UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
Or
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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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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Registrant's telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of January 26, 2022, the registrant had
TABLE OF CONTENTS
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," “should,” "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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 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," “Mesa,” "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:
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public health epidemics or pandemics such as COVID-19; |
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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; |
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the supply and retention of qualified airline pilots and mechanics; |
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the volatility of pilot and mechanic attrition; |
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dependence on, and changes to, or non-renewal of, our capacity purchase and flight services agreements; |
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failure to meet certain operational performance targets in our capacity purchase and flight services agreements, which could result in termination of those agreements; |
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increases in our labor costs; |
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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; |
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the direct operation of regional jets by our major partners; |
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the financial strength of our major 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; |
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limitations on our ability to expand regional flying within the flight systems of our major partners and those of other major airlines; |
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our significant amount of debt and other contractual obligations; |
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our compliance with ongoing financial covenants under our credit facilities and other agreements; and |
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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)
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December 31, |
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September 30, |
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2021 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash |
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Receivables, net |
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Expendable parts and supplies, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Lease and equipment deposits |
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Operating lease right-of-use assets |
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Deferred heavy maintenance, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt and finance leases |
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$ |
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$ |
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Current portion of deferred revenue |
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Current maturities of operating leases |
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Accounts payable |
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Accrued compensation |
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Other accrued expenses |
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Total current liabilities |
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Noncurrent liabilities: |
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Long-term debt and finance leases, excluding current portion |
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Noncurrent operating lease liabilities |
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Deferred credits |
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Deferred income taxes |
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Deferred revenue, net of current portion |
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Other noncurrent liabilities |
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Total noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 15) |
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Stockholders' equity: |
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Preferred stock of no par value, |
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Common stock of no par value and additional paid-in capital, (2021) shares issued and outstanding, |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
2
MESA AIR GROUP, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share amounts) (Unaudited)
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Three Months Ended December 31, |
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2021 |
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2020 |
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Operating revenues: |
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Contract revenue |
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$ |
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$ |
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Pass-through and other revenue |
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Total operating revenues |
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Operating expenses: |
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Flight operations |
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Fuel |
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Maintenance |
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Aircraft rent |
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Aircraft and traffic servicing |
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General and administrative |
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Depreciation and amortization |
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Government grant recognition |
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— |
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( |
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Total operating expenses |
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Operating income (loss) |
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Other income (expense), net: |
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Interest expense |
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Interest income |
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Loss on investments, net |
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— |
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Other income (expense), net |
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Total other expense, net |
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Income (loss) before taxes |
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Income tax expense (benefit) |
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Net income (loss) and comprehensive income (loss) |
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$ |
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$ |
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Net income (loss) per share attributable to |
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common shareholders |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average common shares outstanding |
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Basic |
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Diluted |
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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)
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Three Months Ended December 31, 2020 |
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Common |
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Stock and |
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Additional |
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Number of |
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Number of |
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Paid-In |
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Retained |
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Shares |
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Warrants |
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Capital |
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Earnings |
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Total |
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Balance at September 30, 2020 |
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— |
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$ |
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$ |
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$ |
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Stock compensation expense |
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— |
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— |
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— |
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Repurchased shares |
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( |
) |
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— |
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( |
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— |
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( |
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Restricted shares issued |
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— |
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— |
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— |
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— |
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Issuance of warrants, net of issuance costs |
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— |
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— |
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Net income |
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— |
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— |
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— |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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Three Months Ended December 31, 2021 |
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Common |
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Stock and |
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Additional |
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Number of |
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Number of |
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Paid-In |
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Retained |
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Shares |
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Warrants |
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Capital |
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Earnings |
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Total |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
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Stock compensation expense |
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— |
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— |
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— |
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Repurchased shares |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Restricted shares issued |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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See accompanying notes to these condensed consolidated financial statements.
4
MESA AIR GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
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Three Months Ended December 31, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: |
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Depreciation and amortization |
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Stock compensation expense |
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Loss on investments, net |
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— |
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Deferred income taxes |
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( |
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Amortization of deferred credits |
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( |
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( |
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Amortization of debt discount and issuance costs and accretion of interest into long-term debt |
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Gain on extinguishment of debt |
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— |
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( |
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Loss on disposal of assets |
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Provision for obsolete expendable parts and supplies |
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( |
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Changes in assets and liabilities: |
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Receivables |
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( |
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Expendable parts and supplies |
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( |
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Prepaid expenses and other operating assets and liabilities |
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Accounts payable |
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( |
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Deferred revenue |
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( |
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Accrued expenses and other liabilities |
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( |
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( |
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Operating lease right-of-use assets and liabilities |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
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( |
) |
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( |
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Investments in equity securities |
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( |
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— |
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Payments of equipment and other deposits |
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( |
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— |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from long-term debt |
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Principal payments on long-term debt and finance leases |
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( |
) |
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( |
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Payments of debt and warrant issuance costs |
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( |
) |
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( |
) |
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Repurchase of stock |
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( |
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( |
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Net cash provided by financing activities |
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Net change in cash, cash equivalents and restricted cash |
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( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
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$ |
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|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for income taxes, net |
|
$ |
— |
|
|
$ |
|
|
|
Operating lease payments in operating cash flows |
|
$ |
|
|
|
$ |
|
|
|
Supplemental non-cash operating activities |
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
Supplemental non-cash financing activities |
|
|
|
|
|
|
|
|
|
Debt issuance costs related to loan agreement with U.S. Department of the Treasury |
|
$ |
— |
|
|
$ |
( |
) |
|
Investments in warrants to purchase common stock |
|
$ |
|
|
|
$ |
— |
|
|
Accrued capital expenditures |
|
$ |
|
|
|
$ |
— |
|
See accompanying notes to these condensed consolidated financial statements.
5
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
The capacity purchase agreements between us and our 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 partner controls route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo services. Ground support expenses including fueling and airport fees are paid directly by DHL.
