mesa-10q_20200331.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 March 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 001-38626

 

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 March 31, 2020, the registrant had 35,194,902 shares of common stock, no par value per share, issued and outstanding.

 

 


TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

3

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Stockholders' Equity

5

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

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

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

 

 

Item 4. Controls and Procedures

40

 

 

PART II – OTHER INFORMATION

42

 

 

Item 1. Legal Proceedings

42

 

 

Item 1A. Risk Factors

42

 

 

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

43

 

 

Item 3. Defaults Upon Senior Securities

43

 

 

Item 4. Mine Safety Disclosures

43

 

 

Item 5. Other Information

43

 

 

Item 6. Exhibits

43

 

 

SIGNATURES

45

 

 


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:

 

public health epidemics or pandemics such as COVID-19;

 

severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of business’ and governments’ responses to the pandemic on our operations and personnel, and on demand for air travel;

 

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 and their ability to successfully manage their businesses through the unprecedented decline in air travel attributable to the COVID-19 pandemic;

 

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.

 

1


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.

 

2


Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)

 

 

 

March 31,

 

 

September 30,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,399

 

 

$

68,855

 

Restricted cash

 

 

3,441

 

 

 

3,646

 

Receivables, net

 

 

14,182

 

 

 

23,080

 

Expendable parts and supplies, net

 

 

22,378

 

 

 

21,337

 

Prepaid expenses and other current assets

 

 

5,911

 

 

 

40,923

 

Total current assets

 

 

98,311

 

 

 

157,841

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,242,797

 

 

 

1,273,585

 

Intangibles, net

 

 

8,782

 

 

 

9,532

 

Lease and equipment deposits

 

 

13,973

 

 

 

2,167

 

Operating lease right-of-use assets

 

 

140,753

 

 

 

 

Other assets

 

 

7,124

 

 

 

8,792

 

Total assets

 

$

1,511,740

 

 

$

1,451,917

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt and financing leases

 

$

168,171

 

 

$

165,900

 

Current maturities of operating leases

 

 

43,648

 

 

 

 

Accounts payable

 

 

49,246

 

 

 

49,930

 

Accrued compensation

 

 

12,406

 

 

 

11,988

 

Other accrued expenses

 

 

27,138

 

 

 

28,888

 

Total current liabilities

 

 

300,609

 

 

 

256,706

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt and financing leases, excluding current portion

 

 

619,793

 

 

 

677,423

 

Noncurrent operating lease liabilities

 

 

78,698

 

 

 

 

Deferred credits

 

 

10,242

 

 

 

12,134

 

Deferred income taxes

 

 

59,791

 

 

 

55,303

 

Other noncurrent liabilities

 

 

1,255

 

 

 

24,483

 

Total noncurrent liabilities

 

 

769,779

 

 

 

769,343

 

Total liabilities

 

 

1,070,388

 

 

 

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; 35,194,902 (2020) and 31,413,287

   (2019) shares issued and outstanding, 0 (2020) and

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

 

 

241,059

 

 

 

238,504

 

Retained earnings

 

 

200,293

 

 

 

187,364

 

Total stockholders' equity

 

 

441,352

 

 

 

425,868

 

Total liabilities and stockholders' equity

 

$

1,511,740

 

 

$

1,451,917

 

 

See accompanying notes to these condensed consolidated financial statements.

 

3


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations

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

 

 

Three Months Ended March 31,

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

2020

 

 

2019

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

165,781

 

 

$

169,771

 

$

337,580

 

 

$

340,220

 

Pass-through and other

 

 

14,115

 

 

 

7,376

 

 

26,351

 

 

 

15,083

 

Total operating revenues

 

 

179,896

 

 

 

177,147

 

 

363,931

 

 

 

355,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

 

52,891

 

 

 

49,366

 

 

105,535

 

 

 

102,611

 

Fuel

 

 

188

 

 

 

101

 

 

358

 

 

 

222

 

Maintenance

 

 

64,335

 

 

 

45,380

 

 

122,430

 

 

 

85,182

 

Aircraft rent

 

 

12,285

 

 

 

14,110

 

 

23,614

 

 

 

28,229

 

Aircraft and traffic servicing

 

 

1,336

 

 

 

1,065

 

 

2,400

 

 

 

1,999

 

General and administrative

 

 

14,500

 

 

 

13,472

 

 

27,496

 

 

 

25,686

 

Depreciation and amortization

 

 

20,469

 

 

 

19,276

 

 

41,021

 

 

 

37,767

 

Total operating expenses

 

 

166,004

 

 

 

142,770

 

 

322,854

 

 

 

281,696

 

Operating income

 

 

