UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 20192020

OR

For the transition period from     to     .

Commission File Number 001-34584

HARBOR DIVERSIFIED, INC.

(Exact name of registrant as specified in its charter)

(920) 749-4188

(Registrant’s telephone number, including area code)

Harbor BioSciences, Inc.

9191 Towne Centre Drive, Suite 409

San Diego, CAN/A

(Former name, or former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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.

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.).    Yes  ☐    No  ☒

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 28, 2019,30, 2020, the last business day of the registrant’s second fiscal quarter for the year ended December 31, 2019,2020, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing price of the registrant’s common stock as reported on the OTC Market, was approximately $1,046,000. As of June 30, 2020, the last business day of the registrant’s second fiscal quarter for the year ending December 31, 2020, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing price of the registrant’s common stock as reported on the OTC Market, was approximately $2,743,000.$1,743,000. The determination of affiliate status for this purpose does not reflect a determination that any of such persons shall be deemed to be an affiliate of the registrant for any other purpose.

As of May 31, 2020,March 26, 2021, the registrant had 54,863,305 shares of common stock outstanding and 4,000,000 shares of Series C Convertible Redeemable Preferred Stock outstanding. The registrant does not have any class of securities registered pursuant to Section 12(b) or Section 12(g) of the Act.

Documents Incorporated by Reference

None

HARBOR DIVERSIFIED, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 20192020

INDEX

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 (this “Annual Report”) containsincludes “forward-looking statements,” which reflect our current views about future events and financial results. We have made these statements in reliance onstatements” within the safe harbor created by the Private Securities Litigation Reform Actmeaning of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended). These forward-lookingamended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements relate to matters such as our industry, business plans and strategies, material contracts, key relationships, consumer behavior, flight schedules, revenue, expenses, margins, profitability, capital expenditures, liquidity, capital resources and other financialoperating information, include all statements that are not statements of historical facts, and operating information. We have used thecan be identified by words “approximately,such as “anticipate,” “anticipate,“approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Annual Report. All of our forward-looking statements are subjectinclude assumptions underlying or relating to risks and uncertaintiessuch statements that may cause actual results to differ materially from those that we are currently expecting, including:and are subject to considerable risks and uncertainties, including without limitation:

The forward-looking statements contained in this Annual Report are based on management’s current plans, estimates and expectations in light of information currently available to us, and they are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors”“Risk Factors” within this Annual Report and in the other reports we file with the Securities and Exchange Commission.Commission (“SEC”).

Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions or estimates prove to be incorrect, our actual results may be different from, and potentially materially worse than, what we may have expressed or implied by these forward-looking statements. Investors should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Annual Report speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.

PART I

General

Harbor Diversified, Inc. (“Harbor”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”). Air Wisconsin is, a regional air carrier that, as of December 31, 2019, provided scheduled passenger service to 81 cities in 31 states.carrier. Harbor Diversified, Inc. is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a non-operating entity with no material assets.

For Because Harbor consolidates Air Wisconsin for financial statement purposes, for purposes of this Annual Report on Form 10-K for the year ended December 31, 20192020 (this “Annual Report”), wheredisclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations, operations and related disclosures. Where reference is intended to include Harbor Diversified, Inc. together withand its consolidated subsidiaries, they are collectivelymay be jointly referred to as “we,” “us,” or “our.” Where reference is intended to refer only to Harbor, Diversified, Inc., it is referred to as the “Company.”

For the year ended December 31, 2019,2020, Air Wisconsin operated a fleet of 64 CRJ-200 regional jets with an average of approximately 284 daily departures under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenue for the yearyears ended December 31, 2019,2020 and more than 97% of our operating revenue for the year ended December 31, 2018,2019 was derived from operations associated with the United capacity purchase agreement. Prior to March 2018, Air Wisconsin flew for American Airlines (and its predecessor, US Airways) for over ten years.

Subject to certain limited exceptions, the United capacity purchase agreement provides Air Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement also has the effect of protecting Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers from flight to flight.passengers. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access. In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the United capacity purchase agreement.

Regional jets provide short and medium-haul scheduled flights that connect outlying communities with larger cities and act as “feeders” for domestic and international hubs. The lower trip costs and the operating efficiencies of regional jets, along with the competitive nature of capacity purchase agreement bidding processes, provide significant value to major airlines. Regional airlines play a daily, essential role in the U.S. air travel system. According to the 2020 Regional Airline Association Annual Report, in 2018,2019 (i) 40% of all scheduled passenger flights in the United States were operated by regional airlines, (ii) of all the U.S. airports with scheduled passenger service, 66% were served exclusively by regional airlines and (iii) Air Wisconsin was the 11th12th largest regional airline in the United States, as measured by passenger enplanements, and its flights accounted for approximately 2.4%2.5% of all passengers carried on U.S. regional airlines.

Regional airlines playImpact of COVID-19 on Our Business and Industry

In March 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a daily, essential roleglobal pandemic, and, in response, federal, state, local, and foreign governments implemented “shelter-in-place” and “stay-at-home” orders and guidelines, quarantine orders, travel restrictions, and other similar restrictions in an attempt to control the spread and mitigate the impact of COVID-19. As of the date of this Annual Report, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the U.S. air travel system. Forty-one percent of all scheduled passenger flightsregions in the United States were operated by regional airlines in 2018, according to the Regional Airline Association. Of all the U.S. airports with scheduled passenger service, 63% are served exclusively by regional airlines. Some of the most popular U.S. airports have more than half of their scheduled departures made by regional aircraft, including Chicago-O’Hare, through which Air Wisconsin currently operates, and Washington-Dulles, where Air Wisconsin expects to resume operations in August 2020.operates.

The sharp decline in airline travel demand due to the novel coronavirus (“COVID-19”)COVID-19 pandemic has had a material, negative impact on the airline industry.industry in the year ended December 31, 2020, affecting United, and in turn, our revenue and results of operations. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic demand related to the COVID-19 pandemic during the first quarter of 2020 and, as of the date of this filing, has stated that it expects demand will remain suppressed in 2021. In response to lower demand for air travel, in the months of April through December 2020, United cut its scheduled capacity by between approximately 50% and 90%. As a result, of lower demand,beginning in March 2020, United cut approximately 80% of itssignificantly reduced Air Wisconsin’s scheduled capacity for April 2020,departures and approximately 90% of its capacity for Mayblock hours actually flown, and June 2020. In May 2020, United temporarily ceased Air Wisconsin’s operations at Washington-Dulles where Air Wisconsin expects to resume operations infrom May 2020 through August 2020, and reduced Air Wisconsin’s average daily scheduled departures to 45, compared to 290 in February 2020 and 284 in2020. As of December 2019. In June31, 2020, Air Wisconsin provided scheduled passenger service to 2069 cities in 12 states.28 states and provinces as compared to 81 cities in 31 states as of December 31, 2019. While the continued severity and duration of the impacts of the COVID-19 pandemic are difficult to predict, the COVID-19 pandemic has continued to impact our financial condition and results of operations through the date of this Annual Report, which we expect to continue in the near term and result in a material impact on our financial condition, liquidity, and results of operations in future periods. Air Wisconsin has taken a number of measures to mitigate the health risks and economic impact of the COVID-19 pandemic. In addition, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations. For moreadditional information, seerefer to the sections entitled “Business – Impact of COVID-19 on Our Businessand Industry,” “Management’s Discussion and Analysis – Overview” and “– Economic Conditions, Challenges and Risks Impacting Financial Results – COVID-19 PandemicResults” ,” and “Risk Factors” within this Annual Report.

Our Business Strategy

Our business strategy consists primarily of serving United and its customers through Air Wisconsin’s provision of regional airline services. We strive to serve as an efficient and reliable provider of flight services to United and to provide a high level of service to United and its customers in accordance with the United capacity purchase agreement.

We also seek to maintain a competitive cost structure. We focus on a disciplined cost control approach through responsible outsourcing of certain operating functions and diligent control of corporate and administrative costs, implementing company-wide efforts to improve our cost position.

Finally, we strive to provide our employees competitive pay and benefit packages and to offer a positive and supportive work environment to make Air Wisconsin an attractive place to work and build a career.

Aircraft Fleet

As of December 31, 2019,2020, Air Wisconsin owned and leased 64 CRJ-200 regional jets, originallyall of which were manufactured by Bombardier, Inc. (“Bombardier”), consisting of the following:

As of May 31, 2020, Air Wisconsin owned and leased 64 CRJ-200 regional jets consisting of the following:

. The CRJ-200 regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.

On January 17, 2020, the Company completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of shares of the Company’s Series C Convertible Redeemable Preferred Stock. Air Wisconsin had leased each of these regional jets prior to the acquisition. See the section entitled “Certain Relationships and Related Transactions, and Director Independence – Transactions with Southshore Leasing, LLC and Southshore Affiliates” within this Annual Report for additional information.

On May 22, 2020, Air Wisconsin acquired eight additional CRJ-200 regional jets in a single transaction for an aggregate purchase price of $3.0 million. Air Wisconsin had leased each of these regional jets prior to the acquisition.

United sets the flight schedules for covered aircraft. In setting the flight schedules, United is required to comply with certain reasonable operating constraints, such as scheduling aircraft for revenue service (that is, not spare aircraft or aircraft in maintenance) for a minimum number of block hours per day, but not more than a maximum number of block hours per day.constraints. United also establishes all fares, controls route selection, pricing, seat inventories, and marketing, collects all revenue, and provides airport landing slots, terminal facilities and ground handling services for any flights operated by Air Wisconsin pursuant to the agreement. Air Wisconsin provides the flight and cabin crew and is responsible for dispatch and operational control of each covered aircraft as well as any required maintenance. When providing the flight services under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks and aircraft paint scheme. In exchange for providing the flight services under the United capacity purchase agreement, Air Wisconsin receives a fixed payment for 63 covered aircraft and a fixed payment for each departure and block hour flown. In addition, the amendment to the United capacity purchase agreement provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks.

United also reimburses Air Wisconsin for certain costs on an actual basis, including aviation insurance, aircraft property tax per aircraft and air navigation fees. Costs relating to fuel and certain landing fees owed by Air Wisconsin are directly paid to suppliers by United. Air Wisconsin can also earn incentive payments, and is subject to penalty rebates, based upon its operational performance and the results of customer satisfaction surveys.surveys (provided that no incentive or penalty payments were made for the period from April 1, 2020 through September 30, 2020). The United capacity purchase agreement previously constrained Air Wisconsin from flying for another air carrier or from permitting a change of control (as defined in the agreement) to occur; however, while a change of control still constitutes a potential termination event, these restrictions were waived byremoved in the amendment to the United in March 2020.capacity purchase agreement.

The United capacity purchase agreement prohibits Air Wisconsin from paying dividends or making other distributions of its earnings, in each case in excess of an amount that would result in Air Wisconsin’s available cash balance being less than a specified amount, other than dividends or distributions made for certain specified purposes.

The United capacity purchase agreement expires in February 2023 unless United elects to exercise its option to extend the agreement for an additional two-yearperiod of no less than two years, but up to three years, in its discretion, in which case it expires inbetween February 2025 and February 2026, unless United elects to exercise its second option to extend the agreement for a second additional two-year period, subject to mutual agreement on certain economic terms, in which case it expires inbetween February 2027.2027 and February 2028. During any extension of the term of the United capacity purchase agreement, Air Wisconsin has the right, in its discretion, to reduce the number of aircraft covered under the agreement to no fewer than 50 covered aircraft. Any aircraft Air Wisconsin chooses to remove from the agreement may not be flown for any carrier during the remainder of the term.

