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MESA Mesa Air

Filed: 10 May 21, 9:55pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2021

Or

 

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

 

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-38626

 

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

85-0302351

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

 

85008

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, no par value

 

MESA

 

Nasdaq Global Select Market

 

 

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

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

 

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

 

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

 

 

 


 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

2

 

 

Condensed Consolidated Balance Sheets

2

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

3

 

 

Condensed Consolidated Statements of Stockholders' Equity

4

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

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

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

37

 

 

Item 4. Controls and Procedures

38

 

 

PART II – OTHER INFORMATION

39

 

 

Item 1. Legal Proceedings

39

 

 

Item 1A. Risk Factors

39

 

 

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

39

 

 

Item 3. Defaults Upon Senior Securities

39

 

 

Item 4. Mine Safety Disclosures

39

 

 

Item 5. Other Information

39

 

 

Item 6. Exhibits

39

 

 

SIGNATURES

41

 

 


 

Cautionary Note Regarding Forward Looking Statements

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

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

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

 

public health epidemics or pandemics such as COVID-19;

 

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

 

the supply and retention of qualified airline pilots and mechanics;

 

the volatility of pilot attrition and mechanics;

 

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

 

increases in our labor costs;

 

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

 

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

 

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

 

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

 

our significant amount of debt and other contractual obligations;

 

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

 

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

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

 

1


Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)

 

 

 

March 31,

 

 

September 30,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

147,867

 

 

$

99,395

 

Restricted cash

 

 

3,351

 

 

 

3,446

 

Receivables, net

 

 

13,867

 

 

 

13,712

 

Expendable parts and supplies, net

 

 

23,044

 

 

 

22,971

 

Prepaid expenses and other current assets

 

 

8,956

 

 

 

16,067

 

Total current assets

 

 

197,085

 

 

 

155,591

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,180,684

 

 

 

1,212,415

 

Intangibles, net

 

 

7,412

 

 

 

8,032

 

Lease and equipment deposits

 

 

8,242

 

 

 

1,899

 

Operating lease right-of-use assets

 

 

105,521

 

 

 

123,251

 

Other assets

 

 

20,647

 

 

 

742

 

Total assets

 

$

1,519,591

 

 

$

1,501,930

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt and financing leases

 

$

103,980

 

 

$

189,268

 

Current portion of deferred revenue

 

 

4,356

 

 

 

9,389

 

Current maturities of operating leases

 

 

44,016

 

 

 

43,932

 

Accounts payable

 

 

70,012

 

 

 

53,229

 

Accrued compensation

 

 

10,449

 

 

 

12,030

 

Other accrued expenses

 

 

28,610

 

 

 

45,478

 

Total current liabilities

 

 

261,423

 

 

 

353,326

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt and financing leases, excluding current portion

 

 

600,058

 

 

 

542,456

 

Noncurrent operating lease liabilities

 

 

38,405

 

 

 

62,531

 

Deferred credits

 

 

7,442

 

 

 

5,705

 

Deferred income taxes

 

 

70,929

 

 

 

64,275

 

Deferred revenue, net of current portion

 

 

29,502

 

 

 

14,369

 

Other noncurrent liabilities

 

 

20,988

 

 

 

1,409

 

Total noncurrent liabilities

 

 

767,324

 

 

 

690,745

 

Total liabilities

 

 

1,028,747

 

 

 

1,044,071

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   0 shares issued and outstanding

 

 

 

 

 

 

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

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

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

  0 (2020) warrants issued and outstanding

 

 

255,950

 

 

 

242,772

 

Retained earnings

 

 

234,894

 

 

 

215,087

 

Total stockholders' equity

 

 

490,844

 

 

 

457,859

 

Total liabilities and stockholders' equity

 

$

1,519,591

 

 

$

1,501,930

 

 

See accompanying notes to these condensed consolidated financial statements.

 

2


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

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

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenue

 

$

81,712

 

 

$

165,781

 

 

$

208,870

 

 

$

337,580

 

Pass-through and other

 

 

15,568

 

 

 

14,115

 

 

 

38,781

 

 

 

26,351

 

Total operating revenues

 

 

97,280

 

 

 

179,896

 

 

 

247,651

 

 

 

363,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

 

37,403

 

 

 

52,891

 

 

 

74,367

 

 

 

105,535

 

Fuel

 

 

198

 

 

 

188

 

 

 

588

 

 

 

358

 

Maintenance

 

 

51,773

 

 

 

64,335

 

 

 

104,637

 

 

 

122,430

 

Aircraft rent

 

 

9,992

 

 

 

12,285

 

 

 

20,040

 

 

 

23,614

 

Aircraft and traffic servicing

 

 

743

 

 

 

1,336

 

 

 

1,644

 

 

 

2,400

 

General and administrative

 

 

11,164

 

 

 

14,500

 

 

 

24,237

 

 

 

27,496

 

Depreciation and amortization

 

 

20,705

 

 

 

20,469

 

 

 

41,175

 

 

 

41,021

 

Lease termination

 

 

4,508

 

 

 

          —

 

 

 

4,508

 

 

 

           —

 

Government grant recognition

 

 

(55,967

)

 

 

          —

 

 

 

(67,278

)

 

 

           —

 

Total operating expenses

 

 

80,519

 

 

 

166,004

 

 

 

203,918

 

 

 

322,854

 

Operating income

 

 

16,761

 

 

 

13,892

 

 

 

43,733

 

 

 

41,077

 

Other (expenses) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,755

)

 

 

(11,673

)

 

 

(17,837

)

 

 

(24,300

)

Interest income

 

 

79

 

 

 

36

 

 

 

205

 

 

 

94

 

Other (expense) income, net

 

 

(506

)

 

 

937

 

 

 

417

 

 

 

641

 

Total other (expense), net

 

 

(9,182

)

 

 

(10,700

)

 

 

(17,215

)

 

 

(23,565

)

Income before taxes

 

 

7,579

 

 

 

3,192

 

 

 

26,518

 

 

 

17,512

 

Income tax expense

 

 

1,890

 

 

 

1,307

 

 

 

6,711

 

 

 

4,842

 

Net income and comprehensive income

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Net income per share attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.05

 

 

$

0.56

 

 

$

0.36

 

Diluted

 

$

0.14

 

 

$

0.05

 

 

$

0.52

 

 

$

0.36

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,628

 

 

 

35,141

 

 

 

35,579

 

 

 

35,082

 

Diluted

 

 

39,432

 

 

 

35,265

 

 

 

38,382

 

 

 

35,220

 

 

 

See accompanying notes to these condensed consolidated financial statements.

