| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 13-3697002 | |
(State of incorporation) | (I.R.S. Employer Identification No.) | |
W6390 Challenger Drive, Suite 203 Appleton, WI | 54914-9120 | |
(Address of principal executive offices) | (Zip Code) | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None | None | None |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☐ | |||||
HARBOR DIVERSIFIED, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31,JUNE 30, 2023
TABLE OF CONTENTS
| Page | ||||
| (i) | ||||
| 1 | ||||
| 1 | ||||
| 1 | ||||
| 2 | ||||
| 3 | ||||
Condensed Notes to Condensed Consolidated Financial Statements | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the three months ended March 31,June 30, 2023 (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements relate to matters such as our industry, business plans and strategies, material contracts, key relationships, consumer behavior, flight schedules and completed flight activity, revenues, expenses, margins, profitability, tax liability, capital expenditures, liquidity, capital resources, outcome of legal proceedings, and other business and operating information. Forward-looking statements include all statements that are not statements of historical facts, and can be identified by words such as “anticipate,” “approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases in this Quarterly Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting and are subject to considerable risks and uncertainties, including without limitation:
the supply of qualified pilots and mechanics to the airline industry, attrition, and the increasing costs associated with hiring, training and retaining qualified pilots and mechanics;
the dependence of the business of our subsidiary, Air Wisconsin Airlines LLC (“Air Wisconsin”), on a capacity purchase agreement (the “American capacity purchase agreement”) with American Airlines, Inc. (“American”), oncesince all Air Wisconsin’s aircraft have been withdrawn from the capacity purchase agreement (the “United capacity purchase agreement”) with United Airlines, Inc. (“United”);, which agreement expired in early June 2023;
the possibility that Air Wisconsin receives an unfavorable result from the arbitration initiated by United in October 2022 related to certain amounts owed to Air Wisconsin pursuant to the United capacity purchase agreement that the parties fail to resolve their dispute prior to receiving a final determination from such arbitration, or that United prevails on its claim that Air Wisconsin wrongfully terminated the agreement;
any acceleration of debt under Air Wisconsin’s credit agreements;
aircraft and engine maintenance costs;
the amounts Air Wisconsin is paid or reimbursed under itsthe American capacity purchase agreementsagreement or any future agreement may be less than the costs incurred, particularly as labor costs increase in response to pilot and mechanic shortages;
the possibility that American could provide Air Wisconsin with inefficient flight schedules, or American could change the expected utilization of Air Wisconsin’s aircraft under the American capacity purchase agreement;
the extent to which Air Wisconsin’s current growth opportunities and strategic operating plan are restricted based on factors impacting the airline industry;
the significant portion of Air Wisconsin’s workforce that is represented by labor unions and the terms of its collective bargaining agreements;
Air Wisconsin’s reliance on only one aircraft type, aircraft manufacturer and engine manufacturer, and the potential issuance of operating restrictions on this aircraft or engine type or occurrence of any aviation incident involving either this aircraft or engine type;
Air Wisconsin’s ability to obtain additional financing on acceptable terms and when required;
developments associated with fluctuations in the economy, including increased inflation, which may negatively impact our costs, create additional wage pressures, and impact the financial stability of Air Wisconsin’s major airline partner;
the impact of losing key personnel or inability to attract additional qualified personnel;
the negative impact of information technology security breaches and other such infrastructure disruptions on Air Wisconsin’s operations; and
|
the duration and spread of infectious diseases, and the related impact on the business, results of the application of accounting guidance, including the requirement to recognize a significant amount of revenue under the applicable capacity purchase agreement that had previously been deferred, on ouroperations, financial condition and resultsliquidity of operations.Air Wisconsin and American in particular, and the airline industry in general.
The forward-looking statements contained in this Quarterly Report are based on management’s current plans, estimates and expectations in light of information currently available to us, and they are subject to uncertainty and changes in circumstances. Actual results may differ materially from our expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors”“Risk Factors” within this Quarterly Report and in the other reports we file with the Securities and Exchange Commission (“SEC”).
(i)
Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions or estimates prove to be incorrect, our actual results may be different from, and potentially materially worse than, what we may have expressed or implied by these forward-looking statements. Comparisons of results for any current or prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Investors should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.
(ii)
March 31, 2023 | December 31, 2022 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
| Cash and cash equivalents | $ | 22,509 | $ | 33,333 | ||||
| Restricted cash | 671 | 849 | ||||||
| Marketable securities | 156,305 | 153,827 | ||||||
| Accounts receivable, net | 41,147 | 40,341 | ||||||
| Notes receivable | 21,093 | 19,452 | ||||||
| Spare parts and supplies, net | 4,978 | 4,579 | ||||||
| Contract costs | 161 | 143 | ||||||
| Prepaid expenses and other | 3,512 | 3,732 | ||||||
Total Current Assets | 250,376 | 256,256 | ||||||
Property and Equipment | ||||||||
| Flight property and equipment | 265,285 | 263,970 | ||||||
| Ground property and equipment | 8,240 | 8,055 | ||||||
| Less accumulated depreciation and amortization | (176,474 | ) | (169,766 | ) | ||||
| Net Property and Equipment | 97,051 | 102,259 | ||||||
Other Assets | ||||||||
Operating lease right-of-use | 12,153 | 13,480 | ||||||
| Intangibles | 5,300 | 5,300 | ||||||
| Long-term investments | 4,275 | 4,275 | ||||||
| Long-term contract costs | 751 | — | ||||||
| Other | 1,126 | 1,077 | ||||||
Total Other Assets | 23,605 | 24,132 | ||||||
Total Assets | $ | 371,032 | $ | 382,647 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
| Accounts payable | $ | 20,950 | $ | 20,165 | ||||
| Accrued payroll and employee benefits | 14,216 | 12,989 | ||||||
| Current portion of operating lease liability | 5,125 | 5,091 | ||||||
| Other accrued expenses | 193 | 137 | ||||||
| Contract liabilities | 1,120 | 1,985 | ||||||
| Deferred revenues | 5,841 | 16,561 | ||||||
| Current portion of long-term debt (stated principal amount of $7,000 at March 31, 2023 and December 31, 2022) | 9,084 | 9,154 | ||||||
Total Current Liabilities | 56,529 | 66,082 | ||||||
Other Long-Term Liabilities | ||||||||
| Long-term debt (stated principal amount of $48,600 at March 31, 2023 and December 31, 2022) | 51,582 | 52,068 | ||||||
| Long-term promissory note | 4,275 | 4,275 | ||||||
| Deferred tax liability | 7,990 | 7,990 | ||||||
| Long-term operating lease liability | 4,543 | 5,849 | ||||||
| Long-term contract liabilities | 398 | — | ||||||
| Other | 1,659 | 1,977 | ||||||
Total Long-Term Liabilities | 70,447 | 72,159 | ||||||
Total Liabilities | ||||||||
Commitments and Contingencies (Note 8) | ||||||||
| Mezzanine Equity (Note 10) | ||||||||
| Series C Convertible Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at March 31, 2023 and December 31, 2022 | 13,200 | 13,200 | ||||||
Stockholders’ Equity | ||||||||
| Common Stock, $0.01 par value, 100,000,000 shares authorized, 55,481,140 shares issued at March 31, 2023 and December 31, 2022, 44,749,986 shares outstanding at March 31, 2023 and 45,219,737 shares outstanding at December 31, 2022 | 555 | 555 | ||||||
Additional paid-in capital | 285,416 | 285,668 | ||||||
| Retained deficit | (39,152 | ) | (40,034 | ) | ||||
| Treasury stock | (15,963 | ) | (14,983 | ) | ||||
Total Stockholders’ Equity | 230,856 | 231,206 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 371,032 | $ | 382,647 | ||||
June 30, 2023 | December 31, 2022 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 15,831 | $ | 33,333 | ||||
Restricted cash | 812 | 849 | ||||||
Marketable securities | 141,453 | 153,827 | ||||||
Accounts receivable, net | 45,074 | 40,341 | ||||||
Notes receivable | 21,093 | 19,452 | ||||||
Spare parts and supplies, net | 5,184 | 4,579 | ||||||
Contract costs | 114 | 143 | ||||||
Contract assets, net | 173 | — | ||||||
Prepaid expenses and other | 2,749 | 3,732 | ||||||
Total Current Assets | 232,483 | 256,256 | ||||||
Property and Equipment | ||||||||
Flight property and equipment | 265,459 | 263,970 | ||||||
Ground property and equipment | 8,287 | 8,055 | ||||||
Less accumulated depreciation and amortization | (183,329 | ) | (169,766 | ) | ||||
Net Property and Equipment | 90,417 | 102,259 | ||||||
Other Assets | ||||||||
Operating lease right-of-use | 11,113 | 13,480 | ||||||
Intangibles | 5,300 | 5,300 | ||||||
Long-term investments | 4,275 | 4,275 | ||||||
Long-term contract costs | 639 | — | ||||||
Other | 1,146 | 1,077 | ||||||
Total Other Assets | 22,473 | 24,132 | ||||||
Total Assets | $ | 345,373 | $ | 382,647 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 21,016 | $ | 20,165 | ||||
Accrued payroll and employee benefits | 13,184 | 12,989 | ||||||
Current portion of operating lease liability | 4,199 | 5,091 | ||||||
Other accrued expenses | 102 | 137 | ||||||
Contract liabilities | — | 1,985 | ||||||
Deferred revenues | — | 16,561 | ||||||
Current portion of long-term debt (stated principal amount of $3,500 at June 30, 2023 and December 31, 2022) | 5,444 | 9,154 | ||||||
Total Current Liabilities | 43,945 | 66,082 | ||||||
Other Long-Term Liabilities | ||||||||
Long-term debt (stated principal amount of $45,100 at June 30, 2023 and $48,600 December 31, 2022) | 47,596 | 52,068 | ||||||
Long-term promissory note | 4,275 | 4,275 | ||||||
Deferred tax liability | 7,990 | 7,990 | ||||||
Long-term operating lease liability | 4,500 | 5,849 | ||||||
Long-term contract liabilities, net | 2,840 | — | ||||||
Other | 1,737 | 1,977 | ||||||
Total Long-Term Liabilities | 68,938 | 72,159 | ||||||
Total Liabilities | 112,883 | 138,241 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Mezzanine Equity (Note 10) | ||||||||
Series C Convertible Redeemable Preferred Stock, $0.01 par value per share, 4,000,000 shares authorized, issued and outstanding at June 30, 2023 and December 31, 2022 | 13,200 | 13,200 | ||||||
Stockholders’ Equity | ||||||||
Common Stock, $0.01 par value per share, 100,000,000 shares authorized, 55,481,140 shares issued at June 30, 2023 and December 31, 2022, 43,830,036 shares outstanding at June 30, 2023 and 45,219,737 shares outstanding at December 31, 2022 | 555 | 555 | ||||||
Additional paid-in capital | 285,111 | 285,668 | ||||||
Retained deficit | (48,321 | ) | (40,034 | ) | ||||
Treasury stock | (18,055 | ) | (14,983 | ) | ||||
Total Stockholders’ Equity | 219,290 | 231,206 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 345,373 | $ | 382,647 | ||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
(unaudited) | ||||||||
Operating Revenues | ||||||||
| Contract revenues | $ | 59,037 | $ | 66,968 | ||||
| Contract services and other | 95 | 7 | ||||||
Total Operating Revenues | 59,132 | 66,975 | ||||||
Operating Expenses | ||||||||
| Payroll and related costs | 29,768 | 26,601 | ||||||
| Aircraft fuel and oil | 102 | 51 | ||||||
| Aircraft maintenance, materials and repairs | 19,349 | 14,501 | ||||||
| Other rents | 1,594 | 1,613 | ||||||
| Depreciation, amortization and obsolescence | 6,357 | 6,644 | ||||||
| Purchased services and other | 4,442 | 3,765 | ||||||
Total Operating Expenses | 61,612 | 53,175 | ||||||
(Loss) Income from Operations | (2,480 | ) | 13,800 | |||||
Other Income (Expense) | ||||||||
| Interest income | 1,366 | 784 | ||||||
| Interest expense | (1 | ) | — | |||||
| Gain (Loss) on marketable securities | 1,740 | (2,423 | ) | |||||
| Other, net | (13 | ) | — | |||||
Total Other Income (Expense) | 3,092 | (1,639 | ) | |||||
Net Income Before Taxes | 612 | 12,161 | ||||||
Income Tax (Benefit) Expense | (270 | ) | 2,898 | |||||
Net Income | $ | 882 | $ | 9,263 | ||||
| Preferred stock dividends | 252 | 198 | ||||||
| Net income available to common stockholders | $ | 630 | $ | 9,065 | ||||
Basic Earnings per share | $ | 0.01 | $ | 0.19 | ||||
Diluted Earnings per share | $ | 0.01 | $ | 0.14 | ||||
Weighted average common shares: | ||||||||
| Basic | 44,980 | 47,638 | ||||||
| Diluted | 61,480 | 64,535 | ||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Operating Revenues | ||||||||||||||||
Contract revenues | $ | 50,970 | $ | 77,923 | $ | 110,007 | $ | 144,891 | ||||||||
Contract services and other | 102 | 7 | 197 | 14 | ||||||||||||
Total Operating Revenues | 51,072 | 77,930 | 110,204 | 144,905 | ||||||||||||
Operating Expenses | ||||||||||||||||
Payroll and related costs | 29,953 | 27,694 | 59,721 | 54,295 | ||||||||||||
Aircraft fuel and oil | 221 | 34 | 323 | 85 | ||||||||||||
Aircraft maintenance, materials and repairs | 17,869 | 16,336 | 37,218 | 30,837 | ||||||||||||
Other rents | 1,474 | 1,657 | 3,068 | 3,270 | ||||||||||||
Depreciation, amortization and obsolescence | 6,370 | 6,674 | 12,727 | 13,318 | ||||||||||||
| Purchased services, legal and other | 7,532 | 3,514 | 11,974 | 7,279 | ||||||||||||
Total Operating Expenses | 63,419 | 55,909 | 125,031 | 109,084 | ||||||||||||
