
|
|
|
|
|||||
| Deferred Expense (Benefit) |
||||||||
| Federal |
3,646 | 789 | ||||||
| State |
(45 | ) | (46 | ) | ||||
|
|
|
|
|
|||||
| Total Deferred Expense |
3,601 | 743 | ||||||
|
|
|
|
|
|||||
| Income Tax Expense |
$ | 2,460 | $ | 322 | ||||
|
|
|
|
|
|||||
70
The following is a reconciliation between a federal income tax rate of 21% in for the years ended December 31, 2020 and 2019 of income before income taxes and the effective tax rate which is derived by dividing the provision for income taxes by the income before the provision for income taxes (in thousands):
| Year ended December 31, |
2020 | 2019 | ||||||
| Computed provision for income taxes at the statutory rate |
$ | 8,867 | $ | (3,964 | ) | |||
| Increase (decrease) in income taxes resulting from: |
||||||||
| State income tax provision, net of federal income tax benefit |
875 | (830 | ) | |||||
| Non-deductible expenses |
136 | 241 | ||||||
| Refundable credits as a result of CARES Act |
(936 | ) | — | |||||
| Valuation allowance changes affecting the provision for income taxes |
(6,330 | ) | 5,873 | |||||
| Return to provision adjustments |
(83 | ) | (954 | ) | ||||
| Other, net |
(69 | ) | (44 | ) | ||||
|
|
|
|
|
|||||
| Provision for income taxes |
$ | 2,460 | $ | 322 | ||||
|
|
|
|
|
|||||
As of December 31, 2019, the Company’s deferred tax assets were primarily the result of federal and state net operating loss carryforwards. A valuation allowance of $6,330 was recorded against our gross deferred tax asset balance as of December 31, 2019. For the year ended December 31, 2020, the Company recorded a net valuation allowance release of $6,330, comprising a full-year valuation release on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, the Company achieved three years of cumulative pretax income. In addition, the scheduling of temporary differences and the projection of taxable income led management to believe that there is sufficient positive evidence to conclude that it is more likely than not that deferred tax assets are realizable. It therefore reduced the valuation allowance accordingly.
Deferred tax assets and liabilities reflect temporary differences between financial and tax reporting. Significant components of deferred tax assets and liabilities are as follows:
| December 31, |
2020 | 2019 | ||||||
| Deferred Tax Assets |
||||||||
| Accruals and reserves not currently deductible |
$ | 6,129 | $ | 6,631 | ||||
| Federal NOL and interest expense limitation carryovers |
5,803 | 13,796 | ||||||
| State NOL and interest expense limitation carryovers |
476 | 1,106 | ||||||
| Accrued and deferred compensation |
1,966 | 2,888 | ||||||
| Prepaid items |
745 | 1,198 | ||||||
| Lease liability |
1,362 | 4,052 | ||||||
| Contract liability |
1,982 | 2,543 | ||||||
| Other |
657 | 1,010 | ||||||
|
|
|
|
|
|||||
| Subtotal before valuation allowance |
19,120 | 33,224 | ||||||
| Less: valuation allowance |
— | (6,330 | ) | |||||
|
|
|
|
|
|||||
| Total Deferred Tax Assets |
19,120 | 26,894 | ||||||
|
|
|
|
|
|||||
| Deferred Tax Liabilities |
||||||||
| Property and equipment |
(23,268 | ) | (24,696 | ) | ||||
| Right-of-use asset |
(2,046 | ) | (4,791 | ) | ||||
| Other |
(6 | ) | (6 | ) | ||||
|
|
|
|
|
|||||
| Total Deferred Tax Liabilities |
(25,320 | ) | (29,493 | ) | ||||
|
|
|
|
|
|||||
| Net Deferred Income Tax Liabilities |
$ | (6,200 | ) | $ | (2,599 | ) | ||
|
|
|
|
|
|||||
At December 31, 2020 and 2019, the Company had federal net operating losses of approximately $27,583 and $60,940, respectively, and state net operating losses of approximately $9,147 and $17,897, respectively. As of December 31, 2020, the estimated effective tax rate applicable to the federal and state net operating losses are 21.0% and 2.8%, respectively. The federal net operating loss is not subject to an expiration date but is subject to an 80% of taxable income limitation after 2020, while the Company expects the state net operating losses to begin to expire in 2024. State net operating
71
losses differ with respect to expiration dates and limitations dependent on state specific regulations. For the years ended December 31, 2020 and 2019, the Company had a federal business interest carryforward of $0 and $4,724, respectively. For the years ended December 31, 2020 and 2019, the Company recorded a valuation allowance of $0 and $6,330, respectively, against federal and state deferred tax assets consisting of net operating loss carryovers and interest expense limitation carryovers. The Company has no ongoing federal or state examinations. Federal tax years 2017, 2018, and 2019 are open to examination.
Under ASC Topic 740, the accounting guidance related to uncertain tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows (in thousands):
|
December 31, |
2020 | 2019 | ||||||
| Unrecognized tax benefits at the beginning of the year |
$ | 248 | $ | 388 | ||||
| Gross decreases – lapse of statute |
(71 | ) | (140 | ) | ||||
|
|
|
|
|
|||||
| Unrecognized tax benefits at the end of the year |
$ | 177 | $ | 248 | ||||
|
|
|
|
|
|||||
| Interest and penalties in year-end balance |
$ | 99 | $ | 121 | ||||
|
|
|
|
|
|||||
6. Debt
Long-Term Debt
Long-term debt consists of the following (with interest rates as of December 31, 2020 and December 31, 2019):
|
December 31, |
2020 | 2019 | ||||||
| Notes due December 31, 2025, 4.0%(a) |
$ | 80,850 | $ | 86,497 | ||||
| Credit Agreements due through 2022, 5.0%(b) |
26,988 | 34,186 | ||||||
| Paycheck Protection Program, 2025 1.0%(c) |
10,000 | — | ||||||
|
|
|
|
|
|||||
| Total debt |
117,838 | 120,683 | ||||||
| Less: current maturities |
23,652 | 12,845 | ||||||
|
|
|
|
|
|||||
| Long-Term Debt |
$ | 94,186 | $ | 107,838 | ||||
|
|
|
|
|
|||||
| (a) | In December 2018, Air Wisconsin entered into a debt restructuring agreement with a lender (Lender), which held certain senior aircraft notes and subordinated aircraft notes. The senior aircraft notes were exchanged for notes in an aggregate principal amount of $70,000 (Aircraft Notes) and the subordinated aircraft notes were cancelled. Air Wisconsin concluded the restructuring should be classified as a troubled debt restructuring. As such, the future undiscounted interest payments were capitalized as part of the carrying value. As of December 31, 2020 and 2019, the future undiscounted interest payments that are capitalized as part of the debt are $10,850 and $16,497, respectively. |
| (b) | Air Wisconsin entered into a credit agreement with the Lender in June 2017 for a principal amount of $14,397, and a second credit agreement in January 2018 for a principal amount of $15,198, which was subsequently amended in December 2018 and again in June 2019 for additional funding of $5,755 and $6,034, respectively, and to extend the maturity date. The loans made by the Lender under these two credit agreements (Other Loans) have maturity dates of December 31, 2020 and June 30, 2022, respectively. |
| (c) | In April 2020, in connection with the PPP, Air Wisconsin issued to a lender a promissory note for an aggregate principal amount of $10,000. The amount outstanding under the note may be forgiven under certain circumstances. The Company has recorded the value of the promissory note on a relative fair value basis as $9,106 of long-term debt and $894 of current portion of long-term debt. The Company expects that principal and interest payments on the note will be deferred until August 2021, Air Wisconsin will commence payments in September 2021, and the maturity date will be April 2025. The repayment provisions of this note may be modified by the SBA. For additional information refer to Note 2. |
72
Aircraft Notes
In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of senior aircraft notes and subordinated aircraft notes. Prior to December 2018, the Lender acquired all of the subordinated aircraft notes from the subordinated lender.
On December 24, 2018, Air Wisconsin and the Lender entered into a debt restructuring arrangement whereby:
| (i) | The senior aircraft notes were exchanged for the Aircraft Notes in the aggregate principal amount of $70,000; |
| (ii) | The aggregate principal balance outstanding under the senior aircraft notes in excess of $70,000, the entire aggregate principal balance outstanding under the subordinated aircraft notes and certain notes payable in 2020, and all interest accrued on the senior aircraft notes and the subordinated aircraft notes prior to the restructuring date, including deferred amounts, was forgiven and deemed paid in full; |
| (iii) | The interest rate for the Aircraft Notes was reset to 4.0% per annum; |
| (iv) | Commencing on June 30, 2021, there is mandatory amortization of the Aircraft Notes in the aggregate amount of $3,500 semi-annually and certain additional mandatory prepayments based on excess cash flow are required; and |
| (v) | The maturity date of the Aircraft Notes was extended to December 31, 2025. |
The Aircraft Notes are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. Air Wisconsin concluded the restructuring should be classified as a troubled debt restructuring. Accordingly, the carrying value of the restructured debt was reduced to the expected future undiscounted cash flows related to its repayment, which includes future principal and interest payments of $70,000 and $10,850, respectively.
Other Credit Agreements
In June 2017, Air Wisconsin and the Lender entered into a credit agreement under which Air Wisconsin borrowed $14,397 (the 2017 Credit Agreement). These loans had an interest rate of 5% and a maturity date of December 31, 2020 and were secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. These loans were paid in full in December 2020.
On January 2018, Air Wisconsin entered into a second credit agreement with the Lender to borrow $15,198 (the 2018 Credit Agreement). In December 2018, the Lender and Air Wisconsin entered into a first amendment to the 2018 Credit Agreement in which the Lender agreed to make an additional loan in the amount of $5,755 in April 2019. In April 2019, Air Wisconsin entered into a second amendment with respect to the 2018 Credit Agreement that extended the due date of one of the payments due in the amount of $7,273 from July 2019 to July 2020. In June 2019, Air Wisconsin entered into a third amendment to the 2018 Credit Agreement that changed the due date of the installment payment of $7,273, due July 2020, to December 2021. The amendment also provided Air Wisconsin the option to make the March 2020 and June 2020 payments under the 2017 Credit Agreement in December 2019, which totaled $7,198. In return, the December 2019 payment under the 2018 Credit Agreement, in the amount of $7,925, would be deferred to be made in two installments of $3,963 each due in March and June of 2022. Air Wisconsin exercised this option. The June 2019 amendment also increased the loan amount of the 2018 Credit Agreement by $6,034, to a total of $26,987, and the amendment extended the maturity date to June 30, 2022, at which time the $6,034 is also due. The loans under the 2018 Credit Agreement have an interest rate of 5% and a maturity date of June 30, 2022 and are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts.
73
Maturities of long-term debt for the years subsequent to December 31, 2020, are as follows:
| Fiscal Year |
Amount | |||
| 2021 |
$ | 23,652 | ||
| 2022 |
26,110 | |||
| 2023 |
11,897 | |||
| 2024 |
11,644 | |||
| 2025 |
44,535 | |||
|
|
|
|||
| Total |
$ | 117,838 | ||
|
|
|
|||
The debt agreements include, among other provisions, certain non-financial covenants. At December 31, 2020 and 2019, Air Wisconsin was in compliance with the covenants of all of its debt agreements.
Long-Term Promissory Note
In July 2003, Air Wisconsin financed a hangar through the issuance of $4,275 City of Milwaukee, Wisconsin variable rate Industrial Development Bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest was payable semiannually on each May 1 and November 1. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the consolidated balance sheets. The hangar is accounted for as a right-of-use asset with a value of $3,010 as of December 31, 2020.
7. Lease Obligations
Effective January 1, 2019, the Company adopted Topic 842. Air Wisconsin leases property and training simulators under operating leases. For leases with durations longer than 12 months, the Company recorded the related operating lease right-of-use asset and operating lease liability at the present value of lease payments over the term. The Company used Air Wisconsin’s incremental borrowing rate to discount the lease payments based on information available at lease conception.
The Company has operating leases for facility space including office space and maintenance facilities. The remaining lease terms for facility space vary from 20 months to 13 years. The Company’s operating leases with lease rates that are variable based on operating costs, use of the facilities or other variable factors are excluded from the Company’s right-of-use assets and operating lease liabilities in accordance with accounting guidance.
As of December 31, 2020, the Company’s right-of-use assets were $8,582, the Company’s current maturities of operating lease liabilities were $1,361, and the Company’s noncurrent lease liabilities were $4,351. During the year ended December 31, 2020, the Company paid $5,398 in operating leases reflected as a reduction from operating cash flows.
The table below presents operating lease related terms and discount rates as of December 31, 2020:
| Weighted-average remaining lease term |
4.94 years | |||
| Weighted-average discount rate |
6.99 | % |
Components of lease costs were as follows for the years ended December 31,
| 2020 | 2019 | |||||||
| Operating lease cost |
$ | 9,326 | $ | 27,624 | ||||
| Short-term lease cost |
1,662 | 4,331 | ||||||
| Variable lease cost |
(994 | ) | 182 | |||||
| Lease termination expense |
1,299 | 19,353 | ||||||
|
|
|
|
|
|||||
| Total lease cost |
$ | 11,293 | $ | 51,490 | ||||
|
|
|
|
|
|||||
74
As of December 31, 2020, Air Wisconsin leased or subleased certain training simulators and facilities for terms of greater than 12 months. Rent expense recorded under these leases was $11,293 and $51,490 in the years ended December 31, 2020 and 2019, respectively. The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of December 31, 2020:
| Fiscal Year |
Amount | |||
| 2021 |
1,766 | |||
| 2022 |
1,778 | |||
| 2023 |
1,513 | |||
| 2024 |
1,103 | |||
| 2025 |
390 | |||
| Thereafter |
579 | |||
|
|
|
|||
| Total lease payments |
7,129 | |||
| Less imputed interest |
(1,417 | ) | ||
|
|
|
|||
| Total lease liabilities |
$ | 5,712 | ||
|
|
|
|||
8. Commitments and Contingencies
Legal Matters
The Company is subject to certain legal actions, which it considers routine to its business activities. As of December 31, 2020, the Company believes, after consultation with legal counsel, that the ultimate outcome of such legal matters, whether individually or in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
Treasury Audit
The Treasury’s Office of Inspector General (OIG) commenced a routine audit in connection with Air Wisconsin’s receipt of funds under the Payroll Support Program. The audit focused, among other things, on certain calculations used to determine the amount of Treasury Payroll Support Air Wisconsin was entitled to receive under the program. Air Wisconsin has disputed in good faith the Treasury’s interpretation of varying definitions and other provisions among Air Wisconsin’s application for Treasury Payroll Support, Treasury’s guidance regarding the Payroll Support Program and the PSP-1 Agreement. Air Wisconsin has not received written notice from the OIG as to whether the audit has been completed or what the audit results were. Nevertheless, the Treasury has entered into the PSP-2 Agreement with Air Wisconsin, has paid to Air Wisconsin the first installment of the payroll support to be provided under the PSP-2 Agreement and has not required Air Wisconsin to refund any amounts it received under the PSP-1 Agreement. Air Wisconsin is not able to determine as of the date of the filing of this Annual Report how the amount of payroll support to which Air Wisconsin is entitled under the PSP-2 Agreement was determined. Nevertheless, Air Wisconsin management believes, based on communications it has received from the Treasury, that it is probable an amount will be due as a result of the audit. However, Air Wisconsin is not able to reasonably estimate, as of the date of filing of this Annual Report, the amount which OIG may ultimately determine to be due. Further, certain provisions in the PSP Extension Law may serve to limit or eliminate the need for any funds to be due as a result of the audit by the OIG.
Standby Letters of Credit
As of December 31, 2020, Air Wisconsin had five outstanding letters of credit in the aggregate amount of $348 to guarantee the performance of its obligations under certain lease agreements and insurance policies. Air Wisconsin maintains a credit facility of $810 for the issuance of such letters of credit as needed to support its operations. Air Wisconsin’s restricted cash secures the credit facility.
75
Cash Obligations
The following table sets forth our cash obligations as of December 31, 2020:
| Payment Due for Year Ending December 31, (in thousands) |
||||||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||
| Aircraft Notes principal |
$ | 70,000 | $ | 7,000 | $ | 7,000 | $ | 7,000 | $ | 7,000 | $ | 42,000 | $ | — | ||||||||||||||
| Aircraft Notes interest |
$ | 10,850 | $ | 2,730 | $ | 2,450 | $ | 2,170 | $ | 1,890 | $ | 1,610 | $ | — | ||||||||||||||
| Other Loans principal |
$ | 36,988 | $ | 13,922 | $ | 16,660 | $ | 2,727 | $ | 2,754 | $ | 925 | $ | — | ||||||||||||||
| Other Loans interest |
$ | 1,853 | $ | 1,262 | $ | 378 | $ | 51 | $ | 24 | $ | 138 | $ | — | ||||||||||||||
| Operating lease obligations |
$ | 7,129 | $ | 1,766 | $ | 1,778 | $ | 1,513 | $ | 1,103 | $ | 390 | $ | 579 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 126,820 | $ | 26,680 | $ | 28,266 | $ | 13,461 | $ | 12,771 | $ | 45,063 | $ | 579 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3,500 commencing June 30, 2021, with certain additional amounts payable based on excess cash flow. No excess cash flow payments are anticipated in the above table. As of December 31, 2020, all of the Company’s long-term debt was subject to fixed interest rates.
9. Retirement Plans
The Company has defined contribution retirement plans that cover substantially all employees. The Company contributes to these plans. Total expense under all plans for 2020 and 2019 was $3,764 and $4,467, respectively.
10. Related-Party Transactions
For the years ended December 31, 2020 and 2019, the Company paid $390 and $3,979, respectively, pursuant to certain aircraft and engine leases with related parties and for other professional services.
Southshore leased aircraft and engines to Air Wisconsin pursuant to various operating lease agreements from April 2010 through January 2020. In the year ended December 31, 2020, Air Wisconsin paid a total of approximately $150 to Southshore, consisting of approximately $66 for the lease of three aircraft and approximately $84 for the lease of additional engines to support Air Wisconsin’s operations. In the year ended December 31, 2019, Air Wisconsin paid a total of approximately $3,739 to Southshore, consisting of approximately $1,878 for the lease of three aircraft, a total of approximately $1,661 for the lease of additional engines, and $200 for the purchase of two previously leased airframes.
In January 2020, the Company completed an acquisition from Southshore of three CRJ-200 regional jets, each having two GE engines, plus five additional GE engines, in exchange for the issuance of 4,000 shares of Series C Preferred with an aggregate value of $13,200, or $3.30 per share (Series C Issue Price), and the assumption of liabilities in the amount of $3,466. As of December 31, 2020, the shares of Series C Preferred were convertible into an aggregate of 16,500 shares of common stock. Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, the Series C Preferred remains convertible into an aggregate of 16,500 shares of common stock as of the date of filing this Annual Report. For additional information, refer to Note 12. On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively.
From time to time, Air Wisconsin has also contracted for services to be performed on certain assets held by Southshore used in Air Wisconsin’s operations and has received reimbursement from Southshore at the cost of such services. Because Air Wisconsin acted as an agent or an intermediary in facilitating such transactions, the amounts of any such transactions are not included in the amounts described above.
76
Resource Holdings Associates (Resource Holdings) has provided AWAC and Air Wisconsin with financial advisory and management services pursuant to an agreement entered into in January 2012. AWAC has paid a recurring monthly fee of $20 in exchange for these financial advisory and management services since January 2012. AWAC paid a total of $240 to Resource Holdings in both 2020 and 2019.
11. Collective Bargaining Agreements
Air Wisconsin has five collective bargaining units. The Airline Pilots Association (ALPA) represents pilots. The Association of Flight Attendants-CWA (AFA) represents flight attendants. The mechanics and the technical store clerks have two separate collective bargaining agreements that are both represented by the International Association of Machinists and Aerospace Workers AFL-CIO (IAMAW). The Transport Workers Union of America (TWU) represents dispatchers.
As of December 31, 2020, Air Wisconsin was in negotiations with the union that represents mechanics and will be in negotiations with the union that represents the dispatchers. Air Wisconsin is in mediated negotiations with the IAMAW representing the mechanics. The agreements with the TWU representing the dispatchers was amendable on November 1, 2020, however Air Wisconsin and the union have not started the negotiation process. Air Wisconsin believes the resolution of its negotiations will not have a material impact on its financial position or operations.
Amendable dates for each bargaining unit are:
| Bargaining Unit |
Amendable Date | |||
| Pilots |
November 21, 2022 | |||
| Dispatchers |
November 1, 2020 | |||
| Mechanics |
October 7, 2015 | |||
| Technical store clerks |
September 20, 2022 | |||
| Flight attendants |
October 1, 2022 | |||
12. Earnings Per Share
Calculations of net income per common share were as follows (in thousands, except per share data):
| 2020 | 2019 | |||||||
| Net income (loss) |
$ | 39,763 | (19,214 | ) | ||||
| Preferred stock dividends |
759 | — | ||||||
|
|
|
|
|
|||||
| Net income (loss) applicable to common stockholders |
39,004 | (19,214 | ) | |||||
|
|
|
|
|
|||||
| Weighted average common shares outstanding |
||||||||
| Shares used in calculating basic earnings per share |
54,863 | 54,863 | ||||||
| Stock options |
559 | — | ||||||
| Series C Preferred |
15,777 | — | ||||||
|
|
|
|
|
|||||
| Shares used in calculating diluted earnings per share |
71,199 | 54,863 | ||||||
|
|
|
|
|
|||||
| Earnings (loss) allocated to common stockholders per common share |
||||||||
| Basic |
$ | 0.71 | (0.35 | ) | ||||
|
|
|
|
|
|||||
| Diluted |
$ | 0.56 | (0.35 | ) | ||||
|
|
|
|
|
|||||
Basic earnings (loss) per share of common stock is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period.
77
Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding assuming conversion of the 2015 Stock Option and Series C Preferred. In loss periods, dilutive shares associated with the 2015 Stock Option and the Series C Preferred were not included in the calculation above, as they would have an anti-dilutive effect on the calculation of earnings per share. For additional information, refer to Note 13.
Series C Preferred
In January 2020, the Company issued 4,000 shares of the Series C Preferred. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred are set forth in the Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock (Certificate of Designations), which the Company filed with the Secretary of State of the State of Delaware.
The Series C Preferred accrues dividends at the rate of 6.0% per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors and paid by the Company (Preferential Dividends).
From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (Dividend Ratchet). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (PIK Dividends).
Each share of Series C Preferred is initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (Conversion Price). One of the requirements of the Certificate of Designations is that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The “Reporting Adjustment Period” is the first 90-trading day period commencing on or after August 28, 2020 (which is the first trading day following the day that is 45 days following the date on which the Company provided notice to its stockholders of the filing of its 2019 Annual Report) during which an aggregate of at least 5.0% of the outstanding shares of common stock are traded. The Conversion Price has been adjusted as of January 7, 2021 to be $0.15091.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (Conversion Cap Excess Shares), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends of an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (Conversion Cap Excess Dividends).
In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (Series C Liquidation Amount).
At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date (as defined in the Certificate of Designations) or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been
78
initiated, (c) any time that fewer than 800 shares of Series C Preferred are outstanding, and (d) December 31, 2024, the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (Redemption Price). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price.
In January 2020, the Company also entered into an Investors’ Rights Agreement with Southshore, pursuant to which the Company agreed, if requested by Southshore at any time following the 180-day period after the Company became subject to the reporting requirements under the Exchange Act, to file with the SEC a registration statement on a Form S-1 with respect to at least 40% of the common stock issuable upon conversion of the Series C Preferred then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $10,000), along with other registration rights. All reasonable expenses related to any such registration shall be borne by the Company. The Investors’ Rights Agreement further provides that, whenever the members of the Board of Directors are to be elected, Southshore will vote so as to elect a majority of directors comprising the Board of Directors that qualify as independent directors.
On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively.
Based on the applicable accounting guidance, the Company is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
As of December 31, 2020, pursuant to the Certificate of Designations, the Series C Preferred was convertible into an aggregate of 16,500 shares of common stock. Following the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, the Series C Preferred is convertible into an aggregate of 16,500,000 shares of common stock, representing approximately 23.1% of the fully diluted shares of capital stock of the Company (assuming the full conversion of the Series C Preferred into common stock).
The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.
13. Stock Options
2015 Stock Option
In 2015, the Company issued a stock option (the 2015 Stock Option) to purchase 558,835 shares of the common stock of the Company at an exercise price of $0.21386 per share. The value of the 2015 Stock Option at the date of grant was $0.07 per share based on a life of 7.0 years, a risk-free interest rate of 2.01% and expected volatility of 157.1%. The 2015 Stock Option was the only stock option outstanding as of December 31, 2020 and 2019.
After July 9, 2019, the 2015 Stock Option became fully exercisable. Prior to that date it could only be exercised based on the occurrence of certain events.
The 2015 Stock Option terminates on the earlier to occur of July 9, 2022 or certain corporate transactions.
79
14. Supplemental Cash Flow Information
Cash payments for interest for the years ended December 31, 2020 and 2019 were $7,311 and $1,841, respectively. Cash payments for income taxes for the years ended December 31, 2020 and 2019 amounted to $(1,035) and $39, respectively. Cash payments included in the measurement of lease liabilities related to operating leases amount to $5,398 and $29,502 for the years ended December 31, 2020 and 2019 respectively. In the year ended December 31, 2019 the Company also recorded a fair market value of $15,832 for 14 aircraft acquired in a non-cash lease termination transaction. The aircraft are recorded in property, plant, and equipment. For additional information, refer to Note 4.
15. Intangible Assets
Intangible assets at December 31, 2020 and 2019 consist of the following (in thousands):
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Gross Carrying Amount | Gross Carrying Amount | |||||||
| Trade names and air carrier certificate |
5,300 | 5,300 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 5,300 | $ | 5,300 | ||||
|
|
|
|
|
|||||
16. Subsequent Events
The Company evaluated its December 31, 2020, financial statements for subsequent events through April 1, 2021, the date the financial statements were available to be issued. The following subsequent events are noted:
| • | Refer to Note 2 for certain subsequent events regarding the impact of the COVID-19 pandemic after period end and the adoption of the American Rescue Plan on the Company’s business and operations and, in particular, Air Wisconsin’s receipt of the additional Treasury Payroll Support. |
| • | Through notices given on January 29, 2021 pursuant to the WARN Act, Air Wisconsin informed approximately 150 pilots (all of whom had received the prior WARN Act notices) that they might be furloughed on April 1, 2021, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, no furloughs have yet been issued pursuant to these notices. |
| • | In March 2021, Congress adopted, and the President signed, the federal American Rescue Plan, which provides further payroll support to eligible air carriers. Air Wisconsin expects to apply for payroll support under such statute and expects that it will be required to enter into an agreement substantially similar to the PSP-1 Agreement and the PSP-2 Agreement if it receives such payroll support. |
| • | Effective January 1, 2021, the Board of Managers of Air Wisconsin appointed Liam Mackay to serve as its Chief Financial Officer. In connection with his appointment, Air Wisconsin entered into an employment agreement with Mr. Mackay. Gregg Garvey, the current Senior Vice President, Chief Accounting Officer and Treasurer of Air Wisconsin, will continue to serve as the Company’s Principal Financial and Accounting Officer. |
| • | Effective March 30, 2021, the Company’s board of directors adopted a stock repurchase program pursuant to which the Company may initially repurchase up to $1,000 of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1,000 per calendar month thereafter. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. |
80
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer and principal financial and accounting officer, our management conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of December 31, 2020, the last day of the period covered by this Annual Report. Disclosure controls and procedures mean controls and other procedures designed to provide reasonable assurance 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 by the SEC’s rules and forms, and that such information is accumulated and communicated to its management, including its principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our principal executive officer and principal financial and accounting officer, concluded that, as of December 31, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.
Remediation of Previously Identified Material Weaknesses
In connection with the audit of our 2019 financial statements, management identified material weaknesses in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a reporting company’s financial statements will not be prevented or detected on a timely basis. The material weaknesses identified as of December 31, 2019 primarily related to (1) the application of accounting treatment for complex and non-routine transactions, including certain lease termination transactions; (2) the adoption of new accounting standards related to Topic 606 and Topic 842; (3) the establishment and design of processes and controls to document and monitor certain controls over financial reporting, including the review of journal entries; (4) the design of controls for users’ access rights related to certain information technology systems, including payroll; and (5) the accounting for valuation allowances on deferred tax assets. While these material weaknesses did not result in a restatement of any previously reported annual or interim consolidated financial statements, our management concluded at that time that there was a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements may not be prevented or detected on a timely basis.
With the filing of the first quarter 10-Q for 2020, management determined that it had remediated the material weaknesses relating to the adoption of new accounting standards, specifically Topic 606 and Topic 842, and the accounting for valuation allowances on deferred tax assets. Efforts to remediate these material weaknesses included:
| • | Developing and implementing formal processes, procedures, and controls pertaining to the adoption of the new accounting standards, including those related to Topic 606 and Topic 842, and the accounting for valuation allowances on deferred tax assets; and |
| • | The hiring of outside consultants to assist management with the implementation of the new accounting standards and the evaluation of the need for valuation allowances on deferred tax assets. |
During the remainder of the year ended December 31, 2020, management successfully completed a comprehensive plan for remediation of the remaining material weaknesses. This plan included the following actions:
| • | Hiring outside consultants to assist help us with our remediation efforts, including assisting us with testing our remediation efforts; |
| • | Developing and implementing formal processes, procedures, and controls pertaining to the application of accounting treatment for complex and non-routine transactions; |
| • | Developing and implementing formal processes and controls to document and monitor certain controls over financial reporting, including the review of journal entries; and |
| • | Updating the design of controls for user access rights related to our information technology systems. |
As of December 31, 2020, our management concluded that the remediation measures described above had been implemented, and that we had sufficient time to test the operating effectiveness and remediate the material weaknesses noted above.
81
Changes in Internal Control Over Financial Reporting
Except for the changes we made in connection with the implementation of the remediation measures described above, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our principal executive officer and principal financial and accounting officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management, including our principal executive officer and principal financial and accounting officer, concluded that, as of December 31, 2020, our internal control over financial reporting was effective at the reasonable assurance level.