The United capacity purchase agreement is subject to early termination under various circumstances, which include, among others:others, the occurrence of the following events:

The following table summarizes Air Wisconsin’s available seat miles (“ASMs”) flown and contract revenue recognized under the United capacity purchase agreement for the years ended December 31, 20192020 and 2018,2019, respectively:

Impact of COVID-19 on Our Business and Industry

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic, and in response, federal, state, local, and foreign governments have implemented travel recommendations and restrictions, “shelter-in-place” guidelines, and similar restrictions in an attempt to control the spread and to mitigate the impact of COVID-19. Air Wisconsin’s business, as well as the industry in which it operates, remains significantly impacted by the unprecedented material decline in demand for air travel resulting from the COVID-19 pandemic. United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic demand related to the COVID-19 pandemic during the first quarter of 2020 and, as of the date of this filing, has stated that it expects demand will remain suppressed for the remainder of 2020 and likely into 2021. As a result of lowered demand, United cut approximately 80% of its scheduled capacity for April 2020, and approximately 90% for May and June 2020. Since March 2020, United has significantly reduced the number of Air Wisconsin’s scheduled departures and block hours actually flown, and United may impose continued reductions. The severity and duration of global health and financial impacts of the COVID-19 pandemic are difficult to predict; thus, the magnitude and scope of the effects of the COVID-19 pandemic on our business and future results of operations are highly uncertain and subject to change.

Maintenance and Repairs

Airlines are subject to extensive regulation. Air Wisconsin has an FAA-mandateda Federal Aviation Administration (“FAA”)-mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance and component service. Air Wisconsin also outsources certain aircraft, engine and other component maintenance functions. To procure these services, Air Wisconsin uses competitive bidding among qualified vendors.

Aircraft Fuel

The United capacity purchase agreement provides that United sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the agreement.

Insurance

Air Wisconsin maintains insurance policies we believe are of types customary for the airline industry and as required by the United States Department of Transportation (“DOT”), lessors and other financing parties, and United under the terms of the United capacity purchase agreement. The policies principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors’ and officers’ liability; fiduciary liability; workers’ compensation and employer’s liability; and war risk (terrorism). Although we currently believe Air Wisconsin’s insurance coverage is adequate, we cannot be certain that the amount of such coverage will not change or that Air Wisconsin will not bear substantial losses from incidents or accidents.

Air Wisconsin maintains relationships with various flight and maintenance institutions across the country that are focused on developing the next generation of aviation professionals. It typically recruits pilots and maintenance technicians who have completed required coursework from accredited flight or maintenance programs and have obtained applicable certifications. Air Wisconsin also provides internship opportunities to individuals in the process of completing their coursework and training for aviation maintenance. These roles provide hands-on experience for the students and prepares them for other opportunities within Air Wisconsin.

The Railway Labor Act (“RLA”) governs Air Wisconsin’s relations with labor organizations. Under the RLA, collective bargaining agreements generally do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, they must notify the other party in the manner agreed to by the parties. Under the RLA, after receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (“NMB”) to appoint a federal mediator. The RLA prescribes no set timetable for the direct negotiation and mediation process. It is not unusual for those processes to last for many months, and even several years. If no agreement is reached in mediation, the NMB, in its discretion, may declare at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 30-day “cooling off” period commences. During that period (or after), a Presidential Emergency Board (“PEB”) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by another “cooling off” period of 30 days. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may strike and the airline may resort to “self-help,” including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the authority to prevent “self-help” by enacting legislation that, among other things, imposes a settlement on the parties. The table above sets forth Air Wisconsin’s employee groups and status of the collective bargaining agreements. Air Wisconsin’s pilots are represented by the Air Line Pilots Association, International; following mediated negotiations with Air Wisconsin under the auspices of the NMB, Air Wisconsin’s pilots ratified a three-year extension to their collective bargaining agreement in November 2019, and the agreement now becomes amendable in November 2022. Air Wisconsin’s collective bargaining agreements with its mechanics and related employees, represented by the International Association of Machinists and Aerospace Workers, and its flight attendants represented by the Association of Flight Attendants are bothis amendable and both areis in mediated negotiations.

Air Wisconsin aims to achieve the highest degree of safety and security within its industry through the implementation of a corporate-wide Safety Management System supporting its organizational culture that holds safety as an essential core value. Air Wisconsin continually works to create and foster a culture of safety, security and compliance that proactively identifies and manages risks to the operation and workplace before they can become injuries, incidents or accidents. All Air Wisconsin employees are required to maintain the highest levels of safety and security throughout its operation and organization and to proactively identify and immediately report hazards, safety concerns and incidents as well as any behavior that violates Air Wisconsin’s policies, regulatory requirements, laws and industry standards. Air Wisconsin is committed to:

The Transportation Security Administration (“TSA”) is responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports. Air Wisconsin is currently in compliance with the directives issued by the TSA and maintains active, open lines of communication with the TSA to ensure proper standards for security of its personnel, equipment and facilities are exercised throughout its operation.

Government Regulation

Aviation Regulation

The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required for airlines to provide domestic and foreign air transportation. International routes and international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline’s ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the foreign country and the carrier’s ability to obtain the necessary authority from the DOT and the applicable foreign government.

The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. Air Wisconsin currently holds an air carrier certificate with Federal Aviation Regulation Part-121 operation specifications.

directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have not entered into an “open skies” air transport agreement with the U.S. We are currently in compliance with these ownership provisions. In addition, the Company’s amended and restated certificate of incorporation and the Company’s amended and restated bylaws currently prohibit the transfer of any shares of the Company’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation Section 1.382-2T(g)) of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of our then-outstanding capital stock. These restrictions on the transfer of the Company’s capital stock inhibit the acquisition of control of Air Wisconsin by any foreign citizen.

Consumer Protection Regulation

The DOT also has jurisdiction over certain consumer protection matters related to air transportation. This covers unfair or deceptive practices, unfair methods of competition, advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints and transportation of passengers with disabilities. The DOT has adopted consumer protection rules regulating lengthy tarmac delays, chronically delayed flights, capacity purchasecodeshare disclosure and undisclosed display bias. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and wet-leasing agreements (where one airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions. In the future, the DOT may adopt additional regulations that increase the costs of Air Wisconsin’s operations or otherwise adversely impact our financial performance.

Environmental Regulation

We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.

The Environmental Protection Agency regulates operations, including air carrier operations, which affect the quality of air in the United States. Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.

Federal law recognizes the right of airport operators with special noise problems to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport.

The U.S. government and foreign governments may consider and adopt new laws, regulations, interpretations and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.

Corporate Information

The Company was originally formed in November 1992 as Initial Acquisition Corp., a Delaware corporation. In March 1997, Initial Acquisition Corp. was merged with Hollis-Eden, Inc., becoming Hollis-Eden Pharmaceuticals, Inc. In February 2010, Hollis-Eden Pharmaceuticals, Inc. was merged with its wholly owned subsidiary and renamed Harbor BioSciences, Inc. In January 2012, the Company acquired 80% of the issued and outstanding capital stock of AWAC from Amun LLC (“Amun”), and in January 2016 the Company acquired the remaining 20% of the issued and outstanding capital stock of AWAC from Amun. AWAC owns all of the equity interests of Air Wisconsin. In February 2012, Harbor BioSciences, Inc. was merged with its wholly owned subsidiary and renamed Harbor Diversified, Inc.

Organizational Structure

The Company is a non-operating holding company that is the parent of a consolidated group of five subsidiaries: (1) AWAC; (2)AWAC, Air Wisconsin; (3) Lotus; (4) AWF;Wisconsin, Lotus, AWF, and (5) Therapeutics. In addition to Air Wisconsin, each of the subsidiaries is described below:

AWAC Aviation, Inc.

AWAC is a holding company and the sole member of Air Wisconsin. Air Wisconsin’s business and operations are described in detail throughout this Annual Report.

Lotus Aviation Leasing, LLC

Lotus was established to acquire and lease flight equipment to Air Wisconsin to support its flight operations. As of December 31, 2019 and May 31, 2020, Lotus owned 39 and 50 engines, respectively.47 engines. Lotus has no other material assets or operations.

Air Wisconsin Funding LLC

AWF was established to provide flight equipment financing to Air Wisconsin. As of December 31, 2019 and May 31, 2020, Air Wisconsin had an outstanding balance of $24.9approximately $8.45 million, and $18.0 million, respectively, under a $35.0 million credit facility with AWF. AWF has a first priority security interest in the flight equipment purchased with the loan proceeds. AWF has no other material assets or operations.

Harbor Therapeutics, Inc.

Therapeutics is a non-operating entity with no material assets.

Public Reporting Obligation

In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As of January 1,For the year ended December 31, 2020, the Company no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result, the Company determined that it is currently required to file reports and other information with the SEC pursuant to Section 15(d) of the Exchange Act. This Annual Report is being filed pursuant to these requirements.

In addition, notwithstandingNotwithstanding that the Company is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, the Company does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, the Company is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. If the Company becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which could result in the Company no longer being required to file SEC reports.

Publicly Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports, filed pursuant to Section 15(d) of the Exchange Act will be filed with the SEC. The SEC maintains a website that contains reports and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company does not currently maintain a separate website, so the reports and other information provided by the Company pursuant to Section 15(d) of the Exchange Act will be available at www.sec.gov.

Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in the Company’s common stock involves substantial risk. The Company’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of the Company’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business.business, 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 United, Air Wisconsin’s sole airline partner. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. ReferFor additional information, refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report for additional information.Report.

Risks Related to Our Business

Our current business is highly dependent on the United capacity purchase agreement sincebecause United is currently Air Wisconsin’s sole airline partner.

We derive nearly all of our operating revenue from the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner. United accounted for approximately 99.9% and 97.2% of our operating revenue for the years ended December 31, 20192020 and 2018, respectively.2019. The termination or non-renewal of the United capacity purchase agreement would have a material adverse effect on our business, financial condition and results of operations, and cash flows.operations.

The United capacity purchase agreement expires in February 2023, unless United elects to exercise its option to extend the agreement for an additional two-year period, in which case it expires in February 2025, unless United elects to exercise its second option to extend the agreement for a second additional two-year period, subject to mutual agreement on certain economic terms, in which case it expires in February 2027.agreement. United is also permitted, subject to certain conditions, including giving notice of 60 days or more, to terminate the agreement early in the event of Air Wisconsin’s material breach of the agreement, subject to Air Wisconsin’s right to cure.

agreement. The United capacity purchase agreement is also subject to termination prior to expiration in various circumstances, including if Air Wisconsin’s controllable flight completion factor or departure performance falls below certain pre-determined levels, and in the event of a non-carrier-specific grounding of at least a specified number of Air Wisconsin’s aircraft, in each case for a specified period of time. Disputes between United and Air Wisconsin have arisen in the past, and, while the prior disputes have been resolved, it is possible that new disputes may arise in the future. New disputes or disagreements with United could result in Air Wisconsin incurring negotiation or resolution costs or entering into litigation or other proceedings. Even if resolved in Air Wisconsin’s favor, the existence of a dispute could harm Air Wisconsin’s relationship with United.