(Loss) Income from Operations | (12,347 | ) | 22,021 | (14,827 | ) | 35,821 | ||||||||||
Other Income (Expense) | ||||||||||||||||
Interest income | 1,429 | 1,382 | 2,795 | 2,166 | ||||||||||||
Interest expense | (11 | ) | — | (12 | ) | — | ||||||||||
(Loss) gain on marketable securities | (795 | ) | (3,602 | ) | 945 | (6,025 | ) | |||||||||
Gain on extinguishment of debt | 70 | — | 70 | — | ||||||||||||
Other, net | (1 | ) | (3 | ) | (14 | ) | (3 | ) | ||||||||
Total Other Income (Expense) | 692 | (2,223 | ) | 3,784 | (3,862 | ) | ||||||||||
Net (Loss) Income Before Taxes | (11,655 | ) | 19,798 | (11,043 | ) | 31,959 | ||||||||||
Income Tax (Benefit) Expense | (2,486 | ) | 4,717 | (2,756 | ) | 7,615 | ||||||||||
Net (Loss) Income | (9,169 | ) | 15,081 | (8,287 | ) | 24,344 | ||||||||||
Preferred stock dividends | 305 | 198 | 557 | 396 | ||||||||||||
Net (loss) income available to common stockholders | $ | (9,474 | ) | $ | 14,883 | $ | (8,844 | ) | $ | 23,948 | ||||||
Basic (Loss) Earnings per share | $ | (0.21 | ) | $ | 0.32 | $ | (0.20 | ) | $ | 0.51 | ||||||
Diluted (Loss) Earnings per share | $ | (0.21 | ) | $ | 0.24 | $ | (0.20 | ) | $ | 0.38 | ||||||
Weighted average common shares: | ||||||||||||||||
Basic | 44,277 | 46,519 | 44,626 | 47,075 | ||||||||||||
Diluted | 44,277 | 63,019 | 44,626 | 63,773 | ||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2022 | 4,000 | $ | 13,200 | 45,220 | 10,261 | $ | 555 | $ | 285,668 | $ | (40,034 | ) | $ | (14,983 | ) | $ | 231,206 | |||||||||||||||||||
Net loss | — | — | — | — | — | — | (8,287 | ) | — | (8,287 | ) | |||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | (557 | ) | — | — | (557 | ) | |||||||||||||||||||||||||
Treasury stock purchases | — | — | (1,390 | ) | 1,390 | — | — | — | (3,072 | ) | (3,072 | ) | ||||||||||||||||||||||||
Balance, June 30, 2023 (unaudited) | 4,000 | $ | 13,200 | 43,830 | 11,651 | $ | 555 | $ | 285,111 | $ | (48,321 | ) | $ | (18,055 | ) | $ | 219,290 | |||||||||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, March 31, 2023 | 4,000 | $ | 13,200 | 44,750 | 10,731 | $ | 555 | $ | 285,416 | $ | (39,152 | ) | $ | (15,963 | ) | $ | 230,856 | |||||||||||||||||||
Net loss | — | — | — | — | — | — | (9,169 | ) | — | (9,169 | ) | |||||||||||||||||||||||||
Preferred stock dividends | — | — | — | — | — | (305 | ) | — | — | (305 | ) | |||||||||||||||||||||||||
Treasury stock purchases | — | — | (920 | ) | 920 | — | — | — | (2,092 | ) | (2,092 | ) | ||||||||||||||||||||||||
Balance, June 30, 2023 (unaudited) | 4,000 | $ | 13,200 | 43,830 | 11,651 | $ | 555 | $ | 285,111 | $ | (48,321 | ) | $ | (18,055 | ) | $ | 219,290 | |||||||||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 4,000 | $ | 13,200 | 45,220 | 10,261 | $ | 555 | $ | 285,668 | $ | (40,034 | ) | $ | (14,983 | ) | $ | 231,206 | |||||||||||||||||||
| Net income | — | — | — | — | — | — | 882 | — | 882 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | — | — | (252 | ) | — | — | (252 | ) | |||||||||||||||||||||||||
| Treasury stock purchases | — | — | (470 | ) | 470 | — | — | — | (980 | ) | (980 | ) | ||||||||||||||||||||||||
Balance, March 31, 2023 (unaudited) | 4,000 | $ | 13,200 | 44,750 | 10,731 | $ | 555 | $ | 285,416 | $ | (39,152 | ) | $ | (15,963 | ) | $ | 230,856 | |||||||||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2021 | 4,000 | $ | 13,200 | 53,316 | 2,165 | $ | 555 | $ | 287,429 | $ | (79,144 | ) | $ | (3,280 | ) | $ | 205,560 | |||||||||||||||||||
Net income | — | — | — | — | — | — | 24,344 | — | 24,344 | |||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (396 | ) | — | — | (396 | ) | |||||||||||||||||||||||||
Cancellation of stock option | — | — | — | — | — | (969 | ) | — | — | (969 | ) | |||||||||||||||||||||||||
Treasury stock purchases | — | — | (7,300 | ) | 7,300 | — | — | — | (9,934 | ) | (9,934 | ) | ||||||||||||||||||||||||
Balance, June 30, 2022 (unaudited) | 4,000 | $ | 13,200 | 46,016 | 9,465 | $ | 555 | $ | 286,064 | $ | (54,800 | ) | $ | (13,214 | ) | $ | 218,605 | |||||||||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 4,000 | $ | 13,200 | 53,316 | 2,165 | $ | 555 | $ | 287,429 | $ | (79,144 | ) | $ | (3,280 | ) | $ | 205,560 | |||||||||||||||||||
| Net income | — | — | — | — | — | — | 9,263 | — | 9,263 | |||||||||||||||||||||||||||
| Preferred stock dividends | — | — | — | — | — | (198 | ) | — | — | (198 | ) | |||||||||||||||||||||||||
| Cancellation of stock option | — | — | — | — | — | (969 | ) | — | — | (969 | ) | |||||||||||||||||||||||||
| Treasury stock purchases | — | — | (6,262 | ) | 6,262 | — | — | — | (7,482 | ) | (7,482 | ) | ||||||||||||||||||||||||
Balance, March 31, 2022 (unaudited) | 4,000 | $ | 13,200 | 47,054 | 8,427 | $ | 555 | $ | 286,262 | $ | (69,881 | ) | $ | (10,762 | ) | $ | 206,174 | |||||||||||||||||||
| Mezzanine Equity - Series C Convertible Redeemable Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Treasury Stock | Amount | Additional Paid-In Capital | Retained Deficit | Cost of Treasury Stock | Total Stockholders’ Equity | ||||||||||||||||||||||||||||
Balance, March 31, 2022 | 4,000 | $ | 13,200 | 47,054 | 8,427 | $ | 555 | $ | 286,262 | $ | (69,881 | ) | $ | (10,762 | ) | $ | 206,174 | |||||||||||||||||||
Net income | — | — | — | — | — | — | 15,081 | — | 15,081 | |||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (198 | ) | — | — | (198 | ) | |||||||||||||||||||||||||
Treasury stock purchases | — | — | (1,038 | ) | 1,038 | — | — | — | (2,452 | ) | (2,452 | ) | ||||||||||||||||||||||||
Balance, June 30, 2022 (unaudited) | 4,000 | $ | 13,200 | 46,016 | 9,465 | $ | 555 | $ | 286,064 | $ | (54,800 | ) | $ | (13,214 | ) | $ | 218,605 | |||||||||||||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
(unaudited) | ||||||||
Cash Flows from Operating Activities | ||||||||
| Net income | $ | 882 | $ | 9,263 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation, amortization and obsolescence allowance | 6,357 | 6,644 | ||||||
| Amortization of contract costs | (936 | ) | (1,066 | ) | ||||
| Amortization of engine overhauls | 676 | 616 | ||||||
| Deferred income taxes | — | (118 | ) | |||||
| Loss (gain) on disposition of property and equipment | 92 | (2 | ) | |||||
| (Gain) loss on marketable securities | (1,740 | ) | 2,423 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (807 | ) | (8,258 | ) | ||||
| Notes receivable | (1,641 | ) | (3,510 | ) | ||||
| Spare parts and supplies | (399 | ) | (229 | ) | ||||
| Prepaid expenses and other | (698 | ) | 4,523 | |||||
Operating lease right-of-use | 55 | 19 | ||||||
| Accounts payable | 784 | (4,263 | ) | |||||
| Accrued payroll and employee benefits | 1,227 | (2,401 | ) | |||||
| Other accrued expenses | 56 | 56 | ||||||
| Long-term deferred revenue | — | (9,046 | ) | |||||
| Contract liabilities | 469 | (1,441 | ) | |||||
| Deferred revenues | (10,720 | ) | 4,310 | |||||
| Income taxes payable | — | 751 | ||||||
| Other long-term liabilities | (318 | ) | (59 | ) | ||||
Net Cash Used in Operating Activities | (6,661 | ) | (1,788 | ) | ||||
Cash Flows from Investing Activities | ||||||||
| Additions to property and equipment | (1,817 | ) | (1,210 | ) | ||||
| Proceeds on disposition of property and equipment | 2 | 3 | ||||||
| Purchase of marketable securities | (738 | ) | (231 | ) | ||||
Net Cash Used in Investing Activities | (2,553 | ) | (1,438 | ) | ||||
Cash Flows from Financing Activities | ||||||||
| Repayments of long-term debt | (556 | ) | (595 | ) | ||||
| Dividends paid on preferred stock | (252 | ) | (198 | ) | ||||
| Cancellation of stock option | — | (969 | ) | |||||
| Repurchased stock | (980 | ) | (7,482 | ) | ||||
Net Cash Used in Financing Activities | (1,788 | ) | (9,244 | ) | ||||
Decrease in Cash, Cash Equivalents and Restricted Cash | (11,002 | ) | (12,470 | ) | ||||
Cash, Cash Equivalents and Restricted Cash, beginning of period | 34,182 | 38,619 | ||||||
Cash, Cash Equivalents and Restricted Cash, end of period | $ | 23,180 | $ | 26,149 | ||||
Six Months Ended June 30, | ||||||||
2023 | 2022 | |||||||
(unaudited) | ||||||||
Cash Flows from Operating Activities | ||||||||
Net (loss) income | $ | (8,287 | ) | $ | 24,344 | |||
Adjustments to reconcile net (loss) income to net cash (used) in/provided by operating activities: | ||||||||
Depreciation, amortization and obsolescence allowance | 12,727 | 13,318 | ||||||
Amortization of contract costs | (1,461 | ) | (2,383 | ) | ||||
Amortization of engine overhauls | 1,515 | 1,305 | ||||||
Deferred income taxes | — | (118 | ) | |||||
Loss on disposition of property and equipment | 208 | 38 | ||||||
(Gain) loss on marketable securities | (945 | ) | 6,025 | |||||
Gain on extinguishment of debt | (70 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (4,733 | ) | (16,697 | ) | ||||
Notes receivable | (1,641 | ) | (7,609 | ) | ||||
Spare parts and supplies | (605 | ) | (159 | ) | ||||
Prepaid expenses and other | 139 | 4,623 | ||||||
Operating lease right-of-use | 126 | 54 | ||||||
Accounts payable | 851 | (1,486 | ) | |||||
Accrued payroll and employee benefits | 195 | (1,728 | ) | |||||
Other accrued expenses | (35 | ) | 24 | |||||
Long-term deferred revenue | — | (9,046 | ) | |||||
Contract liabilities | 2,143 | (2,080 | ) | |||||
Deferred revenues | (16,561 | ) | (8,292 | ) | ||||
Income taxes payable | — | 3,487 | ||||||
Other long-term liabilities | (240 | ) | (60 | ) | ||||
Net Cash (Used) in/Provided by Operating Activities | (16,674 | ) | 3,560 | |||||
Cash Flows from Investing Activities | ||||||||
Additions to property and equipment | (2,453 | ) | (3,732 | ) | ||||
Proceeds on disposition of property and equipment | 10 | 7 | ||||||
Purchase of marketable securities | (1,681 | ) | (958 | ) | ||||
Sale of marketable securities | 15,000 | — | ||||||
Net Cash Provided by/(Used) in Investing Activities | 10,876 | (4,683 | ) | |||||
Cash Flows from Financing Activities | ||||||||
Repayment of long-term debt | (8,112 | ) | (1,190 | ) | ||||
Dividends paid on preferred stock | (557 | ) | (396 | ) | ||||
Cancellation of stock option | — | (969 | ) | |||||
Repurchased stock | (3,072 | ) | (9,934 | ) | ||||
Net Cash Used in Financing Activities | (11,741 | ) | (12,489 | ) | ||||
Decrease in Cash, Cash Equivalents and Restricted Cash | (17,539 | ) | (13,612 | ) | ||||
Cash, Cash Equivalents and Restricted Cash, beginning of period | 34,182 | 38,619 | ||||||
Cash, Cash Equivalents and Restricted Cash, end of period | $ | 16,643 | $ | 25,007 | ||||
Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |||||||
Net (losses) gains recognized during the period on equity securities | $ | (795 | ) | $ | 945 | |||
Less: Net losses recognized during the period on equity securities sold during the period | (82 | ) | (82 | ) | ||||
Unrealized (losses) gains recognized during the period on equity securities held as of the end of the period | $ | (713 | ) | $ | 1,027 | |||
Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||
| Net gains (losses) recognized during the period on equity securities | $ | 1,740 | $ | (2,423 | ) | |||
| Less: Net gains recognized during the period on equity securities sold during the period | — | — | ||||||
| Unrealized gains (losses) recognized during the period on equity securities held as of the end of the period | $ | 1,740 | $ | (2,423 | ) | |||
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||
Net losses recognized during the period on equity securities | $ | (3,602 | ) | $ | (6,025 | ) | ||
Less: Net gains (losses) recognized during the period on equity securities sold during the period | — | — | ||||||
Unrealized losses recognized during the period on equity securities held as of the end of the period | $ | (3,602 | ) | $ | (6,025 | ) | ||
Assets | Depreciable Life | Current Residual Value | ||||
| Aircraft | 7 years | $ | 50 | |||
| Rotable parts | 7 years | 10 | % | |||
| Spare engines | 7 years | $ | 25 | |||
| Ground equipment | up to 10 years | 0 | % | |||
| Office equipment | up to 10 years | 0 | % | |||
| Leasehold improvements | Shorter of asset or lease life | 0 | % | |||
Assets | Depreciable Life | Current Residual Value | ||||||
Aircraft | 7 years | $ | 50 | |||||
Spare engines | 7 years | $ | 25 | |||||
Rotable parts | 7 years | 10 | % | |||||
Ground equipment | up to 10 years | 0 | % | |||||
Office equipment | up to 10 years | 0 | % | |||||
Leasehold improvements | Shorter of asset or lease life | 0 | % | |||||
June 30, 2023 | December 31, 2022 | |||||||||||||||
Assets | Original Cost | Accumulated Depreciation/ Amortization | Original Cost | Accumulated Depreciation/ Amortization | ||||||||||||
Aircraft | $ | 70,676 | $ | 45,244 | $ | 70,089 | $ | 40,544 | ||||||||
Spare engines | 164,706 | 112,719 | 163,708 | 103,834 | ||||||||||||
Rotable parts | 27,207 | 18,345 | 27,936 | 18,655 | ||||||||||||
Ground equipment | 2,738 | 2,163 | 2,718 | 2,063 | ||||||||||||
Office equipment | 4,515 | 4,296 | 4,519 | 4,218 | ||||||||||||
Leasehold improvements | 1,034 | 562 | 818 | 452 | ||||||||||||
| Total | $ | 270,876 | $ | 183,329 | $ | 269,788 | $ | 169,766 | ||||||||
March 31, 2023 | December 31, 2022 | |||||||||||||||
Assets | Original Cost | Accumulated Depreciation/ Amortization | Original Cost | Accumulated Depreciation/ Amortization | ||||||||||||
| Aircraft | 70,143 | 42,874 | 70,089 | 40,544 | ||||||||||||
| Engines | 164,706 | 108,194 | 163,708 | 103,834 | ||||||||||||
| Rotable parts | 27,622 | 18,535 | 27,936 | 18,655 | ||||||||||||
| Ground equipment | 2,736 | 2,113 | 2,718 | 2,063 | ||||||||||||
| Office equipment | 4,517 | 4,255 | 4,519 | 4,218 | ||||||||||||
| Leasehold improvements | 987 | 503 | 818 | 452 | ||||||||||||
270,711 | 176,474 | 269,788 | 169,766 | |||||||||||||
March 31, 2023 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Marketable securities – exchange-traded funds | $ | 111,024 | $ | 111,024 | $ | — | $ | — | ||||||||
| Marketable securities – mutual funds | 45,281 | 45,281 | — | — | ||||||||||||
| Long-term investments – bonds (see Note 6) | 4,275 | — | 4,275 | — | ||||||||||||
Total | $ | 160,580 | $ | 156,305 | $ | 4,275 | $ | — | ||||||||
June 30, 2023 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities – exchange-traded funds | $ | 111,030 | $ | 111,030 | $ | — | $ | — | ||||||||
