mesa-10q_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2019

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 001-38626

 

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

85-0302351

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

 

85008

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (602) 685-4000

 

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

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange of Which Registered

Common Stock, no par value

 

MESA

 

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

As of December 31, 2019, the registrant had 33,039,126 shares of common stock, no par value per share, issued and outstanding.

 

 


TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

 

 

Condensed Consolidated Balance Sheets

2

 

 

Condensed Consolidated Statements of Operations

3

 

 

Condensed Consolidated Statements of Stockholders' Equity

4

 

 

Condensed Consolidated Statements of Cash Flows

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

 

 

Item 4. Controls and Procedures

29

 

 

PART II – OTHER INFORMATION

30

 

 

Item 1. Legal Proceedings

30

 

 

Item 1A. Risk Factors

30

 

 

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

30

 

 

Item 3. Defaults Upon Senior Securities

30

 

 

Item 4. Mine Safety Disclosures

30

 

 

Item 5. Other Information

30

 

 

Item 6. Exhibits

30

 

 

SIGNATURES

32

 

 


Where You Can Find More Information

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (http://investor.mesa-air.com/), SEC filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our members and public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as "may", "should", "expects", "might", "plans", "anticipates", "could", "intends", "target", "projects", "contemplates", "believes", "estimates", "predicts", "potential", "seek", "would", "continue", or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the "Risk Factors" section and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

the supply and retention of qualified airline pilots;

 

the volatility of pilot attrition;

 

dependence on, and changes to, or non-renewal of, our capacity purchase agreements;

 

increases in our labor costs;

 

reduced utilization (the percentage derived from dividing (i) the number of block hours actually flown during a given month under a particular capacity purchase agreement by (ii) the maximum number of block hours that could be flown during such month under the particular capacity purchase agreement) under our capacity purchase agreements;

 

direct operation of regional jets by our major airline partners;

 

the financial strength of our major airline partners;

 

limitations on our ability to expand regional flying within the flight systems of our major airline partners' and those of other major airlines;

 

our significant amount of debt and other contractual obligations;

 

our compliance with ongoing financial covenants under our credit facilities; and

 

our ability to keep costs low and execute our growth strategies.

While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.

 

1


Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)

 

 

 

December 31,

 

 

September 30,

 

 

 

2019

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,763

 

 

$

68,855

 

Restricted cash

 

 

3,448

 

 

 

3,646

 

Receivables, net

 

 

24,121

 

 

 

23,080

 

Expendable parts and supplies, net

 

 

22,400

 

 

 

21,337

 

Prepaid expenses and other current assets

 

 

4,502

 

 

 

40,923

 

Total current assets

 

 

112,234

 

 

 

157,841

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,261,267

 

 

 

1,273,585

 

Intangibles, net

 

 

9,157

 

 

 

9,532

 

Lease and equipment deposits

 

 

4,872

 

 

 

2,167

 

Operating lease right-of-use assets

 

 

146,071

 

 

 

 

Other assets

 

 

8,400

 

 

 

8,792

 

Total assets

 

$

1,542,001

 

 

$

1,451,917

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt and financing leases

 

$

166,089

 

 

$

165,900

 

Current maturities of operating leases

 

 

37,674

 

 

 

 

Accounts payable

 

 

47,750

 

 

 

49,930

 

Accrued compensation

 

 

10,048

 

 

 

11,988

 

Other accrued expenses

 

 

34,350

 

 

 

28,888

 

Total current liabilities

 

 

295,911

 

 

 

256,706

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt and financing leases, excluding current portion

 

 

641,017

 

 

 

677,423

 

Noncurrent operating lease liabilities

 

 

95,992

 

 

 

 

Deferred credits

 

 

11,032

 

 

 

12,134

 

Deferred income taxes

 

 

58,506

 

 

 

55,303

 

Other noncurrent liabilities

 

 

1,352

 

 

 

24,483

 