American Capacity Purchase Agreement
As of December 31, 2021, we operated
Our American CPA is subject to termination prior to its expiration in various circumstances including:
|
|
▪ |
If either American or we become insolvent, file for bankruptcy, or fail to pay the debts as they become due, the non-defaulting party may terminate the agreement; |
|
|
▪ |
If either we or American fail to perform the covenants, conditions or provisions of the American CPA, subject to certain notice and cure rights, the non-defaulting party may terminate the agreement; |
|
|
▪ |
If, at any time during the term of the American CPA, the number of covered aircraft is less than twenty (20); |
|
|
▪ |
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; |
|
|
▪ |
If our CCF or CD0 fall below certain levels for a specified period of time; |
|
|
▪ |
Upon the occurrence of a force majeure event (as defined in the American CPA) 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. |
6
Under the American CPA, American has the option in its sole discretion to withdraw up to: (i)
|
|
▪ |
If our CCF falls below certain levels for a specified period of time, American may withdraw |
|
|
▪ |
If our CD0 falls below certain levels for a specified period of time, American may withdraw one aircraft; |
|
|
▪ |
If we fail to satisfactorily complete established cabin interior program requirements by certain deadlines, American may withdraw one aircraft; or |
|
|
▪ |
If our block hour utilization falls below certain levels for a specified period of time, American may withdraw a specified number of aircraft. |
United Capacity Purchase Agreement
As of December 31, 2021, we operated
Under our United CPA, United owns
Pursuant to the United CPA, we 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, and as of December 31, 2021, had entered into agreements to lease
Our United CPA is subject to termination rights prior to its expiration, including:
|
|
▪ |
If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances; |
|
|
▪ |
If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to thirty (30) days' notice and cure rights; |
|
|
▪ |
If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement; |
|
|
▪ |
If we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier; |
|
|
▪ |
|
|
|
▪ |
If United elects to terminate our United CPA 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; and |
|
|
▪ |
|
7
DHL Flight Services Agreement
On December 20, 2019, we entered into a Flight Services Agreement with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate two (
Under our DHL FSA, DHL leases
Our DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020.
Our DHL FSA is subject to the following termination rights prior to its expiration:
|
|
▪ |
If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights. |
|
|
▪ |
If either party is declared bankrupt or insolvent. |
|
|
▪ |
If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days. |
|
|
▪ |
|
|
|
▪ |
If we fail to comply with performance standards for three consecutive measurement periods. |
|
|
▪ |
If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days. |
|
|
▪ |
Upon a change in our control or ownership. |
|
|
▪ |
DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and we do not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance. |
|
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, 2021 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2021 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.
8
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 and 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 December 31, 2021, our chief operating decision maker was the Chief Executive Officer. While we operate under two separate capacity purchase agreements and a flight services agreement, 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 and allocate resources, 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.
Contract Revenue and Pass-through and Other Revenue
We recognize contract revenue when the service is provided under our capacity purchase agreements and flight services agreement. Under the capacity purchase agreements and flight services agreement, our major partners generally pay for each departure, flight hour or block hour incurred, and an amount per aircraft in service each month with additional incentives or penalties based on flight completion, on-time performance, and other operating metrics. Our performance obligation is met when each flight is completed, and revenue is recognized and reflected in contract revenue.
We recognize pass-through revenue when the service is provided under our 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 agreements, and major maintenance on aircraft leased from our major partners at nominal rates. Our 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.
We record deferred revenue when cash payments are received or are due from our major partners in advance of our performance. During the three months ended December 31, 2021, we recognized $
The deferred revenue balance as of December 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 September 30, |
|
Total Revenue |
|
|
|
2022 (remainder of) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
9
A portion of the compensation under our capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest expense or aircraft lease expense costs while the aircraft is under contract. We have concluded that this component of the compensation 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. We account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing our estimate of the stand-alone selling prices.
The lease revenue associated with our capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue in the condensed consolidated statements of operations. We recognized $
We have entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease
We mitigate the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that we can operate in the event of a default. Additionally, the leases have specified lease return condition requirements and we maintain inspection rights under the leases. As of December 31, 2021, we recognized $
Lease revenue recognized under the GoJet agreements, net of amortization of the lease incentive assets, was $
|
Periods Ending September 30, |
|
Total Payments |
|
|
|
2022 (remainder of) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
Leases
We determine if an arrangement is a lease at inception. As a lessee, we have lease agreements with lease and non-lease components and have elected to account for such components as a single lease component. Our operating lease activities are recorded in operating lease right-of-use assets, current maturities of operating leases, and noncurrent operating lease liabilities in the condensed consolidated balance sheets. Finance leases are reflected in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion in the condensed consolidated balance sheets.
10
Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. We use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments, or the implicit rate in the lease when it is readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis over the lease term, while finance leases result in a front-loaded expense pattern.
As a lessee, we have elected a short-term lease practical expedient on all classes of underlying assets, permitting us to not apply the recognition requirements of ASC 842 to leases with terms of 12 months or less.
We lease, at nominal rates, certain aircraft from United and DHL under our United CPA and DHL FSA, which are excluded from operating lease assets and liabilities as they do not represent embedded leases under ASC 842. Other than such leases at nominal amounts, approximately
The majority of our leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to us; therefore, the trusts meet the criteria of a variable interest entity. However, since these are single-owner trusts in which we do not participate, we are not at risk for losses and are not considered the primary beneficiary. Management believes that our maximum exposure under these leases is the remaining lease payments.
Contract Liabilities
Contract liabilities consist of deferred credits for cost reimbursements from major partners related to aircraft modifications and pilot 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 in other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. Our total current and non-current deferred credit balances at December 31, 2021 and September 30, 2021 were $
Maintenance Expense
We operate under a Federal Aviation Administration ("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.
We account 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 $
We account for heavy maintenance and major overhaul costs for all other fleets under the direct expense method whereby 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.
11
Engine overhaul expense totaled $
|
3. |
Recent Accounting Pronouncements |
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by eliminating certain exceptions allowable under the existing guidance related to the approach for intraperiod tax allocations, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. Our adoption of this guidance on October 1, 2021 did not have a material impact.