Marketable securities – mutual funds | 30,423 | 30,423 | — | — | ||||||||||||
Long-term investments – bonds (see Note 6) | 4,275 | — | 4,275 | — | ||||||||||||
Total | $ | 145,728 | $ | 141,453 | $ | 4,275 | $ | — | ||||||||
| March 31, 2022 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Marketable securities – exchange-traded funds | $ | 111,851 | $ | 111,851 | $ | — | $ | — | ||||||||
| Marketable securities – mutual funds | 24,327 | 24,327 | — | — | ||||||||||||
| Long-term investments – bonds (see Note 6) | 4,275 | — | 4,275 | — | ||||||||||||
Total | $ | 140,453 | $ | 136,178 | $ | 4,275 | $ | — | ||||||||
December 31, 2022 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Marketable securities – exchange-traded funds | $ | 109,178 | $ | 109,178 | $ | — | $ | — | ||||||||
Marketable securities – mutual funds | 44,649 | 44,649 | — | — | ||||||||||||
Long-term investments – bonds (see Note 6) | 4,275 | — | 4,275 | — | ||||||||||||
Total | $ | 158,102 | $ | 153,827 | $ | 4,275 | $ | — | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
Aircraft Notes, due December 31, 2025 ( 4.0%) | $ | 60,666 | $ | 61,222 | ||||
| Less: current maturities | 9,084 | 9,154 | ||||||
Long-term debt | $ | 51,582 | $ | 52,068 | ||||
June 30, 2023 | December 31, 2022 | |||||||
Aircraft Notes, due December 31, 2025 (4.0%) | $ | 53,040 | $ | 61,222 | ||||
Less: current maturities | 5,444 | 9,154 | ||||||
Long-term debt | $ | 47,596 | $ | 52,068 | ||||
Fiscal Year | Amount | |||
July 2023 through December 2023 | $ | 972 | ||
2024 | 8,874 | |||
2025 | 43,194 | |||
Total | $ | 53,040 | ||
Fiscal Year | Amount | |||
| April 2023 through December 2023 | $ | 8,598 | ||
| 2024 | 8,874 | |||
| 2025 | 43,194 | |||
Total | $ | 60,666 | ||
2023 | ||||
Weighted-average remaining lease term | ||||
Weighted-average discount rate | ||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||
| Operating lease costs | $ | 1,474 | $ | 1,474 | $ | 1,489 | $ | 1,472 | $ | 2,958 | $ | 2,946 | ||||||||||||
| Short-term lease costs | 65 | 104 | 61 | 125 | 126 | 229 | ||||||||||||||||||
| Variable lease costs | 55 | 35 | (76 | ) | 60 | (16 | ) | 95 | ||||||||||||||||
Total Lease Costs | $ | 1,594 | $ | 1,613 | $ | 1,474 | $ | 1,657 | $ | 3,068 | $ | 3,270 | ||||||||||||
Fiscal Year | Amount | Amount | ||||||
| April 2023 through December 2023 | $ | 4,165 | ||||||
July 2023 through December 2023 | $ | 2,826 | ||||||
| 2024 | 3,222 | 3,342 | ||||||
| 2025 | 2,487 | 2,609 | ||||||
| 2026 | 171 | 212 | ||||||
2027 | 75 | |||||||
Thereafter | 358 | |||||||
Total lease payments | 9,422 | |||||||
Less imputed interest | 723 | |||||||
Total Lease Liabilities | $ | 8,699 | ||||||
Fiscal Year | Amount | |||
| 2027 | 75 | |||
| Thereafter | 358 | |||
| Total lease payments | 10,478 | |||
| Less imputed interest | (810 | ) | ||
Total Lease Liabilities | $ | 9,668 | ||
Payment Due for Year Ending December 31, | ||||||||||||||||||||||||||||
Total | 2023 (April through December) | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
| Aircraft Notes Principal | $ | 55,600 | $ | 7,000 | $ | 7,000 | $ | 41,600 | $ | — | $ | — | $ | — | ||||||||||||||
| Aircraft Notes Interest | $ | 5,066 | $ | 1,598 | $ | 1,874 | $ | 1,594 | $ | — | $ | — | $ | — | ||||||||||||||
| Operating Lease Obligations | $ | 10,478 | $ | 4,165 | $ | 3,222 | $ | 2,487 | $ | 171 | $ | 75 | $ | 358 | ||||||||||||||
Total | $ | 71,144 | $ | 12,763 | $ | 12,096 | $ | 45,681 | $ | 171 | $ | 75 | $ | 358 | ||||||||||||||
Payment Due for Year Ending December 31, | ||||||||||||||||||||||||||||
Total | 2023 (July through December) | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
Aircraft Notes Principal | $ | 48,600 | $ | — | $ | 7,000 | $ | 41,600 | $ | — | $ | — | $ | — | ||||||||||||||
Aircraft Notes Interest | 4,440 | 972 | 1,874 | 1,594 | — | — | — | |||||||||||||||||||||
Operating Lease Obligations | 9,422 | 2,826 | 3,342 | 2,609 | 212 | 75 | 358 | |||||||||||||||||||||
Total | $ | 62,462 | $ | 3,798 | $ | 12,216 | $ | 45,803 | $ | 212 | $ | 75 | $ | 358 | ||||||||||||||
Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||
| Net income | $ | 882 | $ | 9,263 | ||||
| Preferred stock dividends | 252 | 198 | ||||||
| Net income applicable to common stockholders | 630 | 9,065 | ||||||
| Weighted average common shares outstanding | ||||||||
| Shares used in calculating basic earnings per share | 44,980 | 47,638 | ||||||
| Stock option | — | 397 | ||||||
| Series C Preferred | 16,500 | 16,500 | ||||||
| Shares used in calculating diluted earnings per share | 61,480 | 64,535 | ||||||
| Earnings allocated to common stockholders per common share | ||||||||
| Basic | $ | 0.01 | $ | 0.19 | ||||
| Diluted | $ | 0.01 | $ | 0.14 | ||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Net (loss) income | $ | (9,169 | ) | $ | 15,081 | $ | (8,287 | ) | $ | 24,344 | ||||||
Preferred stock dividends | 305 | 198 | 557 | 396 | ||||||||||||
Net (loss) income applicable to common stockholders | $ | (9,474 | ) | $ | 14,883 | $ | (8,844 | ) | $ | 23,948 | ||||||
Weighted average common shares outstanding | ||||||||||||||||
Shares used in calculating basic earnings per share | 44,277 | 46,519 | 44,626 | 47,075 | ||||||||||||
Stock option | — | — | — | 198 | ||||||||||||
Series C Preferred | — | 16,500 | — | 16,500 | ||||||||||||
Shares used in calculating diluted earnings per share | 44,277 | 63,019 | 44,626 | 63,773 | ||||||||||||
(Loss) e arnings allocated to common stockholders per common share | ||||||||||||||||
Basic | $ | (0.21 | ) | $ | 0.32 | $ | (0.20 | ) | $ | 0.51 | ||||||
Diluted | $ | (0.21 | ) | $ | 0.24 | $ | (0.20 | ) | $ | 0.38 | ||||||
March 31, 2023 | December 31, 2022 | |||||||
| Cash and cash equivalents | $ | 22,509 | $ | 33,333 | ||||
| Restricted cash | 671 | 849 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 23,180 | $ | 34,182 | ||||
June 30, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | $ | 15,831 | $ | 33,333 | ||||
Restricted cash | 812 | 849 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 16,643 | $ | 34,182 | ||||
March 31, 2023 | December 31, 2022 | |||||||
Gross Carrying Amount | Gross Carrying Amount | |||||||
| Trade names and air carrier certificate | 5,300 | 5,300 | ||||||
Total | $ | 5,300 | $ | 5,300 | ||||
June 30, 2023 | December 31, 2022 | |||||||
Gross Carrying Amount | Gross Carrying Amount | |||||||
Trade names and air carrier certificate | $ | 5,300 | $ | 5,300 | ||||
Total | $ | 5,300 | $ | 5,300 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related condensed notes included in this Quarterly Report, and with the audited consolidated financial statements, accompanying notes, and the other financial information included within our Annual Report on Form 10-K for the year ended December 31, 2022 (our “2022 Annual Report”). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and elsewhere within this Quarterly Report, particularly in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
Harbor Diversified, Inc. (“Harbor”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), which is a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a non-operating entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, disclosures relating to activities of Air Wisconsin also apply to Harbor unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the “Company,” “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as “Harbor.”
United Capacity Purchase Agreement
During the three months ended March 31,June 30, 2023, Air Wisconsin primarily provided regional airline services to United Airlines, Inc. (“United”) pursuant to a capacity purchase agreement (the “United capacity purchase agreement”) which was entered into in February 2017.2017 and which terminated in early June 2023. Under thethat agreement Air Wisconsin has operated as United Express, with a presence at both Chicago O’Hare and, until April 2023, Washington-Dulles international airports, two of United’s key domestic hubs.airports. Air Wisconsin usesused United’s logos, service marks, and aircraft paint schemes, United controlscontrolled route selection, pricing, seat inventories, marketing and scheduling, and United providesprovided Air Wisconsin with ground support services and gate access. Prior to the commencement of services on March 1, 2023 under the American capacity purchase agreement described below, more than 99.9% of our operating revenues was derived from operations associated with the United capacity purchase agreement. For additional information, refer to Note 1, Summary of Significant Accounting Policies – Contract Revenues, and Note 3, Capacity Purchase Agreements with United and American. within this Quarterly Report.
Dispute with United
A dispute exists underAlthough the United capacity purchase agreement with respecthas terminated, a dispute continues to certain recurring amounts owed toexist under the agreement. Air Wisconsin by United.has claimed that United owes it certain amounts under the agreement. As of June 30, 2023, the aggregate amount in dispute recorded in the condensed consolidated financial statements was approximately $52.0 million. United has denied that it owes this amount and has claimed that Air Wisconsin improperly terminated the agreement and that Air Wisconsin owes it certain amounts for the alleged wrongful termination. In October 2022, United initiated arbitration under the United capacity purchase agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin.agreement. An arbitration hearing commenced in July 2023 before three arbitrators. Air Wisconsin expects that, unless the parties reach a settlement before then, the arbitration hearing will occur in July 2023 and that the arbitrators will issue their decision and award in Augustthe fourth quarter of 2023. In October 2022, United also delivered an initial wind-down schedule that provided for the withdrawal of aircraft from coverage under the United capacity purchase agreement beginning in March 2023 and continuing through November 2023. In December 2022 and February 2023, Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the agreement and asserted a claim for damages for wrongful termination. In accordance with the termination provisions, and in response to Air Wisconsin’s first termination notice, United delivered a revised wind-down schedule in January 2023. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until early June 2023, at which time all of Air Wisconsin’s remaining aircraft would be withdrawn from the agreement, and Air Wisconsin would cease flying for United.
Since the arbitration process is still on-going, the hearingdecision has not yet occurred and no award has been issued, Air Wisconsin cannot reasonably estimate the likely outcome of the arbitration including any potential award of the disputed amounts. Air Wisconsin, however, maintains that it has a strong position, that it was entitled to terminate the agreement and that it is entitled to the disputed amounts, including the amounts recorded in the condensed consolidated financial statements, under the terms of the agreement.
For additional information, refer to the section entitled “Risk Factors” within this Quarterly Report.
19
American Capacity Purchase Agreement
In August 2022, Air Wisconsin entered into a new five-year capacity purchase agreement (the “American capacity purchase agreement”) with American Airlines, Inc. (“American”), which was subsequently amended in February 2023 and March 2023, pursuant to which Air Wisconsin has agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will becomebecame Air Wisconsin’s sole airline partner oncewhen all Air Wisconsin’s aircraft arewere removed from United’s flying operations.operations in early June 2023. As of June 30, 2023, Air Wisconsin had 32 aircraft in service for American.
21
Under the American capacity purchase agreement, Air Wisconsin is entitled to receive from American a fixed daily amount for each aircraft covered under the agreement (subject to Air Wisconsin’s ability to meet certain block hour utilization thresholds), a fixed payment for each departure, and a fixed payment for each block hour flown, in each case subject to annual increases during the term of the agreement. Beginning in September 2023, Air Wisconsin will also be eligible to receive incentivebonus compensation, and will be required to pay rebates, upon the achievement of, or failure to achieve, certain pre-established performance criteria. Air Wisconsin is responsible for certain customary costs relating to the flight operation and maintenance of the covered aircraft along with other customary controllable expenses, including expenses associated with flight crews, line maintenance and overhead. American will reimburse Air Wisconsin for certain customary costs and expenses incurred in connection with Air Wisconsin’s flight operations, including fuel, ground handling, landing and air traffic control, changes to livery and branding, aircraft and passenger liability insurance, property taxes and systems support. American has the right to schedule all aircraft covered by the agreement, including determining route selection and frequency, and the timing of scheduled arrivals and departures, in each case subject to certain scheduling parameters. American also has the right to determine and publish fares and to establish seat inventories, overbooking levels, and allocation of seats among fare categories. Furthermore, American will provide all ground handling services, including gate and ticket counter activities,services, baggage handling, cargo handling, aircraft loading/unloading services, passenger ticketing, and aircraft cabin cleaning. American has the right to all revenues resulting from the sale of passenger tickets associated with the covered aircraft and all other sources of revenue associated with the operation of the covered aircraft, including revenues relating to baggage charges, food and beverage sales and ticket change fees. Similar to the United capacity purchase agreement, theThe American capacity purchase agreement protects Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers.