Air Wisconsin currently uses the systems, facilities and services of United to support a significant portion of its operations, including airport and terminal facilities and operations, information technology interface, ticketing and reservations, scheduling, dispatching interface, fuel purchasing and ground handling services.operations. If United were to cease to maintain any of these systems, close any of these facilities, or no longer provide these services to Air Wisconsin, whether due to termination of the United capacity purchase agreement, a strike or other labor interruption by United personnel, bankruptcy or other financial hardship experienced by United, or for any other reason, Air Wisconsin may not be able to obtain access to alternative systems, facilities or services on terms and conditions as favorable as those it currently receives, or at all. Upon certain termination events described in the United capacity purchase agreement, United could require Air Wisconsin to sell or assign to United certain facilities and assets that Air Wisconsin uses in connection with the services it provides. As a result, in order to offer airline service after termination of the United capacity purchase agreement, Air Wisconsin may have to replace these facilities, assets and services. Air Wisconsin may be unable to arrange such replacements on satisfactory terms, or at all.

Delta Airlines has announced that it intends to retire the CRJ-200 aircraft in its fleet by 2023. If the United capacity purchase agreement were to be terminated, or if United chose to remove 50-seat aircraft, such as Air Wisconsin’s CRJ-200 aircraft, from its fleet, or otherwise decided not renewed,to extend the agreement, our business would be significantly impacted, and it is unlikely we would have an immediate source of revenue or earnings to offset the financial impact. United is not under any obligation to extend or renewthe term of the United capacity purchase agreement, with Air Wisconsin, whether on similar terms or at all.

The United capacity purchase agreement permits United to

The amounts Air Wisconsin receives under the United capacity purchase agreement may be less than the corresponding costs Air Wisconsin incurs.

Under the United capacity purchase agreement, a portion of the revenue Air Wisconsin receives is based upon predetermined rates determinedcalculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. The primary operating costs intended to be compensated by the predetermined rates include labor costs, including salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid at the rates set in the United capacity purchase agreement, our financial position and operating results will be negatively affected.

Air Wisconsin’s current growth opportunities, strategic operating plan and future growth opportunities may be limited by the United capacity purchase agreement or a number of factors impacting the airline industry, including the COVID-19 pandemic.

Growth opportunities within United’s current flight systemsnetwork may be limited by various factors, including “scope” clauses in United’s current collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. Although United currently has significant room under its scope clauses with respect to 50-seat aircraft, which currently comprise Air Wisconsin’s fleet, these clauses could limit Air Wisconsin’s ability to operate larger aircraft for United which would limit Air Wisconsin’s expansion opportunities. United is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.

Further, Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including access to airport terminals and facilities, terms of United’s collective bargaining agreements limiting the usage of regional carriers, required capital expenditures required to maintain or expand fleet operations, significant changes in variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, and the excess capacity in the industry due to the significantly depressed passenger demand for air travel as a result ofdue to the COVID-19 pandemic, we believe limited growth opportunities exist. In order toTo take advantage of these opportunities, to the extent and in the event that passenger demand for air travel rebounds, Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities. Due to the significant decline in passenger demand for air travel and the resulting economic disruption, there may not be any new or additional flying opportunities available to Air Wisconsin. In addition, even if Air Wisconsin is offered these growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.

refurbishment, marketing and sales activities. We cannot predict what effect, if any, the closing of this transaction may have on Mitsubishi’s continued support of the CRJ-200 regional jet or Air Wisconsin’s continued ability to obtain required parts and services.

Additionally, Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE Aviation recently announced, in response to provide required maintenance or support services, or the COVID-19 pandemic, that it would lay offinterruption of Air Wisconsin’s operations as a significant percentageresult of its workforce. We cannot predict what effect these layoffs will have on the availability of parts and services tounscheduled or unanticipated maintenance requirements for Air Wisconsin from the manufacturer of itsWisconsin’s aircraft or engines.

Air Wisconsin has a significant amount of debt and other contractual obligations that could impair its liquidity and ability to obtain additional financing and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.

The airline business is capital intensive and, as a result, Air Wisconsin is highly leveraged. As of December 31, 2019,2020, Air Wisconsin had approximately $120.7$117.8 million (including capitalized interest of $16.5$10.9 million) in total third-party current and long-term debt, which was incurred primarily in connection with the acquisition of aircraft, and most of which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts. During Air Wisconsin’s year ended December 31, 2019, its principal third-party debt service payments totaled $7.0 million. For future annual cash obligations relating to third-party debt, see the section entitled “Management Discussion and Analysis –Commitments and Capital Obligations” within this Annual Report.

As of December 31, 2019, Air Wisconsin held 13 aircraft pursuant to operating leases, with an average remaining term of less than one year. During the year ended December 31, 2019, Air Wisconsin’s aircraft operating lease payments totaled approximately $26.0 million. As of December 31, 2019, future minimum lease payments due under all operating leases were approximately $20.0 million. For future annual cash obligations relating to all operating leases, see the section entitled “Management Discussion and Analysis –Commitments and Capital Obligations” within this Annual Report. In January 2020, the Company acquired ownership of three aircraft which were previously leased by Air Wisconsin from Southshore. In May 2020, Air Wisconsin acquired ownership of eight of its leased aircraft from the lessor. As a result, as of May 31, 2020, Air Wisconsin had two aircraft under lease with an average remaining term of less than one year, and future minimum lease payments due under all operating leases were approximately $10.3 million.

A significant portion of Air Wisconsin’s workforce is represented by labor unions and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.

As of MayDecember 31, 2020, 1,057841 of Air Wisconsin’s employees were represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers AFL-CIO (“IAMAW”), and the Transport Workers Union of America. In November 2019, Air Wisconsin’s pilots, represented by ALPA, ratified a new three-year extension to the collective bargaining agreement. Similarly, in September 2018 and November 2018, Air Wisconsin reached an agreement with the technical stores clerks and dispatchers with new amendable dates of September 20, 2022 and November 1, 2020, respectively.America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which may result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements with represented employees may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results.

Information technology security breaches, hardware or software failures or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.

The performance and reliability of Air Wisconsin’s technology, the technology of United, and the technology of United,our third-party service providers, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United or our third-party service providers, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs. Air Wisconsin’s technological systems, software and related data, and those of United, and those supplied by our third party service providers, may be vulnerable to a variety of sources of interruption or exploitation due to events beyond itsour control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.

In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and storestores sensitive data, including personal information of its employees and information of United. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations, any or all of which could adversely affect our business and financial condition.

We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including employment, class action and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming to resolve, divert management’s attention and resources, cause us to incur significant expenses or liability, and require us to change our business practices. Because of the potential risks, expenses and uncertainties associated with litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot be certain that the results of any of these actions will not have a material adverse effect on our business, results of operations and financial condition.

which are highly uncertain and cannot be predicted. A long-term continuation of reduced passenger demand for air travel could have a material adverse effect on our business, operating results, financial condition and liquidity. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth herein.

Worldwide, several regional and larger carriers have ceased operations as a direct result of the COVID-19 pandemic. In July 2020, United announced that it was terminating its flying agreement with ExpressJet Airlines, Inc. (“ExpressJet”). In September 2020, ExpressJet ceased operations. As of the date of this filing, in addition to ExpressJet, Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased operations as a result, at least in part, due to the COVID-19 pandemic’s impact on their business. In addition, a further outbreak of COVID-19, an outbreak of another disease or similar public health threat, or any other event that would affect travel demand, travel behavior or travel restrictions, including the material decline in passenger demand for air travel, and the significant risks and disruptions caused by the COVID-19 pandemic, could have a material adverse impact on our business, financial condition and operating results and those of United. For more information, see the section entitled “Management’s Discussion and Analysis – Economic Conditions, Challenges and Risks Impacting Financial Results – COVID-19 Pandemic” within this Annual Report.

The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.

The business of airlines is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, facility disruptions, acts of war or terrorism, increased security measures, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers and increase operating costs and decrease revenue, which in turn could adversely affect profitability. Because Air Wisconsin’s revenue (other than the portion of its revenue based on the number of aircraft covered under the United capacity purchase agreement) depends primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays, any of these factors could have a material adverse effect on our business, results of operations and financial condition.

The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.

The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America, in 2016, American Airlines and US Airways, in 2013, Southwest and AirTran Airways, in 2011, United and Continental Airlines in 2010 and Delta and Northwest Airlines in 2008.Airlines. Any additional consolidation or significant alliance activity within the airline industry could further limit the number of potential partners with whom Air Wisconsin could enter into capacity purchase agreements. In addition, any further consolidation activity involving United, or reduction in the size of its network, could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to provide additional service to United. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs could negatively impact Air Wisconsin’s future growth opportunities.

In the course of consolidation, major airlines may also make other strategic changes, such as relocating or consolidating hubs. For example, in May 2020, United temporarily ceased Air Wisconsin’s operations at Washington-Dulles and significantly reduced Air Wisconsin’s average daily scheduled departures. While we expect Air Wisconsin to resumeresumed operations at Washington-Dulles in August, but we cannot be certain whether these operationsUnited will be resumed, and whether United willnot make future changes to Air Wisconsin’s operations. If United were to make changes such as these in its strategy and operations, or otherwise decide to reduce the size of its network, Air Wisconsin’s operations and our financial results could be adversely impacted.

Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.

The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general. If additional terrorist attacks are launched, against the airline industry, there may be lasting consequences, of the attacks, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry, and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs. If aA terrorist attack, were to occur, whether or not involving Air Wisconsin’s aircraft, it could have a material adverse impact on our business and operations.

any reason may have a material adverse effect on our operations. Air Wisconsin incurs substantial costs complying with applicable governmental regulations, and Air Wisconsin’s business may also be subject to additional costs as a result of potential regulatory changes, which additional costs could have an adverse effect on Air Wisconsin’s operations and our financial results.

In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations and require that it incur substantial ongoing costs.

Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

Air Wisconsin is subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require Air Wisconsin isto reduce its emissions, secure carbon offset credits or may be subjectotherwise pay for emissions, or make capital investments to new or proposed lawsmodify certain aspects of its operations to reduce emissions. Future policy, legal, and regulations that mayregulatory developments relating to the protection of the environment could have a direct effect on its operations (or an indirect effect through its third-party specialistsproviders of goods or services or airport facilities at which it operates). and increase its costs and have a material adverse effect on its operations. Any such existing, future, new or potential laws and regulations could have an adverse impact on our business, results of operations and financial condition.

Similarly, Air Wisconsin is also subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.

The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of the Company’s common stock.

Under DOT regulations and federal law, Air Wisconsin must be owned and controlled by citizens of the United States as that term is defined in the Federal Aviation Act and interpreted by the DOT. The restrictions imposed by federal law and regulations limit who can purchase Air Wisconsin’s equity securities in the following ways:

The restrictions on foreign ownership of Air Wisconsin’s equity securities may impair or prevent a sale of common stock by a stockholder of the Company and may adversely affect the price at which a stockholder can sell the Company’s common stock.

Risks Related to the Company’s Common StockGeneral Risk Factors

Because there is no active trading market for the Company’s common stock, the common stock may continue to be illiquid.

Although the Company’s common stock is traded under the symbol “HRBR” on the OTC Market, the trading volume for the common stock has historically been very limited. The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.

The price of the Company’s common stock has been and may continue to be volatile.

