See accompanying notes to these condensed consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
See accompanying notes to these condensed consolidated financial statements.
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 passenger service to 121 cities in 40 states, the District of Columbia, Canada, Mexico, Cuba, and the Bahamas. As of December 31, 2018, Mesa operated a fleet of 145 aircraft with approximately 628 daily departures and 3,400 employees. Mesa operates all of its flights as either American Eagle or United Express flights pursuant to the terms of the capacity purchase agreements entered into with American Airlines, Inc. and United Airlines, Inc.
The financial arrangements between the Company and its major airline partners involve a revenue-guarantee arrangement (i.e. a "capacity purchase agreement") whereby the major airline pays a monthly guaranteed amount for each aircraft under contract, a fixed fee for each block hour and flight flown and reimbursement of certain direct operating expenses in exchange for providing regional flying. The major airline partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these capacity purchase agreements, the major airline controls route selection, pricing and seat inventories, thereby reducing the Company's exposure to fluctuations in passenger traffic, fare levels, and fuel prices.
On August 8, 2018, the Company filed its Second Amended and Restated Articles of Incorporation, which, among other things: (i) effected a 2.5-for-1 stock split of its common stock; and (ii) increased the authorized number of shares of its common and preferred stock to 125,000,000 and 5,000,000, respectively. All references to share and per share amounts in the Company's condensed consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares.
On August 14, 2018, the Company completed an initial public offering ("IPO") of its common stock, in which it issued and sold 9,630,000 shares (the "Firm Shares") of common stock at a public offering price of $12.00 per share, resulting in gross proceeds to the Company of approximately $115.6 million. Additionally, in connection with the IPO, the Company granted the underwriters an option to purchase up to an additional 1,444,500 shares of common stock at the same price. On September 11, 2018, the Company closed the sale of 1,344,500 shares ("Option Shares") of its common stock, in connection with the partial exercise of the overallotment option granted to the underwriters in its IPO. Of the 1,344,500 Option Shares sold, 723,985 were purchased directly from the Company and the remaining 620,515 shares were purchased directly from the selling shareholders. The Firm Shares and Option Shares were sold to the public for a price of $12.00 per share.
The sale of the Firm Shares and Option Shares raised gross proceeds of approximately $124.2 million. The Company did not receive any proceeds from the sale of the Option Shares by the selling shareholders. The Company received $111.7 million in net proceeds after deducting $8.7 million of underwriting discounts and commissions and $3.8 million in offering costs.
As part of the IPO, stock appreciation rights ("SARs") previously issued under the Mesa Air Group, Inc. Amended and Restated Stock Appreciation Rights Plan (the "SAR Plan"), which settled only in cash, were cancelled and exchanged for an aggregate of 1,266,034 shares of restricted common stock under the Company's 2018 Equity Incentive Plan (the "
2018 Plan
"), of which 966,022 were fully vested upon issuance and are included in the number of shares of common stock outstanding after the IPO. Of the 966,022 fully vested shares, 314,198 shares were retained by the Company to satisfy tax withholding obligations, resulting in a net issuance of 651,824 shares. Additionally, 983,113 shares of restricted common stock were issued to certain of its employees and directors under its 2018 Plan in exchange for the cancellation of 491,915 shares of existing unvested restricted phantom stock units and 491,198 shares of restricted stock under the 2011 and 2017 Plans, respectively.
American Capacity Purchase Agreement
As of December 31, 2018, the Company operated 64 CRJ-900 aircraft for American under a capacity purchase agreement (the "American Capacity Purchase Agreement"). Unless otherwise extended or amended, the capacity purchase agreement for the aircraft expires between 2021 and 2025. In exchange for providing flights and all other services under the agreement, the Company receives a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours (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) flown during the month. In addition, the Company may also receive incentives or pay penalties based upon the Company's operational performance, including controllable on-time departure and controllable completion percentages. American also reimburses the Company for the actual amount incurred for certain items such as passenger liability and hull insurance, and aircraft property taxes. In addition, American also provides, at no cost to the Company, certain ground
6
handling and customer service functions, a
s well as airport-related facilities and fuel. The Company also receives a monthly profit margin payment from American based on the number of aircraft operating. The capacity purchase agreement is subject to early termination for cause under specified circ
umstances and subject to the Company
'
s right to cure under certain conditions. American had a 7.2% ownership interest in the Company, calculated on a fully-diluted basis as of December 31, 2018, and September 30, 2018. The related party amounts presented o
n the
condensed
consolidated balance sheets and statements of operations pertain to American.
United Capacity Purchase Agreement
As of December 31, 2018, the Company operated 20 CRJ-700 and 60 E-175 aircraft for United under a capacity purchase agreement (the "United Capacity Purchase Agreement"). Subject to certain early termination rights, the capacity purchase agreement for each of the 20 CRJ-700 aircraft expires between August and December 2019. Subject to early termination rights, the capacity purchase agreement for 30 of the E-175 aircraft (owned by United) expires between June 2019 and August 2020, subject to United's right to extend for four additional two-year terms (maximum of eight years). Subject to early termination rights, the capacity purchase agreement for 18 of the E-175 aircraft (owned by Mesa) expires between January 2028 and November 2028. During fiscal 2017, the Company and United expanded the capacity purchase agreement to include, subject to early termination rights, an additional 12 E-175 aircraft (purchased by United) with the aircraft entering service through January 2018 for five-year terms, subject to United's right to extend for four additional two-year terms (maximum of eight years). In exchange for performing the flight services under such agreement, the Company receives from United a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours flown during the month. Additionally, certain costs incurred by the Company in performing the flight services are "pass-through" costs, whereby United agrees to reimburse the Company for the actual amounts incurred for the following items: property tax per aircraft, passenger liability insurance, and additionally for the E-175 aircraft owned by United, heavy airframe and engine maintenance, landing gear, auxiliary power units ("APU") and component maintenance. The Company also receives a profit margin based upon certain reimbursable costs under the agreement, as well as its operational performance in addition to a fixed profit margin. The capacity purchase agreement is also subject to early termination for cause under specified circumstances and subject to the Company's right to cure under certain circumstances. United is also permitted, subject to certain conditions, to terminate the agreement early in its discretion by giving us notice of 90 days or more.