The American capacity purchase agreement provides that the parties may discuss the possibility of adding CRJ-700 regional jets to Air Wisconsin’s fleet for the purpose of providing regional airline services under the agreement, but neither party is currently under any obligation with respect to these additional aircraft. Should Air Wisconsin in the future include aircraft other than the CRJ-200 as part of its flying operations, such an event would likely lead Air Wisconsin to conduct qualitative tests for impairment of the CRJ-200 fleet and related assets.
For additional information, refer to the section entitled “Business – American Capacity Purchase Agreement” within our 2022 Annual Report.
Labor Shortages
Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result offlight demand has increased during the reduced flying caused byrecovery from the COVID-19 pandemic, the shortage was temporarily abated. However, as flight demand has increased, labor shortages within the airline industry have become acute, particularly for regional airlines such as Air Wisconsin. The shortage is particularly critical at the captain level, since it can take as long as two years to replace a captain, taking into account training time and experience required at the first officer level before a pilot can be elevated to the rank of captain.
Pilot shortages within the airline industry are the result of a number of factors, including personnel seeking opportunities with larger airlines where compensation may be substantially higher, the number of pilots at major airlines reaching retirement age, upward pressure on wages and bonuses at other regional carriers and within other industries, and the proliferation of cargo and low-cost carriers that have increased demand for pilots. In the past several months, these and other factors have caused our pilot attrition rates to be higher than our ability to hire and retain replacement pilots, resulting in our inability to consistently achieve block hours in line with pre-pandemic levels. To address the diminished supply of qualified pilot candidates, regional airlines, including Air Wisconsin, have implemented significant pilot wage and bonus increases, which has substantially increased our labor costs and may continue to negatively impact our results of operations and financial condition. Air Wisconsin is continuing to negotiate with its bargaining groups for further wage increases and quality of life improvements. If we are unable to maintain a sufficient number of qualified pilots to operate our scheduled flights, it could lead to reduced flight schedules and possibly reduced fixed payments for aircraft, either of which could further impact our financial condition.
In addition to pilots, Air Wisconsin’s operations rely on the availability of other qualified personnel, including maintenance technicians.mechanics. As a result of global supply chain constraints and inflationary pressures, as well as increased flying levels, Air Wisconsin has experienced increased costs of certain maintenance activities and delays in obtaining third-party maintenance services, which has been compounded by difficulty recruiting and retaining qualified mechanics. Mechanic shortages within the industry have resulted from several factors, including larger airlines offering higher salaries and more extensive benefit programs, greater demand for mechanics across the airline industry, and upward pressure on wages in other industries. We anticipate these drivers will continue to place upward pressure on our operating costs.
20
Employee Retention Credit
Air Wisconsin recorded an employee retention credit in 2021 in the aggregate amount of approximately $1.1 million pursuant to the CARES Act for payroll expenses incurred during the second, third, and fourth quarters of 2020. A credit of $0.2 million for one of the three eligible quarters was received in 2022 and the remaining credits were received in January 2023.
Economic Conditions, Challenges and Risks Impacting Financial Results
For a discussion of the general and specific factors and trends affecting our business and results of operations, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our 2022 Annual Report.
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Results of Operations
Comparison of the Three Months Ended March 31,June 30, 2023 and March 31,June 30, 2022
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
| Three Months Ended June 30, | ||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||
Operating Data: | ||||||||||||||||||||||||||||||||
Available Seat Miles (“ASMs”) (in thousands) | 250,954 | 321,822 | (70,868 | ) | (22.0 | %) | 230,382 | 337,314 | (106,932 | ) | (31.7%) | |||||||||||||||||||||
Actual Block Hours | 23,077 | 28,534 | (5,457 | ) | (19.1 | %) | 22,070 | 28,260 | (6,190 | ) | (21.9%) | |||||||||||||||||||||
Actual Departures | 15,252 | 18,508 | (3,256 | ) | (17.6 | %) | 15,643 | 18,586 | (2,943 | ) | (15.8%) | |||||||||||||||||||||
Revenue Passenger Miles (“RPMs”) (in thousands) | 205,377 | 247,653 | (42,276 | ) | (17.1 | %) | ||||||||||||||||||||||||||
Revenue Passenger Miles (in thousands) | 195,326 | 290,666 | (95,340 | ) | (32.8%) | |||||||||||||||||||||||||||
Average Stage Length (in miles) | 339 | 357 | (18 | ) | (5.0 | %) | 298 | 369 | (71 | ) | (19.2%) | |||||||||||||||||||||
Contract Revenue Per Available Seat Mile (in cents) | 23.53 | ¢ | 20.81 | ¢ | 2.72 | ¢ | 13.1 | % | 22.12 | ¢ | 23.10 | ¢ | (0.98 | )¢ | (4.2%) | |||||||||||||||||
Passengers | 600,900 | 691,324 | (90,424 | ) | (13.1 | %) | 643,845 | 781,490 | (137,645 | ) | (17.6%) | |||||||||||||||||||||
The decrease in ASMs, block hours, departures, and passengers during the three months ended March 31,June 30, 2023, compared to the three months ended March 31,June 30, 2022, was primarily due to the industry-wide pilot shortage, the commencementwind-down schedule with United, and the removal of certain aircraft from service in order to paint them in the American livery and otherwise prepare them for service under the American capacity purchase agreement, which resulted in a significantly lower number of flights relative to the prior year period.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Operating Revenues (in thousands): | ||||||||||||||||
Contract Revenues | $ | 50,970 | $ | 77,923 | $ | (26,953 | ) | (34.6%) | ||||||||
Contract Services and Other | 102 | 7 | 95 | 1,357.1% | ||||||||||||
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Total Operating Revenues | $ | 51,072 | $ | 77,930 | $ | (26,858 | ) | (34.5%) | ||||||||
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Total operating revenues decreased $26.9 million, or 34.5%, during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to a decrease in block hours and departures as a result of the pilot shortage, the wind down schedule with United, and the preparation of aircraft for American flying operations. The operating revenue decrease includes an overall decrease in revenue of $53.9 million under the United capacity purchase agreement, offset by $26.9 million of revenue recorded pursuant to the American capacity purchase agreement which started in March 2023.
Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Operating Expenses (in thousands): | ||||||||||||||||
Payroll and Related Costs | $ | 29,953 | $ | 27,694 | $ | 2,259 | 8.2% | |||||||||
Aircraft Fuel and Oil | 221 | 34 | 187 | 550.0% | ||||||||||||
Aircraft Maintenance, Materials and Repairs | 17,869 | 16,336 | 1,533 | 9.4% | ||||||||||||
Other Rents | 1,474 | 1,657 | (183 | ) | (11.0%) | |||||||||||
Depreciation, Amortization and Obsolescence | 6,370 | 6,674 | (304 | ) | (4.6%) | |||||||||||
Purchased Services, Legal and Other | 7,532 | 3,514 | 4,018 | 114.3% | ||||||||||||
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Total Operating Expenses | $ | 63,419 | $ | 55,909 | $ | 7,510 | 13.4% | |||||||||
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Our consolidated operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related costs increased $2.3 million, or 8.2%, to $30.0 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase was primarily driven by increases in union employee bonuses of $1.7 million, most of which is related to increased pilot bonuses; increased pilot wages of $0.8 million; maintenance employee wages and bonuses of $0.5 million; management employee wages of $0.3 million; payroll taxes of $0.2 million; and other employee expenses of $0.1 million. The increase was partially offset by a decrease of $1.2 million in employee benefits and $0.2 million in wages for flight attendants.
Aircraft Fuel and Oil. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement and the American capacity purchase agreement during the three months ended June 30, 2023 and June 30, 2022 were directly paid to suppliers by United or American, as applicable. Aircraft fuel and oil expense primarily reflects the costs associated with fuel purchased for maintenance flights. These expenses were immaterial for the three months ended June 30, 2023 and June 30, 2022.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased $1.5 million, or 9.4%, to $17.9 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily as a result of an increase in airframe repairs and parts scrapped of $1.9 million and $0.2 million, respectively. The increase was largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. Other increases included $0.1 million in engine overhaul amortization and $0.1 million in shop supplies, tool purchases and repairs, and a decrease in parts rebates. The increase was partially offset by a decrease of $0.4 million in engine repair costs and $0.4 million of materials used.
Other Rents. Other rents expense decreased $0.2, or 11.0%, to $1.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to a short-term rent abatement for a flight simulator during construction at the facility.
Depreciation, Amortization and Obsolescence. Depreciation, amortization and obsolescence expense decreased $0.3 million, or 4.6%, to $6.4 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily related to a $0.3 million decrease in obsolescence reserves.
Purchased Services, Legal and Other. Purchased services, legal and other expense increased $4.0 million, or 114.3%, to $7.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was primarily due to an increase of $4.1 million in legal fees related to the United dispute, $0.1 million for Canadian landing fees, and $0.1 million associated with a loss on disposal of assets. This increase was partially offset by a decrease of $0.1 million for general and liability insurance and $0.2 million for an overall decrease in other services and supplies.
Other Income (Expense)
Interest Income. Interest and dividend income remained relatively unchanged for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Interest and dividend income related to marketable securities and money market funds increased by $0.2 million and was offset by a decrease in United note receivable interest income of $0.2 million.
Interest Expense. Interest expense was immaterial and relatively unchanged for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
Loss on Marketable Securities.Loss on marketable securities decreased $2.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to an increase in the market value of marketable securities. There were $0.7 million in unrealized losses and $0.1 million in realized losses recorded for the three months ended June 30, 2023 compared to an unrealized loss of $3.6 million for the three months ended June 30, 2022.
Gain on Extinguishment of Debt. There was a gain on extinguishment of debt recorded in the amount of $0.1 million for the three months ended June 30, 2023 and no gain recorded in the three months ended June 30, 2022. This is related to a prepayment of $3.5 million of debt that was due December 31, 2023. The gain is due to the decrease in previously expected future interest that was capitalized.
Other, Net. Other income and expense was immaterial and relatively unchanged for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.
Net (Loss) Income
Net loss for the three months ended June 30, 2023 was $9.2 million, or $0.21 per basic share and $0.21 per diluted share, compared to net income of $15.1 million, or $0.32 per basic share and $0.24 per diluted share, for the three months ended June 30, 2022. For additional information, refer to Note 10, Earnings Per Share and Equity.
The decrease in net income for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily resulted from a decrease in operating revenue, and an increase in overall operating expenses consisting primarily of payroll, maintenance, and legal expenses. The decrease in net income was partially offset by non-operating income primarily resulting from a decrease in unrealized losses on marketable securities.
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Income Tax (Benefit) Expense
In the three months ended June 30, 2023, our effective tax rate was 21.3%, compared to 23.8% for the three months ended June 30, 2022. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our deferred tax assets.
We recorded an income tax benefit of $2.5 million and income tax expense of $4.7 million for the three months ended June 30, 2023 and June 30, 2022, respectively.
The income tax benefit for the three months ended June 30, 2023 resulted in an effective tax rate of 21.3%, which differed from the U.S. federal statutory rate of 21%, primarily due to the increase of valuation allowances on federal and state deferred tax assets that are capital in nature, the impact of state income taxes, and permanent differences between financial statement and taxable income.
The income tax expense for the three months ended June 30, 2022 resulted in an effective tax rate of 23.8%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income.
For additional information, refer to Note 5, Income Taxes, in our audited consolidated financial statements included within our 2022 Annual Report.
Comparison of the Six Months Ended June 30, 2023 and June 30, 2022
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Operating Data: | ||||||||||||||||
Available Seat Miles (in thousands) | 481,336 | 659,136 | (177,800 | ) | (27.0%) | |||||||||||
Actual Block Hours | 45,147 | 56,794 | (11,647 | ) | (20.5%) | |||||||||||
Actual Departures | 31,206 | 37,094 | (5,888 | ) | (15.9%) | |||||||||||
Revenue Passenger Miles (in thousands) | 400,686 | 538,319 | (137,633 | ) | (25.6%) | |||||||||||
Average Stage Length (in miles) | 319 | 363 | (44 | ) | (12.1%) | |||||||||||
Contract Revenue Per Available Seat Mile (in cents) | 22.85 | ¢ | 21.98 | ¢ | 0.87 | ¢ | 4.0% | |||||||||
Passengers | 1,244,656 | 1,472,814 | (228,158 | ) | (15.5%) | |||||||||||
The decrease in ASMs, block hours, departures, and passengers during the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily due to the industry-wide pilot shortage, the wind-down schedule with United, and the removal of certain aircraft from service in order to paint them in the American livery and otherwise prepare them for service under the American capacity purchase agreement, which resulted in a significantly lower number of flights relative to the prior year period. The increase in contract revenue per available seat mile during the threesix months ended March 31,June 30, 2023, compared to the threesix months ended March 31,June 30, 2022, was primarily due to an increaseincreased revenue rates in deferred revenue recognized during the current period.American capacity purchase agreement.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Operating Revenues ($ in thousands): | ||||||||||||||||
Contract Revenues | $ | 59,037 | $ | 66,968 | ($ | 7,931 | ) | (11.8% | ) | |||||||
Contract Services and Other | 95 | 7 | 88 | 1,257.1% | ||||||||||||
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Total Operating Revenues | $ | 59,132 | $ | 66,975 | ($ | 7,843 | ) | (11.7% | ) | |||||||
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| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Operating Revenues (in thousands): | ||||||||||||||||
Contract Revenues | $ | 110,007 | $ | 144,891 | $ | (34,884 | ) | (24.1%) | ||||||||
Contract Services and Other | 197 | 14 | 183 | 1,307.1% | ||||||||||||
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Total Operating Revenues | $ | 110,204 | $ | 144,905 | $ | (34,701 | ) | (23.9%) | ||||||||
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Total operating revenues decreased $7.8$34.7 million, or 11.7%23.9%, during the threesix months ended March 31,June 30, 2023, compared to the threesix months ended March 31,June 30, 2022, primarily due to a decrease in block hours and departures as a result of the pilot shortage and the commencement of the wind down schedule with United. The operating revenue decrease includes an overall decrease in revenue of $16.7 million that was partially offset by an increase in the recognition of previously deferred revenue of $6.0$64.6 million under the United capacity purchase agreement, $2.6offset by an increase of $29.7 million of revenue recorded pursuant to the American capacity purchase agreement startingwhich started in March 2023, and $0.1 million recorded for other contract revenues related to startup and pass through items.2023.