The trading price of the Company’s common stock has been volatile. We believe the Company’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:

In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies across many industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of the Company’s common stock could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations could materially reduce the trading price of the Company’s common stock.

The concentration of ownership of the Company’s capital stock among a small number of stockholders could allow such stockholders to exert significant influence over the Company’s business plans and strategic objectives, control all matters submitted to the Company’s stockholders for approval, or deter a change in control transaction, any of which could negatively affect the trading price or trading volume of the Company’s common stock.

As of MayDecember 31, 2020, the Company had 54,863,305 shares of common stock outstanding. As of the same date, Amun LLC (“Amun”) held 20,000,000 shares of the Company’s common stock, representing approximately 28.0% of the fully diluted shares of capital stock of the Company, and Southshore Aircraft Holdings, LLC, through its affiliates (together, “Southshore”), held 4,000,000 shares of the Company’s Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), which were convertible into 16,500,000 shares of common stock, representing approximately 23.1% of the fully diluted shares of capital stock of the Company (in each case assuming the full conversion of the Series C Convertible Redeemable Preferred Stock into common stock). The sharesFollowing the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, pursuant to limitations set forth in the Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”), the Series C Preferred remains convertible into an aggregate of 16,500,000 shares of common stock as of the date of filing this Annual Report.

The shares of Series C Preferred are generally authorized to vote with the Company’s common stock. As a result, Amun and Southshore collectively control a majority of the voting power of the Company’s outstanding capital stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Company’s business plans and strategic objectives, as well as to control all matters submitted to the Company’s stockholders for approval. These stockholders may manage the Company’s business in ways in which certain investors disagree and may be adverse to their interests. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control transaction, depriving the Company’s stockholders of an opportunity to receive a premium for their capital stock, or otherwise negatively affecting the trading price or trading volume of the Company’s common stock.

Mr. Bartlett, one of the Company’s directors, may be deemed to be the beneficial owner of the shares of the Company’s common stock held by Amun due to his status as a member of the board of managers of Amun, and his indirect ownership of 19.6% of the outstanding equity of Amun. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Company’s Series C Convertible Redeemable Preferred Stock held by Southshore due to his status as a member of the board of managers of Southshore, and his direct or indirect ownership of 19.6% of the outstanding equity of Southshore. Accordingly, Mr. Bartlett may be able to exercise influence over decisions involving the voting or disposition of shares of the Company’s capital stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.

The Company may suspend its obligation to comply with SEC filing requirements in future periods, and thereby cease filing reports and other information with the SEC, which could have the effect of reducing the trading volume and trading price of the Company’s common stock.

In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to thisthe filing of our Annual Report on Form 10-K for the year ended December 31, 2019, the last periodic report filed by the Company was the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which was filed with the SEC on January 20, 2012.2011. As of January 1, 2020, the Company no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result,Act, requiring the Company determined that it is currently required to fileresume filing reports and other information with the SEC pursuant to Section 15(d) of the Exchange Act.

The Company has incurred significant direct and indirect costs, and diversion of management time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of this Annual Report,Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the audit of the financial statements contained inwithin our 2019 Annual Report and this Annual Report in accordance with SEC rules and the Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002. The Company expects to incur significant additional costs relating to its public reporting obligations, which could have a negative impact on the Company’s results of operations.

The Company would again become eligible to suspend its public reporting obligations if it (i) determines in accordance with applicable SEC rules it has fewer than 300 stockholders of record (as determined in accordance with applicable SEC rules) as of certain points in time, (ii) does not file registration statements pursuant to the Securities Act, and (iii) meets certain other requirements under applicable SEC rules. In the eventIf the Company becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which would result in the Company no longer being required to file SEC reports. If the Company ceases filing reports and other information with the SEC, it would significantly reduce the amount of publicly available information about the Company and its subsidiaries, which could have the effect of reducing the trading volume and trading price of the Company’s common stock.

In addition, notwithstanding that the Company is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, the Company does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, the Company is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. Accordingly, there may be significantly less information available about the Company, including its governance policies and ownership structure, than is available for other public reporting companies, which may reducecould have the effect of further reducing demand for the Company’s common stock and further reduce the trading volume and trading price.

with respect toIn addition, the United capacity purchase agreement provideprovides that a change of control of Air Wisconsin results in a termination event under the agreement, pursuant to which United may terminate its relationship with Air Wisconsin.

Complying with the requirements of public reporting companies under the Exchange Act, including the requirement for management to assess our disclosure controls and procedures and internal control over financial reporting, will increase our operating costs and divert management’s attention from executing our business strategy.

The Company isWe are subject to the reporting requirements of Section 15(d) of the Exchange Act, which requires, among other things, that itwe file annual, quarterly, and current reports with the SEC with respect to our business, financial condition and results of operations. In addition, pursuant to the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our disclosure controls and procedures and in future periods, we will be required to assess the effectiveness of our internal control over financial reporting. Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs, made some of our business activities more difficult or costly, and increased demand on our management team.

Significant additional resources and management oversight may be required to maintain and, as required, enhance our disclosure controls and procedures and internal control over financial reporting. As discussed below,

Further, the Company’s status as a public reporting company has significantly increased the cost of its director and officer liability insurance, and the Company may be required to accept reduced coverage or incur substantially higher costs in the future to obtain similar coverage. These factors, or other risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the Board of Directors and executive officers, and it may increase the cost of their services.

We have previously identified material weaknesses in our internal control over financial reporting and we could identify additional material weaknesses or significant deficiencies in future periods.

In connection with the audit of our consolidated financial statements as of and forincluded within the years ended December 31, 2019 and December 31, 2018, our independent registered public accounting firmAnnual Report, we identified multiple material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

While we have remediated the previously identified material weaknesses, we may identify additional material weaknesses in future periods, and we cannot be certain that we will be successful in preventing or remediating future significant deficiencies or material weaknesses in internal control over financial reporting. We mayexpect to continue to incur significant costs and diversion of management resources in an effort to remediate these material weaknesses and enhance our controls and procedures. In addition, these efforts may divert management’s attention from other business concerns, which could harm our results of operations. Any newly identified material weaknesses could result in material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of the Company’s common stock.

Share repurchases could increase the volatility of the trading price of our common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.

The Company’s board of directors has adopted a stock repurchase program pursuant to which the Company may repurchase shares of its common stock from time to time. Although the Company’s board of directors has authorized the repurchase program, it does not obligate us to repurchase any specific dollar amount or number of shares, and the program may be modified, suspended or terminated at any time and for any reason. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Our ability to repurchase shares may also be limited by restrictive covenants in future borrowing arrangements we may enter into from time to time.

Repurchases of the Company’s common stock could increase the volatility of the trading price, which could have a negative impact on the trading price. Similarly, the future announcement of the termination or suspension of the repurchase program, or our decision not to utilize the full authorized repurchase amount under the repurchase program, could result in a decrease in the trading price. There can be no assurance that any repurchases we do elect to make will enhance stockholder value because the market price of the Company’s common stock may decline below the levels at which we repurchased shares. Although the repurchase program is intended to enhance long-term stockholder value, we cannot guarantee that it will do so.

The Company may be at increased risk of securities class action and other litigation.

In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If the Company faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations.

As a result of our compliance with Exchange Act reporting obligations, a significant amount of information regarding our business and operations, including our financial condition and operating results, will become publicly available, which may result in threatened or actual litigation or other disputes with our key constituents. If such claims are successful, our business and results of operations could suffer and, even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.

Further, the Company’s status as a public reporting company has significantly increased the cost of its director and officer liability insurance, and the Company may be required to accept reduced coverage or incur substantially higher costs in the future to obtain similar coverage. These factors, or other risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the Company’s board of directors and executive officers, and it may increase the cost of their services.

Our independent registered public accounting firm has identified material weaknesses in our internal control over financial reporting that, if not corrected, could result in material misstatements to our financial statements in future periods.

As further discussed in the section entitled “Controls and Procedures” within this Annual Report, in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2019 and December 31, 2018, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. The identified material weaknesses as of December 31, 2019 primarily relate to: (i) the application of accounting treatment for certain complex and non-routine transactions, (ii) the adoption of new accounting standards related to Topic 606 and Topic 842, (iii) the establishment and design of processes and controls to document and monitor certain controls over financial reporting, (iv) the design of controls for user access rights related to certain information technology systems, and (v) the accounting for valuation allowances on deferred tax assets. While we intend to enhance our controls and procedures, and to remediate the material weaknesses that remain unremediated, we cannot be certain that these measures will be successful in remediating these material weaknesses, or preventing future significant deficiencies or material weaknesses in internal control over financial reporting. We expect to incur significant costs and diversion of management resources in an effort to remediate any material weaknesses and enhance our controls and procedures. During our ongoing evaluation of our controls and procedures, we may identify additional control deficiencies, which could give rise to additional material weaknesses or significant deficiencies. The material weaknesses described above, or any newly identified material weaknesses, could result in material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of the Company’s common stock.

The Company may be at increased risk of securities class action litigation.

In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If the Company faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations.

If securities or industry analysts do not publish reports about our business, an active trading market for the Company’s common stock may not develop.

The extent of any trading market for the Company’s common stock will depend, in part, on any research and reports that securities or industry analysts publish about us or our business. We are not currently aware of any analysts who cover the Company nor do we expect any analysts to commence coverage in the foreseeable future. Investors should not purchase the Company’s common stock with the expectation that we will have analyst coverage, or that an active trading market for the Company’s common stock will be developed or sustained.

None.

business, operating results, financial condition or cash flows. However, regardless of the merit of any claimsmatters raised or the ultimate outcome, of such matters,investigative inquiries, legal proceedings or investigatory inquiriesand other disputes may generally have an adverse impact on us as a result of defense and settlement costs, compliance costs, diversion of management resources, and other factors. As of December 31, 2019,2020, our management believed, after consultation with legal counsel, that the ultimate outcome of suchany investigative inquiries, legal proceedings and investigatory inquiriesother disputes then outstanding, whether individually or taken together, was not likely to have a material adverse effect on our financial position, liquidity or results of operations.

PART II

Market Information

The Company’s common stock is currently traded on the OTC Market under the symbol “HRBR.” The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the Company’s common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the Company’s common stock may never develop or be sustained.

The common stock of Harbor BioSciences, Inc., the Company’s predecessor, was delisted from the NASDAQ Capital Market on September 23, 2010, at which time the Company’s common stock commenced trading on the Over-The-Counter Bulletin Board (“OTCBB”). The Company’s common stock was subsequently delisted from the OTCBB on August 17, 2011 as a result of the filing of a Form 15 by Harbor BioSciences, Inc. with the Securities and Exchange Commission pursuant to Rule 12g-4 under the Exchange Act of 1934, as amended, and subsequently commenced trading on the OTC Market.

Holders of Record

As of January 1, 2020,2021, there were approximately 361403 holders of record of the Company’s common stock. Because many of the Company’s shares of common stock are held by brokers and other institutions on behalf of stockholders, not all of which are known to the Company, the Company is unable to estimateprovide the totalexact number of stockholders represented by these record holders.

The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company, LLC.