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 discontinued. Optional expedients can be applied through December 31, 2022. We continue to evaluate our contracts that reference LIBOR.
|
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. We maintain our cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions. As of December 31, 2021, we had $
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. All of our revenue for the three months ended December 31, 2021 and 2020 was derived from the American and United CPAs, DHL FSA, and from leases of our CRJ-700 aircraft to GoJet. Substantially all of our accounts receivable at December 31, 2021 and September 30, 2021 was derived from these agreements.
American accounted for approximately
Amounts billed under our agreements are subject to our interpretation of the applicable agreement and are subject to audit by our major partners. Periodically, our major 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 partner. As such, we review amounts due based on historical collection trends, the financial condition of the major partners, and current external market factors and record a reserve for amounts estimated to be uncollectible in accordance with the applicable guidance for expected credit losses. The allowance for doubtful accounts was $
|
5. |
Intangible Assets |
Information about our intangible assets as of December 31, 2021 and September 30, 2021, is as follows (in thousands):
|
|
|
December 31, |
|
|
September 30, |
|
||
|
|
|
2021 |
|
|
2021 |
|
||
|
Customer relationship |
|
$ |
|
|
|
$ |
|
|
|
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
Net carrying value |
|
$ |
|
|
|
$ |
|
|
12
Total amortization expense recognized was approximately $
As of December 31, 2021, the intangible assets’ remaining weighted average term is
|
6. |
Balance Sheet Information |
Certain significant amounts included in the condensed consolidated balance sheets as of December 31, 2021 and September 30, 2021, consisted of the following (in thousands):
|
|
|
December 31, |
|
|
September 30, |
|
||
|
|
|
2021 |
|
|
2021 |
|
||
|
Expendable parts and supplies, net: |
|
|
|
|
|
|
|
|
|
Expendable parts and supplies |
|
$ |
|
|
|
$ |
|
|
|
Less: obsolescence and other |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
Prepaid aviation insurance |
|
$ |
|
|
|
$ |
|
|
|
Lease incentives |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
|
Aircraft and other flight equipment |
|
$ |
|
|
|
$ |
|
|
|
Other equipment |
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
Vehicles |
|
|
|
|
|
|
|
|
|
Building |
|
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
|
$ |
|
|
|
$ |
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
Investments in equity securities |
|
$ |
|
|
|
$ |
|
|
|
Lease incentives |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Other accrued expenses: |
|
|
|
|
|
|
|
|
|
Accrued property taxes |
|
$ |
|
|
|
$ |
|
|
|
Accrued interest |
|
|
|
|
|
|
|
|
|
Accrued vacation |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Other noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
Warrant liabilities |
|
$ |
|
|
|
$ |
|
|
|
Lease incentive obligations |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
13
We record impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted net 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. We have assessed whether any impairment of our long-lived assets existed and have determined that no charges were deemed necessary under applicable accounting standards as of December 31, 2021. Our assumptions about future conditions relevant to the assessment of potential impairment of the long-lived assets are subject to uncertainty, and we will continue to monitor these conditions in future periods as new information becomes available, and will update our analyses accordingly.
Property and Equipment, net
Depreciation of property and equipment totaled $
Investments in Equity Securities
In connection with a negotiated forward purchase contract for electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”) executed in February 2021, we obtained warrants giving us the right to acquire a number shares of common stock in Archer Aviation, Inc. (“Archer”). We estimated the initial equity warrant asset value to be $
The initial grant date values of the warrants were 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 aircraft purchase agreement.
Losses on our investments in Archer totaled $
Our investments in Archer are classified as Level 1 within the fair value hierarchy as the values are determined using quoted prices for the equity securities.
In connection with a negotiated forward purchase contract for fully electric aircraft executed in July 2021, we obtained $
|
7. |
Fair Value Measurements |
Fair value is an exit price representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Accounting standards include disclosure requirements relating to the fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:
14
|
Level 1 |
|
— |
|
Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
|
Level 2 |
|
— |
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
|
Level 3 |
|
— |
|
Unobservable inputs in which there is little or no market data, requiring an entity to develop its own assumptions. |
Other than the investments in equity securities described in Note 6, we did not measure any of our assets or liabilities at fair value on a recurring or nonrecurring basis as of December 31, 2021 and September 30, 2021.
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.
Our debt agreements are not traded on an active market. We have determined the estimated fair value of our 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. We utilize the discounted cash flow method to estimate the fair value of Level 3 debt.
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):
|
|
|
December 31, 2021 |
|
|
September 30, 2021 |
|
||||||||||
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
||||
|
Long-term debt and finance leases, including current maturities(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs. |
|
8. |
Long-Term Debt, Finance Leases, and Other Borrowings |
Long-term debt as of December 31, 2021 and September 30, 2021, consisted of the following (in thousands):
|
|
|
December 31, |
|
|
September 30, |
|
||
|
|
|
2021 |
|
|
2021 |
|
||
|
Senior and subordinated notes payable to secured parties, collateralized |
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due |
|
|
|
|
|
|
|
|
|
Notes payable to secured parties, collateralized by the underlying |
|
|
|
|
|
|
|
|
|
aircraft, due |
|
|
|
|
|
|
|
|
|
Senior and subordinated notes payable to secured parties, collateralized |
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due |
|
|
|
|
|
|
|
|
|
Other obligations due to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
|
equipment, due |
|
|
|
|
|
|
|
|
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
|
equipment, due |
|
|
|
|
|
|
|
|
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
|
aircraft, due |
|
|
|
|
|
|
|
|
|
Notes payable to financial institution due |
|
|
|
|
|
|
|
|
|
Revolving credit facility(8) |
|
|
|
|
|
|
|
|
|
Notes payable to U.S. Treasury due |
|
|
|
|
|
|
|
|
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
|
equipment, due |
|
|
|
|
|
|
— |
|
|
Gross long-term debt, including current maturities |
|
|
|
|
|
|
|
|
|
Less unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Less notes payable warrants |
|
|
( |
) |
|
|
( |
) |
|
Net long-term debt, including current maturities |
|
|
|
|
|
|
|
|
|
Less current portion, net of unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Net long-term debt |
|
$ |
|
|
|
$ |
|
|
15
|
(1) |
In fiscal 2015, we financed |
|
(2) |
In fiscal 2016, we financed |
|
(3) |
In fiscal 2016, we financed |
|
(4) |
In February 2018, we leased |
|
(5) |
In January 2019, we financed certain flight equipment with $ |
|
(6) |
In June 2019, we financed |
|
(7) |
In September 2019, we financed certain flight equipment for $ |
|
(8) |
On September 25, 2019, we extended the term on our $ |
|
(9) |
In October 2020, we entered into a loan and guarantee agreement with the U.S. Department of the Treasury for a secured loan facility of up to $ |
|
(10) |
In December 2021, we financed certain flight equipment with $ |
Principal maturities of long-term debt as of December 31, 2021, and for each of the next five years are as follows (in thousands):
|
Periods Ending December 31, |
|
Total Principal |
|
|
|
2022 (remainder of) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
The net book value of collateralized aircraft and equipment as of December 31, 2021 was $
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 December 31, 2021, we had $
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.