 

 

3


 

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2019

 

 

31,413,287

 

 

 

3,600,953

 

 

$

238,504

 

 

$

187,364

 

 

$

425,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption ASU 2018-09 Stock compensation-

   income taxes

 

 

 

 

 

 

 

 

 

 

 

259

 

 

 

259

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,320

 

 

 

 

 

 

1,320

 

Repurchased shares and warrants

 

 

(5,558

)

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Warrants converted to common stock

 

 

1,612,481

 

 

 

(1,612,481

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

18,916

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

10,785

 

 

 

10,785

 

Balance at December 31, 2019

 

 

33,039,126

 

 

 

1,988,472

 

 

$

239,783

 

 

$

198,408

 

 

$

438,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

1,193

 

 

 

 

 

 

1,193

 

Repurchased shares and warrants

 

 

(18,244

)

 

 

 

 

 

(160

)

 

 

 

 

 

(160

)

Warrants converted to common stock

 

 

1,988,472

 

 

 

(1,988,472

)

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

141,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share purchases

 

 

43,934

 

 

 

 

 

 

243

 

 

 

 

 

 

243

 

     Net income

 

 

 

 

 

 

 

 

 

 

 

1,885

 

 

 

1,885

 

Balance at March 31, 2020

 

 

35,194,902

 

 

 

 

 

$

241,059

 

 

$

200,293

 

 

$

441,352

 

 

 

4


 

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)

 

 

 

Six Months Ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

Number of

 

 

Paid-In

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Warrants

 

 

Capital

 

 

Earnings

 

 

Total

 

Balance at September 30, 2020

 

 

35,526,918

 

 

 

 

 

$

242,772

 

 

$

215,087

 

 

$

457,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

850

 

 

 

 

 

 

850

 

Repurchased shares

 

 

(2,256

)

 

 

 

 

 

(19

)

 

 

 

 

 

(19

)

Restricted shares issued

 

 

7,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants, net of issuance costs

 

 

 

 

 

4,899,497

 

 

 

11,489

 

 

 

 

 

 

11,489

 

Net income

 

 

 

 

 

 

 

 

 

 

 

14,118

 

 

 

14,118

 

Balance at December 31, 2020

 

 

35,532,162

 

 

 

4,899,497

 

 

$

255,092

 

 

$

229,205

 

 

$

484,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

808

 

 

 

 

 

 

808

 

Repurchased shares and warrants

 

 

(14,680

)

 

 

 

 

 

(157

)

 

 

 

 

 

(157

)

Warrants converted to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted shares issued

 

 

124,609

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share purchases

 

 

58,070

 

 

 

 

 

 

207

 

 

 

 

 

 

207

 

     Net income

 

 

 

 

 

 

 

 

 

 

 

5,689

 

 

 

5,689

 

Balance at March 31, 2021

 

 

35,700,161

 

 

 

4,899,497

 

 

$

255,950

 

 

$

234,894

 

 

$

490,844

 

 

See accompanying notes to these condensed consolidated financial statements.

 

5


MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

 

 

Six Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

19,807

 

 

$

12,670

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41,175

 

 

 

41,021

 

Stock compensation expense

 

 

1,658

 

 

 

2,513

 

Deferred income taxes

 

 

6,654

 

 

 

4,490

 

Amortization of deferred credits

 

 

(2,258

)

 

 

(2,041

)

Amortization of debt discount and issuance costs

 

 

4,994

 

 

 

2,149

 

Gain on extinguishment of debt

 

 

(950

)

 

 

 

Loss on disposal of assets

 

 

25

 

 

 

514

 

Provision for obsolete expendable parts and supplies

 

 

22

 

 

 

306

 

Loss on lease termination

 

 

4,508

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(155

)

 

 

9,019

 

Expendable parts and supplies

 

 

(84

)

 

 

(1,382

)

Prepaid expenses and other current assets

 

 

(1,988

)

 

 

97

 

Accounts payable

 

 

15,470

 

 

 

(602

)

Deferred revenue

 

 

10,099

 

 

 

 

Accrued liabilities

 

 

(14,091

)

 

 

2,122

 

Change in operating lease right-of- use assets

 

 

(6,311

)

 

 

(5,674

)

Net cash provided by operating activities

 

 

78,575

 

 

 

65,202

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(5,261

)

 

 

(12,968

)

Net returns (payments) on equipment & other deposits

 

 

(6,414

)

 

 

(11,805

)

Net cash used in investing activities

 

 

(11,675

)

 

 

(24,773

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

195,000

 

 

 

23,000

 

Principal payments on long-term debt and financing leases

 

 

(212,020

)

 

 

(79,395

)

Payments of debt and warrant issuance

 

 

(1,326

)

 

 

(494

)

Repurchase of stock

 

 

(176

)

 

 

(201

)

Net cash used in financing activities

 

 

(18,522

)

 

 

(57,090

)

 

 

 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

 

48,378

 

 

 

(16,661

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

102,841

 

 

 

72,501

 

Cash, cash equivalents and restricted cash at end of period

 

$

151,219

 

 

$

55,840

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

16,922

 

 

$

22,402

 

Cash paid for income taxes, net

 

$

49

 

 

$

45

 

Operating lease payments in operating cash flows

 

$

25,716

 

 

$

26,240

 

Supplemental non-cash transactions

 

 

 

 

 

 

 

 

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

 

$

16.4

 

 

$

 

Right-of-use assets (disposed) obtained

 

$

(320

)

 

$

145,627

 

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

 

$

(1,887

)

 

$

 

Accrued capital expenditures

 

$

 

 

$

98

 

 

See accompanying notes to these condensed consolidated financial statements.

 

6


MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), operates as a regional air carrier providing scheduled flight service to 112 cities in 38 states, the District of Columbia, and Mexico as well as cargo flight services originating from Cincinnati/Northern Kentucky International Airport. As of March 31, 2021, Mesa operated a fleet of 163 aircraft with approximately 440 daily departures and 3,111 employees. Mesa operates all of its flights on behalf of major partners as either American Eagle, United Express, or DHL Express flights pursuant to the terms of the Capacity Purchase Agreements (“CPAs”) entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and Flight Services Agreement (“FSA”) with DHL Network Operations (USA), Inc. (“DHL”).

The financial arrangements between the Company and its major partners involve a revenue-guarantee arrangement whereby the major partner pays fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these capacity purchase agreements, the major airline controls route selection, pricing and seat inventories, reducing the Company's exposure to fluctuations in passenger traffic, fare levels, and fuel prices.

American Capacity Purchase Agreement

As of March 31, 2021, the Company operated 45 CRJ-900 aircraft under the American Capacity Purchase Agreement. In exchange for providing flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.