Dividends

The Company has not declared or paid any cash dividends on its capital stock. The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. In addition, the Payroll Support ProgramPSP-1 Agreement that Air Wisconsin entered into in April 2020 with the U.S. Department ofTreasury pursuant to the CARES Act and the PSP-2 Agreement that Air Wisconsin entered into in March 2021 with the Treasury pursuant to the recently enacted federal Coronavirus Aid, Relief, and Economic Security Act prevents itPSP Extension Law contain various covenants, that, respectively, prevent the Company from paying dividends prior to October 1, 2021.2021 and March 31, 2022, respectively. As a result, the source of any future dividends may be limited to existing cash available at the Company and from its other subsidiaries. Any future determination to pay dividends will be at the discretion of the Company’s board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements, business prospects and such other factors as the Company’s board of directors deems relevant.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and the other financial information included within this Annual Report on Form 10-K (this “Annual Report”). The following discussion contains forward-looking 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 those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Annual Report, particularly in the Itemssection entitled “Cautionary Note Regarding Forward-Looking Statements” and the Item entitled “Risk Factors.”

Overview

Harbor Diversified, Inc. (the “Company”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier that, as of December 31, 2019, provided scheduled passenger service to 81 cities in 31 states. Harbor Diversified, Inc.carrier. The Company is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is a non-operating entity with no material assets. Because Harbor Diversified, Inc.the Company consolidates Air Wisconsin for financial statement purposes, disclosures relating to activities of Air Wisconsin also apply to Harbor Diversified, Inc.,the Company, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor Diversified, Inc.the Company and its consolidated subsidiaries, they may be jointly referred to as “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as the “Company.”

In compliance with the requirements of Rule 12h-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s predecessor filed a Form 15 with the Securities and Exchange Commission (the “SEC”) to deregister its common stock. Among other things, the filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file the reports and other information required by Section 13(a) of the Exchange Act. However, as of January 1, 2020, which is the first day of the Company’s current fiscal year, the Company determined it no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result, the Company determined it was required to file this Annual Report no later than 120 days after the end of such fiscal year, or by April 29, 2020 (the “Original Filing Deadline”). However, on March 4, 2020, in response to the novel coronavirus (“COVID-19”) pandemic, the SEC issued an order under Section 36 of the Exchange Act (SEC Release No. 34-88465), which provides relief to reporting companies that are unable to timely comply with their filing obligations as a result of the impacts and disruptions caused by the COVID-19 pandemic if certain conditions are satisfied (the “SEC Order”). The Company relied on the SEC Order to extend the due date for the filing of this Annual Report. The Company subsequently provided a notification of late filing pursuant to Rule 12b-25(b) under the Exchange Act to further extend the due date for the filing of this Annual Report.

For the year ended December 31, 2019,2020, Air Wisconsin operated a fleet of 64 CRJ-200 regional jets with an average of approximately 284 daily departures under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenue for the yearyears ended December 31, 2019,2020 and more than 97% of our operating revenue for the year ended December 31, 2018,2019, was derived from operations associated with the United capacity purchase agreement. Prior to March 2018, Air Wisconsin flew for American Airlines (and its predecessor, US Airways) for over ten years.

Focus on Safety for Employees and Passengers

The safety and well-being of our employees and passengers are our priority. Throughout the COVID-19 pandemic, Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by the Centers for Disease Control and Prevention, including working with United States, public events, such as conferences, sporting eventsto:

Reduction in Demand for Air Travel

Governmental restrictions, orders and guidelines have resulted in the mandatory closure of “non-essential” businesses resultingin some jurisdictions, led to the cancellation of many public events, including conferences, sporting events and concerts, led to an unprecedented and sustained material decline in passenger demand for air travel, and resulted in significant disruptions to businessesregional and global financial markets, leading to an immediate and unprecedented materialeconomies.

This decline in passenger demand for all air travel.

Intravel led to a material reduction in seat capacity in April 2020, during which month the International Air Transport Association (“IATA”) reported that April 2020 seat capacity in the United States was 60% lower than that ofin the same period in April 2019. Roughly two-thirds of the global commercial fleet was grounded by the end of April. OnIn May 28,2020, the Transportation Security Administration reported that 87% fewer people passed through U.S. airport checkpoints than on the same day in the previous year. Worldwide, several regional and larger carriers have ceased operations as a direct resultSince April 2020, industry-wide capacity contraction has shown modest improvements; however, the pace of theimprovement has remained slow, with new spikes in COVID-19 pandemic. Ascases slowing or reversing recoveries. In December 2020, IATA reported that domestic seat capacity was 42.9% lower than the same period in December 2019, with industry-wide passenger load factor (a measure of capacity utilization of airlines) on average 17.8 percentage points lower than 2019. While some indicators of business activity, such as retail sales, suggest that the dateease of this filing, Miami Air International, RavnAir Group, Trans States Airlineslockdowns and Compass Airlines, each domestic regional or charter airlines, either filed for Chapter 11 or Chapter 7 bankruptcy or ceased operations.resumption of business may steady the decline of passenger demand, IATA has reported that fresh outbreaks of COVID-19 and government reliance on travel restrictions and quarantine orders may continue to subdue consumer confidence in air travel.

the number of daily flights operated by us, and future results of operations, are highly uncertain and subject to change. Our forecasted expense reduction and liquidity management measures discussed below may be modified as we more clearly understand the timing of the recovery of passenger demand for air travel, and the scope of the broader economic impacts of the pandemic. However, Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the COVID-19 pandemic on our financial condition, liquidity and results of operations.

Impact on Competitive Environment

Worldwide, several regional and larger carriers have ceased operations as a direct result of the COVID-19 pandemic. In July 2020, United announced that it was terminating its flying agreement with ExpressJet Airlines, Inc. (“ExpressJet”). ExpressJet ceased operations in September 2020. As of the date of this filing, in addition to ExpressJet, Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased operations.

Expense Management

We have taken a number of actions in response to the financial uncertainty and health concerns raised by the COVID-19 pandemic. We haveDuring 2020, we implemented cost-savingcost-reduction initiatives to mitigate the impact of the COVID-19 outbreak on our operations and financial position and operationscondition, while also protecting the safety of our customers and employees. Air Wisconsin has delayed certain planned capital expenditures and operating expenditures, for the remainder of 2020, through actions it took such as delayingnon-essential planned heavy airframe maintenance events, delayingnon-essential maintenance events associated with engines and rotable parts, seeking concessions from third-party suppliers, offering voluntary short-term unpaid leave to employees, suspending all pay increasesdeferring the payment of the employer’s portion of employees’ social security tax payments, and bonusesfurloughing certain employees. Air Wisconsin has been able to responsibly delay certain non-essential maintenance events primarily as a result of its reduced flight schedules.

In July 2020, Air Wisconsin informed approximately 871 employees that they might be furloughed or laid off as of October 1, 2020, through notices given pursuant to the federal Worker Adjustment and Retraining Notification (“WARN”) Act; and on October 1, 2020, Air Wisconsin furloughed or laid off approximately 305 employees, due to the COVID-19 pandemic and the resulting decrease in passenger demand for salariedair travel. As of the date of this Annual Report, 116 of those employees who were furloughed have been recalled, accepted the recall offer and institutingremain employed by Air Wisconsin. Through notices given in January 2021 pursuant to the WARN Act, Air Wisconsin informed approximately 150 pilots, each of whom had received the October 2020 WARN Act notices, that they might be furloughed on April 1, 2021, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. As of the date of this Annual Report, no furloughs have yet been issued pursuant to these notices. The necessity and scope of any additional furloughs are highly uncertain and will be impacted by a company-wide hiring freeze.number of factors, including the demand for air travel generally, the actual or estimated block hours for which Air Wisconsin is scheduled under the United capacity purchase agreement, and the timing and extent of any additional governmental assistance provided under the CARES Act, the PSP Extension Law and the American Rescue Plan (each described below) or otherwise.

Paycheck Protection Program

In April 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), intended to provide economic relief to United States businesses affected by the COVID-19 pandemic, was signed into law. In April 2020, Air Wisconsin received a $10.0 million loan (“SBA Loan”) under the small business Paycheck Protection Program (“PPP”) established under the CARES Act and administered by the Small Business Administration (“SBA”). The loan is forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, rent, mortgage payments, leave payments and utility costs. payments. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the filing of this Annual Report, the loan has not been forgiven.

Payroll Support Program

In April 2020, Air Wisconsin was also granted approximately $41.0 million of payroll support pursuant toentered into a Payroll Support Program Agreement (the “PSP(“PSP-1 Agreement”) entered into with respect to payroll support from the U.S. Department of the Treasury and offered(“Treasury”) under the payroll support program (“Payroll Support Program”) provided by the CARES Act, of whichAct. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $20.5$42.2 million has been received, with the remaining amount to be paid ratably in July, August and September, 2020. These funds will behave been used to pay for the salaries and benefits of Air Wisconsin’s employees. The PSPPSP-1 Agreement contains various covenants, including that the payroll supportPayroll Support Program proceeds must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin cannotcould not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin cannotcould not reduce any employee’s pay rates or benefits prior to October 1, 2020 without that employee’s consent. Through September 30, 2021, the PSPPSP-1 Agreement also prohibits: (i) Air Wisconsin or any of its affiliates from purchasing an equity security of Air Wisconsin or any direct or indirect parent company of Air Wisconsin that is listed on a national securities exchange and (ii) Air Wisconsin from paying dividends, or making any other capital distributions, with respect to the common stock (or equivalent equity interest) of Air Wisconsin. If Air Wisconsin fails to comply with its obligations under the PSP-1 Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. In addition, the CARES Act authorizes the Secretary of the Department of Transportation to impose certain air service obligations on recipients of payroll support under the CARES Act until March 1, 2022. To date, no such service obligation has been imposed on Air Wisconsin. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the agreement. For additional information, refer to Note 8, Commitments and Contingencies, in our audited consolidated financial statements included in this Annual Report.

In December 2020, Congress adopted, and the President signed, the federal Consolidated Appropriations Act of 2021 (the “PSP Extension Law”), Subtitle A of Title IV of Division N of which provides for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement (the “PSP-2 Agreement”), which is substantially similar to the PSP-1 Agreement. Air Wisconsin expects to receive approximately $28.3 million pursuant to the PSP-2 Agreement, approximately $15.5 million of which was received in March 2021 and the balance of which is expected to be received in April 2021.

In March 2021, Congress adopted, and the President signed, the federal American Rescue Plan Act of 2021, Subtitle C of Title VII (the “American Rescue Plan”) of which provides further payroll support to eligible air carriers. Air Wisconsin expects to apply for payroll support under the American Rescue Plan and expects that it will be required to enter into an agreement substantially similar to the PSP-1 Agreement and the PSP-2 Agreement, if it receives payroll support under the American Rescue Plan.

For additional information related to the COVID-19 pandemic, refer to the sections entitled “Business – Impact of COVID-19 on Our Businessand Industry,” and “Risk Factors” within this Annual Report within this Annual Report.

2020 Financial Highlights

For the year ended December 31, 2020, we had total operating revenue of $185.9 million, a 29.5% decrease, compared to $263.6 million for the year ended December 31, 2019. Net income for the year ended December 31, 2020 was $39.8 million, or net income of $0.71 per basic share and $0.56 per diluted share, compared to a net loss of $19.2 million, or $0.35 per basic and diluted share, for the year ended December 31, 2019. For additional information, refer to Note 12, Earnings per Share, and Note 13, Stock Options, in our audited consolidated financial statements included in this Annual Report.