16
We evaluated whether the pass-through trust formed for the EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated. The pass-through trust was determined to be a VIE; however, we determined that we are not the primary beneficiary of the pass-through trust, and therefore, we have not consolidated the pass-through trust with our financial statements.
CIT Revolving Credit Facility
On September 25, 2019, we extended the term on our $
Loan Agreement with the United States Department of the Treasury
On October 30, 2020, we entered into a Loan and Guarantee Agreement with the U.S. Department of the Treasury (the “U.S. Treasury”) for a secured loan facility of up to $
The Treasury Loan bears interest at a variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b)
All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on
The Treasury Loan requires us, 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
The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury Loan 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, we are 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.
17
In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, we issued to the U.S. Treasury warrants to purchase an aggregate of
Spare Engine Financing
In December 2021, we entered into a loan agreement with a financing institution to finance certain purchases of spare engines via a newly-formed limited liability company (“LLC”). The loan agreement provides for aggregate borrowings of up to $
The newly-formed LLC, which is wholly-owned by Mesa, was determined to be a VIE for which we are the primary beneficiary because we have the power to direct the activities of the LLC that most significantly impact the LLC’s economic performance and the obligation to absorb losses and right to receive benefits from the LLC in our capacity as sole member of the LLC and guarantor of the borrowings. Therefore, this entity is consolidated in our financial statements and the borrowings are reflected as long-term debt in our condensed consolidated balance sheet.
The loan agreement contains a loan-to-value (“LTV”) financial covenant pursuant to which we are required to prepay certain amounts of the loan if the aggregate outstanding principal balance of the loan exceeds a specified percentage of the appraised value of the engines beginning in the 12th full month after closing and each June 1 and December 1 thereafter.
As of December 31, 2021, we were in compliance with all debt covenants.
|
9. |
Earnings Per Share |
Calculations of net income (loss) per common share attributable to Mesa Air Group were as follows (in thousands, except per share data):
|
|
|
Three Months Ended December 31, |
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
||
|
Net income (loss) attributable to Mesa Air Group |
|
$ |
( |
) |
|
$ |
|
|
|
|
Basic weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
Add: Incremental shares for: |
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants |
|
|
— |
|
|
|
|
|
|
|
Dilutive effect of restricted stock |
|
|
— |
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to Mesa Air Group: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
( |
) |
|
$ |
|
|
|
|
Diluted |
|
$ |
( |
) |
|
$ |
|
|
|
Basic income or loss per common share is computed by dividing net income or loss 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 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.
18
The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted net income (loss) per share because the effect of including such potentially dilutive shares would have been anti-dilutive:
|
|
|
Three Months Ended December 31, |
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
||
|
Warrants |
|
|
|
|
|
|
— |
|
|
|
Restricted stock |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
10. |
Common Stock |
As discussed in Note 8, we issued warrants to the U.S. Treasury to purchase shares of our common stock, no par value, at an exercise price of $
We have not historically paid dividends on shares of our common stock. Additionally, the Treasury Loan and our aircraft lease facility with RASPRO Trust 2005, a pass-through trust, contain restrictions that limit our ability to or prohibit us from paying dividends to holders of our common stock.
|
11. |
Income Taxes |
Our effective tax rate (ETR) from continuing operations was
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As of September 30, 2021, we had aggregate federal and state net operating loss carryforwards of approximately $
|
12. |
Share-Based Compensation and Stock Repurchases |
Restricted Stock
We have granted restricted stock units (“RSUs”) as part of our long-term incentive compensation to employees and non-employee members of the Board of Directors. RSUs generally vest over a period of 3 to
19
The restricted share activity for the three months ended December 31, 2021 is summarized as follows:
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Number |
|
|
Grant Date |
|
||
|
|
|
of Shares |
|
|
Fair Value |
|
||
|
Restricted shares unvested at September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Restricted shares unvested at December 31, 2021 |
|
|
|
|
|
$ |
|
|
As of December 31, 2021, there was $
Compensation cost for share-based awards is recognized on a straight-line basis over the vesting period. Share-based compensation expense for the three months ended December 31, 2021 and 2020 was $
We repurchased
|
13. |
Employee Stock Purchase Plan |
2019 ESPP
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
A maximum of
|
14. |
Leases |
As of December 31, 2021, we leased
The components of our operating lease costs were as follows (in thousands):
|
|
|
Three Months Ended December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs |
|
$ |
|
|
|
$ |
|
|
|
Variable and short-term lease costs |
|
|
|
|
|
|
|
|
|
Total lease costs |
|
$ |
|
|
|
$ |
|
|
As of December 31, 2021, our operating lease right-of-use assets were $
20
Our operating lease payments in operating cash flows for the three months ended December 31, 2021 and 2020 were $
As of December 31, 2021, our operating leases have a remaining weighted average lease term of
As of December 31, 2021, we have $
|
15. |
Commitments and Contingencies |
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.
