UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2020March 31, 2021

Or

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-38626

 

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

85-0302351

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

 

85008

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

Title of Each Classeach class

 

Trading Symbol(s)

 

Name of Each Exchange of Which Registeredeach exchange on which registered

Common Stock, no par value

 

MESA

 

Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of June 30March 31, 2020,2021, the registrant had 35,414,28435,700,161 shares of common stock, no par value per share, issued and outstanding.

 

 


TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

 

 

Condensed Consolidated Balance Sheets

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

3

 

 

Condensed Consolidated Statements of Stockholders' Equity

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

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

2625

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

4037

 

 

Item 4. Controls and Procedures

4138

 

 

PART II – OTHER INFORMATION

4239

 

 

Item 1. Legal Proceedings

4239

 

 

Item 1A. Risk Factors

4239

 

 

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

4539

 

 

Item 3. Defaults Upon Senior Securities

4539

 

 

Item 4. Mine Safety Disclosures

4539

 

 

Item 5. Other Information

4539

 

 

Item 6. Exhibits

4539

 

 

SIGNATURES

4741

 

 


Where You Can Find More Information

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

Cautionary NotesNote Regarding Forward Looking Statements

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

In some cases, youForward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can identify forward-looking statementsalso be identified by termswords such as "may""future," "anticipates," "believes," "estimates," "expects", "should""intends, "expects", "might", "plans", "anticipates", "could", "intends", "target", "projects", "contemplates", "believes", "estimates", "predicts", "potential", "seek", "would", "continue", or" "plans," "predicts," "will," "would," "could," "can," "may," and similar terms.  Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the negativeresults discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to, those discussed in Part I, Item 1A of these terms or other similar expressions. The forward-looking statements in this QuarterlyAnnual Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on10-K under the heading "Risk Factors."   Unless otherwise stated, references to particular years, quarters, months or periods refer to our current expectationsfiscal years ended September 30 and projections about future eventsthe associated quarters, months, and financial trends that we believe may affect our business, financial condition and resultsperiods of operations. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. These forward-looking statements speak only asthose fiscal years. Each of the date of this Quarterly Report on Form 10-Qterms the "Company," "Mesa Airlines," "we," "us" and are subject"our" as used herein refers collectively to a number of risks, uncertaintiesMesa Air Group, Inc. and assumptions described in the "Risk Factors" section and elsewhere in this Quarterly Report on Form 10-Q. Becauseits wholly owned subsidiaries, unless otherwise stated.  We do not assume any obligation to revise or update any forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. statements.

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

 

public health epidemics or pandemics such as COVID-19;

 

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

 

the supply and retention of qualified airline pilots;pilots and mechanics;

 

the volatility of pilot attrition;attrition and mechanics;

 

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

 

increases in our labor costs;

 

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

 

the direct operation of regional jets by our major airline partners;

 

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

 

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

 

our significant amount of debt and other contractual obligations;

 

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

 

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

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

 

1


Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)

 

 

June 30,

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,934

 

 

$

68,855

 

 

$

147,867

 

 

$

99,395

 

Restricted cash

 

 

3,444

 

 

 

3,646

 

 

 

3,351

 

 

 

3,446

 

Receivables, net

 

 

14,618

 

 

 

23,080

 

 

 

13,867

 

 

 

13,712

 

Expendable parts and supplies, net

 

 

22,418

 

 

 

21,337

 

 

 

23,044

 

 

 

22,971

 

Prepaid expenses and other current assets

 

 

7,143

 

 

 

40,923

 

 

 

8,956

 

 

 

16,067

 

Total current assets

 

 

112,557

 

 

 

157,841

 

 

 

197,085

 

 

 

155,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,233,727

 

 

 

1,273,585

 

 

 

1,180,684

 

 

 

1,212,415

 

Intangibles, net

 

 

8,407

 

 

 

9,532

 

 

 

7,412

 

 

 

8,032

 

Lease and equipment deposits

 

 

2,121

 

 

 

2,167

 

 

 

8,242

 

 

 

1,899

 

Operating lease right-of-use assets

 

 

131,480

 

 

 

 

 

 

105,521

 

 

 

123,251

 

Other assets

 

 

7,021

 

 

 

8,792

 

 

 

20,647

 

 

 

742

 

Total assets

 

$

1,495,313

 

 

$

1,451,917

 

 

$

1,519,591

 

 

$

1,501,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt and financing leases

 

$

176,896

 

 

$

165,900

 

 

$

103,980

 

 

$

189,268

 

Current portion of deferred revenue

 

 

4,356

 

 

 

9,389

 

Current maturities of operating leases

 

 

43,219

 

 

 

 

 

 

44,016

 

 

 

43,932

 

Accounts payable

 

 

39,918

 

 

 

49,930

 

 

 

70,012

 

 

 

53,229

 

Accrued compensation

 

 

10,350

 

 

 

11,988

 

 

 

10,449

 

 

 

12,030

 

Other accrued expenses

 

 

37,663

 

 

 

28,888

 

 

 

28,610

 

 

 

45,478

 

Total current liabilities

 

 

308,046

 

 

 

256,706

 

 

 

261,423

 

 

 

353,326

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and financing leases, excluding current portion

 

 

586,877

 

 

 

677,423

 

 

 

600,058

 

 

 

542,456

 

Noncurrent operating lease liabilities

 

 

71,068

 

 

 

 

 

 

38,405

 

 

 

62,531

 

Deferred credits

 

 

9,355

 

 

 

12,134

 

 

 

7,442

 

 

 

5,705

 

Deferred income taxes

 

 

61,203

 

 

 

55,303

 

 

 

70,929

 

 

 

64,275

 

Deferred revenue, net of current portion

 

 

12,240

 

 

 

 

 

 

29,502

 

 

 

14,369

 

Other noncurrent liabilities

 

 

1,030

 

 

 

24,483

 

 

 

20,988

 

 

 

1,409

 

Total noncurrent liabilities

 

 

741,773

 

 

 

769,343

 

 

 

767,324

 

 

 

690,745

 

Total liabilities

 

 

1,049,819

 

 

 

1,026,049

 

 

 

1,028,747

 

 

 

1,044,071

 

Commitments and contingencies (Note 15 and Note 16)

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

0 shares issued and outstanding

 

 

 

 

 

 

 

 

 

 

 

 

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

125,000,000 shares authorized; 35,414,284 (2020) and 31,413,287

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

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

 

 

241,782

 

 

 

238,504

 

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

125,000,000 shares authorized; 35,700,161 (2021) and 35,526,918

(2020) shares issued and outstanding, 4,899,497 (2021) and

0 (2020) warrants issued and outstanding

 

 

255,950

 

 

 

242,772

 

Retained earnings

 

 

203,712

 

 

 

187,364

 

 

 

234,894

 

 

 

215,087

 

Total stockholders' equity

 

 

445,494

 

 

 

425,868

 

 

 

490,844

 

 

 

457,859

 

Total liabilities and stockholders' equity

 

$

1,495,313

 

 

$

1,451,917

 

 

$

1,519,591

 

 

$

1,501,930

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

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

 

 

Three Months Ended June 30,

 

Nine Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

71,648

 

 

$

170,366

 

$

409,228

 

 

$

510,586

 

 

$

81,712

 

 

$

165,781

 

 

$

208,870

 

 

$

337,580

 

Pass-through and other

 

 

1,451

 

 

 

9,858

 

 

27,802

 

 

 

24,941

 

 

 

15,568

 

 

 

14,115

 

 

 

38,781

 

 

 

26,351

 

Total operating revenues

 

 

73,099

 

 

 

180,224

 

 

437,030

 

 

 

535,527

 

 

 

97,280

 

 

 

179,896

 

 

 

247,651

 

 

 

363,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

 

29,664

 

 

 

53,025

 

135,199

 

 

 

155,636

 

 

 

37,403

 

 

 

52,891

 

 

 

74,367

 

 

 

105,535

 

Fuel

 

 

146

 

 

 

211

 

504

 

 

 

433

 

 

 

198

 

 

 

188

 

 

 

588

 

 

 

358

 

Maintenance

 

 

22,591

 

 

 

54,322

 

145,021

 

 

 

139,504

 

 

 

51,773

 

 

 

64,335

 

 

 

104,637

 

 

 

122,430

 

Aircraft rent

 

 

15,582

 

 

 

12,875

 

39,196

 

 

 

41,104

 

 

 

9,992

 

 

 

12,285

 

 

 

20,040

 

 

 

23,614

 

Aircraft and traffic servicing

 

 

538

 

 

 

978

 

2,938

 

 

 

2,977

 

 

 

743

 

 

 

1,336

 

 

 

1,644

 

 

 

2,400

 

General and administrative

 

 

11,737

 

 

 

12,435

 

39,233

 

 

 

38,121

 

 

 

11,164

 

 

 

14,500

 

 

 

24,237

 

 

 

27,496

 

Depreciation and amortization

 

 

20,635

 

 

 

19,761

 

61,656

 

 

 

57,528

 

 

 

20,705

 

 

 

20,469

 

 

 

41,175

 

 

 

41,021

 

Lease termination

 

 

 

 

 

9,540

 

 

 

 

 

9,540

 

 

 

4,508

 

 

 

          —

 

 

 

4,508

 

 

 

           —

 

CARES Act grant recognition

 

 

(43,018

)

 

 

 

 

(43,018

)

 

 

 

Government grant recognition

 

 

(55,967

)

 

 

          —

 

 

 

(67,278

)

 

 

           —

 

Total operating expenses

 

 

57,875

 

 

 

163,147

 

 

380,729

 

 

 

444,843

 

 

 

80,519

 

 

 

166,004

 

 

 

203,918

 

 

 

322,854

 

Operating income

 

 

15,224

 

 

 

17,077

 

 

56,301

 

 

 

90,684

 

 

 

16,761

 

 

 

13,892

 

 

 

43,733

 

 

 

41,077

 

Other (expenses) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(10,368

)

 

 

(13,496

)

 

(34,668

)

 

 

(42,110

)

 

 

(8,755

)

 

 

(11,673

)

 

 

(17,837

)

 

 

(24,300

)

Interest income

 

 

1

 

 

 

733

 

95

 

 

 

1,188

 

 

 

79

 

 

 

36

 

 

 

205

 

 

 

94

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

(3,616

)

Other income (expense), net

 

 

79

 

 

 

(451

)

 

720

 

 

 

82

 

Other (expense) income, net

 

 

(506

)

 

 

937

 

 

 

417

 

 

 

641

 

Total other (expense), net

 

 

(10,288

)

 

 

(13,214

)

 

(33,853

)

 

 

(44,456

)

 

 

(9,182

)

 

 

(10,700

)

 

 

(17,215

)

 

 

(23,565

)

Income before taxes

 

 

4,936

 

 

 

3,863

 

22,448

 

 

 

46,228

 

 

 

7,579

 

 

 

3,192

 

 

 

26,518

 

 

 

17,512

 

Income tax expense

 

 

1,517

 

 

 

856

 

 

6,359

 

 

 

10,891

 

 

 

1,890

 

 

 

1,307

 

 

 

6,711

 

 

 

4,842

 

Net income

 

$

3,419

 

 

$

3,007

 

$

16,089

 

 

$

35,337

 

Net income and comprehensive income

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Net income per share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

 

$

0.09

 

$

0.46

 

 

$

1.02

 

 

$

0.16

 

 

$

0.05

 

 

$

0.56

 

 

$

0.36

 

Diluted

 

$

0.10

 

 

$

0.09

 

$

0.46

 

 

$

1.01

 

 

$

0.14

 

 

$

0.05

 

 

$

0.52

 

 

$

0.36

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,299

 

 

 

34,835

 

 

35,154

 

 

 

34,683

 

 

 

35,628

 

 

 

35,141

 

 

 

35,579

 

 

 

35,082

 

Diluted

 

 

35,299

 

 

 

35,112

 

 

35,248

 

 

 

35,051

 

 

 

39,432

 

 

 

35,265

 

 

 

38,382

 

 

 

35,220

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

3


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Nine Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2018

 

 

23,902,903

 

 

 

10,614,990

 

 

$

234,683

 

 

$

139,784

 

 

$

374,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,454

 

 

 

 

 

 

1,454

 

Stock issuance costs

 

 

 

 

 

 

 

 

157

 

 

 

 

 

 

157

 

Net income

 

 

 

 

 

 

 

 

 

 

 

19,081

 

 

 

19,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

23,902,903

 

 

 

10,614,990

 

 

$

236,294

 

 

$

158,865

 

 

$

395,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

$

1,298

 

 

 

 

 

$

1,298

 

Repurchased shares

 

 

(52,967

)

 

 

 

 

 

(449

)

 

 

 

 

 

(449

)

Stock issuance costs

 

 

 

 

 

 

 

 

28

 

 

 

 

 

 

28

 

Warrants converted to common stock

 

 

3,834,693

 

 

 

(3,834,693

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

284,846

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

13,249

 

 

 

13,249

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

27,969,475

 

 

 

6,780,297

 

 

$

237,171

 

 

$

172,114

 

 

$

409,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

$

1,507

 

 

 

 

 

$

1,507

 

Repurchased shares

 

 

(116,757

)

 

 

 

 

 

(1,065

)

 

 

 

 

 

(1,065

)

Warrants converted to common stock

 

 

2,176,964

 

 

 

(2,176,964

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

331,486

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

3,007

 

 

 

3,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

30,361,168

 

 

 

4,603,333

 

 

$

237,613

 

 

$

175,121

 

 

$

412,734

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2019

 

 

31,413,287

 

 

 

3,600,953

 

 

$

238,504

 

 

$

187,364

 

 

$

425,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption ASU 2018-09 Stock compensation-

   income taxes

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

259

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,320

 

 

 

 

 

 

1,320

 

Repurchased shares and warrants

 

 

(5,558

)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Warrants converted to common stock

 

 

1,612,481

 

 

 

(1,612,481

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

18,916

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,785

 

 

 

10,785

 

Balance at December 31, 2019

 

 

33,039,126

 

 

 

1,988,472

 

 

$

239,783

 

 

$

198,408

 

 

$

438,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,193

 

 

 

 

 

 

1,193

 

Repurchased shares and warrants

 

 

(18,244

)

 

 

 

 

 

(160

)

 

 

 

 

 

(160

)

Warrants converted to common stock

 

 

1,988,472

 

 

 

(1,988,472

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

141,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share purchases

 

 

43,934

 

 

 

 

 

 

243

 

 

 

 

 

 

243

 

     Net income

 

 

 

 

 

 

 

 

 

 

 

1,885

 

 

 

1,885

 

Balance at March 31, 2020

 

 

35,194,902

 

 

 

 

 

$

241,059

 

 

$

200,293

 

 

$

441,352

 

 

 

4


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

Nine Months Ended June 30, 2020

 

 

Six Months Ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2019

 

 

31,413,287

 

 

 

3,600,953

 

 

$

238,504

 

 

$

187,364

 

 

$

425,868

 

Balance at September 30, 2020

 

 

35,526,918

 

 

 

 

 

$

242,772

 

 

$

215,087

 

 

$

457,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption ASU 2018-09 Stock compensation-

income taxes

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

259

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,320

 

 

 

 

 

 

1,320

 

 

 

 

 

 

 

 

 

850

 

 

 

 

 

 

850

 

Repurchased shares and warrants

 

 

(5,558

)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Warrants converted to common stock

 

 

1,612,481

 

 

 

(1,612,481

)

 

 

 

 

 

 

 

 

 

Repurchased shares

 

 

(2,256

)

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Restricted shares issued

 

 

18,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants, net of issuance costs

 

 

 

 

 

4,899,497

 

 

 

11,489

 

 

 

 

 

 

11,489

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,785

 

 

 

10,785

 

 

 

 

 

 

 

 

 

 

 

 

14,118

 

 

 

14,118

 

Balance at December 31, 2020

 

 

35,532,162

 

 

 

4,899,497

 

 

$

255,092

 

 

$

229,205

 

 

$

484,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

33,039,126

 

 

 

1,988,472

 

 

$

239,783

 

 

$

198,408

 

 

$

438,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,193

 

 

 

 

 

 

1,193

 

 

 

 

 

 

 

 

 

808

 

 

 

 

 

 

808

 

Repurchased shares and warrants

 

 

(18,244

)

 

 

 

 

 

(160

)

 

 

 

 

 

(160

)

 

 

(14,680

)

 

 

 

 

 

(157

)

 

 

 

 

 

(157

)

Warrants converted to common stock

 

 

1,988,472

 

 

 

(1,988,472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

141,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124,609

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share purchases

 

 

43,934

 

 

 

 

 

 

243

 

 

 

 

 

 

243

 

 

 

58,070

 

 

 

 

 

 

207

 

 

 

 

 

 

207

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,885

 

 

 

1,885

 

 

 

 

 

 

 

 

 

 

 

 

5,689

 

 

 

5,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

35,194,902

 

 

 

 

 

$

241,059

 

 

$

200,293

 

 

$

441,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,020

 

 

 

 

 

 

1,020

 

Repurchased shares and warrants

 

 

(88,785

)

 

 

 

 

 

(297

)

 

 

 

 

 

(297

)

Restricted shares issued

 

 

308,167

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,419

 

 

 

3,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2020

 

 

35,414,284

 

 

 

 

 

$

241,782

 

 

$

203,712

 

 

$

445,494

 

Balance at March 31, 2021

 

 

35,700,161

 

 

 

4,899,497

 

 

$

255,950

 

 

$

234,894

 

 

$

490,844

 

 

See accompanying notes to these condensed consolidated financial statements.

 

5


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

Nine Months Ended June 30,

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,089

 

 

$

35,337

 

 

$

19,807

 

 

$

12,670

 

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

activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

61,656

 

 

 

57,528

 

 

 

41,175

 

 

 

41,021

 

Stock compensation expense

 

 

3,533

 

 

 

4,259

 

 

 

1,658

 

 

 

2,513

 

Deferred income taxes

 

 

5,902

 

 

 

10,898

 

 

 

6,654

 

 

 

4,490

 

Long-term deferred revenue

 

 

12,240

 

 

 

 

Amortization of deferred credits

 

 

(2,928

)

 

 

(3,854

)

 

 

(2,258

)

 

 

(2,041

)

Unfavorable lease liabilities

 

 

 

 

 

(4,525

)

Amortization of debt financing costs and accretion of interest on

non-interest-bearing subordinated notes

 

 

3,182

 

 

 

3,147

 

Loss on extinguishment of debt

 

 

 

 

 

3,616

 

Loss (Gain) on disposal of assets

 

 

528

 

 

 

(49

)

Amortization of debt discount and issuance costs

 

 

4,994

 

 

 

2,149

 

Gain on extinguishment of debt

 

 

(950

)

 

 

 

Loss on disposal of assets

 

 

25

 

 

 

514

 

Provision for obsolete expendable parts and supplies

 

 

287

 

 

 

477

 

 

 

22

 

 

 

306

 

Loss on lease termination

 

 

 

 

 

9,540

 

 

 

4,508

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

8,462

 

 

 

5,903

 

 

 

(155

)

 

 

9,019

 

Expendable parts and supplies

 

 

(1,403

)

 

 

(5,076

)

 

 

(84

)

 

 

(1,382

)

Prepaid expenses and other current assets

 

 

(1,257

)

 

 

(7,861

)

 

 

(1,988

)

 

 

97

 

Accounts payable

 

 

(9,890

)

 

 

(4,888

)

 

 

15,470

 

 

 

(602

)

Deferred revenue

 

 

10,099

 

 

 

 

Accrued liabilities

 

 

11,659

 

 

 

9,625

 

 

 

(14,091

)

 

 

2,122

 

Change in operating lease right-of-use assets

 

 

(4,459

)

 

 

 

Change in operating lease right-of- use assets

 

 

(6,311

)

 

 

(5,674

)

Net cash provided by operating activities

 

 

103,601

 

 

 

114,077

 

 

 

78,575

 

 

 

65,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(25,160

)

 

 

(116,731

)

 

 

(5,261

)

 

 

(12,968

)

Sales of investment securities

 

 

 

 

 

20,077

 

Lease and equipment deposits

 

 

(13,804

)

 

 

621

 

Returns of lease and equipment deposits

 

 

13,850

 

 

 

 

Net returns (payments) on equipment & other deposits

 

 

(6,414

)

 

 

(11,805

)

Net cash used in investing activities

 

 

(25,114

)

 

 

(96,033

)

 

 

(11,675

)

 

 

(24,773

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

23,000

 

 

 

163,658

 

 

 

195,000

 

 

 

23,000

 

Principal payments on long-term debt and financing leases

 

 

(103,718

)

 

 

(197,409

)

 

 

(212,020

)

 

 

(79,395

)

Debt financing costs

 

 

(1,394

)

 

 

(4,870

)

Debt prepayment costs

 

 

 

 

 

(1,672

)

Stock issuance costs

 

 

 

 

 

185

 

Payments of debt and warrant issuance

 

 

(1,326

)

 

 

(494

)

Repurchase of stock

 

 

(498

)

 

 

(1,514

)

 

 

(176

)

 

 

(201

)

Net cash used in financing activities

 

 

(82,610

)

 

 

(41,622

)

 

 

(18,522

)

 

 

(57,090

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

(4,123

)

 

 

(23,578

)

 

 

48,378

 

 

 

(16,661

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

72,501

 

 

 

107,134

 

 

 

102,841

 

 

 

72,501

 

Cash, cash equivalents and restricted cash at end of period

 

$

68,378

 

 

$

83,556

 

 

$

151,219

 

 

$

55,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

30,375

 

 

$

37,587

 

 

$

16,922

 

 

$

22,402

 

Cash paid for income taxes, net

 

$

45

 

 

$

415

 

 

$

49

 

 

$

45

 

Operating lease payments in operating cash flows (1)

 

$

34,919

 

 

$

 

Supplemental non-cash operating activities

 

 

 

 

 

 

 

 

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

 

$

145,054

 

 

$

 

Supplemental non-cash investing activities

 

 

 

 

 

 

 

 

Operating lease payments in operating cash flows

 

$

25,716

 

 

$

26,240

 

Supplemental non-cash transactions

 

 

 

 

 

 

 

 

Warrants received from Archer Aviation Inc. ("Archer")

 

$

16.4

 

 

$

 

Right-of-use assets (disposed) obtained

 

$

(320

)

 

$

145,627

 

Debt issuance cost related to loan agreement with US Department of Treasury

 

$

(1,887

)

 

$

 

Accrued capital expenditures

 

$

60

 

 

$

836

 

 

$

 

 

$

98

 

See accompanying notes to these condensed consolidated financial statements.