Revenue

The number of aircraft we have in scheduled service and the block hours and departures we generate from our flights are primary drivers of our revenue under the United capacity purchase agreement. As a result of lower passenger demand from the COVID-19 pandemic, block hours decreased from 161,566 during the year ended December 31, 2019 to 74,438 during the year ended December 31, 2020, or by 53.9%, and the number of departures decreased from 105,360 in 2019 to 52,405 in 2020, or by 50.3%.

Primarily as a result of the reduced flight schedules during the year ended December 31, 2020 compared to the year ended December 31, 2019, revenue from the United capacity purchase agreement decreased by 29.5% to $186.0 million. Furthermore, we deferred recognizing revenue of $43.2 million related to fixed payments received under the United capacity purchase agreement during the year ended December 31, 2020 as a result of significant reductions to our flight schedules. For additional information, refer to the section entitled “–Revenue Recognition.”

However, as a result of the October 2020 amendment to the United capacity purchase agreement, we recognized $28.7 million of revenue during the year ended December 31, 2020, resulting from the payment or accrual by United to Air Wisconsin based on certain scheduling benchmarks. For additional information, refer to Note 1 to Consolidated Financial Statements “–Contract and Other Revenues.”

Operating Expenses

Our total operating expenses decreased $141.9 million, or 49.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. This decrease    was due to a number of factors including a significant reduction in the number of flights we operated as a result of the COVID-19 pandemic. Further, due to the acquisitions of formerly leased aircraft in 2019 and 2020 aircraft rent decreased by $36.4 million in 2020 when compared to 2019, partially offset by an increase in depreciation of $8.9 million in 2020. Additionally, we recorded $42.2 million in payroll support grants received from the Treasury under the CARES Act as an offset to our operating expenses during the year ended December 31, 2020. For additional information, refer to the section entitled “–Results of Operations—Operating Expenses.”

Stock Repurchase Program

The Company’s board of directors has adopted a stock repurchase program pursuant to which the Company may initially repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.

Economic Conditions, Challenges and Risks Impacting Financial Results

We believe that, although the United capacity purchase agreement reduces Air Wisconsin’s exposure to certain risks, its operating and business performance is driven by various factors that typically affect regional airlines and their markets, including factors that affect the broader airline and travel industries. The following key factors, in addition to the impact of the COVID-19 pandemic, may materially affect our future performance.

Contract Disputes. More than 99% of our operating revenuerevenues for the year ended December 31, 2019 was2020 were derived from operations associated with the United capacity purchase agreement. Long-term contractual agreements,Agreements such as the United capacity purchase agreement are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Currently, a dispute between United and Air Wisconsin exists under the United capacity purchase agreement with respect to certain amounts owed to Air Wisconsin under the terms of the agreement and with respect to United’s failure to schedule the covered aircraft in accordance with the minimum scheduling parameters contained in the agreement as a result of the COVID-19 pandemic. We cannot predict the outcome of these disputes, or any related negotiations, on the terms of the United capacity purchase agreement or our relationship with United.

Market Volatility. The airline industry is volatile and affected by economic cycles and other factors, such as tourist activity, consumer confidence, discretionary spending, fear of terrorism or war, global pandemics, as well as economic conditions, fare initiatives, fuel prices, labor actions, changes in governmental regulations, changes in taxes and fees, and weather. These factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. The effect of economic cycles and these other factors may be somewhat mitigated by Air Wisconsin’s reliance on the United capacity purchase agreement. If, however, United experiences a prolonged decline in passenger demand, or is negatively affected by low ticket prices or high fuel cost, it may materially reduce or inefficiently schedule Air Wisconsin’s scheduled flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the utilization of Air Wisconsin’s aircraft or operating efficiency of the flights scheduled under the United capacity purchase agreement.

Maintenance Contracts, Costs and Timing. Air Wisconsin’s employees perform routine airframe and engine maintenance along with periodic inspections of equipment at its maintenance facilities. It also uses third-party vendors for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for Air Wisconsin’s aircraft. As of December 31, 2019,2020, the average age of Air Wisconsin’s CRJ-200 regional jets was approximately 17.3more than 18 years. We expect that maintenance costs will increase as its fleet continues to age.

We use the direct expense method of accounting for Air Wisconsin’s maintenance of airframes, rotable parts, and normal recurring maintenance and for Lotus’ maintenance of engines, pursuant to which we recognize the expense when the maintenance work is completed. We use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit.

While Air Wisconsin keeps a record of expected maintenance events, the actual timing and costs of maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs.

Aircraft Leases. As of December 31, 2019, and May 31, 2020, Air Wisconsin had thirteen and two aircraft in its fleet under lease. During the year ended December 31, 2020, in three different transactions, Air Wisconsin acquired all of the remaining aircraft that were under various lease respectively.agreements. Therefore, as of December 31, 2020, Air Wisconsin no longer had any operational aircraft under lease. In order to determine the proper classification of its leased aircraft as either operating leases or finance leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of the aircraft, as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management to assess whether the lease is classified as an operating lease or a finance lease under existing accounting standards. All of Air Wisconsin’s aircraft leases have beenare classified as operating leases. UnderIn accordance with the new accounting standard Accounting Standards Codification (“ASC”) Topic 842, thatwhich the Company adopted in 2019, these leases have been included on the Balance Sheet under Other Assets as operating lease right-of-use assets.

See For additional information, refer to Note 1,4, Recently Adopted Standards,Property and Note 7, Lease ObligationsEquipment, in our audited consolidated financial statements included in this Annual Report for a detailed discussion of the new lease accounting standards contained in ASC 842.Report.

Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of December 31, 2019,2020, Air Wisconsin had 1,3501,042 full-time employees and 2721 part-time employees, for a total of 1,3771,063 employees, of which 1,095841 were represented by unions. Air Wisconsin’s pilots, represented by the Airline Pilots Association, ratified a three-year extension to their collective bargaining agreement with Air Wisconsin in November 2019, and the agreement now becomes amendable in November 2022. Air Wisconsin’s collective bargaining agreementsagreement with its mechanics and related employees, represented by the International Association of Machinists and Aerospace Workers and with its aircraft attendants, represented by the Association of Flight Attendants, are bothis amendable and both areis in mediated negotiations. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with Air Wisconsin’s unionized employees may adversely affect Air Wisconsin’s ability to conduct business.

Seasonality

Our results of operations for any interim period are not necessarily indicative of those for the entire year sincebecause the airline industry is subject to seasonal fluctuations and general economic conditions. While Air Wisconsin’s operations can be negatively impacted by factors outside of its control, including inclement weather, the United capacity purchase agreement mitigates some of the risks associated with seasonal fluctuations.

Components of Our Results of Operations

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

Operating Revenue

Our consolidated operating revenue consists primarily of contract revenue from flight services.

Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to the United capacity purchase agreement, along with the additional amounts received based on the number of flights and block hours flown. The United capacity purchase agreement includes provisional cash payments four times a month based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. In addition, contract revenue in 2020 includes the impact of the amendment to the United capacity purchase agreement that Air Wisconsin entered into in October 2020 which, among other things, settled certain disputes that had existed between United and Air Wisconsin regarding amounts owed to Air Wisconsin under the United capacity purchase agreement and provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The accruals are evidenced by notes receivable from United to Air Wisconsin.

Contract Services and Other. Contract services and other revenue are not material and primarily consist of the sale of parts.

Operating Expenses

Our operating expenses consist of the following items:

Payroll and Related Costs. Payroll and related expenses primarily relate to wages, benefits and payroll taxes for all Air Wisconsin’s employees, as well as costs related to lodging of our flight crews and crew training expenses.

Aircraft Fuel and Oil. Substantially all aircraft fuel and related fueling costs for flying under the United capacity purchase agreement are directly paid and supplied by United; we do not record any revenue or expense for such fuel. We include the cost of aircraft oil, which we are responsible for under the United capacity purchase agreement, although that expense is not material.

Other Rents. Other rents include expenses related to leased engines, costs related to leased flight simulators used to train Air Wisconsin’s pilots, and building rents such as crew and maintenance bases and corporate office space.

Depreciation, Amortization and Obsolescence. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and rotable parts depreciation. Obsolescence expense is a periodic non-cash charge primarily related to the provision for obsolescence on our expendable aircraft parts.

Purchased Services and Other. Purchased services and other expense primarily includes third-party aircraft line maintenance support in Chicago (O’Hare) and Washington (Dulles), information technology systems, legal fees, professional and technical fees, insurance and property taxes and other administrative expenses. The majority of insurance and property taxes are pass-through costs to United.

Other (Expense) Income, Net

Interest Expense. Interest expense is interest primarily relating to Air Wisconsin’s debt under the Aircraft Credit Agreements and the Other Credit Agreements.

Interest Income. Interest income includes interest income earned on our cash and cash equivalent balances.balance and notes receivable due from United.

Other. Other income (expense) includes income (expense) derived from activities not classified in any other area of the consolidated statements of income.

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 the United capacity purchase agreement.

Our chief operating decision maker uses condensed consolidated financial information to evaluate our performance, which is the same basis on which she communicates our results and performance to the Company’s board of directors. She bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in Note 1, Recently Adopted Standards, in our audited consolidated financial statements included in this Annual Report, and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.

Operating Revenue

Total operating revenue increaseddecreased by $23.0$77.7 million, or 9.5%29.5%, during the year ended December 31, 2019,2020, compared to the year ended December 31, 2018.2019. Contract revenue in 2019 increasedthe year ended December 31, 2020 decreased by $22.9$77.6 million, or 9.5%29.5%, primarily due to an increasea decrease in flying and an increase in performance incentive revenue underas a result of the United capacity purchase agreement.COVID-19 pandemic. Air Wisconsin’s block hours flown during the year ended December 31, 2019 increased 8.4%2020 decreased 53.9%, compared to the year ended December 31, 2018,2019, also due to increased flying with United resulting from improved productivity and the completion of our fleet transition from American.COVID-19 pandemic.

Operating Expenses

Depreciation, Amortization and Obsolescence. Depreciation, amortization and obsolescence expense increased $3.1$2.0 million, or 13.9%7.9%, to $25.2$27.2 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018. This2019. The increase was primarily attributable to Air Wisconsin’s acquisitionthe acquisitions in July 2019, January 2020, May 2020 and September 2020 of 14 aircraft that wereand engines previously leased by Air Wisconsin. For additional information, refer to it as well as the acquisition of new engines. See Note 4, Property and Equipment, in our audited consolidated financial statements included in this Annual Report.

CARES Act Payroll Support Program. In April 2020, Air Wisconsin entered into the PSP-1 Agreement to receive emergency relief through the Payroll Support Program in the form of payroll support paid in installments through October 2020. Air Wisconsin received approximately $42.2 million under the PSP-1 Agreement all of which was recognized during 2020 as a reduction in expense over the periods the payroll support was intended to offset payroll expenses.

Purchased Services and Other. Purchased services and other expense increased $3.1decreased $3.5 million, or 15.3%14.9%, to $23.2$19.8 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018. This increase was2019. The decrease is primarily due to a loss of approximately $2.5$0.5 million decrease in uncollectible accounts and a $1.4 million decrease in on call maintenance expense, line maintenance and charters, this is offset by a $0.5 million increase in professional, legal expenses, and other in 2020 compared to 2019, and $2.1 million more in losses on the sale and retirement of fifteen unserviceable engines, an increase of $0.8 millionassets in legal fees and a decrease of $0.2 million in all other purchased services.2019 when compared to 2020.