If we fail to accept delivery of the spare engines when duly tendered, we may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery.
Litigation
We are subject to
We are involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings that we do not believe will have a material adverse effect upon our business, financial condition, or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.
Electric Aircraft Forward Purchase Commitments
As described in Note 6, in February 2021, we entered into a forward purchase contract with Archer for a number of electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL aircraft is $
As described in Note 6, in July 2021, we entered into a forward purchase contract with Heart for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is $
Other Commitments
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.
21
|
16. |
Subsequent Events |
For the months of November and December 2021 and January 2022, the Company did not meet the minimum performance levels under the American CPA for either the controllable flight completion rate ("CCF") or controllable on-time departures ("CD0"). Under the terms of the American CPA, the Company's failure to meet the CCF or CD0 minimum performance levels for three (3) consecutive months gives American the right to terminate the CPA upon 90 days' notice and to provide a wind-down schedule. American has agreed to waive any default arising out of the Company's failure to meet the CCF or CD0 performance levels in January, which eliminates the right to terminate the American CPA for failure to meet the CD0 and CCF performance levels for the three (3) consecutive months ended January 2022, and has agreed to reset the 3-consecutive month period to commence with the month of February 2022. Additionally, American has the right to remove two (2) additional aircraft from the CPA, one (1) aircraft for not meeting the CD0 minimum performance level for two consecutive months and one (1) aircraft for not meeting the CCF minimum performance level for two (2) consecutive months. American has also agreed to waive its right to remove two (2) aircraft in connection with missing the November and December 2021 CCF and CD0 minimum performance levels. In the future, American has the right to remove additional aircraft should the Company fail to meet the CCF or CD0 minimum performance levels in subsequent two (2) consecutive month periods.
In February 2022, the Company entered into a forward purchase agreement with a manufacturer of hybrid-electric vertical takeoff and landing (“VTOL”) aircraft (the “Aircraft Purchase Agreement”). The Aircraft Purchase Agreement provides for the purchase of
22
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 forward‑looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements below. Factors that could cause or contribute to 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 120 cities in 42 states, the District of Columbia, the Bahamas, 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 (“CPAs”) entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”), and a flight services agreement (“FSA”) with DHL Network Operations (USA), Inc. (“DHL”) (each, our "major partner"). We have a significant presence in several of our major partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix, and Washington-Dulles.
As of December 31, 2021, our fleet consisted of 167 aircraft which we operated under our CPAs and FSA, leased to a third party, or maintained as spares, with approximately 457 daily departures. We operate 40 CRJ-900 aircraft under our American CPA and 60 E-175 and 20 E-175LL aircraft under our United CPA. We operate 2 Boeing 737-F400 aircraft under our DHL FSA. For the three months ended December 31, 2021, approximately 65% of our aircraft in scheduled service were operated for United, approximately 33% were operated for American and 2% were operated for DHL. All of our operating revenue in our three months ended December 31, 2021 was derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party.
Our long-term CPAs 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 flights actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major partners. Our CPAs 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 CPAs, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major partners. Our major partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access.
Under our DHL FSA, we receive a fee per block hour with a minimum monthly block hour guarantee in exchange for providing cargo flight services. Ground support including fueling and airport fees are paid directly by DHL.
Impact of the COVID-19 Pandemic
The rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world significantly reduced demand for air travel beginning in the quarter ended March 31, 2020. This reduction in demand had an unprecedented and materially adverse impact on our revenues and financial position in both fiscal 2020 and 2021 that has continued into fiscal year 2022. The exact timing and pace of the recovery is uncertain given the significant impact of the pandemic on the overall U.S. and global economy, as well as the uncertainty of certain factors outside of our control including current or future travel restrictions, vaccination effectiveness, vaccine mandates, and future variants of the virus. Since a portion of our revenue is fixed due to the structure of our CPAs, the impact to Mesa from the COVID-19 pandemic has been partially mitigated. In addition, our exposure to fluctuations in passenger traffic, ticket and fuel prices is limited.
Components of Results of Operations
The following discussion summarizes the key components of our condensed consolidated statements of operations.
23
Operating Revenues
Our operating revenues consist 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 CPAs and FSA with our major partners, along with the additional amounts received based on the number of flights and block hours flown, and rental revenue for aircraft leased to GoJet. Contract revenues we receive from our major partners are paid and recognized over time consistent with the delivery of service under our CPAs and FSA.
Pass-Through and Other Revenue. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, landing fees, and other aircraft and traffic servicing costs received pursuant to our agreements with our major partners, as well as certain maintenance costs related to our E-175 aircraft.
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 CPAs and FSA, including aircraft repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our CPAs and FSA were directly paid and supplied by our major partners. Accordingly, we do not record an expense or pass-through revenue for fuel supplied by American and United for flying under our CPAs or DHL under our FSA.
Maintenance. Maintenance expense includes costs related to engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-through maintenance costs related to our E-175 aircraft. Heavy maintenance and major overhaul costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. All other 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. As a result of using the direct expense method for heavy maintenance on the majority of our fleets, the timing of maintenance expense reflected in the financial statements may vary significantly from period to period.
Aircraft Rent. Aircraft rent expense includes costs related to leased engines and aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense includes expenses related to our CPAs, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major 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 Income (Expense), Net
Interest Expense. Interest expense is interest on our debt incurred to finance purchases of aircraft, engines, and equipment, including amortization of debt financing costs and discounts.
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Loss on Investments, Net. Loss on investments consists of losses on our investments in equity securities resulting from changes in the fair value of the equity securities.
24
Other Expense. Other expense includes expense derived from activities not classified in any other area of the condensed consolidated statements of operations.
Segment Reporting
Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) 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 and flight services agreement.
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 CODM 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. 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.