Total noncurrent liabilities

 

 

807,899

 

 

 

769,343

 

Total liabilities

 

 

1,103,810

 

 

 

1,026,049

 

Commitments and contingencies (Note 14 and Note 15)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock of no par value, 5,000,000 shares authorized;

   no shares issued and outstanding

 

 

 

 

 

 

Common stock of no par value and additional paid-in capital,

   125,000,000 shares authorized; 33,039,126 (2020) and 31,413,287

   (2019) shares issued and outstanding, 1,988,472 (2020) and

  3,600,953 (2019) warrants issued and outstanding

 

 

239,783

 

 

 

238,504

 

Retained earnings

 

 

198,408

 

 

 

187,364

 

Total stockholders' equity

 

 

438,191

 

 

 

425,868

 

Total liabilities and stockholders' equity

 

$

1,542,001

 

 

$

1,451,917

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts) (Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Operating revenues:

 

 

 

 

 

 

 

 

Contract revenue

 

$

171,800

 

 

$

170,449

 

Pass-through and other

 

 

12,236

 

 

 

7,707

 

Total operating revenues

 

 

184,036

 

 

 

178,156

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Flight operations

 

 

52,644

 

 

 

53,245

 

Fuel

 

 

169

 

 

 

121

 

Maintenance

 

 

58,095

 

 

 

39,802

 

Aircraft rent

 

 

11,329

 

 

 

14,119

 

Aircraft and traffic servicing

 

 

1,064

 

 

 

934

 

General and administrative

 

 

12,996

 

 

 

12,214

 

Depreciation and amortization

 

 

20,552

 

 

 

18,491

 

Total operating expenses

 

 

156,849

 

 

 

138,926

 

Operating income

 

 

27,187

 

 

 

39,230

 

Other (expenses) income, net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(12,628

)

 

 

(14,842

)

Interest income

 

 

58

 

 

 

156

 

Other (expense) income, net

 

 

(297

)

 

 

486

 

Total other (expense), net

 

 

(12,867

)

 

 

(14,200

)

Income before taxes

 

 

14,320

 

 

 

25,030

 

Income tax expense

 

 

3,535

 

 

 

5,949

 

Net income

 

$

10,785

 

 

$

19,081

 

Net income per share attributable to

 

 

 

 

 

 

 

 

common shareholders

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.55

 

Diluted

 

$

0.31

 

 

$

0.54

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

35,023

 

 

 

34,518

 

Diluted

 

 

35,182

 

 

 

35,113

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

3


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Three Months Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2018

 

 

23,902,903

 

 

 

10,614,990

 

 

$

234,683

 

 

$

139,784

 

 

$

374,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,454

 

 

 

 

 

 

1,454

 

Stock issuance costs

 

 

 

 

 

 

 

 

157

 

 

 

 

 

 

157

 

Net income

 

 

 

 

 

 

 

 

 

 

 

19,081

 

 

 

19,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

23,902,903

 

 

 

10,614,990

 

 

$

236,294

 

 

$

158,865

 

 

$

395,159

 

 

 

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Three Months Ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2019

 

 

31,413,287

 

 

 

3,600,953

 

 

$

238,504

 

 

$

187,364

 

 

$

425,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption ASU 2018-09 Stock compensation-

   income taxes

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

259

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,320

 

 

 

 

 

 

1,320

 

Repurchased shares and warrants

 

 

(5,558

)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Warrants converted to common stock

 

 

1,612,481

 

 

 

(1,612,481

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

18,916

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,785

 

 

 

10,785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

33,039,126

 

 

 

1,988,472

 

 

$

239,783

 

 

$

198,408

 

 

$

438,191

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

4


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

10,785

 

 

$

19,081

 

Adjustments to reconcile net income to net cash flows provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20,552

 

 

 

18,491

 

Stock compensation expense

 

 

1,320

 

 

 

1,454

 

Deferred income taxes

 