 

On November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement (the “Amended and Restated American Capacity Purchase Agreement”). The Amended and Restated American Capacity Purchase Agreement included the following amendments to the existing CPA:

 

 

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

 

 

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

 

 

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

 

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

 

 

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

 

7


 

On April 9, 2021, we entered into Amendment No. 2 (“Amendment No. 2”) to the Amended and Restated American   Capacity Purchase Agreement. The amendments in Amendment No. 2 reflect the following:

 

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

On April 19, 2021, we entered into Amendment No. 3 (“Amendment No. 3”) to the Amended and Restated American Capacity Purchase Agreement. The amendments in Amendment No. 3 reflect the following: 

 

 

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

 

 

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

 

Our Amended and Restated American Capacity Purchase Agreement is subject to termination prior to its expiration, subject to the Company’s right to cure, in various circumstances including:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

United Capacity Purchase Agreement

As of March 31, 2021, we operated 60 E-175 and 16 E-175LL aircraft for United under the United Capacity Purchase Agreement. In exchange for providing the flight services under our United Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.

Under our United Capacity Purchase Agreement, United owns 42 of the 60 E-175 and all of the E-175LL aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs") and component maintenance for the 42 United owned E-175 aircraft.

 

8


On November 26, 2019, we amended and restated our United Capacity Purchase Agreement. The Amended and Restated United Purchase Agreement included the following amendments:

 

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

 

 

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

 

 

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

On November 4, 2020, we amended and restated our United Capacity Purchase Agreement. The amendments reflect the following: 

 

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

 

 

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

Our United Capacity Purchase Agreement is subject to following termination rights prior to its expiration.

 

 

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

 

 

If United elects to terminate our United Capacity Purchase Agreement in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us.

 

 

Commencing five (5) years after the actual in-service date, United has the right to remove the E-175LL aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the ten (10) year anniversary of the in-service date, certain accelerated margin payments.

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

DHL Flight Services

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

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

 

9


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

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

 

 

At any time under after the first anniversary of the commencement date of Aircraft with 90 day’s written notice;

 

 

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

 

 

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

2.

Summary of Significant Accounting Policies

Basis of Presentation

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

These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 2020 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2020 on file with the U.S. Securities and Exchange Commission (the "SEC"). Information and footnote disclosures normally included in financial statements have been condensed or omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and GAAP. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented.

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

Segment Reporting

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

Use of Estimates

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

 

 

10


 

Contract revenue and Pass- through and other

 

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

 

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

 

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

 

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

 

The Company mitigates the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases have specified lease return condition requirements and the Company maintains inspection rights under the leases. As of March 31, 2021, the Company recognized $4.8 million of lease incentive assets and $4.2 million of related lease incentive obligations for reimbursement of certain aircraft maintenance costs defined within the lease agreements. Lease incentive assets will be recognized as a reduction to lease revenue over the lease term.

 

Lease revenue recognized and amounts deferred for supplemental rent payments were immaterial as of March 31, 2021. The following table summarizes future minimum rental income under operating leases related to leased aircraft that had remaining non-cancelable lease terms as of March 31, 2021 (In thousands):

 

Periods Ending

March 31,

 

Total Payments

 

Remainder of 2021

 

$

3,276

 

2022

 

 

6,552

 

2023

 

 

6,552

 

2024

 

 

6,552

 

2025

 

 

6,552

 

Thereafter

 

 

28,962

 

Total

 

$

58,446

 

 

 

11


 

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

 

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

 

Periods Ending

March 31,

 

Total Maturities

 

Remainder of 2021

 

$

675

 

2022

 

 

9,097

 

2023

 

 

9,430

 

2024

 

 

9,169

 

2025

 

 

3,695

 

Thereafter

 

 

1,792

 

Total

 

$

33,858

 

 

Aircraft Leases

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

 

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

 

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

 

Contract Liabilities

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

Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. The Company's total current and non-current deferred credit balances at March 31, 2021 and September 30, 2020 are $5.2 million and $8.5 million, respectively. The Company recognized $1.1 million and $0.9 million of the deferred credits within contract revenue during the three months ended March 31, 2021 and 2020, respectively, and $1.9 million and $2.0 million during the six months ended March 31, 2021 and 2020, respectively.

Maintenance Expense

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

 

 

12


 

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

 

The Company accounts for heavy maintenance and major overhaul costs for all other fleets under the direct expense method where costs are expensed to maintenance expense as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms.

Engine overhaul expense totaled $6.9 million and $14.5 million for the three months ended March 31, 2021, and 2020, respectively, of which $2.2 million and $0.7 million, respectively, was pass-through expense. Engine overhaul expense totaled $21.3 million and $25.1 million for the six months ended March 31, 2021, and 2020, respectively, of which $11.8 million and $2.6 million, respectively, was pass-through expense. Airframe C-check expense totaled $14.1 million and $10.5 million for the three months ended March 31, 2021, and 2020, respectively, of which $5.6 million and $3.9 million, respectively, was pass-through expense. Airframe C-check expense totaled $24.2 million and $17.8 million for the six months ended March 31, 2021, and 2020, respectively, of which $12.7 million and $5.1 million, respectively, was pass-through expense.

 

Government Grant

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

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

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

 

3.

Recent Accounting Pronouncements

 

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

 

13


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

 

In June 2016, the FASB issued new guidance requiring all expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial instruments measured at amortized cost and also applies to some off-balance sheet credit exposures. Our adoption of this guidance on a modified retrospective basis on October 1, 2020 did not have a material impact as credit losses have not been, and are not expected to be, significant based on historical collection trends, the financial condition of our airline partners and external market factors.

 

4.

Concentrations of Credit Risk

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

Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at each respective balance sheet date. At March 31, 2021, the Company had capacity purchase agreements with American and United and a flight services agreement with DHL. Substantially all of the Company's condensed consolidated revenue for the six months ended March 31, 2021 and 2020 and accounts receivable at March 31, 2021 and September 30, 2020 was derived from these agreements. American accounted for approximately 45% and 51% of the Company's total revenue for the three months ended March 31, 2021 and 2020, respectively, and 46 % and 51% for the six months ended March 31, 2021 and 2020. United accounted for approximately 53% and 49% of the Company's revenue for the three months ended March 31, 2021 and 2020, respectively, and 52% and 49% for the six months ended March 31, 2021 and 2020. A termination of either the American or the United capacity purchase agreement would have a material adverse effect on the Company's business prospects, financial condition, results of operations, and cash flows.

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

5.

Intangible Assets

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

 

 

 

March 31,

 

 

September 30,

 

 

 

2021

 

 

2020

 

Customer relationship

 

$

43,800

 

 

$

43,800

 

Accumulated amortization

 

 

(36,388

)

 

 

(35,768

)

Net carrying value

 

$

7,412

 

 

$

8,032

 

 

Total amortization expense recognized was approximately $0.3 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively, and $0.6 million and $0.7 million for the six months ended March 31, 2021 and

 

14


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

 

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

6.