Results of Operations
Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020
We had operating loss of $4.0 million in our three months ended December 31, 2021 compared to operating income of $27.0 million in our three months ended December 31, 2020. In our three months ended December 31, 2021, we had net loss of $14.3 million compared to net income of $14.1 million in our three months ended December 31, 2020. Our operating revenues for the three months ended December 31, 2021 reflected an increase in contract revenue primarily related to more flying on all fleets relative to prior period, partially offset by flying fewer aircraft under our American CPA compared to the three months ended December 31, 2020, and a decrease in pass-through and other revenues primarily due to a decrease in pass-through maintenance expense.
Flight operations expense increased in the three months ended December 31, 2021 due to higher pilot and flight attendant wages, pilot and flight attendant lodging, and pilot training expenses. Our maintenance expense increased primarily due to an increase in C-checks (excluding pass-through amounts), component contracts, labor, parts, and other maintenance expense as a result of increased flying and a higher volume of maintenance events compared to the three months ended December 31, 2020. Additionally, there were no government grant funds utilized as an offset to operating expenses during the three months ended December 31, 2021, compared to $11.3 million during the three months ended December 31, 2020.
Operating Revenues
|
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||||||
|
Operating revenues ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
$ |
136,894 |
|
|
$ |
127,158 |
|
|
$ |
9,736 |
|
|
|
7.7 |
% |
|
Pass-through and other |
|
|
10,863 |
|
|
|
23,213 |
|
|
|
(12,350 |
) |
|
|
(53.2 |
)% |
|
Total operating revenues |
|
$ |
147,757 |
|
|
$ |
150,371 |
|
|
$ |
(2,614 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles—ASMs (thousands) |
|
|
2,104,621 |
|
|
|
1,670,943 |
|
|
|
433,678 |
|
|
|
26.0 |
% |
|
Block hours |
|
|
86,079 |
|
|
|
69,247 |
|
|
|
16,832 |
|
|
|
24.3 |
% |
|
Revenue passenger miles—RPMs (thousands) |
|
|
1,764,161 |
|
|
|
1,171,411 |
|
|
|
592,750 |
|
|
|
50.6 |
% |
|
Average stage length (miles) |
|
|
644 |
|
|
|
637 |
|
|
|
7 |
|
|
|
1.1 |
% |
|
Contract revenue per available seat mile—CRASM (in cents) |
|
¢ |
6.50 |
|
|
¢ |
7.61 |
|
|
¢ |
(1.11 |
) |
|
|
(14.6 |
)% |
|
Passengers |
|
|
2,693,468 |
|
|
|
1,829,714 |
|
|
|
863,754 |
|
|
|
47.2 |
% |
"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown.
25
"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.
"Revenue passenger miles” or “RPMs" means the number of miles traveled by paying passengers.
Total operating revenue decreased by $2.6 million, or 1.7%, to $147.8 million for our three months ended December 31, 2021 as compared to our three months ended December 31, 2020. Contract revenue increased by $9.7 million, or 7.7%, to $136.9 million primarily due to an increase in block hours flown during the same period, partially offset by flying fewer aircraft under our American CPA compared to the three months ended December 31, 2020. Our block hours flown during our three months ended December 31, 2021 increased 24.3% compared to the three months ended December 31, 2020 due to increased flying on our CRJ-900 and E-175 fleets. Our pass-through and other revenue decreased during our three months ended December 31, 2021 by $12.4 million, or 53.2%, to $10.9 million primarily due to a decrease in pass-through maintenance revenue related to our E-175 fleet.
Operating Expenses
|
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||||||
|
Operating expenses ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations |
|
$ |
47,598 |
|
|
$ |
36,964 |
|
|
$ |
10,634 |
|
|
|
28.8 |
% |
|
Fuel |
|
|
1,257 |
|
|
|
390 |
|
|
|
867 |
|
|
|
222.3 |
% |
|
Maintenance |
|
|
58,981 |
|
|
|
52,864 |
|
|
|
6,117 |
|
|
|
11.6 |
% |
|
Aircraft rent |
|
|
9,586 |
|
|
|
10,048 |
|
|
|
(462 |
) |
|
|
(4.6 |
)% |
|
Aircraft and traffic servicing |
|
|
715 |
|
|
|
901 |
|
|
|
(186 |
) |
|
|
(20.6 |
)% |
|
General and administrative |
|
|
12,578 |
|
|
|
13,073 |
|
|
|
(495 |
) |
|
|
(3.8 |
)% |
|
Depreciation and amortization |
|
|
21,028 |
|
|
|
20,470 |
|
|
|
558 |
|
|
|
2.7 |
% |
|
Government grant recognition |
|
|
— |
|
|
|
(11,311 |
) |
|
|
11,311 |
|
|
|
(100.0 |
)% |
|
Total operating expenses |
|
$ |
151,743 |
|
|
$ |
123,399 |
|
|
$ |
28,344 |
|
|
|
23.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles—ASMs (thousands) |
|
|
2,104,621 |
|
|
|
1,670,943 |
|
|
|
433,678 |
|
|
|
26.0 |
% |
|
Block hours |
|
|
86,079 |
|
|
|
69,247 |
|
|
|
16,832 |
|
|
|
24.3 |
% |
|
Average stage length (miles) |
|
|
644 |
|
|
|
637 |
|
|
|
7 |
|
|
|
1.1 |
% |
|
Departures |
|
|
43,447 |
|
|
|
35,344 |
|
|
|
8,103 |
|
|
|
22.9 |
% |
Flight Operations. Flight operations expense increased $10.6 million, or 28.8%, to $47.6 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The increase was primarily driven by an increase in pilot and flight attendant wages and lodging expenses, premium pay, and pilot training-related costs.
Fuel. Fuel expense increased $0.9 million, or 222.3%, to $1.3 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The increase was primarily driven by fuel expense related to maintenance events and ferry flights for our CRJ-900 fleet. All fuel costs related to flying under our CPAs and FSA during our three months ended December 31, 2021 and 2020 were directly paid to suppliers by our major partners.