 

3,205

 

 

 

5,953

 

Amortization of deferred credits

 

 

(1,103

)

 

 

(1,188

)

Unfavorable lease liabilities

 

 

 

 

 

(1,548

)

Amortization of debt financing costs and accretion of interest on

   non-interest-bearing subordinated notes

 

 

1,054

 

 

 

1,042

 

Loss (Gain) on disposal of assets

 

 

407

 

 

 

(1

)

Provision for obsolete expendable parts and supplies

 

 

97

 

 

 

122

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,040

)

 

 

8,275

 

Expendable parts and supplies

 

 

(1,158

)

 

 

(1,866

)

Prepaid expenses and other current assets

 

 

327

 

 

 

(2,042

)

Accounts payable

 

 

(2,336

)

 

 

(2,829

)

Accrued liabilities

 

 

5,791

 

 

 

(799

)

Change in operating lease right-of- use assets

 

 

329

 

 

 

 

Net cash provided by operating activities

 

 

38,230

 

 

 

44,145

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,124

)

 

 

(26,036

)

Sales of investment securities

 

 

 

 

 

4,947

 

Lease and equipment deposits

 

 

(2,795

)

 

 

 

Returns of lease and equipment deposits

 

 

91

 

 

 

760

 

Net cash used in investing activities

 

 

(12,828

)

 

 

(20,329

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal payments on long-term debt and financing leases

 

 

(36,467

)

 

 

(38,605

)

Debt financing costs

 

 

(184

)

 

 

(258

)

Stock issuance costs

 

 

 

 

 

157

 

Repurchase of stock

 

 

(41

)

 

 

 

Net cash used in financing activities

 

 

(36,692

)

 

 

(38,706

)

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(11,290

)

 

 

(14,890

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

72,501

 

 

 

107,134

 

Cash, cash equivalents and restricted cash at end of period

 

$

61,211

 

 

$

92,244

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,440

 

 

$

12,266

 

Cash paid for income taxes, net

 

$

15

 

 

$

 

Operating lease payments in operating cash flows (1)

 

$

9,534

 

 

$

 

Supplemental non-cash operating activities

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange of lease liabilities

 

$

142,165

 

 

$

 

Supplemental non-cash investing activities

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

334

 

 

$

5,635

 

 

See accompanying notes to these condensed consolidated financial statements.

(1 )See section 14 Leases and Commitments.

 

5


MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), operates as a regional air carrier providing scheduled flight service to 144 cities in 41 states, the District of Columbia, Canada, Mexico, Cuba, and the Bahamas. As of December 31, 2019, Mesa operated a fleet of 145 aircraft with approximately 742 daily departures and 3,600 employees. Mesa operates all of its flights as either American Eagle or United Express flights pursuant to the terms of the capacity purchase agreements entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”).

The financial arrangements between the Company and its major airline partners involve a revenue-guarantee arrangement (i.e. a "capacity purchase agreement") whereby the major airline pays a monthly guaranteed amount for each aircraft under contract, a fixed fee for each block hour (the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination) and flight flown and reimbursement of certain direct operating expenses in exchange for providing regional flying. The major airline partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these capacity purchase agreements, the major airline controls route selection, pricing and seat inventories, thereby reducing the Company's exposure to fluctuations in passenger traffic, fare levels, and fuel prices.

American Capacity Purchase Agreement

As of December 31, 2019, the Company operated 60 CRJ-900 aircraft for American under our American Capacity Purchase Agreement. In exchange for providing flight services under our American Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes, all as set forth in our American Capacity Purchase Agreement. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.

Our American Capacity Purchase Agreement establishes minimum levels of flight operations.  In prior periods, the FAA Qualification Standards (as defined below) have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels, and, as a result, we have issued credits to American pursuant to the terms of our American Capacity Purchase Agreement.