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Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
| Three Months Ended March 31, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
Operating Expenses ($ in thousands): | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||||||||||||||
Operating Expenses (in thousands): | ||||||||||||||||||||||||||||||||
Payroll and Related Costs | $ | 29,768 | $ | 26,601 | $ | 3,167 | 11.9% | $ | 59,721 | $ | 54,295 | $ | 5,426 | 10.0% | ||||||||||||||||||
Aircraft Fuel and Oil | 102 | 51 | 51 | 100.0% | 323 | 85 | 238 | 280.0% | ||||||||||||||||||||||||
Aircraft Maintenance, Materials and Repairs | 19,349 | 14,501 | 4,848 | 33.4% | 37,218 | 30,837 | 6,381 | 20.7% | ||||||||||||||||||||||||
Other Rents | 1,594 | 1,613 | (19 | ) | (1.2% | ) | 3,068 | 3,270 | (202 | ) | (6.2%) | |||||||||||||||||||||
Depreciation, Amortization and Obsolescence | 6,357 | 6,644 | (287 | ) | (4.3% | ) | 12,727 | 13,318 | (591 | ) | (4.4%) | |||||||||||||||||||||
Purchased Services and Other | 4,442 | 3,765 | 677 | 18.0% | ||||||||||||||||||||||||||||
Purchased Services, Legal and Other | 11,974 | 7,279 | 4,695 | 64.5% | ||||||||||||||||||||||||||||
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Total Operating Expenses | $ | 61,612 | $ | 53,175 | $ | 8,437 | 15.9% | $ | 125,031 | $ | 109,084 | $ | 15,947 | 14.6% | ||||||||||||||||||
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Our consolidated operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related costs increased $3.2$5.4 million, or 11.9%10.0%, to $29.8$59.7 million for the threesix months ended March 31,June 30, 2023, compared to the threesix months ended March 31,June 30, 2022. The increase was primarily driven by increases in union employee bonuses of $4.2 million, most of which is related to increased pilot bonuses and hourly pay of $3.4 million, payroll taxes of $0.3 million, management employeebonuses; increased pilot wages of $0.2 million, and$1.7 million; maintenance employee wages of $0.2$0.7 million; management wages of $0.5 million; and payroll taxes of $0.5 million. The increase was partially offset by a decrease of $0.5 milliondecreases in employee benefits $0.2of $1.7 million, inflight attendant wages for flight attendants,of $0.3 million, and $0.2 million in other employee expenses.expenses of $0.3 million.
Aircraft Fuel and Oil. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement and the American capacity purchase agreement during the threesix months ended March 31,June 30, 2023 and March 31,June 30, 2022 were directly paid to suppliers by United or American, as applicable. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases.fuel purchased for maintenance flights. These expenses were immaterial for the threesix months ended March 31,June 30, 2023 and March 31,June 30, 2022.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased $4.8$6.4 million, or 33.4%20.7%, to $19.3$37.2 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022, primarily as a result of an increase in airframe repairs and materials purchases of $3.4$5.3 million and $1.7$1.3 million, respectively. The increase was largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. Other increases to maintenance expense included a $0.3 million increase in scrapped aircraft parts and $0.2 million for engine overhaul amortization. The increase was partially offset by a decrease of $0.4$0.7 million in engine repair costs.
Other Rents. Other rents expense remained relatively unchangeddecreased $0.2 million, or 6.2%, to $3.1 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31, 2022.June 30, 2022, primarily due to a short-term rent abatement for a flight simulator during construction at the facility.
Depreciation, Amortization and Obsolescence. Depreciation, amortization and obsolescence expense decreased $0.3$0.6 million, or 4.3%4.4%, to $6.4$12.7 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022, primarily related to a $0.3$0.6 million decrease in obsolescence reserves. All other depreciation accounts were relatively unchanged and are immaterial.
Purchased Services, Legal and Other. Purchased services, legal and other expense increased $0.7$4.7 million, or 18.0%64.5%, to $4.4$12.0 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022. The increase was primarily due to an increase of $0.6$4.7 million in legal fees $0.1related to the United dispute, a $0.2 million for miscellaneous IT supplies, and $0.1 million associated with aincrease in the loss on disposal of assets.assets, and a $0.2 million overall increase in miscellaneous supplies and other expenses. This increase was partially offset by a decrease of $0.2 million for general and liability insurance, $0.1 million for technology fees and maintenance, and $0.1 million for professional and technical fees.
Other Income (Expense)
Interest Income. Interest and dividend income increased $0.6 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022. The increase was primarily due to an increase of $0.9$1.3 million in interest and dividends earned on marketable securities and money market funds, partially offset by a decrease of $0.3$0.7 million in interest earned on the notes receivable due from United.
2226
Interest Expense. Interest expense was immaterial and relatively unchanged for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022.
Gain (Loss) on Marketable Securities. Gains on marketable securities increased $4.2$7.0 million for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022, due to an increase in the market value of marketable securities. There were $1.8$1.0 million in unrealized gains offset by $0.1 million of realized losses recorded for the threesix months ended March 31,June 30, 2023 compared to an unrealized loss of $2.4$6.0 million for the threesix months ended MarchJune 30, 2022.
Gain on Extinguishment of Debt. There was a gain on extinguishment of debt recorded in the amount of $0.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This is related to a prepayment of $3.5 million of debt that was due December 31, 2022.2023. The gain is due to the decrease in previously expected future interest that was capitalized.
Other, Net. Other income and expense was immaterial and relatively unchanged for the threesix months ended March 31,June 30, 2023 compared to the threesix months ended March 31,June 30, 2022.
Net (Loss) Income
Net incomeloss for the threesix months ended March 31,June 30, 2023 was $0.9$8.3 million, or $0.01$0.20 per basic share and $0.01$0.20 per diluted share, compared to net income of $9.3$24.3 million, or $0.19$0.51 per basic share and $0.14$0.38 per diluted share, for the threesix months ended March 31,June 30, 2022. For additional information, refer to Note 10, Earnings Per Share and Equity.
The decrease in net income for the threesix months ended March 31,June 30, 2023, compared to the threesix months ended March 31,June 30, 2022, primarily resulted from a decrease in operating revenue, and an increase in overall operating expenses consisting primarily of payroll, maintenance and payrolllegal expenses. The decrease in net income was partially offset by non-operating income primarily resulting from unrealized gains on marketable securities.
Income TaxesTax (Benefit) Expense
In the threesix months ended March 31,June 30, 2023, our effective tax rate was (44.19)%25.0%, compared to 23.8% in the threesix months ended March 31,June 30, 2022. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and state tax rate applicable to such income, as well as any valuation allowance required on our deferred tax assets.
We recorded an income tax benefit of $2.8 million and income tax expense of $7.6 million for the six months ended June 30, 2023 and June 30, 2022, respectively.
The income tax benefit for the six months ended June 30, 2023 resulted in an effective tax rate of 25.0%, which differed from the U.S. federal statutory rate of 21%, primarily due to the reversal of valuation allowance on federal and state deferred tax assets that are capital in nature, impact of state income taxes, and permanent differences between financial statement and taxable income.
The income tax expense for the threesix months ended March 31,June 30, 2022 resulted in an effective tax rate of 23.8%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income.
We recorded an income tax benefit of $0.3 million and income tax provision of $2.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
The income tax provision for the three months ended March 31, 2023 resulted in an effective tax rate of (44.19)%, which differed from the U.S. federal statutory rate of 21% primarily due to the reversal of the valuation allowance on federal and state deferred tax assets that are capital in nature due to the unrealized gains on marketable securities during the quarter, the impact of state taxes and permanent differences between financial statement and taxable income.
For additional information, refer to Note 5, Income Taxes, in our audited consolidated financial statements included within our 2022 Annual Report.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities, and Air Wisconsin’s cash flows from operations. As of March 31,June 30, 2023, our cash and cash equivalents balance was $22.5$15.8 million, and we held $156.3$141.5 million of marketable securities. For the threesix months ended March 31,June 30, 2023, cash used in operations was $6.7$16.7 million. In the near term, we expect to fund our liquidity requirements through cash generated from operations, as well as our existing cash, cash equivalents, and marketable securities balances.
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Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor and maintenance costs, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment for Air Wisconsin. During the threesix months ended March 31,June 30, 2023, we had $1.8$2.5 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
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Air Wisconsin’s ability to service its long-term debt obligations and business development efforts depends, in part, on its ability to generate cash from operating activities as well as other factors, some of which may be beyond our control. If Air Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, restructure its current debt financing or liquidate its marketable securities, to achieve its longer-term objectives. As of March 31,June 30, 2023, Air Wisconsin had $9.1$5.4 million of short-term debt and $51.6$47.6 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to Note 6, Debt, in our audited consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities” within our 2022 Annual Report.
The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lenderthe holder of the Aircraft Notes contain restrictions that limit Air Wisconsin’s ability to pay or prohibit it from paying, dividends or distributions to Harbor.
We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
Restricted Cash
As of March 31,June 30, 2023, in addition to cash and cash equivalents of $22.5$15.8 million, the Company had $0.7$0.8 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensationAir Wisconsin’s obligations under certain lease agreements, airport agreements and insurance program, landing fees at certain airports and facility leases,policies, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of the periods presented ($ in(in thousands):
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Net cash used in operating activities | ($ | 6,661 | ) | ($ | 1,788 | ) | ($ | 4,873 | ) | 272.5 | % | |||||
Net cash used in investing activities | (2,553 | ) | (1,438 | ) | (1,115 | ) | 77.5 | % | ||||||||
Net cash used in financing activities | (1,788 | ) | (9,244 | ) | 7,456 | (80.7 | %) | |||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||
Net Cash (Used) in/ Provided by Operating Activities | $ | (16,674 | ) | $ | 3,560 | $ | (20,234 | ) | (568.4%) | |||||||
Net Cash Provided by/ (Used) in Investing Activities | 10,876 | (4,683 | ) | 15,559 | 332.2% | |||||||||||
Net Cash Used in Financing Activities | (11,741 | ) | (12,489 | ) | 748 | 6.0% | ||||||||||
Cash Flows Used in(Used) in/Provided by Operating Activities
During the threesix months ended March 31,June 30, 2023, our cash flows used in operating activities were $6.7$16.7 million. We had a net incomeloss of $0.9$8.3 million. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of $6.1$12.8 million, accrued payrollcontract liabilities of $2.1 million, and employee benefits of $1.2 million, accounts payable of $0.8 million, and contract liabilities of $0.5$0.9 million, partially offset by decreases in cash primarily related to deferred revenue of $10.7$16.6 million, gains on marketable securitiesaccounts receivable of $1.7$4.7 million, notes receivable of $1.6 million, accounts receivableand gains on marketable securities of $0.8 million, prepaid expenses and other of $0.7 million, spare parts and supplies of $0.4 million, and other long-term liabilities of $0.3$0.9 million.
During the threesix months ended March 31,June 30, 2022, our cash flows used inprovided by operating activities were $1.8$3.6 million. We had net income of $9.3$24.3 million. Cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of $6.2$12.2 million, prepaid and other expenses of $4.5$4.6 million, deferred revenueincome taxes payable of $4.3$3.5 million, and loss on marketable securities of $2.4$6.0 million, partially offset by decreases in cash primarily related to long-term deferred revenues of $9.0 million, notes receivable of $7.6 million, accounts receivable of $8.3$16.7 million, accounts payabledeferred revenue of $4.3 million, notes receivable of $3.5$8.3 million, accrued payroll and benefits of $2.4$1.7 million, accounts payable of $1.5 million and contract liabilities of $1.4$2.1 million.
Cash Flows UsedProvided by/(Used) in Investing Activities
During the threesix months ended March 31,June 30, 2023, our cash flows used inprovided by investing activities were $2.6$10.9 million of which $1.8$15.0 million was from the sale of marketable securities, offset by $2.5 million for additions to property and equipment and $0.8$1.7 million for investments infrom the purchase of marketable securities.
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During the threesix months ended March 31,June 30, 2022, our cash flows used in investing activities were $1.4$4.7 million resulting primarily from $3.7 million in additions to property and equipment.equipment and $1.0 million from the purchase of marketable securities.
Cash Flows Used in Financing Activities
During the threesix months ended March 31,June 30, 2023, our cash flows used in financing activities were $1.8$11.7 million, reflecting $1.0$8.1 million for repayments of long-term debt, $3.1 million to repurchase shares of our common stock, $0.6 million in repayments of long-term debt and $0.2$0.5 million of dividends paid on preferred stock.
During the threesix months ended March 31,June 30, 2022, our cash flows used in financing activities were $9.2$12.5 million, reflecting 7.5$1.2 million to repurchase sharesin repayments of our commonlong-term debt, $0.4 million of dividends paid on preferred stock, $1.0 million for the cancellation of a stock option, $0.6and $9.9 million in repaymentsto repurchase shares of long-term debt and $0.2 million of dividends paid on preferredour common stock.
Commitments and Contractual Obligations
As of March 31,June 30, 2023, Air Wisconsin had $71.1$62.5 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of $55.6$48.6 million in principal amount of the Aircraft Notes related to owned aircraft used in continuing operations and $5.0$4.4 million of projected interest on the Aircraft Notes. As of March 31,June 30, 2023, Air Wisconsin also had $10.5$9.4 million of operating lease obligations primarily related to certain training simulators and facilities.
The following table sets forth our cash obligations relating to long-term debt and contractual obligations for the periods presented ($in thousands):presented:
| Payment Due for Year Ended December 31, (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment Due for Year Ended December 31, (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | April through December 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | July through December 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
Aircraft Notes Principal | $ | 55,600 | $ | 7,000 | $ | 7,000 | $ | 41,600 | $ | — | $ | — | $ | — | $ | 48,600 | $ | — | $ | 7,000 | $ | 41,600 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||
Aircraft Notes Interest | $ | 5,066 | $ | 1,598 | $ | 1,874 | $ | 1,594 | $ | — | $ | — | $ | — | 4,440 | 972 | 1,874 | 1,594 | — | — | — | |||||||||||||||||||||||||||||||||||
Operating Lease Obligations | $ | 10,478 | $ | 4,165 | $ | 3,222 | $ | 2,487 | $ | 171 | $ | 75 | $ | 358 | 9,422 | 2,826 | 3,342 | 2,609 | 212 | 75 | 358 | |||||||||||||||||||||||||||||||||||
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Total | $ | 71,144 | $ | 12,763 | $ | 12,096 | $ | 45,681 | $ | 171 | $ | 75 | $ | 358 | $ | 62,462 | $ | 3,798 | $ | 12,216 | $ | 45,803 | $ | 212 | $ | 75 | $ | 358 | ||||||||||||||||||||||||||||
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The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million, and certain additional amounts may be duepayable based on excess cash flow.cash. The amounts set forth in the table do not reflect any such additional excess cash flow payments. The Aircraft Notes areIn June 2023, Air Wisconsin prepaid the semi-annual installment due December 31, 2023, resulting in a gain on extinguishment of debt of $0.1 million. As of June 30, 2023, all of the Company’s long-term debt was subject to fixed interest rates. For additional information, refer to Note 6, Debt, in our audited consolidated financial statements included within our 2022 Annual Report and Note 14, Subsequent Events, in this Quarterly Report.