 

(1)See section 15 Leases and Commitments.

 

 

See accompanying notes to these condensed consolidated financial statements.

 

6


MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), operates as a regional air carrier providing scheduled flight service to 66112 cities in 2938 states, the District of Columbia, and Mexico.Mexico as well as cargo flight services originating from Cincinnati/Northern Kentucky International Airport. As of June 30, 2020,March 31, 2021, Mesa operated a fleet of 145163 aircraft with approximately 175440 daily departures and 3,4003,111 employees. Mesa operates all of its flights on behalf of major partners as either American Eagle, United Express, or UnitedDHL Express flights pursuant to the terms of the capacity purchase agreementsCapacity Purchase Agreements (“CPAs”) entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and Flight Services Agreement (“FSA”) with DHL Network Operations (USA), Inc. (“DHL”).

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

Impact of the COVID-19 Pandemic

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

In response to the recent COVID-19 pandemic, we have implemented various measures to protect our employees as they continue to provide safe and reliable transportation to the passengers of American and United. The safety of our employees and passengers remains our primary focus and, to that end, measures that we have taken include but are not limited to:

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

Mandated face covering for all employees working onboard aircraft, at corporate and training facilitates and locations where social distancing cannot be maintained.

7


In coordination with our codeshare partners, we’ve implemented a policy that requires all crewmembers to wear face coverings while on duty.  We have provided, and continue to resupply, our employees with Personal Protective Equipment (PPE) consisting of gloves and face coverings for use whenever social distancing cannot be maintained or when working with our customers. In addition, at various locations, we have coordinated with our codeshare partners to conduct temperature checks of employees reporting for duty. In those locations where this is not yet established, crewmembers have been directed to self-monitor their temperature before reporting for duty and twice daily.

Based on recommendations from the Centers for Disease Control (CDC), we have increased facility cleaning and disinfection protocols at all of our facilities and have implemented social distancing measures including extending our current remote working policy for many of our Corporate personnel.  We’ve enhanced current protocol to increase physical distance between workers who remain working at our Corporate facilities.

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

Offering Leaves of Absence to employees starting in May in blocks of 1-3 months.

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

Reducing employee-related costs, including:

Offering voluntary short-term unpaid leaves to all employees.

Compensation reductions for Executive level employees.

Instituting a company-wide hiring freeze.

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

Balance Sheet, Cash Flow and Liquidity. As of June 30, 2020, our cash and cash equivalents balance was $64.9 million. We have taken the following actions to increase liquidity and strengthen our financial position.

Reducing planned heavy engine and airframe maintenance events by approximately $16.8 million in the current fiscal year.

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

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

In April 2020, we were granted $92.5 million in emergency relief through the payroll support program of the CARES Act to be paid in installments through September 2020. We received $46.3 million as of June 2020 and the remaining $46.2 million is scheduled to be paid to Mesa in 3 equal monthly payments from July to September 2020.$43.0 million has been utilized to offset the payroll expenses in the quarter ended June 30, 2020 and $3.3 million has been deferred to offset future payroll costs.

The CARES Act also provides for up to $25 billion in secured loans to the airline industry. We have been allocated $277.0 million under the loan program. We are in ongoing discussions with the U.S. Department of the Treasury regarding the terms and our participation level of such a loan.

American Capacity Purchase Agreement

As of June 30, 2020,March 31, 2021, the Company operated 5445 CRJ-900 aircraft for American under ourthe American Capacity Purchase Agreement. In exchange for providing flight services, under our American Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes, all as set forth in our American Capacity Purchase Agreement.taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.

 

8


OurOn November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement establishes utilization credits which are required to be paid if the Company does not operate at minimum levels of flight operations.  In prior periods, the FAA Qualification Standards (as defined below) have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels,(the “Amended and as a result, we have issued credits to American pursuant to the terms of ourRestated American Capacity Purchase Agreement.

OurAgreement”). The Amended and Restated American Capacity Purchase Agreement will terminate with respectincluded the following amendments to different tranches of aircraft betweenthe existing CPA:

Extended the CPA fora five-year term, commencing January 1, 2021 to December 31, 2025;

Reduced the number of aircraft operated under the agreement to 40 CRJ-900 aircraft;

Provided American the option in its sole discretion to withdraw up to: (a) 10 aircraft during calendar year 2021, provided that for the 6-month period ending June 30, 2021, American may only exercise this right if the number of mainline narrow body aircraft in American’s fleet has been reduced by a specified number of aircraft during such period, (b) 5 aircraft during each of calendar years 2022 and 2023, and (c) during the period from January 1, 2024 to July 31, 2024. American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter they have the right to remove the last 20 aircraft;

On December 22, 2020, we entered into Amendment No. 1 (“Amendment No. 1”) to the Amended and Restated American Capacity Purchase Agreement. The amendments in Amendment No. 1 reflect the following: 

Addition of CRJ-900 aircraft to the Amended and Restated American Capacity Purchase Agreement (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) 3 aircraft, commencing January 5, 2021 to March 3, 2021, and (ii) increasing to a total of 5 aircraft, commencing March 4, 2021.  The term of the Incremental Aircraft will be determined by American in its sole discretion to withdraw any Incremental Aircraft upon 60 days’ prior notice.  American may specify one or more dates for the withdrawal of such Incremental Aircraft.

7


On April 9, 2021, we entered into Amendment No. 2 (“Amendment No. 2”) to the Amended and 2025, unless otherwise extended or amended. As ofRestated American   Capacity Purchase Agreement. The amendments in Amendment No. 2 reflect the date of this filing,following:

Addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) 5 aircraft, commencing March 4, 2021 to May 5, 2021, and (ii) decreasing to a total of 3 aircraft, commencing May 6, 2021 to June 2, 2021, and (iii) increasing to a total of 5 aircraft commencing on June 3, 2021 until August 17, 2021.  The term of the Incremental Aircraft will be determined by American in its sole discretion to withdraw any Incremental Aircraft upon 60 days’ prior notice.  American may specify one or more dates for the withdrawal of such Incremental Aircraft.

On April 19, 2021, we remainentered into Amendment No. 3 (“Amendment No. 3”) to the Amended and Restated American Capacity Purchase Agreement. The amendments in discussions with American regardingAmendment No. 3 reflect the terms of extending the 31 aircraft that are due to expire in 2021, the 16 aircraft that are due to expire in 2022,following: 

A temporary reduction in rates for fixed amount per month, per aircraft and per block rates for the period December 2020 to March 2021. The basis for the reduction is lower labor costs due to the grant received under the Payroll Support Program Extension (PSP2).

Agreement to a temporary reduction in rates if Mesa receives grants under the Payroll Support Program Extension (PSP3).

Our Amended and the 7 aircraft that expire in 2025. OurRestated American Capacity Purchase Agreement is subject to termination prior to that date,its expiration, subject to ourthe Company’s right to cure, in various circumstances including:

 

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

 

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

 

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

 

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

 

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

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

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

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

On January 31, 2019, the Company entered into an amendment to the American Capacity Purchase Agreement, the terms of which provide for new and revised operational performance metrics, the Company's right to earn additional incentive compensation based on the achievement of such metrics, and the right of American to permanently withdraw up to six (6) aircraft in the event the Company fails to meet such new/revised performance metrics.  Under the terms of such amendment the Company agreed, effective April 2, 2019, to convert two (2) aircraft to be utilized by the Company as operational spares in the Company's sole discretion throughout its system. In July 2019, American exercised its right to permanently withdraw 2 (2) aircraft from the American Capacity Purchase Agreement due to the Company's failure to meet certain performance metrics. The aircraft were removed on November 2, 2019. On November 25, 2019, the Company amended its agreement with American Airlines. The Company did not meet certain performance metrics during the then most recent measurement period, which would have allowed American to remove 2 additional aircraft from the capacity purchase agreement. American had agreed to defer the right to remove these two aircraft but subsequently elected to remove 1 of the two previously deferred aircraft, effective January 2, 2020.  As of January 2, 2020, American had removed 3 (3) of the six (6) aircraft under the January 31st amendment.

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

On June 11, 2020, the Company entered into the Twenty-First Amendment to The American Capacity Purchase Agreement effective April 1, 2020. The amendments include (i) the permanent withdrawal of 2 (2) additional aircraft from the American Capacity Purchase Agreement, effective June 15, 2020, with such aircraft included in the tranche of aircraft American has the right to ratably remove commencing January 1, 2021 in exchange for American paying the full cost of the aircraft for the same period and (ii) the addition of utilization-based credits, entitling American to payment credits for the period April 1, 2020 through September 30, 2020, based upon the achievement of agreed upon aircraft utilization thresholds, subject to Mesa’s receipt of previously approved funds under the CARES Act. The impact of the contract modification was not material to the three or nine months ended June 30, 2020.

9


United Capacity Purchase Agreement

As of June 30, 2020, the CompanyMarch 31, 2021, we operated 20 CRJ-70060 E-175 and 60 E-17516 E-175LL aircraft for United under ourthe United Capacity Purchase Agreement.In exchange for providing the flight services under our United Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.

Under our United Capacity Purchase Agreement, United owns 42 of the 60 E-175 and all of the E-175LL aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"APUs") and component maintenance for the 42 E-175 aircraft owned by United. Our United Capacity Purchase Agreement permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. If United elects to terminate our United Capacity Purchase Agreement in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated to assume the aircraft ownership and associated debt with respect to such aircraft through the end of the term of the agreement.aircraft.

8


On November 26, 2019, we amended and restated our United Capacity Purchase Agreement. The Amended and Restated United Purchase Agreement to, among other things, incorporateincluded the terms of the 14 prior amendments to that Agreement and to extend the term thereof through the addition of twenty (20) new Embraer E175LL aircraft to the scope of such Agreement.  These new aircraft will be financed and owned by us and operated for a period of twelve (12) years from the in-service date.  Deliveries of the new E175LL aircraft were scheduled to begin in Mayfollowing amendments:

Addition of 20 new E-175 LL aircraft to be financed by the Company and operate them for a period of twelve (12) years from the aircraft acceptance and in-service date, expiring between November 2032 and June 2033.

Extended the term of the 42 E-175 aircraft leased from United for an additional five (5) years, which now expire between 2024 and 2028. Extended the term of the 18 E-175 aircraft that Company owns for an additional five (5) years, which now expires in 2028.

The Company agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement. The amendment also granted United a right to purchase the leased CRJ-700 aircraft at any point during the (9) year lease term for an amount representing the appraised value of the aircraft.

On November 4, 2020, and be completed by December 31, 2020. In March 2020, the deliveries of the new E175LL aircraft were negotiated between United and Embraer to begin in September 2020 and be completed by the quarter ended June 30, 2021. Commencing five (5) years after the actual in-service date, United has the right to remove the E175LL aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the ten (10) year anniversary of the in-service date, certain accelerated margin payments.  

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

Transferred the financing and ownership of the 20 new E-175 LL aircraft to United. The aircraft will be leased to the Company at nominal amounts to operate for a period of twelve (12) years from the aircraft acceptance and in-service date, expiring between November 2032 and June 2033.

As of March 31, 2021, 16 E-175LL have been delivered and the remaining 4 aircraft are expected to be delivered by the end of June 2021.

Our United Capacity Purchase Agreement is subject to earlyfollowing termination under various circumstances noted above and including:rights prior to its expiration.

 

ByPermits United, if certain operational performance factors fall below a specified percentage for a specified time, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice under certain circumstances;of 90 days or more.

 

ByIf United if we failelects to perform the material covenants, agreements, terms or conditions ofterminate our United Capacity Purchase Agreement in its entirety or similar agreements withpermanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United subjectat no cost to thirty (30) days' notice and cure rights;us.

 

If eitherCommencing five (5) years after the actual in-service date, United has the right to remove the E-175LL aircraft from service by giving us notice of 90 days or we become insolvent, file bankruptcy or failmore, subject to pay debts when due,certain conditions, including the non-defaulting party may terminatepayment of certain wind-down expenses plus, if removed prior to the agreement; orten (10) year anniversary of the in-service date, certain accelerated margin payments.

Our United Capacity Purchase Agreement provides for temporary rate reductions for the period April 2020 to September 2020. The basis for the reduction is lower labor costs due to the grant received by the Company under the Payroll Support Program (PSP). The First Amendment also provides for further temporary rate reductions if the Payroll Support Program is extended.

DHL Flight Services

On December 20, 2019, the Company entered into a Flight Services Agreement with DHL. Under the terms of this agreement, Mesa operates 2 Boeing 737-400F aircraft to provide cargo air transportation services to DHL. In exchange for providing air services, the Company receives a fee per block hour with a minimum block hour guarantee.  The Company is eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL.

Under our Flight Services Agreement, DHL leases 2 Boeing 737-400F aircraft, and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including c-checks, off-wing engine maintenance and overhauls including LLPs, Landing Gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs.  Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by the Company.

9


The Flight Services Agreement expires five (5) years from the commencement date of the first aircraft placed into service. DHL has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.

Our DHL Flight Services Agreement is subject to following termination rights prior to its expiration:

 

By United if we mergeAt any time under after the first anniversary of the commencement date of Aircraft with or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier.90 day’s written notice;

Failure to comply with performance standards for three consecutive measurement periods;

 

DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services.

2.

Summary of Significant Accounting Policies

Basis of Presentation

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

10


These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 20192020 included in the Company's Annual Report on Form 10-K for the year ended September 30, 20192020 on file with the U.S. Securities and Exchange Commission (the "SEC"). Information and footnote disclosures normally included in financial statements have been condensed or omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and GAAP. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented.

The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"Act,") and may remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of its August 2018 IPO,the Company’s initial public offering (“IPO”), subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

AdoptionSegment Reporting

As of New Lease Standard

Effective October 1, 2019,March 31, 2021, our chief operating decision maker was the Chief Executive Officer. While the Company operates under separate capacity purchase agreements, we do not manage our business based on any performance measure at the individual contract level. Our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. Accordingly, we have adopted a single operating and reportable segment.ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") which provides guidance requiring lessees

Use of Estimates

The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to recognize a right-of-use assetmake estimates and a lease liability onassumptions that affect the balance sheet for substantially all leases, withreported amounts of assets, liabilities, revenues, and expenses and the exceptiondisclosure of short-term leases. Leases will be classified as either financing or operating, with classification affectingcontingent assets and liabilities at the patterndate of expense recognition in the statement of income. We determine if an arrangement is a lease at inception. Our current lease activities are recorded in operating lease right-of-use (“ROU”) assets, current maturities of operating lease and noncurrent operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and financing leases, long-term debt and financing leases, excluding current portion.financial statements. Actual results could differ from those estimates.

 

ROU assets represent our right to use an underlying asset for the lease term

10


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

 

As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not applyThe Company recognizes contract revenue when the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less).

As a lessor, ourservice is provided under its capacity purchase agreements and flight services agreement. Under the capacity purchase agreements, our major partners generally pay for each departure, flight hour or block hour, and an amount per aircraft in service each month with additional incentives based on flight completion, on-time performance, and other operating metrics. The Company’s performance obligation is met as each flight is completed, and revenue is recognized and reflected in contract revenue.

A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs including aircraft principal and interest debt service costs, aircraft depreciation and interest expense or aircraft lease expense costs while the aircraft is under contract. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right"right of use"use" of a specific type and number of aircraft over a stated period-of-time. A portionThe lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations. The Company recognized $18.1 million and $52.4 million of lease revenue for the three months ended March 31, 2021 and 2020, respectively, and $67.6 million and $105.7 million during the six months ended March 31, 2021 and 2020, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive income because the use of the compensation inaircraft is not a separate activity of the total service provided under our capacity purchase agreements.

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

The Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to reimburselease 6 CRJ 700 aircraft as of March 2021. The lease agreements are accounted for as operating leases and have a term of nine-years beginning on the delivery date of each aircraft. The Company intends to lease our entire fleet of 20 CRJ 700 aircraft to GoJet with final aircraft deliveries expected by October 2021. Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet’s completion of qualifying maintenance events defined in the agreements. Lease revenue for fixed monthly rent payments is recognized ratably within pass-through and other revenue. Lease revenue for supplemental rent is deferred and recognized within pass-through and other revenue when it is probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term.

The Company mitigates the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases have specified lease return condition requirements and the Company maintains inspection rights under the leases. As of March 31, 2021, the Company recognized $4.8 million of lease incentive assets and $4.2 million of related lease incentive obligations for reimbursement of certain aircraft ownershipmaintenance costs of these aircraft. We account for the non-lease component under ASC 606 and account fordefined within the lease component under ASC 842. We allocate the consideration in the contract betweenagreements. Lease incentive assets will be recognized as a reduction to lease revenue over the lease term.

Lease revenue recognized and non-lease components based on their stated contract prices, which is based on a cost basis approach representingamounts deferred for supplemental rent payments were immaterial as of March 31, 2021. The following table summarizes future minimum rental income under operating leases related to leased aircraft that had remaining non-cancelable lease terms as of March 31, 2021 (In thousands):

Periods Ending

March 31,

 

Total Payments

 

Remainder of 2021

 

$

3,276

 

2022

 

 

6,552

 

2023

 

 

6,552

 

2024

 

 

6,552

 

2025

 

 

6,552

 

Thereafter

 

 

28,962

 

Total

 

$

58,446

 

11


The Company records deferred revenue when cash payments are received or are due from our estimateairline partners in advance of the stand-alone selling prices.Company’s performance, including amounts that are refundable. During the three months ended March 31, 2021, the Company deferred $4.9 million of revenue which was billed and paid by our partners.

 

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

Periods Ending

March 31,

 

Total Maturities

 

Remainder of 2021

 

$

675

 

2022

 

 

9,097

 

2023

 

 

9,430

 

2024

 

 

9,169

 

2025

 

 

3,695

 

Thereafter

 

 

1,792

 

Total

 

$

33,858

 

 

Aircraft Leases

In addition to the aircraftAs discussed in Note 1, we lease, at nominal rates, certain aircraft from United and DHL under our United Capacity Purchase Agreement and DHL Flight Services Agreement, which are excluded from operating lease assets and liabilities as the lease contracts do not represent embedded leases under ASC 842. Other than nominal leases with our major partners, approximately 12%10% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major airline partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. Additionally, any remaining ROU assets and lease liabilities willwould be written off.

 


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

 

In March 2021, the Company purchased a leased CRJ 900 aircraft prior to the expiration of the lease term resulting in the lease termination expenses of $4.5 million. Termination expenses primarily related to the reversal of maintenance deposits on the aircraft that were no longer refundable from the lessor at termination of the lease.