 

Our American Capacity Purchase Agreement will terminate with respect to different tranches of aircraft between 2021 and 2025, unless otherwise extended or amended. As of the date of this filing, we remain in discussions with American regarding the terms of extending the 32 aircraft that are due to expire in 2021 and the 20 aircraft that are due to expire in 2022 and the 7 that expire in 2025. Our American Capacity Purchase Agreement is subject to termination prior to that date, subject to our right to cure, in various circumstances including:

 

If either American or we become insolvent, file for bankruptcy or fail to pay our debts as they become due, the non-defaulting party may terminate the agreement;

 

Failure by us or American to perform the covenants, conditions or provisions of our American Capacity Purchase Agreement, subject to 15 days' notice and cure rights;

 

If we are required by the FAA or the DOT to suspend operations and we have not resumed operations within three business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft, American may terminate the agreement;

 

If our controllable flight completion factor falls below certain levels for a specified period of time, subject to our right to cure; or

 

Upon a change in our ownership or control without the written approval of American.

 

6


In the event that American has the right to terminate our American Capacity Purchase Agreement, American may, in lieu of termination, withdraw up to an aggregate of 14 aircraft from service under our American Capacity Purchase Agreement. Upon any such withdrawal, American's payments to us would be correspondingly reduced by the number of withdrawn aircraft.

On January 31, 2019, the Company entered into an amendment to the American Capacity Purchase Agreement, the terms of which provide for new and revised operational performance metrics, the Company's right to earn additional incentive compensation based on the achievement of such metrics, and the right of American to permanently withdraw up to six (6) aircraft in the event the Company fails to meet such new/revised performance metrics.  Under the terms of such amendment the Company agreed, effective April 2, 2019, to convert two (2) aircraft to be utilized by the Company as operational spares in the Company's sole discretion throughout its system. In July 2019, American exercised its right to permanently withdraw two (2) aircraft from the American Capacity Purchase Agreement due to the Company's failure to meet certain performance metrics. The aircraft were removed on November 2, 2019. On November 25, 2019, the Company amended its agreement with American Airlines. The Company did not meet certain performance metrics during the most recent measurement period, which allows American to remove two additional aircraft from the capacity purchase agreement. American has agreed to defer the right to remove these two aircraft but has elected to remove one of two previously deferred aircraft, effective January 2, 2020.  As of January 2, 2020 American has removed three (3) of the six (6) aircraft under this amendment and retains the right to permanently withdraw the remaining three (3) aircraft at any time.

United Capacity Purchase Agreement

As of December 31, 2019, the Company operated 20 CRJ-700 and 60 E-175 aircraft for United under our United Capacity Purchase Agreement. In exchange for providing the flight services under our United Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United. We also receive a minimum profit margin based upon our operational performance. Under our United Capacity Purchase Agreement, United owns 42 of the 60 E-175 aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs") and component maintenance for the 42 E-175 aircraft owned by United. Our United Capacity Purchase Agreement permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. If United elects to terminate our United Capacity Purchase Agreement in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated to assume the aircraft ownership and associated debt with respect to such aircraft through the end of the term of the agreement.

On November 26, 2019, we amended and restated our United Capacity Purchase Agreement to, among other things, incorporate the terms of the 11 prior amendments to that Agreement and to extend the term thereof through the addition of twenty (20) new Embraer E175LL aircraft to the scope of such Agreement.  These new aircraft will be financed and owned by us and operated for a period of twelve (12) years from the in-service date.  Deliveries of the new E175LL aircraft are scheduled to begin in May 2020 and be completed by December 31, 2020.  Commencing five (5) years after the actual in-service date, United has the right to remove the E175LL aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the ten (10) year anniversary of the in-service date, certain accelerated margin payments.  