Balance Sheet Information

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

 

 

 

March 31,

 

 

September 30,

 

 

 

2021

 

 

2020

 

Expendable parts and supplies, net:

 

 

 

 

 

 

 

 

Expendable parts and supplies

 

$

27,324

 

 

$

27,431

 

Less: obsolescence and other

 

 

(4,280

)

 

 

(4,460

)

 

 

$

23,044

 

 

$

22,971

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets:

 

 

 

 

 

 

 

 

Deferred offering and reimbursed costs

 

$

 

 

$

1,261

 

Other

 

 

8,956

 

 

 

14,806

 

 

 

$

8,956

 

 

$

16,067

 

Property and equipment, net:

 

 

 

 

 

 

 

 

Aircraft and other flight equipment substantially

   pledged

 

$

1,603,377

 

 

$

1,596,174

 

Other equipment

 

 

5,189

 

 

 

5,147

 

Leasehold improvements

 

 

2,763

 

 

 

2,763

 

Vehicles

 

 

1,114

 

 

 

1,032

 

Building

 

 

699

 

 

 

699

 

Furniture and fixtures

 

 

303

 

 

 

302

 

Total property and equipment

 

 

1,613,445

 

 

 

1,606,117

 

Less: accumulated depreciation

 

 

(432,761

)

 

 

(393,702

)

 

 

$

1,180,684

 

 

$

1,212,415

 

Other Assets:

 

 

 

 

 

 

 

 

Warrants

 

$

16,374

 

 

$

 

Other

 

 

4,273

 

 

 

 

 

 

$

20,647

 

 

$

 

Other accrued expenses:

 

 

 

 

 

 

 

 

Accrued property taxes

 

$

5,996

 

 

$

11,354

 

Accrued interest

 

 

2,480

 

 

 

3,268

 

Accrued vacation

 

 

5,718

 

 

 

5,975

 

Other

 

 

14,416

 

 

 

24,881

 

 

 

$

28,610

 

 

$

45,478

 

 

The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. The Company has assessed whether any impairment of its long-lived assets existed and has determined that no charges were deemed necessary under applicable accounting standards as of March 31, 2021. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

Property and equipment, net:

 

 

15


 

Depreciation expense totaled approximately $20.4 million and $20.1 million for the three months ended March 31, 2021 and 2020, respectively, and $40.6 million and $40.3 million for the six months ended March 31, 2021 and 2020, respectively. 

Other Assets

 

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

 

The grant date value of the warrants, $16.4 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related asset purchase agreement.

 

7.

Fair Value Measurements

 

Level 1

 

 

Quoted prices in active markets for identical assets or liabilities.

Level 2

 

 

 

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

 

Level 3

 

 

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

September 30, 2020

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

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

$

725.4

 

 

$

731.4

 

 

$

743.3

 

 

$

768.7

 

 

(1)

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

 

 

 

16


 

8.

Long-Term Debt, Financing Leases and Other Borrowings

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

 

 

 

March 31,

 

 

September 30,

 

 

 

2021

 

 

2020

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2022(1)(2)

 

$

 

 

$

41,472

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2024(3)

 

 

 

 

 

55,674

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2027(4)

 

 

106,092

 

 

 

105,887

 

Notes payable to secured parties, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2028(5)

 

 

162,247

 

 

 

172,137

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2028(6)

 

 

130,505

 

 

 

138,114

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(7)

 

 

 

 

 

47,319

 

Senior and subordinated notes payable to secured parties, collateralized

 

 

 

 

 

 

 

 

by the underlying aircraft, due 2022(8)

 

 

 

 

 

29,682

 

Notes payable to financial institution due 2020(10)

 

 

1,523

 

 

 

1,523

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2020(11)

 

 

 

 

 

4,182

 

Other obligations due to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2023(12)

 

 

5,663

 

 

 

6,864

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

equipment, due 2024(13)

 

 

54,573

 

 

 

63,341

 

Notes payable to financial institution, collateralized by the underlying

 

 

 

 

 

 

 

 

aircraft, due 2023(14)

 

 

39,375

 

 

 

48,125

 

Notes payable to financial institution due 2023 (15)

 

 

5,000

 

 

 

6,000

 

Revolving Credit Facility (16)

 

 

22,930

 

 

 

22,930

 

Notes payable to financial institution due 2025 (17)

 

 

197,525

 

 

 

 

Gross long-term debt, including current maturities

 

 

725,433

 

 

 

743,250

 

Less unamortized debt issuance costs

 

 

(10,598

)

 

 

 

Less Notes payable warrants

 

 

(10,797

)

 

 

(11,526

)

Net long-term debt, including current maturities

 

 

704,038

 

 

 

731,724

 

Less current portion

 

 

(103,980

)

 

 

(189,268

)

Net long-term debt

 

$

600,058

 

 

$

542,456

 

 

(1) 

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

(2) 

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

(3) 

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

(4) 

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

(5) 

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

 

17


(6) 

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

(7) 

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

(8)

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

(10)

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

(11) 

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

(12) 

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

(13) 

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

(14) 

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

(15) 

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

(16)

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

(17)

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

 

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

 

March 31, 2021

 

Total Principal

 

Remainder of 2021

 

$

59,013

 

2022

 

 

113,682

 

2023

 

 

89,462

 

2024

 

 

61,209

 

2025

 

 

56,526

 

Thereafter

 

 

345,541

 

 

 

$

725,433

 

 

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

Enhanced Equipment Trust Certificate ("EETC")

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

 

18


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

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

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

CIT Revolving Credit Facility

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

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

Loan agreement with United States Department of Treasury

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

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

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

 

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

 

19


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

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

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

Debt Repayment

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

As of March 31, 2021, the Company is in compliance will all debt covenants.

9.

Earnings Per Share and Equity

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

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income attributable to Mesa Air Group

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Basic weighted average common shares outstanding

 

 

35,628

 

 

 

35,141

 

 

 

35,579

 

 

 

35,082

 

Add: Incremental shares for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive share adjustment - UST Warrant

 

 

3,038

 

 

 

 

 

 

2,183

 

 

 

138

 

Dilutive share adjustment - Restricted Shares

 

 

766

 

 

 

124

 

 

 

620

 

 

 

 

Diluted weighted average common shares outstanding

 

 

39,432

 

 

 

35,265

 

 

 

38,382

 

 

 

35,220

 

Net income per common share attributable to  Mesa Air Group:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.05

 

 

$

0.56

 

 

$

0.36

 

Diluted

 

$

0.14

 

 

$

0.05

 

 

$

0.52

 

 

$

0.36

 

 

 

 

20


 

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

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

 

10.

Common Stock

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

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

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

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

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

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

 

21


11.