Contract Liabilities

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

Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. The Company's total current and non-current deferred credit balances at June 30, 2020March 31, 2021 and September 30, 20192020 are $9.4$5.2 million and $12.1$8.5 million, respectively. The Company recognized $0.9$1.1 million and $1.3$0.9 million of the deferred credits towithin contract revenue in the condensed consolidated statements of operations during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $2.9$1.9 million and $3.8$2.0 million during the ninesix months ended June 30,March 31, 2021 and 2020, and 2019, respectively.

Contract Assets

The Company recognizes assets from the costs incurred to fulfill a contract including aircraft painting and reconfiguration and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the condensed consolidated balance sheets. The Company's contract assets balances at June 30, 2020 and September 30, 2019 are $2.4 million and $3.9 million, respectively. Contract cost amortization was $0.3 million and $0.6 million for the three months ended June 30, 2020 and 2019, respectively and $1.2 million and $1.8 million for the nine months ended June 30, 2020 and 2019, respectively.

Use of Estimates

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

.

Maintenance Expense

The Company operates under a Federal Aviation Administration ("FAA")an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred.

12


The Company usesaccounts for heavy maintenance and major overhaul costs on our owned E-175 fleet under the deferral method whereby the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. Amortization of heavy maintenance and major overhaul costs charged to depreciation and amortization expense was immaterial for the three months and six months ended March 31, 2021 and 2020. At March 31, 2021 and September 30, 2020, the Company had deferred heavy maintenance balance, net of accumulated amortization, of $1.2 million and $0 million, respectively.

The Company accounts for heavy maintenance and major overhaul costs for all other fleets under the direct expense method of accountingwhere costs are expensed to maintenance expense as incurred, except for itscertain maintenance of regional jet engine overhauls, airframe, landing gear,contracts where labor and normal recurringmaterials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance whereinand repair for utilization maintenance contracts where labor and materials price risks have been transferred to the Company recognizes theservice provider are charged to maintenance expense when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. For leased aircraft, the Company is subject to lease return provisions that require a minimum portion of the "life" of an overhaul be remaining on the engine at the lease return date. The Company estimates the cost of maintenance lease return obligations and accrues such costs over the remaining lease term when the expense is probable and can be reasonably estimated.

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

12


Engine overhaul expense totaled $3.2$6.9 million and $11.4$14.5 million for the three months ended June 30,March 31, 2021, and 2020, and 2019, respectively, of which $0.4$2.2 million and $1.9$0.7 million, respectively, was pass-through expense. Engine overhaul expense totaled $28.3$21.3 million and $20.8$25.1 million for the ninesix months ended June 30,March 31, 2021, and 2020, and 2019, respectively, of which $3.0$11.8 million and $3.0$2.6 million, respectively, was pass-through expense. Airframe C-check expense totaled $2.9$14.1 million and $4.4$10.5 million for the three months ended June 30,March 31, 2021, and 2020, and 2019, respectively, of which $0.8$5.6 million and $0.0$3.9 million, respectively, was pass-through expense. Airframe C-check expense totaled $20.6$24.2 million and $10.6$17.8 million for the ninesix months ended June 30,March 31, 2021, and 2020, and 2019, respectively, of which $5.9$12.7 million and $0.0$5.1 million, respectively, was pass-through expense.

Government Grant

In February 2021, the Company was granted $48.7 million in financial assistance by the Department of the Treasury under the Payroll Support Program Extension (“PSP2”) under the Consolidated Appropriations Act of 2021. In March 2021, we were notified that, based on funding availability, recipients that were currently in compliance with executed PSP agreements would receive an additional award amount. As a result, the company was granted an additional $7.3 million through the PSP2 for a total grant of $56.0 million. The additional $7.3 million was received in April 2021. PSP2 funding must be used exclusively for the continuation of payment of employee wages, salaries, and benefits and is conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs from the date of the extension agreement through March 2021. Other conditions include prohibitions on share repurchases and dividends through March 2022 and certain limitations on executive compensation until October 2022. The Department of Transportation also has the authority until March 1, 2022 to require airlines that received payroll support program funds to maintain scheduled air service deemed necessary to any point served by the airline before March 1, 2020.

On April 15, 2021, the Company was notified by the U.S. Department of the Treasury we are eligible to receive funds under the third Payroll Support Program (PSP3), which was created under the American Recovery Plan Act of 2021 (ARP), enacted on March 11, 2021. PSP3 provides additional funding for passenger air carriers and contractors that received financial assistance under the Payroll Support Program Extension (PSP2). PSP3 funding must be used exclusively for the continuation of payment of employee wages, salaries, and benefits. Based on the share of funds we received from the first extension of the payroll support program, and the similar structures of both extensions, we estimate that we will receive approximately $52.2 million. However, the actual amounts received and the allocation could differ from our estimates. The Company received the first PSP3 installment of $26.1 million on April 23, 2021. These payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through September 2021 or the date on which assistance provided under the agreement is exhausted, whichever is later. Other conditions would include prohibitions on share repurchases and dividends through September 2022 and certain limitations on executive compensation until April 2023.

During the three and six months ended March 31, 2021, the Company recognized $56.0 million and $67.3 million respectively, for the payroll support government funds. We deferred $11.3 million under PSP1 that was recognized during the three months ended December 31,2020. As of March 31,2021, there are 0 deferred payments.

 

3.

Contract revenue and Pass- through and other

The Company recognizes contract revenue when the service is provided under its capacity purchase agreements. Under the capacity purchase agreements, our airline partners generally pay for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partners also directly pay for or reimburses the Company for certain direct expenses incurred under the capacity purchase agreement, such as fuel and airport landing fees. The Company’s performance obligation is met when each flight is completed and revenue is recognized and reflected in contract revenue. The directly reimbursed expenses, earned as flights are completed over the agreement term, are recognized and reflected in pass-through revenue.  

During the quarter ended June 30, 2020, the Company completed a significantly lower than normal number of flights due to the impact of COVID-19. Since the revenue recognition is based on the number of flights completed, the fixed amount of cash received exceeded the revenue recognized based on the number of flights completed during the quarter. Under US GAAP, the fixed monthly payments are recognized as revenue ratably based on completed flights over the contract term. The Company deferred $16.0 million of revenue in the quarter ended June 30, 2020. The current portion of $3.8 million of deferred revenue is recorded as a part of other accrued expenses and long-term portion of $12.2 million is recorded as deferred revenue on the balance sheet. This deferred revenue will be recognized when flights are completed over the remaining contract term.

The deferred revenue balance as of June 30, 2020 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (In thousands):

 

 

Total Revenue

 

2020

 

$

 

2021

 

 

7,397

 

2022

 

 

8,603

 

Total

 

$

16,000

 

A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time.

The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's condensed consolidated statements of operations. The Company recognized $52.0 million and $54.5 million of lease revenue for the three months ended June 30, 2020 and 2019, respectively, and $157.7 million and $164.5 million of lease revenue for the nine months ended June 30, 2020 and 2019, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the condensed consolidated statements of operations because the use of the aircraft is not a separate activity of the total service provided under our capacity purchase agreements.  

13


4.

Recent Accounting Pronouncements

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU2020-04”ASU 2020-04”). This ASU provides optional expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London Interbank Offered Rate (LIBOR) or another reference rate expected to be

13


discontinued. Optional expedients can be applied from March 12, 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Lossesnew guidance requiring all expected credit losses for financial instruments held at the reporting date to be measured based on Financial Instruments ("ASU 2016-13").historical experience, current conditions and reasonable supportable forecasts. This ASU introduces a new accountingreplaces the existing incurred loss model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognitionand is applicable to the measurement of credit losses whileon financial instruments measured at amortized cost and also providing additional transparency aboutapplies to some off-balance sheet credit risk. The CECL model utilizesexposures. Our adoption of this guidance on a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The Company adopted Topic 842 effective October 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s contracts are or contain leases, (2) lease classification and (3) initial direct costs.  In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." The Company did not elect the hindsight practical expedient. This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company elected this adoption methodbasis on October 1, 2019.There was 0 adjustment to retained earnings.

Additionally, the Company’s adoption of Topic 842 did not have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the consolidated statements of operations or the consolidated statements of cash flows. The Company’s adoption of Topic 8422020 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor.  The Company’s prepaid aircraft rents, accrued aircraft rentscredit losses have not been, and deferred rent credits that were separately stated in the Company’s September 30, 2019 balance sheet have been classified as a component of the Company’s right-of-use assets effective October 1, 2019. The consolidated financial statements for the three months ended December 31, 2019 are presented under the new standard, while comparative years presented are not adjusted and continueexpected to be, reported in accordance withsignificant based on historical collection trends, the Company’s historical accounting policy. See Note 15, "Leases, Commitmentsfinancial condition of our airline partners and Contingencies," for more information.

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

external market factors.

 

5.4.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are primarily held by financial institutions in the United States and accounts receivable. Amounts on deposit with a financial institution may at times exceed federally insured limits. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions.  As of March 31, 2021, the Company had $3.4 million in restricted cash. We have an agreement with a financial institution for letter of credit facility and to issue letters of credit for particular airport authorities, worker's compensation insurance, property and casualty insurance and other business needs as required in certain lease agreements. Pursuant to the term of this agreement, $3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit.

Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at each respective balance sheet date. At June 30, 2020,March 31, 2021, the Company had capacity purchase agreements with American and United. AllUnited and a flight services agreement with DHL. Substantially all of the Company's condensed consolidated revenue for the ninesix months ended June 30,March 31, 2021 and 2020 and 2019 and accounts receivable at June 30, 2020March 31, 2021 and September 30, 20192020 was derived from these agreements. The termsAmerican accounted for approximately 45% and 51% of boththe Company's total revenue for the three months ended March 31, 2021 and 2020, respectively, and 46 % and 51% for the six months ended March 31, 2021 and 2020. United accounted for approximately 53% and 49% of the Company's revenue for the three months ended March 31, 2021 and 2020, respectively, and 52% and 49% for the six months ended March 31, 2021 and 2020. A termination of either the American andor the United capacity purchase agreements are not aligned with the lease obligationsagreement would have a material adverse effect on the aircraft performing services under such agreements.Company's business prospects, financial condition, results of operations, and cash flows.

14


Amounts billed by the Company under capacity purchase agreements are subject to the Company's interpretation of the applicable capacity purchase agreement and are subject to audit by the Company's major airline partners. Periodically, the Company's major airline partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major airline partner. As such, the Company periodically reviews amounts past due based on historical collection trends, the financial condition of airline partners and external market factors and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $5.4$1.3 million and $1.0$0.8 million at June 30, 2020March 31, 2021 and September 30, 2019,2020, respectively. If the Company's ability to collect these receivables and the financial viability of its partners is materially different than estimated, the Company's estimate of the allowance could be materially impacted.

American accounted for approximately 60% and 53% of the Company's total revenue for the three months ended June 30, 2020 and 2019, respectively, and 53 % and 54 % for the nine months ended June 30, 2020 and 2019, respectively. United accounted for approximately 40% and 47% of the Company's revenue for the three months ended June 30, 2020 and 2019, respectively, and 47% and 46% for the nine months ended June 30, 2020 and 2019, respectively. A termination of either the American or the United capacity purchase agreement would have a material adverse effect on the Company's business prospects, financial condition, results of operations, and cash flows.

6.5.

Intangible Assets

The Company monitors for any indicators of impairment of the intangible assets. When certain conditions or changes in the economic situation such as the current environment brought by COVID-19 exist, the assets may be impaired and the carrying amount of the assets exceed its fair value.

We determined that our reduced flying schedules and cash flow projections as a result of the COVID-19 pandemic indicate that an impairment loss may have been incurred. Therefore, we quantitatively assessed whether it was more likely than not that the intangible assets we hold have been impaired as of June 30, 2020. We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business from the COVID-19 pandemic, (2) current discount rates, (3) changes to the regulatory environment and (4) the nature and amount of government support that will be provided.

Based on our carrying amount recoverability test, we have concluded that our finite-lived intangible assets are not impaired as of June 30, 2020. Given the uncertain future amid COVID-19, we will conduct additional tests in the 4th quarter of 2020.

Information about the intangible assets of the Company at June 30, 2020as of March 31, 2021 and September 30, 2019, were2020, is as follows (in thousands):

 

 

June 30,

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Customer relationship

 

$

43,800

 

 

$

43,800

 

 

$

43,800

 

 

$

43,800

 

Accumulated amortization

 

 

(35,393

)

 

 

(34,268

)

 

 

(36,388

)

 

 

(35,768

)

 

$

8,407

 

 

$

9,532

 

Net carrying value

 

$

7,412

 

 

$

8,032

 

 

Total amortization expense recognized was approximately $0.4$0.3 million and $0.5$0.4 million for the three months ended June 30,March 31, 2021 and 2020, respectively, and 2019, respectively, and $1.1$0.6 million and $1.4$0.7 million for the ninesix months ended June 30, March 31, 2021 and

14


2020 and 2019, respectively.respectively. The Company expects to record amortization expense of $0.4$0.6 million for the remainder of 2020,2021, and $1.2 million, $1.0$1.0 million, $0.9 million, $0.8 million, $0.7 million for fiscal years 2021, 2022, 2023, 2024 and 2024,2025, respectively.

 

15As of March 31, 2021, the Company’s intangible assets remaining weighted average term is 14.6 years.


7.6.

Balance Sheet Information

Certain significant amounts included in the Company's condensed consolidated balance sheet as of June 30, 2020March 31, 2021 and September 30, 2019,2020, consisted of the following (in thousands):

 

 

June 30,

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Expendable parts and supplies, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expendable parts and supplies

 

$

26,368

 

 

$

25,336

 

 

$

27,324

 

 

$

27,431

 

Less: obsolescence and other

 

 

(3,950

)

 

 

(3,999

)

 

 

(4,280

)

 

 

(4,460

)

 

$

22,418

 

 

$

21,337

 

 

$

23,044

 

 

$

22,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid aircraft rent

 

$

 

 

$

35,786

 

Deferred reimbursed costs

 

 

1,387

 

 

 

2,092

 

Deferred offering and reimbursed costs

 

$

 

 

$

1,261

 

Other

 

 

5,756

 

 

 

3,045

 

 

 

8,956

 

 

 

14,806

 

 

$

7,143

 

 

$

40,923

 

 

$

8,956

 

 

$

16,067

 

Property and equipment, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aircraft and other flight equipment

 

$

1,597,916

 

 

$

1,582,199

 

Aircraft and other flight equipment substantially

pledged

 

$

1,603,377

 

 

$

1,596,174

 

Other equipment

 

 

5,323

 

 

 

5,122

 

 

 

5,189

 

 

 

5,147

 

Leasehold improvements

 

 

2,763

 

 

 

2,797

 

 

 

2,763

 

 

 

2,763

 

Vehicles

 

 

962

 

 

 

924

 

 

 

1,114

 

 

 

1,032

 

Building

 

 

699

 

 

 

699

 

 

 

699

 

 

 

699

 

Furniture and fixtures

 

 

303

 

 

 

302

 

 

 

303

 

 

 

302

 

Total property and equipment

 

 

1,607,966

 

 

 

1,592,043

 

 

 

1,613,445

 

 

 

1,606,117

 

Less: accumulated depreciation

 

 

(374,239

)

 

 

(318,458

)

 

 

(432,761

)

 

 

(393,702

)

 

$

1,233,727

 

 

$

1,273,585

 

 

$

1,180,684

 

 

$

1,212,415

 

Other Assets:

 

 

 

 

 

 

 

 

Warrants

 

$

16,374

 

 

$

 

Other

 

 

4,273

 

 

 

 

 

 

 

 

 

 

 

 

 

$

20,647

 

 

$

 

Other accrued expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued property taxes

 

$

9,035

 

 

$

9,186

 

 

$

5,996

 

 

$

11,354

 

Accrued interest

 

 

5,941

 

 

 

4,497

 

 

 

2,480

 

 

 

3,268

 

Accrued vacation

 

 

5,767

 

 

 

6,128

 

 

 

5,718

 

 

 

5,975

 

Deferred revenue-current portion

 

 

3,760

 

 

 

 

Other

 

 

13,160

 

 

 

9,077

 

 

 

14,416

 

 

 

24,881

 

 

$

37,663

 

 

$

28,888

 

 

$

28,610

 

 

$

45,478

 

 

The Company monitors for any indicators ofrecords impairment of thecharges on long-lived fixed assets. When certain conditions or changesassets used in the economic situation such as the current environment brought by COVID-19 exist,operations when events and circumstances indicate that the assets may be impaired, andthe undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceed itsexceeds their estimated fair value. The Company has assessed whether any impairment of its long-lived assets needexisted and has determined that no charges were deemed necessary under applicable accounting standards as of March 31, 2021. The Company’s assumptions about future conditions important to be tested for recoverabilityits assessment of carrying amount.

To determine whether impairments exist, we grouppotential impairment of its long-lived assets, atincluding the Capacity Purchase Agreement and fleet-type level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity purchase arrangements, block hours, maintenance events, labor costs and other relevant factors. Due to our reduced flying schedules and projections of future cash flows, we evaluated each of our fleets to determine if anyimpact of the fleetsCOVID-19 pandemic to its business, are impaired.subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

Based on our carrying amount recoverability test, we have concluded that no fleet was impaired as of June 30, 2020 as the future cash flows exceeded the carrying value of our long-lived fixed assets. Given the uncertain future amid COVID-19, we will conduct additional tests in 4th quarter 2020.Property and equipment, net:

15


 

Depreciation expense totaled approximately $20.2$20.4 million and $19.3$20.1 million for the three months ended June 30,March 31, 2021 and 2020, respectively, and 2019, respectively, and $60.5$40.6 million and $56.2$40.3 million for the ninesix months ended June 30,March 31, 2021 and 2020, and 2019, respectively. 

Other Assets

 

16


PriorIn connection with a negotiated forward purchase contract for electrically-powered vertical takeoff and landing aircraft (eVTOL aircraft) executed in February 2021, we obtained equity warrant assets giving us the right to acquire 1,171,649 shares of common stock in Archer Aviation, Inc. (Archer), a private, venture-backed company. Our investments in Archer do not have a readily determinable fair value, so we account for them using the measurement alternative under ASC 321 and measure the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the Company’s adoption of Topic 842 on October 1, 2019, the Company recorded amortizationterm and nature of the unfavorable leaseinvestment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment or other features that indicate a discount to fair value is warranted. Any changes in fair value from the grant date fair value of the equity warrant assets will be recognized as increases or decreases on our balance sheet and as net gains or losses on equity warrant assets, in other (expense) income, net. We estimated the initial equity warrant asset value to be $16.4 million based on the Archer enterprise valuation disclosed within a February 10, 2021 S-4 filing with the SEC. There were no observable price changes or transactions as of March 31, 2021, and as such no adjustments to the recorded grant date fair value of the equity warrant assets was recorded.

The grant date value of the warrants, $16.4 million, was recognized as a vendor credit liability of approximately $1.4 million forwithin other noncurrent liabilities. The liability related to the three months ended June 30, 2019 and $4.5 million forwarrant assets will be settled in the nine months ended June 30, 2019future, as a reduction to lease expense. Uponof the Company’s adoptionacquisition date value of Topic 842, the unfavorable lease liability is now includedeVTOL aircraft contemplated in its ROUthe related asset balance and amortized therein.purchase agreement.

 

8.7.

Fair Value Measurements

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

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

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

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

 

 

 

Jun 30, 2020

 

 

September 30, 2019

 

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Long-term debt and financing leases, including current

   maturities(1)

 

$

777.8

 

 

$

857.2

 

 

$

858.1

 

 

$

882.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

September 30, 2020

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Long-term debt and financing leases, including current maturities(1)

$

725.4

 

 

$

731.4

 

 

$

743.3

 

 

$

768.7

 

 

(1)

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

 

 

 

1716


9.8.