In addition to adding the 20 new E175LL aircraft to the amended and restated United Capacity Purchase Agreement, we extended the term of our 42 E-175 aircraft leased from United for an additional five (5) years, which now expire between 2024 and 2028.  As part of the amended and restated United Capacity Purchase Agreement, we agreed to lease our twenty (20) CRJ-700 aircraft to another United Express service provider for a term of seven (7) years. We will continue to operate such aircraft until they are transitioned over the period between May 2020 and December 2020. United has a right to purchase the CRJ 700 aircraft at the then fair market value. In addition, we own 18 E-175 aircraft that expire in 2028.

 

7


Our United Capacity Purchase Agreement is subject to early termination under various circumstances noted above and including:

 

By United if certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;

 

By United if we fail to perform the material covenants, agreements, terms or conditions of our United Capacity Purchase Agreement or similar agreements with United, subject to thirty (30) days' notice and cure rights;

 

If either United or we become insolvent, file bankruptcy or fail to pay debts when due, the non-defaulting party may terminate the agreement; or

 

By United if we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). All intercompany accounts and transactions have been eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with, the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 2019 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2019 on file with the U.S. Securities and Exchange Commission (the "SEC"). Information and footnote disclosures normally included in financial statements have been condensed or omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and GAAP. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented.

The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act,") and may remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of the IPO, subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Adoption of New Lease Standard

 

Effective October 1, 2019, we have adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. We determine if an arrangement is a lease at inception. Our current lease activities are recorded in operating lease right-of-use (“ROU”) assets, current maturities of operating lease and noncurrent operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and financing leases, long-term debt and financing leases, excluding current portion.

 

 

8


ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

As a lessor, for our aircraft operated under our capacity purchase agreements, we have historically accounted for the non-lease component under ASC 606 and have historically accounted for the lease component under ASC 840. Under the available practical expedient, we have elected to account for the lease and non-lease components as a single component for all classes of underlying assets.  As the predominant component of the combined components are the flights services, the leases are being accounted for entirely under ASC 606. As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).

 

 

Aircraft Lease

In addition to the aircraft we receive from United under our United Capacity Purchase Agreement, approximately 12% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major airline partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. Additionally, any remaining ROU assets and lease liabilities will be written off.

 

The majority of the Company's leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which the Company does not participate, the Company is not at risk for losses and is not considered the primary beneficiary. Management believes that the Company's maximum exposure under these leases is the remaining lease payments.

 

Use of Estimates

The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.

 

Maintenance Expense

The Company operates under a Federal Aviation Administration ("FAA") approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein the Company recognizes the expense when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. For leased aircraft, the Company is subject to lease return provisions that require a minimum portion of the "life" of an overhaul be remaining on the engine at the lease return date. The Company estimates the cost of maintenance lease return obligations and accrues such costs over the remaining lease term when the expense is probable and can be reasonably estimated.

 

9


Under the Company's aircraft operating lease agreements and FAA operating regulations, it is obligated to perform all required maintenance activities on its fleet, including component repairs, scheduled air frame checks and major engine restoration events. The Company estimates the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on estimates, which can be impacted by changes in utilization of its aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events consist of overhauls to major components.

Engine overhaul expense totaled $10.6 million and $4.1 million for the three months ended December 31, 2019, and 2018, respectively, of which $1.9 million and $1.5 million, respectively, was pass-through expense.  Airframe C-check expense totaled $7.3 million and $1.5 million for the three months ended December 31, 2019, and 2018, respectively, of which $1.2 million and $0.0 million, respectively, was pass-through expense

 

3.

