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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, 2021

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 on 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 January 26, 2022, the registrant had 35,964,013 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 and Comprehensive Income (Loss)

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

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4. Controls and Procedures

32

 

 

PART II – OTHER INFORMATION

33

 

 

Item 1. Legal Proceedings

33

 

 

Item 1A. Risk Factors

33

 

 

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

33

 

 

Item 3. Defaults Upon Senior Securities

33

 

 

Item 4. Mine Safety Disclosures

33

 

 

Item 5. Other Information

33

 

 

Item 6. Exhibits

33

 

 

SIGNATURES

35

 

 


 

Cautionary Note Regarding Forward Looking Statements

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

Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects", "intends," "plans," "predicts," "will," "would," “should,” "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 under the heading "Risk Factors." Unless otherwise stated, references to particular years, quarters, months, or periods refer to our fiscal years ended September 30 and the associated quarters, months, and periods of those fiscal years. Each of the terms "the Company," "Mesa Airlines," “Mesa,” "we," "us" and "our" as used herein refers collectively to Mesa Air Group, Inc. and its wholly owned subsidiaries, unless otherwise stated. We do not assume any obligation to revise or update any forward-looking statements.

The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

public health epidemics or pandemics such as COVID-19;

 

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

 

the supply and retention of qualified airline pilots and mechanics;

 

the volatility of pilot and mechanic attrition;

 

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

 

failure to meet certain operational performance targets in our capacity purchase and flight services agreements, which could result in termination of those 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;

 

the direct operation of regional jets by our major partners;

 

the financial strength of our major partners and their ability to successfully manage their businesses through the unprecedented decline in air travel attributable to the COVID-19 pandemic or any other public health epidemic;

 

limitations on our ability to expand regional flying within the flight systems of our major 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 other agreements; and

 

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

Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.

 

1


Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)

 

 

 

December 31,

 

 

September 30,

 

 

 

2021

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

102,332

 

 

$

120,517

 

Restricted cash

 

 

3,350

 

 

 

3,350

 

Receivables, net

 

 

2,919

 

 

 

3,167

 

Expendable parts and supplies, net

 

 

25,206

 

 

 

24,467

 

Prepaid expenses and other current assets

 

 

4,488

 

 

 

6,885

 

Total current assets

 

 

138,295

 

 

 

158,386

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,157,922

 

 

 

1,151,891

 

Intangible assets, net

 

 

6,537

 

 

 

6,792

 

Lease and equipment deposits

 

 

8,249

 

 

 

6,808

 

Operating lease right-of-use assets

 

 

88,469

 

 

 

93,100

 

Deferred heavy maintenance, net

 

 

3,271

 

 

 

3,499

 

Other assets

 

 

31,752

 

 

 

36,121

 

Total assets

 

$

1,434,495

 

 

$

1,456,597

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt and finance leases

 

$

111,059

 

 

$

111,710

 

Current portion of deferred revenue

 

 

5,528

 

 

 

6,298

 

Current maturities of operating leases

 

 

26,935

 

 

 

32,652

 

Accounts payable

 

 

62,933

 

 

 

61,476

 

Accrued compensation

 

 

7,638

 

 

 

12,399

 

Other accrued expenses

 

 

36,283

 

 

 

33,657

 

Total current liabilities

 

 

250,376

 

 

 

258,192

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt and finance leases, excluding current portion

 

 

547,409

 

 

 

539,700

 

Noncurrent operating lease liabilities

 

 

34,405

 

 

 

33,991

 

Deferred credits

 

 

3,721

 

 

 

3,934

 

Deferred income taxes

 

 

65,716

 

 

 

69,940

 

Deferred revenue, net of current portion

 

 

24,788

 

 

 

28,202

 

Other noncurrent liabilities

 

 

33,606

 

 

 

34,591

 

Total noncurrent liabilities

 

 

709,645

 

 

 

710,358

 

Total liabilities

 

 

960,021

 

 

 

968,550

 

Commitments and contingencies (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; 35,963,984 (2022) and 35,958,759

   (2021) shares issued and outstanding, 4,899,497 (2022) and

   4,899,497 (2021) warrants issued and outstanding

 

 

257,073

 

 

 