Long-Term Debt, Financing Leases and Other Borrowings

Long-term debt as of June 30, 2020March 31, 2021 and September 30, 2019,2020, consisted of the following (in thousands):

 

 

June 30,

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

aircraft, due 2022(1)(2)

 

$

41,472

 

 

$

49,795

 

 

$

 

 

$

41,472

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

aircraft, due 2024(3)

 

 

55,674

 

 

 

60,761

 

 

 

 

 

 

55,674

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2027(4)

 

 

105,786

 

 

 

110,912

 

 

 

106,092

 

 

 

105,887

 

Notes payable to secured parties, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

aircraft, due 2028(5)

 

 

181,776

 

 

 

191,168

 

 

 

162,247

 

 

 

172,137

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2028(6)

 

 

141,871

 

 

 

152,945

 

 

 

130,505

 

 

 

138,114

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(7)

 

 

53,647

 

 

 

71,998

 

 

 

 

 

 

47,319

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(8)

 

 

34,607

 

 

 

47,309

 

 

 

 

 

 

29,682

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2020(9)

 

 

415

 

 

 

1,659

 

Notes payable to financial institution due 2020(10)

 

 

1,523

 

 

 

2,329

 

 

 

1,523

 

 

 

1,523

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment, due 2022(11)

 

 

4,182

 

 

 

6,962

 

equipment, due 2020(11)

 

 

 

 

 

4,182

 

Other obligations due to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment, due 2023(12)

 

 

7,196

 

 

 

8,530

 

 

 

5,663

 

 

 

6,864

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

equipment, due 2024(13)

 

 

67,631

 

 

 

80,153

 

 

 

54,573

 

 

 

63,341

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

aircraft, due 2023(14)

 

 

52,500

 

 

 

65,625

 

 

 

39,375

 

 

 

48,125

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2023(15)

 

 

6,500

 

 

 

8,000

 

Working capital draw loan, used to cover operational needs (16)

 

 

23,000

 

 

 

 

Notes payable to financial institution due 2023 (15)

 

 

5,000

 

 

 

6,000

 

Revolving Credit Facility (16)

 

 

22,930

 

 

 

22,930

 

Notes payable to financial institution due 2025 (17)

 

 

197,525

 

 

 

 

Gross long-term debt, including current maturities

 

 

777,780

 

 

 

858,145

 

 

 

725,433

 

 

 

743,250

 

Less unamortized debt issuance costs

 

 

(14,007

)

 

 

(14,822

)

 

 

(10,598

)

 

 

 

Less Notes payable warrants

 

 

(10,797

)

 

 

(11,526

)

Net long-term debt, including current maturities

 

 

763,773

 

 

 

843,323

 

 

 

704,038

 

 

 

731,724

 

Less current portion

 

 

(176,896

)

 

 

(165,900

)

 

 

(103,980

)

 

 

(189,268

)

Net long-term debt

 

$

586,877

 

 

$

677,423

 

 

$

600,058

 

 

$

542,456

 

 

(1)(1) 

In fiscal 2007, the Company financed 3 CRJ-900 and 3 CRJ-700 aircraft for $120.3 million. The debt bears interest at the monthly LIBOR plus 2.25% (2.41% at June 30, 2020) and requires monthly principal and interest payments. The loan was paid in full during quarter ended December 31, 2020.

(2)(2) 

In fiscal 2014, the Company financed 10 CRJ-900 aircraft for $88.4 million. The debt bears interest at the monthly LIBOR plus a spread ranging from 1.95% to 7.25% (2.11% to 7.41% at June 30, 2020) and requires monthly principal and interest payments. In fiscal 2018, the Company repaid $40.0 million related to four CRJ-900 aircraft.During quarter ended December 31, 2020, the company paid the remaining balance in full.

(3)(3) 

In fiscal 2014, the Company financed 8 CRJ-900 aircraft with $114.5 million in debt. The debt bears interest at 5.00% and requires monthly principal and interest payments. The loan was paid in full during quarter ended December 31, 2020.

(4)(4) 

In fiscal 2015, the Company financed 7 CRJ-900 aircraft with $170.2 million in debt. The senior notes payable of $151.0 million bear interest at monthly LIBOR plus 2.71% (2.87% at June 30, 2020) and require monthly principal and interest payments. The subordinated notes payable is noninterest-bearing and become payable in full on the last day of the term of the notes. The Company has imputed an interest rate of 6.25% on the subordinated notes payable and recorded a related discount of $8.1 million, which is being accreted to interest expense over the term of the notes.

(5)(5) 

In fiscal 2016, the Company financed 10 E-175 aircraft with $246.0 million in debt under an EETC financing arrangement (see discussion below). The debt bears interest ranging from 4.75% to 6.25% and requires semi-annual principal and interest payments.

 

1817


(6)(6) 

In fiscal 2016, the Company financed 8 E-175 aircraft with $195.3 million in debt. The senior notes payable of $172.0$172.0 million bear interest at the three-month LIBOR plus a spread ranging from 2.20% to 2.32% (2.50% to 2.62% at June 30, 2020) and require quarterly principal and interest payments. The subordinated notes payable bear interest at 4.50% and require quarterly principal and interest payments.

(7) 

In June 2018, the Company refinanced 6 CRJ-900 aircraft with $27.5 million in debt and financed 9 CRJ-900 aircraft, which were previously leased, with $69.6 million in debt. The senior notes payable of $65.8 million bear interest at the three-month LIBOR plus 3.50% (3.8% at June 30, 2020) and require quarterly principal and interest payments. The subordinated notes payable of $29.8 million bear interest at three month LIBOR plus 7.50% (7.8% at June 30, 2020) and require quarterly principal and interest payments. The loan was paid in full during quarter ended December 31, 2020.

(8)

In December 2017, the Company refinanced 9 CRJ-900 aircraft with $74.9 million in debt. The senior notes payable of $46.9 million bear interest at the three-month LIBOR plus 3.50% (3.8% at June 30, 2020) and require quarterly principal and interest payments. The subordinated notes payable bear interest at the three-month LIBOR plus 4.50% (4.8% at June 30, 2020) and require quarterly principal and interest payments. The loan was paid in full during quarter ended December 31, 2020.

(9)(10)

In fiscal 2015, the Company financed certain flight equipment with $8.3 million in debt. The debt bears interest at 5.163% and requires monthly principal and interest payments.

(10)

In fiscal 2015 and 2016, the Company financed certain flight equipment maintenance costs with $10.2 million in debt. The debt bears interest at the three-month LIBOR plus 3.07% (3.37% at June 30, 2020) and requires quarterly principal and interest payments.

(11)(11) 

In fiscal 2016-2019, the Company financed certain flight equipment maintenance costs with $26.1 million in debt. The debt bears interest at the three-month LIBOR plus a spread ranging from 2.93% to 3.21% (3.23% to 3.51% at June 30, 2020) and requires quarterly principal and interest payments. The debt is subject to a fixed charge ratio covenant. As of June 30,The loan was paid in full during quarter ended December 31, 2020 the Company was in compliance with this covenant..

12)(12) 

In February 2018, the Company leased 2 spare engines. The leases were determined to be capital as the leases contain a bargain purchase option at the end of the term. Imputed interest is 9.128% and the leases requires monthly payments.

(13) 

In January 2019, the Company financed certain flight equipment with $91.2 million in debt. The debt bears interest at the monthly LIBOR plus 3.10% (3.26% at June 30, 2020) and requires monthly principal and interest payments.

(14) 

In June 2019, the Company financed 10 CRJ-700 aircraft with $70.0 million in debt, which were previously leased. The debt bears interest at the monthly LIBOR plus 5.00% (5.16% at June 30, 2020) and requires monthly principal and interest payments. The interest rate reduced from 5.25% to 5.00% in 1st quarter, 2020 due to United Airlines extension of CRJ-700.

(15)(15) 

On September 27,2019, the Company financed certain flight equipment for $8.0 million. The debt bears interest at the monthly LIBOR plus 5.00% (5.16% at June 30, 2020) and requires monthly principal and interest payments. The interest rate reduced from 5.25% to 5.00% in 1st quarter, 2020 due to United Airlines extension of CRJ-700.  

(16)

On September 25, 2019, the companyCompany extended the term on their $35.0 million working capital draw loan by three years, which now terminates in September 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. In 2ndDuring quarter ended June 30, 2020, $23.0 million was drawn to cover operational needs.

(17)

On October 30, 2020, the Company entered into a loan and guarantee agreement with United States Department of Treasury for a secured loan facility of up to $200.0 million that matures on October 30, 2025. On October 30, 2020, the Company borrowed $43.0 million and on November 13, 2020, the Company borrowed an additional $152.0 million. These amounts bear interest at the three-month LIBOR plus 3.50% which was paid-in-kind and capitalized into the balance of the loans for the first interest payment date on December 15, 2020. NaN further borrowings are available under the Loan and Guarantee Agreement.

 

Principal maturities of long-term debt as of June 30, 2020,March 31, 2021, and for each of the next five years are as follows (in thousands):

 

Periods Ending June 30,

 

Total Principal

 

Remainder of 2020

 

$

178,459

 

2021

 

 

162,494

 

March 31, 2021

 

Total Principal

 

Remainder of 2021

 

$

59,013

 

2022

 

 

133,663

 

 

 

113,682

 

2023

 

 

79,268

 

 

 

89,462

 

2024

 

 

55,677

 

 

 

61,209

 

2025

 

 

56,526

 

Thereafter

 

 

168,219

 

 

 

345,541

 

 

$

777,780

 

 

$

725,433

 

 

The net book value of collateralized aircraft and equipment as of June 30, 2020March 31, 2021 was $1,114.0$1,060.0 million.

Enhanced Equipment Trust Certificate ("EETC")

19


In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. At June 30, 2020March 31, 2021 Mesa has $181.8$162.2 million of equipment notes outstanding issued under the EETC financing included in long-term debt on the condensed consolidated balance

18


sheets. The structure of the EETC financing consists of a pass-through trust created by Mesa to issue pass-through certificates, which represent fractional undivided interests in the pass-through trust and are not obligations of Mesa.

The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds.

Mesa evaluated whether the pass-through trust formed for its EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated.consolidated. The pass-through trust was determined to be a VIE, however, the Company has determined that it does not have a variable interest in the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements.

On January 28, 2019, the Company entered into a Term Loan Agreement (the "Term Loan") pursuant to which the lenders thereunder committed to lend to the Company term loans in the aggregate principal amount of $91.2 million.  Borrowings under the Term Loan bear interest at LIBOR plus 3.10%. This interest rate is significantly lower than the interest rate under the Company's Spare EngineCIT Revolving Credit Facility (defined below), which the Term Loan refinanced and replaced.  The Spare Engine Facility accrued interest at LIBOR plus 7.25%.  The Term Loan has a term of five years, with principal and interest payments due monthly over the term of the loan in accordance with an amortization schedule.  The Company recorded a loss on extinguishment of debt of $3.6 million, due to a $1.9 million write-off of financing fees and $1.7 million in prepayment penalties, in connection with the repayment of the Spare Engine Facility.

On June 14, 2019, the Company completed the purchase of 10 CRJ-700 aircraft, which were previously leased under the aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor (the “GECAS Lease Facility”), for $70.0 million. The Company financed the aircraft purchase with $70.0 million in new debt. The notes payable of $70.0 million require monthly payments of principal and interest through fiscal 2023 bearing interest at LIBOR plus 5.0%. The Company recorded non-cash lease termination expense of $9.5 million in connection with the lease buyout.

On September 25, 2019, the Company extended the term on itstheir $35.0 million working capital draw loan by three years, which now terminates in September 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. InAs of March 31, 2021, $22.9 million has been drawn on the 2nd quarterrevolver.

Future borrowings, if any, under this facility are subject to, among other things, the Company having sufficient unencumbered assets to meet the borrowing base requirements under the facility.

Loan agreement with United States Department of 2020, $23.0 million was drawn to cover operational needs.Treasury

On September 27, 2019,October 30, 2020, the Company financed certain flight equipmententered into a Loan and Guarantee Agreement with $8.0United States Department of Treasury (the “U.S. Treasury”) for a secured loan facility of up to $200.0 million that matures in new debt. This debt requires monthly paymentsOctober 2025 (“the Treasury Loan Agreement”). On October 30, 2020, the Company borrowed $43.0 million (“the $43M Treasury Loan”) and on November 13, 2020, the Company borrowed an additional $152.0 million (“the $152M Treasury Loan”), collectively referred to as the “Treasury Term Loan Facility”. NaN further borrowings are available under the Treasury Loan Agreement. The Company also issued warrants to purchase shares of principalcommon stock to the U.S. Treasury.

The Loan and interest through fiscal 2023 and bearsGuarantee Agreement bear interest at Libora variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus 5.0%(b) 3.50%. Accrued interest on the loans will be payable in arrears on the first business day following the 14th day of each March, June, September and December, beginning with December 15, 2021.

On April 9, 2020, Export Development Canada (“EDC”All principal amounts outstanding under the Loan and Guarantee Agreement are due and payable in a single installment on October 30, 2025 (the “Maturity Date) provided. Interest will be paid by increasing the principal amount of the loan by the amount of such interest due on an interest payment date for the first 12 months. Mesa's obligations under the Treasury Loan Agreement are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment and tooling (collectively, the “Collateral”). The obligations under the Loan Agreement are guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds may be used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Loan Agreement may be made, in whole or in part, by Mesa Airlines, without premium or penalty, at any time and from time to time.  Amounts prepaid may not be reborrowed.  Mandatory prepayments of loans under the Loan Agreement are required, without premium or penalty, to the extent necessary to comply with deferralthe covenants discussed below, certain dispositions of principlethe Collateral, certain debt issuances secured by liens on the Collateral and certain insurance payments duerelated to the Collateral.  In addition, if a “change of control” (as defined in the Loan Agreement) occurs with respect to Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Loan Agreement.

The Loan Agreement requires the Company, under certain circumstances, including within ten (10) business days prior to the last business day of March and owingSeptember of each year, beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio.  If the calculated collateral coverage ratio is less than 1.6 to 1.0, Mesa Airlines will be required either to provide additional Collateral (which may include cash collateral) to secure its obligations under the Loan Agreement or repay the term loans under the Loan Agreement, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.6 to 1.0.  

19


The Loan Agreement contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Loan Agreement also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on March 19, 2020dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, totaling $28.0 million.  All Deferred Payments shall be due in a lump sum paymentrestrictions on September 30, 2020dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service.

In connection with the Loan and Guarantee Agreement and as partial compensation to Treasury for the provision of financial assistance under the Loan and Guarantee Agreement, the Company issued to Treasury warrants to purchase an aggregate of 4,899,497 shares of the Company’s common stock at an exercise price of $3.98 per share, which was the letter agreement datedclosing price of the Common Stock on The Nasdaq Stock Market on April 9, 2020. The company performedexercise price and number of shares of common stock issuable under the Warrants are subject to adjustment as a result of anti-dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions.  The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. For accounting purposes, the fair value for the Treasury Loan Warrant Shares is estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Term Loan Facility in the condensed consolidated balance sheet.

The Company incurred $3.1 million in debt issuance costs relating to the Loan and Guarantee Agreement. In accordance with the applicable guidance, Mesa allocated the debt modification accounting assessmentissuance costs between the Treasury Loan and treatedrelated warrants. At funding on October 30, 2020, the $43M Treasury Loan was recorded net of $0.7 million in capitalized debt issuance costs. At funding on November 13, 2020, the $152M Treasury Loan was recorded net of $2.3 million in capitalized debt issuance costs. The remaining $0.1 million in debt issuance costs was allocated to the warrants as a modification with immaterialreduction to the warrant value within additional paid-in capital. Debt issuance costs capitalized.allocated to the debt are amortized into interest expense using the effective interest method over the term of the related loan.

InDebt Repayment

Prior to the November 13, 2020 funding of the $152M Treasury Loan, the Company repaid $167.7 million in existing aircraft debt covering 44 aircraft, including indebtedness under its (a) Senior Loan Agreements, dated June 2020,27, 2018, (b) Junior Loan Agreements, also dated June 27, 2018, (c) Credit Agreements, dated January 31, 2007, April 16, 2014, and May 23, 2014, (d) Senior Loan Agreements, dated December 27, 2017, and (e) Junior Loan Agreements, also dated December 27, 2017 (collectively, “the EDC Loans”). The Company made payments totaling $164.1 million to repay the company amended their RASPRO aircraft lease agreement to defer $4.0EDC Loans, consisting of principal of $167.7 million, and a $3.6 million discount on the balance owed. Additionally, in connection with the repayment, $2.5 million of unamortized original issue discount and deferred financing costs were recorded as a lease payment otherwise dueloss on debt extinguishment, resulting in June 2020. Pera net gain on extinguishment of $1.0 million recorded within other income.

As of March 31, 2021, the amended agreement dated June 5,2020, the companyCompany is to pay this amount over the period of September 2021 through March 2024. The company made the accounting election available for COVID-19 related concession provided by a lessor. This event is not a lease modification and requires no changes to current accounting treatment.in compliance will all debt covenants.

20


10.9.

Earnings Per Share and Equity

Calculations of net income per common share attributable to Mesa Air Group were as follows (in thousands, except per share data):

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income attributable to Mesa Air Group

 

$

3,419

 

 

$

3,007

 

 

$

16,089

 

 

$

35,337

 

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Basic weighted average common shares outstanding

 

 

35,299

 

 

 

34,835

 

 

 

35,154

 

 

 

34,683

 

 

 

35,628

 

 

 

35,141

 

 

 

35,579

 

 

 

35,082

 

Add: Incremental shares for: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of restricted stock

 

 

 

 

 

277

 

 

 

94

 

 

 

368

 

Dilutive share adjustment - UST Warrant

 

 

3,038

 

 

 

 

 

 

2,183

 

 

 

138

 

Dilutive share adjustment - Restricted Shares

 

 

766

 

 

 

124

 

 

 

620

 

 

 

 

Diluted weighted average common shares outstanding

 

 

35,299

 

 

 

35,112

 

 

 

35,248

 

 

 

35,051

 

 

 

39,432

 

 

 

35,265

 

 

 

38,382

 

 

 

35,220

 

Net income per common share attributable to Mesa Air Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

 

$

0.09

 

 

$

0.46

 

 

$

1.02

 

 

$

0.16

 

 

$

0.05

 

 

$

0.56

 

 

$

0.36

 

Diluted

 

$

0.10

 

 

$

0.09

 

 

$

0.46

 

 

$

1.01

 

 

$

0.14

 

 

$

0.05

 

 

$

0.52

 

 

$

0.36

 

 

20


 

Basic income per common share is computed by dividing net income attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period.

The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants (excluding warrants with a nominal conversion price) is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income or loss per share calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested restricted stock and warrants would have an anti-dilutive effect. There were 0 anti-dilutive shares relating to restricted stock and exercise of warrants that were excluded from the calculation of diluted loss per share for the three and ninesix months ended June 30, 2020March 31, 2021 and 2019.2020.

 

11.10.

Common Stock

The Company previously issued warrants to third parties, which had a five-year term to be converted to common stock at an exercise price of $0.004 per share. Certain personsPersons who arewere not U.S. citizens held certain of these outstanding warrants to purchase shares of the Company's common stock.warrants. The warrants wereare exercisable only if consistent with federal law, which requires that no more than 24.9% of the Company's stock be voted, directly or indirectly, or controlled by persons who are not U.S. citizens. The warrants couldcan be exercisedconverted to common stock upon the warrant holders demonstrating U.S. citizenship or if consistent with above described federal law ownership limitations. In June 2018, the Company and holders agreed to extend the term of outstanding warrants set to expire by five years (through fiscal year 2023). AsAll of these warrants were converted to common shares as of March 31, 2020 alland these warrants were not related to any of the outstanding warrants had been fully exercised.the Company issued pursuant to the terms of a Treasury Warrant Agreement under the Loan and Guarantee Agreement entered on October 30, 2020.

In July 2018, the Company's Board of Directors and Compensation Committee approved the issuance of shares of restricted common stock under its 2018 Equity Incentive Plan (the "2018 Plan") immediately following completion of the Company's IPO to certain of its employees and directors in exchange for the cancellation of existing restricted phantom stock units, unvested restricted shares and SARs. The shares of restricted common stock issued under the 2018 Plan in exchange for the cancellation of restricted phantom stock units, unvested restricted shares and SARs are subject to vesting on the same terms set forth in the prior vesting schedules and are not subject to acceleration in connection with the 2018 Plan issuances.

On August 8, 2018, the Company filed its Second Amended and Restated Articles of Incorporation, which, among other things: (i) effected a 2.5-for-1 stock split of its common stock; and (ii) increased the authorized number of shares of its common and preferred stock to 125,000,000 and 5,000,000, respectively. All references to share and per share amounts in the Company's condensed consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares.