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"). This ASU introduces a new accounting model known as Credit 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 receivables. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The Company adopted Topic 842 effective October 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s contracts are or contain leases, (2) lease classification and (3) initial direct costs.  In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." The Company did not elect the hindsight practical expedient. This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company elected this adoption method on October 1, 2019.There was not adjustment to 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 consolidated statements of operations or the consolidated statements of cash flows. The Company’s adoption of Topic 842 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor.  The Company’s prepaid aircraft rents, accrued aircraft rents and deferred rent credits that were separately stated in the Company’s September 30, 2019 balance sheet have been classified as a component of the Company’s right-of-use assets effective October 1, 2019. The consolidated financial statements for the three months ended December 31, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. See Note 14, "Leases, Commitments and Contingencies," for more information.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which contains amendments that affect a wide variety of Topics in the Codification, including amendment to Subtopic 718-40, Compensation-Stock Compensation-Income Taxes, that clarifies the timing of when an entity should recognize excess tax benefits. We adopted this standard on October 1, 2019 and it did not have a material impact on our condensed consolidated financial statements.

 

 

 

10


4.

Concentrations

At December 31, 2019, the Company had capacity purchase agreements with American and United. All of the Company's condensed consolidated revenue for the three months ended December 31, 2019 and 2018 and accounts receivable at December 31, 2019 and September 30, 2018 was derived from these agreements. The terms of both the American and United capacity purchase agreements are not aligned with the lease obligations on the aircraft performing services under such agreements.

Amounts billed by the Company under capacity purchase agreements are subject to the Company's interpretation of the applicable capacity purchase agreement and are subject to audit by the Company's major airline partners. Periodically, the Company's major airline partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major airline partner. As such, the Company periodically reviews amounts past due and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $1.8 million and $1.0 million at December 31, 2019 and September 30, 2019, respectively. If the Company's ability to collect these receivables and the financial viability of its partners is materially different than estimated, the Company's estimate of the allowance could be materially impacted.

American accounted for approximately 51% and 53% of the Company's total revenue for the three months ended December 31, 2019 and 2018, respectively. United accounted for approximately 49% and 47% of the Company's revenue for the three months ended December 31, 2019 and 2018, respectively. A termination of either the American or the United capacity purchase agreement would have a material adverse effect on the Company's business prospects, financial condition, results of operations, and cash flows.

5.

Intangible Assets

Information about the intangible assets of the Company at December 31, 2019 and September 30, 2019, were as follows (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2019

 

 

2019

 

Customer relationship

 

$

43,800

 

 

$

43,800

 

Accumulated amortization

 

 

(34,643

)

 

 

(34,268

)

 

 

$

9,157

 

 

$

9,532

 

 

Total amortization expense recognized was approximately $0.4 million and $0.5 million for the three months ended December 31, 2019 and 2018, respectively. The Company expects to record amortization expense of $1.1 million for the remainder of 2020, and $1.2 million, $1.0 million, $0.9 million, $0.8 million for fiscal years 2021, 2022, 2023, and 2024 respectively.

 

11


6.

Balance Sheet Information

Certain significant amounts included in the Company's condensed consolidated balance sheet as of December 31, 2019 and September 30, 2019, consisted of the following (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2019

 

 

2019

 

Expendable parts and supplies, net:

 

 

 

 

 

 

 

 

Expendable parts and supplies

 

$

26,455

 

 

$

25,336

 

Less: obsolescence and other

 

 

(4,055

)

 

 

(3,999

)

 

 

$

22,400

 

 

$

21,337

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

Prepaid aircraft rent

 

$

-

 

 

$

35,786

 

Deferred offering and reimbursed costs

 

 

1,664

 

 

 

2,092

 

Other

 

 

2,838

 

 

 

3,045

 

 

 

$

4,502

 

 

$

40,923

 

Property and equipment, net:

 

 

 

 

 

 

 

 

Aircraft and other flight equipment substantially

   pledged

 

$

1,588,368

 

 

$

1,582,199

 

Other equipment

 

 

5,122

 

 

 

5,122

 

Leasehold improvements

 

 

2,797

 

 

 

2,797

 

Vehicles

 

 

945

 

 

 

924

 

Building

 

 

699

 

 

 

699

 

Furniture and fixtures

 

 

302

 

 

 

302

 

Total property and equipment

 

 

1,598,233

 

 

 

1,592,043

 

Less: accumulated depreciation

 