Income Taxes

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

The Company's ETR during the six months ended March 31, 2020 was different than the statutory rate of 21% as a result of the vesting and exercise of stock compensation, state taxes, and changes in valuation allowance against state net operating losses, as well as differences between the book and tax deductions associated with meals, entertainment, employer provided parking, and compensation of officers.

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

12.

Share-Based Compensation and Stock Repurchases

Restricted Stock

The restricted share activity for the six months ended March 31, 2021 were summarized as follows:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

 

Number

 

 

Grant Date

 

 

 

of Shares

 

 

Fair Value

 

Restricted shares unvested at September 30, 2020

 

 

1,195,548

 

 

$

5.47

 

Granted

 

 

121,688

 

 

 

8.58

 

Vested

 

 

(132,109

)

 

 

8.75

 

Forfeited

 

 

(17,500

)

 

 

4.90

 

Restricted shares unvested at March 31, 2021

 

 

1,167,627

 

 

$

5.44

 

 

As of March 31, 2021, there was $4.4 million, of total unrecognized compensation cost related to unvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.3 years.

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

The Company repurchased 175,925 shares of its common stock for $0.2 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the six months ended March 31, 2021.  

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

13.

Employee Stock Purchase Plan

2019 ESPP

 

22


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

A maximum of 500,000 Mesa Air Group, Inc. ordinary shares may be issued under the 2019 ESPP. As of March 31, 2021, eligible employees purchased and the Company issued 157,714 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP.  

14.

Commitments and Contingencies

 

Leases

As of March 31, 2021, the Company leased 17 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The leases require the Company to pay all taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased.

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

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

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

Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $13.9 million and $18.6 million for the three months ended March 31, 2021 and 2020, respectively, and $27.7 million and $35.4 million for the six months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, the Company’s operating leases have a remaining weighted average lease terms of 3.1 years and our operating lease liabilities were measured using a weighted average discount rate of 4.2%.

Engine Purchase Commitments

 

On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of 10 new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. During the quarter ended March 31, 2021, a $7.0 million non-refundable purchase deposit was made for the first 5 engines to be delivered in calendar 2021.  The Company has options to purchase an additional (10) ten similar engines beyond 2022. The total purchase commitment related to these 10 engines is approximately $50.0 million.  

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

 

Other

 

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

 

23


 

Litigation

The Company is subject to 2 putative class action lawsuits alleging federal securities law violations in connection with our IPO, 1 in the Superior Court of the State of Arizona and 1 in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief. In addition, we are subject to certain legal actions which we consider routine to our business activities. As of March 31, 2021, our management believed, after consultation with legal counsel, that the ultimate outcome of the two putative class action lawsuits and such other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity or results of operations.

15.

Subsequent Events  

 

On April 15, 2021, the Company was notified by the U.S. Department of the Treasury we are eligible to receive funds under the third Payroll Support Program (PSP3) as described in Note 2.

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

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

 

 

24


 

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

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

Overview

 

Mesa Airlines is a regional air carrier providing scheduled flight service to 112 cities in 38 states, the District of Columbia, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either American Eagle, United Express, or DHL Express flights pursuant to the terms of capacity purchase agreements entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”), and DHL Express pursuant to the terms of a Flight Services Agreement (“FSA”) with DHL Network Operations (USA), Inc. (each, our "major airline partner"). We have a significant presence in several of our major airline partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.

As of March 31, 2021, we operated, under the Capacity Purchase Agreements, FSA or as spare, a fleet of 163 aircraft with approximately 440 daily departures. We operate 45 CRJ-900 aircraft under our capacity purchase agreement with American (our "American Capacity Purchase Agreement") and 60 E-175 and 16 E-175LL aircraft under our capacity purchase agreement with United (our "United Capacity Purchase Agreement"). We operate 2 Boeing 737- F400 aircraft under the Flight Services Agreement with DHL Network Operations. For the three months ended March 31, 2021, approximately 53% of our aircraft in scheduled service were operated for United, approximately 45% were operated for American and 2% were operated for DHL. All of our operating revenue in our six months ended March 31, 2021 was derived from operations associated with our American and United Capacity Purchase Agreements and DHL Flight Services Agreement.  

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

Components of Results of Operations

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

Operating Revenues

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

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

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

 

25


Operating Expenses

Our operating expenses consist of the following items:

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

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

Maintenance. Maintenance expense includes routine repair and maintenance and heavy maintenance costs for airframes, engines, auxiliary power units and landing gears. Maintenance costs are expensed as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms.

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

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

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

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

Other (Expenses) Income, Net

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

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

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

Segment Reporting

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

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

 

26


Cautionary Statement Regarding Non-GAAP Measures

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

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

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

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

Results of Operations

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

We had operating income of $16.8 million in our three months ended March 31, 2021 compared to operating income of $13.9 million in our three months ended March 31, 2020.  In our three months ended March 31, 2021, we had net income of $5.7 million compared to net income of $1.9 million in our three months ended March 31, 2020.  Our operating results for the three months ended March 31, 2021 reflected a decrease in contract revenue due to reduced rates to partners related to PSP2 and lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19.

Flight operations expense decreased in the three months ended March 31, 2021 due to lower pilot and flight attendant wages and pilot training expenses. Our maintenance expense decreased primarily due to fewer heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher c-check expense and pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines.  In addition, general and administrative expense decrease as a result of lower pass-through property taxes.  Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with the U.S. Department of the Treasury.

 

27


Operating Revenues

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Operating revenues ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

$

81,712

 

 

$

165,781

 

 

$

(84,069

)

 

 

(50.7

)%

Pass-through and other

 

 

15,568

 

 

 

14,115

 

 

 

1,453

 

 

 

10.3

%

Total operating revenues

 

$

97,280

 

 

$

179,896

 

 

$

(82,616

)

 

 

(45.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

1,771,498

 

 

 

2,611,940

 

 

 

(840,442

)

 

 

(32.2

)%

Block hours

 

 

73,942

 

 

 

108,305

 

 

 

(34,363

)

 

 

(31.7

)%

Revenue passenger miles—RPMs (thousands)

 

 

1,148,498

 

 

 

1,785,153

 

 

 

(636,655

)

 

 

(35.7

)%

Average stage length (miles)

 

 

690

 

 

 

619

 

 

 

71

 

 

 

11.5

%

Contract revenue per available seat mile—CRASM

   (in cents)

 

¢ 4.61

 

 

¢ 6.35

 

 

¢ 1.74

 

 

 

(27.4

)%

Passengers

 

 

1,684,043

 

 

 

2,838,412

 

 

 

(1,154,369

)

 

 

(40.7

)%

 

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

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

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

"CRASM" means contract revenue divided by ASMs.