No Attestation Report of the Registered Public Accounting Firm
Pursuant to an exemption established by the Jumpstart Our Business Startups Act for “smaller reporting companies”, this Annual Report is not required to and does not include an attestation report of our independent registered public accounting firm on our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
82
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Consistent with the SEC rules and regulations, our executive officers include certain officers of our subsidiary, Air Wisconsin Airlines LLC (“Air Wisconsin”). The following table sets forth information concerning our executive officers and directors as of January 1, 2021:
| Name |
Age |
Position | ||
| Executive Officers: |
||||
| Christine R. Deister |
71 | Chief Executive Officer and Secretary, Harbor Diversified, Inc. | ||
| Robert Binns |
56 | Chief Executive Officer and President, Air Wisconsin Airlines LLC | ||
| Liam Mackay |
37 | Chief Financial Officer, Air Wisconsin Airlines LLC | ||
| Gregg Garvey |
55 | Senior Vice President, Chief Accounting Officer and Treasurer, Air Wisconsin Airlines LLC | ||
| Non-Employee Directors: |
||||
| Richard A. Bartlett |
63 | Director, Harbor Diversified, Inc. | ||
| Nolan Bederman(1) |
48 | Director, Harbor Diversified, Inc. | ||
| Kevin J. Degen(1) |
63 | Director, Harbor Diversified, Inc. | ||
| (1) | Serves as a member of our audit committee. |
Executive Officers
Christine R. Deister
Ms. Deister, 71, has served as the Company’s Chief Executive Officer and Secretary since March 2020. Ms. Deister has also served as Chief Financial Officer and Secretary of Lotus Aviation Leasing, LLC and Chief Financial Officer and Secretary of Air Wisconsin Funding LLC (“AWF”) since April, 2020, as well as President, Secretary and a director of Harbor Therapeutics, Inc. since April, 2020. Ms. Deister was initially appointed Chief Financial Officer and Secretary of the Company in March 2012, and was subsequently appointed President of the Company in July 2019. Previously, Ms. Deister served as President and Chief Executive Officer of Air Wisconsin from April 2015 until March 2020. From November 2014 to April 2015, Ms. Deister served as Chief Commercial Officer of Air Wisconsin. From November 2004 to November 2014, Ms. Deister served as Executive Vice President and Chief Financial Officer of Air Wisconsin. Prior to Air Wisconsin Ms. Deister served as Executive Vice President and Chief Financial Officer of Hawaiian Airlines from 2001 to November 2004. Prior to 2001, Ms. Deister held various executive roles with Trans World Airlines, including Senior Vice President of Finance and Treasurer.
Robert Binns
Mr. Binns, 56, has served as Air Wisconsin’s President since April 2019, and as its Chief Executive Officer since March 2020. Mr. Binns has also served as Executive Vice President and director of AWAC Aviation, Inc. (“AWAC”) since April 2020. Mr. Binns brings over 25 years of airline and industry-related leadership to these roles. Prior to joining Air Wisconsin, Mr. Binns held executive roles with Hybrid Enterprises, LLC, the exclusive reseller of Lockheed Martin’s hybrid airship, Global Aviation Holdings, TransMeridian Airlines, Pegasus Aviation and Trans World Airlines. Mr. Binns holds an M.B.A. from the University of Kansas, an M.A. in Political Behavior from Essex University in England, and a B.A. in History and Political Science from the University of Kansas.
Liam Mackay
Effective January 1, 2021, the Board of Managers of Air Wisconsin appointed Liam Mackay to serve as its Chief Financial Officer. Prior to joining Air Wisconsin, Mr. Mackay, 37, served as Director, United Express Commercial Strategy at United, since 2019. From 2016 to 2019, Mr. Mackay served as Director, United Express Regional Partner Management at United, and from 2011 to 2016, he served as Senior Manager, Financial Analysis at United. Mr. Mackay graduated from The University of Western Ontario in 2005 with a Bachelor of Administrative & Commercial Studies in Commercial Aviation Management degree, and he obtained a Masters of Business Administration in Aviation from Embry-Riddle Aeronautical University in 2007.
83
Gregg Garvey
Mr. Garvey, 55, has served as Air Wisconsin’s Senior Vice President, Chief Accounting Officer and Treasurer since October 2018, and has worked with Air Wisconsin in various roles since 1999. Mr. Garvey also serves as Vice President, Chief Financial Officer and Treasurer of AWAC. Prior to joining Air Wisconsin in 1999, Mr. Garvey served as a Tax Manager, Tax Supervisor, and Staff Accountant at Schenck & Associates (currently part of CliftonLarsonAllen LLP), a large regional public accounting firm in Appleton, Wisconsin. Mr. Garvey also held positions of Financial Analyst and Forecasting Accountant, and Senior Tax Accountant at Repap Wisconsin, Inc. a paper company formerly located in Kimberly Wisconsin. Mr. Garvey holds a B.B.A. in Accounting from the University of Wisconsin-Whitewater, an M.S. in Taxation from the University of Wisconsin-Milwaukee, and an M.B.A. from the University of Wisconsin-Oshkosh. Mr. Garvey is also a Certified Public Accountant.
Non-Employee Directors
Richard A. Bartlett
Mr. Bartlett, 63, has served on the Company’s board of directors since August 2011. Mr. Bartlett is the managing director of Resource Holdings, Ltd., a private equity firm located in New York, New York. He has served on the board of directors of numerous privately held and publicly traded companies across a wide variety of industries, including the board of directors of Air Wisconsin for more than 25 years. Mr. Bartlett served on the board of directors of US Airways, Inc. from 2005 to 2008. Prior to joining Resource Holdings, Ltd. in 1984, he served as a law clerk for an associate justice of the Supreme Court of the United States, and prior to that, for a senior judge of the U.S. Circuit Court for the District of Columbia. Mr. Bartlett received his J.D. from Yale Law School and his B.A. from Princeton University.
We believe Mr. Bartlett’s experience serving as a principal at a private equity firm for over 30 years, and on the boards of directors of multiple companies, including Air Wisconsin and US Airways, Inc., provides him with the skills necessary to understand business strategy and planning, financial statements, and board process and functions, all of which qualify him for service as a director.
Nolan Bederman
Mr. Bederman, 48, has served on the Company’s board of directors since March 2019. Mr. Bederman currently serves as a founder and Managing Partner of Bederman Capital Corp., a private equity firm. Prior to forming Bederman Capital Corp., Mr. Bederman served as partner and co-founder of Genuity Capital Partners from 2005 to 2013. Prior to Genuity Capital Partners, Mr. Bederman served as an executive director of private equity with CIBC Capital Partners from 2002 to 2004, and was promoted to Vice President of investment banking with Merrill Lynch & Co., where he served as a mergers and acquisitions advisor from 1998 to 2002. Mr. Bederman received his J.D. and M.B.A. from the University of Toronto, and a B.A. in Economics from the University of Western Ontario.
We believe Mr. Bederman’s experience in private equity, and as the founder of multiple complex organizations, brings to the Company’s board of directors critical skills related to leadership, financial oversight, strategic planning and corporate governance, all of which qualify him for service as a director.
Kevin J. Degen
Mr. Degen, 63, has served on the Company’s board of directors since March 2019. Mr. Degen has served as a principal with Greencastle Advisors LLC, an advisory firm in the transportation sector, since 2010. Prior to founding Greencastle, Mr. Degen was employed by Seabury Group LLC, an aviation advisory firm, from 2000 to 2009, where he was a Managing Director. Prior to Seabury Group, from 1996 to 1999, Mr. Degen served as Senior Vice President for Donaldson, Lufkin and Jenrette, an investment banking firm, and from 1993 to 1996, as a portfolio manager with Southport Management Group. Prior to Southport, Mr. Degen held various investment banking positions with Lehman Brothers, PaineWebber Inc., and E.F. Hutton Inc. from 1982 to 1992. Mr. Degen serves as a director of START III USA LLC, an aircraft leasing SPV. Mr. Degen received an M.B.A. from Harvard Business School and a B.S. in Engineering from Princeton University.
84
We believe Mr. Degen’s extensive experience within the transportation sector, as well as his many years serving as an advisor and investment banker, provide him with industry experience, knowledge of complex organizations, and financial management and strategic planning skills, all of which qualify him for service as a director.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Board of Directors and Director Independence
The Company’s board of directors is presently comprised of three members. While the Company does not have a class of securities listed on a national securities exchange, the Company’s board of directors believes it is a good corporate governance practice to assess whether certain directors would qualify as “independent directors” for purposes of the NASDAQ Listing Rules (the “NASDAQ Rules”). The Company’s board of directors has considered the current “independent director” standards set forth in the NASDAQ Rules and has affirmatively determined that each of Messrs. Bederman and Degen do not have a relationship with the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and therefore qualify as “independent directors” under the NASDAQ Rules. Accordingly, a majority of the members of the Company’s board of directors qualify as “independent directors.”
Board Leadership Structure
The Company’s board of directors has not appointed a Chairman of the Board or a Lead Independent Director although it retains the discretion to do so. The Company’s board of directors believes this is the most appropriate leadership structure at this time given the current number of directors and the scope of the Company’s business and operations.
Board Role in Risk Oversight
The Company’s board of directors provides oversight with respect to our management of risk, both as a whole and through the audit committee. The Company’s board of directors typically reviews and discusses with management at each of its regular meetings information presented by management relating to our operational results and outlook, including information regarding risks related to our business and operations. The audit committee oversees the management of risk as part of its responsibilities related to the oversight of the Company’s independent registered public accounting firm, and the review of the Company’s financial results and internal control over financial reporting.
Codes of Business Conduct and Ethics
We have adopted a code of business conduct and ethics (the “Code of Ethics”) applicable to our Chief Executive Officer and other officers that have a financial or operational oversight role, which is intended to comply with the requirements of Item 406 of Regulation S-K. We expect that any amendment to the Code of Ethics, or any waivers of its requirements applicable to our executive officers or directors, will be disclosed in the Company’s future filings under the Exchange Act. The Code of Ethics was filed as an exhibit to the 2019 Annual Report.
Meetings of the Board of Directors
During 2020, the Company’s board of directors held 11 regularly scheduled meetings and numerous additional meetings. Each of the directors participated in all of the meetings of the Company’s board of directors during the period for which he was a director.
85
Board of Director Policies and Procedures
The Company’s board of directors has documented the Company’s corporate governance practices by adopting certain policies and procedures, including the Code of Ethics and the charter of the audit committee. The Code of Ethics includes certain restrictions on the eligibility of our directors, officers and employees to trade in the Company’s common stock. These policies and procedures are designed to ensure the Company’s board of directors, together with the audit committee, will have the necessary authority and governance frameworks in place to make decisions independent of the Company’s management.
Audit Committee
The Company has a standing audit committee of its board of directors. The audit committee oversees the Company’s corporate accounting and financial reporting process and the audits of the Company’s financial statements. For this purpose, the audit committee’s principal functions are to: (i) oversee the integrity of the Company’s financial statements, the audits of the Company’s financial statements conducted by the Company’s independent registered public accounting firm (“Independent Auditors”), the qualifications and the independence and performance of the Independent Auditors, and compliance with legal, regulatory and disclosure requirements relating to the Company’s accounting and financial reporting processes; (ii) review the Company’s internal control over financial reporting; and (iii) facilitate communication among the Independent Auditors, the Company’s financial and senior management, and the board of directors of the Company. The audit committee is directly responsible for oversight of the work of the Independent Auditors, including resolution of any disagreements between management and the Independent Auditors regarding financial reporting or the application of accounting policies. This oversight includes review and discussion with management and the Independent Auditors of (i) the Company’s financial statements and the reports or information delivered to the audit committee by the Independent Auditors; and (ii) analyses prepared by management and the Independent Auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, as well as assessment of the Company’s system of internal control over financial reporting.
The Company’s board of directors regularly reviews the qualifications of the audit committee members and has determined that each of the members: (i) is “independent” as defined in Rule 10A-3 under the Exchange Act, (ii) is an “independent director” as defined under the NASDAQ Rules, (iii) has the ability to read and understand financial statements, and (iv) qualifies as an “audit committee financial expert” as defined in Item 407 of Regulation S-K. The latter determination is based on a qualitative assessment of each member’s level of knowledge and experience based on a number of factors.
The audit committee is also responsible for the review, approval and monitoring of transactions involving the Company and any “related persons” (directors or executive officers, or stockholders owning 5.0% or greater of our outstanding capital stock, or any of their respective immediate family members) that involve amounts exceeding $120,000 in which a related person has a direct or indirect material interest.
The audit committee is presently comprised of two directors and operates under a written charter adopted by the Company’s board of directors. The Company’s board of directors reviews and assesses the adequacy of the audit committee’s written charter on an annual basis. The current members of the audit committee are Messrs. Bederman and Degen.
During 2020, the audit committee held four regularly scheduled meetings and numerous additional meetings. Each of the members of the audit committee attended all of the meetings of the audit committee during the period for which he served on the audit committee.
Special Committee
On November 1, 2019, the Company’s board of directors formed a special committee to evaluate the potential acquisition from Southshore of three CRJ-200 regional jets, each having two engines, plus five additional engines. Messrs. Bederman and Degen, each of whom qualified as “disinterested directors” for purposes of the Southshore transaction, were appointed to serve as members of the special committee. The special committee met frequently, including with special committee counsel, their financial advisor, and an independent valuation firm, throughout the process of analyzing, negotiating and completing the transaction with Southshore, with both members present for all meetings. On January 17, 2020, following the approval of the special committee, the Company completed the acquisition from Southshore in exchange for the issuance of shares of the Series C Preferred. For additional information, refer to the section entitled “Certain Relationships and Related Transactions and Director Independence – Transactions with Southshore Leasing, LLC and Southshore Affiliates” within this Annual Report.
86
Director Compensation
For service on the Company’s board of directors, each director receives a quarterly cash retainer in the amount of $15,000. For service on the audit committee, the members receive an additional quarterly cash retainer in the amount of $2,500. The directors are not paid additional amounts for attendance at board or committee meetings.
To the extent any director serves on the board of directors (or similar governing body) of any of our active wholly owned subsidiaries, the director is typically paid a quarterly cash retainer in the amount of $2,500, which amount is in addition to amounts paid for service on the Company’s board of directors. Mr. Bartlett served as a director of AWAC until April 7, 2020. Messrs. Bederman and Degen each serve on the board of managers of Air Wisconsin.
No current director has been granted any equity awards in connection with his service on the Company’s board of directors or the audit committee.
We reimburse reasonable expenses incurred in connection with attending meetings of the Company’s board of directors and the audit committee.
Director Compensation Table
| Name | Fees Earned Or Paid in Cash ($)(1) |
All Other Compensation ($) |
Total ($) | |||||||||
| Richard A. Bartlett(2) |
$ | 62,500 | — | $ | 62,500 | |||||||
| Nolan Bederman(3) |
$ | 80,000 | — | $ | 80,000 | |||||||
| Kevin J. Degen(3) |
$ | 80,000 | — | $ | 80,000 | |||||||
| (1) | This amount includes a quarterly cash retainer of $15,000 paid to each director for service on the Company’s board of directors. |
| (2) | Mr. Bartlett received $2,500 for serving as a director of AWAC during the first quarter of 2020. Mr. Bartlett resigned from the board of directors of AWAC on April 7, 2020. |
| (3) | Messrs. Bederman and Degen were each appointed to the Company’s board of directors on September 20, 2018 and to the audit committee in March 2019. Messrs. Bederman and Degen each earned $10,000 for serving on the audit committee and $10,000 for serving on the board of managers of Air Wisconsin, to which they were appointed in March 2019. |
87
| ITEM 11. | EXECUTIVE COMPENSATION |
This narrative discussion of the compensation objectives, policies and arrangements that apply to our named executive officers is intended to be read in conjunction with, the Summary Compensation Table and related disclosures set forth below. As a “smaller reporting company,” we are eligible to comply with scaled executive compensation disclosure requirements under applicable SEC rules and regulations.
Named Executive Officers
Our named executive officers include our principal executive officer and our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2020. Consistent with SEC rules and regulations, our named executive officers include certain officers of our subsidiary, Air Wisconsin Airlines LLC, as indicated in the table below.
For the year ended December 31, 2020, our named executive officers were:
| Named Executive Officer |
Position | |
| Christine R. Deister |
Chief Executive Officer and Secretary, Harbor Diversified, Inc. Principal Executive Officer | |
| Robert Binns |
Chief Executive Officer and President, Air Wisconsin Airlines LLC | |
| Gregg Garvey |
Senior Vice President, Chief Accounting Officer and Treasurer, Air Wisconsin Airlines LLC Principal Financial and Accounting Officer |
Compensation Overview
The primary objective of our executive compensation program is to attract and retain executives with the skills necessary to lead us in achieving our strategic objectives and creating long-term value for our stockholders. We recognize that there is significant competition for talented executives, especially within the airline industry, and it can be particularly challenging for regional airlines to recruit executives and other key employees of the caliber necessary to achieve our goals.
When making executive compensation decisions, the Company’s board of directors generally informs itself of the compensation amounts paid to executives at other regional airlines, although this is only one of several factors considered. In recent years, our executive compensation program has been impacted by the significant financial uncertainty impacting our business, both as a result of factors impacting the regional airline industry generally, and the additional risks and uncertainties caused by the COVID-19 pandemic. This dynamic has resulted in us paying our named executive officers lower amounts of total compensation than might otherwise be expected for executives with similar titles and responsibilities at other airlines. In addition, we have not adopted an equity incentive plan, and have not historically granted equity awards to our named executive officers, which impacts both the aggregate value of compensation that we pay and the mix of compensation elements that we pay relative to other companies in our industry.
Compensation Objectives
When establishing executive compensation, the Company’s board of directors is guided by the following principles:
| • | Attract, retain and incentivize executives with the background, experience and vision necessary to lead us in achieving our strategic objectives and creating long-term value for our stockholders; |
| • | Provide a total compensation package that is generally competitive with other companies in our industry that operate in similar geographic locations and are of a similar size and stage of growth; and |
| • | Tie a meaningful portion of the cash bonus opportunity to the achievement of individual and Company performance objectives that are important to the creation of long-term value for our stockholders, while retaining discretion to pay bonuses deemed appropriate by the Company’s board of directors. |
88
Compensation Determinations
The members of the Company’s board of directors, which includes two independent directors, are responsible for overseeing our executive compensation program, based on their own experience, their understanding of our business and industry, and feedback from our senior executives. We have not appointed a separate compensation committee. In addition, we have not historically retained a compensation consultant, although we retain the right to do so in the future.
Elements of Compensation Program
In light of the compensation philosophy and objectives discussed above, the compensation program for our named executive officers generally consists of a base salary, a discretionary cash bonus program, and other benefits as described below.
Base Salary
We pay base salaries to attract and retain talented executives with the necessary background, experience and vision required for our future growth and success. Base salaries are reviewed periodically and adjusted in response to factors such as title and responsibility level, individual contributions to achieving our strategic objectives, our operational and financial performance, and competitive pay practices within our industry.
Discretionary Cash Bonus Program
Historically, we have not adopted a formal non-equity incentive program as defined in SEC rules and regulations. Rather, we have typically paid discretionary cash bonuses to our named executive officers and other senior executives. The target bonus opportunity is generally expressed as a percentage of base salary, which vary by executive based on factors such as title, responsibility level and tenure. The actual amounts of these bonuses are generally based on a number of subjective factors such as: (i) individual contributions to achieving our strategic objectives, (ii) our actual operational and financial performance, and (iii) executive retention concerns. Examples of strategic objectives that have impacted historical bonus decisions include the restructuring of indebtedness, the negotiation of key customer agreements, the hiring and retention of pilots, and cash management goals.
While final determinations of bonus payments are made based on the consideration of a number of individual and Company performance factors, the bonus calculations are typically not formulaic and are therefore discretionary in nature. For additional information, refer to the section entitled “–Summary Compensation Table” within this Annual Report.
Going forward, the Company intends to design and implement a long-term cash incentive plan (“LTIP”) to reward our senior executives, including our named executive officers, for the achievement of pre-determined strategic and operational objectives and the creation of long-term value. We currently expect that the LTIP will be implemented commencing for fiscal year 2022.
Equity-Based Awards
We have not historically granted equity awards to our named executive officers, and our named executive officers do not currently own any shares of our common stock or any equity awards exercisable for or convertible into shares of our common stock. We have not adopted an equity incentive plan, although we retain the right to do so in the future.
Benefits
We offer a standard benefits package that we believe is necessary to attract and retain key executives. Our named executive officers are eligible to participate in our medical, dental, vision and other welfare benefit plans, such as long-term disability insurance and life insurance.
We maintain a 401(k) plan for the benefit of our eligible employees, including our named executive officers. Currently, we contribute up to 3% of a participant’s compensation, and, in addition, we match contributions made by participants in an amount up to 50% of the amount contributed by participants, on up to 8% of their compensation, subject to IRS limitations, provided that all Company contributions are discretionary.
89
For the year ended December 31, 2020, certain senior executives were also eligible to participate in our Supplemental Executive Savings Plan (“SESP”), which is a non-qualified deferred compensation retirement benefit plan. Pursuant to the SESP, we contribute, on a discretionary basis, an amount equal to the excess of the full amount of contributions to which the participant would have been entitled under our 401(k) plan, but for the IRS limitations on employer contributions, over the actual amount we contribute to the 401(k) plan for the participant.
Employment Agreements
We have entered into employment agreements with Ms. Deister, Mr. Binns and Mr. Mackay, each of which are summarized below. We have not entered into an employment agreement (or other similar agreement) with Mr. Garvey.
Deister Agreement
Air Wisconsin entered into an employment agreement with Ms. Deister (the “Deister Agreement”), pursuant to which Ms. Deister was initially appointed to serve as President and Chief Executive Officer of Air Wisconsin. Ms. Deister ceased to be President when Mr. Binns was appointed President in April 2019 and ceased to be Chief Executive Officer when Mr. Binns was appointed Chief Executive Officer in March 2020. The Deister Agreement terminated as of December 31, 2020.
The Deister Agreement provided for an annual base salary of $425,000 for 2020. In addition, each year during the term of the Deister Agreement, Ms. Deister was eligible to receive a discretionary cash bonus in an amount determined by the Air Wisconsin board of managers. For the year ended December 31, 2019, Ms. Deister earned a cash bonus of $212,500. For the year ended December 31, 2020, Ms. Deister did not earn a cash bonus. During the term of the Deister Agreement, Ms. Deister participated in such medical, disability, life insurance and other employee benefit plans and programs as were in effect from time to time on the same basis as the other senior executives. For additional information, refer to the section entitled “– Summary Compensation Table” within this Annual Report.
Ms. Deister currently serves as Chief Executive Officer and Secretary of the Company with an annual salary of $150,000. Ms. Deister also currently serves as Vice President for Special Projects for Air Wisconsin for which she is not expected to receive any additional compensation. The Company does not have an employment agreement with Ms. Deister.
90
Binns Agreement
Air Wisconsin entered into an employment agreement with Mr. Binns (the “Binns Agreement”), pursuant to which Mr. Binns was initially appointed to serve as President of Air Wisconsin in April 2019. Mr. Binns was also appointed to serve as Chief Executive Officer of Air Wisconsin in March 2020. The Binns Agreement has an initial term of two years, from April 1, 2019 through April 1, 2021, with successive automatic one-year renewal periods, subject to earlier termination in accordance with its terms.
The Binns Agreement originally provided for a minimum annual base salary of $350,000, which amount was increased to $425,000 upon Mr. Binns appointment as Chief Executive Officer of Air Wisconsin. The base salary amount may be increased by Air Wisconsin’s board of managers in its sole discretion.
Pursuant to the Binns Agreement, Mr. Binns is eligible to receive a cash bonus for each year during the term of the Binns Agreement, which shall be paid based on the achievement of certain individual and Company performance objectives, as well as certain other subjective factors, as determined by Air Wisconsin’s board of managers from time to time. For the year ended December 31, 2019, Mr. Binns earned a cash bonus of $196,875, which was paid in October 2020, following the completion of the audit of the Company’s financial statements for the year ended December 31, 2019. For the year ended December 31, 2020, Mr. Binns earned a cash bonus of $406,250, a portion of which was paid in March 2021, and the remainder of which will be paid in October 2021. Mr. Binns is required to remain employed through the payment date.
As discussed above, the Company intends to implement an LTIP to reward the senior executives for the achievement of strategic objectives and the creation of long-term value. Mr. Binns will be eligible to receive LTIP awards once adopted. Until such time as the LTIP has been implemented, Mr. Binns is eligible to receive a long-term incentive award (the “LTI Award”), each year during the term of the Binns Agreement in an amount equal to the actual incentive bonus amount for the immediately prior year. For the year ended December 31, 2020, Mr. Binns earned an LTI Award of $196,875. For the year ended December 31, 2020, Mr. Binns earned an LTI Award of $406,250. The LTI Awards are payable in cash in four equal annual installments on each of the first four anniversaries of the grant date. Mr. Binns is required to remain employed on each relevant payment date. For additional information, refer to the section entitled “– Summary Compensation Table” within this Annual Report.
During the term of the Binns Agreement, Mr. Binns is eligible to participate in such medical, disability, life insurance and other employee benefit plans and programs as are in effect from time to time on the same basis as the other senior executives.
91
In the event of the termination of the Binns Agreement “Without Cause” or for “Good Reason” (each as defined in the Binns Agreement), Air Wisconsin shall pay to Mr. Binns: (i) any base salary that has been earned but remains unpaid as of the date of termination; and (ii) a severance payment equal to one year of base salary plus the amount of the actual cash bonus amount for the prior year, such payment to be made within 30 days after such termination. In addition, Mr. Binns shall be eligible to participate in benefit plans for one year following such termination. The Binns Agreement does not provide for any payments or benefits to be paid in connection with a change in control transaction (or similar transaction).
The Binns Agreement was amended in March 2021 primarily for the purpose of conforming certain payment provisions to the requirements of the agreements Air Wisconsin has entered into with the Treasury for payroll support.
Mackay Agreement
Air Wisconsin entered into an employment agreement with Mr. Mackay (the “Mackay Agreement”) pursuant to which Mr. Mackay was appointed to serve as the Chief Financial Officer of Air Wisconsin effective as of January 1, 2021. The Mackay Agreement provides Mr. Mackay with (i) an initial employment term of two years, from January 1, 2021 through December 31, 2022, with successive automatic one-year renewal periods, subject to earlier termination as described therein; (ii) a minimum annual base salary of $220,000, which may be increased by the board of managers in its sole discretion; (iii) a one-time sign-on bonus in the amount of $35,000, which is subject to forfeiture in certain circumstances as described therein; (iv) reimbursement for housing expenses until Mr. Mackay relocates to the Appleton, Wisconsin area; and (v) such medical, disability, life insurance and other employee benefit plans and programs as are in effect from time to time on substantially the same terms as those available to the other senior executives of Air Wisconsin.
Pursuant to the Mackay Agreement, Mr. Mackay is also eligible to receive a cash bonus for each year during the term of the agreement based on the achievement of certain individual and Company performance objectives, as well as certain subjective factors, as determined by Air Wisconsin’s board of managers from time to time, with an initial target bonus in an amount equal to 50% of his base salary for the applicable year. The cash bonus earned with respect to a particular year will be paid no later than March 31 of the following year, so long as Mr. Mackay continues to be employed through the payment date.
In the event of the termination of the Mackay Agreement “Without Cause” or for “Good Reason” (each as defined in the agreement), Air Wisconsin shall pay to Mr. Mackay: (i) any base salary that has been earned but remains unpaid as of the date of termination and (ii) a severance payment equal to one year of base salary plus the amount of the actual cash bonus paid for the prior year, such payment to be made within 30 days after the date of termination. In addition, Mr. Mackay shall be eligible to participate in employee benefit plans for one year following the date of termination. The Mackay Agreement does not provide for any payments or benefits to be paid in connection with a change in control transaction (or similar transaction).
Severance Agreements / Change in Control Agreements
Except as described under the section entitled “– Employment Agreements” within this Annual Report, we currently do not have severance agreements or change in control agreements (or other similar agreements) with any of our named executive officers. However, we reserve the right to enter into these types of agreements with our named executive officers or other employees in the future.
92
Summary Compensation Table
The following table sets forth summary compensation information for our named executive officers for the year ended December 31, 2020:
| Name and Title | Year | Salary ($) |
Bonus ($)(1) |
Non-Equity Incentive Plan Compensation ($)(2) |
Stock and Options Awards(3) |
All Other Compensation ($)(4) |
Total ($) |
|||||||||||||||||||||
| Christine R. Deister(5) |
2020 | 513,940 | — | — | — | 45,093 | 559,033 | |||||||||||||||||||||
| Chief Executive Officer and Secretary |
2019 | 433,750 | 212,500 | — | — | 44,813 | 691,063 | |||||||||||||||||||||
| Robert Binns(6) |
2020 | 406,245 | 812,500 | (7) | — | — | 49,648 | 1,268,393 | ||||||||||||||||||||
| Chief Executive Officer and President, Air Wisconsin |
2019 | 262,500 | 393,750 | (8) | — | — | 108,254 | 764,504 | ||||||||||||||||||||
| Gregg Garvey |
2020 | 215,000 | 215,000 | — | — | 35,692 | 465,692 | |||||||||||||||||||||
| Senior Vice President, Chief Accounting Officer and Treasurer, Air Wisconsin |
2019 | 215,000 | 120,000 | — | — | 26,567 | 361,567 | |||||||||||||||||||||
| (1) | The amounts in this column reflect the payment of discretionary cash bonuses to our named executive officers. For additional information, refer to the section entitled “Elements of Compensation Program – Discretionary Cash Bonus Program” within this Annual Report. |
| (2) | We did not adopt a non-equity incentive plan, as defined in the applicable SEC rules and regulations, for 2020 or 2019. |
| (3) | We have not granted any equity awards to our named executive officers. |
| (4) | All other compensation for 2020 included the following: |
(i) Ms. Deister: (1) aggregate cash payments in the amount of $10,000 for services provided to the board of directors of AWAC and the board of managers of Air Wisconsin (consistent with the amounts paid to the other directors and managers), (2) $19,950 for our contributions pursuant to the 401(k) plan, and (3) $15,143 for our contributions to the SESP;
(ii) Mr. Binns: (1) aggregate cash payments in the amount of $15,000 for services provided to the board of directors of AWAC and the board of managers of Air Wisconsin (consistent with the amounts paid to the other directors and managers), (2) $19,950 for our contributions pursuant to the 401(k) plan, (3) $11,594 for our contributions to the SESP and (4) $3,104 for a personal travel allowance benefit (based on the incremental cost to the Company); and
(iii) Mr. Garvey: (1) $19,950 for our contributions pursuant to the 401(k) plan, (2) $3,100 for our contributions to the SESP, and (3) $12,642 for a personal travel allowance benefit (based on the incremental cost to the Company).
| (5) | The salary amount for Ms. Deister for 2020 includes (i) $425,000 for services provided to Air Wisconsin, (ii) $35,000 for services provided to the Company, and (iii) a one-time payment of $53,940 for unused vacation time in accordance with the Company’s policies. |
| (6) | Mr. Binns joined Air Wisconsin as President in April 2019 and was appointed Chief Executive Officer in March 2020. |
| (7) | Of this amount, (i) $406,250 reflects a discretionary cash bonus that was earned by Mr. Binns for performance in 2020, a portion of which was paid in March 2021 and the remainder of which will be paid in October 2021, and (ii) $406,250 reflects the issuance of an LTI Award, which is payable in cash in four equal annual installments on each of the first four anniversaries of the grant date. Mr. Binns is required to remain employed through each relevant payment date. For additional information, refer to the section entitled “Elements of Compensation Program – Discretionary Cash Bonus Program” and “Employment Agreements” within this Annual Report for additional information. |
| (8) | Of this amount, (i) $196,875 reflects a discretionary cash bonus that was earned by Mr. Binns for performance in 2019, but which was not determined and paid until October 2020 following the completion of the audit of the Company’s financial statements for the fiscal year ended December 31, 2019, and (ii) $196,875 reflects the issuance of an LTI Award, which is payable in cash in four equal annual installments on each of the first four anniversaries of the grant date. Mr. Binns is required to remain employed through each relevant payment date. |
93
Outstanding Equity Awards at Fiscal Year End
As of December 31, 2020, none of our named executive officers held any outstanding equity awards to acquire shares of our common stock.