256,372

 

Retained earnings

 

 

217,401

 

 

 

231,675

 

Total stockholders' equity

 

 

474,474

 

 

 

488,047

 

Total liabilities and stockholders' equity

 

$

1,434,495

 

 

$

1,456,597

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

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

 

 

 

Three Months Ended December 31,

 

 

 

2021

 

 

2020

 

Operating revenues:

 

 

 

 

 

 

 

 

Contract revenue

 

$

136,894

 

 

$

127,158

 

Pass-through and other revenue

 

 

10,863

 

 

 

23,213

 

Total operating revenues

 

 

147,757

 

 

 

150,371

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Flight operations

 

 

47,598

 

 

 

36,964

 

Fuel

 

 

1,257

 

 

 

390

 

Maintenance

 

 

58,981

 

 

 

52,864

 

Aircraft rent

 

 

9,586

 

 

 

10,048

 

Aircraft and traffic servicing

 

 

715

 

 

 

901

 

General and administrative

 

 

12,578

 

 

 

13,073

 

Depreciation and amortization

 

 

21,028

 

 

 

20,470

 

Government grant recognition

 

 

 

 

 

(11,311

)

Total operating expenses

 

 

151,743

 

 

 

123,399

 

Operating income (loss)

 

 

(3,986

)

 

 

26,972

 

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,930

)

 

 

(9,082

)

Interest income

 

 

51

 

 

 

126

 

Loss on investments, net

 

 

(6,462

)

 

 

 

Other income (expense), net

 

 

(59

)

 

 

923

 

Total other expense, net

 

 

(14,400

)

 

 

(8,033

)

Income (loss) before taxes

 

 

(18,386

)

 

 

18,939

 

Income tax expense (benefit)

 

 

(4,112

)

 

 

4,821

 

Net income (loss) and comprehensive income (loss)

 

$

(14,274

)

 

$

14,118

 

Net income (loss) per share attributable to

 

 

 

 

 

 

 

 

common shareholders

 

 

 

 

 

 

 

 

Basic

 

$

(0.40

)

 

$

0.40

 

Diluted

 

$

(0.40

)

 

$

0.39

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

35,963

 

 

 

35,531

 

Diluted

 

 

35,963

 

 

 

36,647

 

 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2020

 

 

35,526,918

 

 

 

 

 

$

242,772

 

 

$

215,087

 

 

$

457,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

850

 

 

 

 

 

 

850

 

Repurchased shares

 

 

(2,256

)

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Restricted shares issued

 

 

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants, net of issuance costs

 

 

 

 

 

4,899,497

 

 

 

11,489

 

 

 

 

 

 

11,489

 

Net income

 

 

 

 

 

 

 

 

 

 

 

14,118

 

 

 

14,118

 

Balance at December 31, 2020

 

 

35,532,162

 

 

 

4,899,497

 

 

$

255,092

 

 

$

229,205

 

 

$

484,297

 

 

 

 

 

Three Months Ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2021

 

 

35,958,759

 

 

 

4,899,497

 

 

$

256,372

 

 

$

231,675

 

 

$

488,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

716

 

 

 

 

 

 

716

 

Repurchased shares

 

 

(2,275

)

 

 

 

 

 

(15

)

 

 

 

 

 

(15

)

Restricted shares issued

 

 

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(14,274

)

 

 

(14,274

)

Balance at December 31, 2021

 

 

35,963,984

 

 

 

4,899,497

 

 

$

257,073

 

 

$

217,401

 

 

$

474,474

 

 

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,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(14,274

)

 

$

14,118

 

Adjustments to reconcile net income (loss) to net cash flows provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,028

 

 

 

20,470

 

Stock compensation expense

 

 

716

 

 

 

850

 

Loss on investments, net

 

 

6,462

 

 

 

 

Deferred income taxes

 

 

(4,224

)

 

 

4,836

 

Amortization of deferred credits

 

 

(213

)

 

 

(793

)

Amortization of debt discount and issuance costs and accretion of interest into long-term debt

 

 

3,199

 

 

 

1,860

 

Gain on extinguishment of debt

 

 

 

 

 

(950

)

Loss on disposal of assets

 

 

5

 

 