13,892

 

 

 

34,377

 

 

41,077

 

 

 

73,607

 

Other (expenses) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(11,673

)

 

 

(13,772

)

 

(24,300

)

 

 

(28,614

)

Interest income

 

 

36

 

 

 

299

 

 

94

 

 

 

455

 

Loss on extinguishment of debt

 

 

-

 

 

 

(3,616

)

 

-

 

 

 

(3,616

)

Other (expense) income, net

 

 

937

 

 

 

47

 

 

641

 

 

 

533

 

Total other (expense), net

 

 

(10,700

)

 

 

(17,042

)

 

(23,565

)

 

 

(31,242

)

Income before taxes

 

 

3,192

 

 

 

17,335

 

 

17,512

 

 

 

42,365

 

Income tax expense

 

 

1,307

 

 

 

4,086

 

 

4,842

 

 

 

10,035

 

Net income

 

$

1,885

 

 

$

13,249

 

$

12,670

 

 

$

32,330

 

Net income per share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.38

 

$

0.36

 

 

$

0.93

 

Diluted

 

$

0.05

 

 

$

0.38

 

$

0.36

 

 

$

0.92

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,141

 

 

 

34,699

 

 

35,082

 

 

 

34,607

 

Diluted

 

 

35,265

 

 

 

34,962

 

 

35,220

 

 

 

35,041

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

4


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Six Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

$

1,298

 

 

 

 

 

$

1,298

 

Repurchased shares

 

 

(52,967

)

 

 

 

 

 

(449

)

 

 

 

 

 

(449

)

Stock issuance costs

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

28

 

Warrants converted to common stock

 

 

3,834,693

 

 

 

(3,834,693

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

284,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

13,249

 

 

 

13,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

27,969,475

 

 

 

6,780,297

 

 

$

237,171

 

 

$

172,114

 

 

$

409,285

 

 

 

 

5


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,193

 

 

 

 

 

 

1,193

 

Repurchased shares and warrants

 

 

(18,244

)

 

 

 

 

 

(160

)

 

 

 

 

 

(160

)

Warrants converted to common stock

 

 

1,988,472

 

 

 

(1,988,472

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

141,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share purchases

 

 

43,934

 

 

 

 

 

 

243

 

 

 

 

 

 

243

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,885

 

 

 

1,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

35,194,902

 

 

 

 

 

$

241,059

 

 

$

200,293

 

 

$

441,352

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

6


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

12,670

 

 

$

32,330

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41,021

 

 

 

37,767

 

Stock compensation expense

 

 

2,513

 

 

 

2,752

 

Deferred income taxes

 

 

4,490

 

 

 

10,039

 

Amortization of deferred credits

 

 

(2,041

)

 

 

(2,575

)

Unfavorable lease liabilities

 

 

 

 

 

(3,095

)

Amortization of debt financing costs and accretion of interest on

   non-interest-bearing subordinated notes

 

 

2,149

 

 

 

2,000

 

Loss on extinguishment of debt

 

 

 

 

 

3,616

 

Loss (Gain) on disposal of assets

 

 

514

 

 

 

(33

)

Provision for obsolete expendable parts and supplies

 

 

306

 

 

 

319

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

9,019

 

 

 

1,734

 

Expendable parts and supplies

 

 

(1,382

)

 

 

(3,890

)

Prepaid expenses and other current assets

 

 

97

 

 

 

(7,244

)

Accounts payable

 

 

(602

)

 

 

(3,451

)

Accrued liabilities

 

 

2,122

 

 

 

(499

)

Change in operating lease right-of-use assets

 

 

(5,674

)

 

 

 

Net cash provided by operating activities

 

 

65,202

 

 

 

69,770

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(12,968

)

 

 

(34,250

)

Sales of investment securities

 

 

 

 

 

20,077

 

Lease and equipment deposits

 

 

(13,804

)

 

 

(7,296

)

Returns of lease and equipment deposits

 

 

1,999

 

 

 

2,978

 

Net cash used in investing activities

 

 

(24,773

)

 

 

(18,491

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

     Proceeds from long-term debt

 

 

23,000

 

 

 

91,200

 

Principal payments on long-term debt and financing leases

 

 

(79,395

)

 

 

(163,748

)

Debt financing costs

 

 

(494

)

 

 

(2,540

)

Debt prepayment costs

 

 

 

 

 

(1,672

)

Stock issuance costs

 

 

 

 

 

185

 

Repurchase of stock

 

 

(201

)

 

 

(449

)

Net cash used in financing activities

 

 

(57,090

)

 

 

(77,024

)

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(16,661

)

 

 

(25,745

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

72,501

 

 

 

107,134

 

Cash, cash equivalents and restricted cash at end of period

 

$

55,840

 

 

$

81,389

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

22,402

 

 

$

27,937

 

Cash paid for income taxes, net

 

$

45

 

 

$

51

 

Operating lease payments in operating cash flows (1)

 

$

26,240

 

 

$

 

Supplemental non-cash operating activities

 

 

 

 

 

 

 

 

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

 

$

145,627

 

 

$

 

Supplemental non-cash investing activities

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

98

 

 

$

6,345

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

(1)See section 14 Leased and Commitments.