21


The Company's shares of common stock were listed on The NASDAQ Global Select Market under the symbol "MESA" effective August 10, 2018. On August 14, 2018, the Company completed its IPO, in which it issued and sold 9,630,000 shares of common stock, no par value, at a public offering price of $12.00 per share (the "Firm Shares"). Additionally, in connection with the IPO, the Company granted the underwriters an option to purchase up to an additional 1,444,500 shares of common stock at the same price. On September 11, 2018, the Company closed the sale of 1,344,500 shares ("Option Shares") of its common stock, in connection with the partial exercise of the overallotment option granted to the underwriters in its IPO. Of the 1,344,500 Option Shares sold, 723,985 were purchased directly from the Company and the remaining 620,515 shares were purchased directly from the selling shareholders. The Firm Shares and Option Shares were sold to the public for a price of $12.00 per share. The aggregate gross proceeds to us from the IPO were approximately $124.2 million. The Company received $111.7 million in net proceeds after deducting $8.7 million of underwriting discounts and commissions and $3.6 million in offering costs.

On April 9, 2019, and pursuant to Section 4.4 of the 2018 Plan in connection with the 2.5-for-1 stock split effected on August 8, 2018, the board of directors approved an increase in the number of shares authorized for issuance under the 2018 Plan by 1,000,000 shares of common stock.

On October 30, 2020, the Company entered into the Loan and Guarantee Agreement with the United States Department of the Treasury (the “Treasury”) and the Bank of New York Mellon, as Administrative and Collateral Agent, under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

In connection with the Loan and Guarantee Agreement and as partial compensation to the Treasury for the provision of financial assistance under the Loan and Guarantee Agreement, the Company issued warrants to the Treasury to purchase shares of the Company’s common stock, no par value, at an exercise price of $3.98 per share (the “Exercise Price”), which was the closing price of the Common Stock on The Nasdaq Stock Market on April 9, 2020. The Warrants were issued pursuant to the terms of a Treasury Warrant Agreement entered into by the Company and the Treasury. The exercise price and number of Warrant Shares issuable under the Warrants are subject to adjustment as a result of anti-dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option.The warrants will be accounted for within equity at a grant date fair value determined under the Black Scholes Option Pricing Model. As of March 31, 2021, 4,899,497 warrants were issued and outstanding.

The Company has not historically paid dividends on shares of its common stock. Additionally, the Loan and Guarantee Agreement and the Company's aircraft lease facility (the "RASPRO" Lease Facility) with RASPRO Trust 2005, a pass-through trust, containscontain restrictions that limit the Company's ability to or prohibit it from paying dividends to holders of its common stock.

21


12.11.

Income Taxes

The Company’s effective tax rate (ETR) from continuing operations was 30.7%24.9% and 28.3%25.3% for the three months and ninesix months ended June 30, 2020,March 31, 2021, respectively and 22.2%40.9% and 23.6%27.6% for the three months and ninesix months ended June 30, 2019,March 31,2020, respectively. The Company's ETR during the three months and ninesix months ended June 30, 2020March 31, 2021 was different from the prior year tax rates as a result of differencesvesting of stock compensation where the tax deduction state taxes differed from the book expense, changes in the bookvaluation allowance against state net operating losses, and tax valuechanges in state statutory rates.

The Company's ETR during the six months ended March 31, 2020 was different than the statutory rate of 21% as a result of the vesting and exercise of stock compensation, state taxes, and changes in valuation allowance against state net operating losses, as well as differences between the book and tax deductions associated with meals, entertainment, employer provided parking, and compensation of officers.  The non-deductible amounts related to these items increased slightly from the prior year to the current year.

The Company's ETR during the nine months ended June 30, 2019 was different than the statutory rate as a result of state taxes, the vesting and exercises of stock compensation, differences in the GAAP and tax deductibility of meals and parking benefits, and changes in the valuation allowance against state net operating losses.

As of September 30, 2019,2020, the Company had aggregate federal and state net operating loss carryovers of approximately $478.3$512.4 million and $228.3$223.9 million, respectively, which expire in fiscal years 2027-20372027-2038 and 2020-2039,2021-2040, respectively.  Approximately $2.7$0.7 million of state net operating loss carryforwards are expected to expire in the current fiscal year.

13.12.

Share-Based Compensation and Stock Repurchases

Restricted Stock

The restricted share activity for the ninesix months ended June 30, 2020March 31, 2021 were summarized as follows:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

Number

 

 

Grant Date

 

 

Number

 

 

Grant Date

 

 

of Shares

 

 

Fair Value

 

 

of Shares

 

 

Fair Value

 

Restricted shares unvested at September 30, 2019

 

 

847,974

 

 

$

9.56

 

Restricted shares unvested at September 30, 2020

 

 

1,195,548

 

 

$

5.47

 

Granted

 

 

660,297

 

 

 

4.07

 

 

 

121,688

 

 

 

8.58

 

Vested

 

 

(468,697

)

 

 

9.69

 

 

 

(132,109

)

 

 

8.75

 

Forfeited

 

 

(6,000

)

 

 

7.03

 

 

 

(17,500

)

 

 

4.90

 

Restricted shares unvested at June 30, 2020

 

 

1,033,574

 

 

$

6.01

 

Restricted shares unvested at March 31, 2021

 

 

1,167,627

 

 

$

5.44

 

 

22


As of June 30, 2020,March 31, 2021, there was $5.0$4.4 million, of total unrecognized compensation cost related to unvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.42.3 years.

Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. Share-based compensation expense for the three months ended June 30,March 31, 2021 and 2020 and 2019 was $1.0$0.8 million and $1.5$1.2 million, respectively, and for the ninesix months ended June 30,March 31, 2021 and 2020 and 2019 was $3.5$1.7 million and $4.3$2.5 million, respectively.

The Company repurchased 112,587175,925 shares of its common stock for $0.5$0.2 million to cover the income tax obligation on vested employee equity awards and warrant exercisesconversions during the ninesix months ended June 30, 2020.March 31, 2021.  

The Company has granted restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) as part of its long-term incentive compensation to employees and non-employee members of the Board of Directors.  RSAs and RSUs generally vest over a period of 3 to 5 years for employees and over one year for members of the Board of Directors. The restricted common stock underlying RSAs are deemed issued and outstanding upon grant and carry the same voting rights of unrestricted outstanding common stock. The restricted common stock underlying RSUs are not deemed issued or outstanding upon grant, and do not carry any voting rights.  

14.13.

Employee Stock Purchase Plan

2019 ESPP

22


The Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan (the "2019 ESPP") is a nonqualified plan that provides eligible employees of Mesa Air Group, Inc. with an opportunity to purchase Mesa Air Group, Inc. ordinary shares through payroll deductions. Under the 2019 ESPP, eligible employees may purchase Mesa Air Group, Inc. ordinary shares through the Employee Stock Purchase Plan. Under the 2019 ESPP, eligible employees may elect to contribute 1% to 15% of their eligible compensation during each semi-annual offering period to purchase Mesa Air Group, Inc. ordinary shares at a 10% discount.

A maximum of 500,000 Mesa Air Group, Inc. ordinary shares may be issued under the 2019 ESPP. As of June 30, 2020,March 31, 2021, eligible employees purchased and the Company issued 43,934157,714 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP.

15.14.

LeasesCommitments and CommitmentsContingencies

 

EffectiveOctober 1, 2019, the Company adopted Topic 842 and recorded ROU assets and lease liabilitiesLeases

As of $154.6 million and $141.9 million, respectively. As part of the adoption, prepaid aircraft rent, deferred rent credits and accrued aircraft rents of $35.8 million, $21.3 million and $1.8 million, respectively, were classified as a component of the Company’s ROU assets.

At June 30, 2020,March 31, 2021, the Company leased 1817 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The leases require the Company to pay all taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased.

It is common for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased airport facility and office space premises. This type of indemnity typically makes us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct.

Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or other equipment.

We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above. While our insurance does not typically cover environmental liabilities, we have insurance policies in place as required by applicable environmental laws. We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $15.6$13.9 million and $18.1$18.6 million for the three months ended June 30,March 31, 2021 and 2020, respectively, and 2019, respectively, and $51.0$27.7 million and $55.9$35.4 million for the ninesix months ended June 30,March 31, 2021 and 2020, and 2019, respectively.

respectively.

As of June 30, 2020,March 31, 2021, the Company’s operating leases have a remaining weighted average lease right-of-use assets were $131.5 million, the Company’s current maturitiesterms of 3.1 years and our operating lease liabilities were $43.2 million, and the Company’s noncurrent lease liabilities were $71.1 million.

Asmeasured using a weighted average discount rate of June 30, 2020, the Company’s operating lease payments in operating cash flows for the nine months ended June 30, 2020 is $34.9 million. The disclosure is not applicable for the nine months ended June 30, 2019 due to the method of adoption of the new leasing Standard ASC-842. (1)

23


The table below presents lease related terms and discount rates as of June 30, 2020:

As of June 30, 2020

Weighted average remaining lease term Operating

   leases

3.8 years

Weighted average discount rate Operating leases

4.2

%

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Operating lease cost

 

$

15,634

 

 

$

18,094

 

 

$

(2,460

)

 

 

(13.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Operating lease cost

 

$

51,000

 

 

$

55,897

 

 

$

(4,897

)

 

 

(8.8

)%

The following table summarizes future minimum rental payments primarily related to leased aircraft required under operating leases that had initial or remaining non-cancelable lease terms as of June 30, 2020 (in thousands):

Periods Ending

June 30,

 

Total Maturities

 

2020

 

$

9,390

 

2021

 

 

47,377

 

2022

 

 

33,216

 

2023

 

 

15,947

 

2024

 

 

14,682

 

Thereafter

 

 

1,654

 

Less: Interest

 

$

(7,892

)

Amounts recorded in the Consolidated Balance Sheet

 

$

114,374

 

The following represents future minimum lease obligations under non-cancelable operating leases as of September 30, 2019 (in thousands):

Periods Ending

September 30,

 

Total Payments

 

2020

 

$

47,814

 

2021

 

 

46,007

 

2022

 

 

31,090

 

2023

 

 

13,726

 

2024

 

 

13,185

 

Thereafter

 

 

1,368

 

Total

 

$

153,190

 

4.2%.

Engine Purchase Commitments

 

On MarchFebruary 26, 2020,2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into (a)an Amended and Restated Letter Agreement No. 13-1 (“Letter Agreement No. 13-1”), which amends and restates Letter Agreement No. 13 entered into by the parties effective December 11, 2019, and (b) Amended and Restated Letter Agreement No. 12-1 (“Letter Agreement No. 12-1” and together with Letter Agreement No. 13-1, the “Amended and Restated Letter Agreements”), which amends and restates Letter Agreement No. 12 entered into by the parties effective October 22, 2019.13-3. The Amended and Restated Letter Agreements each provide that they are effective March 20, 2020.

24


Under Letter Agreement No. 13-1, the Company has agreed to purchase and take delivery of 2010 new spare CF34-8C5 engines.  Delivery ofor CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1,2022. During the new sparequarter ended March 31, 2021, a $7.0 million non-refundable purchase deposit was made for the first 5 engines will now commence in April 2021, with the final spare engine beingto be delivered in Decembercalendar 2021.  The parties had previously agreedCompany has options to commence delivery of the new sparepurchase an additional (10) ten similar engines in August 2020.  The payment terms for the new spare engines were also amended, with payments to now be made in four (4) separate tranches commencing in October and December 2020 and February and March 2021.  

beyond 2022. The total purchase commitment underrelated to these agreements10 engines is approximately $108.0$50.0 million.

If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.  

 

16.

Other

We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.

23


Litigation

Contingencies

The Company is involvedsubject to 2 putative class action lawsuits alleging federal securities law violations in variousconnection with our IPO, 1 in the Superior Court of the State of Arizona and 1 in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief. In addition, we are subject to certain legal proceedings (including, but not limitedactions which we consider routine to insured claims) and FAA civil action proceedingsour business activities. As of March 31, 2021, our management believed, after consultation with legal counsel, that the Company doesultimate outcome of the two putative class action lawsuits and such other routine legal matters are not believe willlikely to have a material adverse effect upon its business,on our financial condition,position, liquidity or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.operations.

17.

Supplemental Disclosure

The Company adopted ASU 2016-18 on a retrospective basis during the quarter ended December 31, 2018. The following is a reconciliation of the captions in the Condensed Consolidated Balance Sheets to the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

June 30,

 

 

September 30,

 

 

 

 

2020

 

 

2019

 

 

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,934

 

 

$

68,855

 

 

Restricted cash

 

 

3,444

 

 

 

3,646

 

 

Cash, cash equivalents, and restricted cash in

   Condensed Consolidated Statement of

   Cash Flows

 

$

68,378

 

 

$

72,501

 

 

The restricted cash balance primarily includes deposits in trust accounts to collateralize letters of credit and to fund workers' compensation claims, landing fees, and other business needs.

18.15.

Subsequent Events  

 

None.On April 15, 2021, the Company was notified by the U.S. Department of the Treasury we are eligible to receive funds under the third Payroll Support Program (PSP3) as described in Note 2.

On April 9, 2021, the Company entered into Amendment No. 2 (“Amendment No. 2”) to the Amended and Restated American Capacity Purchase Agreement as described in Note 1.

On April 19, 2021, the Company entered into Amendment No. 3 (“Amendment No. 3”) to the Amended and Restated American Capacity Purchase Agreement as described in Note 1.

 

25

24


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 condensed consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forwardlooking statements that involve risks and uncertainties such as our plans, estimates, and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements below.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections titled "Cautionary Notes Regarding Forward-Looking Statements" above and "Risk Factors" below.

Overview

Mesa Airlines is a regional air carrier providing scheduled flight service to 66112 cities in 2938 states, the District of Columbia, and Mexico. Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either American Eagle, United Express, or UnitedDHL Express flights pursuant to the terms of capacity purchase agreements we entered into with American Airlines, Inc. ("(“American") and United Airlines, Inc. ("(“United"”), and DHL Express pursuant to the terms of a Flight Services Agreement (“FSA”) with DHL Network Operations (USA), Inc. (each, our "major airline partner"). We have a significant presence in several of our major airline partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.

As of June 30, 2020,March 31, 2021, we operated, under the Capacity Purchase Agreements, FSA or as spare, a fleet of 145163 aircraft with approximately 175440 daily departures. We operate 5445 CRJ-900 aircraft under our capacity purchase agreement with American (our "American Capacity Purchase Agreement") and 20 CRJ-70060 E-175 and 60 E-17516 E-175LL aircraft under our capacity purchase agreement with United (our "United Capacity Purchase Agreement"). We operate 2 Boeing 737- F400 aircraft under the Flight Services Agreement with DHL Network Operations. For the three months ended June 30, 2020,March 31, 2021, approximately 40%53% of our aircraft in scheduled service were operated for United, and approximately 60%45% were operated for American.American and 2% were operated for DHL. All of our operating revenue in our fiscal year ended September 30, 2019 (our "2019 fiscal year") and the ninesix months ended June 30, 2020March 31, 2021 was derived from operations associated with our American and United Capacity Purchase Agreements.Agreements and DHL Flight Services Agreement.  

Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour (the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination) and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase agreements also shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our capacity purchase agreements, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major airline partners. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access.

Impact of the COVID-19 Pandemic

On January 30, 2020, the World Health Organization declared an outbreak of a highly contagious form of an upper respiratory infection caused by COVID-19, a novel coronavirus strain commonly referred to as “coronavirus”. In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread, including in all of the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; “shelter in place” and other governmental regulations; reduced spending due to both job losses and other effects attributable to COVID-19; and an unprecedented decline in air travel.

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

26


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

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

Reducing employee-related costs, including:

Offering voluntary short-term unpaid leaves to all employees.

Compensation reductions for Executive level employees.

Instituting a company-wide hiring freeze.

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

Balance Sheet, Cash Flow and Liquidity. As of June 30, 2020, our cash and cash equivalents balance was $64.9 million. We have taken the following actions to increase liquidity and strengthen our financial position.

Reducing planned heavy engine and airframe maintenance events by approximately $16.8 million in the current fiscal year.

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

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

In April 2020, we were granted $92.5 million in emergency relief through the payroll support program of the CARES Act to be paid in installments through September 2020. We received $46.3 million as of June 30 and the remaining $46.2 million is scheduled to be paid to Mesa in three equal monthly payments from July to September 2020.$43.0 million has been utilized to offset the payroll expenses in the quarter ended June 30, 2020 and $3.3 million has been deferred to offset future payroll costs.

The CARES Act also provides for up to $25 billion in secured loans to the airline industry. We have been allocated $277.0 million under the loan program. We are in ongoing discussions with the U.S. Department of the Treasury regarding the terms and our participation level of such a loan.

Components of Results of Operations

The following discussion summarizes the key components of our condensed consolidated statements of operations.

Operating Revenues

Our condensed consolidated operating revenues consist primarily of contract revenue flight services as well as pass-through and other revenues.

Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our capacity purchase agreements with our major airline partners, along with the additional amounts received based on the number of flights and block hours flown. Contract revenues we receive from our major airline partners are paid and recognized by us on a weekly basis.

Pass-Through and Other. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, and certain maintenance costs related to our E-175 aircraft.

25


Operating Expenses

Our operating expenses consist of the following items:

Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews and pilot training expenses.

27


Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our capacity purchase agreements and flight service agreement, including aircraft repositioning and maintenance.  All aircraft fuel and related fueling costs for flying under our capacity purchase agreements were directly paid and supplied by our major airline partners. Accordingly, weThe fuel and related cost for flying under our FSA were directly paid and supplied by DHL. We do not record an expense or the related revenue for fuel supplied by American and United for flying under our capacity purchase agreements.agreements and DHL under our FSA.

Maintenance. Maintenance expense includes costs related to salariesroutine repair and benefits earned by our maintenance personnel, engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-throughheavy maintenance costs relatedfor airframes, engines, auxiliary power units and landing gears. Maintenance costs are expensed as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to our E-175 aircraft,the service provider and require payment on a utilization basis, such as well asflight hours. Costs incurred for maintenance lease return obligations on our leased aircraft whenand repair for utilization maintenance contracts where labor and materials price risks have been transferred to the expense is probable and can be reasonably estimated. We record these expenses using the direct expense method of accounting, wherein the expense is recognized when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. As a result of using the direct expense method, the timing ofservice provider are charged to maintenance expense reflected in the financial statements may vary significantly period to period.based on contractual payment terms.

Aircraft Rent. Aircraft rent includes costs related to leased engines and aircraft.

Aircraft and Traffic Servicing. Aircraft and traffic servicing includes expenses related to our capacity purchase agreements, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major airline partners.

General and Administrative. General and administrative expense includes insurance and taxes, the majority of which are pass-through costs, non-operational administrative employee wages and related expenses, building rents, real property leases, utilities, legal, audit and other administrative expenses.

Depreciation and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and equipment depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.

Other (Expense)(Expenses) Income, Net

Interest Expense. Interest expense is interest on our debt incurred to finance purchases of aircraft, engines, equipment as well as debt financing costs amortization.

Interest Income. Interest income includes interest income on our cash and cash equivalent balances.

Other Expense. Other expense includes expense derived from activities not classified in any other area of the condensed consolidated statements of income, including write-offs of miscellaneous third-party fees.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280, "Segment Reporting," we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flight services in accordance with our capacity purchase agreements.

While we operate under two separate capacity purchase agreements and one flight services agreement, we do not manage our business based on any performance measure at the individual contract level. Additionally, our chief operating decision maker (“CODM”) uses condensed consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. The CODM bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.

 

2826


Cautionary Statement Regarding Non-GAAP Measures

We present Adjusted EBITDA and Adjusted EBITDAR in this Quarterly Report on Form 10-Q, which are not recognized financial measures under GAAP, as supplemental disclosures because our senior management believes that they are well recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts and other interested parties in comparing companies in our industry.

Adjusted EBITDA. We define Adjusted EBITDA as net income or loss before interest, income taxes, and depreciation and amortization, adjusted for the impact of revaluation of liability awards, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.

Adjusted EBITDAR. We define Adjusted EBITDAR as net income or loss before interest, income taxes, depreciation and amortization, and aircraft rent, adjusted for the impact of revaluation of liability awards, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.

Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: (i) Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; (ii) Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (iii) Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and (vi)  Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements and other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted EBITDA and Adjusted EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

Results of Operations

Three Months Ended June 30, 2020March 31, 2021 Compared to Three Months Ended June 30, 2019March 31, 2020

We had operating income of $15.2$16.8 million in our three months ended June 30, 2020March 31, 2021 compared to operating income of $17.1$13.9 million in our three months ended June 30, 2019.March 31, 2020.  In our three months ended June 30, 2020,March 31, 2021, we had net income of $3.4$5.7 million compared to net income of $3.0$1.9 million in our three months ended June 30, 2019.March 31, 2020.  Our operating results for the three months ended June 30, 2020March 31, 2021 reflected a decrease in contract revenue primarilydue to reduced rates to partners related to PSP2 and lower flying on all our fleetsCRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19 and decrease in pass-through and other revenues primarily due to a decrease in maintenance pass-through expense.COVID-19.