 

24

 

Provision for obsolete expendable parts and supplies

 

 

238

 

 

 

(37

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

248

 

 

 

(1,700

)

Expendable parts and supplies

 

 

(978

)

 

 

256

 

Prepaid expenses and other operating assets and liabilities

 

 

2,094

 

 

 

4,296

 

Accounts payable

 

 

174

 

 

 

(5,723

)

Deferred revenue

 

 

(4,184

)

 

 

53,999

 

Accrued expenses and other liabilities

 

 

(4,868

)

 

 

(12,637

)

Operating lease right-of-use assets and liabilities

 

 

(672

)

 

 

404

 

Net cash provided by operating activities

 

 

4,751

 

 

 

79,273

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(19,775

)

 

 

(1,773

)

Investments in equity securities

 

 

(200

)

 

 

 

Payments of equipment and other deposits

 

 

(6,954

)

 

 

 

Net cash used in investing activities

 

 

(26,929

)

 

 

(1,773

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

30,811

 

 

 

195,000

 

Principal payments on long-term debt and finance leases

 

 

(24,510

)

 

 

(189,131

)

Payments of debt and warrant issuance costs

 

 

(2,293

)

 

 

(1,257

)

Repurchase of stock

 

 

(15

)

 

 

(19

)

Net cash provided by financing activities

 

 

3,993

 

 

 

4,593

 

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(18,185

)

 

 

82,093

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

123,867

 

 

 

102,841

 

Cash, cash equivalents and restricted cash at end of period

 

$

105,682

 

 

$

184,934

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,815

 

 

$

6,743

 

Cash paid for income taxes, net

 

$

 

 

$

1

 

Operating lease payments in operating cash flows

 

$

10,152

 

 

$

9,304

 

Supplemental non-cash operating activities

 

 

 

 

 

 

 

 

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

 

$

4,190

 

 

$

69

 

Supplemental non-cash financing activities

 

 

 

 

 

 

 

 

Debt issuance costs related to loan agreement with U.S. Department of the Treasury

 

$

 

 

$

(1,887

)

Investments in warrants to purchase common stock

 

$

100

 

 

$

 

Accrued capital expenditures

 

$

1,722

 

 

$

 

 

See accompanying notes to these condensed consolidated financial statements.

 

5


MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), operates as a regional air carrier providing scheduled flight service to 120 cities in 42 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of December 31, 2021, Mesa’s fleet consisted of 167 aircraft which were operated under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services Agreement (“FSA”), leased to a third party, or maintained as operational spares, with approximately 457 daily departures and 2,999 employees. Mesa operates all of its flights as either American Eagle, United Express, or DHL Express flights pursuant to the terms of CPAs entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc (“DHL”).

The capacity purchase agreements between us and our major partners involve a revenue-guarantee arrangement whereby the major partner pays fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major 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 partner controls route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo services. Ground support expenses including fueling and airport fees are paid directly by DHL.

American Capacity Purchase Agreement

As of December 31, 2021, we operated 40 CRJ-900 aircraft under the American Capacity Purchase Agreement (the “American CPA”). In exchange for providing passenger flight services, 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 departure (“CD0”) and controllable flight completion (“CCF”) percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. 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. The American CPA covers 40 CRJ-900 aircraft for a five-year term expiring on December 31, 2025.

Our American CPA is subject to termination prior to its expiration in various circumstances including:

 

 

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

 

If either we or American fail to perform the covenants, conditions or provisions of the American CPA, subject to certain notice and cure rights, the non-defaulting party may terminate the agreement;

 

If, at any time during the term of the American CPA, the number of covered aircraft is less than twenty (20);

 

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;

 

If our CCF or CD0 fall below certain levels for a specified period of time;

 

Upon the occurrence of a force majeure event (as defined in the American CPA) that lasts for a specified period of consecutive days and affects our ability to operate scheduled flights, including a future epidemic or pandemic;

 

If a labor dispute affects our ability to operate over a specified number of days or we operate in violation of any existing American collective bargaining agreement; or

 

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

 

6


 

Under the American CPA, American has the option in its sole discretion to withdraw up to: (i) 10 aircraft during calendar year 2021, (ii) five aircraft during each of calendar years 2022 and 2023, and (iii) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter American has the right to remove the remaining 20 aircraft. American also has the right and option to withdraw a specified number of aircraft upon each occurrence of the following:

 

If our CCF falls below certain levels for a specified period of time, American may withdraw one aircraft;

 

If our CD0 falls below certain levels for a specified period of time, American may withdraw one aircraft;

 

If we fail to satisfactorily complete established cabin interior program requirements by certain deadlines, American may withdraw one aircraft; or

 

If our block hour utilization falls below certain levels for a specified period of time, American may withdraw a specified number of aircraft.