Equity Incentive Plans
We do not have outstanding any equity incentive plans, whether or not approved by our stockholders, pursuant to which any equity awards have been or may be issued to our directors, executive officers and other employees.
94
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information regarding the beneficial ownership of the Company’s common stock as of March 26, 2021 by: (i) each of our directors; (ii) each of our named executive officers; (iii) all of our executive officers and directors as a group; and (iv) all those known to us to be beneficial owners of more than five percent of the Company’s common stock.
| Beneficial Ownership(1)(2) | ||||||||
| Number of Shares |
Percentage | |||||||
| 5% Stockholders |
||||||||
| Amun LLC |
20,000,000 | 28.0 | % | |||||
| Southshore Aircraft Holdings, LLC(3) |
16,500,000 | 23.1 | % | |||||
| Named Executive Officers and Directors |
||||||||
| Christine R. Deister |
— | — | ||||||
| Robert Binns |
— | — | ||||||
| Gregg Garvey |
— | — | ||||||
| Kevin J. Degen |
— | — | ||||||
| Nolan Bederman |
— | — | ||||||
| Richard A. Bartlett(4) |
36,500,000 | 51.2 | % | |||||
| All executive officers and directors as a group (6 persons) |
36,500,000 | 51.2 | % | |||||
| (1) | Unless otherwise indicated in the footnotes to this table, and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 54,863,305 shares of the Company’s common stock and 4,000,000 shares of the Series C Preferred outstanding as of March 26, 2021. |
| (2) | The address of each stockholder listed is W6390 Challenger Drive, Suite 203 Appleton, WI 54914-9120. |
| (3) | Consists of 16,500,000 shares of the Company’s common stock issuable upon the conversion of shares of the Series C Preferred that are immediately convertible. Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (the “Certificate of Designations”), 754,550 shares of the 4,000,000 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock, with the remaining 3,245,450 shares of Series C Preferred remaining outstanding as Conversion Cap Excess Shares as of the date of filing this Annual Report. |
| (4) | Includes (i) 20,000,000 shares of the Company’s common stock held by Amun LLC (“Amun”) and (ii) 4,000,000 shares of the Series C Preferred held by Southshore that are immediately convertible into 16,500,000 shares of the Company’s common stock (based on the conversion price as of the date of filing of this Annual Report). The 20,000,000 shares of the Company’s common stock held by Amun as of March 26, 2021 represent approximately 28.0% of the fully diluted shares of capital stock of the Company, and the shares of the Series C Preferred held by Southshore as of December 31, 2020 represent approximately 23.1% of the fully diluted shares of capital stock of the Company (in each case assuming the full conversion of the Series C Preferred into common stock). Mr. Bartlett, one of the Company’s directors, may be deemed to be the beneficial owner of the shares of the Company’s common stock held by Amun due to his status as a member of the board of managers of Amun, and his ownership of a controlling interest in entities that collectively own approximately 19.6% of the outstanding equity interests of Amun. However, Mr. Bartlett does not control voting or investment decisions made by Amun, which are made by the board of managers of Amun. Mr. Bartlett disclaims beneficial ownership of the shares held by Amun except to the extent of his pecuniary interest therein. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore and his ownership of a controlling interest in entities that collectively own approximately 19.6% of the outstanding equity interests of Southshore. However, Mr. Bartlett does not control voting or investment decisions made by Southshore, which are made by the board of managers of Southshore. Mr. Bartlett disclaims beneficial ownership of the shares held by Southshore except to the extent of his pecuniary interest therein. |
95
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Transactions
Other than the transactions discussed below, and the various compensation arrangements described in the section entitled “Executive Compensation” within this Annual Report, since January 1, 2019, there was not, and there is not currently proposed, any transaction or series of similar transactions to which we were or are expected to be a party for which the amount involved exceeds or is expected to exceed $120,000, and in which any director, executive officer, holder of more than 5% of the Company’s common stock or Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), or any member of the immediate family of any of the foregoing, had or will have a direct or indirect material interest.
Transactions with Amun LLC
Since January 2012, Amun has provided AWAC and Air Wisconsin with financial advisory and management services pursuant to a Stock Purchase Agreement entered into with Amun in January 2012 (the “Amun SPA”). In accordance with the Amun SPA, AWAC has paid a recurring monthly fee of $20,000 in exchange for Amun’s financial advisory and management services. Amun assigned the payment of these fees to Resource Holdings Associates (“Resource Holdings”). AWAC paid a total of $240,000 to Resource Holdings in both 2020 and 2019. It also agreed to make monthly payments of $4,500 to each of Geoffrey T. Crowley, William P. Jordan and Patrick J. Thompson pursuant to the Amun SPA; however, because Messrs. Crowley, Jordan, and Thompson are all currently employed by Air Wisconsin, we did not make these monthly payments to them in 2020 or 2019.
Certain of our employees and directors own and control Amun. Amun is owned and controlled by four individuals who are currently directors and/or employees of the Company or its subsidiaries. Richard A. Bartlett, one of the Company’s directors, indirectly holds 19.6% of the outstanding equity of Amun. Jerry M. Seslowe, who served as a director of AWAC from December 2011 until his resignation on April 7, 2020, and as a director of the Company from August 2011 until his resignation in March 2019, holds, directly or indirectly, 19.6% of the outstanding equity of Amun. John C. Shaw, who served as a director of AWAC from December 2011 until his resignation on April 7, 2020, and as a director of the Company from August 2011 until his resignation in March 2019, directly holds 19.6% of the outstanding equity of Amun. Geoffrey T. Crowley, who serves as a director of AWAC and an employee of Air Wisconsin, directly holds 13.8% of the outstanding equity of Amun. William P. Jordan and Patrick J. Thompson, each of whom served as a director of AWAC from February 2017 until his respective resignation on April 7, 2020, and is employed by Air Wisconsin, each directly hold 13.8% of the outstanding equity of Amun.
Certain of our current or former directors own and control Resource Holdings. Richard A. Bartlett, one of the Company’s directors, indirectly holds 33.3% of the outstanding equity of Resource Holdings. Jerry M. Seslowe and John C. Shaw, each or whom served as a director of AWAC from December 2011 until his respective resignation on April 7, 2020, and as a director of the Company from August 2011 until his respective resignation in March 2019, each indirectly hold 33.3% of the outstanding equity of Resource Holdings.
Transactions with Southshore Leasing, LLC and Southshore Affiliates
Southshore Leasing, LLC (“Southshore Leasing”), through its affiliates (the “Southshore Affiliates” and, together with Southshore Leasing, “Southshore”), leased aircraft and engines to Air Wisconsin pursuant to various operating lease agreements from April 2010 through January 2020. During 2020, Air Wisconsin paid a total of approximately $0.15 million to Southshore, consisting of approximately $0.07 million for the leases of three aircraft and approximately $0.08 million for the lease of additional engines to support the operations of Air Wisconsin’s aircraft fleet. During 2019, Air Wisconsin paid a total of approximately $3.7 million to Southshore, consisting of approximately $1.9 million for the leases of three aircraft and approximately $1.7 million for the lease of additional engines to support the operations of Air Wisconsin’s aircraft fleet.
96
Air Wisconsin also from time to time contracted for services to be performed on assets held by Southshore that are used in Air Wisconsin’s operations and received reimbursement from Southshore at the cost of such services. Because Air Wisconsin acted as an agent or an intermediary in facilitating such transactions, and because no amounts were paid to Air Wisconsin for rendering these services other than reimbursement of direct costs, the dollar amounts of these transactions are not included in the dollar amounts described above.
Certain of our employees and directors directly or indirectly own and control Southshore. Richard A. Bartlett, one of the Company’s directors, directly or indirectly holds 19.6% of the outstanding equity of Southshore Leasing. Jerry M. Seslowe and John C. Shaw, each of whom served as a director of AWAC from December 2011 until his respective resignation on April 7, 2020, and as a director of the Company from August 2011 until his respective resignation in March 2019, each directly or indirectly hold 19.6% of the outstanding equity of Southshore Leasing. Geoffrey T. Crowley, who serves as a director of AWAC and as an employee of Air Wisconsin, directly holds 13.8% of the outstanding equity of Southshore Leasing. William Jordan and Patrick Thompson, each of whom served as a director of AWAC from February 2017 until his respective resignation on April 7, 2020, and is currently employed by Air Wisconsin, directly each holds 13.8% of the outstanding equity of Southshore Leasing.
On January 17, 2020, the Company completed an acquisition from Southshore of three CRJ-200 regional jets, each having two GE engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of the Company’s Series C Preferred. Air Wisconsin had leased each of these regional jets from Southshore under the lease arrangements described above prior to the acquisition. Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, 754,550 shares of the 4,000,000 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock, with the remaining 3,245,450 shares of Series C Preferred remaining outstanding as Conversion Cap Excess Shares as of the date of filing this Annual Report. On November 1, 2019, the Company’s board of directors formed a special committee to evaluate this acquisition from Southshore. Messrs. Bederman and Degen, each of whom qualified as a “disinterested director” for purposes of the transaction, were appointed to serve as members of the special committee. The special committee met frequently, including with special committee counsel, their financial advisor, and an independent valuation firm, throughout the process of analyzing, negotiating and completing the transaction, with both members present for all meetings. The Company completed the acquisition following the approval of the special committee. On January 17, 2020, the Company filed a Certificate of Designations, Preferences, and Rights of Series C Preferred (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred. As of December 31, 2020, the shares of Series C Preferred were convertible into an aggregate of 16,500,000 shares of the Company’s common stock.
Indemnification Agreements
The Company’s amended and restated certificate of incorporation compels indemnification of its directors to the extent permitted by the Delaware General Corporation Law, and its amended and restated bylaws provide for indemnification of the Company’s directors, officers, employees and other agents to the maximum extent permitted by Delaware General Corporation Law. In addition, the Company has entered into indemnification agreements with its directors and Chief Executive Officer containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify its directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.
97
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
AUDIT AND NON-AUDIT FEES
The following table provides the aggregate fees for services provided by BDO USA, LLP, our independent registered public accounting firm for the quarter ended March 31, 2020 and the year ended December 31, 2019 and for services prior to November 3, 2020, and by Grant Thornton LLP, our independent registered public accounting firm for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020, and for services rendered on and after November 3, 2020:
| Year Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| Audit fees(1) |
$ | 262,504 | $ | 848,257 | ||||
| Audit-related fees(2) |
70,000 | — | ||||||
| Tax Fees(3) |
— | 19,070 | ||||||
| Other(4) |
11,256 | — | ||||||
| Total fees |
343,760 | 867,327 | ||||||
| (1) | Consists of fees billed for professional services rendered in connection with the audit of our consolidated financial statements included in this Annual Report and services normally provided in connection with regulatory filings. |
| (2) | Consists of fees billed for professional services for assurance and related services that are traditionally performed by our independent registered public accounting firm, including audits of employee benefit plans and special procedures required to meet certain regulatory requirements. |
| (3) | Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance. |
| (4) | Consists of fees billed for professional services other than the services reported above. |
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The audit committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, internal control services, tax services and other services. The audit committee has adopted a policy for the pre-approval of services provided by our former independent registered public accounting firm, BDO USA, LLP, and our current independent registered public accounting firm, Grant Thornton LLP. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of the audit committee’s approval of the scope of the engagement of the independent registered public accounting firm or on a case-by-case basis before the independent registered public accounting firm is engaged to provide each service.
During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the audit committee requires specific pre-approval before engaging the independent registered public accounting firm.
The audit committee has determined that the rendering of the non-audit services described above by BDO USA, LLP and Grant Thornton LLP is compatible with maintaining the auditor’s independence.
For the year ended December 31, 2020, all audit and non-audit services provided by the independent registered public accounting firm were pre-approved.
98
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this Annual Report:
1. Consolidated Financial Statements
The financial statements filed as part of this Annual Report are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report.
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or notes to the consolidated financial statements within this Annual Report.
3. Exhibits
The exhibits listed below are filed or furnished as part of this Annual Report.
99
EXHIBIT INDEX
100
101
| * | Filed herewith. |
| ** | The certifications attached as Exhibit 32.1 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing. |
| # | Management contract or compensatory plan, contract or arrangement. |
| + | Certain schedules are omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally any omitted schedules to the SEC upon request. |
| † | Portions of this exhibit are redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The registrant agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon request. |
| ITEM 16. | FORM 10-K SUMMARY |
Information with respect to this Item is not required and has been omitted.
102
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HARBOR DIVERSIFIED, INC. | ||||||
| Date: April 1, 2021 | By: | /s/ Christine R. Deister | ||||
| Christine R. Deister | ||||||
| Chief Executive Officer and Secretary | ||||||
| Harbor Diversified, Inc. | ||||||
| (Principal Executive Officer) | ||||||
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Christine R. Deister and Gregg Garvey, and each or either of them, acting individually, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his or her substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
| Signature |
Title |
Date | ||
| /s/ Christine R. Deister |
Chief Executive Officer and Secretary (Principal Executive Officer) |
April 1, 2021 | ||
| /s/ Gregg Garvey |
Senior Vice President, Chief Accounting (Principal Financial and Accounting Officer) |
April 1, 2021 | ||
| /s/ Richard A. Bartlett |
Director, Harbor Diversified, Inc. | April 1, 2021 | ||
| /s/ Nolan Bederman |
Director, Harbor Diversified, Inc. | April 1, 2021 | ||
| /s/ Kevin J. Degen |
Director, Harbor Diversified, Inc. | April 1, 2021 | ||
103
Exhibit 10.3.2
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is made and entered into as of March 29, 2021, by and between Air Wisconsin Airlines LLC, a Delaware limited liability company (the “Company”), and Robert Binns (the “Executive” and, together with the Company, collectively, the “Parties”).
RECITALS
A. The Company and the Executive entered into an employment agreement dated as of March 20, 2019 (the “Original Agreement”), pursuant to which the Executive is currently serving as President and Chief Executive Officer of the Company. Capitalized terms used in this Amendment without definition that are defined in the Original Agreement shall have the meanings assigned to them in the Original Agreement. The Executive also serves on the Board of Managers of the Company (the “Board”) and on the Board of Directors of AWAC Aviation, Inc.
B. In April 2020, the Company entered into a Payroll Support Program Agreement (the “PSP-1 Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company received payroll support under the federal Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
C. In December 2020 the President signed the federal Consolidated Appropriations Act of 2021, Subtitle A of Title IV of Division N of which (the “PSP Extension Law”) provides for additional payroll support to eligible air carriers. The Company has entered into a Payroll Support Program Extension Agreement (the “PSP-2 Agreement”) with the Treasury, which is substantially similar to the PSP-1 Agreement.
D. In March 2021 the President signed the federal American Rescue Plan of 2021, Subtitle C of Title VII of which further extends the payroll support provided to eligible air carriers by the CARES Act and the PSP Extension Law. The Company currently anticipates that it will apply for payroll support and be required to enter into an agreement with the Treasury substantially similar to the PSP-1 Agreement and the PSP-2 Agreement. Such agreement may be referred to herein as the “PSP-3 Agreement” and, together with the PSP-1 Agreement and the PSP-2 Agreement, the “PSP Agreements”.
E. The PSP-1 Agreement and the PSP-2 Agreement contain, and the PSP-3 Agreement is expected to contain, substantially identical provisions that prohibit the Company or any Affiliate (as defined in the PSP Agreements) from paying, during any twelve month period in the period from March 24, 2020, through April 1, 2023 (the “TC Cap Period”), to any employee or officer, whose 2019 Total Compensation (as defined in the PSP Agreements) exceeded $425,000, Total Compensation that exceeds such employee’s or officer’s 2019 Total Compensation (such limit on Total Compensation, the “TC Cap”). The PSP Agreements also provide that, if an employee or officer was employed for less than all of 2019, the employee’s or officer’s Total Compensation for 2019 shall be determined on an annualized basis. The Parties have calculated the Executive’s 2019 Total Compensation, on an annualized basis and in accordance with the provisions of the PSP Agreements, to be $1,012,805, as shown in Schedule 1 attached hereto. It is possible, depending on the amount of any Incentive Bonuses and LTI Awards that would otherwise be paid to the Executive during the TC Cap Period, that the Executive’s Total Compensation determined in accordance with the Original Agreement would exceed the TC Cap.
1
F. The Parties acknowledge both the critical importance to the Company of the payroll support provided by the PSP Agreements and the Company’s obligation to comply with the TC Cap in the PSP Agreements.
G. The parties desire to enter into this First Amendment to provide a mechanism for monitoring the Total Compensation paid to the Executive by the Company or any of its Affiliates during the TC Cap Period and insuring that such Total Compensation never exceeds the TC Cap during the TC Cap Period.
AGREEMENTS
In consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. Amendment to Employee Benefits. Section 5(f) of the Original Agreement is hereby amended by deleting the reference to “fiscal year 2021” in the first sentence thereof and replacing it with a reference to “fiscal year 2022”.
2. Deferred Compensation.
(a) Accrual of Deferred Obligation. (i) Notwithstanding anything to the contrary in the Original Agreement, the Company shall not pay to the Executive, and the Executive shall not knowingly accept from the Company or any of its Affiliates, during any twelve month period in the TC Cap Period, an amount that exceeds the TC Cap as provided in any PSP Agreement. If any payment of Total Compensation that would otherwise be due to the Executive pursuant to the Original Agreement or other Board action is reduced by any amount (the “Unpaid Amount”) as a result of the application of this Section, then the Company shall accrue an obligation to pay to the Executive the Unpaid Amount (such aggregate accrued amount, as it may be increased or decreased during the TC Cap Period, the “Deferred Obligation”). If any payment of Total Compensation exceeds the TC Cap, the Executive shall, promptly following his discovery of such overpayment, return the excess portion of such payment (the “Overpayment”) to the Company, and the amount of the Overpayment shall be added to the Deferred Obligation. The Deferred Obligation shall be increased or decreased in an amount that the Executive and the disinterested members of the Board, each acting reasonably, agree is necessary to make the Executive whole after taking into account any tax consequences to the Executive of his repayment of the Overpayment.
(ii) If the disinterested members of the Board and the Executive agree prior to the end of any twelve month period during the TC Cap Period that the Total Compensation paid or to be paid to the Executive during such twelve month period would be less than the TC Cap, then the Company shall pay to the Executive on or prior to the last day of such twelve month period an amount, not to exceed the then Deferred Obligation, that would cause the Total Compensation paid to the Executive in such twelve month period to be at least $20,000 less than the TC Cap.
2
(b) Monitoring of Deferred Obligation. The Executive shall maintain a spreadsheet, the form and substance of which shall at all times be subject to the approval of the disinterested members of the Board, that lists the dates and amounts of all payments of Total Compensation to the Executive by the Company or any of its Affiliates during the TC Cap Period, the cumulative amount of all such payments during each twelve month period during the TC Cap Period and the amount of the Deferred Obligation as of the date of each payment of Total Compensation to the Executive.
(c) Payment of Deferred Obligation. On the next scheduled payroll date after April 2, 2023, if any Deferred Obligation is then outstanding and the Executive remains employed by the Company on such date, the Company shall pay to the Executive in cash in one lump sum the then unpaid amount of the Deferred Obligation.
(d) Termination of Employment. If the Executive’s employment with the Company terminates for any reason prior to the payment of the Deferred Obligation, the Executive, or his estate, may request that the Deferred Obligation be paid following such termination. The Company and the Executive, or his estate, shall work together co-operatively to determine whether the Deferred Obligation can be paid prior to April 2, 2023, under the then current circumstances in accordance with the terms of the PSP Agreements. In connection therewith, the Deferred Obligation may be treated as a severance payment if such treatment is permitted under the PSP Agreements and would permit the payment of the Deferred Obligation after termination and prior to April 2, 2023. Notwithstanding anything to the contrary herein, the Company shall not be obligated to pay the Deferred Obligation prior to April 2, 2023, unless it receives a written opinion from its outside legal counsel that such payment is permitted by the PSP Agreements. The payment of the Deferred Obligation after termination of the Executive’s employment in accordance with the provisions of this Section shall be in addition to any payments to which the Executive is entitled under Section 7(e) of the Original Agreement, and such payment of the Deferred Obligation shall not be limited by the provisions of Section 7(e) of the Original Agreement.
(e) Disputes. If any dispute arises between the Company and the Executive in any way relating to the TC Cap, the amount that may be paid to the Executive under the PSP Agreements, the aggregate deferred amount owing to the Executive pursuant to Section 2 of this Amendment or the interpretation or implementation of this Amendment, the Parties shall attempt first to resolve such dispute by good faith discussions between the Executive and the disinterested members of the Board. If such dispute is not resolved within thirty days after the commencement of such discussions, then such dispute shall be resolved by arbitration in accordance with the provisions of Paragraph 10 of the Original Agreement.
3. Payment on October 15, 2021. Subject to Section 3 above, the Company shall pay to the Executive on or about October 31, 2021, $91,250. Such amount shall be deemed to be part of the Executive’s Incentive Bonus for 2020 for purposes of determining the Executive’s LTI Award for 2020.
3
4. Successors and Assigns. The rights and obligations of the Company under this Amendment shall be binding on and inure to the benefit of the Company, its successors and permitted assigns. The rights and obligations of the Executive under this Amendment shall be binding on and inure to the benefit of the Executive and the heirs and legal representatives of the Executive. Neither Party may assign this Amendment without the prior written consent of the other, except that the Company may assign this Amendment to any entity that owns, is owned by or is under common control with or is affiliated with the Company or to any entity acquiring all or substantially all of the assets or the business of the Company.
5. Interpretation of this Amendment. The Parties agree that their intent in this Agreement is to comply with the Total Compensation provisions of the PSP Agreements.
6. Amendment. Except as otherwise provided herein, the Original Agreement shall remain in full force and effect in accordance with its terms. Upon and after the effectiveness of this Amendment, each reference in the Original Agreement to “this Agreement”, “hereunder”, “herein”, “hereof” or words of like import referring to the Original Agreement shall mean and be a reference to the Original Agreement as modified and amended hereby.
7. Waiver or Modification. Any waiver by either Party of a breach of any provision of this Amendment shall not operate as, or be construed to be, a waiver of any other breach of such provision of this Amendment. The failure of a Party to insist on strict adherence to any term of this Amendment on one or more occasions shall not be considered a waiver or deprive that Party of the right thereafter to insist on strict adherence to that term or any other term of this Amendment. Neither this Amendment nor any part of it may be waived, changed or terminated orally, and any waiver, amendment or modification must be in writing signed by the Executive and the Company.
8. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall, when executed, be deemed to be an original and all of which shall be deemed to be one and the same instrument. A facsimile or email signature will be deemed sufficient to constitute an original signature.
9. Choice of Law. This Amendment will be governed and construed and enforced in accordance with the laws of the State of Wisconsin, without regard to its conflicts of law rules.
10. Entire Agreement. This Amendment contains the entire understanding of the Parties relating to the subject matter of this Amendment and supersedes all other prior written or oral agreements, understandings or arrangements between the Parties relating to the subject matter of this Amendment. The Executive acknowledges that, in entering into this Amendment, he does not rely and has not relied on any statements or representations not contained in this Amendment.
11. Severability. Any term or provision of this Amendment that is determined to be invalid or unenforceable by any court of competent jurisdiction in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Amendment or affecting the validity or enforceability of any of the terms or provisions of this Amendment in any other jurisdiction and such invalid or unenforceable provision shall be modified by such court so that it is enforceable to the extent permitted by applicable law.
4
12. Headings. The headings of any sections in this Amendment are for reference only and shall not be used in construing the terms of this Amendment.
13. Survival. The covenants, agreements, representations and warranties contained in this Amendment shall survive the termination of the Term and the Executive’s termination of employment with the Company at any time and for any reason.
[Signature page follows]
5
IN WITNESS WHEREOF, this First Amendment has been executed and delivered by the Parties as of the first date written above.
| AIR WISCONSIN AIRLINES LLC | ||
| By: | /s/ Liam Mackay | |
| Liam Mackay, Chief Financial Officer | ||
| /s/ Robert Binns | ||
| ROBERT BINNS | ||
6
SCHEDULE 1
2019 Total Compensation
| Wages and Benefits:
|
$344,985 | |
|
Senior Executive Savings Plan:
|
$2,192 | |
|
Incentive Bonus:
|
$196,875 | |
|
Long Term Incentive Award:
|
$196,875 | |
|
Personal Travel Benefit:
|
$3,977 | |
|
Total Actual 2019 Compensation:
|
$744,904 | |
|
Annualized 2019 Compensation:
|
$993,205 | |
|
Company 401k Contribution:
|
19,600 | |
|
2019 Total Compensation:
|
$1,012,805 |
7
Exhibit 10.4
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made and entered into as of January 1, 2021, by and between Air Wisconsin Airlines LLC, a Delaware limited liability company (the “Company”), and Liam Mackay (the “Executive” and, together with the Company, collectively, the “Parties”).
RECITALS
The Company is engaged in the business of operating a regional airline company. The Company desires to employ the Executive, and the Executive desires to be employed by the Company, as Chief Financial Officer, and the Parties desire to enter into this Agreement to secure the Executive’s employment during the term of Executive’s employment, all on the terms and conditions set forth herein.
AGREEMENTS
In consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. Title. The Company hereby employs the Executive, and the Executive agrees to serve the Company, as its Chief Financial Officer on the terms and conditions hereinafter set forth.
2. Employment Term. The Executive’s employment by the Company as Chief Financial Officer under this Agreement shall commence on January 1, 2021 (the “Effective Date”) and shall continue through December 31, 2022, unless sooner terminated pursuant to Paragraph 7 below. The term of the Executive’s employment hereunder shall thereafter automatically renew for successive one year periods unless sooner terminated pursuant to Paragraph 7 below or unless either Party provides notice to the other Party, at least sixty days prior to the commencement of the first or next such renewal period, that the term of the Executive’s employment shall end upon the expiration of the then term. Such term of employment hereunder, including any such automatic renewal periods, shall hereafter be referred to as the “Term.”
3. Duties.
(a) General Duties, Authority and Direction. The Executive shall report directly to the Company’s Chief Executive Officer. The Executive shall have all the power, authority and responsibilities customarily attendant to the position of Chief Financial Officer, consistent with the Company’s Limited Liability Company Agreement. The Executive shall work under the direction and control of the Chief Executive Officer and the Board of Managers of the Company (the “Board”). The Executive will render his services under this Agreement faithfully and to the best of his abilities and in conformance with all laws and Company rules and policies and will cooperate fully with the Board and other executive officers of the Company in the advancement of the best interests of the Company.
1
(b) Location. The Executive currently resides in Chicago, Illinois. The Executive shall relocate to the Appleton, Wisconsin area as soon as reasonably practicable after the Effective Date taking into consideration the existence of the current global COVID-19 pandemic. Prior to such relocation, the Executive shall perform his duties remotely but shall commute to Appleton on a regular basis. The Company shall reimburse the Executive for the cost of temporary accommodation in the Appleton, WI area, subject to documentation and reasonable verification. Following his relocation to the Appleton, WI area, the Executive shall perform his duties under this Agreement principally out of the Company’s Appleton, WI office.
(c) Exclusive Services. During the Term, the Executive shall, except during vacation periods, periods of illness and the like, devote his full and exclusive time and attention to his duties and responsibilities for the Company and its affiliates, and the Executive shall not engage in any other business activity that would interfere with his full time responsibilities and the performance of his duties under this Agreement.
4. Compensation.
(a) Base Compensation. During the Term, the Executive shall be compensated for his services at an annual base salary of $220,000 or such higher base salary as the Board may determine in its sole discretion (the “Base Salary”). The Executive shall be paid the Base Salary on the same payroll terms that are applicable to other senior executives of the Company. The Base Salary shall be reviewed annually by the Board.
(b) Sign-On Bonus. The Company shall pay the Executive, within thirty days of the Effective Date, a lump sum bonus of $35,000 as a sign-on bonus (the “Sign-on Bonus”). If the Executive terminates his employment with the Company without Good Reason (as defined in subparagraph 7(b)) or if the Company terminates such employment with Cause (as defined in subparagraph 7(a)), in either event within two years of the Effective Date, the Executive shall repay to the Company the entire amount of the Sign-on Bonus within ninety days of such termination. Notwithstanding anything to the contrary contained herein, the Company shall have the right to withhold any amounts owing to the Executive from or after such termination until the Executive has repaid the Sign-on Bonus in full.
(c) Annual Incentive Bonus. For each fiscal year during the Term (so long as the Executive remains employed by the Company on the date of payment), the Executive shall be eligible to receive a lump sum incentive bonus (the “Incentive Bonus”) for the prior fiscal year. Any such bonus in respect of a fiscal year shall be paid no later than March 31 of the next fiscal year. The payment and amount of the Incentive Bonus in any year is subject to the approval of the Board. The Incentive Bonus will be based on a percentage of the Base Salary for the fiscal year (without regard to any increase of the Base Salary for the subsequent fiscal year). The target percentage shall be 50% of Base Salary. The particular percentage shall be determined at the end the fiscal year by the Board based on the Executive’s performance during the fiscal year. The Executive’s performance will be measured based on performance metrics that the Board determines at the beginning of the fiscal year to be reasonably attainable with input from the Chief Executive Officer and the Executive. No amount of the Incentive Bonus is guaranteed, and no payment will be made unless the Executive remains a full time active employee of the Company through the date scheduled for payment of the Incentive Bonus.
2
(d) Withholding. All payments made to or on behalf of the Executive under the terms of this Agreement, including without limitation all payments of Base Salary and any bonuses, as set forth herein, shall be subject to all withholding required or permitted by law (such as federal, state and local income and payroll taxes) and such additional withholding as may be agreed upon by the Executive (such as for payment of the employee portion of insurance or welfare plan premiums).
5. Employee Benefits.
(a) Vacation. During the Term, the Executive shall be entitled to four weeks paid annual vacation in any calendar year. In accordance with Company policy, any accrued vacation time not used in a year shall expire and shall not roll over to any subsequent year.
(b) Business Expenses. The Executive shall be reimbursed for all reasonable expenses incurred by him during the Term in the discharge of his duties hereunder, including but not limited to, expenses for travel and entertainment, provided the Executive shall account for and substantiate all such expenses in accordance with the Company’s policies for reimbursement of the expenses of its senior executives.
(c) Air Travel Benefit. During the Term, the Executive and his eligible family members shall be entitled to reduced rate air travel on other commercial airline companies pursuant to the Company’s interline agreements, subject to the Company’s continuing agreements with such companies.
(d) Benefit Plans. The Executive shall be eligible to participate in any other employee benefit plans and arrangements sponsored or maintained by the Company for the benefit of its senior executives, including without limitation, all welfare benefits plans (life, medical and disability), retirement plans and deferred compensation plans.