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

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

 

28


Operating Expenses

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Operating expenses ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

$

37,403

 

 

$

52,891

 

 

$

(15,488

)

 

 

(29.3

)%

Fuel

 

 

198

 

 

 

188

 

 

 

10

 

 

 

5.3

%

Maintenance

 

 

51,773

 

 

 

64,335

 

 

 

(12,562

)

 

 

(19.5

)%

Aircraft rent

 

 

9,992

 

 

 

12,285

 

 

 

(2,293

)

 

 

(18.7

)%

Aircraft and traffic servicing

 

 

743

 

 

 

1,336

 

 

 

(593

)

 

 

(44.4

)%

General and administrative

 

 

11,164

 

 

 

14,500

 

 

 

(3,336

)

 

 

(23.0

)%

Depreciation and amortization

 

 

20,705

 

 

 

20,469

 

 

 

236

 

 

 

1.2

%

Lease termination

 

 

4,508

 

 

 

 

 

 

4,508

 

 

 

100.0

%

Government grant recognition

 

 

(55,967

)

 

 

 

 

 

(55,967

)

 

 

100.0

%

Total operating expenses

 

$

80,519

 

 

$

166,004

 

 

$

(85,485

)

 

 

(51.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

1,771,498

 

 

 

2,611,940

 

 

 

(840,442

)

 

 

(32.2

)%

Block hours

 

 

73,942

 

 

 

108,305

 

 

 

(34,363

)

 

 

(31.7

)%

Average stage length (miles)

 

 

690

 

 

 

619

 

 

 

71

 

 

 

11.5

%

Departures

 

 

35,344

 

 

 

55,435

 

 

 

(20,091

)

 

 

(36.2

)%

 

Flight Operations. Flight operations expense decreased $15.5 million, or 29.3%, to $37.4 million for our three months ended March 31, 2021 compared to the same period in 2020.  The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs.

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

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

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

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Engine overhaul

 

$

4,709

 

 

$

13,794

 

 

$

(9,085

)

 

 

(65.9

)%

Pass-through engine overhaul

 

 

2,173

 

 

 

704

 

 

 

1,469

 

 

 

208.7

%

C-check

 

 

8,506

 

 

 

6,640

 

 

 

1,866

 

 

 

28.1

%

Pass-through C-check

 

 

5,603

 

 

 

3,873

 

 

 

1,730

 

 

 

44.7

%

Component contracts

 

 

6,370

 

 

 

9,395

 

 

 

(3,025

)

 

 

(32.2

)%

Rotable and expendable parts

 

 

5,064

 

 

 

7,461

 

 

 

(2,397

)

 

 

(32.1

)%

Other pass-through

 

 

3,658

 

 

 

4,511

 

 

 

(853

)

 

 

(18.9

)%

Labor and other

 

 

15,690

 

 

 

17,957

 

 

 

(2,267

)

 

 

(12.6

)%

Total

 

$

51,773

 

 

$

64,335

 

 

$

(12,562

)

 

 

(19.5

)%

 

Aircraft Rent. Aircraft rent expense decreased $2.3 million, or 18.7%, to $10.0 million for our three months ended March 31, 2021 compared to the same period in 2020. The decrease is attributable a $2.3 million decrease in engine rent due to fewer leased engines.

 

29


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

General and Administrative. General and administrative expense decreased $3.3 million, or 23.0%, to $11.2 million for our three months ended March 31, 2021 compared to the same period in 2020. The decrease is primarily due to a decrease in pass-through property tax. For our three months ended March 31, 2021 and 2020, $2.9 million and $4.9 million, respectively, of our insurance and property tax expenses were reimbursed by our major airline partners.

Depreciation and Amortization. Depreciation and amortization expense increased $0.2 million, or 1.2%, to $20.7 million for our three months ended March 31, 2021 compared to the same period in 2020. The increase is primarily attributable to an increase in rotable inventory and spare engines depreciation expense, partially offset by a decrease in amortization of intangibles expense.

Lease Termination. Lease termination expense increased $4.5 million, or 100.0%, to $4.5 million for our three months ended March 31, 2021 compared to the same period in 2020.This increase is attributable to the termination expense resulting from the purchase of CRJ-900 aircraft, which were previously leased from Bombardier Capital.

Government grant recognition. Payroll Support Government Plan funds increased $56.0 million, or 100.0%, to $56.0 million for our three months ended March 31, 2021 compared to the same period in 2020. Under the CARES Act, the government provided the Company with a grant of $56.0 million in payroll support for the period of December 2020 through March 2021.

Other Expense

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

Income Taxes

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

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

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

Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

We had operating income of $43.7 million in our six months ended March 31, 2021 compared to operating income of $41.1 million in our six months ended March 31, 2020.  In our six months ended March 31, 2021, we had net income of $19.8 million compared to net income of $12.7 million in our six months ended March 31, 2020.  Our operating results for the six months ended March 31, 2021 reflected a decrease in contract revenue due to reduced rates to partners related to PSP2 and lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19 and an increase in pass-through and other revenues primarily due to an increase in E-175 maintenance pass-through expense.

 

30


Flight operations expense decreased in the six months ended March 31, 2021 due to lower pilot and flight attendant wages and pilot training expenses. Our maintenance expense decreased primarily due to fewer c-checks and heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines.  In addition, general and administrative expense decreased as a result of lower pass-through property taxes.  Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with the U.S. Department of the Treasury.

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Operating revenues ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

$

208,870

 

 

$

337,580

 

 

$

(128,710

)

 

 

(38.1

)%

Pass-through and other

 

 

38,781

 

 

 

26,351

 

 

 

12,430

 

 

 

47.2

%

Total operating revenues

 

$

247,651

 

 

$

363,931

 

 

$

(116,280

)

 

 

(32.0

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

3,442,441

 

 

 

5,347,325

 

 

 

(1,904,884

)

 

 

(35.6

)%

Block hours

 

 

143,189

 

 

 

223,866

 

 

 

(80,677

)

 

 

(36.0

)%

Revenue passenger miles—RPMs (thousands)

 

 

2,319,909

 

 

 

3,936,747

 

 

 

(1,616,838

)

 

 

(41.1

)%

Average stage length (miles)

 

 

664

 

 

 

595

 

 

 

69

 

 

 

11.6

%

Contract revenue per available seat mile—CRASM

   (in cents)

 

¢ 6.07

 

 

¢ 6.31

 

 

¢ (0.24)

 

 

 

(3.8

)%

Passengers

 

 

3,513,757

 

 

 

6,535,550

 

 

 

(3,021,793

)

 

 

(46.2

)%

 

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

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

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

"CRASM" means contract revenue divided by ASMs.