Other Income (Expense)

Interest Income. Interest income increased $0.3decreased $0.6 million, or 25.6%50.6%, to $1.3$0.6 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018. This increase2019. The decrease was primarily due to an increasea decrease in interest ratesearned on short-term investments offset by interest earned on notes receivable from United in 2019 and an increasethe amount of approximately $9.2 million year-over-year in our cash and cash equivalents available for investing.$0.3 million.

Interest Expense. Interest expense decreased $11.6$0.07 million, or 86.6%3.9%, to $1.8$1.7 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018.2019. This decrease was due primarily dueto a decrease in the principal amount outstanding under Air Wisconsin’s credit agreements with its lender. For additional information, refer to the decreasesubsection entitled “Management’s Discussion and Analysis of approximately $176.8 million in principal resulting from the restructuringFinancial Condition and Results of Senior Aircraft NotesOperations – Debt and Subordinated Aircraft Notes that occurred in December 2018. Further, as part of the troubled debt restructuring, the expected future undiscounted interest payments of $16.5 million were capitalized as part of the carrying value of the debt.

The income tax provision for the year ended December 31, 20182019 resulted in an effective tax rate of 2.9%1.8%, which differed from the U.S. federal statutory rate of 21% as of January 1, 2018, primarily due to permanent differences related to the gain on the troubled debt restructuringimpact of state taxes and otherpermanent differences between financial statement and taxable income. Other factors include the creation ofincome and changes in federal and state valuation allowances against federal and state deferred tax assets andassets. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.

As a result of a troubled debt restructuring in 2018, any remaining federal and state net operating loss and tax credit carryovers were eliminated, and therefore any related deferred tax assets and valuation allowances were reduced. The Tax Cuts and Jobs Act, (the “Tax Act”), signed into law on December 22, 2017, decreased the federal statutory rate to 21% for the year ended December 31, 2018 and subsequent fiscal years. The Tax Act also allowed for federal net operating losses to have an indefinite life with certain limitations. The Company’s net operating losses incurred in the year ended December 31, 2019 and in subsequent years may be used to offset up to 80% of taxable income in a given year.

We continue to maintain a valuation allowance on a portion of our federal and state deferred tax assets.

As of December 31, 2019,2020, we had aggregate federal and state net operating loss carryforwards of approximately $60.9$27.6 million and $17.9$9.1 million. The federal net operating losses do not have an expiration date while the state net operating losses expire beginning in 2024, with some states having either longer expiration periods or none at all.

SeeRefer to Note 5, Income Taxes, in our audited consolidated financial statements included in this Annual Report.

As of December 31, 2019,2020, our principal sources of liquidity were cash and cash equivalents of $69.5$130.4 million, inclusive of the $11.3$50.8 million in cash and cash equivalents held by Air Wisconsin. The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibits it from paying, dividends or distributions to the Company. In addition, the PSPPSP-1 Agreement that Air Wisconsin entered into in April 2020 withand the U.S. Department of the Treasury pursuant to the recently enacted CARES Act preventsPSP-2 Agreement prevent it from paying dividends prior to October 1, 2021.March 31, 2022.

Furthermore, as of December 31, 2019,2020, Air Wisconsin had $120.7$107.8 million (including capitalized interest of $10.9 million) in secured indebtedness incurred in connection with the Aircraft Credit Agreements. In April 2020, Air Wisconsin also received $10.0 million under the PPP. Air Wisconsin’s primary uses of liquidity are capital expenditures and debt repayments. As of December 31, 2019,2020, Air Wisconsin had $12.9$23.6 million of short-term debt, and $107.8$94.2 million of long-term debt.

Sources of cash for the year ended December 31, 20192020 were primarily cash flow from operations of $25.5$73.2 million.

Restricted Cash

As of December 31, 2019,2020, in addition to the cash and cash equivalents of $11.3$130.4 million, Air Wisconsin had $0.8 million in restricted cash which primarily relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program and landing fees at certain airports. Restricted cash includes amounts escrowed in an interest-bearing account that secure letters of credit.the credit facility.

Net Cash Flow Used in Investing Activities

During the year ended December 31, 2020, our net cash flow used in investing activities was $8.7 million resulting primarily from the purchase of aircraft and an investment in rotable parts and engine overhauls to support Air Wisconsin’s fleet under the United capacity purchase agreement. During the year ended December 31, 2019, our net cash flow used in investing activities was $20.9 million. We invested $21.5 million in new and used aircraft engines to support Air Wisconsin’s fleet under the United capacity purchase agreement, offset by $0.6 million from proceeds on disposition of property and equipment.

During the year ended December 31, 2018, our net cash flow used in investing activities was $31.5 million. We invested $31.6 million in new and used aircraft engines to support Air Wisconsin’s fleet under the United capacity purchase agreement, offset by $0.1 million from proceeds on disposition of property and equipment.

Net Cash Flow (Used in) Provided by Financing Activities

During the year ended December 31, 2020, our net cash used in financing activities was $3.6 million, reflecting Air Wisconsin’s receipt of a $10.0 million loan under the PPP established pursuant to the CARES Act, partially offset by a dividend payment of $0.8 million on the Series C Preferred and payments of long-term debt of $12.8 million. During the year ended December 31, 2019, our net cash flow used inprovided by financing activities was $4.6 million. Air Wisconsin received $11.8 million in proceeds from a note payable further described in the section entitled “– Other Credit Agreements” within this Annual Report. Air Wisconsin made $7.2 million of principal repayments on long-term debt during the period under those same agreements.

During the year ended December 31, 2018, Air Wisconsin’s net cash flow provided by financing activities was $15.2 million. Air Wisconsin received $15.2 million in proceeds from issuance of a note payable further described in the section entitled “– Other Credit Agreements” within this Annual Report.

In November 2019, the Board of Directors formed a special committee to evaluate this acquisition from Southshore. Messrs. Bederman and Degen, each of whom was a “disinterested director” for purposes of the transaction, were appointed to serve as members of the special committee. The committee retained special committee counsel, a financial advisor, and an independent valuation firm to advise it on the acquisition. The special committee met frequently, including with its advisors, throughout the process of analyzing, negotiating and completing the transaction, with both members present for all meetings. The special committee’s financial advisor delivered to the special committee its opinion as to the fairness, from a financial point of view, to the Company and its stockholders of the consideration to be paid by the Company in the acquisition. The Company completed the acquisition following the approval of the special committee. In January 2020, the Company filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.

Series C Convertible Redeemable Preferred Stock

The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors (the “Preferential Dividends”). From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the “Dividend Ratchet”). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the “PIK Dividends”).

Each share of Series C Preferred is initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (the “Conversion Price”). One of the requirements of the Certificate of Designations is that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The “Reporting Adjustment Period” is the first 90-trading day period commencing on or after August 28, 2020 (which is the first trading day following the day that is 45 days following the date on which the Company provided notice to its stockholders of the filing of its 2019 Annual Report) during which an aggregate of at least 5.0% of the outstanding shares of common stock are traded. The Conversion Price has been adjusted as of January 7, 2021 to be $0.15091.

The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, (the “Conversion Cap”) plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of the date of the adjustment to the Conversion Price, effective as of January 7, 2021, the Conversion Cap equaled 16,500,000 shares of common stock, and 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares.

In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the “Series C Liquidation Amount”).

At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800,000 shares of Series C Preferred are outstanding, and (d) December 31, 2024, the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (the “Redemption Price”). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price.

In January 2020, the Company also entered into an Investors’ Rights Agreement with Southshore, pursuant to which the Company agreed, if requested by Southshore at any time following the 180-day period after the Company became subject to the reporting requirements under the Exchange Act, to file with the SEC a registration statement on a Form S-1 with respect to at least 40% of the common stock issuable upon conversion of the Series C Preferred then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $10 million), along with other registration rights. All reasonable expenses related to any such registration shall be borne by the Company. The Investors’ Rights Agreement further provides that, whenever the members of the Board of Directors are to be elected, Southshore will vote to elect a majority of directors comprising the Board of Directors that qualify as independent directors.

On April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively.

Based on the applicable accounting guidance, the Company is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.

The number of shares of common stock into which the Series C Preferred is convertible, as determined for purposes of calculating the net income (loss) per share of common stock, may not be consistent with the actual number of shares into which the Series C Preferred is convertible pursuant to the Certificate of Designations on any particular date.

As of December 31, 2019, we had no variable rate notes2020, pursuant to the Certificate of Designations, the Series C Preferred was convertible into an aggregate of 16,500,000 shares of common stock. Following the adjustment of the conversion price of the Series C Preferred effective as of January 7, 2021, the Series C Preferred is convertible into an aggregate of 16,500,000 shares of common stock, representing approximately 23.1% of the fully diluted shares of capital stock of the Company (assuming the full conversion of the Series C Preferred into common stock). Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in our total long-term debt.accordance with the Conversion Cap set forth in the Certificate of Designations, the Series C Preferred remains convertible into an aggregate of 16,500,000 shares of common stock as of the date of filing this Annual Report.

The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.

Aircraft Operating Leases

As of December 31, 2020, Air Wisconsin had no operating aircraft remaining on lease. As of December 31, 2019, Air Wisconsin had 13 aircraft remaining on lease with lease terms ending within 12 months. Future minimum lease payments due under these aircraft operating leases were approximately $2.7 million as of December 31, 2019. As of May 31, 2020, Air Wisconsin had two aircraft remaining on lease with lease terms ending within six months. See Note 16, Subsequent Events, in our audited consolidated financial statements included in this Annual Report.

Debt and Credit Facilities

Aircraft Credit Agreements

In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of Senior Aircraft Notessenior aircraft notes to a loan trustee on behalf of a senior lender (the “Lender”) and Subordinated Aircraft Notessubordinated aircraft notes to athe loan trustee on behalf of a subordinated lender (the “Subordinated Lender”). The aggregate original outstanding principal amount of the Senior Aircraft Notessenior aircraft notes and the Subordinated Aircraft Notes was approximately $649.5 million. The Senior Aircraft Notes and the Subordinated Aircraft Notessubordinated aircraft notes were governed by seven credit agreements. The aircraftPrior to December 2018, the Lender acquired with the proceedsall of the subordinated aircraft notes issued pursuant to a credit agreement secured onlyfrom the notes issued pursuant to that credit agreement. The Senior Aircraft Notes bore interest at fixed rates ranging from 4.75% to 6.84%. The Subordinated Aircraft Notes bore interest at a base rate plus 6- month LIBOR, with semi-annual adjustments for changes in LIBOR; the base rate was 1.5% for the first 15 months, 2.5% for the following 18 months and 3.5% thereafter.

Other Credit Agreements

Air Wisconsin entered into a credit agreement with the Lender in June 2017 in the amount of approximately $14.4 million. This loan bearsbore interest at a rate of 5% per annum. Principal and interest arewere paid quarterly, provided that the Lender on March 30, 2020 agreed to a deferral until September 30, 2020, of all interest and principal payments due between March 31, 2020 and September 29, 2020. This loan matures on December 31, 2020, and iswas secured by each aircraft acquired with the proceeds of any of the original seven aircraft credit agreements and by certain spare aircraft, spare engines and spare parts.parts and was paid in full in December 2020.