Series C Convertible Redeemable Preferred Stock
In January 2020, Harbor completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of Harbor’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred”) with an aggregate value of $13.2 million, or $3.30 per share (the “Series C Issue Price”). Air Wisconsin had leased each of these CRJ-200 regional jets and GE engines from Southshore. In January 2020, Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.
The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the board of directors (the “Preferential Dividends”). From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the “Dividend Ratchet”). At the option of the board of directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the “PIK Dividends”).
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Each share of Series C Preferred was initially convertible at the election of the holders, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (as defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (the “Conversion Price”). The Conversion Price as of the date of this filing is $0.15091. The Conversion Price may be subject to further adjustment as described in the Certificate of Designations.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80 (the “Conversion Cap”), plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of March 31,June 30, 2023, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 26.9%27.3% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. Harbor may redeem all, but not less than all, of the Conversion Cap Excess Shares at any time upon notice to the holders for a cash payment in an amount equal to the Series C Liquidation Amount per share.
In the event of any liquidation, dissolution or winding up of Harbor or a sale of Harbor, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of Harbor to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the “Series C Liquidation Amount”).
On March 31,June 30, 2023, the board of directors declared a Preferential Dividend of $198 and a Conversion Cap Excess Dividend of $54$107 on the Series C Preferred, which were paid on March 31,June 30, 2023.
Based on the applicable accounting guidance, Harbor is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the condensed consolidated balance sheets included in this Quarterly Report.
Debt and Credit Facilities
For information regarding our debt and credit facilities, refer to Part II, Item 1A, “Risk Factors – Any acceleration of debt under our credit agreements could have a significant adverse effect on our business” in this Quarterly Report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities” within our 2022 Annual Report.
Maintenance Commitments
For information regarding our maintenance commitments, refer to the section entitled “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Maintenance Commitments”Commitments” within our 2022 Annual Report.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
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We have no off-balance sheet arrangements that would have or are reasonably likely to have a material current or future effect on our financial condition, results of operations or liquidity.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles. Critical accounting policies are those policies that are most important to the preparation of our condensed consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. To the extent there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies. Our critical accounting policies relate to revenue recognition, long-lived assets and income tax. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. For additional information, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” within our 2022 Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the information regarding market risk provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” within our 2022 Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer, principal financial officer and principal accounting officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of March 31,June 30, 2023, the last day of the period covered by this Quarterly Report. Based on this evaluation, our management, including our principal executive officer, principal financial officer and principal accounting officer, concluded that, as of March 31,June 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Limitations on Effectiveness of Controls
Our management, including our principal executive officer, principal financial officer and principal accounting officer, does not expect that our disclosure controls and procedures, or our system of internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act), will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
Changes in Internal Control overOver Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended March 31,June 30, 2023 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
As of March 31,June 30, 2023, we do not believe we are currently a party to any legal proceedings, regulatory matters, or other disputes or claims that are likely, individually or taken together, to have a material adverse effect on our business, financial condition, results of operations, liquidity or future prospects. However, regardless of the merits of the claims raised, the ultimate resolution of legal proceedings, regulatory matters, and other disputes and claims is inherently uncertain, and they may have an adverse impact on us as a result of an adverse outcome, defense and settlement costs, diversion of management’s time and resources, and other factors. For additional information, including with respect to the arbitration with United, refer to Note 8, Commitments and Contingencies.
Item 1A. Risk Factors
Our shortshort- and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in Harbor’s common stock involves substantial risk. Harbor’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Quarterly Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of Harbor’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to “Cautionary Note Regarding Forward-Looking Statements” within this Quarterly Report.
Risks Related to Our Business
Air Wisconsin may experience difficulty hiring, training and retaining a sufficient number of qualified pilots and mechanics, which may negatively affect Air Wisconsin’s operations and our financial condition.
Historically, the supply of qualified pilots to the airline industry has been limited, which has created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the Federal Aviation Administration (the “FAA”) issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations and correspondingly increasing Air Wisconsin’s labor costs.
As a result of the significant decline in passenger demand and drastically reduced flight departures during the early stage of the COVID-19 pandemic, there was no shortage of qualified pilots in the airline industry. During the first two years of the COVID-19 pandemic, for many reasons, such as reduced flying opportunities, early retirement benefits offered by some airlines, travel restrictions and COVID-19 vaccine mandates, many pilots decided to retire or seek employment in other industries. However, as passenger demand for air travel has increased, Air Wisconsin hasand other airlines have experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from voluntary retirement decisions. Air Wisconsin has also experienced challenges with pilot attrition to other airlines, including United. The pilot shortage is particularly critical at the captain level. Air Wisconsin has historically expended significant resources to recruit and train pilots, including as a result of recent significant upward pressure on pilot compensation at certain regional airlines and limited availability of flight simulators and instructors. Air Wisconsin has increased its pilot compensation and may continue to experience additional cost increases in the future. Since neither the United capacity purchase agreement nor the American capacity purchase agreement requiresdoes not require an increase in the amounts paid to Air Wisconsin as Air Wisconsin increases the amount of pilot compensation, these increases could have an adverse impact on our financial condition and operating results. In addition, now that Air Wisconsin is no longer flying for United, United could increase the number of Air Wisconsin pilots it hires, which could restrict the number of flights Air Wisconsin could fly for American.
Under the American capacity purchase agreement, American is required to pay Air Wisconsin a fixed amount each month for each covered aircraft. However, no monthly payment is required for aircraft that do not meet certain minimum block hour utilization thresholds. Accordingly, if Air Wisconsin is not able to hire and retain a sufficient number of pilots, it will not be paid for all aircraft otherwise covered by the American capacity purchase agreement, which could have an adverse impact on our business and operations.
Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during the COVID-19 pandemic, decisions to leave the airline industry, and the hiring needs of other airlines. There is also a risk that more mechanics may decide to leave the airline industry. Air Wisconsin has increased its mechanic wages, along with offering other hiring incentives, and may continue to experience additional cost increases in the future. If Air Wisconsin is unable to hire and retain a sufficient number of qualified mechanics, it could have an adverse impact on our business and operations.
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If future pilot or mechanic attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to continue to increase its labor costs to attract and retain sufficient qualified pilots and mechanics or it may be unable to fly the number of flights scheduled under the American capacity purchase agreement, which may result in penalties under the agreement that would negatively impact Air Wisconsin’s operations and our financial condition.
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Our business will be highly dependent on the American capacity purchase agreement because American will beis now Air Wisconsin’s sole airline partner.
Prior to March 2023, we derived nearly all of our operating revenues from the United capacity purchase agreement because United was Air Wisconsin’s sole airline partner. Upon the transitionAir Wisconsin ceased flying for United in early June. As of Air Wisconsin’s aircraft to American,June 30, 2023, we will derive nearly all of our operating revenues from the American capacity purchase agreement because American will beis Air Wisconsin’s sole airline partner.
Pursuant to the American capacity purchase agreement, American is permitted to terminate the agreement prior to the expiration of its term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s inability to operate a certain number of aircraft, Air Wisconsin’s failure to meet certain operating benchmarks for specified periods and certain changes of control of Air Wisconsin. In addition, American and Air Wisconsin each have the right to terminate the agreement for any reason after a certain date prior to the specified termination date. If American terminates the American capacity purchase agreement, our business, financial condition, results of operations and liquidity could be significantly negatively impacted, unless Air Wisconsin is able to enter into satisfactory substitute arrangements for the utilization of its aircraft.
Any events that negatively impact the financial or operating performance of American could have a material adverse effect on our business, financial condition and results of operations. American could be materially and adversely impacted, directly or indirectly, by new variants of COVID-19 or other infectious diseases, by worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates and inflation. If American were to experience significant financial difficulties as a result of these or other reasons, it could negatively impact American’s ability to meet its financial obligations under the American capacity purchase agreement or alter its business strategy as it applies to regional airlines. Further, if American were to become bankrupt, the American capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations.
Disagreements regarding the interpretation of our capacity purchase agreements could have an adverse effect on our operating results and financial condition.
Contractual agreements, such as our capacity purchase agreements, are subject to interpretation, and disputes may arise if the parties apply different interpretations to such agreements. Currently, a dispute exists underAlthough the United capacity purchase agreement with respectterminated in early June of 2023, a dispute continues to certain recurring amounts owed toexist under that agreement. Air Wisconsin by United.has claimed that United owes it certain amounts under the capacity purchase agreement. United has denied that it owes those amounts and has claimed that Air Wisconsin improperly terminated the agreement and that Air Wisconsin owes it certain amounts for the alleged wrongful termination. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts claimed by Air Wisconsin. In October 2022, United also delivered an initial wind-down schedule under the United capacity purchase agreement. In December 2022 and FebruaryAn arbitration hearing commenced in July 2023 before three arbitrators. Air Wisconsin sent United noticesexpects the arbitrators will issue their decision and award in the fourth quarter of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the agreement and has asserted a claim for damages for wrongful termination. In accordance with the termination provisions, and in response to Air Wisconsin’s first termination notice, United delivered a revised wind-down schedule in January 2023. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until early June 2023, at which time all of Air Wisconsin’s remaining aircraft will be withdrawn from the agreement, and Air Wisconsin will cease flying for United. Notwithstanding the provision of the agreed wind-down schedule, the sixth amendment does not resolve the ongoing disputes regarding the amounts that United owes to Air Wisconsin or Air Wisconsin’s right to terminate the United capacity purchase agreement and its potential liability for damages if United’s claim of wrongful termination is upheld, both of which remain subject to the arbitration. The arbitration has resulted in substantial costs and a diversion of management’s attention and resources, and it is possible that there could be an unfavorableresources. An adverse determination by the arbitrators whichthat United owes less than Air Wisconsin claims or that Air Wisconsin owes United amounts for the alleged wrongful termination could harm our business, financial condition and results of operations.
It is also possible that a dispute could arise with respect to the American capacity purchase agreement, which could also have an adverse effect on our business, financial condition and results of operations.
Any acceleration of debt under our credit agreements could have a significant adverse effect on our business.
29On August 4, 2023, Air Wisconsin received a notice of default and reservation of rights (the “Notice”) related to certain credit agreements Air Wisconsin entered into with a senior lender and loan trustee (together, the “Lender”) in separate transactions occurring in 2003 and 2004, which were subsequently amended and restated in December 2018 (collectively, the “Aircraft Credit Agreements”), and which Air Wisconsin initially used to finance the acquisition of 35 CRJ-200 regional jets. The Notice alleges a default under the Aircraft Credit Agreements relating to Air Wisconsin’s alleged failure to pay certain amounts with respect to certain notes issued in December 2018 in an outstanding principal amount of $70.0 million under the Aircraft Credit Agreements (the “Aircraft Notes”), but stops short of declaring an “event of default” under the Aircraft Credit Agreements or Aircraft Notes. The Aircraft Notes bear interest at the rate of 4% per annum and mature on December 31, 2025. Interest on the Aircraft Notes is paid quarterly, and the principal amount of the notes is payable in semi-annual installments of $3.5 million, with certain additional mandatory payments based on excess cash (“Excess Cash Payments”). Each Aircraft Note is secured by each aircraft acquired with the proceeds of the original Aircraft Credit Agreements and by certain other aircraft, spare engines and spare parts.
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Specifically, the Notice alleges Air Wisconsin has failed to satisfy its obligations with respect to the Excess Cash Payments. We believe the alleged default is without merit. We intend to contest the claims in the Notice and hope to work with the Lender to come to a resolution, but there can be no assurance that the Lender will not declare an event of default or seek to exercise any of its rights and remedies in the Aircraft Credit Agreements, including, inter alia, commencement of foreclosure proceedings on the aircraft, spare engines and spare parts securing the notes. If the outstanding debt under the Aircraft Credit Agreements and Aircraft Notes is accelerated, we would be required to repay the entire balance of the notes on demand, plus other costs and fees, which could have an adverse effect on our business. For additional information, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities – Aircraft Credit Agreements” within our 2022 Annual Report.
Maintenance costs and delays may increase further, and out-of-service periods may result in aircraft being unavailable for flying.
The average age of Air Wisconsin’s CRJ-200 regional jets as of March 31,June 30, 2023 was approximately 20.620.8 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of its operating expenses. Maintenance issues may result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under the American capacity purchase agreement. There are also industry-wide supply chain issues and parts shortages that have lengthened the time to complete required maintenance. These industry-wide issues could increase Air Wisconsin’s costs for maintenance and parts and possibly require it to renegotiate contracts with third-party providers to ensure their continued support of our programs. In addition, as noted above, there is an industry-wide shortage of aircraft mechanics. Air Wisconsin has increased its labor costs to attract and retain qualified mechanics. However, as passenger demand for air travel has increased and additional aircraft are brought back into service to address the increased demand, the turnaround time for routine and heavy maintenance has lengthened. As a result, Air Wisconsin has experienced, and may continue to experience, delays and increased costs in obtaining both in-house and third-party maintenance services. Any continued increase in Air Wisconsin’s maintenance costs or decreased revenues or delays resulting in out-of-service periods could have a further adverse effect on our financial condition and operating results.
Air Wisconsin has entered into agreements with third-party service providers to provide various services required for its operations, including airframe, engine and component maintenance and IT services, and it expects to enter into additional similar agreements in the future. If its third-party service providers terminate their contracts, or do not provide timely or consistently sufficient parts or high-quality maintenance and support services, Air Wisconsin may not be able to replace them in a cost-efficient manner or in a manner timely enough to support its operational needs, which could have a material adverse effect on our business, financial condition, and results of operations.
If American provides Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsin’s aircraft under the American capacity purchase agreement, our business, financial condition and results of operations may be adversely affected.
Under the terms of the American capacity purchase agreement, American has the ability to schedule Air Wisconsin’s flights in any manner that serves its purposes, subject to certain reasonable operating constraints which do not prevent it from scheduling Air Wisconsin’s flights in a manner Air Wisconsin deems inefficient. From time to time in the past, United scheduled Air Wisconsin’s flights in a manner that created operational inefficiencies for Air Wisconsin, such as building in long crew layovers or overnights, which caused crew staffing issues and resulted in limited crew availability to fly other scheduled Air Wisconsin flights, or providing Air Wisconsin with flight schedules that were inconsistent with Air Wisconsin’s existing operational footprint. It is possible that American will also schedule flights in a manner that Air Wisconsin deems inefficient. These actions could have a material adverse effect on our business, financial condition and results of operations.
Certain factors have led United in the past, and may lead American in the future, to modify the anticipated utilization of Air Wisconsin’s aircraft, some of which are beyond Air Wisconsin’s control. Any factors that cause American to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results. The actual number of flights American schedules under the American capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated or which American initially communicated for the period.
Air Wisconsin’s current and future growth opportunities may be limited by a number of factors impacting American or the airline industry generally.