 

 

 

7


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 135 cities in 39 states, the District of Columbia, Canada, Mexico, Cuba, and the Bahamas. As of March 31, 2020, Mesa operated a fleet of 145 aircraft with approximately 662 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.

Impact of the COVID-19 Pandemic

The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel. The length and severity of the reduction in demand due to the pandemic is uncertain. This reduction in demand has had an unprecedented and materially adverse impact on our revenues and financial position. We expect the adverse impact to grow in the June 2020 quarter. While we are planning for a modest demand recovery beginning in the September 2020 quarter, the exact timing and pace of the recovery is uncertain given the significant impact of the pandemic on the overall U.S. and global economy. Our forecasted expense management and liquidity measures may be modified as we clarify the demand recovery timing. Since a portion of our revenue is fixed due to the structure of our capacity purchase agreements, the impact to Mesa will be partially mitigated or offset. In addition, we have limited exposure to fluctuations in passenger traffic, ticket and fuel prices. While the fixed revenue remains mostly unchanged, the variable revenue based on number of block hours has been significantly reduced in the last few weeks in March and we may experience further reductions. The initiatives and measures put in place to limit the spread of the virus has and will continue to have a materially adverse impact on our business. The Company further reports that, beginning in March 2020, it has experienced a material decline in demand in block hours from both of its major airline partners, American and United Airlines, Inc. (“United” and together with American, the “Partners”) resulting from the spread of the COVID-19 virus.  As a result of this decline in demand and the subsequent capacity reductions by the Company’s Partners, the Company operated 10,297 block hours in April 2020, a 72.4% drop from April 2019. The Company also anticipates similar schedule reductions will likely continue into the second quarter of 2020 and may continue throughout the remainder of 2020 and into 2021.

In response to these developments, our major partners and the Company have implemented measures to focus on the safety of our customers and employees, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following:

Increasing the scope of cleaning and sanitization of aircraft both while remaining overnight and on turn flights. Both on our own, and in coordination with our codeshare partners, we have taken steps to ensure that high touch areas used by both employees and customers are routinely and comprehensively cleaned and disinfected to prevent transmission of the virus on surfaces. To assist our crewmembers in keeping the aircraft clean and disinfected, we have increased the supply of sanitizing wipes onboard.

In coordination with our codeshare partners, social distancing methods onboard have been implemented comprised of seat-blocking to encourage additional space between passengers and our Inflight teams help to encourage passenger spacing onboard.

        •We have provided, and continue to resupply, our employees with Personal Protective Equipment (PPE) consisting of gloves and face coverings for use whenever social distancing cannot be maintained or when working with our

 

8


customers. In addition, at various locations, we have coordinated with our codeshare partners to conduct temperature checks of employees reporting for duty. In those locations where this is not yet established, crewmembers have been directed to self-monitor their temperature before reporting for duty and twice daily.

Based on recommendations from the Centers for Disease Control (CDC), we have increased facility cleaning and disinfection protocols at all of our facilities and have implemented social distancing measures including telecommuting for many of our Corporate personnel and methods to increase physical distance between workers who remain working at our Corporate facilities

Established protocols for employees who are positive for, or suspected of, COVID-19 to ensure that they have the necessary time off. Additionally, we have implemented protocols to ensure that proper notification is made to any affected employees. Protocols have also been put into place for the immediate disinfection of any affected aircraft above and beyond routine cleaning and disinfection protocols.

Expense Management. With the reduction in revenue, we have, and will continue to implement cost saving initiatives, including:

 

 Reducing employee-related costs, including:

 

Offering voluntary short-term unpaid leaves to all employees.

 

Compensation reductions for Executive level employees.

 

Instituting a company-wide hiring freeze.

 

Delaying non-essential heavy maintenance expense and reducing or suspending other discretionary spending.

Balance Sheet, Cash Flow and Liquidity. As of March 31, 2020, our cash and cash equivalents balance was $52.4 million. We have taken the following actions to increase liquidity and strengthen our financial position.

 

Reducing planned heavy engine and airframe maintenance events by approximately $3.7 million in the current fiscal year.