OnIn January 25, 2018, Air Wisconsin entered into a second credit agreement with the Lender to borrow approximately $15.2 million in the year ended December 31, 2018. On December 24, 2018, the Lender and Air Wisconsin entered into a first amendment to that credit agreement in which the Lender agreed to make an additional loan in the amount of $5.8 million on April 30, 2019. In April 2019, Air Wisconsin entered into a second amendment with respect to the 2018 credit agreement that extended the due date of one of the payments due in the amount of $7.3 million from July 2019 to July 2020. The $7.3 million payment was included in long-term debt on the balance sheet for the year ended December 31, 2018. In June 2019, Air Wisconsin entered into a third amendment to the 2018 credit agreement that changed the due date of the installment payment of $7.3 million, due July 2020, to December 2021. The amendment also provided Air Wisconsin the option to make the March 2020 and June 2020 payments under the 2017 credit agreement, totaling $7.2 million, in December 2019, in return for allowing the deferral of the December 2019 payment under the 2018 credit agreement, in the amount of $7.9 million, to be made into two installments of $4.0 million due in March and June of 2022. Air Wisconsin exercised this option. The June 2019 amendment also increased the loan amount of the 2018 credit agreement by $6.0 million, to a total of $27.0 million, and the amendment extended the maturity date to June 30, 2022, at which time the $6.0 million is also due. The loans under the 2018 credit agreement have an interest rate of 5% and a maturity date of June 30, 2022, and are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. Air Wisconsin concluded that the amendments discussed above should be classified as a troubled debt restructuring due to the Lender granting changes to the amortization schedule and extending the loan maturity dates in the amendments. The loans made to Air Wisconsin by the Lender pursuant to the 2017 credit agreement and the 2018 credit agreement with the Lender may be referred to herein as the “Other Credit Agreements.”

SBA Loan and Treasury Payroll Support

In April 2020, Air Wisconsin entered into an agreement with a lender for a $10.0 million loan under the small business Paycheck Protection Program established under the CARES Act and administered by the SBA to promote continued employment, which loan is forgivable subject to certain conditions, such as that the proceeds be used primarily for payroll purposes. Air Wisconsin has received the full amount of that loan. These amounts were expended by Air Wisconsin during the year ended December 31, 2020. However, the process for applying for forgiveness with the lender has not been announced as of the date of filing this Annual Report. Therefore, as of the date of filing this Annual Report, the loan has not been forgiven.

In April 2020, Air Wisconsin also entered into the PSPPSP-1 Agreement with the U.S. Department of the Treasury for payroll support under the CARES Act in the amount of approximately $41.0$42.2 million, payablewhich was paid in several installments through SeptemberOctober 2020. The PSPPSP-1 Agreement contains various covenants, including that the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin cannotcould not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin cannotcould not reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent. As of December 31, 2020, Air Wisconsin has expended the amounts received and believes it has done so in accordance with the requirements of the PSP-1 Agreement.

Maintenance Commitments

Air Wisconsin has entered into twothree non-exclusive heavy maintenance services agreements for certain maintenance, repair and modification services with respect to airframes owned or operated by Air Wisconsin, and one exclusive engine maintenance agreement to perform certain maintenance, repair, restoration, overhaul, modification and other services on aircraft engines owned or operated by Air Wisconsin, with threefour maintenance and repair organizations, based on fixed pricing schedules. TheTwo of the non-exclusive heavy maintenance services agreements are subject to certain escalation of labor rates, and have an initial term through September 2022 and December 2022, but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions as during the initial terms. The third non-exclusive heavy maintenance service agreement is for a one-year term expiring on September 11, 2021. The exclusive engine maintenance agreement is subject to an annual escalation and has an initial term through May 2021, but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions, including pricing, as during the initial term. Air Wisconsin has extended the term of this agreement for one year through May 2022. Due to reduced flying caused by the COVID-19 pandemic, we expect that Air Wisconsin’s expenditures under these agreements will bewere significantly less in 2020 than in 2018 and 2019.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company,us, or that engages in leasing, hedging or research and development arrangements with the Company.us.

We have no off-balance sheet arrangements of the types described in the four categories above that we believe may have material current or future effect on financial condition, liquidity or results of operations.

Critical Accounting Policies

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

We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies, in our audited consolidated financial statements included in this Annual Report.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers, (Topic 606) (“Topic 606”). Under Topic 606, revenue is recognized when Air Wisconsin satisfies its obligation by transferring control of the good or service to the customer. The Company adopted this standard as of January 1, 2018, utilizing the cumulative effect (modified retrospective) method of adoption and applied the standard only to open contracts. The cumulative effect of adopting Topic 606 resulted in an adjustment to opening retained earnings on January 1, 2018, in the amount of $5,420. Under the new standard the Company concluded that the individualBecause our flights are distinct services andthat have the same pattern of transfer to the customer, satisfied over time with the measure of progress for each flight deemed to be substantially the same, the flight services promised in Air Wisconsin’sthe capacity purchase agreementsagreement represent a series of services that should beare accounted for as a single performance obligation. Therefore, our contract revenues are recognized when service is provided and our performance obligation recognized over time.is determined on a per completed flight basis. The performance obligation of each completed flight is measured using departures.

Air Wisconsin’s major airline partners make provisional cash payments to Air Wisconsin during each month of service based on monthly flight schedules and the provisional cash payments are reconciled based on actual completed flights after each month’s flight activity is completed. As a Lessor, for our aircraft operatedAdditionally, under the United capacity purchase agreement, Air Wisconsin has historically accountedwe receive a fixed payment based on a daily rate for each aircraft covered by the non-lease component under Topic 606agreement over the agreement term (“Fixed Payments”). We recognize revenue attributed to the Fixed Payments proportionate to the number of departures completed during each reporting period, relative to the estimated number of departures we anticipate completing over the remaining contract term. Due to the material decrease in completed departures in 2020 from historical levels and has historically accounted forfrom anticipated future levels over the lease component under ASC 840.remaining contract term, we determined the amount of Fixed Payments we received in 2020 was disproportionately high relative to the number of departures we completed during 2020. As of January 1, 2019, under the available practical expedient under ASC 842, Air Wisconsin elected to account for the lease and non-lease components as a single component for all classes of underlying assets. As the predominant component of the combined components are the flight services, the leases are being accounted for entirely under Topic 606 for the year ended December 31, 2019.2020, we deferred recognizing revenue of $43.2 million in Fixed Payments we received during the 2020 calendar year. We deferred recognizing revenue of $22.5 million during the second quarter of 2020 when we had 4,663 departures, $15.4 million during the third quarter of 2020 when we had 8,527 departures, and $5.3 million during the fourth quarter of 2020 when we had 13,799 departures. The amount of deferred revenue from Fixed Payments we recognize will increase or decrease in future reporting periods depending on the number of departures we complete during such reporting period and our then-current forecast of departures we anticipate completing over the remaining contract term based on information available to us as that time. We anticipate we will continue to defer recognizing revenue in 2021 and may begin recognizing previously deferred amounts as revenue by the middle of 2021, depending upon actual and expected future departures.

Under the nonrefundable up-front fee considerationsOur revenues could be impacted by a number of Topic 606, payments from United for the up-front fees will be deferred and amortized over the contract term. Under the guidance in ASC 340-40, the related up-front costsfactors, such as our flight schedules, terminations, weather, our estimates used to fulfill the contract that were incurred prior to the start of flying for United will also be capitalized and amortized over the contract term. Asdetermine the amount of the upfront reimbursements received and deferred over the contract term differs from the fulfillment costs that were capitalized, a charge was required to the opening retained earnings in the year ended December 31, 2018 in the amount of $5,420. This adjustment also resulted in the establishment of a deferred tax asset in the amount of $1,788, which has been classified as a “Contract Liability” deferred tax asset in Note 5. The statement of operations for the year ended December 31, 2018 has been adjusted to reflect the adoption of Topic 606. The statement of operations for the year ended December 31, 2018 was impacted by expenses incurred to prepare additional aircraft for service in the amount of $9,439, that were incurred after the performance obligation under the contract had already been partially satisfied in the year ended December 31, 2017. In addition, amortization of the fulfillment costs capitalized in the year ended December 31, 2017 resulted in additional amortization expense of $400 for the year ended December 31, 2018. These expenses were partially offset by amortization of deferred upfront costs resulting in revenue of $3,480, resulting in total adjustments decreasing operating income by $6,359. The Company then analyzed the need for a valuation allowance against its deferred tax assets as of December 31, 2018, and determined that a valuation allowance in the amount of $457 was necessary. For further details, see Note 5, Income Taxes, in our audited consolidated financial statements included in this Annual Report.

Air Wisconsin recognizes revenue under its capacity purchase agreements with United and American over time as the service is provided. For the year ended December 31, 2019, revenue from the United capacity purchase agreement represented 100% of contract revenue. For the year ended December 31, 2018, contract revenue from Air Wisconsin’s capacity purchase agreements with United and American were 97.2% and 2.8%, respectively. 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 each month, with additional incentives primarily based on flight completion, on-time performance, and customer satisfaction. Under the United capacity purchase agreement, Air Wisconsin’s performance obligation is met and revenue is recognized over time and is reflected in contract revenue. Contract revenue by type for the year ended December 31, 2019 and 2018 (in thousands) follows:

As of December 31, 2019,2020, the Company had no indebtedness, and Air Wisconsin had $120.7$107.8 million in secured indebtedness including $12.9and the $10.0 SBA Loan under the Paycheck Protection Program. This includes $23.6 million of short-term indebtedness, and $107.8$94.2 million of long-term indebtedness. As of December 31, 2020 and December 31, 2019, all of Air Wisconsin’s indebtedness was subject to fixed interest rates. As a result, a hypothetical change in market interest rates would have no impact on the interest expense incurred by Air Wisconsin.

We have not generated or incurred, and do not expect to generate or incur, revenue or expenses in foreign currencies. As a result, we have not been, and do not expect to be, subject to foreign currency exchange risk.

Although airplane fuel is typically a material cost incurred by companies in the airline industry,airlines, other than regional airlines, pursuant to the United capacity purchase agreement, United sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the agreement.��As a result, the effect of the United capacity purchase agreement is to largely insulate Air Wisconsin from volatility related to changes in fuel prices.

The Company’s consolidated financial statements as of and for the years ended December 31, 2020 and 2019, and 2018, and the ReportReports of Independent Registered Public Accounting Firm, are included in this Annual Report as set forth in the index.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

ShareholdersStockholders and Board of Directors

Harbor Diversified, Inc. and Subsidiaries

Appleton, Wisconsin

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheetssheet of Harbor Diversified, Inc. and Subsidiaries (the “Company”) as of December 31, 2019, and 2018, the related consolidated statements of operations, shareholders’comprehensive loss, stockholders’ equity, and cash flows for the yearsyear then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atas of December 31, 2019, and 2018, and the results of theirits operations and theirits cash flows for each of the yearsyear then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases and its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.

Emphasis of Matter

As discussed in Notes 2 and 16 to the consolidated financial statements, the Company has been materially impacted by the outbreak of a novel coronavirus (COVID-19), which was declared a global pandemic by the World Health Organization in March 2020. On March 27, 2020, the President Trump signed into law the Coronavirus Aid, Relief and Economic Securities (CARES) Act, which provides certain relief as a result of the COVID-19 outbreak. The Company is currently evaluating how the CARES Act will impact its financial position, results of operations, and cash flows. Our opinion is not modified with respect to these matters.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our auditsaudit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2012.from 2012 to 2020.

Madison, Wisconsin

July 10, 2020

Harbor Diversified, Inc. and Subsidiaries

Consolidated Balance Sheets (in thousands)