Growth opportunities within American’s current flight network may be limited by various factors, including “scope” clauses in its collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. These clauses could limit Air Wisconsin’s ability to operate additional aircraft for American, which would limit Air Wisconsin’s expansion opportunities. American is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.
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Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including pilot and mechanic shortages, access to airport terminals and facilities, capital expenditures required to maintain or expand fleet operations, significant changes in fuel prices or other variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, we believe limited growth opportunities exist and as a result Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities.
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The amounts Air Wisconsin receives under the United and American capacity purchase agreementsagreement may be less than the corresponding costs Air Wisconsin incurs.
Under the United and American capacity purchase agreements,agreement, a portion of the revenues Air Wisconsin receives is based upon predetermined rates calculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. As noted above, American is not required to pay certain amounts in respect of aircraft that do not meet certain minimum block hour utilization thresholds. The primary operating costs intended to be compensated by the predetermined rates include, among other things, salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs, and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid under the applicable agreement, our financial position and operating results will be negatively affected. For example, Air Wisconsin has experienced, and may continue to experience, upward pressure on pilot and mechanic compensation as it seeks to attract and retain qualified staff. Neither the United capacity purchase agreement nor theThe American capacity purchase agreement providesdoes not provide for adjustments for any resulting compensation increases and, therefore, such increases could negatively impact our operating results.
A significant portion of Air Wisconsin’s workforce is represented by labor unions, and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.
A significant majority of Air Wisconsin’s employees are represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers AFL-CIO (“IAMAW”), and the Transport Workers Union of America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which are likely to result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any future agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.
Air Wisconsin currently operates only one aircraft type, and relies on one aircraft manufacturer and one engine manufacturer, and any operating restrictions or safety concerns applicable to this aircraft or engine type, or any failure to receive sufficient maintenance and support services from these manufacturers, would negatively impact our business and financial condition.
Air Wisconsin currently relies on a single aircraft type, the CRJ-200 regional jet, and a single engine type, the General Electric (“GE”) CF34-3B1 engine. The issuance of FAA or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type, or Air Wisconsin’s inability to obtain necessary parts and services related to this aircraft type or engine type, would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of the CRJ-200 regional jet or the GE CF34-3B1 engine, whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.
Air Wisconsin has been highly dependent upon Bombardier, as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts and related maintenance and support services to it in a timely manner. In June 2020, Bombardier consummated an agreement with Mitsubishi Heavy Industries, Ltd (“Mitsubishi”), pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of the CRJ-200 regional jet, such as type certificates, maintenance, support, refurbishment, marketing and sales activities. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE to provide required maintenance or support services, or as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines.
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The residual value of our aircraft, engines and enginesparts may be less than estimated in our depreciation policies.
As of March 31,June 30, 2023, we had approximately $97.1$90.4 million of property, equipment and related assets, net of accumulated depreciation, of which $92.9$86.3 million relates to aircraft, engines and parts. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. For example, any of the following circumstances could cause us to reduce our estimates as to the useful life, residual value or cash flow potential of our aircraft or engines, which could require an impairment charge:
| • | we add a new aircraft type to our fleet and reduce the number of our |
the pilot shortage causes us to permanently retire some aircraft; or
a lack of demand for our aircraft or engine types reduces the proceeds we receive on disposition to less than we estimated.
Should Air Wisconsin in the future include aircraft other than the CRJ-200 as part of its flying operations, such as the CRJ-700, Air Wisconsin would likely need to conduct qualitative tests for impairment of the CRJ-200 fleet and related assets. If the estimated residual value of any of our aircraft, engines or parts is determined to be lower than the residual value assumptions used in our depreciation policies, the aircraft, engines or parts may be impaired and may result in a material reduction in their book value, or we may need to prospectively modify our depreciation policies. An impairment on any of the aircraft, engines or parts or an increased level of depreciation expense resulting from a change to our depreciation policies could result in a material negative impact to our financial results.
Air Wisconsin’s ability to obtain additional financing may be limited, and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.
The airline business is capital intensive. As of March 31,June 30, 2023, Air Wisconsin had approximately $60.7$53.0 million in total third-party debt, which was incurred in connection with the acquisition of aircraft and which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts. Since the acquisition of such aircraft, Air Wisconsin has financed its operations primarily from cash flow. However, to the extent Air Wisconsin finances its activities or its pursuit of new opportunities with additional debt, it would become subject to additional debt service obligations, as well as additional covenants that may restrict its ability to pursue its business strategy or otherwise constrain its growth and operations. Air Wisconsin’s ability to pay its existing and any additional debt service obligations, in addition to the high level of fixed costs associated with operating a regional airline, will depend on its operating performance, cash flows and ability to secure adequate financing, which will in turn depend on, among other things, the success of its current business strategy, availability and cost of financing, as well as general economic and political conditions and other factors that may be beyond its control. We cannot be certain Air Wisconsin’s working capital and cash flows from operations will be sufficient to make its required payments under its debt and other contractual arrangements.
If Air Wisconsin is unable to pay its debts as they come due or fails to comply with its obligations under the agreements governing its debt, and is unable to obtain waivers of such defaults, its secured lender could foreclose on any of Air Wisconsin’s assets securing such debt. Additionally, a failure to pay Air Wisconsin’s property leases, debt or other fixed cost obligations, or a breach of its other contractual obligations, could result in a variety of further adverse consequences, including the exercise of remedies by its creditors and lessors, such as acceleration. In such a situation, Air Wisconsin may not be able to cure its breach, fulfill its contractual obligations, make required lease payments or otherwise cover its fixed costs, which could have a material adverse effect on our business, results of operations and financial condition. Like other contractual obligations, the agreements covering our debt are subject to interpretation, and disputes may arise if the parties apply different interpretations to such agreements. We cannot predict the outcomes of any such disputes and, even if such disputes do not result in litigation or are resolved in our favor, the time and resources necessary to resolve them could divert the resources of our management and harm our business, financial condition, and results of operations, which could also have an adverse effect on our business, financial condition, and results of operations.
In addition, the agreements that Air Wisconsin entered into with the Treasury for payroll support contained various covenants. If the Treasury determines that Air Wisconsin failed to comply with its obligations under those agreements, it may be required to repay the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.
The loss of key personnel upon whom Air Wisconsin depends to operate its business or the inability to attract additional qualified personnel could adversely affect our business.
Our future success depends on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Any inability to attract or retain qualified management personnel and other employees, or any significant increases in the costs associated with recruiting or retaining qualified employees, could have a material adverse effect on our business, results of operations and financial condition.
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Information technology security breaches, hardware or software failures, or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.
The performance and reliability of Air Wisconsin’s technology, the technology of United and American, and the technology of our third-party service providers, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United, American or our third-party service providers, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs and penalties. Air Wisconsin’s technological systems, software and related data, those of United and American, and those supplied by our third-party service providers, may be vulnerable to a variety of sources of interruption or exploitation due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and stores, and will collect and store, sensitive data, including personal information of its employees and information of United and American. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations, any or all of which could adversely affect our business and financial condition.
Risks Related to Our Industry
The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.
The airline business is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, natural disasters, facility disruptions, acts of war or terrorism, cancellations, increased security measures, and the outbreak of disease. Factors that cause flight delays frustrate passengers, increase operating costs and decrease revenues, which in turn adversely affect profitability. Because Air Wisconsin’s revenues (other than the portion of its revenues based on the number of aircraft covered under the applicableAmerican capacity purchase agreement) depend primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays, any of these factors could have a material adverse effect on our business, results of operations and financial condition.
In addition to the factors noted above, Air Wisconsin’s operations and our financial condition are currently affected, and may in the future be affected, by many other factors and conditions beyond Air Wisconsin’s control, including, among others:
| • | the acute on-going shortage of qualified pilots and mechanics, and resulting increases in compensation and the continuing pressure to significantly increase wages in the industry; |
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions;
air traffic control delays or disruptions;
changes in demand for airline travel or tourism, consumer preferences, or demographic trends;
changes in the competitive environment due to pricing, industry consolidation, or other factors;
labor disputes, strikes, work stoppages, or similar matters impacting employees; and
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation and changes in discretionary spending and consumer confidence.
The effect of the foregoing factors or conditions on Air Wisconsin’s operations is difficult to forecast; however, the occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.
The COVID-19 pandemic, and the outbreak of any other disease or similar public health threat that we may face in the future, could result in additional adverse effects on the business, operating results, financial condition and liquidity of Air Wisconsin and American.
With the onset of the COVID-19 pandemic, airlines experienced a significant decline in domestic and international demand. Passenger demand, has been increasing, but it still remains below 2019 levels. In addition, aand some of the lingering effects of the pandemic continue to affect our operations. A further outbreak of COVID-19 or an outbreak of another disease or similar public health threat, or any other event that would affect consumer demand for air travel or impose travel restrictions, could have a material adverse impact on our business, operating results, financial condition and liquidity, and those of American.
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Several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines and Compass Airlines, each of which are or were domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased or severely limited operations due, at least in part, to the COVID-19 pandemic’s impact on their business.
High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on Air Wisconsin’s operating results and financial condition and liquidity.
Although the American capacity purchase agreement provides that American sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the applicable agreement, aircraft fuel is critical to Air Wisconsin’s operations. The timely and adequate supply of fuel to meet operational demand depends on the continued availability of reliable fuel supply sources as well as related service and delivery infrastructure. Air Wisconsin can neither predict nor guarantee the continued timely availability of aircraft fuel throughout Air Wisconsin’s system. Supplies and prices of fuel are also impacted by factors, such as geopolitical events, economic growth indicators, fiscal/monetary policies, fuel tax policies, changes in regulations, environmental concerns and financial investments in energy markets. Both actual changes in these factors, as well as changes in related market expectations, have and may continue to drive rapid changes in fuel prices in short periods of time. Rising fuel prices may lead to increases in airline fares or fees that may not be sustainable, may reduce the general demand for air travel and may eventually impact the amount of flying that American schedules Air Wisconsin to perform. Any such schedule reductions may impact Air Wisconsin’s operating results. In addition, since single class 50-seat aircraft, such as those in Air Wisconsin’s fleet, are less fuel efficient than certain larger aircraft, increased fuel costs affects Air Wisconsin’s competitiveness in the industry.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.
The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America, American Airlines and US Airways, Southwest and AirTran Airways, United and Continental Airlines and Delta and Northwest Airlines. Any additional consolidation or significant alliance activity within the airline industry could further limit the number of potential airline partners with whom Air Wisconsin could enter into commercial agreements. In addition, any further consolidation activity involving American, reduction in the size of its network or decision to reduce single class 50-seat aircraft such as the CRJ-200 regional jet could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to continue to provide service to American. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs, including as a result of long-term fleet strategy changes announced by several major carriers, could negatively impact Air Wisconsin’s future growth opportunities.
Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath negatively impacted the airline industry in general. If additional terrorist attacks are launched, there may be lasting consequences, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs and whether or not involving Air Wisconsin’s aircraft, could have a material adverse impact on our business and operations. Increased global political instability, including the outbreak of war and hostilities, could result in an increased risk of terrorist activities.
The occurrence of an aviation accident or incident involving Air Wisconsin or its aircraft or engine type could negatively impact our business, financial condition and operating results.
An accident or incident involving Air Wisconsin’s aircraft could result in significant potential claims of injured passengers and others, as well as negative impacts on its operations resulting from the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. If substantial claims resulting from an accident are made in excess of our related liability insurance coverage, then our operational and financial results would be harmed. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Air Wisconsin’s operations are less safe or reliable than other airlines, which could negatively impact our business, financial condition and operating results.
Given that Air Wisconsin currently operates a single aircraft and engine type, any accident or incident involving the CRJ-200 regional jet aircraft type or the GE CF-34 engine type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United or American, and our financial results. In addition, certain groundings of Air Wisconsin’s aircraft would provide American the right to terminate the American capacity purchase agreement.
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Further, any accident or incident involving a CRJ-200 regional jet, regardless of the operator or geographic location of the incident, could cause a public perception that the aircraft type is less safe and reliable than other aircraft types, which could negatively impact our business, financial condition and operating results. Any such accident or incident could result in an acceleration of the implementation of fleet strategy changes by major air carriers that would reduce or eliminate the use of 50-seat aircraft, including the CRJ-200 regional jet.
Air Wisconsin is subject to significant governmental regulation and potential regulatory changes.
All air carriers, including Air Wisconsin, are subject to regulation by the U.S. Department of Transportation (“DOT”), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. In addition, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsin’s aircraft for any reason may have a material adverse effect on Air Wisconsin’s operations and our financial condition. Further, Air Wisconsin’s business may be subject to additional costs as a result of potential regulatory changes, which additional costs could have an adverse effect on our operating results.
Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.
Air Wisconsin is subject to federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require Air Wisconsin to reduce its emissions, secure carbon offset credits or otherwise pay for emissions, or make capital investments to modify certain aspects of its operations to reduce emissions. Future policy, legal, and regulatory developments relating to the protection of the environment could have a direct effect on Air Wisconsin’s operations (or an indirect effect through its third-party providers of parts or services or airport facilities at which it operates) and increase its costs and have a material adverse effect on its operations. Any such developments could have an adverse impact on our business, results of operations and financial condition.
Air Wisconsin is also subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of contamination directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.
The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of Harbor’s common stock.
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled by citizens of the United States as that term is defined in the Federal Aviation Act and interpreted by the DOT. The restrictions imposed by federal law and regulations limit who can purchase Air Wisconsin’s equity securities in the following ways:
at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States;
at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled by U.S. citizens and no more than 49% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country; and
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citizens of foreign countries that have not entered into “open skies” air transport agreements with the U.S. may hold no more than 25% of Air Wisconsin’s total outstanding equity securities.
The restrictions on foreign ownership of Air Wisconsin’s equity securities may impair or prevent a sale of common stock by a stockholder of Harbor and may adversely affect the trading price or trading volume of Harbor’s common stock.
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General Risk Factors
Because the trading market for Harbor’s common stock is limited, the common stock may continue to be illiquid.
Although Harbor’s common stock is traded under the symbol “HRBR” on the OTC Market, the trading volume for the common stock has been and continues to be limited. Harbor has not listed, and does not currently intend to list, Harbor’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.
The price of Harbor’s common stock has been and may continue to be volatile.