(e) General Company Policies. Except to the extent specifically provided herein, the provision of all employee benefits to the Executive shall be made in accordance with the Company’s established policies and procedures.
6. Freedom to Contract. The Executive represents and warrants that he has the right to enter into this Agreement, that he is eligible for employment by the Company as contemplated by this Agreement and that no other written or verbal agreements exist that would be in conflict with or prevent performance of any portion of this Agreement. The Executive represents and warrants that he has not made and will not make any contractual or other commitments that would conflict with or prevent his performance of any portion of this Agreement or conflict with the full enjoyment by the Company of the rights herein granted.
3
7. Termination. Notwithstanding the provisions of Paragraph 2 above, the Executive’s employment under this Agreement and the Term hereunder shall terminate on the earliest of the following dates:
(a) For Cause. On the date of delivery of a notice from the Company terminating the Executive’s employment for Cause stating the grounds for such termination, provided, that in the case of termination pursuant to the following clauses (ii), (viii) or (ix), the Executive shall have ten days following the date of notice from the Company to cure any conduct or act, which constitutes grounds for termination of the Executive’s employment for Cause, to the extent that the Company determines that the Executive’s breach is subject to cure. The Board shall determine, in its sole discretion, whether the Executive has cured the conduct or act attributable to the grounds for termination. The term “Cause” used in this Agreement shall mean: (i) fraud against the Company; (ii) failure or refusal to implement or undertake the lawful directives of the Company, the Chief Executive Officer or the Board; (iii) engaging in conduct that causes material injury, monetary or otherwise, to the Company or that reflects adversely on the Company or materially affects the Executive’s ability to perform his duties hereunder; (iv) arrest for commission of a felony or for commission of a crime, whether or not a felony, involving the Executive’s duties for the Company or that may reflect unfavorably on the Company or bring the Executive into public disrepute or scandal; (v) violation of federal, state or local tax laws; (vi) dependence on alcohol or drugs without the supervision of a physician or the illegal use, possession or sale of drugs; (vii) theft, misappropriation, embezzlement or conversion of the assets or opportunities of the Company; (viii) a material breach of the terms, covenants or representations of this Agreement; or (ix) a violation of Company policies. In the event of the termination of the Executive’s employment for Cause pursuant to this subparagraph (a), the Company shall pay to the Executive only such Base Salary as had been accrued but unpaid as of the date of the termination, and the Executive shall receive no further payments of any kind, except as provided in subparagraph 7(e).
(b) Without Cause or For Good Reason. On the date specified in a written notice from the Company terminating the Executive’s employment Without Cause, or in the event no date is specified in the notice, on the date on which the notice is delivered to the Executive, or on the date specified in a written notice from the Executive terminating his employment for Good Reason stating the grounds for termination of the Executive’s employment for Good Reason; provided, that the Company shall have ten days following the date of notice from the Executive to cure any conduct or act, if curable, which constitute grounds for termination of the Executive’s employment for Good Reason, and if such conduct or act is cured within such ten day period, then Executive’s Employment shall not be terminated For Good Reason. For purposes of this Agreement, “Without Cause” shall mean any reason for the Company’s decision to terminate the Executive’s employment other than by reason of Cause, as provided in subparagraph (a) above, and “Good Reason” shall mean termination by the Executive due to a material breach by the Company of the terms of this Agreement. In the event of the termination of the Executive’s employment by the Company Without Cause or by the Executive for Good Reason, the Company shall pay to the Executive: (i) the Executive’s Base Salary as had been earned but unpaid as of the date of the termination, and (ii) a lump sum severance payment equal to the sum of (A) the total amount of one year of Base Salary, calculated as of the date the Executive’s employment with the Company terminated, plus (B) the total amount of the Incentive Bonus for the prior fiscal year, such payment to be made within thirty days after such termination, and the Executive shall receive no further payments of any kind, except as provided in subparagraph 7(e). In addition, upon termination of the Term by the Company Without Cause or by the Executive for Good Reason, the Executive shall be eligible to participate in the Company’s benefit plans, as provided in subparagraph 5(d), subject to the terms and conditions of those plans, for one year following such termination.
4
(c) Death. On the date of the Executive’s death. In the event of the death of the Executive, the Company shall pay to the Executive’s legal representatives or named beneficiaries (as the Executive may designate from time to time in a writing delivered to the Company) the same payments and other benefits as would be provided to the Executive upon the termination of his employment Without Cause pursuant to subparagraph (b) above.
(d) Expiration of the Full-Time Term. On the expiration of the Term other than by termination by either Party pursuant to this Paragraph 7. If the Executive’s employment with the Company terminates at any time for any reason, other than by termination by a Party pursuant to this Paragraph 7, and the Parties have not entered into a new employment agreement, then the Company shall pay the Executive only such Base Salary as had been accrued but unpaid as of the date of the termination, and the Executive shall receive no further payments of any kind, except as provided in subparagraph 7(e).
(e) No Further Liability. Following the termination of the Term and the Executive’s employment under this Agreement, the Company will have no further liability to the Executive and no further payments or benefits will be provided to the Executive, except, without duplication: (i) as provided in subparagraphs (a) through (d) above; (ii) to the extent the Executive is entitled to payment of benefits following termination of employment under any employee benefit plan made available to the Executive pursuant to Paragraph 5 above in accordance with the terms of those plans; (iii) to the extent the Executive is entitled to the reimbursement of business expenses incurred prior to termination pursuant to Paragraph 5 above; or (iv) to the extent the Executive is entitled to indemnification pursuant to the terms of the Company’s Limited Liability Company Agreement.
8. Restrictive Covenants.
(a) Confidentiality. The Executive agrees that both during his employment with the Company and thereafter he will not disclose to any third party or use in any way (except in furtherance of the best interests of the Company) any confidential information, business secrets, or business opportunity of the Company or any of its affiliates, including without limitation, marketing, advertising and promotional ideas and strategies, marketing surveys and analyses, technology, budgets, forecasts, business plans, customer lists, research or financial, purchasing, planning, employment or personnel data or information. Immediately upon termination of the Executive’s employment or at any other time upon the Company’s request, the Executive will return to the Company all memoranda, notes, records or other documents compiled by the Executive or made available to the Executive during his employment with the Company, concerning the business of the Company or its affiliates, all other confidential information and all personal property of the Company or its affiliates, including without limitation, all files, records, documents, lists, equipment, supplies, promotional materials, keys, phone or credit cards and similar items and all copies thereof or extracts therefrom. Notwithstanding the foregoing, information or materials shall not be subject to the provisions of this subparagraph (a) to the extent such information or materials are publicly available other than as a result of a breach by the Executive of his obligations of confidentiality set forth herein. In addition, if the Executive is required by applicable law or regulation in response to any subpoena, summons or judicial order to disclose information or materials subject to the provisions of this subparagraph (a), then the Executive may disclose such information or materials to the extent he is advised to do so by counsel, provided that the Executive shall, to the extent permitted by law, provide the Company with advance prompt written notice of such subpoena, summons or judicial order to enable the Company to seek a protective order or other appropriate remedy for such information or material, or to waive the provisions of this subparagraph (a).
5
(b) No Solicitation. The Executive agrees that, both during his employment with the Company and for a period of two years following the termination of the Executive’s employment with the Company at any time and for any reason, the Executive will not, directly or indirectly, on behalf of himself or any other person or entity, hire or solicit to hire for employment or consulting or other provision of services, any person who is actively employed (or in the preceding six months was actively employed) by the Company or any of its affiliates. This includes, but is not limited to, inducing or attempting to induce, or influencing or attempting to influence, any person employed by the Company or any of its affiliates to terminate his or her employment with the Company or such affiliate.
(c) Non-Compete. The Executive agrees that, both during his employment with the Company and for a period of six months following the termination of the Executive’s employment with the Company at any time and for any reason, the Executive will not, compete with the business of the Company and its successors and assigns. The term “not compete” as used herein shall mean that the Executive shall not own, manage, operate, consult or be employed by a regional airline flying aircraft with 76 or fewer seats for a major airline in the United States. The Executive acknowledges that the provisions of this subparagraph are reasonably necessary to protect the Company’s legitimate business interests in preserving the confidentiality of the information that will be obtained by the Executive in the performance of his duties under this Agreement and to prevent such information from being used to the Company’s detriment or for the benefit of the Company’s competitors.
6
(d) Enforcement. The Executive acknowledges and agrees that the services he is to provide under this Agreement are of a special, unique and extraordinary nature. The Executive further acknowledges and agrees that the restrictions contained in this Paragraph 8 are necessary to prevent the use and disclosure of confidential information and to protect other legitimate business interests of the Company. The Executive acknowledges that all of the restrictions in this Paragraph 8 are reasonable in all respects, including duration, territory and scope of activity. The Executive agrees that the restrictions contained in this Paragraph 8 shall be construed as separate agreements independent of any other provision of this Agreement or any other agreement between the Executive and the Company. The Executive agrees that the existence of any claim or cause of action by the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and restrictions in this Paragraph 8. The Executive agrees that the restrictive covenants contained in this Paragraph 8 are a material part of the Executive’s obligations under this Agreement for which the Company has agreed to compensate the Executive as provided in this Agreement. The Executive agrees that the injury the Company will suffer in the event of the breach by the Executive of any clause of this Paragraph 8 will cause the Company irreparable injury that cannot be adequately compensated by monetary damages alone. Therefore, the Executive agrees that the Company, without limiting any other legal or equitable remedies available to it, shall be entitled to obtain equitable relief by injunction or otherwise from any court of competent jurisdiction, including, without limitation, injunctive relief to prevent the Executive’s failure to comply with the terms and conditions of this Paragraph 8. The two year period referenced in subparagraph (b) above shall be tolled on a day-for-day basis for each day during which the Executive violates the provisions of subparagraph (b) in any respect, so that the Executive is restricted from engaging in the activities prohibited by subparagraph (b) for the full two year period.
9. Intangible Property. The Executive will not at any time during or after his employment with the Company have or claim any right, title or interest in any trade name, trademark, trade secret, patent, copyright or other intellectual property belonging to or used by the Company and shall not have or claim any right, title or interest in any material or matter of any sort prepared for or used in connection with the advertising, promotion or business of the Company, whatever the Executive’s involvement with such matters may have been, and whether procured, produced, prepared, or published in whole or in part by the Executive, it being the intention of the Parties that the Executive shall and hereby does, recognize that the Company now has and shall hereafter have and retain the sole and exclusive rights in any and all such trade names, trademarks, trade secrets, patents, copyrights (all the Executive’s work in this regard being a work for hire for the Company under the copyright laws of the United States), other intellectual property, material and matter as described above. The Executive shall cooperate fully with the Company during his employment and thereafter in the securing of trade name, trademark, patent or copyright protection or other similar rights in the United States and in foreign countries and shall give evidence and testimony and execute and deliver to the Company all papers requested by it in connection therewith. Following the Executive’s termination of employment with the Company, if the Company requests the Executive’s assistance under this Paragraph 9, the Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by him in connection with the rendering of such assistance.
10. Arbitration. With the exception of any dispute regarding the Executive’s compliance with the provisions of Paragraph 8 (Restrictive Covenants) above, any dispute relating to or arising out of the provisions of this Agreement shall be decided by arbitration in Wisconsin, in accordance with the Expedited Arbitration Rules of the American Arbitration Association then obtaining, unless the Parties mutually agree otherwise in a writing signed by both Parties. This undertaking to arbitrate shall be specifically enforceable. The decision rendered by the arbitrator will be final and judgment may be entered upon it in accordance with appropriate laws in any court having jurisdiction thereof.
7
11. Nondisclosure. Except as may be required by law, neither the Executive nor the Company shall disclose the financial terms of this Agreement to persons not involved in the operation of the Company and the Parties shall disclose the financial terms of this Agreement to those involved in the operation of the Company only as needed to implement the terms of this Agreement or carry out the operations of the Company. The above notwithstanding, the financial terms of this Agreement may be disclosed to (i) the Parties’ attorneys, lenders, accountants, financial or tax advisors, and any potential investors in or purchasers of the Company or a Company affiliate, provided such persons agree not to disclose such terms of this Agreement further, and (ii) members of the Executive’s immediate family, provided such family members agree not to reveal the terms of this Agreement further. The terms of this Paragraph 11 shall not apply to any disclosures that the Company, in its sole discretion, deems are necessary or appropriate in connection with compliance with applicable securities laws.
12. Successors and Assigns. The rights and obligations of the Company under this Agreement shall be binding on and inure to the benefit of the Company, its successors and permitted assigns. The rights and obligations of the Executive under this Agreement shall be binding on and inure to the benefit of the Executive and the heirs and legal representatives of the Executive. Neither Party may assign this Agreement without the prior written consent of the other, except that the Company may assign this Agreement to any entity that owns, is owned by or is under common control with or is affiliated with the Company or to any entity acquiring all or substantially all of the assets or the business of the Company.
13. Insurance. If the Company desires at any time or from time to time during the Term to apply in its own name or otherwise for life, health, accident or other insurance covering the Executive, the Company may do so and may take out such insurance for any sum which the Company may deem necessary to protect its interests. The Executive will have no right, title or interest in or to such insurance, but will, nevertheless, assist the Company in procuring and maintaining the same by submitting from time to time to the usual customary medical, physical, and other examinations and by signing such applications, statements and other instruments as may reasonably be required by the insurance company or companies issuing such policies.
14. Waiver or Modification. Any waiver by either Party of a breach of any provision of this Agreement shall not operate as, or be construed to be, a waiver of any other breach of such provision of this Agreement. The failure of a Party to insist on strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that Party of the right thereafter to insist on strict adherence to that term or any other term of this Agreement. Neither this Agreement nor any part of it may be waived, changed or terminated orally, and any waiver, amendment or modification must be in writing signed by the Executive and the Company.
15. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall, when executed, be deemed to be an original and all of which shall be deemed to be one and the same instrument. A facsimile or email signature will be deemed sufficient to constitute an original signature.
8
16. Choice of Law. This Agreement will be governed and construed and enforced in accordance with the laws of the State of Wisconsin, without regard to its conflicts of law rules.
17. Entire Agreement. This Agreement contains the entire understanding of the Parties relating to the subject matter of this Agreement and supersedes all other prior written or oral agreements, understandings or arrangements, including any previous employment agreements by and between the Parties. The Executive acknowledges that, in entering into this Agreement, he does not rely and has not relied on any statements or representations not contained in this Agreement.
18. Severability. Any term or provision of this Agreement that is determined to be invalid or unenforceable by any court of competent jurisdiction in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction and such invalid or unenforceable provision shall be modified by such court so that it is enforceable to the extent permitted by applicable law.
19. Notices. All notices and other communications required or permitted to be given under this Agreement shall be in writing and delivery shall be deemed to have been made (i) on the day of delivery if delivered in person; (ii) three business days following the date when such notice is deposited in first class mail, postage prepaid, return receipt requested; or (iii) the business day following the date when such notice is deposited with any overnight air courier service, to the Party entitled to receive the same, at the address indicated below or at such other address as such Party shall have specified by written notice to the other Party given in accordance with the terms of this Paragraph 19:
| If to the Company |
Air Wisconsin Airlines Corporation | |
| W6390 Challenger Drive, Suite 203 | ||
| Appleton, Wisconsin 54914 | ||
| Attn: Chief Executive Officer | ||
| If to the Executive |
Liam Mackay | |
| Air Wisconsin Airlines LLC | ||
| W6390 Challenger Drive, Suite 203 | ||
| Appleton, Wisconsin 54914 | ||
20. Headings. The headings of any paragraphs in this Agreement are for reference only and shall not be used in construing the terms of this Agreement.
21. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a Party to this Agreement.
9
22. Indemnification. The Company shall take all reasonable actions consistent with the terms of the Company’s Limited Liability Company Agreement to ensure that the Executive is covered under the terms of any applicable directors and officers’ liability insurance coverage and is subject to coverage under the terms of any indemnification provisions contained in the Company’s Limited Liability Company Agreement, to the same extent that such coverage and such provisions are provided by the Company with respect to other management level employees of the Company.
23. Survival. The covenants, agreements, representations and warranties contained in this Agreement shall survive the termination of the Term and the Executive’s termination of employment with the Company at any time and for any reason.
[Signature page follows]
10
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the Parties as of the first date written above.
| AIR WISCONSIN AIRLINES LLC | ||
| By: | /s/ Robert Binns | |
| Robert Binns | ||
| President and Chief Executive Officer | ||
| /s/ Liam S. Mackay | ||
| LIAM MACKAY | ||
11
Exhibit 10.5.3
Execution Version
Certain confidential information contained in this document, marked by [***], has been omitted because it (i) is not material and would be competitively harmful if publicly disclosed, or (ii) contains personally identifiable information, omitted pursuant to Item 601(a)(6) under Regulation S-K.
FIRST AMENDMENT TO CAPACITY PURCHASE AGREEMENT
This First Amendment to Capacity Purchase Agreement (this “Amendment”) is made, entered into and effective as of October 14, 2020 (the “Amendment Effective Date”), by and among United Airlines, Inc., a Delaware corporation (“United”), Air Wisconsin Airlines LLC, a Delaware limited liability company (“Contractor”), and, solely for the purposes of Section 16, each of AWAC Aviation, Inc., a Delaware corporation (“AWAC”), and Harbor Diversified, Inc., a Delaware corporation (“Harbor”). United and Contractor are collectively referred to herein as the “Parties” and individually as a “Party.”
RECITALS
WHEREAS, United and Contractor entered into that certain Capacity Purchase Agreement, dated as of February 26, 2017 (the “Agreement”);
WHEREAS, pursuant to Section 10.04 of the Agreement, the Agreement may be amended pursuant to a written agreement signed by Contractor and United that specifically states that it is intended to amend or modify the Agreement; and
WHEREAS, Contractor and United intend to amend the Agreement subject to and in accordance with this Amendment.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree to amend the Agreement as follows:
1. Scheduling. The following new Section 2.01(f) is added to the Agreement:
“(f) Pre-Termination Scheduling. Notwithstanding anything in this Section 2.01 or elsewhere in this Agreement to the contrary, if United does not exercise its extension right under Section 8.01(b) on or prior to [***], then United shall not schedule a number of block hours in any calendar month after [***] that exceeds the number of scheduled block hours set forth in the Final Monthly Schedule for [***].”
2. Crew and Maintenance Bases. Section 3.02(c) of the Agreement is hereby deleted and replaced in its entirety with the following:
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
“(c) Crew and Maintenance Bases.
| (i) | From time to time, if Contractor alters its operating schedule pursuant to written direction from United (an “Alteration”), whether such direction is contained in a Final Monthly Schedule or otherwise, then either United or Contractor may submit written notice to the other party requesting to confer to determine whether changes to Contractor’s crew and/or maintenance bases are reasonably necessary in response to such Alteration (a “Base Change Request Notice”). |
If either party submits a Base Change Request Notice to the other party, then, for a period not to exceed [***] from and after the delivery of such Base Change Request Notice, United and Contractor shall confer and determine (both parties acting in a commercially reasonable manner) whether changes to Contractor’s crew and/or maintenance bases are reasonably necessary in response to such Alteration; provided that the parties hereby stipulate that, with respect to any Base Change Request Notice, if any Specified Condition has persisted for at least [***] (which [***] period includes the [***] period specified in the definition of the applicable Specified Condition), whether or not such [***] period commenced before or after the giving of the applicable Base Change Request Notice or before or after the [***] period referenced above, and such Specified Condition remains in existence as of the delivery of such Base Change Request Notice, then the applicable Specified Opening or Specified Closing (as the case may be) associated with such Specified Condition will be deemed to be “reasonably necessary in response to such Alteration” as referenced above in this sentence. If a Specified Condition has existed for such [***] period or if the parties otherwise agree in writing (in the case of United, signed by its Senior Vice President – United Express, or, if that office no longer exists, the person holding the successor or replacement office) that the change to Contractor’s crew and/or maintenance bases identified in the Base Change Request Notice is reasonably necessary in response to the applicable Alteration, then the parties shall execute an agreement (an “Alteration Agreement”) in the form attached hereto as Exhibit A; provided that each Alteration Agreement, (A) in the case of United, shall be signed by its Senior Vice President – United Express (or if that office no longer exists, the person holding the successor or replacement office), (B) shall describe the crew and/or maintenance base to be opened or closed, (C) shall indicate with reasonable detail the steps and targeted timeline for the implementation of the application Alteration, and (D) in the case of an Alteration Agreement that is for a Hub MX Base Opening, a Hub MX Base Closing or a Non-Specified Condition Opening or Closing, shall specify the amount agreed by the parties (both parties acting in a commercially reasonable manner) to be paid by United to Contractor as reimbursement of Contractor’s reasonable and documented out-of-pocket expenses that relate directly and exclusively to the applicable opening or closing.
United shall pay to Contractor the amount for each Specified Opening or Specified Closing (as the case may be) applicable to such Specified Opening or Specified Closing in accordance with Section 3.02(c)(iii).
2
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
Without limiting the foregoing in this Section 3.02(c)(i), Contractor shall use commercially reasonable efforts to provide at least [***] advance written notice to United of any changes to its crew and/or maintenance bases not covered by a Base Change Request Notice; provided, however, that, except as provided in sub-clause 3.02(c)(iv)(II), United shall not have any payment obligation pursuant to this Section 3.02(c) other than as contemplated in an Alteration Agreement.
| (ii) | For purposes of this Section 3.02(c), the following conditions set forth in sub-clauses (a)-(h) below are, collectively, the “Specified Conditions”, it being understood that (x) a Specified Condition in a sub-clause below shall only give rise to the Specified Opening or Specified Closing defined in the same sub-clause, and not any other Specified Opening or Specified Closing, and (y) no [***] period referenced in any of sub-clauses (a)-(h) below shall commence prior to [***]: |
(a) the scheduling parameters set forth in Paragraph 2 of Exhibit P attached hereto have not been met in a period of at least [***], and the existence of a new maintenance base at a non-Hub Airport would have allowed such scheduling parameters to have been met (any maintenance base opened pursuant to an Alteration Agreement due to such Specified Condition, a “Non-Hub MX Base Opening”).
(b) for at least [***] of the days in a period of at least [***], fewer than [***] have been scheduled for overnight maintenance at a non-Hub Airport (any maintenance base closed pursuant to an Alteration Agreement due to such Specified Condition, a “Non-Hub MX Base Closing”).
(c) the scheduling parameters set forth in Paragraph 2 of Exhibit P attached hereto have not been met for a period of at least [***], and the existence of a new maintenance base at a Hub Airport would have allowed such scheduling parameters to have been met (any maintenance base opened pursuant to an Alteration Agreement due to such Specified Condition, a “Hub MX Base Opening”).
(d) for at least [***] of the days in a period of at least [***], fewer than [***] have been scheduled for overnight maintenance at a Hub Airport (any maintenance base closed pursuant to an Alteration Agreement due to such Specified Condition, a “Hub MX Base Closing”).
(e) Contractor’s crewmembers’ block per duty period number would have [***] for a period of at least [***], if a crew base at a non-Hub Airport had been opened at the beginning of such period (any crew base opened pursuant to an Alteration Agreement due to such Specified Condition, a “Non-Hub Crew Base Opening”). For all purposes of this Agreement, the parties agree that crewmember block per duty period is calculated as a result of Contractor’s ordinary course use of its crew optimization software, and Contractor will promptly provide to United a copy of each periodic output from such crew optimization process.
3
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
(f) Contractor’s crewmembers’ block per duty period number for a period of at least [***] is not at least [***] as a result of a particular existing crew base at a non-Hub Airport remaining open than it would have been had such crew base been closed (any crew base closed pursuant to an Alteration Agreement due to such Specified Condition, a “Non-Hub Crew Base Closing”).
(g) both (1) there is a minimum of [***] that are scheduled to be flown by Contractor from a Hub Airport over at least a [***] period and (2) [***] (any crew base opened pursuant to an Alteration Agreement due to such Specified Condition, a “Hub Crew Base Opening”).
(h) both (1) the [***] that are scheduled to be flown by Contractor from a Hub Airport drops below [***] over at least a [***] period and (2) [***] (any crew base closed pursuant to an Alteration Agreement due to such Specified Condition, a “Hub Crew Base Closing”).
“Specified Opening” means any of the following: a Non-Hub MX Base Opening, a Hub MX Base Opening, a Non-Hub Crew Base Opening, a Hub Crew Base Opening and any other crew or maintenance base opening approved as set forth in an Alteration Agreement.
“Specified Closing” means any of the following: a Non-Hub MX Base Closing, a Hub MX Base Closing, a Non-Hub Crew Base Closing, a Hub Crew Base Closing and any other crew or maintenance base closing approved as set forth in an Alteration Agreement.
| (iii) | Payment Amounts; Certain Adjustments to Base Compensation. United’s payment obligation under Section 3.02(c)(i) shall be determined as provided in this Section 3.02(c)(iii) with respect to each Specified Opening or Specified Closing that is subject to an applicable Alteration Agreement. For each Specified Opening or Specified Closing (as the case may be), an amount equal to [***] of the applicable payment obligation set forth below in this Section 3.02(c)(iii) (which payment obligation, for the avoidance of doubt, is distinct from the rate increases referenced below in this Section 3.02(c)(iii)) shall be paid by United within [***] of the parties’ execution and delivery of the Alteration Agreement applicable to such Specified Opening or Specified Closing, and the remainder shall be paid by United no later than the [***] following the execution and delivery of such Alteration Agreement. |
| (a) | In connection with each Non-Hub MX Base Opening, United shall pay Contractor $[***] and, effective as of the date of the parties’ execution and delivery of an Alteration Agreement, the Per Aircraft per Day rate set forth on Appendix 1 to Schedule 3 shall automatically be increased by $[***], without any further action by the parties if, but only for so long as, the number of remaining maintenance bases after giving effect to both such opening and any contemporaneous maintenance base closings [***]. |
4
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
| (b) | In connection with each Non-Hub MX Base Closing, United shall pay Contractor $[***] and, effective as of the date of the parties’ execution and delivery of an Alteration Agreement, the Per Aircraft per Day rate set forth on Appendix 1 to Schedule 3 shall automatically be reduced by $[***], without any further action by the parties if, but only for so long as, the number of remaining maintenance bases (not including Contractor’s maintenance base located at [***]) after giving effect to both such closing and any contemporaneous maintenance base openings [***]. |
| (c) | In connection with each Hub MX Base Opening or Hub MX Base Closing, United shall pay Contractor [***]. |
| (d) | In connection with a Non-Hub Crew Base Opening or a Hub Crew Base Opening, United shall pay $[***] to Contractor and, effective as of the date of the parties’ execution and delivery of an Alteration Agreement, the Per Aircraft per Day rate set forth on Appendix 1 to Schedule 3 shall automatically be increased by $[***], without any further action by the parties if, but only for so long as, the number of remaining crew bases after giving effect to both such opening and any contemporaneous crew base closings [***]. |
| (e) | In connection with a Non-Hub Crew Base Closing or a Hub Crew Base Closing, United shall pay $[***] to Contractor and, effective as of the date of the parties’ execution and delivery of an Alteration Agreement, the Per Aircraft per Day rate set forth on Appendix 1 to Schedule 3 shall automatically be reduced by $[***], without any further action by the parties if, but only for so long as, the number of remaining crew bases (without regard to Contractor’s crew base located at [***]) after giving effect to both such closing and any contemporaneous crew base opening [***]. |
| (f) | In connection with a crew or maintenance base opening or closing that is not a Non-Hub MX Base Opening, an Non-Hub MX Base Closing, a Hub MX Base Opening, a Hub MX Base Closing, a Non-Hub Crew Base Opening, a Non-Hub Crew Base Closing, a Hub Crew Base Opening, or a Hub Crew Base Closing (a “Non-Specified Condition Opening or Closing”), United shall pay Contractor [***]. |
| (iv) | Notwithstanding anything to the contrary in this Agreement, (I) United shall have no obligation to make any payment, and there shall be no adjustment to the Per Aircraft per Day rate, under Section 3.02(c)(iii) with respect to any crew base closing at [***], that occurred prior to the Amendment Effective Date or with respect to the first opening of any crew base at [***], that occurs after the Amendment Effective Date, and (II) United shall pay to Contractor no later than [***] after the Amendment Effective Date an amount equal to $[***] for the closing of Contractor’s maintenance base and crew base in [***], which commenced prior to the Amendment Effective Date, and United shall have no further obligation to make payments with respect to such closings, including under Section 3.02(c)(iii). |
5
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
| (v) | Upon the reasonable request of United at any time from time to time, Contractor shall inform United, with reasonable detail and on a reasonably prompt basis, as to the status of any crew and/or maintenance base opening or closing. |
| (vi) | Notwithstanding anything to the contrary in this Agreement, the parties acknowledge and agree that the payments provided for in this Section 3.02(c) shall constitute Contractor’s sole and exclusive right to reimbursement for, or recovery of, costs related to or associated with changes to Contractor’s crew and/or maintenance bases, including, without limitation, inventory costs, labor costs, severance, relocation and any other costs incurred by Contractor in connection with such changes in excess of the amount set forth in this Section 3.02(c).” |
3. United Debt Obligations. The following new Section 3.08 is added to the Agreement:
“Section 3.08 United Debt Obligations.
(a) Scheduling – Deferred Obligations. Effective [***], for any fiscal quarter in which the number of Scheduled Quarterly Block Hours is less than the Deferred Obligation Quarterly Benchmark, then on the [***] following the end of such fiscal quarter, United shall accrue a payment obligation to Contractor (a “Deferred Obligation”) in an amount equal to the product of:
(i) the Deferred Obligation Quarterly Benchmark minus the greater of (A) the Scheduled Quarterly Block Hours and (B) the UA Quarterly Benchmark, multiplied by,
(ii) the Accrued Liability Rate for the calendar year in which such fiscal quarter falls.
Notwithstanding the foregoing,
(y) with respect to the second fiscal quarter of 2020, the Deferred Obligation Quarterly Benchmark and the Scheduled Quarterly Block Hours for such quarter shall be calculated solely for the period from and after June 1, 2020 through and including June 30, 2020 (it being understood that the Deferred Obligation for the second fiscal quarter of calendar year 2020 will be calculated for the month of June rather than the entire quarter); and
(z) if United exercises its extension right under Section 8.01(b) at any time on or prior to [***], in a manner that extends the Agreement for a period of [***] (a “Subject Extension”), then, for purposes of calculating the Deferred Obligation for the quarter in which the Subject Extension occurs, the Deferred Obligation Quarterly Benchmark, the Scheduled Quarterly Block Hours and the UA Quarterly Benchmark for such quarter shall be calculated solely with respect to the period of time preceding the date on which such extension right is exercised, rather than the entire quarter
6
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
(with the quantity set forth in clause (B)(i) of the definition of “UA Quarterly Benchmark” being prorated based on the number of days in such period), and for all subsequent quarters following the fiscal quarter in which United exercises a Subject Extension, the Deferred Obligation shall be deemed to be zero.