Maintenance. Aircraft maintenance expense increased $6.1 million, or 11.6%, to $59.0 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. This increase was primarily driven by an increase in C-checks (excluding pass-through amounts), component contracts, parts, and labor and other expense due to increased flying and a higher number of maintenance events compared to the three months ended December 31, 2020. This increase was partially offset by a decrease in engine overhaul expense. Total pass-through maintenance expenses reimbursed by our major partners decreased by $8.5 million during our three months ended December 31, 2021 compared to our three months ended December 31, 2020.
26
The following table presents information regarding our maintenance costs during the three months ended December 31, 2021 and 2020 (in thousands):
|
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|||||||
|
Engine overhaul |
|
$ |
1,529 |
|
|
$ |
4,753 |
|
|
$ |
(3,224 |
) |
|
|
(67.8 |
)% |
|
Pass-through engine overhaul |
|
|
3,781 |
|
|
|
9,633 |
|
|
|
(5,852 |
) |
|
|
(60.7 |
)% |
|
C-check |
|
|
9,106 |
|
|
|
2,958 |
|
|
|
6,148 |
|
|
|
207.8 |
% |
|
Pass-through C-check |
|
|
— |
|
|
|
7,138 |
|
|
|
(7,138 |
) |
|
|
(100.0 |
)% |
|
Component contracts |
|
|
7,662 |
|
|
|
5,787 |
|
|
|
1,875 |
|
|
|
32.4 |
% |
|
Rotable and expendable parts |
|
|
7,759 |
|
|
|
5,318 |
|
|
|
2,441 |
|
|
|
45.9 |
% |
|
Other pass-through |
|
|
7,620 |
|
|
|
3,112 |
|
|
|
4,508 |
|
|
|
144.9 |
% |
|
Labor and other |
|
|
21,524 |
|
|
|
14,165 |
|
|
|
7,359 |
|
|
|
52.0 |
% |
|
Total |
|
$ |
58,981 |
|
|
$ |
52,864 |
|
|
$ |
6,117 |
|
|
|
11.6 |
% |
Aircraft Rent. Aircraft rent expense decreased $0.5 million, or 4.6%, to $9.6 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The decrease is attributable to a $0.5 million decrease in aircraft rent due to the purchase of a CRJ-900 aircraft during fiscal 2021 that was previously under lease.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased $0.2 million, or 20.6%, to $0.7 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The decrease is primarily due to a decrease in interrupted trip expense and regulatory and freight charges.
General and Administrative. General and administrative expense decreased $0.5 million, or 3.8%, to $12.6 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The decrease is primarily due to a decrease in property tax expense. For our three months ended December 31, 2021 and 2020, $3.3 million and $4.5 million, respectively, of our insurance and property tax expenses were reimbursed by our major partners.
Depreciation and Amortization. Depreciation and amortization expense increased $0.6 million, or 2.7%, to $21.0 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. The increase is primarily attributable to an increase in depreciation of aircraft, spare engines, and related equipment and amortization of deferred heavy maintenance.
Government grant recognition. Recognition of payroll support funds decreased $11.3 million, or 100.0%, to $0.0 million for our three months ended December 31, 2021 compared to our three months ended December 31, 2020. Under the CARES Act, the government provided the Company with a grant of $95.2 million in payroll support for the period of April through October 2020, of which, the final $11.3 million was recognized during the three months ended December 31, 2020. There were no government grant funds received by the Company recognized during the three months ended December 31, 2021.
Other Expense
Other expense increased $6.4 million, or 79.3%, to $14.4 million for our three months ended December 31, 2021, compared to our three months ended December 31, 2020. The increase is primarily attributable to losses on investments in equity securities of $6.5 million as a result of a reduction in the market price of our investment in Archer Aviation, Inc., offset by a decrease in interest expense due to lower interest rates on our Treasury Loan and a decrease in outstanding aircraft principal balances.
Income Taxes
Our effective tax rate (ETR) from continuing operations was 22.4% for the three months ended December 31, 2021 and 25.5% for the three months ended December 31, 2020. Our ETR during the three months ended December 31, 2021 decreased from the prior year tax rate primarily as a result of certain permanent tax differences, state taxes, and changes in the valuation allowance against state net operating losses. For the three months ended December 31, 2021, we used the year-to-date effective tax rate method to determine the interim income tax benefit because a reliable estimate of the annual effective tax rate could not be made.
27
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As of September 30, 2021, we had aggregate federal and state net operating loss carryforwards of $541.3 million and $235.7 million, respectively, which expire in 2027-2038 and 2022-2041, respectively. Approximately $1.2 million of state net operating loss carryforwards are expected to expire in the current fiscal year.
Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR, which are not recognized financial measures under GAAP, in this Quarterly Report on Form 10-Q 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 gains and losses on investments, lease termination costs, and gains or losses on extinguishment of debt including 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 gains and losses on investments, lease termination costs, and gains or losses on extinguishment of debt including write-off of associated financing fees.
You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted EBITDAR, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA and Adjusted EBITDAR. Gains and losses on investments, which are presented as adjustments to EBITDA and EBITDAR because they are non-cash gains and losses driven by changes in stock prices and other valuation techniques and are not reflective of our core operations, will occur in periods in which there are changes in the fair values of our investments in equity securities. Our presentation of Adjusted EBITDA and Adjusted EBITDAR should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA or Adjusted EBITDAR and any such modification may be material.
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; (vi) Adjusted EBITDA and Adjusted EBITDAR do not reflect gains and losses on investments, which are non-cash gains and losses but will occur in periods when there are changes in the value of our investments in equity securities; and (vii) 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.