Our maintenance expense decreased primarily due to fewer engine heavy maintenance events due to timing and a decrease in component contracts and rotable and expendable parts as a result of less flying.  Flight operations expense also decreased this quarterin the three months ended March 31, 2021 due to lower pilot and flight attendant wages and pilot training expenses. We also hadOur maintenance expense decreased primarily due to fewer heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher c-check expense and pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines.  In addition, general and administrative expense decrease as a decrease in lease termination expense relating to the purchaseresult of ten CRJ-700 aircraft in June 2019 that were previously leased under our GECAS Lease Facility. In addition,lower pass-through property taxes.  Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with the U.S. Department of the Treasury.Treasury.

 

2927


Operating Revenues

 

 

Three Months Ended Jun 30,

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Operating revenues ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

$

71,648

 

 

$

170,366

 

 

$

(98,718

)

 

 

(57.9

)%

 

$

81,712

 

 

$

165,781

 

 

$

(84,069

)

 

 

(50.7

)%

Pass-through and other

 

 

1,451

 

 

 

9,858

 

 

 

(8,407

)

 

 

(85.3

)%

 

 

15,568

 

 

 

14,115

 

 

 

1,453

 

 

 

10.3

%

Total operating revenues

 

$

73,099

 

 

$

180,224

 

 

$

(107,125

)

 

 

(59.4

)%

 

$

97,280

 

 

$

179,896

 

 

$

(82,616

)

 

 

(45.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

783,702

 

 

 

2,724,961

 

 

 

(1,941,259

)

 

 

(71.2

)%

 

 

1,771,498

 

 

 

2,611,940

 

 

 

(840,442

)

 

 

(32.2

)%

Block hours

 

 

31,622

 

 

 

114,042

 

 

 

(82,420

)

 

 

(72.3

)%

 

 

73,942

 

 

 

108,305

 

 

 

(34,363

)

 

 

(31.7

)%

Revenue passenger miles—RPMs (thousands)

 

 

314,422

 

 

 

2,211,275

 

 

 

(1,896,853

)

 

 

(85.8

)%

 

 

1,148,498

 

 

 

1,785,153

 

 

 

(636,655

)

 

 

(35.7

)%

Average stage length (miles)

 

 

567

 

 

 

580

 

 

 

(13

)

 

 

(2.2

)%

 

 

690

 

 

 

619

 

 

 

71

 

 

 

11.5

%

Contract revenue per available seat mile—CRASM

(in cents)

 

¢ 9.14

 

 

¢ 6.25

 

 

¢ 2.89

 

 

 

46.2

%

 

¢ 4.61

 

 

¢ 6.35

 

 

¢ 1.74

 

 

 

(27.4

)%

Passengers

 

 

548,705

 

 

 

3,770,683

 

 

 

(3,221,978

)

 

 

(85.4

)%

 

 

1,684,043

 

 

 

2,838,412

 

 

 

(1,154,369

)

 

 

(40.7

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown.

"Average stage length" means the average number of statute miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

"CRASM" means contract revenue divided by ASMs.

"RPM" means the number of miles traveled by paying passengers.

Total operating revenue decreased by $107.1$82.6 million, or 59.4%45.9%, to $73.1$97.3 million for our three months ended June 30, 2020March 31, 2021 as compared to our three months ended June 30, 2019.March 31, 2020. Contract revenue decreased by $98.7$84.1 million, or 57.9%50.7%, to $71.6$81.7 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleetsfleet as a result of COVID-19.the impact of COVID-19, temporary reduced rates to our partners and flying fewer aircraft under the American CPA.  Our block hours flown during our three months ended June 30, 2020March 31, 2021, decreased 72.3%31.7% compared to the three months ended June 30, 2019March 31, 2020 due to decreased flying on all our fleets. Our pass-through and other revenue decreasedincreased during our three months ended June 30, 2020March 31, 2021 by $8.4$1.5 million, or 85.3%10.3%, to $1.5$15.6 million primarily due to pass-through maintenance revenue related to our E-175 fleet. In addition, the decrease is attributable to reduced rates to partners related to PSP2 and fewer aircraft operating under the Amended and Restated American Purchase Agreement

 

During the three months ended June 30, 2020, the Company completed a significantly lower than normal number of flights due to the impact of COVID-19. Since the revenue recognition is based on number of flights completed, the fixed amount of cash received exceeded the revenue recognized based on the number of flights completed during the quarter. Under US GAAP, the fixed monthly payments are recognized as revenue ratably based on completed flights over the contract term. As a result, the Company deferred $16.0 million of revenue in the three months ended June 30, 2020. The deferred revenue will be recognized when flights are completed over the remaining contract term.

3028


Operating Expenses

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Operating expenses ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

$

29,664

 

 

$

53,025

 

 

$

(23,361

)

 

 

(44.1

)%

 

$

37,403

 

 

$

52,891

 

 

$

(15,488

)

 

 

(29.3

)%

Fuel

 

 

146

 

 

 

211

 

 

 

(65

)

 

 

(30.8

)%

 

 

198

 

 

 

188

 

 

 

10

 

 

 

5.3

%

Maintenance

 

 

22,591

 

 

 

54,322

 

 

 

(31,731

)

 

 

(58.4

)%

 

 

51,773

 

 

 

64,335

 

 

 

(12,562

)

 

 

(19.5

)%

Aircraft rent

 

 

15,582

 

 

 

12,875

 

 

 

2,707

 

 

 

21.0

%

 

 

9,992

 

 

 

12,285

 

 

 

(2,293

)

 

 

(18.7

)%

Aircraft and traffic servicing

 

 

538

 

 

 

978

 

 

 

(440

)

 

 

(45.0

)%

 

 

743

 

 

 

1,336

 

 

 

(593

)

 

 

(44.4

)%

General and administrative

 

 

11,737

 

 

 

12,435

 

 

 

(698

)

 

 

(5.6

)%

 

 

11,164

 

 

 

14,500

 

 

 

(3,336

)

 

 

(23.0

)%

Depreciation and amortization

 

 

20,635

 

 

 

19,761

 

 

 

874

 

 

 

4.4

%

 

 

20,705

 

 

 

20,469

 

 

 

236

 

 

 

1.2

%

Lease Termination

 

 

 

 

 

9,540

 

 

 

(9,540

)

 

 

(100.0

)%

CARES Act grant recognition

 

 

(43,018

)

 

 

 

 

 

(43,018

)

 

 

100.0

%

Lease termination

 

 

4,508

 

 

 

 

 

 

4,508

 

 

 

100.0

%

Government grant recognition

 

 

(55,967

)

 

 

 

 

 

(55,967

)

 

 

100.0

%

Total operating expenses

 

$

57,875

 

 

$

163,147

 

 

$

(105,272

)

 

 

(64.5

)%

 

$

80,519

 

 

$

166,004

 

 

$

(85,485

)

 

 

(51.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

783,702

 

 

 

2,724,961

 

 

 

(1,941,259

)

 

 

(71.2

)%

 

 

1,771,498

 

 

 

2,611,940

 

 

 

(840,442

)

 

 

(32.2

)%

Block hours

 

 

31,622

 

 

 

114,042

 

 

 

(82,420

)

 

 

(72.3

)%

 

 

73,942

 

 

 

108,305

 

 

 

(34,363

)

 

 

(31.7

)%

Average stage length (miles)

 

 

567

 

 

 

580

 

 

 

(13

)

 

 

(2.2

)%

 

 

690

 

 

 

619

 

 

 

71

 

 

 

11.5

%

Departures

 

 

18,092

 

 

 

61,798

 

 

 

(43,706

)

 

 

(70.7

)%

 

 

35,344

 

 

 

55,435

 

 

 

(20,091

)

 

 

(36.2

)%

 

Flight Operations. Flight operations expense decreased $23.4$15.5 million, or 44.1%29.3%, to $29.7$37.4 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020.  The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs, and employee related expense as a result of less flying due to COVID-19. The decrease was also due to $5.0 million in tax credits provided by the Employee Retention Credit under the CARES Act related to the quarter ended June 30, 2020.costs.

Fuel. Fuel expense decreased $0.1increased $0.01 million, or 30.8%5.3%, to $0.1$0.2 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020.  The decreaseincrease was primarily driven by a decrease in ferry flight fuel.fuel expense related to c-checks. All fuel costs related to flying under our capacity purchase agreements during our three months ended June 30,March 31, 2021 and 2020 and 2019 were directly paid to suppliers by our major airline partners.

Maintenance. Aircraft maintenance costs decreased $31.7$12.6 million, or 58.4%19.5%, to $22.6$51.8 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. This decrease was primarily driven by a decrease in engine overhaul, component contracts, other pass-through,parts, and labor and other expenses.expense. This decrease was partially offset by an increase in c-check, pass-through c-check, and pass-through engine overhaul expense. Total pass-through maintenance expenses reimbursed by our major airline partners decreasedincreased by $7.7$2.3 million during our three months ended June 30, 2020.March 31, 2021.

The following table presents information regarding our maintenance costs during ourthe three months ended June 30,March 31, 2021 and 2020 and 2019 (in thousands):

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Engine overhaul

 

$

2,816

 

 

$

9,508

 

 

$

(6,692

)

 

 

(70.4

)%

 

$

4,709

 

 

$

13,794

 

 

$

(9,085

)

 

 

(65.9

)%

Pass-through engine overhaul

 

 

402

 

 

 

1,856

 

 

 

(1,454

)

 

 

(78.3

)%

 

 

2,173

 

 

 

704

 

 

 

1,469

 

 

 

208.7

%

C-check

 

 

2,096

 

 

 

4,417

 

 

 

(2,321

)

 

 

(52.5

)%

 

 

8,506

 

 

 

6,640

 

 

 

1,866

 

 

 

28.1

%

Pass-through C-check

 

 

762

 

 

 

 

 

 

762

 

 

 

100.0

%

 

 

5,603

 

 

 

3,873

 

 

 

1,730

 

 

 

44.7

%

Component contracts

 

 

3,162

 

 

 

9,353

 

 

 

(6,191

)

 

 

(66.2

)%

 

 

6,370

 

 

 

9,395

 

 

 

(3,025

)

 

 

(32.2

)%

Rotable and expendable parts

 

 

3,381

 

 

 

6,620

 

 

 

(3,239

)

 

 

(48.9

)%

 

 

5,064

 

 

 

7,461

 

 

 

(2,397

)

 

 

(32.1

)%

Other pass-through

 

 

(3,660

)

 

 

3,368

 

 

 

(7,028

)

 

 

(208.7

)%

 

 

3,658

 

 

 

4,511

 

 

 

(853

)

 

 

(18.9

)%

Labor and other

 

 

13,632

 

 

 

19,200

 

 

 

(5,568

)

 

 

(29.0

)%

 

 

15,690

 

 

 

17,957

 

 

 

(2,267

)

 

 

(12.6

)%

Total

 

$

22,591

 

 

$

54,322

 

 

$

(31,731

)

 

 

(58.4

)%

 

$

51,773

 

 

$

64,335

 

 

$

(12,562

)

 

 

(19.5

)%

 

31


Aircraft Rent. Aircraft rent expense increased $2.7decreased $2.3 million, or 21.0%18.7%, to $15.6$10.0 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The increasedecrease is due to $4.9 million in additional engine rent expense offset byattributable a $2.1$2.3 million decrease in aircraft lease expense as a result of purchasing ten CRJ-700 aircraft in June 2019 which were previouslyengine rent due to fewer leased under the GECAS Lease Facility.engines.

29


Aircraft and Traffic Servicing.Aircraft and traffic servicing expense decreased $0.4$0.6 million, or 45.0%44.4%, to $0.5$0.7 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The decrease is primarily due to a decrease in interrupted trip expense and pass-through regulatory charges. For our three months ended June 30,March 31, 2021 and 2020, 49.9% and 2019, 7.9% and 56.8%32.0%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major airline partners.

General and Administrative. General and administrative expense decreased $0.7$3.3 million, or 5.6%23.0%, to $11.7$11.2 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The decrease is primarily due to a decrease in wages and pass-through insurance expense, partially offset by an increase in property taxes.tax. For our three months ended June 30,March 31, 2021 and 2020, and 2019, $3.9$2.9 million and $3.7$4.9 million, respectively, of our insurance and property tax expenses were reimbursed by our major airline partners.

Depreciation and Amortization. Depreciation and amortization expense increased $0.9$0.2 million, or 4.4%1.2%, to $20.6$20.7 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The increase is primarily attributable to an increase in rotable inventory and spare engines depreciation expense, related to the purchase of ten CRJ-700 aircraft which were previously leased under the GECAS Lease Facility.  The increase is partially offset by a decrease in aircraft enhancement depreciation.amortization of intangibles expense.

Lease Termination.Lease termination expense decreased $9.5increased $4.5 million, or 100.0%, to $0.0$4.5 million for our three months ended June 30, 2020March 31, 2021 compared to the same period in 2019. We incurred a lease2020.This increase is attributable to the termination expense forresulting from the ten CRJ-700purchase of CRJ-900 aircraft, purchased in June 2019 thatwhich were previously leased under the GECAS facility.from Bombardier Capital.

CARES Act Grant Recognition. CARES ActGovernment grant recognitionrecognition. Payroll Support Government Plan funds increased $43.0$56.0 million,, or 100.0%, to $43.0$56.0 million for our three months ended June 30, 2020March 31, 2021 compared to none in the same period in 2019.2020. Under the CARES Act, the government provided the company $46.3Company with a grant of $56.0 million in payroll support duringfor the quarter ended June 30, 2020. The company has recorded $43.0 million to offset the payroll expenses in the quarter ended June 30,period of December 2020 and $3.3 million has been deferred to offset the future payroll costs. The support offsets payroll expenses recorded in the functional areas of the operating expense lines.through March 2021.

Other Expense

Other expense decreased $2.9$1.5 million, or 22.1%14.2%, to $10.3$9.2 million for our three months ended June 30, 2020,March 31, 2021, compared to the same period in 2019.2020. The decrease is primarily a result of a decrease in interest expense due to lower interest rates on our loan agreement with U.S. Department of Treasury and a decrease in outstanding aircraft principal balances.

Income Taxes

The Company's effective tax rate (ETR) from continuing operations was 30.7%24.9% for the three months ended June 30, 2020March 31, 2021 and 22.2%40.9% for the three months ended June 30, 2019. March 31, 2020. The Company's ETR during the three months ended March 31, 2021 was different from the U.S. federal statutory rate of 21% primarily due to permanent book and tax deductible expense differences, vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state apportionment and state statutory rates. We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.

The Company's current year effective tax rate increased compared to the prior year tax rate as a result of an increasea decrease to the forecast for the current fiscal year, as the Company's permanent differences between book and taxable income intherefore have a larger impact on the deductibility of meals, employer provided parking, and compensation of officers.Company's effective tax rate. In addition, the Company's rate varied from the prior year's as a result of the vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates.

The income tax provision for the three months ended June 30, 2020 results in an effective tax rate of 30.7%, which differs from the U.S. federal statutory rate of 21% primarily due to permanent book and tax deductible expense differences, state taxes, changes in the valuation allowance against state net operating losses, routine stock vestings and exercises, and changes in state apportionment and state statutory rates.

We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.

As of September 30, 2019,2020, the Company had aggregate federal and state net operating loss carryforwards of $478.3$512.4 million and $228.3$223.9 million, respectively, which expire in 2027-20372027-2038 and 2020-2039,2021-2040, respectively.  Approximately $2.7$0.7 million of state net operating loss carryforwards are expiringexpected to expire in 2020.the current year.

32


NineSix Months Ended June 30, 2020March 31, 2021 Compared to NineSix Months Ended June 30, 2019March 31, 2020

We had operating income of $56.3$43.7 million in our ninesix months ended June 30, 2020March 31, 2021 compared to operating income of $90.7$41.1 million in our ninesix months ended June 30, 2019.March 31, 2020.  In our ninesix months ended June 30, 2020,March 31, 2021, we had net income of $16.0$19.8 million compared to net income of $35.3$12.7 million in our ninesix months ended June 30, 2019.  March 31, 2020.  Our operating results for the ninesix months ended June 30, 2020March 31, 2021 reflected a decrease in contract revenue primarilydue to reduced rates to partners related to the decrease inPSP2 and lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to COVID-19.the impact of COVID-19 and an increase in pass-through and other revenues primarily due to an increase in E-175 maintenance pass-through expense.

Our flight

30


Flight operations expense decreased this quarterin the six months ended March 31, 2021 due to lower pilot and flight attendant wages and pilot training expensesexpenses. Our maintenance expense decreased primarily due to fewer c-checks and heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines.  In addition, general and administrative expense decreased as a result of less flying due to COVID-19.  Our maintenance expense increased primarily due to more airframe C-Checks and engine heavy maintenance events due to timing of events.  We also had an increase in depreciation expense primarily due to the purchase of ten CRJ-700 aircraft that were previously leased under our GECAS Lease Facility.  We had a decrease in lease termination expense relating to the purchase of ten CRJ-700 aircraft in June 2019 that were previously leased under our GECAS Lease Facility. In addition,lower pass-through property taxes.  Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with the U.S. Department of the Treasury.Treasury.

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Operating revenues ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

$

409,228

 

 

$

510,586

 

 

$

(101,358

)

 

 

(19.9

)%

 

$

208,870

 

 

$

337,580

 

 

$

(128,710

)

 

 

(38.1

)%

Pass-through and other

 

 

27,802

 

 

 

24,941

 

 

 

2,861

 

 

 

11.5

%

 

 

38,781

 

 

 

26,351

 

 

 

12,430

 

 

 

47.2

%

Total operating revenues

 

$

437,030

 

 

$

535,527

 

 

$

(98,497

)

 

 

(18.4

)%

 

$

247,651

 

 

$

363,931

 

 

$

(116,280

)

 

 

(32.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

6,131,028

 

 

 

8,088,146

 

 

 

(1,957,118

)

 

 

(24.2

)%

 

 

3,442,441

 

 

 

5,347,325

 

 

 

(1,904,884

)

 

 

(35.6

)%

Block hours

 

 

255,488

 

 

 

341,071

 

 

 

(85,583

)

 

 

(25.1

)%

 

 

143,189

 

 

 

223,866

 

 

 

(80,677

)

 

 

(36.0

)%

Revenue passenger miles—RPMs (thousands)

 

 

4,251,169

 

 

 

6,402,057

 

 

 

(2,150,888

)

 

 

(33.6

)%

 

 

2,319,909

 

 

 

3,936,747

 

 

 

(1,616,838

)

 

 

(41.1

)%

Average stage length (miles)

 

 

591

 

 

 

582

 

 

 

9

 

 

 

1.5

%

 

 

664

 

 

 

595

 

 

 

69

 

 

 

11.6

%

Contract revenue per available seat mile—CRASM

(in cents)

 

¢ 6.67

 

 

¢ 6.31

 

 

¢ 0.36

 

 

 

5.7

%

 

¢ 6.07

 

 

¢ 6.31

 

 

¢ (0.24)

 

 

 

(3.8

)%

Passengers

 

 

7,084,255

 

 

 

10,874,745

 

 

 

(3,790,490

)

 

 

(34.9

)%

 

 

3,513,757

 

 

 

6,535,550

 

 

 

(3,021,793

)

 

 

(46.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown.

"Average stage length" means the average number of statute miles flown per flight segment.

“Block hours” means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.

"CRASM" means contract revenue divided by ASMs.

"RPM" means the number of miles traveled by paying passengers

 

31


Total operating revenue decreased by $98.5$116.3 million, or 18.4%32.0%, to $437.0$247.7 million for our ninesix months ended June 30, 2020March 31, 2021 as compared to our ninesix months ended June 30, 2019.March 31, 2020. Contract revenue decreased by $101.4$128.7 million, or 19.9%38.1%, to $409.2$208.9 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleetsfleet as a result of COVID-19.the impact of COVID-19, temporary reduced rate to our partners and flying fewer aircraft under the American CPA. Our block hours flown during our ninesix months ended June 30, 2020March 31, 2021 decreased 25.1%36.0% compared to the ninesix months ended June 30, 2019March 31, 2020 primarily due to decreased flying on all of our CRJ-900, CRJ-700, and E-175 fleets. Our pass-through and other revenue increased during our ninesix months ended June 30, 2020March 31, 2021 by $2.9$12.4 million, or 11.5%47.2%, to $27.8$38.8 million primarily due to pass-through maintenance revenue related to our E-175 fleet.