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

 

 

31


 

Total operating revenue decreased by $116.3 million, or 32.0%, to $247.7 million for our six months ended March 31, 2021 as compared to our six months ended March 31, 2020. Contract revenue decreased by $128.7 million, or 38.1%, to $208.9 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleet as a result of the impact of COVID-19, temporary reduced rate to our partners and flying fewer aircraft under the American CPA. Our block hours flown during our six months ended March 31, 2021 decreased 36.0% compared to the six months ended March 31, 2020 primarily due to decreased flying on our CRJ-900, CRJ-700, and E-175 fleets. Our pass-through and other revenue increased during our six months ended March 31, 2021 by $12.4 million, or 47.2%, to $38.8 million primarily due to pass-through maintenance revenue related to our E-175 fleet. In addition, the decrease is attributable to reduced rates to partners related to PSP2 and fewer aircraft operating under the Amended and Restated American Purchase Agreement.

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Operating expenses ($ in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flight operations

 

$

74,367

 

 

$

105,535

 

 

$

(31,168

)

 

 

(29.5

)%

Fuel

 

 

588

 

 

 

358

 

 

 

230

 

 

 

64.2

%

Maintenance

 

 

104,637

 

 

 

122,430

 

 

 

(17,793

)

 

 

(14.5

)%

Aircraft rent

 

 

20,040

 

 

 

23,614

 

 

 

(3,574

)

 

 

(15.1

)%

Aircraft and traffic servicing

 

 

1,644

 

 

 

2,400

 

 

 

(756

)

 

 

(31.5

)%

General and administrative

 

 

24,237

 

 

 

27,496

 

 

 

(3,259

)

 

 

(11.9

)%

Depreciation and amortization

 

 

41,175

 

 

 

41,021

 

 

 

154

 

 

 

0.4

%

Lease termination

 

 

4,508

 

 

 

 

 

 

4,508

 

 

 

100.0

%

Government grant recognition

 

 

(67,278

)

 

 

 

 

 

(67,278

)

 

 

100.0

%

Total operating expenses

 

$

203,918

 

 

$

322,854

 

 

$

(118,936

)

 

 

(36.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available seat miles—ASMs (thousands)

 

 

3,442,441

 

 

 

5,347,325

 

 

 

(1,904,884

)

 

 

(35.6

)%

Block hours

 

 

143,189

 

 

 

223,866

 

 

 

(80,677

)

 

 

(36.0

)%

Average stage length (miles)

 

 

664

 

 

 

595

 

 

 

69

 

 

 

11.6

%

Departures

 

 

182,557

 

 

 

118,160

 

 

 

64,397

 

 

 

54.5

%

 

Flight Operations. Flight operations expense decreased $31.2 million, or 29.5%, to $74.4 million for our six months ended March 31, 2021 compared to the same period in 2020.  The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs.

 

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

Maintenance. Aircraft maintenance costs decreased $17.8 million, or 14.5%, to $104.6 million for our six months ended March 31, 2021 compared to the same period in 2020. This decrease was primarily driven by a decrease in engine overhaul expense, component contracts, parts, and labor and other expense. This decrease was partially offset by an increase in pass-through engine overhaul and pass-through c-check expense. Total pass-through maintenance expenses reimbursed by our major airline partners increased by $14.8 million during our six months ended March 31, 2021.

 

32


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

 

 

 

Six Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

Change

 

Engine overhaul

 

$

9,462

 

 

$

22,545

 

 

$

(13,083

)

 

 

(58.0

)%

Pass-through engine overhaul

 

 

11,806

 

 

 

2,555

 

 

 

9,251

 

 

 

362.1

%

C-check

 

 

11,464

 

 

 

12,692

 

 

 

(1,228

)

 

 

(9.7

)%

Pass-through C-check

 

 

12,741

 

 

 

5,093

 

 

 

7,648

 

 

 

150.2

%

Component contracts

 

 

12,157

 

 

 

19,082

 

 

 

(6,925

)

 

 

(36.3

)%

Rotable and expendable parts

 

 

10,382

 

 

 

14,866

 

 

 

(4,484

)

 

 

(30.2

)%

Other pass-through

 

 

6,770

 

 

 

8,848

 

 

 

(2,078

)

 

 

(23.5

)%

Labor and other

 

 

29,855

 

 

 

36,749

 

 

 

(6,894

)

 

 

(18.8

)%

Total

 

$

104,637

 

 

$

122,430

 

 

$

(17,793

)

 

 

(14.5

)%

 

Aircraft Rent. Aircraft rent expense decreased $3.6 million, or 15.1%, to $20.0 million for our six months ended March 31, 2021 compared to the same period in 2020. The decrease is attributable to $3.6 million decrease in engine rent due to fewer leased engines.

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

General and Administrative. General and administrative expense decreased $3.3 million, or 11.9%, to $24.2 million for our six months ended March 31, 2021 compared to the same period in 2020. The decrease is primarily due to a decrease in pass-through property taxes. For our six months ended March 31, 2021 and 2020, $7.4 million and $9.3 million, respectively, of our insurance and property tax expenses were reimbursed by our major airline partners.

Depreciation and Amortization. Depreciation and amortization expense increased $0.2 million, or 0.4%, to $41.2 million for our six months ended March 31, 2021 compared to the same period in 2020. The increase is primarily attributable to an increase in spare engines depreciation expense, partially offset by a decrease in amortization of intangibles expense.

Lease Termination. Lease termination expense increased $4.5 million, or 100.0%, to $4.5 million for our six months ended March 31, 2021 compared to the same period in 2020. This increase is attributable to the termination expense resulting from the purchase the purchase of CRJ-900 aircraft, which was previously leased from Bombardier Capital.

 

Government grant recognition. Payroll Support Government Plan funds increased $67.3 million, or 100.0%, to $67.3 million for our six months ended March 31, 2021 compared to the same period in 2020. Under the CARES Act, the government provided the Company with a grant of $56.0 million in payroll support for the period of December 2020 through March 2021.  We also recognized $11.3 million of the grant amount received for the period of April through October 2020 as of December 31, 2020.

Other Expense

Other expense decreased $6.4 million, or 26.9%, to $17.2 million for our six months ended March 31, 2021, compared to the same period in 2020. The decrease is primarily a result of a decrease in interest expense due to lower interest rates on our loan agreement with U.S. Department of Treasury and a decrease in outstanding aircraft principal balances.

Income Taxes

The income tax expense totaled $6.7 million for the six months ended March 31, 2021 as compared to a tax expense of $4.8 million for the six months ended March 31, 2020. The effective tax rate was 25.3% versus 27.6% in the prior year.

The effective tax rate for the six months ended March 31, 2021 was impacted by vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates.

 

33


We file income tax returns in the US and in various state jurisdictions with varying statutes of limitations.  We are generally no longer subject to income tax examination by tax authorities for years prior to 2017 and 2016 for federal and state purposes, respectively, with the exception of the examination of our net operating losses.  The balance of unrecognized tax benefits is not anticipated to fluctuate significantly from fiscal 2020 to fiscal 2021.  It is our policy to recognize interest expense and penalties related to uncertain income tax matters as a component of income tax expense.