The Deferred Obligations shall (I) bear interest at the rate of [***]% per annum, compounding annually, (II) be unsecured, (III) be evidenced by negotiable instruments in the form attached hereto as Exhibit B provided by United at Contractor’s request, (IV) be absolute and unconditional and not be subject to any offset and (V) shall be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion). United shall provide to Contractor no later than [***] after the completion of the Final Monthly Schedule for the last month of each quarter information regarding [***] sufficient to permit Contractor to calculate the UA Quarterly Benchmark for such quarter.
(b) Settlement of Contractual Claims.
(i) Settlement Obligation. On the First Amendment Effective Date, in consideration of Contractor’s release of claims set forth in Section 3.08(b)(ii), United agrees to accrue a payment obligation to Contractor (the “Settlement Obligation”) in an amount equal to the sum of (i) $[***] and (ii) all interest accrued thereon from the First Amendment Effective Date at a rate of [***]% per annum, compounded annually. The Settlement Obligation shall (i) be unsecured, (ii) be evidenced by negotiable instruments in the form attached hereto as Exhibit B provided by United at Contractor’s request, (iii) be absolute and unconditional and not be subject to any offset and (iv) be paid in full on February 28, 2023 (or before such date if United so elects in its sole discretion).
(ii) Release of Claims. Effective from and after the First Amendment Effective Date, and notwithstanding anything to the contrary in the Agreement or any Ancillary Agreement, each party (the “Releasing Party”) FOREVER RELEASES, ACQUITS, HOLDS HARMLESS, AND DISCHARGES the other party (the “Released Party”), in each case for itself and also for the Releasing Party’s successors, affiliates, and assignees, and in each case for the benefit of the Released Party as well as the Released Party’s predecessor and successor entities, divisions, and affiliates, and their current and former officers, directors, members, managers, partners, owners, employees, volunteers, servants, agents and attorneys, of and from any and all existing or contingent claims, demands, actions, causes of action, liabilities, damages, contracts, expenses, costs, accounts, duties, obligations, rights, covenants and promises of every kind and character, in each case, to the extent accrued prior to the Amendment Effective Date, whether sounding in contract or tort, whether existing or contingent, that arise from or relate to the following:
(w) payments for Base Compensation for periods prior to May 1, 2019;
7
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
(x) except as provided in sub-clause 3.02(c)(iv)(II), reimbursement of one-time and recurring expenses incurred by Contractor relating to changes in maintenance and crew bases that occurred prior to the Amendment Effective Date;
(y) incentive bonus payments for periods prior to January 1, 2020; or
(z) failure of either party to comply with the minimum scheduled block hour parameters set forth in Exhibit P to the Agreement as in effect prior to the Amendment Effective Date.”
4. Exclusivity. The Agreement is amended (i) by deleting the text of Article V and replacing it with “[Intentionally Omitted]” and (ii) by deleting the text “and shall not be flown for anyone else for the remainder of the Term of Agreement” from the last sentence of Section 8.01(b) of the Agreement. Any provision in the Agreement or any Ancillary Agreement that refers to Section 5.01 of the Agreement or that limits Contractor’s ability to, or prohibits it from, flying any aircraft that is not a Covered Aircraft for any other carrier or for any purpose shall be of no further force or effect.
5. United Extension Right. The first sentence of Section 8.01(b) of the Agreement is hereby deleted and replaced in its entirety with the following:
“(b) United may elect, in its sole discretion, to extend the Covered Aircraft Term of all of the Covered Aircraft for a minimum of two years or for any number of months in excess thereof up to an additional three years beyond the Covered Aircraft Term Expiration Date of each respective Covered Aircraft specified on Schedule 1, by providing written notice of such election to Contractor on or prior to [***].”
6. Notices. Section 10.02 of the Agreement is hereby amended by deleting the addresses set forth therein and replacing them with the following:
“if to United:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Senior Vice President – United Express
E-mail: [***]
and to:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Vice President – Procurement
E-mail: [***]
8
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
with a copy to:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Vice President, Deputy General Counsel and Corporate Secretary
E-mail: [***]
if to Contractor:
Air Wisconsin Airlines LLC
W6390 Challenger Drive, Suite 203
Appleton, WI 54914
Attention: [***]
Telephone: [***]
Facsimile: [***]
E-mail: [***]
with a copy to:
DLA Piper
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: [***]
E-mail: [***]
7. Public Filing of the Amendment. Prior to making any public filing of this Amendment, Contractor shall provide a proposed redacted version of this Amendment and afford United [***] to propose the redaction of any additional commercially sensitive information contained in this Amendment, provided that nothing in this provision will limit the right of Contractor to make any disclosure that it determines (upon consultation with its legal counsel) to be necessary pursuant to applicable laws or regulations.
8. Parent Guarantee. The first sentence of Section 10.19 of the Agreement is hereby deleted, and the heading of such Section shall be restated as “Dividend Restriction” with a corresponding change in the Table of Contents.
9. Covered Aircraft. Effective [***], the Covered Aircraft and Delivery Schedule table on Schedule 1 of the Agreement is hereby deleted and replaced with the revised Covered Aircraft and Delivery Schedule table attached hereto as Attachment 1. The Parties hereby acknowledge and agree that all of the aircraft listed on Schedule 1 are Covered Aircraft. [***]. Note (j) to Schedule 1 to the Agreement is hereby amended by adding the following sentences at the end thereof:
“Contractor shall have the right at any time, without notice to United, to fly any Scheduled Flight with any CRJ-200 regional jet that is in United livery and configuration and covered by Contractor’s FAA approved maintenance program. Such aircraft shall not be included in determining the weighted average number of Covered Aircraft for purposes of Section A.1.c of Schedule 3 unless such aircraft is substituted for a Covered Aircraft pursuant to this Note (j).”
9
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
10. Incentive Compensation.
(a) Effective [***], the lead-in to Paragraph A(2) of Schedule 3 is hereby deleted and replaced in its entirety with the following:
| “2. | Incentive Compensation. With respect to each calendar month after expiration of the Ramp-Up Period, incentive compensation (“Incentive Compensation”) shall be calculated as specified in Appendix 4 to this Schedule 3 and as follows, other than during the Interim Period when Incentive Compensation shall be deemed to be [***]:” |
(b) United shall pay to Contractor all accrued and unpaid incentive bonus payments for the period from [***], through [***], within [***] after the Amendment Effective Date.
(c) The Operating Goals under the Incentive Program for [***] shall be as follows:
| Operating Goal: | [***] | [***] | [***] | |||
| On-Time Zero (excluding United Cancelled Flights) | [***] | [***] | [***] | |||
| Customer Satisfaction | [***] | [***] | [***] | |||
| Controllable Completion Factor | [***] | [***] | [***] | |||
11. Flight Reconciliation. Effective [***], the following new Paragraph B(3)(e) of Schedule 3 is added to the Agreement:
| “e. | For any fiscal quarter for which the [***] for such fiscal quarter, then the reconciliation for the final month in such fiscal quarter shall include a payment by United to Contractor in an amount equal to the product of (i) [***], multiplied by (ii) [***].” |
12. Reasonable Operating Constraints. Effective [***], Paragraph 1 of Exhibit P to the Agreement, setting forth the minimum and maximum scheduling parameters, is hereby deleted and replaced in its entirety with the following:
10
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
1. Scheduling Parameters:
| Minimum |
Maximum | |||
| Scheduled Block Hours per Available Covered Aircraft per day | [***] | [***] |
*Note: The above maximum schedule parameter applies only to Covered Aircraft in revenue service and does not apply to Spare Aircraft or aircraft in maintenance. The above maximum schedule parameter is per day per Available Covered Aircraft calculated on the Final Monthly Schedule.
13. Definitions. Exhibit A of the Agreement is amended (i) by deleting clause (x) of the definition of “Termination Event” and (ii) by adding, or amending and restating, as applicable, the following definitions:
“Accrued Liability Rate” – means, for any calendar year, the sum of (i) the product of (A) [***], multiplied by (B) [***], plus (ii) the product of (A) [***] multiplied by (B) [***] divided by (C) [***]. (For the avoidance of doubt, the Accrued Liability Rate for 2020 will be equal to $[***], which is the sum of (i) the product of (A) $[***] multiplied by (B) [***], plus (ii) the product of (A) $[***], multiplied by (B) [***], divided by (C) [***].)
“Alteration” – is defined in Section 3.02(c)(i).
“Alteration Agreement” – is defined in Section 3.02(c)(i).
“Available Covered Aircraft” – means a Covered Aircraft available to schedule for revenue service (excluding Spare Aircraft and aircraft in heavy maintenance, overhauls or modifications but including any Covered Aircraft in short-term storage) pursuant to Section 2.01.
“AWAC” – AWAC Aviation, Inc.
“Base Change Request Notice” – is defined in Section 3.02(c)(i).
“Deferred Obligation” – is defined in Section 3.08(a).
“Deferred Obligation Quarterly Benchmark” – means, for any fiscal quarter, the aggregate number of [***] for that quarter that corresponds to [***].
“First Amendment Effective Date” – means the effective date of the First Amendment to Capacity Purchase Agreement by and between United and Contractor dated as of October 14, 2020.
“Interim Period” – means the period beginning at 12:00 a.m. local time in Houston, Texas on [***] and ending at 12:00 a.m. local time in Houston, Texas on [***].
“Hub Crew Base Closing” – is defined in Section 3.02(c)(ii)(h).
11
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
“Hub Crew Base Opening” – is defined in Section 3.02(c)(ii)(g).
“Hub MX Base Closing” – is defined in Section 3.02(c)(ii)(d).
“Hub MX Base Opening” – is defined in Section 3.02(c)(ii)(c).
“maintenance base” – means a facility where Contractor, or a third party provider on its behalf, routinely performs the daytime or overnight maintenance of the Covered Aircraft described in Paragraph 2 of Exhibit P, regardless whether such facility is owned or leased by Contractor or whether such maintenance is performed by Contractor or a third party provider. As of the Amendment Effective Date, Contractor’s maintenance bases are located at [***].
“Non-Hub Crew Base Closing” – is defined in Section 3.02(c)(ii)(f).
“Non-Hub Crew Base Opening” – is defined in Section 3.02(c)(ii)(e).
“Non-Hub MX Base Closing” – is defined in Section 3.02(c)(ii)(b).
“Non-Hub MX Base Opening” – is defined in Section 3.02(c)(ii)(a).
“Non-Specified Condition Opening or Closing” – is defined in Section 3.02(c)(iii)(f).
“Scheduled Quarterly Block Hours” – means, for any fiscal quarter, the aggregate number of scheduled block hours set forth in the Final Monthly Schedules for all months in such fiscal quarter.
“Settlement Obligation” – is defined in Section 3.08(b)(i).
“Specified Closing” – is defined in Section 3.02(c)(ii).
“Specified Conditions” – is defined in Section 3.02(c)(ii).
“Specified Opening” – is defined in Section 3.02(c)(ii).
“Subject Extension” – is defined in Section 3.08(a).
“UA Quarterly Benchmark” – means, with respect to any fiscal quarter, a number of [***] equal to the lesser of: (A) the aggregate number of [***] that would result from [***] over such fiscal quarter, and (B) the greater of (i) [***], and (ii) the number of [***]; provided, however, that solely with respect to the calculation of the [***] for the second fiscal quarter of 2020, the [***] for such quarter shall be calculated solely for the period from and after June 1, 2020 through and including June 30, 2020 (it being understood that the [***] for the second fiscal quarter of calendar year 2020 will be calculated for the month of June rather than the entire quarter and references to “fiscal quarter” in this definition with respect to the second fiscal quarter of 2020 shall instead be deemed to be references to the month of June).
12
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
14. Removed Definition. Exhibit A of the Agreement is amended by deleting the term “Parent Guarantee” and its associated definition.
| 15. Form | of Parent Guarantee. Exhibit Q of the Agreement is deleted. |
16. Termination of Parent Guarantee. That certain Guarantee Agreement, effective as of February 26, 2017, executed by Harbor and AWAC, is hereby terminated, effective as of the date hereof.
17. Miscellaneous. Capitalized terms used in this Amendment that are defined in the Agreement have the meanings assigned to them in the Agreement. This Amendment may be executed in counterparts, each of which is deemed an original hereof. The Parties shall become bound by this Amendment immediately upon execution hereof by each Party. Except as expressly amended in this Amendment, the Agreement will remain in full force and effect. Notwithstanding anything to the contrary in this Amendment, the terms and provisions of this Amendment are intended solely for the benefit of the Parties, and it is not the intention of the Parties to confer third party beneficiary rights upon any other person. This Amendment (together with the attached exhibits) constitutes the entire agreement between the Parties, and supersedes any other agreements, representations, warranties, covenants, communications, or understandings, whether oral or written (including, but not limited to, e-mail correspondence), that may have been made or entered into by or between the Parties or any of their respective affiliates or agents relating in any way to the transactions contemplated by this Amendment.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date and year first written above.
| UNITED AIRLINES, INC. | ||||
| By: | /s/ Sarah Rae Murphy | |||
| Name: | Sarah Rae Murphy | |||
| Title: | Senior Vice President - United Express | |||
| AIR WISCONSIN AIRLINES LLC | ||
| By: | /s/ Robert Binns | |
| Robert Binns | ||
| President and Chief Executive Officer | ||
13
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
| AWAC AVIATION, INC. | ||
| (SOLELY FOR PURPOSES OF SECTION 16) | ||
| By: | /s/ Robert Binns | |
| Robert Binns | ||
| Executive Vice President | ||
| HARBOR DIVERSIFIED, INC. | ||
| (SOLELY FOR PURPOSES OF SECTION 16) | ||
| By: | /s/ Christine Deister | |
| Christine Deister | ||
| Chief Executive Officer | ||
14
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
ATTACHMENT 1
Schedule 1
Covered Aircraft and Delivery Schedule
[***]
15
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
EXHIBIT A
Form of Alteration Agreement
ALTERATION AGREEMENT
This Alteration Agreement (this “Agreement”) is made, entered into and effective as of [ ], by and between United Airlines, Inc., a Delaware corporation (“United”), and Air Wisconsin Airlines LLC, a Delaware limited liability company (“Contractor”). United and Contractor are collectively referred to herein as the “Parties” and individually as a “Party.”
RECITALS
WHEREAS, the Parties entered into that certain Capacity Purchase Agreement, dated as of February 26, 2017 (as amended from time to time thereafter, the “CPA”); capitalized terms used herein that are not defined herein and that are defined in the CPA shall have the meanings assigned to them in the CPA; and
WHEREAS, pursuant to Section 3.02(c) of the CPA, the parties are required to enter into an Alteration Agreement under the circumstances described in that Section; and [United/Contractor] submitted to the other Party a Base Change Request Notice dated [ ] (the “Applicable Base Change Request Notice”).
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. The Parties have determined that the [opening/closing] of the [maintenance/crew] base located at [ ] identified in the Applicable Base Change Request Notice is reasonably necessary (the “Applicable Base Change”), or the Applicable Base Change is deemed reasonably necessary in accordance with the proviso to the first sentence of the second paragraph of sub-clause 3.02(c)(i) of the CPA.
2. If the Applicable Base Change is a Hub MX Base Opening, a Hub MX Base Closing or a Non-Specified Condition Opening or Closing, the amount that United shall pay to Contractor as reimbursement of Contractor’s reasonable, direct, out-of-pocket expenses that relate to such Applicable Base Change is [$ ]; provided, however, that the terms and conditions regarding the payment of such amount are set forth in Section 3.02 (c) (iii) of the CPA, and are not set forth in this Agreement.
16
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
3. The Applicable Base Change is targeted to be accomplished according to the following timeline: .
4. This Agreement may be executed in counterparts, each of which is deemed an original hereof.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date and year first written above.
| UNITED AIRLINES, INC. | ||
| By: |
| |
|
Name: | ||
| Title: Senior Vice President – United Express | ||
| AIR WISCONSIN AIRLINES LLC | ||
| By: |
| |
| Robert Binns | ||
| President and Chief Executive Officer | ||
17
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
EXHIBIT B
Form of Negotiable Instrument
NEGOTIABLE PROMISSORY NOTE
FOR VALUE RECEIVED, and subject to the terms and conditions set forth herein, United Airlines, Inc., a Delaware corporation (the “Maker”), hereby unconditionally promises to pay to the order of Air Wisconsin Airlines LLC or its assigns (the “Noteholder,” and together with the Maker, the “Parties”), the principal amount of $[ ], together with all accrued interest thereon, as provided in this Negotiable Promissory Note (the “Note,” as the same may be amended, restated, supplemented, or otherwise modified from time to time in accordance with its terms).
1. Definitions. Capitalized terms used herein shall have the meanings set forth in this Section 1.
“Business Day” means a day other than a Saturday, Sunday, or other day on which commercial banks in New York City are authorized or required by law to close.
“Default” means any of the events specified in Section 6 which constitute an Event of Default or which, upon the giving of notice, the lapse of time, or both, pursuant to Section 6 would, unless cured or waived, become an Event of Default.
“Event of Default” has the meaning set forth in Section 6.
“Governmental Authority” means the government of any nation or any political subdivision thereof, whether at the national, state, territorial, provincial, municipal or any other level, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of, or pertaining to, government.
“Law” as to any Person, means the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law (including common law), statute, ordinance, treaty, rule, regulation, order, decree, judgment, writ, injunction, settlement agreement, requirement or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“Maturity Date” means the earlier of (a) February 28, 2023 and (b) the date on which all amounts under this Note shall become due and payable pursuant to Section 7.
“Person” means any individual, corporation, limited liability company, trust, joint venture, association, company, limited or general partnership, unincorporated organization, Governmental Authority, or other entity.
18
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
| 2. | Final Payment Date; Optional Prepayments. |
2.1 Final Payment Date. The aggregate unpaid principal amount of this Note, all accrued and unpaid interest, and all other amounts payable under this Note shall be due and payable on the Maturity Date, unless otherwise provided in Section 7.
2.2 Optional Prepayment. The Maker may prepay this Note in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount may be reborrowed.
| 3. | Interest. |
3.1 Interest Rate. Except as otherwise provided in Section 3.2, the outstanding principal amount of this Note shall accrue interest at the rate of [***]% per annum from the date of this Note until this Note is paid in full, whether at maturity, upon acceleration, by prepayment, or otherwise. Interest shall be compounded annually on each anniversary of the date of this Note on a 365 day basis with all accrued interest being added to the principal amount of this Note.
3.2 Default Interest. If any amount payable hereunder is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration, or otherwise, the entire outstanding principal amount of this Note shall bear interest at the rate of [***]% per annum from the date of such non-payment until such amount is paid in full.
3.3 Interest Rate Limitation. If at any time and for any reason whatsoever, the interest rate payable on this Note shall exceed the maximum rate of interest permitted to be charged by the Noteholder to the Maker under applicable Law, such interest rate shall be reduced automatically to the maximum rate of interest permitted to be charged under applicable Law; any portion of each sum paid attributable to that portion of such interest rate that exceeds the maximum rate of interest permitted by applicable Law shall be deemed a voluntary prepayment of principal.
| 4. | Payment Mechanics. |
4.1 Manner of Payment. All payments of interest and principal shall be made in lawful money of the United States of America no later than 12:00 PM central time on the date on which such payment is due by wire transfer of immediately available funds to the Noteholder’s account at a bank specified by the Noteholder in writing to the Maker from time to time.
4.2 Application of Payments. All payments made hereunder shall be applied first to the payment of any fees or charges outstanding hereunder, second to accrued interest, and third to the payment of the principal amount outstanding under this Note.
19
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
4.3 Business Day Convention. Whenever any payment to be made hereunder shall be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension will be taken into account in calculating the amount of interest payable under this Note.
5. Representations and Warranties. The Maker hereby represents and warrants to the Noteholder on the date hereof as follows:
5.1 Existence. The Maker is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its jurisdiction of organization.
5.2 Power and Authority. The Maker has the power and authority, and the legal right, to execute and deliver this Note and to perform its obligations hereunder.
5.3 Authorization; Execution and Delivery. The execution and delivery of this Note by the Maker and the performance of its obligations hereunder have been duly authorized by all necessary corporate action in accordance with all applicable Laws. The Maker has duly executed and delivered this Note.
5.4 No Approvals. No consent or authorization of, filing with, notice to, or other act by, or in respect of, any Governmental Authority or any other Person is required in order for the Maker to execute, deliver, or perform any of its obligations under this Note.
5.5 No Violations. The execution and delivery of this Note and the consummation by the Maker of the transactions contemplated hereby do not and will not (a) violate any provision of the Maker’s organizational documents; (b) violate any Law applicable to the Maker or by which any of its properties or assets may be bound; or (c) constitute a default under any material agreement or contract by which the Maker may be bound.
5.6 Enforceability. This Note is a valid, legal, and binding obligation of the Maker, enforceable against the Maker in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).
6. Events of Default. The occurrence of any of the following shall constitute an Event of Default hereunder:
6.1 Failure to Pay. The Maker fails to pay any principal amount of this Note, interest or any other amount when due.
6.2 Breach of Representations and Warranties. Any representation or warranty made or deemed made by the Maker to the Noteholder herein is incorrect in any material respect on the date as of which such representation or warranty was made or deemed made.
20
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
6.3 Bankruptcy; Insolvency.
(a) the Maker commences any case, proceeding, or other action (i) under any existing or future law relating to bankruptcy, insolvency, reorganization, or other relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition, or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian, conservator, or other similar official for it or for all or any substantial part of its assets, or the Maker makes a general assignment for the benefit of its creditors;
(b) there is commenced against the Maker any case, proceeding, or other action of a nature referred to in Section 6.3(a) above which (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged, or unbonded for a period of sixty (60) days;
(c) there is commenced against the Maker any case, proceeding, or other action seeking issuance of a warrant of attachment, execution, or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which has not been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof;
(d) the Maker takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in Section 6.3(a), Section 6.3(b), or Section 6.3(c) above; or
(e) the Maker is generally not, or is unable to, or admits in writing its inability to, pay its debts as they become due.
7. Remedies. Upon the occurrence of an Event of Default and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Maker (a) declare the entire principal amount of this Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable and/or (b) exercise any or all of its rights, powers, or remedies under applicable law; provided, however that, if an Event of Default described in Section 6.3 shall occur, the principal of and accrued interest on this Note shall become immediately due and payable without any notice, declaration, or other act on the part of the Noteholder.
8. No Offset. The Maker’s obligation to make the payments provided for in this Note and otherwise perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Maker or any of its affiliates may have against the Noteholder or others.
21
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
9. Miscellaneous.
9.1 Notices.
All notices, requests, or other communications required or permitted to be delivered hereunder shall be delivered in writing, in each case to the address specified below or to such other address as such Party may from time to time specify in writing in compliance with this provision:
| (i) | If to the Maker: |
| United Airlines, Inc. |
| Willis Tower |
| 233 S. Wacker Drive |
| Chicago, IL 60606 |
| Attention: Senior Vice President – United Express |
| E-mail: [***] |
| and to: |
| United Airlines, Inc. |
| Willis Tower |
| 233 S. Wacker Drive |
| Chicago, IL 60606 |
| Attention: Vice President – Procurement |
| E-mail: [***] |
| with a copy to: |
| United Airlines, Inc. |
| Willis Tower |
| 233 S. Wacker Drive |
| Chicago, IL 60606 |
| Attention: Vice President, Deputy General Counsel and Corporate Secretary |
| E-mail: [***] |
| (ii) | If to the Noteholder: |
| Air Wisconsin Airlines LLC |
| W6390 Challenger Drive, Suite 203 |
| Appleton, WI 54914 |
| Attention: [***], President and Chief Executive Officer |
| Telephone: [***] |
| E-mail: [***] |
22
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
| with a copy to: |
| DLA Piper |
| 4365 Executive Drive, Suite 1100 |
| San Diego, CA 92121 |
| Attention: [***] |
| E-mail: [***] |
(b) Notices if (i) mailed by certified or registered mail or sent by hand or overnight courier service shall be deemed to have been given when received; and (ii) sent by email shall be deemed received upon the sender’s receipt of an acknowledgment from the intended recipient (such as by the “return receipt requested” function, as available, return email, or other written acknowledgment).
9.2 Expenses. The Maker shall reimburse the Noteholder on demand for all out-of-pocket costs, expenses, and fees (including expenses and fees of its external counsel) incurred by the Noteholder in connection with the enforcement of the Noteholder’s rights hereunder.
9.3 Governing Law. This Note and any claim, controversy, dispute, or cause of action (whether in contract or tort or otherwise) based upon, arising out of, or relating to this Note, and the transactions contemplated hereby, shall be governed by the laws of the State of New York, without regard to any conflict of laws provisions thereof.
9.4 Submission to Jurisdiction.
(a) The Maker hereby irrevocably and unconditionally (i) agrees that any legal action, suit, or proceeding arising out of or relating to this Note may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York and (ii) submits to the jurisdiction of any such court in any such action, suit, or proceeding. Final judgment against the Maker in any action, suit, or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment.
(b) Nothing in this Section 9.4 shall affect the right of the Noteholder to (i) commence legal proceedings or otherwise sue the Maker in any other court having jurisdiction over the Maker or (ii) serve process upon the Maker in any manner authorized by the laws of any such jurisdiction.
9.5 Venue. The Maker irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Note in any court referred to in Section 9.4(b) and the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
9.6 Waiver of Jury Trial. THE MAKER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY WHETHER BASED ON CONTRACT, TORT, OR ANY OTHER THEORY.
23
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
9.7 Integration; Effectiveness. This Note constitutes the entire contract between the Parties with respect to the subject matter hereof and supersedes all previous agreements and understandings, oral or written, with respect thereto. Delivery of an executed signature page to this Note in electronic (i.e., “pdf” or “tif”) format shall be effective as delivery of a manually executed counterpart of this Note.
9.8 Successors and Assigns. This Note may be assigned, transferred, or negotiated by the Noteholder to any Person, at any time, without notice to or the consent of the Maker. The Maker may not assign or transfer this Note or any of its rights, or delegate any of its duties, hereunder without the prior written consent of the Noteholder which may be withheld in its sole discretion. This Note shall inure to the benefit of and be binding upon the parties hereto and their successors and permitted assigns.
9.9 Waiver of Notice. The Maker hereby waives presentment, demand for payment, protest, notice of dishonor, notice of protest or nonpayment, notice of acceleration of maturity, and diligence in connection with the enforcement of this Note or the taking of any action to collect sums owing hereunder.
9.10 Amendments and Waivers. No term of this Note may be waived, modified, or amended except by an instrument in writing signed by both of the parties hereto. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given.
9.11 Headings. The headings of the various Sections and subsections herein are for reference only and shall not define, modify, expand, or limit any of the terms or provisions hereof.
9.12 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Noteholder, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights, remedies, powers, and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers, and privileges provided by law.
9.13 Severability. If any term or provision of this Note is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability shall not affect any other term or provision of this Note or invalidate or render unenforceable such term or provision in any other jurisdiction.
24
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
IN WITNESS WHEREOF, the Maker has executed this Note as of [DATE].
| UNITED AIRLINES, INC. |
|
By Name: Title: |
25
CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY [***], HAS BEEN OMITTED BECAUSE IT (I) IS NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, OR (II) CONTAINS PERSONALLY IDENTIFIABLE INFORMATION, OMITTED PURSUANT TO
ITEM 601(A)(6) UNDER REGULATION S-K.
Exhibit 10.8.2
PAYROLL SUPPORT PROGRAM EXTENSION AGREEMENT
| Recipient: Air Wisconsin Airlines LLC W6390 Challenger Drive, Suite 203 Appleton, WI 54914 |
PSP Participant Number: PSAP-2101090099 Employer Identification Number: 39-1767281 DUNS Number: 807197819 | |
| Additional Recipients: N/A | ||
| Amount of Initial Payroll Support Payment: $15,536,464.00 | ||
The Department of the Treasury (Treasury) hereby provides Payroll Support (as defined herein) under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021. The Signatory Entity named above, on behalf of itself and its Affiliates (as defined herein), agrees to comply with this Agreement and applicable Federal law as a condition of receiving Payroll Support. This Signatory Entity and its undersigned authorized representatives acknowledge that a materially false, fictitious, or fraudulent statement (or concealment or omission of a material fact) in connection with this Agreement may result in administrative remedies as well as civil and/or criminal penalties.
The undersigned hereby agree to the attached Payroll Support Program Extension Agreement.
| /s/ David A. Lebryk | /s/ Robert Binns | 3/22/21 | ||||
| Department of the Treasury | Air Wisconsin Airlines LLC | |||||
| Name: David A. Lebryk | Signature of First Authorized Representative | Date | ||||
| Title: Fiscal Assistant Secretary | ROBERT BINNS | CEO | ||||
| Date: 03/23/2021 | Print Name of First Authorized Representative | Title | ||||
| /s/ Gregg Garvey | ||||||
| Air Wisconsin Airlines LLC | ||||||
| Signature of Second Authorized Representative | Date | |||||
| Gregg Garvey | 3/22/21 | |||||
| Print Name of Second Authorized Representative | Title | |||||
OMB Approved No. 1505-0263
1
PAYROLL SUPPORT PROGRAM EXTENSION AGREEMENT
INTRODUCTION
Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (PSP Extension Law) directs the Department of the Treasury (Treasury) to provide Payroll Support (as defined herein) to passenger air carriers and certain contractors that must be exclusively used for the continuation of payment of Employee Salaries, Wages, and Benefits (as defined herein). The PSP Extension Law permits Treasury to provide Payroll Support in such form, and on such terms and conditions, as the Secretary of the Treasury determines appropriate, and requires certain assurances from the Recipient (as defined herein).
This Payroll Support Program Extension Agreement, including the application and all supporting documents submitted by the Recipient and the Payroll Support Program Extension Certification attached hereto (collectively, Agreement), memorializes the binding terms and conditions applicable to the Recipient.
DEFINITIONS
As used in this Agreement, the following terms shall have the following respective meanings, unless the context clearly requires otherwise. In addition, this Agreement shall be construed in a manner consistent with any public guidance Treasury may from time to time issue regarding the implementation of the PSP Extension Law.
Additional Payroll Support Payment means any disbursement of Payroll Support occurring after the first disbursement of Payroll Support under this Agreement.
Affiliate means any Person that directly or indirectly controls, is controlled by, or is under common control with, the Recipient. For purposes of this definition, “control” of a Person shall mean having the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person, whether by ownership of voting equity, by contract, or otherwise.
Benefits means, without duplication of any amounts counted as Salary or Wages, pension expenses in respect of Employees, all expenses for accident, sickness, hospital, and death benefits to Employees, and the cost of insurance to provide such benefits; any Severance Pay or Other Benefits payable to Employees pursuant to a bona fide voluntary early retirement program or voluntary furlough; and any other similar expenses paid by the Recipient for the benefit of Employees, including any other fringe benefit expense described in lines 10 and 11 of Financial Reporting Schedule P-6, Form 41, as published by the Department of Transportation, but excluding any Federal, state, or local payroll taxes paid by the Recipient.