The trading price of Harbor’s common stock has been volatile. We believe Harbor’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:
the outcome of the current arbitration of the dispute between United and Air Wisconsin;
the potential delay in or difficulties associated with the transition of Air Wisconsin’s aircraft from the United capacity purchase agreement to the American capacity purchase agreement;
market perceptions and speculation as to differences between the United capacity purchase agreement and the American capacity purchase agreement;
the industry-wide pilot and mechanic shortages;
| • | future announcements regarding fleet strategy changes by major air carriers, including any decision to reduce or eliminate single class 50-seat aircraft; |
actual or anticipated fluctuations in our financial and operating results from period to period;
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation, and changes in discretionary spending and consumer confidence;
| • | the impact of the COVID-19 pandemic or other pandemics and widespread outbreaks of communicable diseases on passenger demand for air travel, consumer behavior and tourism; |
the repayment, restructuring or refinancing of Air Wisconsin’s debt obligations and our actual or perceived need for additional capital;
market perceptions about our financial stability and the financial stability of Air Wisconsin’s business partners;
market perceptions regarding Air Wisconsin’s operating performance, reliability and customer service, and the operating performance, reliability and customer service of its business partners and competitors;
factors and perceptions impacting the airline industry generally, including future passenger demand for air travel;
announcements of significant contracts, acquisitions or divestitures by us or Air Wisconsin’s competitors;
bankruptcies or other financial issues impacting Air Wisconsin’s business partners or competitors;
threatened or actual litigation and government investigations;
changes in the regulatory environment impacting Air Wisconsin’s business and industry;
purchases or sales of shares of Harbor’s common stock pursuant to Harbor’s publicly announced stock repurchase program or otherwise;
the illiquidity of Harbor’s common stock;
speculative trading practices of Harbor’s stockholders and other market participants;
perceptions about securities that are traded on the OTC Market;
the impact of the application of accounting guidance; and
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions.
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In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by companies across industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of Harbor’s common stock could fluctuate based upon factors that have little or nothing to do with Harbor, and these fluctuations could materially reduce the trading price of Harbor’s common stock.
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The concentration of ownership of Harbor’s capital stock among a small number of stockholders could allow such stockholders to exert significant influence over the Company’s business plans and strategic objectives, control all matters submitted to Harbor’s stockholders for approval, or deter a change in control transaction, any of which could negatively affect the trading price or trading volume of its common stock.
As of March 31,June 30, 2023, Harbor had 44,749,98643,830,036 shares of common stock outstanding. As of the same date, Amun LLC (“Amun”) held 20,000,000 shares of Harbor’s common stock, representing approximately 32.7%33.2% of the fully diluted shares of capital stock of Harbor, and Southshore Aircraft Holdings, LLC, through its affiliates (together, “Southshore”), held shares of Harbor’s Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), which are immediately convertible into 16,500,000 shares of common stock, representing approximately 26.9%27.3% of the fully diluted shares of capital stock of Harbor (in each case assuming the full conversion of the Series C Preferred into common stock).
The shares of Series C Preferred are generally authorized to vote with Harbor’s common stock. As a result, Amun and Southshore collectively control a majority of the voting power of Harbor’s outstanding capital stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Company’s business plans and strategic objectives, as well as to control all matters submitted to Harbor’s stockholders for approval. These stockholders may manage the Company’s business in ways with which certain investors may disagree and may be adverse to their interests. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control transaction, depriving Harbor’s stockholders of an opportunity to receive a premium for their investment, or otherwise negatively affecting the trading price or trading volume of Harbor’s common stock.
Mr. Bartlett, one of Harbor’s directors, may be deemed to be the beneficial owner of the shares of Harbor’s common stock held by Amun due to his status as a member of the board of managers of Amun and his ownership of equity interests in Amun. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore and his ownership of equity interests in Southshore. Accordingly, Mr. Bartlett may be able to exercise influence over decisions involving the voting or disposition of shares of Harbor’s capital stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.
Harbor may suspend its obligation to comply with SEC filing requirements in future periods and thereby cease filing reports and other information with the SEC, which could have the effect of reducing the trading volume and trading price of Harbor’s common stock.
In February 2012, Harbor’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending Harbor’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, the last periodic report filed by Harbor was the Annual Report on Form 10-K for the year ended December 31, 2011. As of January 1, 2020, Harbor no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act, requiring Harbor to resume filing reports and other information with the SEC pursuant to the Exchange Act.
The Company has incurred, and expects to continue to incur, significant direct and indirect costs, and diversion of management’s time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the audit of the consolidated financial statements contained within its Annual Reports in accordance with SEC rules and Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”).
Harbor would again become eligible to suspend its public reporting obligations if it: (i) determines in accordance with applicable SEC rules it has fewer than 300 stockholders of record as of certain points in time, (ii) does not file registration statements pursuant to the Securities Act (which it does not currently intend to do), and (iii) meets certain other requirements under applicable SEC rules. If Harbor becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which would result in Harbor no longer being required to file SEC reports. If Harbor ceases filing reports and other information with the SEC, it would significantly reduce the amount of publicly available information about the Company and its business and operations, which could have the effect of reducing the trading volume and price of Harbor’s common stock.
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Further, notwithstanding that Harbor is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, Harbor does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, Harbor is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. Accordingly, there may be significantly less information available about the Company, including its governance policies and ownership structure, than is available for other public reporting companies, which could have the effect of further reducing demand for Harbor’s common stock and the trading price.
Provisions in Harbor’s governing documents and the American capacity purchase agreement might deter acquisition bids, which could adversely affect the value of Harbor’s common stock.
Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, contain provisions that, among other things:
| • | prohibit the transfer of any shares of Harbor’s capital stock that would result in: (i) any person or entity becoming a |
authorize the board of directors, without stockholder approval, to authorize and issue preferred stock with powers, preferences and rights that may be senior to Harbor’s common stock, that could dilute the interest of, or impair the voting power of, holders of Harbor’s common stock and could also have the effect of discouraging, delaying or preventing a change of control;
establish advance notice procedures that stockholders must comply with in order to nominate candidates to the board of directors and propose matters to be brought before an annual or special meeting of Harbor’s stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company;
give the board of directors exclusive authority to set the number of directors and increase or decrease the number of directors by one or more resolutions, which may prevent stockholders from being able to fill vacancies on the board of directors;
authorize a majority of the board of directors to appoint a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which may prevent stockholders from being able to fill vacancies on the board of directors; and
restrict the ability of stockholders to call special meetings of stockholders.
In addition, the American capacity purchase agreement provides that certain changes of control of Air Wisconsin give American the right to terminate the agreement.
These provisions may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial, any of which could also adversely affect the trading price of Harbor’s common stock.
Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, limit certain transfers of Harbor’s stock in order to preserve Harbor’s ability to use net operating loss carryforwards, which could adversely affect the trading price of its common stock.
To reduce the risk of a potential adverse effect on Harbor’s ability to use net operating loss carryforwards for federal income tax purposes, Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of Harbor’s capital stock that could result in adverse tax consequences by impairing Harbor’s ability to utilize net operating loss carryforwards. These transfer restrictions are subject to a number of rules and exceptions, and generally may only be repealed or amended by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Harbor’s capital stock. These transfer restrictions apply to the beneficial owners of the shares of Harbor’s capital stock. The transfer restrictions contained in Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for Harbor’s common stock, which may adversely affect the trading price. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial.
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Harbor currently does not intend to pay dividends on its common stock and, consequently, the only opportunity to achieve a return on an investment in Harbor’s common stock may be the appreciation in value of Harbor’s common stock.
Harbor has not historically paid dividends on shares of its common stock and does not expect to pay dividends in the foreseeable future. The United capacity purchase agreement and Air Wisconsin’s credit agreements contain restrictions that limit Air Wisconsin’s ability to pay or prohibit it from paying, dividends to Harbor. Any future determination by Harbor to pay dividends will be at the discretion of the board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements (or similar agreements), business prospects and such other factors as the board of directors deems relevant. Consequently, investors should consider that their only opportunity to achieve a positive return on their investment in Harbor’s common stock may be the appreciation in value of the common stock. However, as a result of numerous risks and uncertainties described in this Quarterly Report, the trading price may not appreciate and may decline significantly.
As a “smaller reporting company,” Harbor has availed itself of reduced disclosure requirements, which may make Harbor’s common stock less attractive to investors.
Harbor is a “smaller reporting company” under applicable SEC rules and regulations, and it will continue to be a “smaller reporting company” for so long as either: (i) the market value of Harbor’s common stock held by non-affiliates as of the end of its most recently completed second quarter is less than $250 million or (ii) the market value of Harbor’s common stock held by non-affiliates is less than $700 million and the annual revenues of Harbor are less than $100 million during the most recently completed fiscal year. Because Amun and Southshore collectively hold a significant percentage of the fully diluted shares of capital stock of Harbor, it would require a significant increase in the market value of Harbor’s common stock for Harbor to no longer qualify as a “smaller reporting company.”
As a “smaller reporting company,” Harbor has relied on exemptions from certain disclosure requirements that are applicable to other public reporting companies. These exemptions include reduced financial disclosure and disclosure regarding executive compensation. Investors may find Harbor’s common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for Harbor’s common stock and negatively impact the trading price.
Complying with the requirements of public reporting companies under the Exchange Act, including the requirement for management to assess our disclosure controls and procedures and internal control over financial reporting, could increase our operating costs and divert management’s attention from executing our business strategy.
We are subject to the reporting requirements of Section 15(d) of the Exchange Act, which requires, among other things, that we file annual, quarterly, and current reports with the SEC with respect to our business, financial condition and results of operations. In addition, pursuant to SOX, we are required to assess the effectiveness of our disclosure controls and procedures and our internal control over financial reporting. Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs and increased demands on our management team. Significant additional resources and management oversight may be required to maintain and, as required, enhance our disclosure controls and procedures and internal control over financial reporting, which could have an adverse impact on our business and operating results. Further, Harbor’s status as a public reporting company and the risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the board of directors and executive officers, and it may increase the cost of their services.
We could identify material weaknesses or significant deficiencies in future periods.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. We cannot be certain that we will be successful in identifying, preventing or remediating future material weaknesses or significant deficiencies in internal control over financial reporting, which failure could result in material misstatements of our annual or interim consolidated financial statements. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of Harbor’s common stock.
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Stock repurchases could increase the volatility of the trading price of Harbor’s common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.
The board of directors has adopted a stock repurchase program pursuant to which Harbor may repurchase shares of its common stock from time to time. SinceFrom the inception of the program through June 30, 2023, Harbor has purchased approximately 10.111.0 million shares of its common stock pursuant to the program. Although the board of directors has authorized the repurchase program, and Harbor has completed the purchase of shares of common stock, it does not obligate us to repurchase any additional dollar amount or number of shares, and the program may be modified, suspended or terminated at any time and for any reason. The additional number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Our ability to repurchase shares may also be limited by restrictive covenants in future borrowing arrangements or capacity purchase agreements (or similar agreements) we may enter into from time to time. Repurchases of Harbor’s common stock could increase the volatility of the trading price and reduce the trading volume of the common stock, either of which could have a negative impact on the trading price. Similarly, the future announcement of the termination or suspension of the repurchase program, or our decision not to utilize the full authorized repurchase amount under the repurchase program, could result in a decrease in the trading price. There can be no assurance that any repurchases we do elect to make will enhance stockholder value because the market price of Harbor’s common stock may decline below the levels at which we repurchased shares. We cannot guarantee that the repurchase program will enhance long-term stockholder value.
Harbor may be at increased risk of securities class action and other litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If Harbor faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations. As a result of our compliance with Exchange Act reporting obligations, a significant amount of information regarding our business and operations, including our financial condition and operating results, is publicly available, which may result in threatened or actual litigation or other disputes with our stockholders, employees or other constituents. If such claims are successful, our business and results of operations could suffer and, even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.
If securities or industry analysts do not publish reports about our business, an active trading market for Harbor’s common stock may not develop.
The extent of any trading market for Harbor’s common stock will depend, in part, on any research and reports that securities or industry analysts publish about us or our business. Analyst coverage of the Company is limited and does not appear to be consistently produced, and investors should not purchase Harbor’s common stock with the expectation that we will have analyst coverage, or that an active trading market for Harbor’s common stock will be developed or sustained.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 30, 2021, the board of directors adopted a stock repurchase program pursuant to which Harbor was initially authorized to repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, depends on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. Harbor may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.
No “affiliated purchaser” of Harbor acquired any shares of Harbor’s equity securities during the three months ended March 31,June 30, 2023.
Below is a summary of Harbor’s stock repurchase activity during the three months ended March 31,June 30, 2023:
Period | Total number of shares repurchased(1) | Average price paid per share | Dollar value of shares repurchased | Approximate dollar value of shares remaining available under stock repurchase program | ||||||||||||
January 1 – January 31, 2023 | 164,780 | $ | 2.13 | $ | 351,247 | $ | 4,333,600 | |||||||||
February 1 – February 28, 2023 | 144,559 | $ | 2.09 | $ | 302,483 | $ | 5,031,117 | |||||||||
March 1 – March 31, 2023 | 160,412 | $ | 2.03 | $ | 326,275 | $ | 5,704,842 | |||||||||
Total | 469,751 | $ | 2.09 | $ | 980,005 | $ | 5,704,842 | |||||||||
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Period | Total number of shares repurchased(1) | Average price paid per share | Dollar value of shares repurchased(2) | Approximate dollar value of shares remaining available under stock repurchase program | ||||||||||||
April 1 – April 30, 2023 | 219,332 | $ | 2.14 | $ | 470,435 | $ | 6,234,407 | |||||||||
May 1 – May 31, 2023 | 440,572 | $ | 2.27 | $ | 999,974 | $ | 6,234,433 | |||||||||
June 1 – June 30, 2023 | 260,046 | $ | 2.27 | $ | 591,022 | $ | 6,643,411 | |||||||||
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Total | 919,950 | $ | 2.24 | $ | 2,061,431 | |||||||||||
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| (1) | All of the reported shares were repurchased pursuant to Harbor’s publicly announced stock repurchase program. In addition, all of the reported shares were purchased pursuant to a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act and in compliance with Rule 10b-18 under the Exchange Act. |
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| (2) | These amounts do not reflect the 1% federal corporate stock repurchase excise tax, which went into effect in January 2023, once repurchases exceed $1.0 million. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Incorporated by Reference | ||||||||||||||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Provided | ||||||||
31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
32.1** | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||||||||||
101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | X | ||||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||
| * | Filed herewith. |
| ** | The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of SOX, shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and shall not be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HARBOR DIVERSIFIED, INC. | ||||||
| Date: | By: | /s/ Christine R. Deister | ||||
| Christine R. Deister | ||||||
| Chief Executive Officer and Secretary | ||||||
| Harbor Diversified, Inc. | ||||||
| (Principal Executive Officer) | ||||||
| Date: | By: | /s/ Liam Mackay | ||||
| Liam Mackay | ||||||
Chief Financial Officer Air Wisconsin Airlines LLC | ||||||
| (Principal Financial Officer) | ||||||
| Date: | By: | /s/ Gregg Garvey | ||||
| Gregg Garvey | ||||||
| Senior Vice President, Chief Accounting Officer and Treasurer | ||||||
| Air Wisconsin Airlines LLC | ||||||
| (Principal Accounting Officer) | ||||||
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