Adjusted EBITDA and Adjusted EBITDAR

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

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,689

 

 

$

1,885

 

 

$

19,807

 

 

$

12,670

 

Income tax expense

 

 

1,890

 

 

 

1,307

 

 

 

6,711

 

 

 

4,842

 

Income before taxes

 

$

7,579

 

 

$

3,192

 

 

$

26,518

 

 

$

17,512

 

Adjustments(1)(2)

 

 

4,508

 

 

 

 

 

 

3,558

 

 

 

 

Adjusted income before taxes

 

 

12,087

 

 

 

3,192

 

 

 

30,076

 

 

 

17,512

 

Interest expense

 

 

8,755

 

 

 

11,673

 

 

 

17,837

 

 

 

24,300

 

Interest income

 

 

(79

)

 

 

(36

)

 

 

(205

)

 

 

(94

)

Depreciation and amortization

 

 

20,705

 

 

 

20,469

 

 

 

41,175

 

 

 

41,021

 

Adjusted EBITDA

 

$

41,468

 

 

$

35,298

 

 

$

88,883

 

 

$

82,739

 

Aircraft rent

 

 

9,992

 

 

 

12,285

 

 

 

20,040

 

 

 

23,614

 

Adjusted EBITDAR

 

$

51,460

 

 

$

47,583

 

 

$

108,923

 

 

$

106,353

 

 

 

(1)

Includes adjustment for gain on extinguishment of debt of $1.0 million related to repayment of the Company’s aircraft debts during our six months ended March 31, 2021.

 

(2)

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

Liquidity and Capital Resources

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

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

In February 2021, the Company was granted $48.7 million in financial assistance by the Department of the Treasury under the Payroll Support Program Extension (“PSP2”) under the Consolidated Appropriations Act of 2021. In March 2021, we were notified that, based on funding availability, recipients that were currently in compliance with executed PSP agreements would receive an additional award amount. As a result, the Company was granted an additional $7.3 million through the PSP2 for a total grant of $56.0 million. The additional $7.3 million was received in April 2021.

On April 15, 2021, the Company was notified by the U.S. Department of the Treasury we are eligible to receive funds under the third Payroll Support Program (PSP3), which was created under the American Recovery Plan Act of 2021 (ARP), enacted on March 11, 2021. The Company expects it will be eligible and estimates the amount is approximately $52.2 million. The Company received the first installment of $26.1 million on April 23, 2021.

Sources and Uses of Cash

 

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

 

34


Loan Agreement”), each under the CARES Act, cash on hand, cash generated from operations and funds from external borrowings.

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

 

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

 

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

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

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

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

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect the current market conditions and our projected demand. Our capital expenditures are primarily directed toward our aircraft fleet and flight equipment. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for the six months ending March 31,2021 is approximately 0.9% of annual revenue, which is lower compared to our historical expense as the Company is focusing on cost savings due to COVID 19 pandemic impact on the airline industry. We expect to incur capital expenditures to support our business activities. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

As of March 31, 2021, our principal sources of liquidity were cash and cash equivalents of $147.9 million. In addition, we had restricted cash of $3.4 million as of March 31, 2021. As of March 31, 2021, we also had $718.2 million in secured indebtedness incurred primarily in connection with our financing of aircraft. As of March 31, 2021, we had $101.8 million of short-term debt, excluding capital leases, and $618.0 million of long-term debt excluding capital leases.

Restricted Cash

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

 

Cash Flows

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

 

35


 

 

Six Months Ended March 31,

 

 

 

2021

 

 

2020

 

Net cash provided by operating activities

 

$

78,575

 

 

$

65,202

 

Net cash used in investing activities

 

 

(11,675

)

 

 

(24,773

)

Net cash used in financing activities

 

 

(18,522

)

 

 

(57,090

)

Net increase (decrease) in cash and cash equivalents

 

 

48,378

 

 

 

(16,661

)

Cash and cash equivalents at beginning of period

 

 

102,841

 

 

 

72,501

 

Cash and cash equivalents at end of period

 

$

151,219

 

 

$

55,840

 

 

Net Cash Flow Provided by Operating Activities

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

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

 

Net Cash Flows Used in Investing Activities

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

During our six months ended March 31, 2020, net cash flow used in investing activities totaled $24.8 million. We invested $3.6 million in aircraft improvements, $7.6 million in inventory, $1.7 million in miscellaneous projects and $11.8 million in net returns and payments on equipment and other deposits.

Net Cash Flows Provided by Financing Activities

During our six months ended March 31, 2021, net cash flow used in financing activities was $18.5 million. We received $195.0 million of proceeds from our US Treasury Loan Agreement. We made $212.0 million of principal repayments on long-term debt during the period. We incurred $1.3 million of costs related to debt financing.

During our six months ended March 31, 2020, net cash flow used in financing activities was $57.1 million. We drew $23.0 million from our $35.0 million working capital draw loan for operational needs. We made $79.4 million of principal repayments on long-term debt during the period. We incurred $0.5 million of costs related to debt financing and $0.2 million of costs related to the repurchase of shares of our common stock.

Off-Balance Sheet Arrangements

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

 

36


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

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

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.

The accompanying discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated interim financial statements included elsewhere in this Form 10-Q. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in Part 1, Item 7 of the 2020 Form 10-K under the heading "Critical Accounting Policies."

Recently Issued Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

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

  

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

 

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

  

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

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Inherent Limitations on Effectiveness of Controls

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

 

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PART II – OTHER INFORMATION

 

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

In addition, we are subject to certain legal actions which we consider routine to our business activities. As of March 31, 2021, our management believed, after consultation with legal counsel, that the ultimate outcome of the two putative class action lawsuits and such other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity or results of operations.

Item 1A. Risk Factors

We refer you to documents filed by us with the SEC, specifically "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled "Cautionary Statements Regarding Forward-looking Statements" of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and herein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

 

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

The Company repurchased 175,925 shares of its common stock for $0.2 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the six months ended March 31, 2021

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

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EXHIBIT INDEX

 

Exhibit No.

 

Exhibit Description

  10.1

 

Payroll support Program Agreement between The Department of the Treasury and Mesa Airlines, Inc., dated as of February 3, 2021

  31.1

 

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

 

 

 

  31.2

 

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

 

 

 

  32.1*

 

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

 

 

 

  32.2*

 

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

 

 

 

101.INS

 

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

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

 

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

 

*

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

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

MESA AIR GROUP, INC.

 

 

 

 

Date: May 10, 2021

 

By:

/s/ Michael J. Lotz 

 

 

 

Michael J. Lotz

President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

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