2
Corporate Officer means, with respect to the Recipient, its president; any vice president in charge of a principal business unit, division, or function (such as sales, administration or finance); any other officer who performs a policy-making function; or any other person who performs similar policy making functions for the Recipient. Executive officers of subsidiaries or parents of the Recipient may be deemed Corporate Officers of the Recipient if they perform such policy-making functions for the Recipient.
Employee means an individual who is employed by the Recipient and whose principal place of employment is in the United States (including its territories and possessions), including salaried, hourly, full-time, part-time, temporary, and leased employees, but excluding any individual who is a Corporate Officer or independent contractor.
Involuntary Termination or Furlough means the Recipient terminating the employment of one or more Employees or requiring one or more Employees to take a temporary suspension or unpaid leave for any reason, including a shut-down or slow-down of business; provided, however, that an Involuntary Termination or Furlough does not include a Permitted Termination or Furlough.
Maximum Awardable Amount means the amount determined by the Secretary with respect to the Recipient pursuant to section 403(a) of the PSP Extension Law.
Payroll Support means funds disbursed by the Secretary to the Recipient under this Agreement, including the first disbursement of Payroll Support and any Additional Payroll Support Payment.
PSP Extension Law means Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021
Permitted Termination or Furlough means, with respect to an Employee, (1) a voluntary furlough, voluntary leave of absence, voluntary resignation, or voluntary retirement, (2) termination of employment resulting from such Employee’s death or disability, or (3) the Recipient terminating the employment of such Employee for cause or placing such Employee on a temporary suspension or unpaid leave of absence for disciplinary reasons, in either case, as reasonably determined by the Recipient acting in good faith.
Person means any natural person, corporation, limited liability company, partnership, joint venture, trust, business association, governmental entity, or other entity.
PSP1 means the Payroll Support Program established under Division A, Title IV, Subtitle B of the Coronavirus Aid, Relief, and Economics Security Act (Pub. L. No. 116 -136).
3
Recall means the dispatch of a notice by the Recipient, via mail, courier, or electronic mail, to an Employee who was subject to an Involuntary Termination or Furlough notifying the Employee that (1) the Employee must, within a specified period of time that is not less than 14 days or such other period for recall as is specified in an existing collective bargaining agreement entered into before December 27, 2020, elect either (a) to return to employment or bypass return to employment, in accordance with an applicable collective bargaining agreement or, in the absence of a collective bargaining agreement, the Recipient’s policy; or (b) to permanently separate from employment with the Recipient; and (2) failure to respond within such time period specified shall be considered an election under clause (1)(b) of this definition.
Recipient means, collectively, the Signatory Entity; its Affiliates that are listed on the signature page hereto as Additional Recipients; and their respective heirs, executors, administrators, successors, and assigns.
Returning Employee means an Employee of the Recipient who was subject to an Involuntary Termination or Furlough and who has elected to return to employment pursuant to a Recall.
Salary means, without duplication of any amounts counted as Benefits, a predetermined regular payment, typically paid on a weekly or less frequent basis but which may be expressed as an hourly, weekly, annual or other rate, as well as cost-of-living differentials, vacation time, paid time off, sick leave, and overtime pay, paid by the Recipient to its Employees, but excluding any Federal, state, or local payroll taxes paid by the Recipient.
Secretary means the Secretary of the Treasury.
Severance Pay or Other Benefits means any severance payment or other similar benefits, including cash payments, health care benefits, perquisites, the enhancement or acceleration of the payment or vesting of any payment or benefit or any other in-kind benefit payable (whether in lump sum or over time, including after October 1, 2022) by the Recipient to a Corporate Officer or Employee in connection with any termination of such Corporate Officer’s or Employee’s employment (including, without limitation, resignation, severance, retirement, or constructive termination), which shall be determined and calculated in respect of any Employee or Corporate Officer of the Recipient in the manner prescribed in 17 CFR 229.402(j) (without regard to its limitation to the five most highly compensated executives and using the actual date of termination of employment rather than the last business day of the Recipient’s last completed fiscal year as the trigger event).
Signatory Entity means the passenger air carrier or contractor that has entered into this Agreement.
4
Taxpayer Protection Instruments means warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by the Recipient or an Affiliate to Treasury as compensation for the Payroll Support under this Agreement, if applicable.
Total Compensation means compensation including salary, wages, bonuses, awards of stock, and any other financial benefits provided by the Recipient or an Affiliate, as applicable, which shall be determined and calculated for the 2019 calendar year or any applicable 12-month period in respect of any Employee or Corporate Officer of the Recipient in the manner prescribed under paragraph e.6 of the award term in 2 CFR part 170, App. A, but excluding any Severance Pay or Other Benefits in connection with a termination of employment.
Wage means, without duplication of any amounts counted as Benefits, a payment, typically paid on an hourly, daily, or piecework basis, including cost-of-living differentials, vacation, paid time off, sick leave, and overtime pay, paid by the Recipient to its Employees, but excluding any Federal, state, or local payroll taxes paid by the Recipient.
5
PAYROLL SUPPORT PAYMENTS
| 1. | Upon the execution of this Agreement by Treasury and the Recipient, the Secretary shall approve the Recipient’s application for Payroll Support. |
| 2. | The Recipient may receive Payroll Support in multiple payments up to the Maximum Awardable Amount, and the amounts (individually and in the aggregate) and timing of such payments will be determined by the Secretary in his sole discretion. The Secretary may, in his sole discretion, increase or reduce the Maximum Awardable Amount (a) consistent with section 403(a) of the PSP Extension Law and (b) on a pro rata basis in order to address any shortfall in available funds, pursuant to section 403(c) of the PSP Extension Law. |
| 3. | The Secretary may determine in his sole discretion that any Payroll Support shall be conditioned on, and subject to, compliance by the Recipient with all applicable requirements under PSP1 if the Recipient received financial assistance in PSP1, and such additional terms and conditions (including the receipt of, and any terms regarding, Taxpayer Protection Instruments) to which the parties may agree in writing. |
TERMS AND CONDITIONS
Retaining and Paying Employees
| 4. | The Recipient shall use the Payroll Support exclusively for the continuation of payment of Wages, Salaries, and Benefits to the Employees of the Recipient, including the payment of lost Wages, Salaries, and Benefits to Returning Employees. |
| a. | Furloughs and Layoffs. The Recipient shall not conduct an Involuntary Termination or Furlough of any Employee between the date of this Agreement and March 31, 2021. |
| b. | Employee Salary, Wages, and Benefits |
| i. | Salary and Wages. Except in the case of a Permitted Termination or Furlough, the Recipient shall not, between the date of this Agreement and March 31, 2021, reduce, without the Employee’s consent, (A) the pay rate of any Employee earning a Salary, or (B) the pay rate of any Employee earning Wages. |
| ii. | Benefits. Except in the case of a Permitted Termination or Furlough, the Recipient shall not, between the date of this Agreement and March 31, 2021, reduce, without the Employee’s consent, the Benefits of any Employee; provided, however, that for purposes of this paragraph, personnel expenses associated with the performance of work duties, including those described in line 10 of Financial Reporting Schedule P-6, Form 41, as published by the Department of Transportation, may be reduced to the extent the associated work duties are not performed. |
6
| 4.1 | If the Recipient received financial assistance in PSP1, the Recipient shall: |
| a. | Recall, not later than 72 hours after this Agreement has been executed by each party hereto, any Employees who were subject to an Involuntary Termination or Furlough between October 1, 2020, and the effective date of this Agreement, and enable each Returning Employee to return to employment within 30 days after making the election to do so; |
| b. | compensate, not later than 30 days after a Returning Employee returns to employment, such Returning Employee for lost Salary, Wages, and Benefits (offset by any amounts received by the Returning Employee from the Recipient or an Affiliate as a result of such Returning Employee’s Involuntary Termination or Furlough, including any Severance Pay or Other Benefits or furlough pay) between December 1, 2020, and the effective date of this Agreement; and |
| c. | restore the rights and protections for any Returning Employees as if such Returning Employees had not been subject to an Involuntary Termination or Furlough. |
| 4.2 | If the Recipient did not receive financial assistance in PSP1, the Recipient shall: |
| a. | Recall, not later than 72 hours after this Agreement has been executed by each party hereto, any Employees who were subject to an Involuntary Termination or Furlough between March 27, 2020, and the effective date of this Agreement, and enable each Returning Employee to return to employment within 30 days of making the election to do so; |
| b. | compensate, not later than 30 days after a Returning Employee returns to employment, such Returning Employee for lost Salary, Wages, and Benefits (offset by any amounts received by the Returning Employee from the Recipient or an Affiliate as a result of such Returning Employee’s Involuntary Termination or Furlough, including any Severance Pay or Other Benefits or furlough pay) between December 1, 2020, and the effective date of this Agreement; and |
| c. | restore the rights and protections for any Returning Employees as if such Returning Employees had not been subject to an Involuntary Termination or Furlough. |
7
Dividends and Buybacks
| 5. | Through March 31, 2022, neither the Recipient nor any Affiliate shall, in any transaction, purchase an equity security of the Recipient or of any direct or indirect parent company of the Recipient that, in either case, is listed on a national securities exchange. |
| 6. | Through March 31, 2022, the Recipient shall not pay dividends, or make any other capital distributions, with respect to the common stock (or equivalent equity interest) of the Recipient. |
Limitations on Certain Compensation
| 7. | Beginning October 1, 2020, and ending October 1, 2022, the Recipient and its Affiliates shall not pay any of the Recipient’s Corporate Officers or Employees whose Total Compensation exceeded $425,000 in calendar year 2019 (other than an Employee whose compensation is determined through an existing collective bargaining agreement entered into before December 27, 2020): |
| a. | Total Compensation which exceeds, during any 12 consecutive months of such two-year period, the Total Compensation the Corporate Officer or Employee received in calendar year 2019; or |
| b. | Severance Pay or Other Benefits in connection with a termination of employment with the Recipient which exceed twice the maximum Total Compensation received by such Corporate Officer or Employee in calendar year 2019. |
| 8. | Beginning October 1, 2020, and ending October 1, 2022, the Recipient and its Affiliates shall not pay, during any 12 consecutive months of such two-year period, any of the Recipient’s Corporate Officers or Employees whose Total Compensation exceeded $3,000,000 in calendar year 2019 Total Compensation in excess of the sum of: |
| a. | $3,000,000; and |
| b. | 50 percent of the excess over $3,000,000 of the Total Compensation received by such Corporate Officer or Employee in calendar year 2019. |
| 9. | For purposes of determining applicable amounts under paragraphs 7 and 8 with respect to any Corporate Officer or Employee who was employed by the Recipient or an Affiliate for less than all of calendar year 2019, the amount of Total Compensation in calendar year 2019 shall mean such Corporate Officer’s or Employee’s Total Compensation on an annualized basis. |
8
Continuation of Service
| 10. | If the Recipient is an air carrier, until March 1, 2022, the Recipient shall comply with any applicable requirement issued by the Secretary of Transportation under section 407) of the PSP Extension Law to maintain scheduled air transportation service to any point served by the Recipient before March 1, 2020. |
Effective Date
| 11. | This Agreement shall be effective as of the date of its execution by both parties. |
Reporting and Auditing
| 12. | Until the calendar quarter that begins after the later of October 1, 2022, and the date on which no Taxpayer Protection Instrument is outstanding, not later than 45 days after the end of each of the first three calendar quarters of each calendar year and 90 days after the end of each calendar year, the Signatory Entity, on behalf of itself and each other Recipient, shall certify to Treasury that it is in compliance with the terms and conditions of this Agreement and provide a report containing the following: |
| a. | the amount of Payroll Support funds expended during such quarter; |
| b. | the Recipient’s financial statements (audited by an independent certified public accountant, in the case of annual financial statements); and |
| c. | a copy of the Recipient’s IRS Form 941 filed with respect to such quarter; and |
| d. | a detailed summary describing, with respect to the Recipient, (a) any changes in Employee headcount during such quarter and the reasons therefor, including any Involuntary Termination or Furlough, (b) any changes in the amounts spent by the Recipient on Employee Wages, Salary, and Benefits during such quarter, and (c) any changes in Total Compensation for, and any Severance Pay or Other Benefits in connection with the termination of, Corporate Officers and Employees subject to limitation under this Agreement during such quarter; and the reasons for any such changes. |
| 13. | If the Recipient or any Affiliate, or any Corporate Officer of the Recipient or any Affiliate, becomes aware of facts, events, or circumstances that may materially affect the Recipient’s compliance with the terms and conditions of this Agreement, the Recipient or Affiliate shall promptly provide Treasury with a written description of the events or circumstances and any action taken, or contemplated, to address the issue. |
| 14. | In the event the Recipient contemplates any action to commence a bankruptcy or insolvency proceeding in any jurisdiction, the Recipient shall promptly notify Treasury. |
| 15. | The Recipient shall: |
9
| a. | Promptly provide to Treasury and the Treasury Inspector General a copy of any Department of Transportation Inspector General report, audit report, or report of any other oversight body, that is received by the Recipient relating to this Agreement. |
| b. | Immediately notify Treasury and the Treasury Inspector General of any indication of fraud, waste, abuse, or potentially criminal activity pertaining to the Payroll Support. |
| c. | Promptly provide Treasury with any information Treasury may request relating to compliance by the Recipient and its Affiliates with this Agreement. |
| 16. | The Recipient and Affiliates will provide Treasury, the Treasury Inspector General, and such other entities as authorized by Treasury timely and unrestricted access to all documents, papers, or other records, including electronic records, of the Recipient related to the Payroll Support, to enable Treasury and the Treasury Inspector General to make audits, examinations, and otherwise evaluate the Recipient’s compliance with the terms of this Agreement. This right also includes timely and reasonable access to the Recipient’s and its Affiliates’ personnel for the purpose of interview and discussion related to such documents. This right of access shall continue as long as records are required to be retained. In addition, the Recipient will provide timely reports as reasonably required by Treasury, the Treasury Inspector General, and such other entities as authorized by Treasury to comply with applicable law and to assess program effectiveness. |
Recordkeeping and Internal Controls
| 17. | If the Recipient is a debtor as defined under 11 U.S.C. § 101(13), the Payroll Support funds, any claim or account receivable arising under this Agreement, and any segregated account holding funds received under this Agreement shall not constitute or become property of the estate under 11 U.S.C. § 541. |
| 18. | The Recipient shall expend and account for Payroll Support funds in a manner sufficient to: |
| a. | Permit the preparation of accurate, current, and complete quarterly reports as required under this Agreement. |
| b. | Permit the tracing of funds to a level of expenditures adequate to establish that such funds have been used as required under this Agreement. |
| 19. | The Recipient shall establish and maintain effective internal controls over the Payroll Support; comply with all requirements related to the Payroll Support established under applicable Federal statutes and regulations; monitor compliance with Federal statutes, regulations, and the terms and conditions of this Agreement; and take prompt corrective actions in accordance with audit recommendations. The Recipient shall promptly remedy any identified instances of noncompliance with this Agreement. |
10
| 20. | The Recipient and Affiliates shall retain all records pertinent to the receipt of Payroll Support and compliance with the terms and conditions of this Agreement (including by suspending any automatic deletion functions for electronic records, including e-mails) for a period of three years following the period of performance. Such records shall include all information necessary to substantiate factual representations made in the Recipient’s application for Payroll Support, including ledgers and sub-ledgers, and the Recipient’s and Affiliates’ compliance with this Agreement. While electronic storage of records (backed up as appropriate) is preferable, the Recipient and Affiliates may store records in hardcopy (paper) format. The term “records” includes all relevant financial and accounting records and all supporting documentation for the information reported on the Recipient’s quarterly reports. |
| 21. | If any litigation, claim, investigation, or audit relating to the Payroll Support is started before the expiration of the three-year period, the Recipient and Affiliates shall retain all records described in paragraph 20 until all such litigation, claims, investigations, or audit findings have been completely resolved and final judgment entered or final action taken. |
Remedies
| 22. | If Treasury believes that an instance of noncompliance by the Recipient or an Affiliate with (a) this Agreement, (b) sections 404 or 406 of the PSP Extension Law, or (c) the Internal Revenue Code of 1986 as it applies to the receipt of Payroll Support has occurred, Treasury may notify the Recipient in writing of its proposed determination of noncompliance, provide an explanation of the nature of the noncompliance, and specify a proposed remedy. Upon receipt of such notice, the Recipient shall, within seven days, accept Treasury’s proposed remedy, propose an alternative remedy, or provide information and documentation contesting Treasury’s proposed determination. Treasury shall consider any such submission by the Recipient and make a final written determination, which will state Treasury’s findings regarding noncompliance and the remedy to be imposed. |
| 23. | If Treasury makes a final determination under paragraph 22 that an instance of noncompliance has occurred, Treasury may, in its sole discretion, withhold any Additional Payroll Support Payments; require the repayment of the amount of any previously disbursed Payroll Support, with appropriate interest; require additional reporting or monitoring; initiate suspension or debarment proceedings as authorized under 2 CFR Part 180; terminate this Agreement; or take any such other action as Treasury, in its sole discretion, deems appropriate. |
| 24. | Treasury may make a final determination regarding noncompliance without regard to paragraph 22 if Treasury determines, in its sole discretion, that such determination is necessary to protect a material interest of the Federal Government. In such event, Treasury shall notify the Recipient of the remedy that Treasury, in its sole discretion, shall impose, after which the Recipient may contest Treasury’s final determination or propose an alternative remedy in writing to Treasury. Following the receipt of such a submission by the Recipient, Treasury may, in its sole discretion, maintain or alter its final determination. |
11
| 25. | Any final determination of noncompliance and any final determination to take any remedial action described herein shall not be subject to further review. To the extent permitted by law, the Recipient waives any right to judicial review of any such determinations and further agrees not to assert in any court any claim arising from or relating to any such determination or remedial action. |
| 26. | Instead of, or in addition to, the remedies listed above, Treasury may refer any noncompliance or any allegations of fraud, waste, or abuse to the Treasury Inspector General. |
| 27. | Treasury, in its sole discretion, may grant any request by the Recipient for termination of this Agreement, which such request shall be in writing and shall include the reasons for such termination, the proposed effective date of the termination, and the amount of any unused Payroll Support funds the Recipient requests to return to Treasury. Treasury may, in its sole discretion, determine the extent to which the requirements under this Agreement may cease to apply following any such termination. |
| 28. | If Treasury determines that any remaining portion of the Payroll Support will not accomplish the purpose of this Agreement, Treasury may terminate this Agreement in its entirety to the extent permitted by law. |
Debts
| 29. | Any Payroll Support in excess of the amount which Treasury determines, at any time, the Recipient is authorized to receive or retain under the terms of this Agreement constitutes a debt to the Federal Government. |
| 30. | Any debts determined to be owed by the Recipient to the Federal Government shall be paid promptly by the Recipient. A debt is delinquent if it has not been paid by the date specified in Treasury’s initial written demand for payment, unless other satisfactory arrangements have been made. Interest, penalties, and administrative charges shall be charged on delinquent debts in accordance with 31 U.S.C. § 3717, 31 CFR 901.9, and paragraphs 31 and 32. Treasury will refer any debt that is more than 180 days delinquent to Treasury’s Bureau of the Fiscal Service for debt collection services. |
| 31. | Penalties on any debts shall accrue at a rate of not more than 6 percent per year or such other higher rate as authorized by law. |
| 32. | Administrative charges relating to the costs of processing and handling a delinquent debt shall be determined by Treasury. |
| 33. | The Recipient shall not use funds from other federally sponsored programs to pay a debt to the government arising under this Agreement. |
12
Protections for Whistleblowers
| 34. | In addition to other applicable whistleblower protections, in accordance with 41 U.S.C. § 4712, the Recipient shall not discharge, demote, or otherwise discriminate against an Employee as a reprisal for disclosing information to a Person listed below that the Employee reasonably believes is evidence of gross mismanagement of a Federal contract or grant, a gross waste of Federal funds, an abuse of authority relating to a Federal contract or grant, a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a Federal contract (including the competition for or negotiation of a contract) or grant: |
| a. | A Member of Congress or a representative of a committee of Congress; |
| b. | An Inspector General; |
| c. | The Government Accountability Office; |
| d. | A Treasury employee responsible for contract or grant oversight or management; |
| e. | An authorized official of the Department of Justice or other law enforcement agency; |
| f. | A court or grand jury; or |
| g. | A management official or other Employee of the Recipient who has the responsibility to investigate, discover, or address misconduct. |
Lobbying
| 35. | The Recipient shall comply with the provisions of 31 U.S.C. § 1352, as amended, and with the regulations at 31 CFR Part 21. |
Non-Discrimination
| 36. | The Recipient shall comply with, and hereby assures that it will comply with, all applicable Federal statutes and regulations relating to nondiscrimination including: |
| a. | Title VI of the Civil Rights Act of 1964 (42 U.S.C. § 2000d et seq.), including Treasury’s implementing regulations at 31 CFR Part 22; |
| b. | Section 504 of the Rehabilitation Act of 1973, as amended (29 U.S.C. § 794); |
| c. | The Age Discrimination Act of 1975, as amended (42 U.S.C. §§ 6101—6107), including Treasury’s implementing regulations at 31 CFR Part 23 and the general age discrimination regulations at 45 CFR Part 90; and |
| d. | The Air Carrier Access Act of 1986 (49 U.S.C. § 41705). |
13
Additional Reporting
| 37. | Within seven days after the date of this Agreement, the Recipient shall register in SAM.gov, and thereafter maintain the currency of the information in SAM.gov until at least October 1, 2022. The Recipient shall review and update such information at least annually after the initial registration, and more frequently if required by changes in the Recipient’s information. The Recipient agrees that this Agreement and information related thereto, including the Maximum Awardable Amount and any executive total compensation reported pursuant to paragraph 38, may be made available to the public through a U.S. Government website, including SAM.gov. |
| 38. | For purposes of paragraph 37, the Recipient shall report total compensation as defined in paragraph e.6 of the award term in 2 CFR part 170, App. A for each of the Recipient’s five most highly compensated executives for the preceding completed fiscal year, if: |
| a. | the total Payroll Support is $25,000 or more; |
| b. | in the preceding fiscal year, the Recipient received: |
| i. | 80 percent or more of its annual gross revenues from Federal procurement contracts (and subcontracts) and Federal financial assistance, as defined at 2 CFR 170.320 (and subawards); and |
| ii. | $25,000,000 or more in annual gross revenues from Federal procurement contracts (and subcontracts) and Federal financial assistance, as defined at 2 CFR 170.320 (and subawards); and |
| c. | the public does not have access to information about the compensation of the executives through periodic reports filed under section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a), 78o(d)) or section 6104 of the Internal Revenue Code of 1986. To determine if the public has access to the compensation information, the Recipient shall refer to U.S. Securities and Exchange Commission total compensation filings at http://www.sec.gov/answers/execomp.htm. |
| 39. | The Recipient shall report executive total compensation described in paragraph 38: |
| a. | as part of its registration profile at https://www.sam.gov; and |
| b. | within five business days after the end of each month following the month in which this Agreement becomes effective, and annually thereafter. |
14
| 40. | The Recipient agrees that, from time to time, it will, at its own expense, promptly upon reasonable request by Treasury, execute and deliver, or cause to be executed and delivered, or use its commercially reasonable efforts to procure, all instruments, documents and information, all in form and substance reasonably satisfactory to Treasury, to enable Treasury to ensure compliance with, or effect the purposes of, this Agreement, which may include, among other documents or information, (a) certain audited financial statements of the Recipient, (b) documentation regarding the Recipient’s revenues derived from its business as a passenger air carrier or regarding the passenger air carriers for which the Recipient provides services as a contractor (as the case may be), and (c) the Recipient’s most recent quarterly Federal tax returns. The Recipient agrees to provide Treasury with such documents or information promptly. |
| 41. | If the total value of the Recipient’s currently active grants, cooperative agreements, and procurement contracts from all Federal awarding agencies exceeds $10,000,000 for any period before termination of this Agreement, then the Recipient shall make such reports as required by 2 CFR part 200, Appendix XII. |
Other
| 42. | The Recipient acknowledges that neither Treasury, nor any other actor, department, or agency of the Federal Government, shall condition the provision of Payroll Support on the Recipient’s implementation of measures to enter into negotiations with the certified bargaining representative of a craft or class of employees of the Recipient under the Railway Labor Act (45 U.S.C. 151 et seq.) or the National Labor Relations Act (29 U.S.C. 151 et seq.), regarding pay or other terms and conditions of employment. |
| 43. | Notwithstanding any other provision of this Agreement, the Recipient has no right to, and shall not, transfer, pledge, mortgage, encumber, or otherwise assign this Agreement or any Payroll Support provided under this Agreement, or any interest therein, or any claim, account receivable, or funds arising thereunder or accounts holding Payroll Support, to any party, bank, trust company, or other Person without the express written approval of Treasury. |
| 44. | The Signatory Entity will cause its Affiliates to comply with all of their obligations under or relating to this Agreement. |
| 45. | Unless otherwise provided in guidance issued by Treasury or the Internal Revenue Service, the form of any Taxpayer Protection Instrument held by Treasury and any subsequent holder will be treated as such form for purposes of the Internal Revenue Code of 1986 (for example, a Taxpayer Protection Instrument in the form of a note will be treated as indebtedness for purposes of the Internal Revenue Code of 1986). |
| 46. | This Agreement may not be amended or modified except pursuant to an agreement in writing entered into by the Recipient and Treasury, except that Treasury may unilaterally amend this Agreement if required in order to comply with applicable Federal law or regulation. |
15
| 47. | Subject to applicable law, Treasury may, in its sole discretion, waive any term or condition under this Agreement imposing a requirement on the Recipient or any Affiliate. |
| 48. | This Agreement shall bind and inure to the benefit of the parties and their respective heirs, executors, administrators, successors, and assigns. |
| 49. | The Recipient represents and warrants to Treasury that this Agreement, and the issuance and delivery to Treasury of the Taxpayer Protection Instruments, if applicable, have been duly authorized by all requisite corporate and, if required, stockholder action, and will not result in the violation by the Recipient of any provision of law, statute, or regulation, or of the articles of incorporation or other constitutive documents or bylaws of the Recipient, or breach or constitute an event of default under any material contract to which the Recipient is a party. |
| 50. | The Recipient represents and warrants to Treasury that this Agreement has been duly executed and delivered by the Recipient and constitutes a legal, valid, and binding obligation of the Recipient enforceable against the Recipient in accordance with its terms. |
| 51. | This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which together shall constitute a single contract. |
| 52. | The words “execution,” “signed,” “signature,” and words of like import in any assignment shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. Notwithstanding anything herein to the contrary, delivery of an executed counterpart of a signature page of this Agreement by electronic means, or confirmation of the execution of this Agreement on behalf of a party by an email from an authorized signatory of such party, shall be effective as delivery of a manually executed counterpart of this Agreement. |
| 53. | The captions and paragraph headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. |
| 54. | This Agreement is governed by and shall be construed in accordance with Federal law. Insofar as there may be no applicable Federal law, this Agreement shall be construed in accordance with the laws of the State of New York, without regard to any rule of conflicts of law (other than section 5-1401 of the New York General Obligations Law) that would result in the application of the substantive law of any jurisdiction other than the State of New York. |
| 55. | Nothing in this Agreement shall require any unlawful action or inaction by either party. |
| 56. | The requirement pertaining to trafficking in persons at 2 CFR 175.15(b) is incorporated herein and made applicable to the Recipient. |
16
| 57. | This Agreement, together with the attachments hereto, including the Payroll Support Program Extension Certification and any attached terms regarding Taxpayer Protection Instruments, constitute the entire agreement of the parties relating to the subject matter hereof and supersede any previous agreements and understandings, oral or written, relating to the subject matter hereof. There may exist other agreements between the parties as to other matters, which are not affected by this Agreement and are not included within this integration clause. |
| 58. | No failure by either party to insist upon the strict performance of any provision of this Agreement or to exercise any right or remedy hereunder, and no acceptance of full or partial Payroll Support (if applicable) or other performance by either party during the continuance of any such breach, shall constitute a waiver of any such breach of such provision. |
ATTACHMENT
Payroll Support Program Extension Certification of Corporate Officer of Recipient
17
PAYROLL SUPPORT PROGRAM EXTENSION
CERTIFICATION OF CORPORATE OFFICER OF RECIPIENT
In connection with the Payroll Support Program Extension Agreement (Agreement) between Air Wisconsin Airlines LLC and the Department of the Treasury (Treasury) relating to Payroll Support being provided by Treasury to the Recipient under Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021, I hereby certify under penalty of perjury to the Treasury that all of the following are true and correct. Capitalized terms used but not defined herein have the meanings set forth in the Agreement.
(1) I have the authority to make the following representations on behalf of myself and the Recipient. I understand that these representations will be relied upon as material in the decision by Treasury to provide Payroll Support to the Recipient.
(2) The information and certifications provided by the Recipient in an application for Payroll Support, and in any attachments or other information provided by the Recipient to Treasury related to the application, are true and correct and do not contain any materially false, fictitious, or fraudulent statement, nor any concealment or omission of any material fact.
(3) The Recipient has the legal authority to apply for the Payroll Support, and it has the institutional, managerial, and financial capability to comply with all obligations, terms, and conditions set forth in the Agreement and any attachment thereto.
(4) The Recipient and any Affiliate will give Treasury, Treasury’s designee or the Treasury Office of Inspector General (as applicable) access to, and opportunity to examine, all documents, papers, or other records of the Recipient or Affiliate pertinent to the provision of Payroll Support made by Treasury based on the application, in order to make audits, examinations, excerpts, and transcripts.
(5) No Federal appropriated funds, including Payroll Support, have been paid or will be paid, by or on behalf of the Recipient, to any person for influencing or attempting to influence an officer or employee of an agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the awarding of any Federal contract, the making of any Federal grant, the making of any Federal loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, amendment, or modification of any Federal contract, grant, loan, or cooperative agreement.
18
(6) If the Payroll Support exceeds $100,000, the Recipient shall comply with the disclosure requirements in 31 CFR Part 21 regarding any amounts paid for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with the Payroll Support.
