| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying 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 Harbor Diversified, Inc. (Harbor) and subsidiaries (collectively, the Company). Harbor is a non-operating holding company is a non-operating entity with The consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly in all material respects the financial condition and results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. All of the dollar and share amounts set forth in these condensed notes to consolidated financial statements are presented in thousands except per share and par value amounts. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Harbor’s Annual Report on Form 10-K (COVID-19) Description of Operations The Company has principal lines of business focused on (1) providing regional air services through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin, and (3) providing flight equipment financing to Air Wisconsin. The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement (United capacity purchase agreement) with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020, April 2021 and April 2022. United is currently Air Wisconsin’s sole airline partner. For additional information, refer to Note 3, Capacity Purchase Agreement with United. Air Wisconsin operates as a United Express carrier with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. Contract Revenues The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. United pays Air Wisconsin a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with incentive payments available, and penalties payable, based on the achievement, or failure to achieve, certain performance criteria. Under the agreement, Air Wisconsin’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The agreement also provides for the reimbursement to Air Wisconsin of certain direct operating expenses such as hull and liability insurance, property taxes and Canadian navigational fees. United makes provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments are subsequently reconciled with United based on actual completed flight activity. As of the date of this filing, these payments are reconciled through December 2021. As of March 31, 2022, United owed Air Wisconsin $5,066 pursuant to the United capacity purchase agreement, which is recorded in accounts receivable, net, on the consolidated balance sheets. United has disputed that it owes a portion of that amount. Under the United capacity purchase agreement, Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time Revenue from Contracts with Customers Under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the COVID-19 Consistent with the discussion above, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, Air Wisconsin also recognized increased non-refundable As part of the October 2020 amendment to the United capacity purchase agreement (CPA Amendment), United issued a note receivable to Air Wisconsin in the amount of $11,048 along with a cash settlement of $670, of which $4,410 was deferred as of December 31, 2020, with the remaining portion to be recognized in proportion to the number of flights expected to be completed in subsequent periods. In October 2021, in accordance with the CPA Amendment, Air Wisconsin received $294 from United for the opening of a crew base, of which $73 was deferred as of December 31, 2021. For the three months ended March 31, 2022, Air Wisconsin recorded $519 of revenue related to these items, compared to $313 of revenue related to these items for the three months ended March 31, 2021. The deferred CPA Amendment revenue, in the amount of $2,263, is recorded as part of contract liabilities on the consolidated balance sheets. The timing of the recognition of deferred fixed revenues, non-refundable The amount of revenues recognized for the three months ended March 31, 2022 that were previously recorded as contract liabilities were $6,321. The CPA Amendment provided, among other things, for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours resulting from the COVID-19 recorded $3,509 and $7,235, respectively, in revenue related to this performance obligation. Under the CPA Amendment, United pays this amount by the delivery of a note due at the end of the contract term in February 2023. Therefore, this amount was recorded in notes receivable on the consolidated balance sheets. The notes receivable contain a significant financing component and any interest income is separately reported in the consolidated statements of operations. As of March 31, 2022, these notes totaled $51,078, bore interest at the rate of 4.5%, and had a maturity date of February 28, 2023. As of March 31, 2022, interest receivable on these notes totaled $2,710. Other Revenues Other revenues primarily consist of the sales of parts to other airlines and are immaterial in all periods presented. The transaction price for the sale of these parts generally is fair market value. Restricted Cash As of March 31, 2022, the Company had a restricted cash balance of $576. A portion of the balance secures a credit facility for the issuance of letters of credit guaranteeing the performance of Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies. The remaining portion is cash held for the repurchase of shares under Harbor’s stock repurchase program. For additional information, refer to Note 8, Commitments and Contingencies Stock Repurchase Program. Marketable Securities The Company’s equity security investments, consisting of exchange-traded funds and mutual funds, are recorded at fair value based on quoted market prices (level 1) in marketable securities on the consolidated balance sheets, in accordance with the guidance in ASC Topic 321, Investments-Equity Securities The calculation of net unrealized gains and losses that relate to marketable securities held as of March 31, 2022 is as follows:
Net losses recognized during the three months ended March 31, 2022 on equity securities $ (2,423 )
Less: Net gains and losses recognized during the period on equity securities sold during the three months ended March 31, 2022 —
Unrealized losses recognized during the reporting period on equity securities still held at March 31, 2022 $ (2,423 )
The calculation of net unrealized gains and losses that relate to marketable securities held as of March 31, 2021 is as follows:
Net losses recognized during the three months ended March 31, 2021 on equity securities $ (57 )
Less: Net gains and losses recognized during the period on equity securities sold during the three months ended March 31, 2021 —
Unrealized losses recognized during the reporting period on equity securities still held at March 31, 2021 $ (57 )
Property and Equipment Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
Assets Depreciable Life Current Residual Value
Aircraft 7 years $ 50
Rotable parts 7 years 10 %
Spare engines 7 years $ 25
Ground equipment up to 10 years 0 %
Office equipment up to 10 years 0 %
Leasehold improvements Shorter of asset or lease life 0 % Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop visit. Lotus’ engine maintenance costs are expensed. Depreciation expense as of March 31, 2022 and 2021 was $6,315 and $6,249, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations. Impairment of Long-Lived and Intangible Assets The Company evaluates long-lived and intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived and intangible assets and determined that no quantitative impairment tests were required to be performed as of March 31, 2022. Income Taxes The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities. As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not more-likely-than-not The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2018. With a few exceptions, the Company is no longer subject to state or local income tax examinations for years prior to 2017. As of March 31, 2022, the Company had no outstanding tax examinations. Concentration of Customer Risk United is currently Air Wisconsin’s sole airline partner. Substantially all the Company’s revenues in the three months ended March 31, 2022 and 2021 were derived from the United capacity purchase agreement. For additional information, refer to Note 3, Capacity Purchase Agreement with United Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Fair Value of Financial Instruments The Company’s financial instruments include cash and cash equivalents, restricted cash, marketable securities, accounts receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments, with the exception of marketable securities, are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Marketable securities are reported at fair value based on quoted market prices. Long-term investments are held-to-maturity Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). Fair Value Measurement Level 1—Quoted market prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable. Level 3—Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations each reporting period, and it is possible that an asset or liability may be classified differently from year to year. The tables below set forth the Company’s classification of marketable securities and long-term investments as of:
March 31, 2022
Total Level 1 Level 2 Level 3
Marketable securities – exchange-traded funds $ 111,851 $ 111,851 $ — $ —
Marketable securities – mutual funds 24,327 24,327 — —
Long-term investments – bonds (see Note 6) 4,275 — 4,275 —
Total $ 140,453 $ 136,178 $ 4,275 $ —
March 31, 2021
Total Level 1 Level 2 Level 3
Marketable securities – exchange-traded funds $ 19,943 $ 19,943 $ — $ —
Long-term investments – bonds (see Note 6) 4,275 — 4,275 —
Total $ 24,218 $ 19,943 $ 4,275 $ —
Reclassification Certain operating expenses previously recorded in purchased services and other in the consolidated statement of operations for the three months ended March 31, 2021, have been reclassified to aircraft maintenance, materials and repairs to conform to the presentation for the three month period ended March 31, 2022, with no effect on net income. The reclassification relates to certain third party maintenance activities. Certain current liabilities previously recorded in contract liabilities in the consolidated balance sheets as of December 31, 2021 have been reclassified to deferred revenue to conform to the presentation as of March 31, 2022. As a result of this change, the consolidated statements of cash flows also required a reclassification from contract liabilities to deferred revenues in the Cash Flows from Operating Activities Upcoming Accounting Pronouncement In June 2016, FASB issued ASU 2016-13, Financial Instruments Measurement of Credit Losses on Financial Instruments 2016-13). 2016-13 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 receivable. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 2016-13 |