 

Working with major partners and original equipment manufacturers ("OEM") to delay the timing of our future aircraft and spare engine deliveries.

 

Drew $23.0 million from our previously undrawn revolving credit facility with CIT Bank, N.A.

 

In April 2020, we were granted $92.5 million in emergency relief through the payroll support program of the CARES Act to be paid in installments through September 2020. We received the first installment of $30.8 million in April 2020 and the remaining $61.6 million is scheduled to be paid to Mesa in four equal payments from June to September 2020.

 

The CARES Act also provides for up to $25 billion in secured loans to the airline industry. We have submitted an application for a loan under the loan program of $184 million for working capital, $568 million for financing new equipment and $252 million for financing existing equipment and are awaiting the outcome of the application process.

 

American Capacity Purchase Agreement

As of March 31, 2020, the Company operated 59 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.

 

9


Our American Capacity Purchase Agreement establishes utilization credits which are required to be paid if the Company does not operate at minimum levels of flight operations.  In prior periods, the FAA Qualification Standards (as defined below) have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels, and, as a result, we have issued credits to American pursuant to the terms of our American Capacity Purchase Agreement.

 

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 30 aircraft that are due to expire in 2021 and the 19 aircraft that are due to expire in 2022 and the 7 aircraft 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.

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 then most recent measurement period, which would have allowed American to remove two additional aircraft from the capacity purchase agreement. American had agreed to defer the right to remove these two aircraft but subsequently elected to remove one of the two previously deferred aircraft, effective January 2, 2020.  As of January 2, 2020 American had removed three (3) of the six (6) aircraft under the January 31st amendment.

On April 3, 2020, the Company received a new withdrawal notice from American seeking to permanently withdraw three aircraft from the American Capacity Purchase Agreement. Two of the aircraft will be withdrawn effective May 19, 2020 and the third aircraft will be withdrawn effective June 1, 2020. The withdrawal of these three aircraft stems from withdrawal rights that American previously asserted were triggered in September 2019 and November 2019. At such time, American refrained from exercising such withdrawal rights, however, reserved the right to withdraw the three aircraft at a later date under certain circumstances.  In light of the rapid grounding of aircraft caused by the COVID-19 virus, the overall reduction in demand for air travel, and the need to reduce capacity, American elected to remove such aircraft now.  

Following the removal of the three aircraft referenced above, the Company will continue to operate 56 CRJ-900 aircraft under the American CPA.  

 

 

 

10


United Capacity Purchase Agreement

As of March 31, 2020, 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. In March 2020, the deliveries of the new E175LL aircraft were negotiated between United and Embraer to begin in September 2020 and be completed by the quarter ended June 30, 2021. 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. 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.

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.

 

11


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.

 

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.

 

12


 

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

 

Contract Liabilities

Contract liabilities consist of deferred credits for cost reimbursements from major airline partners related to aircraft modifications associated with capacity purchase agreements and pilot training.  The deferred credits are recognized over time depicting the pattern of transfer of control of services resulting in ratable recognition of revenue over the remaining term of the capacity purchase agreements.

Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. The Company's total current and non-current deferred credit balances at March 31, 2020 and September 30, 2019 are $10.2 million and $12.1 million, respectively. The Company recognized $0.9 million and $1.4 million of the deferred credits to revenue in the condensed consolidated statements of operations during the three months ended March 31, 2020 and 2019, respectively, and $2.0 million and $2.6 million during the six months ended March 31, 2020 and 2019, respectively.

Contract Assets

The Company recognizes assets from the costs incurred to fulfill a contract including aircraft painting and reconfiguration and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the condensed consolidated balance sheets. The Company's contract assets balances at March 31, 2020 and September 30, 2019 are $2.8 million and $3.9 million, respectively. Contract cost amortization was $0.4 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively, and $0.9 million and $1.0 million for the six months ended March 31, 2020 and 2019, respectively.

 

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.

 

13


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 $14.5 million and $5.2 million for the three months ended March 31, 2020, and 2019, respectively, of which $0.7 million and $(0.4) million, respectively, was pass-through expense. Engine overhaul expense totaled $25.1 million and $9.4 million for the six months ended March 31, 2020, and 2019, respectively, of which $2.6 million and $1.2 million, respectively, was pass-through expense.  Airframe C-check expense totaled $10.5 million and $4.7 million for the three months ended March 31, 2020, and 2019, respectively, of which $3.9 million and $0.0 million, respectively, was pass-through expense. Airframe C-check expense totaled $17.8 million and $6.2 million for the six months ended March 31, 2020, and 2019, respectively, of which $5.1 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 recogniz