I acknowledge that a materially false, fictitious, or fraudulent statement (or concealment or omission of a material fact) in this certification, or in the application that it supports, may be the subject of criminal prosecution and also may subject me and the Recipient to civil penalties and/or administrative remedies for false claims or otherwise.
| /s/ Robert Binns |
/s/ Gregg Garvey | |
| Corporate Officer of Signatory Entity | Second Authorized Representative | |
| Name: ROBERT BINNS | Name: Gregg Garvey | |
| Title: PRESIDENT & CEO | Title: SVP, CAO & Treasurer | |
| Date: 3/22/21 | Date: 3/22/21 | |
19
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christine R. Deister, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Harbor Diversified, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 1, 2021 | /s/ Christine R. Deister | |||||
| Christine R. Deister | ||||||
| Chief Executive Officer and Secretary | ||||||
| Harbor Diversified, Inc. | ||||||
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregg Garvey, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Harbor Diversified, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 1, 2021 | /s/ Gregg Garvey | |||||
| Gregg Garvey | ||||||
| Senior Vice President, Chief Accounting Officer and Treasurer | ||||||
| Air Wisconsin Airlines LLC | ||||||
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The following certifications are hereby made in connection with the Annual Report on Form 10-K of Harbor Diversified, Inc. (the “Company”) for the period ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”):
I, Christine R. Deister, Principal Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented.
| Date: April 1, 2021 | By: | /s/ Christine R. Deister | ||||
| Christine R. Deister | ||||||
| Chief Executive Officer and Secretary | ||||||
| Harbor Diversified, Inc. | ||||||
| (Principal Executive Officer) |
I, Gregg Garvey, Principal Financial and Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented.
| Date: April 1, 2021 | By: | /s/ Gregg Garvey | ||||
| Gregg Garvey | ||||||
| Senior Vice President, Chief Accounting Officer and Treasurer | ||||||
| Air Wisconsin Airlines LLC | ||||||
| (Principal Financial and Accounting Officer) |
The foregoing Certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Allowance for doubtful accounts receivables | $ 59 | $ 129 |
| Inventory allowances valuation reserves | 9,649 | 8,389 |
| Current portion of long-term debt principal amount | 20,922 | 7,198 |
| Non-current portion of long term debt principal amount | $ 86,066 | $ 96,988 |
| Common stock par value | $ 0.01 | $ 0.01 |
| Common stock share authorized | 100,000,000 | 100,000,000 |
| Common stock share issued | 55,481,140 | 55,481,140 |
| Common stock share outstanding | 54,863,305 | 54,863,305 |
| Series C Redeemable Convertible Preferred Stock [Member] | ||
| Temporary equity par value | $ 0.01 | $ 0.01 |
| Temporary equity shares authorized | 4,000,000 | 0 |
| Temporary equity shares issued | 4,000,000 | 0 |
| Temporary equity shares outstanding | 4,000,000 | 0 |
Consolidated Statements of Stockholders' Equity - USD ($) shares in Thousands, $ in Thousands |
Total |
Mezzanine Equity Series C Convertible Redeemable Preferred Stock [Member] |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Repurchased Stock [Member] |
|---|---|---|---|---|---|---|
| Beginning Balance at Dec. 31, 2018 | $ 96,735 | $ 555 | $ 288,980 | $ (192,319) | $ (481) | |
| Beginning balance, Shares at Dec. 31, 2018 | 54,863 | 618 | ||||
| Net income (loss) | (19,214) | (19,214) | ||||
| Ending Balance at Dec. 31, 2019 | 77,521 | $ 555 | 288,980 | (211,533) | $ (481) | |
| Ending balance, shares at Dec. 31, 2019 | 54,863 | 618 | ||||
| Net income (loss) | 39,763 | 39,763 | ||||
| Dividend | (759) | (759) | ||||
| Preferred Stock | $ 13,200 | |||||
| Preferred Stock, Shares | 4,000 | |||||
| Ending Balance at Dec. 31, 2020 | $ 116,525 | $ 13,200 | $ 555 | $ 288,221 | $ (171,770) | $ (481) |
| Ending balance, shares at Dec. 31, 2020 | 4,000 | 54,863 | 618 |
Summary of Significant Accounting Policies |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying 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 Harbor Diversified, Inc. and subsidiaries (collectively, the Company). Harbor Diversified, Inc. is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), which is the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. The Company is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which is a non-operating entity with no material assets. Description of Operations The Company has principal lines of business focused on (1) providing air transportation through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin and (3) providing flight equipment financing to Air Wisconsin. The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement (the United capacity purchase agreement) with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020. For additional information, refer to Note 3, Capacity Purchase Agreement with United. Air Wisconsin operates as a United Express carrier with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. 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 Accounting Standards Codification (ASC) 280, “ Segment Reporting ,” we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flying services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the Board of Directors. The chief operating decision maker 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 operate as one operating and reportable segment. As further discussed below, substantially all of our operating revenue in 2020 and 2019 was derived from operations associated with United. Contract and Other Revenues The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. United pays the Company a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with additional incentives primarily based on flight completion, on-time performance, and customer satisfaction ratings. Under this agreement, the Company’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. The Company and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. Under the United capacity purchase agreement, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria (provided that, pursuant to the amendment to the United capacity purchase agreement, no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The incentives are defined in the agreement and are determined and measured on a monthly basis. At the end of each month during the term of the agreement, the Company calculates the incentives achieved during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). As discussed above, under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Due to the material decrease in completed flights for the year ended December 31, 2020 from historical levels and anticipated future levels in periods within the remaining contract term, Air Wisconsin determined that the amount of the fixed payments it received was disproportionately high relative to anticipated fixed revenue for future periods due to fewer flights completed in the year ended December 31, 2020. Air Wisconsin anticipates the future number of flights it will complete over the remainder of the agreement will significantly increase from 2020 levels. Accordingly, Air Wisconsin deferred recognizing revenue of $43,220 in the year ended December 31, 2020. Air Wisconsin’s deferred revenue related to the fixed portion will adjust over the remaining contract term based on the number of flights completed each reporting period relative to the number of flights anticipated over the remaining contract term. The current portion of the deferred revenue, in the amount of $12,500, is recorded as part of contract liabilities, and the long-term portion of the deferred revenue, in the amount of $30,720, is recorded as deferred revenue on the consolidated balance sheets. Due to fewer flights during the year ended December 31, 2020, Air Wisconsin also recognized less non-refundable upfront fee revenue, as well as lower fulfillment costs, both of which are being amortized over the remaining term of the agreement in proportion to flights flown. During the year ended December 31, 2020, Air Wisconsin recorded $2,504 of revenue from upfront fees and $269 of fulfillment costs, compared to $3,725 and $400 for the year ended December 31, 2019, respectively. The timing of the recognition of these items in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown in the same period. The amount of revenue recognized for the year ended December 31, 2020 that was previously recorded as a contract liability is $7,116. In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement (CPA amendment), which, among other things, provided for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours caused by the COVID-19 pandemic, and as a result of the CPA amendment, management determined, using a significant amount of judgement, that from an accounting perspective, a new performance obligation was created by United requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United stand ready rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation will be recognized over time on a straight line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined by the CPA amendment. For the year ending December 31, 2020, Air Wisconsin recorded $21,392 in revenue related to this performance obligation. This amount was recorded in tong-term notes receivable on the balance sheet as of December 31, 2020. As part of the CPA amendment, Air Wisconsin also settled outstanding issues, including the opening and closing of maintenance bases. United agreed to accrue a liability to Air Wisconsin in the amount of $11,048 along with a cash settlement of $670. These amounts were recognized using a cumulative catchup adjustment based on prior and future expected departures. In total, Air Wisconsin recognized revenue of $7,307 and deferred the remaining portion which will be recognized in proportion to future departures. These accrued amounts contain a significant financing component and any interest income is separately reported in the statement of operations. Further, the accrued amounts are evidenced by notes receivable payable by United to Air Wisconsin. As of December 31, 2020, these notes totaled 2020, interest receivable on these notes totaled $309. United makes provisional cash payments to the Company during each month of service based on monthly flight schedules. These provisional cash payments are reconciled based on actual completed flights after each month’s flight activity is completed. As of December 31, 2020, United owed Air Wisconsin $1,180 which is recorded in “Accounts receivable less allowances” on the balance sheet. Other revenues are immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts generally is fair market value. Cash and Cash Equivalents Investments and deposits with a maturity of three months or less when acquired and money market funds are considered cash and cash equivalents. Restricted Cash Restricted cash represents amounts escrowed in an interest-bearing account relating to the Company’s letters of credit. Spare Parts and Supplies Expendable parts are stated at average cost less an obsolescence allowance. The Company provides for an allowance for obsolescence after considering the useful life of the aircraft fleet, the estimated cost of expendable parts expected to be on hand at the end of the useful life and the estimated salvage value of the parts. This allowance is based on management estimates and is subject to change. Expendable parts are charged to expense when used. Expendable parts that are repairable are returned to inventory at the average cost of comparable parts, less a reserve for scrap. Supplies are stated at average cost. Property and Equipment and Depreciation Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop event. Lotus’ engine maintenance costs are expensed. Depreciation expense in 2020 and 2019 was $25,719 and $23,578, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations. Impairment of Long-Lived Assets The Company evaluates long-lived assets for potential impairment and records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and determined that no quantitative impairment tests were needed as of December 31, 2020. Impairment of Intangible Assets Indefinite-lived intangible assets are not subject to amortization but are subject to an annual assessment for impairment by applying a fair-value-based test. Since Air Wisconsin’s trade names and air carrier certificate have indefinite lives, there is no amortization. The Company evaluated these assets for impairment and determined that no impairment existed as of December 31, 2020 or 2019. Maintenance The Company operates its aircraft under a continuous inspection and maintenance program. The normal cost of recurring maintenance is expensed when incurred except for planned major maintenance activities for engines where the deferral method of accounting is applied. Income Taxes The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities. As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open. The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2017. With a few exceptions, the Company is no longer subject to state or local income tax examinations for the years prior to 2016. As of December 31, 2020, the Company had no outstanding tax examinations. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company had accrued $99 and $121 for the payment of interest and penalties at December 31, 2020 and 2019, respectively. Comprehensive Income The Company does not have any components of comprehensive income and, as of December 31, 2020 and 2019, comprehensive income is equal to net income reported in the consolidated statements of operations. Concentration of Credit Risk The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. Concentration of Customer Risk Substantially all the Company’s revenues in the years ended December 31, 2020 and 2019 were derived from the United capacity purchase agreement. Refer to Note 3 for additional information. Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Fair Value of Financial Instruments The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, notes receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Long-term investments are held-to-maturity Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows: Level 1 - Quoted market prices in active markets for identical assets or liabilities. Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable. Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations annually, and it is possible that an asset or liability may be classified differently from year to year. However, the Company expects that changes in classifications between levels will be rare. The Company classifies money market funds and deposits as Level 1 and long-term investments as Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (Topic 842). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the balance sheet. The accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted Topic 842 effective January 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).” This update provides an optional approach that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years as 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, however, an adjustment was not necessary to opening retained earnings. 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 financial statements of operations and statement of cash flows. The Company’s prepaid aircraft rents and accrued aircraft rents that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019. As a result of the adoption of the new lease accounting guidance, the Company recognized the following ROU assets and lease liabilities as of January 1, 2019:
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The Company adopted ASU 2018-13 as of January 1, 2020. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The adoption of ASU 2018-13 did not have a material impact on the Company’s results of operations, financial position, or related disclosures. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 introduces a new accounting model known as Current Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivable. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.In August 2020, the FASB issued ASU No. 2020-06, Debt (Subtopic 470-20); Debt with Conversion and Other Options and Derivatives and Hedging (Subtopic 815-40); Contracts in Entity’s Own Equity (ASU 2020-06). ASU 2020-06 amends the guidance on convertible instruments and the derivatives scope exception for contracts and convertible instruments on an entity’s own equity. This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2020. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements.Reclassification In accordance with ASU 2016-18, restricted cash on the statement of cash flows for the period ended December 31, 2019, has been reclassified to be included in the beginning and ending balances of Cash and Cash Equivalents. The restricted cash was previously reported in the Cash Flows from Investing Activities section of the statement. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liquidity |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Text Block [Abstract] | ||
| Liquidity and Management's Plan, COVID-19 | 2. Liquidity The Company’s ability to meet its liquidity needs is dependent upon generating cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company’s operations will be sufficiently profitable, or that additional funds will be available, to meet its future liquidity needs. Impact of the COVID-19 Pandemic In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and, in response, federal, state, local, and foreign governments implemented “shelter-in-place” “stay-at-home” COVID-19. As of the date of this Annual Report, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in which Air Wisconsin operates. The sharp decline in airline travel demand due to the COVID-19 pandemic had a material, negative impact on the airline industry in the year ended December 31, 2020, affecting United, and in turn, Air Wisconsin’s revenue and results of operations. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic demand related to the COVID-19 pandemic during the first quarter of 2020 and, as of the date of this filing, has stated that it expects demand will remain suppressed in 2021. In response to lower demand for air travel, in the months of April through December 2020, United cut its scheduled capacity by between approximately 50% and 90%. As a result, beginning in March 2020, United significantly reduced Air Wisconsin’s scheduled departures and block hours actually flown, and temporarily ceased Air Wisconsin’s operations at Washington-Dulles from May 2020 through August 2020. As of December 31, 2020, Air Wisconsin provided scheduled passenger service to 69 cities in 28 states and provinces as compared to 81 cities in 31 states as of December 31, 2019. In July 2020, Air Wisconsin informed approximately 871 employees that they might be furloughed or laid off as of October 1, 2020, through notices given pursuant to the federal Worker Adjustment and Retraining Notification (WARN) Act; and on October 1, 2020, Air Wisconsin furloughed or laid off approximately 305 employees, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, 116 of those employees who were furloughed have been recalled, accepted the recall offer and remain employed by Air Wisconsin. Through notices given in January 2021 pursuant to the WARN Act, Air Wisconsin informed approximately 150 pilots, each of whom had received the October 2020 WARN Act notices, that they might be furloughed on April 1, 2021, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, no furloughs have yet been issued pursuant to these notices. While the continued severity and duration of the impacts of the COVID-19 pandemic are difficult to predict, the COVID-19 pandemic has continued to impact the Company’s financial condition and results of operations through the date of this Annual Report, which the Company expects to continue in the near term and result in a material impact on our financial condition, liquidity, and results of operations in future periods. Air Wisconsin has taken a number of measures to mitigate the health risks and economic impact of the COVID-19 pandemic. In addition, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations. The Company is taking actions based on currently available information to address the changing business environment; however, it cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on its results of operations, financial condition, or liquidity. Since a portion of the Company’s revenue is fixed due to the structure of the United capacity purchase agreement, the impact of the COVID-19 pandemic on the Company’s financial position may be partially mitigated or offset. However, if United ceases to pay the full amount required under the agreement, whether due to its own financial disruption resulting from the COVID-19 pandemic, as a result of a dispute with the Company, or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition, and liquidity. The fixed amount received is based on a fixed contractual rate and number of covered aircraft, while variable revenue earned is based on the number of block hours and departures. Variable revenues have been significantly reduced, due to the lower number of flights. In addition, a certain portion of the fixed amount received has been deferred based on future expected flight activity, since fixed revenue is allocated over current and expected future departures through the end of the contract term. The Company may continue to experience ongoing or further reductions in revenues. The travel restrictions, guidelines and other initiatives adopted to limit the spread of the virus have had, and will continue to have, a material adverse impact on passenger demand for air travel. As a result of this decline in demand, and the subsequent capacity reductions by United, the Company’s approximately 1,271 departures and 1,759 scheduled block hours in June 2020 were approximately 86% and 88% less than its departures and scheduled block hours in June 2019, respectively. Cost Reduction Initiatives In response to these developments, during the year ended December 31, 2020 the Company implemented cost reduction initiatives seeking to mitigate the impact of the COVID-19 pandemic on the Company’s operations, financial condition and liquidity, while also protecting the safety of the Company’s customers and employees. These measures have included, but are not limited to, the following: (1) Reducing or deferring employee-related costs, including: (i) Offering voluntary short-term unpaid leaves to employees and furloughing certain employees, and (ii) Deferring the employer’s portion of employees’ social security tax payments. (2) Reducing other non-employee costs in the current fiscal year, including: (i) Delaying planned non-essential heavy airframe maintenance events primarily as a result of reduced flight schedules, (ii) Delaying non-essential maintenance events associated with engines and rotable parts primarily as a result of reduced flight schedules, (iii) Seeking concessions from third-party suppliers, and (iv) Reducing or suspending certain discretionary spending. Payroll Support In March 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition to the cost reduction measures discussed above, in April 2020, Air Wisconsin applied to a lender for a $10,000 loan (SBA Loan) under the small business Paycheck Protection Program (PPP) established under the CARES Act and administered by the Small Business Administration (SBA). The entire loan amount was received by Air Wisconsin on April 13, 2020. The application for these funds required Air Wisconsin to certify in good faith that current economic uncertainty made the loan request necessary to support the ongoing operations of Air Wisconsin. Air Wisconsin was also required to certify that the loan funds would be used to retain workers and maintain payroll, or to make mortgage payments, lease payments, and utility payments. The SBA Loan bears interest at a rate of 1.0% per annum. The SBA Loan originally had a two-year term, and monthly principal and interest payments were originally deferred for six months after the date of the loan. Pursuant to the Flexibility Act signed into law in June 2020 (Flexibility Act), the maturity date may be, but has not yet been, extended to 2025, and the interest deferral has been extended to 2021. The SBA Loan may be prepaid at any time without penalty. Under the CARES Act, Air Wisconsin can apply for and be granted forgiveness for all or a portion of the SBA Loan. Such forgiveness, if any, will be determined, subject to limitations, based on the use of the loan proceeds for specified purposes, provided that not more than 40% of the forgiven amount may be for non-payroll costs. While Air Wisconsin believes that its use of the loan proceeds will meet the conditions for forgiveness of the SBA Loan, there can be no assurance that Air Wisconsin will obtain forgiveness of the loan in whole or in part. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the filing of this Annual Report, the loan has not been forgiven. Air Wisconsin is in compliance with the terms of the SBA Loan. In addition, in April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (PSP-1 Agreement) with respect to payroll support (Treasury Payroll Support) from the U.S. Department of Treasury (Treasury) under the payroll support program (Payroll Support Program) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $42,185 in the twelve month period ended December 31, 2020. Air Wisconsin believes that in the year ended December 31, 2020, it expended the amount received in compliance with the PSP-1 Agreement. The PSP-1 Agreement contains various covenants, including that the proceeds from the Payroll Support Program must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin could not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin could not reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent. Further, the United capacity purchase agreement, Air Wisconsin’s credit agreements and the agreements with the Treasury for payroll support all contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. If Air Wisconsin fails to comply with its obligations under the PSP-1 Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the agreement. Subject to the outcome of the audit, Air Wisconsin believes it is in compliance with the terms of the PSP-1 Agreement. For additional information, refer to Note 8. In December 2020, Congress adopted, and the President signed, the federal Consolidated Appropriations Act of 2021 (PSP Extension Law), Subtitle A of Title IV of Division N of which provides for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement (the “PSP-2 Agreement”), which is substantially similar to the PSP-1 Agreement. Air Wisconsin expects to receive approximately $28,326 pursuant to the PSP-2 Agreement, approximately $15,536 of which was received in March 2021 and the balance of which is expected to be received in April 2021. In March 2021, Congress adopted, and the President signed, the federal American Rescue Plan Act of 2021 (the American Rescue Plan) , Subtitle C of Title VII of which provides further payroll support to eligible air carriers. Air Wisconsin expects to apply for payroll support under the American Rescue Plan and expects that it will be required to enter into an agreement substantially similar to the PSP -1 Agreement and the PSP -2 Agreement, if it receives payroll support under the American Rescue Plan. The proceeds of the Treasury Payroll Support under the CARES Act are recorded in cash and cash equivalents when received and were recognized as a reduction in expense under “CARES Act Payroll Support Program” in the Company’s consolidated statements of operations over the periods that the funds are intended to offset payroll expenses. In 2020 Air Wisconsin received and recognized approximately $42,185 under the Payroll Support Program. In light of the measures discussed above that the Company has implemented to mitigate the impact of the COVID-19 pandemic on its operations, financial condition and liquidity, the Company currently believes its available working capital and anticipated cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months from the date of filing this Annual Report. |
Capacity Purchase Agreement with United |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Accounting Policies [Abstract] | ||
| Capacity Purchase Agreement with United | 3. Capacity Purchase Agreement with United In February 2017, Air Wisconsin entered into the United capacity purchase agreement with United Airlines, Inc. to operate up to 65 CRJ-200 regional jet aircraft. In October 2020, Air Wisconsin entered into an amendment to the agreement, which, among other things, (i) set the number of aircraft covered by the agreement at 63; (ii) settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the agreement; (iii) provided a process for determining the circumstances under which, and the amount for which, United would pay or reimburse Air Wisconsin for costs incurred in connection with the opening and closing of maintenance and crew bases in response to alterations to Air Wisconsin’s operating schedule made at United’s direction; (iv) provided for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks; (v) modified the minimum and maximum daily block hour scheduling parameters; (vi) provided that no incentive compensation would be paid for the period from April 1, 2020 through September 30, 2020; (vii) terminated the limited guarantee by the Company and AWAC of the monetary obligations of Air Wisconsin under the United capacity purchase agreement; (viii) terminated certain provisions in the United capacity purchase agreement that were previously waived by United in March 2020, which constrained Air Wisconsin from flying for another air carrier; and (ix) amended United’s option to extend the term of the agreement such that United now has an option to extend the term for a period of no less than two years (and up to three years, in its discretion), and a second option to extend for an additional two-year period, subject to mutual agreement by Air Wisconsin and United as to compensation. |
Property and Equipment |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property and Equipment | 4. Property and Equipment The following presents Air Wisconsin’s aircraft as of December 31, 2020 and 2019.
As part of an agreement reached in January 2018 Bombardier Inc. (BBD) agreed to pay Air Wisconsin $25,192 in installments through September 2019, provided that BBD had the right to deliver to Air Wisconsin the unencumbered title to certain CRJ-200 aircraft in satisfaction of any installment payments that remained at the time of such delivery. Under the agreement, Air Wisconsin and BBD also agreed to terminate all residual value guarantee agreements (RVG’s) on 35 owned aircraft and to terminate certain other agreements that limited BBD’s obligations under such guarantee agreements. On July 1, 2019, BBD exercised its right under the agreement and delivered to Air Wisconsin 14 CRJ-200 aircraft which had previously been leased to Air Wisconsin. The delivery of the aircraft was in lieu of remaining installment payments due to Air Wisconsin totaling $8,212. All installment payments received from BBD prior to July 1, 2019, were recorded as “Other income” in the statements of operations and amounted to $2,537 for the year ended December 31, 2019. Air Wisconsin recorded the 14 CRJ-200 aircraft as “Flight property and equipment” on the Balance Sheet at their fair market value based on recent asset valuations completed around that time. Fair market value was determined to be $15,832 based on one hundred and forty dollars per remaining engine cycle with a minimum value of $50 per engine, and each of the aircraft airframes was assigned a fair market value of $100. The airframes and engines were then depreciated in accordance with the table under “Property and Equipment and Depreciation” as set forth in Note 1. The transaction resulted in a lease termination expense of $19,539 which is included as part of “Aircraft rent” on the 2019 statement of operations. The lease termination expense, net of the recording of the assets at fair market value as noted above, included a charge for the following Balance Sheet items at the time the aircraft were acquired in July 2019:
In January 2020, the Company completed an asset acquisition from Southshore Leasing, LLC (Southshore Leasing), through its affiliates (the Southshore Affiliates and, together with Southshore Leasing, Southshore), of three CRJ-200 regional jets, each having two General Electric (GE) engines, plus five additional GE engines, in exchange for the issuance of shares of the Company’s Series C Convertible Redeemable Preferred Stock (Series C Preferred). The Company had leased each of these regional jets and engines prior to the acquisition. Refer to Note 12 for additional information. In May 2020, Air Wisconsin completed an acquisition of eight CRJ-200 regional jets, each having two GE engines, for $3,000. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition. In September 2020, Air Wisconsin completed an acquisition of two CRJ-200 regional jets, each having two GE engines, for $818. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | 5. Income Taxes The income tax provision consists of the following:
The following is a reconciliation between a federal income tax rate of 21% in for the years ended December 31, 2020 and 2019 of income before income taxes and the effective tax rate which is derived by dividing the provision for income taxes by the income before the provision for income taxes (in thousands):
As of December 31, 2019, the Company’s deferred tax assets were primarily the result of federal and state net operating loss carryforwards. A valuation allowance of $6,330 was recorded against our gross deferred tax asset balance as of December 31, 2019. For the year ended December 31, 2020, the Company recorded a net valuation allowance release of $6,330, comprising a full-year valuation release on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, the Company achieved three years of cumulative pretax income. In addition, the scheduling of temporary differences and the projection of taxable income led management to believe that there is sufficient positive evidence to conclude that it is more likely than not that deferred tax assets are realizable. It therefore reduced the valuation allowance accordingly. Deferred tax assets and liabilities reflect temporary differences between financial and tax reporting. Significant components of deferred tax assets and liabilities are as follows:
At December 31, 2020 and 2019, the Company had federal net operating losses of approximately $27,583 and $60,940, respectively, and state net operating losses of approximately $9,147 and $17,897, respectively. As of December 31, 2020, the estimated effective tax rate applicable to the federal and state net operating losses are 21.0% and 2.8%, respectively. The federal net operating loss is not subject to an expiration date but is subject to an 80% of taxable income limitation after 2020, while the Company expects the state net operating losses to begin to expire in 2024. State net operating losses differ with respect to expiration dates and limitations dependent on state specific regulations. For the years ended December 31, 2020 and 2019, the Company had a federal business interest carryforward of $0 and $4,724, respectively. For the years ended December 31, 2020 and 2019, the Company recorded a valuation allowance of $0 and $6,330, respectively, against federal and state deferred tax assets consisting of net operating loss carryovers and interest expense limitation carryovers. The Company has no ongoing federal or state examinations. Federal tax years 2017, 2018, and 2019 are open to examination. Under ASC Topic 740, the accounting guidance related to uncertain tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows (in thousands):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt | 6. Debt Long-Term Debt Long-term debt consists of the following (with interest rates as of December 31, 2020 and December 31, 2019):
Aircraft Notes In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of senior aircraft notes and subordinated aircraft notes. Prior to December 2018, the Lender acquired all of the subordinated aircraft notes from the subordinated lender. On December 24, 2018, Air Wisconsin and the Lender entered into a debt restructuring arrangement whereby:
The Aircraft Notes are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. Air Wisconsin concluded the restructuring should be classified as a troubled debt restructuring. Accordingly, the carrying value of the restructured debt was reduced to the expected future undiscounted cash flows related to its repayment, which includes future principal and interest payments of $70,000 and $10,850, respectively. Other Credit Agreements In June 2017, Air Wisconsin and the Lender entered into a credit agreement under which Air Wisconsin borrowed $14,397 (the 2017 Credit Agreement). These loans had an interest rate of 5% and a maturity date of December 31, 2020 and were secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. These loans were paid in full in December 2020. On January 2018, Air Wisconsin entered into a second credit agreement with the Lender to borrow $15,198 (the 2018 Credit Agreement). In December 2018, the Lender and Air Wisconsin entered into a first amendment to the 2018 Credit Agreement in which the Lender agreed to make an additional loan in the amount of $5,755 in April 2019. In April 2019, Air Wisconsin entered into a second amendment with respect to the 2018 Credit Agreement that extended the due date of one of the payments due in the amount of $7,273 from July 2019 to July 2020. In June 2019, Air Wisconsin entered into a third amendment to the 2018 Credit Agreement that changed the due date of the installment payment of $7,273, due July 2020, to December 2021. The amendment also provided Air Wisconsin the option to make the March 2020 and June 2020 payments under the 2017 Credit Agreement in December 2019, which totaled $7,198. In return, the December 2019 payment under the 2018 Credit Agreement, in the amount of $7,925, would be deferred to be made in two installments of $3,963 each due in March and June of 2022. Air Wisconsin exercised this option. The June 2019 amendment also increased the loan amount of the 2018 Credit Agreement by $6,034, to a total of $26,987, and the amendment extended the maturity date to June 30, 2022 , at which time the $6,034 is also due. The loans under the 2018 Credit Agreement have an interest rate of 5% and a maturity date of June 30, 2022 and are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. Maturities of long-term debt for the years subsequent to December 31, 2020, are as follows:
The debt agreements include, among other provisions, certain non-financial covenants. At December 31, 2020 and 2019, Air Wisconsin was in compliance with the covenants of all of its debt agreements. Long-Term Promissory Note In July 2003, Air Wisconsin financed a hangar through the issuance of $4,275 City of Milwaukee, Wisconsin variable rate Industrial Development Bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest was payable semiannually on each May 1 and November 1. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the consolidated balance sheets. The hangar is accounted for as a right-of-use |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease Obligations |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease Obligations | 7. Lease Obligations Effective January 1, 2019, the Company adopted Topic 842. Air Wisconsin leases property and training simulators under operating leases. For leases with durations longer than 12 months, the Company recorded the related operating lease right-of-use The Company has operating leases for facility space including office space and maintenance facilities. The remaining lease terms for facility space vary from 20 months to 13 years. The Company’s operating leases with lease rates that are variable based on operating costs, use of the facilities or other variable factors are excluded from the Company’s right-of-use As of December 31, 2020, the Company’s right-of-use The table below presents operating lease related terms and discount rates as of December 31, 2020:
Components of lease costs were as follows for the years ended December 31,