28
Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDAR (in thousands):
|
|
|
Three Months Ended December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Reconciliation: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(14,274 |
) |
|
$ |
14,118 |
|
|
Income tax expense (benefit) |
|
|
(4,112 |
) |
|
|
4,821 |
|
|
Income (loss) before taxes |
|
$ |
(18,386 |
) |
|
$ |
18,939 |
|
|
Loss on investments, net |
|
|
6,462 |
|
|
|
— |
|
|
Adjustments(1) |
|
|
— |
|
|
|
(950 |
) |
|
Adjusted income (loss) before taxes |
|
|
(11,924 |
) |
|
|
17,989 |
|
|
Interest expense |
|
|
7,930 |
|
|
|
9,082 |
|
|
Interest income |
|
|
(51 |
) |
|
|
(126 |
) |
|
Depreciation and amortization |
|
|
21,028 |
|
|
|
20,470 |
|
|
Adjusted EBITDA |
|
$ |
16,983 |
|
|
$ |
47,415 |
|
|
Aircraft rent |
|
|
9,586 |
|
|
|
10,048 |
|
|
Adjusted EBITDAR |
|
$ |
26,569 |
|
|
$ |
57,463 |
|
|
|
(1) |
Includes adjustment for gain on extinguishment of debt of $1.0 million related to the repayment of certain aircraft debts during the three months ended December 31, 2020. |
Liquidity and Capital Resources
We expect to meet our cash needs for the next twelve months with cash and cash equivalents, financing arrangements, and cash flows from operations. As of December 31, 2021, we had $102.3 million in unrestricted liquidity. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
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 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 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.
29
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 including spare engines. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for the three months ended December 31, 2021 were approximately 1.5% of quarterly revenue. 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 December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $102.3 million. In addition, we had restricted cash of $3.4 million as of December 31, 2021. As of December 31, 2021, we had $674.6 million in secured indebtedness, excluding finance leases, incurred in connection with our financing of 84 total aircraft and related equipment. As of December 31, 2021, we had $107.1 million of current debt, excluding finance leases, and $567.5 million of long-term debt excluding finance leases.
Restricted Cash
As of December 31, 2021, we had $3.4 million in restricted cash. We have an agreement with a financial institution for a 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 terms 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 three months ended December 31, 2021 and 2020 (in thousands):
|
|
|
Three Months Ended December 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Net cash provided by operating activities |
|
$ |
4,751 |
|
|
$ |
79,273 |
|
|
Net cash used in investing activities |
|
|
(26,929 |
) |
|
|
(1,773 |
) |
|
Net cash provided by financing activities |
|
|
3,993 |
|
|
|
4,593 |
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
(18,185 |
) |
|
|
82,093 |
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
123,867 |
|
|
|
102,841 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
105,682 |
|
|
$ |
184,934 |
|
Net Cash Flow Provided by Operating Activities
During our three months ended December 31, 2021, we had cash flow provided by operating activities of $4.8 million. We had net loss of $14.3 million adjusted for the following significant non-cash items: depreciation and amortization of $21.0 million, stock-based compensation of $0.7 million, losses on investments in equity securities of $6.5 million, deferred income taxes of $(4.2) million, amortization of deferred credits of $(0.2) million, and amortization of debt discount and financing costs and accretion of interest of $3.2 million. We had a net change of $(8.2) million within other net operating assets and liabilities primarily due to changes in deferred revenue and accrued expenses and other liabilities.
During our three months ended December 31, 2020, we had cash flow provided by operating activities of $79.3 million. We had net income of $14.1 million adjusted for the following significant non-cash items: depreciation and amortization of $20.5 million, stock-based compensation of $0.9 million, deferred income taxes of $4.8 million, amortization of deferred credits of $(0.8) million, amortization of debt discount and financing costs and accretion of interest of $1.9 million, and gain on extinguishment of debt of $(1.0) million. We had a net change of $38.9 million within other net operating assets and liabilities largely driven by an increase in current portion of deferred revenue offset by decreases in other accrued expenses and accounts payable during our three months ended December 31, 2020.
Net Cash Flows Used in Investing Activities
During our three months ended December 31, 2021, net cash flow used in investing activities totaled $26.9 million. We invested $19.8 million in capital expenditures primarily consisting of spare engines and other equipment, and $6.9 million in payments of equipment and other deposits. We invested a total of $0.2 million in equity securities of a private company.
30
During our three months ended December 31, 2020, net cash flow used in investing activities totaled $1.8 million. We invested $1.8 million in tools and equipment.
Net Cash Flows Provided by Financing Activities
During our three months ended December 31, 2021, net cash flow provided by financing activities was $4.0 million. We received $30.8 million of proceeds from long-term debt. We made $24.5 million of principal repayments on long-term debt during the period and paid $2.3 million of costs related to debt financing.
During our three months ended December 31, 2020, net cash flow provided by financing activities was $4.6 million. We received $195.0 million of proceeds from the Treasury Loan. We made $189.1 million of principal repayments on long-term debt and paid $1.3 million of costs related to debt financing.
Critical Accounting 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.
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 estimates and policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting estimates as explained in Part 1, Item 7 of the 2021 Form 10-K under the heading "Critical Accounting Estimates."
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 3: "Recent Accounting Pronouncements" 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 December 31, 2021, we had $499.6 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 $0.6 million in the three months ended December 31, 2021.
As of December 31, 2021, we had $179.0 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 December 31, 2021.
31
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. In December 2020, the administrator of LIBOR proposed to cease publication of certain LIBOR settings after December 2021 and to cease publication of the remainder of the LIBOR settings after June 2023. The majority of our debt arrangements are indexed to one- and three-month LIBOR, which will be sunset on June 30, 2023. 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 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 December 31, 2021, we had $499.6 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 agreements largely shelter us from volatility related to fuel prices, which are directly paid and supplied by our major 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.
32
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
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 December 31, 2021, our management believed 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, 2021, 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, 2021 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 2,275 shares of its common stock for $0.1 million to cover the income tax obligation on vested employee equity awards during the three months ended December 31, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
33
EXHIBIT INDEX
|
Exhibit No. |
|
Exhibit Description |
|
|
|
|
|
10.1** |
|
|
|
|
|
|
|
31.1 |
|
|
|
|
|
|
|
31.2 |
|
|
|
|
|
|
|
32.1* |
|
|
|
|
|
|
|
32.2* |
|
|
|
|
|
|
|
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. |
|
** |
Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed. |
34
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: February 9, 2022 |
|
By: |
/s/ Torque Zubeck |
|
|
|
|
Torque Zubeck Chief Financial Officer (Principal Financial Officer) |
35