 

(336,966

)

 

 

(318,458

)

 

 

$

1,261,267

 

 

$

1,273,585

 

 

 

 

 

 

 

 

 

 

Other accrued expenses:

 

 

 

 

 

 

 

 

Accrued property taxes

 

$

11,018

 

 

$

9,186

 

Accrued interest

 

 

6,715

 

 

 

4,497

 

Accrued vacation

 

 

6,149

 

 

 

6,128

 

Accrued wheels, brakes and tires

 

 

3,072

 

 

 

1,513

 

Other

 

 

7,396

 

 

 

7,564

 

 

 

$

34,350

 

 

$

28,888

 

 

Depreciation expense totaled approximately $20.2 million and $18.0 million for the three months ended December 31, 2019 and 2018, respectively.

Prior to the Company’s adoption of Topic 842 on October 1, 2019, the Company recorded amortization of the unfavorable lease liability of approximately $1.5 million for the three months ended December 31, 2018 as a reduction to lease expense. Upon the Company’s adoption of Topic 842, the unfavorable lease liability is now included in its ROU asset balance and amortized therein.

 

7.

Fair Value Measurements

The carrying values reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.

The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.

 

12


The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions):

 

 

 

December 31, 2019

 

 

September 30, 2019

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Long-term debt and financing leases, including current

   maturities(1)

 

$

821.8

 

 

$

846.9

 

 

$

858.1

 

 

$

882.7

 

 

(1) 

Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs.

 

 

8.

Long-Term Debt, Financing Leases and Other Borrowings

Long-term debt as of December 31, 2019 and September 30, 2019, consisted of the following (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2019

 

 

2019

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2022(1)(2)

 

$

45,019

 

 

$

49,795

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2024(3)

 

 

57,867

 

 

 

60,761

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2027(4)

 

 

107,940

 

 

 

110,912

 

Notes payable to secured parties, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2028(5)

 

 

191,168

 

 

 

191,168

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2028(6)

 

 

149,283

 

 

 

152,945

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(7)

 

 

65,984

 

 

 

71,998

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(8)

 

 

43,136

 

 

 

47,309

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2020(9)

 

 

1,244

 

 

 

1,659

 

Notes payable to financial institution due 2020(10)

 

 

1,822

 

 

 

2,329

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2020(11)

 

 

5,358

 

 

 

6,962

 

Other obligations due to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2023(12)

 

 

8,162

 

 

 

8,530

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2024(13)

 

 

76,037

 

 

 

80,153

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2023(14)

 

 

61,250

 

 

 

65,625

 

Notes payable to financial institution due 2023 (15)

 

 

7,503

 

 

 

8,000

 

Revolving Credit Facility (16)

 

 

 

 

 

 

Gross long-term debt, including current maturities

 

 

821,773

 

 

 

858,145

 

Less unamortized debt issuance costs

 

 

(14,667

)

 

 

(14,822

)

Net long-term debt, including current maturities

 

 

807,106

 

 

 

843,323

 

Less current portion

 

 

(166,089

)

 

 

(165,900

)

Net long-term debt

 

$

641,017

 

 

$

677,423

 

 

(1) 

In fiscal 2007, the Company financed three CRJ-900 and three CRJ-700 aircraft for $120.3 million. The debt bears interest at the monthly LIBOR plus 2.25% (4.16% at December 31, 2019) and requires monthly principal and interest payments.

(2) 

In fiscal 2014, the Company financed ten CRJ-900 aircraft for $88.4 million. The debt bears interest at the monthly LIBOR plus a spread ranging from 1.95% to 7.25% (3.86% to 9.16% at December 31, 2019) and requires monthly principal and interest payments. In fiscal 2018, the Company repaid $40.0 million related to four CRJ-900 aircraft.

 

13


(3) 

In fiscal 2014, the Company financed eight CRJ-900 aircraft with $114.5 million in debt. The