During In addition, the three months ended June 30, 2020,decrease is attributable to reduced rates to partners related to PSP2 and fewer aircraft operating under the Company completed a significantly lower than normal number of flights due to the impact of COVID-19. Since the revenue recognition is based on number of flights completed, the fixed amount of cash received exceeded the revenue recognized based on the number of flights completed during the quarter. Under US GAAP, the fixed monthly payments are recognized as revenue ratably based on completed flights over the contract term. As a result, the Company deferred $16.0 million of revenue in the three months ended June 30, 2020. The deferred revenue will be recognized when flights are completed over the remaining contract term.

33


Operating ExpensesAmended and Restated American Purchase Agreement.

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Operating expenses ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

$

135,199

 

 

$

155,636

 

 

$

(20,437

)

 

 

(13.1

)%

 

$

74,367

 

 

$

105,535

 

 

$

(31,168

)

 

 

(29.5

)%

Fuel

 

 

504

 

 

 

433

 

 

 

71

 

 

 

16.4

%

 

 

588

 

 

 

358

 

 

 

230

 

 

 

64.2

%

Maintenance

 

 

145,021

 

 

 

139,504

 

 

 

5,517

 

 

 

4.0

%

 

 

104,637

 

 

 

122,430

 

 

 

(17,793

)

 

 

(14.5

)%

Aircraft rent

 

 

39,196

 

 

 

41,104

 

 

 

(1,908

)

 

 

(4.6

)%

 

 

20,040

 

 

 

23,614

 

 

 

(3,574

)

 

 

(15.1

)%

Aircraft and traffic servicing

 

 

2,938

 

 

 

2,977

 

 

 

(39

)

 

 

(1.3

)%

 

 

1,644

 

 

 

2,400

 

 

 

(756

)

 

 

(31.5

)%

General and administrative

 

 

39,233

 

 

 

38,121

 

 

 

1,112

 

 

 

2.9

%

 

 

24,237

 

 

 

27,496

 

 

 

(3,259

)

 

 

(11.9

)%

Depreciation and amortization

 

 

61,656

 

 

 

57,528

 

 

 

4,128

 

 

 

7.2

%

 

 

41,175

 

 

 

41,021

 

 

 

154

 

 

 

0.4

%

Lease Termination

 

 

 

 

 

9,540

 

 

 

(9,540

)

 

 

(100.0

)%

CARES Act grant recognition

 

 

(43,018

)

 

 

 

 

 

(43,018

)

 

 

100.0

%

Lease termination

 

 

4,508

 

 

 

 

 

 

4,508

 

 

 

100.0

%

Government grant recognition

 

 

(67,278

)

 

 

 

 

 

(67,278

)

 

 

100.0

%

Total operating expenses

 

$

380,729

 

 

$

444,843

 

 

$

(64,114

)

 

 

(14.4

)%

 

$

203,918

 

 

$

322,854

 

 

$

(118,936

)

 

 

(36.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

6,131,028

 

 

 

8,088,146

 

 

 

(1,957,118

)

 

 

(24.2

)%

 

 

3,442,441

 

 

 

5,347,325

 

 

 

(1,904,884

)

 

 

(35.6

)%

Block hours

 

 

255,488

 

 

 

341,071

 

 

 

(85,583

)

 

 

(25.1

)%

 

 

143,189

 

 

 

223,866

 

 

 

(80,677

)

 

 

(36.0

)%

Average stage length (miles)

 

 

591

 

 

 

582

 

 

 

9

 

 

 

1.5

%

 

 

664

 

 

 

595

 

 

 

69

 

 

 

11.6

%

Departures

 

 

136,252

 

 

 

182,557

 

 

 

(46,305

)

 

 

(25.4

)%

 

 

182,557

 

 

 

118,160

 

 

 

64,397

 

 

 

54.5

%

 

Flight Operations. Flight operations expense decreased $20.4$31.2 million, or 13.1%29.5%, to $135.2$74.4 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019.  2020.  The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs, and employee related expense as a result of less flying due to COVID-19. The decrease was also due to $5.0 million in tax credits provided by the Employee Retention Credit under the CARES Act related to the quarter ended June 30, 2020costs.

 

Fuel. Fuel expense increased $0.1$0.2 million, or 16.4%64.2%, to $0.5$0.6 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019.  2020.  The increase was primarily driven by an increase in ferry flight fuel.fuel expense related to the delivery of the new E-175 aircraft. All fuel costs related to flying under our capacity purchase agreements during our ninesix months ended June 30,March 31, 2021 and 2020 and 2019 were directly paid to suppliers by our major airline partners.

Maintenance. Aircraft maintenance costs increased $5.5decreased $17.8 million, or 4.0%14.5%, to $145.0$104.6 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. This increasedecrease was primarily driven by an increasea decrease in engine overhaul expense, airframe C-Check expense,component contracts, parts, and labor and other expense. This decrease was partially offset by a decreasean increase in component contracts, rotablepass-through engine overhaul and expendable, and other pass-through c-check expense. Total pass-through maintenance expenses reimbursed by our major airline partners increased by $2.6$14.8 million during our ninesix months ended June 30, 2020.March 31, 2021.

32


The following table presents information regarding our maintenance costs during our ninesix months ended June 30,March 31, 2021 and 2020 and 2019 (in thousands):

 

 

Nine Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Engine overhaul

 

$

25,361

 

 

$

17,738

 

 

$

7,623

 

 

 

43.0

%

 

$

9,462

 

 

$

22,545

 

 

$

(13,083

)

 

 

(58.0

)%

Pass-through engine overhaul

 

 

2,956

 

 

 

3,044

 

 

 

(88

)

 

 

(2.9

)%

 

 

11,806

 

 

 

2,555

 

 

 

9,251

 

 

 

362.1

%

C-check

 

 

14,787

 

 

 

10,629

 

 

 

4,158

 

 

 

39.1

%

 

 

11,464

 

 

 

12,692

 

 

 

(1,228

)

 

 

(9.7

)%

Pass-through C-check

 

 

5,856

 

 

 

 

 

 

5,856

 

 

 

100.0

%

 

 

12,741

 

 

 

5,093

 

 

 

7,648

 

 

 

150.2

%

Component contracts

 

 

22,243

 

 

 

27,726

 

 

 

(5,483

)

 

 

(19.8

)%

 

 

12,157

 

 

 

19,082

 

 

 

(6,925

)

 

 

(36.3

)%

Rotable and expendable parts

 

 

18,247

 

 

 

21,397

 

 

 

(3,150

)

��

 

(14.7

)%

 

 

10,382

 

 

 

14,866

 

 

 

(4,484

)

 

 

(30.2

)%

Other pass-through

 

 

5,188

 

 

 

8,393

 

 

 

(3,205

)

 

 

(38.2

)%

 

 

6,770

 

 

 

8,848

 

 

 

(2,078

)

 

 

(23.5

)%

Labor and other

 

 

50,383

 

 

 

50,577

 

 

 

(194

)

 

 

(0.4

)%

 

 

29,855

 

 

 

36,749

 

 

 

(6,894

)

 

 

(18.8

)%

Total

 

$

145,021

 

 

$

139,504

 

 

$

5,517

 

 

 

4.0

%

 

$

104,637

 

 

$

122,430

 

 

$

(17,793

)

 

 

(14.5

)%

 

34


Aircraft Rent. Aircraft rent expense decreased $1.9$3.6 million, or 4.6%15.1%, to $39.2$20.0 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019. 2020. The decrease is attributable to a $9.9$3.6 million decrease in aircraft lease expense as a result of purchasing ten CRJ-700 aircraft in June 2019 which were previously leased under the GECAS Lease Facility, offset by an $8.0 million increase in engine rent due to additional engine rent expense.fewer leased engines.

Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased $0.04$0.8 million, or 1.3%31.5%, to $2.9$1.6 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The decrease is primarily due to a decrease in interrupted trip expense and pass-through regulatory charges, partially offset by an increase in interrupted trip expense.pass-through legal fees related to our GoJet lease. For our ninesix months ended June 30,March 31, 2021 and 2020, 54.7% and 2019, 31.3% and 57.1%36.5%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major airline partners.

General and Administrative. General and administrative expense increased $1.1decreased $3.3 million, or 2.9%11.9%, to $39.2$24.2 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019.2020. The increasedecrease is primarily due to an increasea decrease in pass-through property tax, partially offset by a decrease in legal expense.taxes. For our ninesix months ended June 30,March 31, 2021 and 2020, and 2019, $13.2$7.4 million and $11.3$9.3 million, respectively, of our insurance and property tax expenses were reimbursed by our major airline partners.

Depreciation and Amortization. Depreciation and amortization expense increased $4.1$0.2 million, or 7.2%0.4%, to $61.7$41.2 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019. 2020. The increase is primarily attributable to an increase in spare engines depreciation expense, related to the purchase of ten CRJ-700 aircraft which were previously leased under the GECAS Lease Facility.  The increase was also partially related to the purchase of rotable inventory, partially offset by a decrease in aircraft improvement depreciation.amortization of intangibles expense.

Lease Termination.Lease termination expense decreased $9.5increased $4.5 million, or 100.0%, to $0.0$4.5 million for nineour six months ended June 30, 2020March 31, 2021 compared to the same period in 2019. We incurred a lease2020. This increase is attributable to the termination expense forresulting from the ten CRJ-700purchase the purchase of CRJ-900 aircraft, purchased in June 2019 that werewhich was previously leased under the GECAS facility.from Bombardier Capital.

CARES Act Grant Recognition. CARES Act

Government grant recognitionrecognition. Payroll Support Government Plan funds increased $43.0$67.3 million,, or 100.0%, to $43.0$67.3 million for threeour six months ended June 30, 2020March 31, 2021 compared to none in the same period in 2019.2020. Under the CARES Act, the government provided the company $46.3Company with a grant of $56.0 million in payroll support duringfor the quarter ended June 30, 2020. The company has recorded $43.0period of December 2020 through March 2021.  We also recognized $11.3 million to offset the payroll expenses in the quarter ended June 30, 2020 and $3.3 million has been deferred to offset the future payroll costs. The support offsets payroll expenses recorded in the functional areas of the operating expense lines.grant amount received for the period of April through October 2020 as of December 31, 2020.

Other Expense

Other expense decreased $10.6$6.4 million, or 23.9%26.9%, to $33.9$17.2 million for nineour six months ended June 30, 2020,March 31, 2021, compared to the same period in 2019. 2020. The decrease is primarily a result of a decrease in interest expense due to lower interest rates on our new Spare Engine Facilityloan agreement with U.S. Department of Treasury and a decrease in outstanding aircraft principal balances. Additionally, we had one-time $3.6 million early termination fee related to our engine financing in the nine months ended June 30, 2019.  We also saw a decrease in interest income.balances.

Income Taxes

The income tax expense (benefit) totaled $6.4$6.7 million for the ninesix months ended June 30, 2020March 31, 2021 as compared to a tax expense (benefit) of $10.9$4.8 million for the ninesix months ended June 30, 2019.March 31, 2020. The effective tax rate was 28.3%25.3% versus 23.6%27.6% in the prior year.

The effective tax rate for the ninesix months ended June 30, 2020March 31, 2021 was impacted by permanent difference betweenvesting of stock compensation where the tax deduction differed from the book and taxable income in the deductibility of meals, employer provided parking, and compensation of officers. The effective rate was also impacted byexpense, state taxes, changes in the valuation allowance against state net operating losses, vesting and exercises of stock compensation, and changes in state apportionment and state statutory rates.

33


We file income tax returns in the US and in various state jurisdictions with varying statutes of limitations.  We are generally no longer subject to income tax examination by tax authorities for years prior to 2017 and 20152016 for federal and state purposes, respectively, with the exception of the examination of our net operating losses.  The balance of unrecognized tax benefits is not anticipated to fluctuate significantly from fiscal 20192020 to fiscal 2020.2021.  It is our policy to recognize interest expense and penalties related to uncertain income tax matters as a component of income tax expense.

35


Adjusted EBITDA and Adjusted EBITDAR

The following table presents a reconciliation of net income to estimated Adjusted EBITDA and Adjusted EBITDAR for the periodsperiod presented (in thousands):

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,419

 

 

$

3,007

 

 

$

16,089

 

 

$

35,337

 

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Income tax expense

 

 

1,517

 

 

 

856

 

 

 

6,359

 

 

 

10,891

 

 

 

1,890

 

 

 

1,307

 

 

 

6,711

 

 

 

4,842

 

Income before taxes

 

$

4,936

 

 

$

3,863

 

 

$

22,448

 

 

$

46,228

 

 

$

7,579

 

 

$

3,192

 

 

$

26,518

 

 

$

17,512

 

Adjustments (1)(2)

 

 

 

 

 

9,540

 

 

 

 

 

 

13,156

 

 

 

4,508

 

 

 

 

 

 

3,558

 

 

 

 

Adjusted income before taxes

 

$

4,936

 

 

$

13,403

 

 

$

22,448

 

 

$

59,384

 

 

 

12,087

 

 

 

3,192

 

 

 

30,076

 

 

 

17,512

 

Interest expense

 

 

10,368

 

 

 

13,496

 

 

 

34,668

 

 

 

42,110

 

 

 

8,755

 

 

 

11,673

 

 

 

17,837

 

 

 

24,300

 

Interest income

 

 

(1

)

 

 

(733

)

 

 

(95

)

 

 

(1,188

)

 

 

(79

)

 

 

(36

)

 

 

(205

)

 

 

(94

)

Depreciation and amortization

 

 

20,635

 

 

 

19,761

 

 

 

61,656

 

 

 

57,528

 

 

 

20,705

 

 

 

20,469

 

 

 

41,175

 

 

 

41,021

 

Adjusted EBITDA

 

$

35,938

 

 

$

45,927

 

 

$

118,677

 

 

$

157,834

 

 

$

41,468

 

 

$

35,298

 

 

$

88,883

 

 

$

82,739

 

Aircraft rent

 

 

15,582

 

 

 

12,875

 

 

 

39,196

 

 

 

41,104

 

 

 

9,992

 

 

 

12,285

 

 

 

20,040

 

 

 

23,614

 

Adjusted EBITDAR

 

$

51,520

 

 

$

58,802

 

 

$

157,873

 

 

$

198,938

 

 

$

51,460

 

 

$

47,583

 

 

$

108,923

 

 

$

106,353

 

 

 

(1)

We have added non-GAAP adjustments for costs associated with lease termination, loss on extinguishment of debt and write-off of associated financing fees:

Our financial results include lease termination expense of $9.5 millionIncludes adjustment for the three and nine months ended June 30, 2019 related to our acquisition of ten CRJ-700 which were previously leased under our aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor (the “GECAS Lease Facility”).

Our financial results reflect lossgain on extinguishment of debt of $3.6$1.0 million related to repayment of the Company’s Spare Engine Facility for the nineaircraft debts during our six months ended June 30, 2019.  This loss includes a $1.9 million write-off of financing fees.March 31, 2021.

 

(2)

Includes lease termination expense of $4.5 million for the three and six months ended March 31, 2021 related to purchase of CRJ-900 aircraft, which were previously leased from Bombardier Capital.

Liquidity and Capital Resources

As a result of the COVID-19 pandemic, we have taken, and are continuing to take, certain actions to increase liquidity and strengthen our financial position whichposition. These actions include:

Reducing planned heavy engine and airframe maintenance events by approximately $16.8 million in the current fiscal year.

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

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

One of our aircraft lenders has agreed to defer $28.0 million of principal debt payments otherwise due beginning on March 19, 2020, to and including September 30, 2020.  All deferred payments will be due in a lump sum payment on September 30, 2020 per a letter agreement dated April 9, 2020. Although the agreement is to pay the full amount back on September 30, 2020,In February 2021, the Company is seeking more favorable repayment terms fromwas granted $48.7 million in financial assistance by the lender. No assurance can be givenDepartment of the Treasury under the Payroll Support Program Extension (“PSP2”) under the Consolidated Appropriations Act of 2021. In March 2021, we were notified that, we will be successfulbased on funding availability, recipients that were currently in further modifying or securing more favorable repayment terms. The company performedcompliance with executed PSP agreements would receive an additional award amount. As a debt modification accounting assessment and determined that this event is a debt modification and no changes to the current accounting treatment is required.

In June 2020,result, the Company amended its RASPRO aircraft agreement to deferwas granted an additional $7.3 million through the PSP2 for a $4.0total grant of $56.0 million. The additional $7.3 million lease payment otherwise duewas received in June 2020. Per the amended agreement dated June 5,2020,April 2021.

On April 15, 2021, the Company is required to pay this amount over the period of September 2021 through March 2024. The Company made the accounting election available for COVID-19 related concession providedwas notified by a lessor. This event is not a lease modification and requires changes to current accounting treatment.

36


In April 2020, we were granted $92.5 million in emergency relief through the payroll support program of the CARES Act to be paid in installments through September 2020. We received $46.3 million as of June 2020, and the remaining $46.2 million is scheduled to be paid to Mesa in three equal monthly payments from July to September 2020.$43.0 million has been utilized to offset the payroll expenses in the quarter ended June 30, 2020 and $3.3 million has been deferred to offset future payroll costs.

The relief payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020. Other conditions include continuing essential air service as directed by the U.S. Department of Transportation and certain limitations on executive compensation.

         The CARES Act also provides for up to $25 billion in secured loans to the airline industry. We have been allocated $277.0 million under the loan program. We are in ongoing discussions with the U.S. Department of the Treasury regardingwe are eligible to receive funds under the terms and our participation levelthird Payroll Support Program (PSP3), which was created under the American Recovery Plan Act of such a loan.

The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020.2021 (ARP), enacted on March 11, 2021. The Company expects to deferit will be eligible and estimates the amount is approximately $7.0$52.2 million.The Company received the first installment of $26.1 million of such taxes, with 50% of the deferred amount to be repaid on December 31, 2021 and the remaining 50% to be repaid on December 31, 2022.

These aforementioned reliefs from the CARES Act are expected to provide liquidity during the stay at home and recovery periods this year.

We expect to meet our cash needs for the next twelve months with cash and cash equivalents, financing arrangements, government assistance from the CARES Act, and cash flows from operations. As of June 30, 2020, we had $65 million in unrestricted liquidity. Additionally, we have five unencumbered CRJ-700 aircraft available to use as collateral for potential financing arrangements if needed. However, we continue to monitor the impact of the pandemic, including its adverse effect on customer demand, the general economy, and our major airline partners. Should the effects of the pandemic continue long-term, our capital requirements and sources of capital may be adversely impaired. See Part II, Item 1A, Risk Factors for additional discussion.April 23, 2021.

Sources and Uses of Cash

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft pre-delivery payments, maintenance, aircraft rent and to pay debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. Our principal sources of liquidity are the cash grant we received under the payroll support programs (PSP, PSP2, PSP3) and the Loan and Guarantee Agreement we entered into with the Treasury (the “US Treasury

34


Loan Agreement”), each under the CARES Act, cash on hand, cash generated from operations and funds from external borrowings. In the near term, we expect to fund our primary cash requirements through cash generated from operations and cash and cash equivalents on hand. We also have the ability to utilize our credit and guaranty agreement (the "CIT Revolving Credit Facility") pursuant to which the CIT Lenders committed to lend to Mesa Airlines and Mesa Air Group—Airline Inventory Management, LLC, ("borrowingsMAG-AIM".) revolving loans in the aggregate principal amount of up to $35.0 million. As of June 30, 2020, $12.0 million remains available for borrowing until the facility matures on August 12, 2022.

We believe that the key factors that could affect our internal and external sources of cash include:

 

Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our services, competitive pricing pressures, and our ability to achieve further reductions in operating expenses; and

 

Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Our ability to service our long-term debt obligations, including our equipment notes, to remain in compliance with the various covenants contained in our debt agreements and to fund our working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to other factors, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.

37


We believe that cash flow from operating activities coupled with existing cash and cash equivalents, short-term investments, existing credit facilities, financing arrangements and government assistance fromunder the CARES Act, will be adequate to fund our operating and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.  