As of December 31, 2020, Air Wisconsin leased or subleased certain training simulators and facilities for terms of greater than 12 months. Rent expense recorded under these leases was $11,293 and $51,490 in the years ended December 31, 2020 and 2019, respectively. The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of December 31, 2020:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies | 8. Commitments and Contingencies Legal Matters The Company is subject to certain legal actions, which it considers routine to its business activities. As of December 31, 2020, the Company believes, after consultation with legal counsel, that the ultimate outcome of such legal matters, whether individually or in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations. Treasury Audit The Treasury’s Office of Inspector General (OIG) commenced a routine audit in connection with Air Wisconsin’s receipt of funds under the Payroll Support Program. The audit focused, among other things, on certain calculations used to determine the amount of Treasury Payroll Support Air Wisconsin was entitled to receive under the program. Air Wisconsin has disputed in good faith the Treasury’s interpretation of varying definitions and other provisions among Air Wisconsin’s application for Treasury Payroll Support, Treasury’s guidance regarding the Payroll Support Program and the PSP-1 Agreement. Air Wisconsin has not received written notice from the OIG as to whether the audit has been completed or what the audit results were. Nevertheless, the Treasury has entered into the PSP-2 Agreement with Air Wisconsin, has paid to Air Wisconsin the first installment of the payroll support to be provided under the PSP-2 Agreement and has not required Air Wisconsin to refund any amounts it received under the PSP-1 Agreement. Air Wisconsin is not able to determine as of the date of the filing of this Annual Report how the amount of payroll support to which Air Wisconsin is entitled under the PSP-2 Agreement was determined. Nevertheless, Air Wisconsin management believes, based on communications it has received from the Treasury, that it is probable an amount will be due as a result of the audit. However, Air Wisconsin is not able to reasonably estimate, as of the date of filing of this Annual Report, the amount which OIG may ultimately determine to be due. Further, certain provisions in the PSP Extension Law may serve to limit or eliminate the need for any funds to be due as a result of the audit by the OIG. Standby Letters of Credit As of December 31, 2020, Air Wisconsin had five outstanding letters of credit in the aggregate amount of $348 to guarantee the performance of its obligations under certain lease agreements and insurance policies. Air Wisconsin maintains a credit facility of $810 for the issuance of such letters of credit as needed to support its operations. Air Wisconsin’s restricted cash secures the credit facility. Cash Obligations The following table sets forth our cash obligations as of December 31, 2020:
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3,500 commencing June 30, 2021, with certain additional amounts payable based on excess cash flow. No excess cash flow payments are anticipated in the above table. As of December 31, 2020, all of the Company’s long-term debt was subject to fixed interest rates. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement Plans |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Retirement Benefits [Abstract] | ||
| Retirement Plans | 9. Retirement Plans The Company has defined contribution retirement plans that cover substantially all employees. The Company contributes to these plans. Total expense under all plans for 2020 and 2019 was $3,764 and $4,467, respectively. |
Related-Party Transactions |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Related Party Transactions [Abstract] | ||
| Related-Party Transactions | 10. Related-Party Transactions For the years ended December 31, 2020 and 2019, the Company paid $390 and $3,979, respectively, pursuant to certain aircraft and engine leases with related parties and for other professional services. Southshore leased aircraft and engines to Air Wisconsin pursuant to various operating lease agreements from April 2010 through January 2020. In the year ended December 31, 2020, Air Wisconsin paid a total of approximately $150 to Southshore, consisting of approximately $66 for the lease of three aircraft and approximately $84 for the lease of additional engines to support Air Wisconsin’s operations. In the year ended December 31, 2019, Air Wisconsin paid a total of approximately $3,739 to Southshore, consisting of approximately $1,878 for the lease of three aircraft, a total of approximately $1,661 for the lease of additional engines, and $200 for the purchase of two previously leased airframes. In January 2020, the Company completed an acquisition from Southshore of three CRJ-200 regional jets, each having two GE engines, plus five additional GE engines, in exchange for the issuance of 4,000 shares of Series C Preferred with an aggregate value of $13,200, or $3.30 per share (Series C Issue Price), and the assumption of liabilities in the amount of $3,466. As of December 31, 2020, the shares of Series C Preferred were convertible into an aggregate of 16,500 shares of common stock. Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, the Series C Preferred remains convertible into an aggregate of . On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively. 16,500 shares of common stock as of the date of filing this Annual Report. For additional information, refer to Note 12From time to time, Air Wisconsin has also contracted for services to be performed on certain assets held by Southshore used in Air Wisconsin’s operations and has received reimbursement from Southshore at the cost of such services. Because Air Wisconsin acted as an agent or an intermediary in facilitating such transactions, the amounts of any such transactions are not included in the amounts described above. Resource Holdings Associates (Resource Holdings) has provided AWAC and Air Wisconsin with financial advisory and management services pursuant to an agreement entered into in January 2012. AWAC has paid a recurring monthly fee of $20 in exchange for these financial advisory and management services since January 2012. AWAC paid a total of $240 to Resource Holdings in both 2020 and 2019. |
Collective Bargaining Agreements |
12 Months Ended | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Retirement Benefits [Abstract] | |||||||||||||||||||||||||||||||||||||
| Collective Bargaining Agreements | 11. Collective Bargaining Agreements Air Wisconsin has five collective bargaining units. The Airline Pilots Association (ALPA) represents pilots. The Association of Flight Attendants-CWA (AFA) represents flight attendants. The mechanics and the technical store clerks have two separate collective bargaining agreements that are both represented by the International Association of Machinists and Aerospace Workers AFL-CIO (IAMAW). The Transport Workers Union of America (TWU) represents dispatchers. As of December 31, 2020, Air Wisconsin was in negotiations with the union that represents mechanics and will be in negotiations with the union that represents the dispatchers. Air Wisconsin is in mediated negotiations with the IAMAW representing the mechanics. The agreements with the TWU representing the dispatchers was amendable on November 1, 2020, however Air Wisconsin and the union have not started the negotiation process. Air Wisconsin believes the resolution of its negotiations will not have a material impact on its financial position or operations. Amendable dates for each bargaining unit are:
|
||||||||||||||||||||||||||||||||||||
Earnings Per Share and Equity |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share and Equity | 12. Earnings Per Share Calculations of net income per common share were as follows (in thousands, except per share data):
Basic earnings (loss) per share of common stock is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding assuming conversion of the 2015 Stock Option and Series C Preferred. In loss periods, dilutive shares associated with the 2015 Stock Option and the Series C Preferred were not included in the calculation above, as they would have an anti-dilutive effect on the calculation of earnings per share. For additional information, refer to Note 13. Series C Preferred In January 2020, the Company issued 4,000 shares of the Series C Preferred. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred are set forth in the Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock (Certificate of Designations), which the Company filed with the Secretary of State of the State of Delaware. The Series C Preferred accrues dividends at the rate of 6.0% per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors and paid by the Company (Preferential Dividends). From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (Dividend Ratchet). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (PIK Dividends). Each share of Series C Preferred is initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (Conversion Price). One of the requirements of the Certificate of Designations is that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The “Reporting Adjustment Period” is the first 90-trading day period commencing on or after August 28, 2020 (which is the first trading day following the day that is 45 days following the date on which the Company provided notice to its stockholders of the filing of its 2019 Annual Report) during which an aggregate of at least 5.0% of the outstanding shares of common stock are traded. The Conversion Price has been adjusted as of January 7, 2021 to be $0.15091. The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (Conversion Cap Excess Shares), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends of an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (Conversion Cap Excess Dividends). In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (Series C Liquidation Amount). At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date (as defined in the Certificate of Designations) or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800 shares of Series C Preferred are outstanding, and (d) December 31, 2024, the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (Redemption Price). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price. In January 2020, the Company also entered into an Investors’ Rights Agreement with Southshore, pursuant to which the Company agreed, if requested by Southshore at any time following the 180-day period after the Company became subject to the reporting requirements under the Exchange Act, to file with the SEC a registration statement on a Form S-1 with respect to at least 40% of the common stock issuable upon conversion of the Series C Preferred then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $10,000), along with other registration rights. All reasonable expenses related to any such registration shall be borne by the Company. The Investors’ Rights Agreement further provides that, whenever the members of the Board of Directors are to be elected, Southshore will vote so as to elect a majority of directors comprising the Board of Directors that qualify as independent directors. On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively. Based on the applicable accounting guidance, the Company is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. As of December 31, 2020, pursuant to the Certificate of Designations, the Series C Preferred was convertible into an aggregate of 16,500 shares of common stock. Following the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, the Series C Preferred is convertible into an aggregate of 16,500,000 shares of common stock, representing approximately % of the fully diluted shares of capital stock of the Company (assuming the full conversion of the Series C Preferred into common stock). The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity . Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Options |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Share-based Payment Arrangement [Abstract] | ||
| Stock Options | 13. Stock Options 2015 Stock Option In 2015, the Company issued a stock option (the 2015 Stock Option) to purchase 558,835 shares of the common stock of the Company at an exercise price of $0.21386 per share. The value of the 2015 Stock Option at the date of grant was $0.07 per share based on a life of 7.0 years, a risk-free interest rate of 2.01% and expected volatility of 157.1%. The 2015 Stock Option was the only stock option outstanding as of December 31, 2020 and 2019. After July 9, 2019, the 2015 Stock Option became fully exercisable. Prior to that date it could only be exercised based on the occurrence of certain events. The 2015 Stock Option terminates on the earlier to occur of July 9, 2022 or certain corporate transactions. |
Supplemental Cash Flow Information |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 | ||
| Supplemental Cash Flow Elements [Abstract] | ||
| Supplemental Cash Flow Information | 14. Supplemental Cash Flow Information Cash payments for interest for the years ended December 31, 2020 and 2019 were $7,311 and $1,841, respectively. Cash payments for income taxes for the years ended December 31, 2020 and 2019 amounted to $(1,035) and $39, respectively. Cash payments included in the measurement of lease liabilities related to operating leases amount to $5,398 and $29,502 for the years ended December 31, 2020 and 2019 respectively. In the year ended December 31, 2019 the Company also recorded a fair market value of $15,832 for 14 aircraft acquired in a non-cash lease termination transaction. The aircraft are recorded in property, plant, and equipment. For additional information, refer to Note 4. |
Intangible Assets |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets | 15. Intangible Assets Intangible assets at December 31, 2020 and 2019 consist of the following (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subsequent Events |
12 Months Ended | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||
| Subsequent Events [Abstract] | ||||||||||||||||||||||
| Subsequent Events | 16. Subsequent Events The Company evaluated its December 31, 2020, financial statements for subsequent events through April 1, 2021, the date the financial statements were available to be issued. The following subsequent events are noted:
|
Summary of Significant Accounting Policies (Policies) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation The accompanying 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 Harbor Diversified, Inc. and subsidiaries (collectively, the Company). Harbor Diversified, Inc. is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), which is the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. The Company is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which is a non-operating entity with no material assets. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description of Operations | Description of Operations The Company has principal lines of business focused on (1) providing air transportation through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin and (3) providing flight equipment financing to Air Wisconsin. The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement (the United capacity purchase agreement) with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020. For additional information, refer to Note 3, Capacity Purchase Agreement with United. Air Wisconsin operates as a United Express carrier with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting | 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 Accounting Standards Codification (ASC) 280, “ Segment Reporting ,” we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flying services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the Board of Directors. The chief operating decision maker 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 operate as one operating and reportable segment. As further discussed below, substantially all of our operating revenue in 2020 and 2019 was derived from operations associated with United. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contract and Other Revenues | Contract and Other Revenues The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. United pays the Company a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with additional incentives primarily based on flight completion, on-time performance, and customer satisfaction ratings. Under this agreement, the Company’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. The Company and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. Under the United capacity purchase agreement, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria (provided that, pursuant to the amendment to the United capacity purchase agreement, no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The incentives are defined in the agreement and are determined and measured on a monthly basis. At the end of each month during the term of the agreement, the Company calculates the incentives achieved during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). As discussed above, under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Due to the material decrease in completed flights for the year ended December 31, 2020 from historical levels and anticipated future levels in periods within the remaining contract term, Air Wisconsin determined that the amount of the fixed payments it received was disproportionately high relative to anticipated fixed revenue for future periods due to fewer flights completed in the year ended December 31, 2020. Air Wisconsin anticipates the future number of flights it will complete over the remainder of the agreement will significantly increase from 2020 levels. Accordingly, Air Wisconsin deferred recognizing revenue of $43,220 in the year ended December 31, 2020. Air Wisconsin’s deferred revenue related to the fixed portion will adjust over the remaining contract term based on the number of flights completed each reporting period relative to the number of flights anticipated over the remaining contract term. The current portion of the deferred revenue, in the amount of $12,500, is recorded as part of contract liabilities, and the long-term portion of the deferred revenue, in the amount of $30,720, is recorded as deferred revenue on the consolidated balance sheets. Due to fewer flights during the year ended December 31, 2020, Air Wisconsin also recognized less non-refundable upfront fee revenue, as well as lower fulfillment costs, both of which are being amortized over the remaining term of the agreement in proportion to flights flown. During the year ended December 31, 2020, Air Wisconsin recorded $2,504 of revenue from upfront fees and $269 of fulfillment costs, compared to $3,725 and $400 for the year ended December 31, 2019, respectively. The timing of the recognition of these items in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown in the same period. The amount of revenue recognized for the year ended December 31, 2020 that was previously recorded as a contract liability is $7,116. In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement (CPA amendment), which, among other things, provided for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours caused by the COVID-19 pandemic, and as a result of the CPA amendment, management determined, using a significant amount of judgement, that from an accounting perspective, a new performance obligation was created by United requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United stand ready rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation will be recognized over time on a straight line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined by the CPA amendment. For the year ending December 31, 2020, Air Wisconsin recorded $21,392 in revenue related to this performance obligation. This amount was recorded in tong-term notes receivable on the balance sheet as of December 31, 2020. As part of the CPA amendment, Air Wisconsin also settled outstanding issues, including the opening and closing of maintenance bases. United agreed to accrue a liability to Air Wisconsin in the amount of $11,048 along with a cash settlement of $670. These amounts were recognized using a cumulative catchup adjustment based on prior and future expected departures. In total, Air Wisconsin recognized revenue of $7,307 and deferred the remaining portion which will be recognized in proportion to future departures. These accrued amounts contain a significant financing component and any interest income is separately reported in the statement of operations. Further, the accrued amounts are evidenced by notes receivable payable by United to Air Wisconsin. As of December 31, 2020, these notes totaled 2020, interest receivable on these notes totaled $309. United makes provisional cash payments to the Company during each month of service based on monthly flight schedules. These provisional cash payments are reconciled based on actual completed flights after each month’s flight activity is completed. As of December 31, 2020, United owed Air Wisconsin $1,180 which is recorded in “Accounts receivable less allowances” on the balance sheet. Other revenues are immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts generally is fair market value. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and Cash Equivalents | Cash and Cash Equivalents Investments and deposits with a maturity of three months or less when acquired and money market funds are considered cash and cash equivalents. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted Cash | Restricted Cash Restricted cash represents amounts escrowed in an interest-bearing account relating to the Company’s letters of credit. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Spare Parts and Supplies | Spare Parts and Supplies Expendable parts are stated at average cost less an obsolescence allowance. The Company provides for an allowance for obsolescence after considering the useful life of the aircraft fleet, the estimated cost of expendable parts expected to be on hand at the end of the useful life and the estimated salvage value of the parts. This allowance is based on management estimates and is subject to change. Expendable parts are charged to expense when used. Expendable parts that are repairable are returned to inventory at the average cost of comparable parts, less a reserve for scrap. Supplies are stated at average cost. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property and Equipment and Depreciation | Property and Equipment and Depreciation Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop event. Lotus’ engine maintenance costs are expensed. Depreciation expense in 2020 and 2019 was $25,719 and $23,578, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment of Long-Lived Assets | Impairment of Long-Lived Assets The Company evaluates long-lived assets for potential impairment and records impairment losses on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and determined that no quantitative impairment tests were needed as of December 31, 2020. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairment of Intangible Assets | Impairment of Intangible Assets Indefinite-lived intangible assets are not subject to amortization but are subject to an annual assessment for impairment by applying a fair-value-based test. Since Air Wisconsin’s trade names and air carrier certificate have indefinite lives, there is no amortization. The Company evaluated these assets for impairment and determined that no impairment existed as of December 31, 2020 or 2019. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Maintenance | Maintenance The Company operates its aircraft under a continuous inspection and maintenance program. The normal cost of recurring maintenance is expensed when incurred except for planned major maintenance activities for engines where the deferral method of accounting is applied. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | Income Taxes The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities. As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open. The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2017. With a few exceptions, the Company is no longer subject to state or local income tax examinations for the years prior to 2016. As of December 31, 2020, the Company had no outstanding tax examinations. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company had accrued $99 and $121 for the payment of interest and penalties at December 31, 2020 and 2019, respectively. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive Income | Comprehensive Income The Company does not have any components of comprehensive income and, as of December 31, 2020 and 2019, comprehensive income is equal to net income reported in the consolidated statements of operations. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Concentration of Credit Risk | Concentration of Credit Risk The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Concentration of Customer Risk | Concentration of Customer Risk Substantially all the Company’s revenues in the years ended December 31, 2020 and 2019 were derived from the United capacity purchase agreement. Refer to Note 3 for additional information. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Estimates and Assumptions | Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, notes receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Long-term investments are held-to-maturity Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). ASC 820 establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows: Level 1 - Quoted market prices in active markets for identical assets or liabilities. Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable. Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations annually, and it is possible that an asset or liability may be classified differently from year to year. However, the Company expects that changes in classifications between levels will be rare. The Company classifies money market funds and deposits as Level 1 and long-term investments as |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Recently Adopted Accounting Pronouncements | Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (Topic 842). ASU 2016-02 is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases on the balance sheet. The accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted Topic 842 effective January 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).” This update provides an optional approach that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years as 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, however, an adjustment was not necessary to opening retained earnings. 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 financial statements of operations and statement of cash flows. The Company’s prepaid aircraft rents and accrued aircraft rents that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019. As a result of the adoption of the new lease accounting guidance, the Company recognized the following ROU assets and lease liabilities as of January 1, 2019:
In August 2018, the FASB issued ASU 2018-13, Fair 2018-13 Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses Measurement of Credit Losses on Financial Instruments 2016-13). 2016-13 2016-13 2016-13 In August 2020, the FASB issued ASU No. 2020-06, Debt (Subtopic470-20); 815-40); 2020-06). 2020-06 2020-06 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassifications | Reclassification In accordance with ASU 2016-18, restricted cash on the statement of cash flows for the period ended December 31, 2019, has been reclassified to be included in the beginning and ending balances of Cash and Cash Equivalents. The restricted cash was previously reported in the Cash Flows from Investing Activities section of the statement. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Property and Equipment Useful lives | Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of ROU assets and lease liabilities | As a result of the adoption of the new lease accounting guidance, the Company recognized the following ROU assets and lease liabilities as of January 1, 2019:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Company's Aircrafts | The following presents Air Wisconsin’s aircraft as of December 31, 2020 and 2019.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Income Tax Provision | The income tax provision consists of the following:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Effective Income Tax Rate Reconciliation | The following is a reconciliation between a federal income tax rate of 21% in for the years ended December 31, 2020 and 2019 of income before income taxes and the effective tax rate which is derived by dividing the provision for income taxes by the income before the provision for income taxes (in thousands):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Components of Deferred Tax Assets and Liabilities | Significant components of deferred tax assets and liabilities are as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Unrecognized Tax Benefits | A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows (in thousands):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Long-term Debt | Long-term debt consists of the following (with interest rates as of December 31, 2020 and December 31, 2019):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Maturities of Long-Term Debt | Maturities of long-term debt for the years subsequent to December 31, 2020, are as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease Obligations (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Operating Lease Related Terms and Discount Rates | The table below presents operating lease related terms and discount rates as of December 31, 2020:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Component of Lease Cost | Components of lease costs were as follows for the years ended December 31,
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Lease Payments Under Non-Cancelable Operating Leases | The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of December 31, 2020:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Cash Obligations | The following table sets forth our cash obligations as of December 31, 2020:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share and Equity (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Calculations of Net Income Per Common Share | Calculations of net income per common share were as follows (in thousands, except per share data):
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Intangible Assets | Intangible assets at December 31, 2020 and 2019 consist of the following (in thousands):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies - Additional Information (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Summary of Significant Accounting Policies [Line Items] | ||
| Depreciation expense | $ 25,719 | $ 23,578 |
| Accrued payment of interest and penalties | 99 | 121 |
| Long-term note receivable | $ 32,440 | |
| Notes Receivable Instrument, Interest Rate | 4.50% | |
| Notes Receivable Instrument, Maturity Date | Feb. 28, 2023 | |
| Interest Receivable | $ 309 | |
| Impairment of Intangible Assets, Indefinite-lived | 0 | 0 |
| Deferred revenue recognized | 7,116 | |
| Revenue, Performance Obligation | 21,392 | |
| Cash paid, Liabilities | 670 | |
| Accrued Liabilities | 11,048 | |
| Revenues | 7,307 | |
| Air Wisconsin [Member] | ||
| Summary of Significant Accounting Policies [Line Items] | ||
| Deferred recognizing revenue | 43,220 | |
| Deferred revenue current | 12,500 | |
| Deferred Revenue, Noncurrent | 30,720 | |
| Accounts Receivable, after Allowance for Credit Loss | 1,180 | |
| Upfront fee | 2,504 | 3,725 |
| Fulfillment costs | $ 269 | $ 400 |
Summary of Significant Accounting Policies - Summary of ROU assets and lease liabilities (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
Jan. 01, 2019 |
|---|---|---|---|
| Operating Lease, Liability [Abstract] | |||
| Right-of-use assets – operating leases | $ 8,582 | $ 24,026 | $ 70,892 |
| Lease liabilities – operating leases | $ 5,712 | $ 40,921 |
Capacity Purchase Agreement with United - Additional Information (Detail) - United Airlines [Member] - CRJ-200 [Member] |
1 Months Ended |
|---|---|
|
Feb. 28, 2017
Aircraft
| |
| Extension Period One [Member] | |
| Period of extension of the agreement | 2 years |
| Extension Period Two [Member] | |
| Period of extension of the agreement | 2 years |
| Maximum [member] | |
| Number of aircraft operated | 65 |
Property and Equipment - Summary of aircraft (Detail) - CRJ-200 [Member] - Aircraft |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Property, Plant and Equipment [Line Items] | ||
| Owned | 64 | 51 |
| Leased | 0 | 13 |
Income Taxes - Summary of income tax provision (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Current Income Tax Expense (Benefit) | ||
| Federal | $ (1,061) | $ (247) |
| State | (80) | (174) |
| Total Current Benefit | (1,141) | (421) |
| Deferred Income Tax Expense (Benefit) | ||
| Federal | 3,646 | 789 |
| State | (45) | (46) |
| Total Deferred Expense | 3,601 | 743 |
| Income Tax Expense | $ 2,460 | $ 322 |
Income Taxes - Additional Information (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Income Tax Disclosure [Line Items] | ||
| Effective Income Tax Rate, Federal statutory rate | 21.00% | 21.00% |
| Valuation allowance release against certain deferred tax assets | $ 6,330 | $ 6,330 |
| Estimated effective tax rate applicable to federal net operating losses | 21.00% | |
| Estimated effective tax rate applicable to state net operating losses | 2.80% | |
| Federal business interest carryforward | $ 0 | 4,724 |
| Operating loss carryforward valuation allowance | 0 | 6,330 |
| Federal [Member] | ||
| Income Tax Disclosure [Line Items] | ||
| Net operating losses | 27,583 | 60,940 |
| State [Member] | ||
| Income Tax Disclosure [Line Items] | ||
| Net operating losses | $ 9,147 | $ 17,897 |
Income Taxes - Schedule of Effective Income Tax Rate Reconciliation (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Effective income tax rate reconciliation | ||
| Computed provision for income taxes at the statutory rate | $ 8,867 | $ (3,964) |
| State income tax provision, net of federal income tax benefit | 875 | (830) |
| Non-deductible expenses | 136 | 241 |
| Refundable credits as a result of CARES Act | (936) | |
| Valuation allowance changes affecting the provision for income taxes | (6,330) | 5,873 |
| Return to provision adjustments | (83) | (954) |
| Other, net | (69) | (44) |
| Income Tax Expense | $ 2,460 | $ 322 |
Income Taxes - Schedule of Components of Deferred Tax Assets and Liabilities (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Deferred Tax Assets | ||
| Accruals and reserves not currently deductible | $ 6,129 | $ 6,631 |
| Federal NOL and interest expense limitation carryovers | 5,803 | 13,796 |
| State NOL and interest expense limitation carryovers | 476 | 1,106 |
| Accrued and deferred compensation | 1,966 | 2,888 |
| Prepaid items | 745 | 1,198 |
| Lease liability | 1,362 | 4,052 |
| Contract liability | 1,982 | 2,543 |
| Other | 657 | 1,010 |
| Subtotal before valuation allowance | 19,120 | 33,224 |
| Less: valuation allowance | (6,330) | (6,330) |
| Total Deferred Tax Assets | 19,120 | 26,894 |
| Deferred Tax Liabilities | ||
| Property and equipment | (23,268) | (24,696) |
| Right-of-use asset | (2,046) | (4,791) |
| Other | (6) | (6) |
| Total Deferred Tax Liabilities | (25,320) | (29,493) |
| Net Deferred Income Tax Liabilities | $ (6,200) | $ (2,599) |
Income Taxes - Schedule of unrecognized tax benefits (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Unrecognized tax benefits | ||
| Unrecognized tax benefits at the beginning of the year | $ 248 | $ 388 |
| Gross decreases - lapse of statute | (71) | (140) |
| Unrecognized tax benefits at the end of the year | 177 | 248 |
| Interest and penalties in year-end balance | $ 99 | $ 121 |
Debt - Schedule Of Long Term Debt (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Total debt | $ 117,838 | $ 120,683 |
| Less: current maturities | 23,652 | 12,845 |
| Long-Term Debt | 94,186 | 107,838 |
| Notes Due December 31, 2025 [Member] | ||
| Total debt | 80,850 | 86,497 |
| Credit Agreements Due Through 2022 [Member] | ||
| Total debt | 26,988 | $ 34,186 |
| Paycheck Protection Program Due 2025 [Member] | ||
| Total debt | $ 10,000 |
Debt - Schedule Of Long Term Debt (Parenthetical) (Detail) - USD ($) $ in Thousands |
12 Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
Dec. 31, 2020 |
Apr. 30, 2020 |
Dec. 31, 2019 |
Jun. 30, 2019 |
Dec. 24, 2018 |
Feb. 24, 2018 |
Jan. 25, 2018 |
Jun. 05, 2017 |
|
| Long term debt, current portion | $ 23,652 | $ 12,845 | ||||||
| Promissory Note [Member] | ||||||||
| Aggregate principal amount | $ 10,000 | |||||||
| Long-term debt, gross | 9,106 | |||||||
| Long term debt, current portion | $ 894 | |||||||
| Credit Agreements Due Through 2022 [Member] | ||||||||
| Line of credit | $ 26,987 | |||||||
| Aircraft Notes [Member] | ||||||||
| Aggregate principal amount | 70,000 | 70,000 | $ 70,000 | $ 70,000 | ||||
| Future undiscounted interest payments | $ 10,850 | $ 16,497 | 10,850 | |||||
| Credit Agreement [Member] | Credit Agreements Due Through 2022 [Member] | ||||||||
| Line of credit | $ 14,397 | |||||||
| Line of credit, additional borrowing amount | $ 5,755 | |||||||
| Line of credit, maturity date | Dec. 31, 2020 | |||||||
| Second Credit Agreement [Member] | Credit Agreements Due Through 2022 [Member] | ||||||||
| Line of credit | $ 15,198 | |||||||
| Line of credit, additional borrowing amount | $ 6,034 | |||||||
| Line of credit, maturity date | Jun. 30, 2022 |
Debt - Schedule of Maturities of Long-term Debt (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Maturities of Long-term Debt [Abstract] | ||
| 2021 | $ 23,652 | |
| 2022 | 26,110 | |
| 2023 | 11,897 | |
| 2024 | 11,644 | |
| 2025 | 44,535 | |
| Total | $ 117,838 | $ 120,683 |
Lease Obligations - Additional Information (Detail) - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
Jan. 01, 2019 |
|
| Lessee, Lease, Description [Line Items] | |||
| Operating lease right of use asset | $ 8,582 | $ 24,026 | $ 70,892 |
| Current portion of operating lease liability | 1,361 | 6,311 | |
| Long-term operating lease liability | 4,351 | 10,538 | |
| Cash payments included in the measurement of lease liabilities related to operating leases | 5,398 | 29,502 | |
| Operating lease rent expense | $ 11,293 | $ 51,490 | |
| Minimum [Member] | |||
| Lessee, Lease, Description [Line Items] | |||
| Lease term of training simulators | 12 months | ||
| Operating Lease Remaining Lease | 20 months | ||
| Maximum [Member] | |||
| Lessee, Lease, Description [Line Items] | |||
| Operating Lease Remaining Lease | 13 years | ||
Lease Obligations - Summary Of Weighted average Terms and Discount Rate For Operating Leases (Detail) |
Dec. 31, 2020 |
|---|---|
| Leases [Abstract] | |
| Weighted-average remaining lease term | 4 years 11 months 8 days |
| Weighted-average discount rate | 6.99% |
Lease Obligations - Schedule of Component Of Lease Cost (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Lease, Cost [Abstract] | ||
| Operating lease cost | $ 9,326 | $ 27,624 |
| Short-term lease cost | 1,662 | 4,331 |
| Variable lease cost | (994) | 182 |
| Lease termination expense | 1,299 | 19,353 |
| Total Lease Cost | $ 11,293 | $ 51,490 |
Lease Obligations - Schedule of Future Minimum Lease Payments Under Non-Cancelable Operating Leases (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Jan. 01, 2019 |
|---|---|---|
| Leases [Abstract] | ||
| 2021 | $ 1,766 | |
| 2022 | 1,778 | |
| 2023 | 1,513 | |
| 2024 | 1,103 | |
| 2025 | 390 | |
| Thereafter | 579 | |
| Operating lease obligations, Total | 7,129 | |
| Less imputed interest | (1,417) | |
| Total Lease Liabilities | $ 5,712 | $ 40,921 |
Commitments and Contingencies - Additional Information (Detail) $ in Thousands |
Jun. 30, 2021
USD ($)
|
Dec. 31, 2020
USD ($)
Letter_Of_Credit
|
|---|---|---|
| Other Commitments [Line Items] | ||
| Number of outstanding letters of credit | Letter_Of_Credit | 5 | |
| Air Wisconsin [Member] | ||
| Other Commitments [Line Items] | ||
| Outstanding letters of credit facility | $ 810 | |
| Aircraft Notes principal [Member] | ||
| Other Commitments [Line Items] | ||
| Prinipal amount of notes payable | $ 3,500 | |
| Letter of Credit [Member] | ||
| Other Commitments [Line Items] | ||
| Outstanding letters of credit facility | $ 348 |
Retirement Plans - Additional Information (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Retirement Benefits [Abstract] | ||
| Total expense under defined contribution retirement plans | $ 3,764 | $ 4,467 |
Earnings Per Share and Equity - Calculations of Net Income Per Common Share (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Net income (loss) | $ 39,763 | $ (19,214) |
| Preferred stock dividends | 759 | |
| Net income (loss) applicable to common stockholders | $ 39,004 | $ (19,214) |
| Weighted average common shares outstanding | ||
| Shares used in calculating basic earnings per share | 54,863 | 54,863 |
| Stock options | 559 | |
| Series C Preferred | 15,777 | |
| Shares used in calculating diluted earnings per share | 71,199 | 54,863 |
| Earnings (loss) allocated to common stockholders per common share | ||
| Basic | $ 0.71 | $ (0.35) |
| Diluted | $ 0.56 | $ (0.35) |
Stock Options - Additional Information (Detail) - 2015 Stock Option [Member] - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2015 |
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Options granted | 558,835 | |
| Stock option issued, exercise price | $ 0.21386 | |
| Value of the option at the date of grant | $ 0.07 | |
| Options granted, life | 7 years | |
| Options granted, risk free interest rate | 2.01% | |
| Options granted, expected volatility | 157.10% | |
Supplemental Cash Flow Information - Additional Information (Detail) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
| Business Acquisition [Line Items] | ||
| Cash payments for interest | $ 7,311 | $ 1,841 |
| Cash payments for income taxes | (1,035) | 39 |
| Cash payments included in the measurement of lease liabilities related to operating leases | $ 5,398 | 29,502 |
| Fair market value aircraft acquired in a non-cash lease termination transaction | $ 15,832 | |
Intangible Assets - Components of Intangible Assets (Detail) - USD ($) $ in Thousands |
Dec. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Trade names and air carrier certificate | $ 5,300 | $ 5,300 |
| Total | $ 5,300 | $ 5,300 |
Subsequent Events - Additional Information (Detail) - USD ($) $ in Thousands |
1 Months Ended | |
|---|---|---|
Mar. 30, 2021 |
Mar. 31, 2021 |
|
| Subsequent Event [Line Items] | ||
| Increase in repurchase of common stock, per month | $ 1,000 | |
| Subsequent Event [Member] | Common Stock [Member] | ||
| Subsequent Event [Line Items] | ||
| Future stock repurchase program adopted, value | $ 1,000 |