United Capacity Purchase Agreement

As of December 31, 2021, we operated 60 E-175 and 20 E-175LL aircraft under the United Capacity Purchase Agreement (the “United CPA”). In exchange for providing passenger flight services, 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 reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. United also 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 E-175 aircraft owned by United. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.

Under our United CPA, United owns 42 of the 60 E-175 aircraft and all of the E-175LL aircraft and leases them to us at nominal amounts. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and the E-175 aircraft owned by us have terms expiring in 2028. The E-175LL aircraft have terms expiring between 2032 and 2033.

Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement, and as of December 31, 2021, had entered into agreements to lease 17 of our 20 CRJ-700 aircraft.

Our United CPA is subject to termination rights prior to its expiration, including:

 

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

 

If we fail to perform the material covenants, agreements, terms or conditions of our United CPA 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;

 

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;

 

United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more;

 

If United elects to terminate our United CPA 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; and

 

Commencing five (5) years after the actual in-service date, United has the right to remove the E-175 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.

 

7


DHL Flight Services Agreement

On December 20, 2019, we entered into a Flight Services Agreement with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate two (2) Boeing 737-400F aircraft to provide cargo air transportation services. In exchange for providing such services, we receive a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL.

Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us.

Our DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.

Our DHL FSA is subject to the following termination rights prior to its expiration:

 

If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights.

 

If either party is declared bankrupt or insolvent.

 

If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days.

 

At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days’ written notice.

 

If we fail to comply with performance standards for three consecutive measurement periods.

 

If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days.

 

Upon a change in our control or ownership.

 

DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and we do not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.

2.

Summary of Significant Accounting Policies

Basis of Presentation

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

These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 2021 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2021 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.

 

8


The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act,") and may remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of the Company’s initial public offering (“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 and 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.

Segment Reporting

As of December 31, 2021, our chief operating decision maker was the Chief Executive Officer. While we operate under two separate capacity purchase agreements and a flight services agreement, we do not manage our business based on any performance measure at the individual contract level. Our chief operating decision maker uses consolidated financial information to evaluate our performance and allocate resources, which is the same basis on which he communicates our results and performance to our Board of Directors. Accordingly, we have a single operating and reportable segment.

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.

Contract Revenue and Pass-through and Other Revenue

We recognize contract revenue when the service is provided under our capacity purchase agreements and flight services agreement. Under the capacity purchase agreements and flight services agreement, our major partners generally pay for each departure, flight hour or block hour incurred, and an amount per aircraft in service each month with additional incentives or penalties based on flight completion, on-time performance, and other operating metrics. Our performance obligation is met when each flight is completed, and revenue is recognized and reflected in contract revenue.

We recognize pass-through revenue when the service is provided under our capacity purchase agreements and flight services agreement. Pass-through revenue represents reimbursements for certain direct expenses incurred including passenger liability and hull insurance, property taxes, other direct costs defined within the agreements, and major maintenance on aircraft leased from our major partners at nominal rates. Our performance obligation is met when each flight is completed or as the maintenance services are performed, and revenue is recognized and reflected in pass-through and other revenue.

We record deferred revenue when cash payments are received or are due from our major partners in advance of our performance. During the three months ended December 31, 2021, we recognized $4.2 million of previously deferred revenue. Deferred revenue is recognized as flights are completed over the remaining contract term.

The deferred revenue balance as of December 31, 2021 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (in thousands):

 

Periods Ending

September 30,

 

Total Revenue

 

2022 (remainder of)

 

$

3,631

 

2023

 

 

9,569

 

2024

 

 

9,517

 

2025