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect the current market conditions and our projected demand. Our capital expenditures are primarily directed toward our aircraft fleet and flight equipment. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for the threesix months ended June 30, 2020ending March 31,2021 is approximately 6.4%0.9% of annual revenue, which is higherlower compared to our historical expense of approximately 1.2% to 1.5% of annual revenues not onlyas the Company is focusing on cost savings due to expenses incurred related to aircraft enhancements but also a decrease in revenue due to the COVID-19COVID 19 pandemic impact on the airline industry. We expect to continue to incur capital expenditures to support our business activities. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

As of June 30, 2020,March 31, 2021, our principal sources of liquidity were cash and cash equivalents of $64.9$147.9 million. In addition, we had restricted cash of $3.4 million as of June 30, 2020. Restricted cash includes certificates of deposit that secure letters of credit issued for particular airport authorities as required in certain lease agreements. Primary uses of liquidity are capital expenditures, and debt repayments. March 31, 2021. As of June 30, 2020,March 31, 2021, we also had $718.2 million in secured indebtedness incurred primarily in connection with our financing of aircraft. As of March 31, 2021, we had $176.9$101.8 million of short-term debt, excluding financingcapital leases, and $586.9$618.0 million of long-term debt excluding financing leases.

Sources of cash for the nine months ended June 30, 2020 were primarily cash flows from operations of $103.6 million. This positive cash flow was primarily driven by receipts from performance under our capacity purchase agreements.capital leases.

Restricted Cash

As of June 30, 2020,March 31, 2021, we had $3.4 million in restricted cash. We have an agreement with a financial institution for a $6.0 million letter of credit facility and to issue letters of credit for landing fees,particular airport authorities, worker's compensation insurance, property and casualty insurance and other business needs.needs as required in certain lease agreements. Pursuant to suchthe term of this agreement, $3.5$3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit.

 

Cash Flows

The following table presents information regarding our cash flows for each of the threesix months ended June 30,March 31, 2021 and 2020 and 2019 (in thousands):

 

35


 

Nine Months Ended June 30,

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

 

 

2021

 

 

2020

 

Net cash provided by operating activities

 

$

103,601

 

 

$

114,077

 

 

$

78,575

 

 

$

65,202

 

Net cash used in investing activities

 

 

(25,114

)

 

 

(96,033

)

 

 

(11,675

)

 

 

(24,773

)

Net cash used in by financing activities

 

 

(82,610

)

 

 

(41,622

)

Net decrease in cash and cash equivalents

 

 

(4,123

)

 

 

(23,578

)

Net cash used in financing activities

 

 

(18,522

)

 

 

(57,090

)

Net increase (decrease) in cash and cash equivalents

 

 

48,378

 

 

 

(16,661

)

Cash and cash equivalents at beginning of period

 

 

72,501

 

 

 

107,134

 

 

 

102,841

 

 

 

72,501

 

Cash and cash equivalents at end of period

 

$

68,378

 

 

$

83,556

 

 

$

151,219

 

 

$

55,840

 

 

Net Cash Flow Provided Byby Operating Activities

During our ninesix months ended June 30, 2020,March 31, 2021, we had cash flow provided by operating activities was $103.6of $78.6 million. We had net income of $16.1$19.8 million adjusted for the following significant non-cash items: depreciation and amortization of $61.7$41.2 million, stock-based compensation of $3.5$1.7 million, deferred income taxes of $5.9million, long-term deferred revenue of $12.2$6.6 million, amortization of deferred credits of $(2.9)$(2.3) million, amortization of debt discount and issuance costs of $5.0 million, gain on extinguishment of debt of $(1.0) million, loss on contract termination of $4.5 million. We had a net change of $2.9 million within other net operating assets and liabilities largely driven by an increase in accounts payable, deferred revenue and decrease in accrued liabilities during our six months ended March 31, 2021.

During our six months ended March 31, 2020, we had cash flow provided by operating activities of $65.2 million. We had net income of $12.7 million adjusted for the following significant non-cash items: depreciation and amortization of $41.0 million, stock-based compensation of $2.5 million, deferred income taxes of $4.5million, amortization of deferred credits of $(2.0) million, amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $3.2$2.1 million and $0.5 million loss on disposal of assets and provision for obsolete expendable parts of $0.3 million.assets. We had a net change of $3.1$3.9 million within other net operating assets and liabilities largely driven by an increase in accrued liability during our ninesix months ended June 30,March 31, 2020.

 

38


During our nine months ended June 30, 2019, cash flow provided by operating activities of $114.1 million reflects our growth and execution of our strategic initiatives. We had net income of $35.3 million adjusted for the following significant non-cash items: depreciation and amortization of $57.5 million, stock-based compensation of $4.3 million, deferred income taxes of $10.9million, amortization of unfavorable lease liabilities and deferred credits of $(8.4) million, amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $3.1 million, and loss on extinguishment of debt of $3.6 million and loss on lease termination of $9.5 million.  We had a net change of $(2.3) million within other net operating assets and liabilities largely driven by a decrease in prepaid expenses and other current assets primarily due to the purchase of ten CRJ-700 aircraft that were previously leased under our GECAS Lease Facility during our nine months ended June 30, 2019.

Net Cash Flows Used Inin Investing Activities

During our ninesix months ended June 30,March 31, 2021, net cash flow used in investing activities totaled $11.7 million. We invested $2.9 million in inventory, $1.6 million in aircraft purchases, $0.1 million in vehicles, $0.7 million in tools, equipment and miscellaneous projects and $6.4 million in net returns and payments on equipment and other deposits.

During our six months ended March 31, 2020, net cash flow used in investing activities totaled $(25.1)$24.8 million. We invested $(11.0) million in spare engines and (3.8)$3.6 million in aircraft improvements, $(8.4)$7.6 million in inventory, $(1.9)$1.7 million in tools and miscellaneous projects and $(13.8)$11.8 million in leasenet returns and payments on equipment deposits offsetand other deposits.

Net Cash Flows Provided by $13.9 million from the return of lease and equipment deposits.Financing Activities

During our ninesix months ended June 30, 2019,March 31, 2021, net cash flow used in investingfinancing activities totaled $(96.0)was $18.5 million. We invested $116.7received $195.0 million in ten aircraft and seven spare engines and aircraft improvements, offset by $20.1of proceeds from our US Treasury Loan Agreement. We made $212.0 million from sales of investment securities, and $0.6principal repayments on long-term debt during the period. We incurred $1.3 million in equipment deposits

Net Cash Flows Used In Financing Activitiesof costs related to debt financing.

During our ninesix months ended June 30,March 31, 2020, net cash flow used in financing activities was $(82.6)$57.1 million. We drew $23.0 million from our $35.0 million working capital draw loan for operational needs. We made $(104.0)$79.4 million of principal repayments on long-term debt during the period. We incurred $(1.4)$0.5 million of costs related to debt financing and $(0.5) million of costs related to the repurchase of shares of our common stock.

During our nine months ended June 30, 2019, net cash flow used in financing activities was $(41.6) million.  We received $163.7 million in proceeds from long-term debt primarily related to purchasing ten aircraft, and spare aircraft engine and aircraft engine kit financing.  We made $197.4 million of principal repayments on long-term debt during the period. We incurred $4.9 million of costs related to debt financing, $1.7 million in debt prepayment costs, and $1.5$0.2 million of costs related to the repurchase of shares of our common stock.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a companyCompany 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 the company,Company, or that engages in leasing, hedging or research and development arrangements with the company.Company.

36


We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission (the "SEC").

A majority of our leased aircraft are leased through trusts formed for the sole purpose of purchasing, financing and leasing aircraft to us. Because these are single-owner trusts in which we do not participate, we are not at risk for losses and we are not considered the primary beneficiary. We believe that our maximum exposure under the leases are the remaining lease payments and any return condition obligations.

Commitments and Contractual Obligations

There have been no material changes outside of the ordinary course of business in our commitments and contractual obligations from those specified in our Form 10-K for the fiscal year ended September 30, 2019.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related

39


disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.

The accompanying discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated interim financial statements included elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.10-Q. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. Except with respect to our revenue recognition practices included in Note 2: "Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q, thereThere have been no changes to the critical accounting policies as explained in Part 1, Item 7 of the 20192020 Form 10-K under the heading "Critical Accounting Policies."

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 4:2: "Summary of Significant Accounting Policies" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the ordinary course of our business. These risks include interest rate risk and, on a limited basis, commodity price risk with respect to foreign exchange transactions. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Interest Rate Risk. We are subject to market risk associated with changing interest rates on our variable rate long-term debt; the variable interest rates are based on LIBOR. The interest rates applicable to variable rate notes may rise and increase the amount of interest expense on our variable rate long-term debt. We do not purchase or hold any derivative instruments to protect against the effects of changes in interest rates.

As of June 30, 2020,March 31, 2021, we had $510.4$533.8 million of variable-rate debt including current maturities. A hypothetical 50 basis point change in market interest rates would have affected interest expense by approximately $2.6$2.7 million in the twelvesix months ended June 30, 2020.March 31, 2021.

As of June 30, 2020,March 31, 2021, we had $270.8$192.2 million of fixed-rate debt, including current maturities. A hypothetical 50 basis point change in market interest rates would not impact interest expense or have a material effect on the fair value of our fixed-rate debt instruments as of June 30, 2020.March 31, 2021.

  

On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by Treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement

37


for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.

  

We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As of June 20, 2020,March 31, 2021, we had $510.4$533.8 million of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.

40


Foreign Currency Risk. We have de minimis foreign currency risks related to our station operating expenses denominated in currencies other than the U.S. dollar, primarily the Canadian dollar. Our revenue is U.S. dollar denominated. To date, foreign currency transaction gains and losses have not been material to our financial statements and we have not had a formal hedging program with respect to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results.

Fuel Price Risk. Unlike other airlines, our capacity purchase agreements largely shelter us from volatility related to fuel prices, which are directly paid and supplied by our major airline partners.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Quarterly Report on Form 10-Q. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'sCompany's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2020, to which this report relates that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of the Company.

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.  

 

4138


PART II – OTHER INFORMATION

 

The Company isWe are subject to two putative class action lawsuits alleging federal securities law violations in connection with itsour IPO— one in the Superior Court of the State of Arizona and one in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief. We do

In addition, we are subject to certain legal actions which we consider routine to our business activities. As of March 31, 2021, our management believed, after consultation with legal counsel, that the ultimate outcome of the two putative class action lawsuits and such other routine legal matters are not currently believe that this matter is likely to have a material adverse impacteffect on our consolidatedfinancial position, liquidity or results of operations, cash flows, or our financial position. However, any litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, results of operations, financial condition, and prospects.  operations.

In addition, from time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of such litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, any such litigation and claims can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

We refer you to documents filed by us with the SEC, specifically "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (the “2019 10-K”), as updated by the information disclosed in “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, (the “Second Quarter Form 10-Q”), each of which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled "Cautionary Statements Regarding Forward-looking Statements" of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in the 2019our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and the Second Quarter Form 10-Qherein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures, the potential for future waves of outbreaks and the related impacts to the travel industry and on our major airlines partners.results.

We have updated our existing risk factors to add the following risk factor related to recent developments.  Except for the updates set forth below, there have been no material changes in our risk factors from those disclosed in our 2019 10-K, as updated in our Second Quarter 10-Q.

The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted the business of our airline partners, American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”), and in turn had had an adverse impact that has been material to our business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition and liquidity.

The COVID-19 outbreak, along with the measures governments and private organizations worldwide have implemented in an attempt to contain the spread of this pandemic, has resulted in a severe decline in demand for air travel, which has adversely affected the business of our major airline partners, American and United (the “Partners”), from whom we derive all of our operating revenue, and in turn has adversely affected our business, operations and financial condition to an unprecedented extent. Measures ranging from travel restrictions, “shelter in place” and quarantine orders, limitations on public gatherings to cancellation of public events and many others have resulted in a precipitous decline in demand for both business and leisure travel worldwide.

42


In response to this material deterioration in demand, both American and United made significant cuts in capacity in their domestic and international schedules in April and announced their expectations regarding making further reductions in May and plans to proactively evaluate and cancel flights on a rolling 90-day basis until they see signs of a recovery in demand. These capacity reductions have impacted flights operated by the Company.  The initiatives and measures put in place to limit the spread of the virus has and will continue to have a materially adverse impact on our business. The Company further reports that, beginning in March 2020, it has experienced a material decline in demand in block hours from both of its major airline partners, American and United Airlines, Inc. (“United” and together with American, the “Partners”) resulting from the spread of the COVID-19 virus. As a result of this decline in demand and the subsequent capacity reductions by the Company’s Partners, the Company operated at significantly lower block hours in the third quarter of 2020. While there has been a modest demand recovery, the Company anticipates similar schedule reductions will likely continue into the fourth quarter of 2020 and may continue throughout the remainder of 2020 and the foreseeable future.

As a result of the foregoing, the Company has implemented cost saving initiatives, including reducing employee-related costs through voluntary unpaid leaves, compensation reductions for Executive level employees, a company-wide hiring freeze, and delaying non-essential heavy maintenance expense and reducing or suspending discretionary spending,  We have also taken steps to increase liquidity and strengthen our financial position, including reducing planned heavy engine and airframe maintenance, working with major partners and OEMs to delay the timing of the delivery of our future aircraft and spare engine deliveries, and drawing $23 million under our previously undrawn revolving credit facility.  While the severity, magnitude and duration of the COVID-19 pandemic remain uncertain, there can be no assurance that these actions will be sufficient to sustain our business operations through this pandemic.

We have taken and intend to take additional actions to improve our financial position, including measures to improve liquidity, such as obtaining financial assistance under the CARES Act.  In April 2020, we were granted $92.5 million in emergency relief through the Payroll Support Program of the CARES Act.  We received $46.3 million as of June 2020 and expect to receive the remaining $46.2 million in three equal installments from July to September 2020.  The Company is also considering borrowing up to approximately $277 million from the U.S. Treasury Department pursuant to the loan program under the CARES Act. In connection with the financial assistance we have received and expect to receive under this legislation, we will be required to comply with certain provisions of the CARES Act, including the requirement that funds provided pursuant to the Payroll Support Program be used exclusively for the continuation of payment of employee wages, salaries and benefits; the requirement against involuntary furloughs and reductions in employee pay rates and benefits through September 2020; the requirement of continuing essential air service; restrictions on share repurchases and dividends; and limits on the payment of certain executive compensation.  The substance and duration of these restrictions may materially affect our operations, and we may not be successful in managing these impacts for the duration of the restrictions. In particular, limitations on executive compensation, which, depending on the form of aid, could extend up to six years, may impact the Company's ability to attract and retain senior management or attract other key employees during this critical time.

The full extent of the ongoing impact of COVID-19 on our future operational and financial performance will depend on future developments, many of which are outside our control, including the effectiveness of the mitigation strategies discussed above, the severity, magnitude, duration and spread of COVID-19, including any recurrence of the pandemic, and related travel advisories and restrictions, the impact of COVID-19 on overall long-term demand for air travel, the impact on demand and capacity which could result from government mandates on air service including, for instance, any requirement for passengers to wear masks while traveling or have their temperature checked or have administered other tests or examinations prior to entering an airport or boarding an airplane, or which would limit the number of seats that can be occupied on an aircraft to allow for social distancing, the impact of COVID-19 on the financial health and operations of our Partners and future governmental actions, all of which are highly uncertain and cannot be predicted.

In addition, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could adversely impact our business, financial condition and operating results. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.

43


The Company has a significant amount of debt and other contractual obligations and intends to seek material amounts of additional financial liquidity in the short-term, and insufficient liquidity may have a material adverse effect on the Company's financial condition and business.

The Company has a significant amount of debt and other contractual obligations, including debt incurred in connection with the acquisition of aircraft and aircraft engines, and long-term lease obligations primarily relating to our aircraft fleet. In addition, the Company has substantial noncancelable commitments for capital expenditures, including for the acquisition of new aircraft and related spare engines.

In addition, in response to the travel restrictions, decreased demand for air travel and other effects the COVID-19 pandemic has had and is expected to have on our major airline partners and, in turn, on the Company's business, the Company currently intends to continue to seek material amounts of additional financial liquidity in the short-term, which may include the proposed drawing of loans under the loan program of the CARES Act.

There can be no assurance as to the timing of any such incurrence, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all. As of June 30, 2020, we had total long-term debt of $777.7 million (including current portion of $176.8 million) and $12.0 million available for borrowing under our CIT Revolving Credit Facility at June 30, 2020. We received $46.3 million under the payroll support program under the CARES Act as of June 30, 2020, and expect to receive the remaining $46.2 million in three equal payments from July to September 2020. As discussed elsewhere in this Quarterly Report on Form 10-Q, we are eligible for a $277.0 million loan under the loan program of the CARES Act.

The Company's substantial level of indebtedness, the Company's non-investment grade credit ratings and the availability of Company assets as collateral for loans or other indebtedness, which available collateral would be reduced as a result of any CARES Act loan program borrowings and other future liquidity-raising transactions, may make it difficult for the Company to raise additional capital if needed to meet its liquidity needs on acceptable terms, or at all.

Although the Company's cash flows from operations and its available capital, including the proceeds from financing transactions, have been sufficient to meet its obligations and commitments to date, the Company's liquidity has been, and may in the future be, negatively affected by the risk factors discussed in the 2019 Form 10-K, as updated by the Second Quarter 10-Q and this report, including risks related to future results arising from the COVID-19 pandemic. If the Company's liquidity is materially diminished, the Company's cash flow available to fund its working capital requirements, capital expenditures and business development efforts may be materially and adversely affected.

A material reduction in the Company's liquidity could also result in the Company not being able to timely pay its leases and debts or comply with material provisions of its contractual obligations, including covenants under its financing agreements and leases with, among others, CIT, Export Development Canada, and RASPRO Trust 2005. In addition, several of the Company's debt agreements contain affirmative and negative covenants that, among other things, restrict the ability of the Company and its subsidiaries to enter into, create, incur, assume or suffer to exist any liens.

In addition to the foregoing, the degree to which we are leveraged could have important consequences to holders of our securities, including the following:

we must dedicate a substantial portion of cash flow from operations to the payment of principal and interest on applicable indebtedness, which, in turn, reduces funds available for operations and capital expenditures;

our flexibility in planning for, or reacting to, changes in the markets in which we compete may be limited;

we may be at a competitive disadvantage relative to our competitors with less indebtedness;

we are rendered more vulnerable to general adverse economic and industry conditions;

we are exposed to increased interest rate risk given that a portion of our indebtedness obligations are at variable interest rates; and

our credit ratings may be reduced and our debt and equity securities may significantly decrease in value.

See Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, of this report for additional information regarding the Company's liquidity as of June 30, 2020.

44


The loss of key personnel upon whom we depend to operate our business or the inability to attract additional qualified personnel could adversely affect our business.

We believe that our future success will depend in large part on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Among other things, the CARES Act imposes significant restrictions on executive compensation which, assuming we receive a secured loan from Treasury, will remain in place through the date that is one year after such secured loan is fully repaid. Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries which may present retention challenges in the case of executives presented with alternative, non-airline opportunities. Any inability to retain or attract significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.

The Inability to Secure Financing for the Twenty New E-175 Aircraft Scheduled for Delivery Beginning in September 2020 May Negatively Affect Our Prospects, Operations and Financial Condition.

           As we previously reported, our United Capacity Purchase Agreement provides for the addition of twenty (20) new Embraer E175 aircraft to the scope of such Agreement.  We intend to finance and own these new aircraft and operate them for a period of twelve (12) years from the in-service date.  While deliveries of the new E-175 aircraft are scheduled to begin in September 2020 and continue through June 2021, as of the date of this Quarterly Report on Form 10-Q, given the current COVID-19 environment, we do not currently have the financing in place to acquire and take delivery of such aircraft.  If we are unable to secure such financing on a timely basis or at all, we could forfeit the right to acquire some or all of such aircraft.  A loss of the aircraft to a competitor could have a material adverse effect on our business prospects, financial condition, results of operations, and cash flows.

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

The Company repurchased 112,587175,925 shares of its common stock for $0.5$0.2 million to cover the income tax obligation on vested employee equity awards and warrant exercisesconversions during the ninesix months ended June 30, 2020.March 31, 2021

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

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EXHIBIT INDEX

 

Exhibit No.

 

Exhibit Description

  

  10.1**10.1

 

Twenty- First Amendment to Code SharePayroll support Program Agreement between The Department of the Treasury and Revenue Sharing AgreementMesa Airlines, Inc., dated as of February 3, 2021

  31.1

 

Certification of Principal Executive Officer pursuant to Rule 13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

 

  31.2

 

Certification of Principal Financial Officer pursuant to Rule 13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

 

  32.1*

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.2*

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

104          

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*

This certification will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

 

**

Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.

 

 

4640


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.

 

 

 

MESA AIR GROUP, INC.

 

 

 

 

Date: AugustMay 10, 20202021

 

By:

/s/ Michael J. Lotz 

 

 

 

Michael J. Lotz

President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

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