In February 2018, the Company mutually agreed with United to temporarily remove two aircraft from service under its United capacity purchase agreement until the Company was able to fully staff flight operations. During the temporary removal, the Company agreed to pay the lease costs associated with the two E-175 aircraft, which totaled $1.9 million. In June 2018, the Company was able to fully staff flight operations and these two E-175 aircraft were placed back into service under the United capacity purchase agreement.
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.
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, 2018 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2018 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.
7
The Company is an
"
emerging growth company,
"
as defined in the Jumpstart Our Business Startups Act of 2012 (the
"
JOBS Act,
"
) and may r
emain an emerging growth company until the last day of
its
fiscal year following the fifth anniversary of the 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 re
vised accounting standards. The Company has elected to
"
opt out
"
of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject t
o the same new or revised accounting standards as other public companies that are not emerging growth companies.
Adoption of New Revenue Standard
On October 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09" or "Topic 606") using the modified retrospective method. See Note 3: "Recent Accounting Pronouncements" for more information. To conform to Topic 606, the Company modified its revenue recognition policy as described below.
Revenue Recognition
The Company recognizes revenue when the service is provided under its capacity purchase agreements. Under these agreements, the major airline partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours flown. The contracts also include reimbursement of certain costs incurred by the Company in performing flight services. These costs, known as "pass-through costs," may include passenger and hull insurance as well as aircraft property taxes. Additionally, for the E-175 aircraft owned by United, the capacity purchase agreement provides that United will reimburse the Company for heavy airframe and engine maintenance, landing gear, APUs and component maintenance. The Company also receives compensation under its capacity purchase agreements for heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all aircraft in scheduled service other than the E-175 aircraft owned by United. The contracts also include a profit margin on certain reimbursable costs, as well as a profit margin, incentives and penalties based on certain operational benchmarks. The Company is eligible to receive incentive compensation upon the achievement of certain performance criteria defined in the capacity purchase agreements. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable constraint guidance under Topic 606. All revenue recognized under these contracts is presented as the gross amount billed to the major airline partners.
Under the capacity purchase agreements, the Company has committed to perform various activities that can be generally classified into in-flight services and maintenance services. When evaluating these services, the Company determined that the nature of its promise is to provide a single integrated service, flight services, because its contracts require integration and assumption of risk associated with both services to effectively deliver and provide the flights as scheduled over the contract term. Therefore, the in-flight services and maintenance services are inputs to that combined integrated flight service. Both the services occur over the term of the agreement and the performance of maintenance services significantly effects the utility of the in-flight services. The Company's individual flights flown under the capacity purchase agreements are deemed to be distinct and the flight service promised in the capacity purchase agreements represents a series of services that should be accounted for as a single performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore, revenue is recognized when each flight is completed.
In allocating the transaction price, variable payments (i.e. billings based on flights and block hours flown, pass-through costs, etc.) that relate specifically to the Company's efforts in performing flight services are recognized in the period in which the individual flight is completed. The Company has concluded that allocating the variability directly to the individual flights results in an overall allocation meeting the objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the Company to their customers.
8
A portion of the Company
'
s compensation under its capacity purchase agreements with American and U
nited is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the
"
right of use
"
of a specific ty
pe and number of aircraft over a stated period-of-time. The lease revenue associated with the Company
'
s capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company
'
s
condensed
consolidated stateme
nts of operations. The Company recognized $54.9 million and $54.6 million of lease revenue for the three months December 31, 2018 and 2017, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the
conden
sed
consolidated statements of operations because the use of the aircraft is not a separate activity of the total service provided.
The Company's capacity purchase agreements are renewable periodically and contain provisions pursuant to which the parties could terminate their respective agreements, subject to certain conditions as described in Note 1. The capacity purchase agreements also contain terms with respect to covered aircraft, services provided and compensation as described in Note 1. The capacity purchase agreements are amended from time to time to change, add or delete terms of the agreements.
The Company's revenues could be impacted by a number of factors, including amendment or termination of its capacity purchase agreements, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and settlement of reimbursement disputes with the Company's major airline partners. In the event contracted rates are not finalized at a quarterly or annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has an enforceable right, it estimates the amount the Company expects to be entitled to that is subject to the ASC 606 constraint.
The Company's capacity purchase agreements contain an option that allows its major airline partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. Both of the Company's major airline partners have exercised this option. Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its capacity purchase agreements. In addition, the Company's major airline partners also provide, at no cost to the Company, certain ground handling and customer service functions, as well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by the Company's major airline partners at no cost are presented net in its condensed consolidated financial statements; hence, no amounts are recorded for revenue or expense for these items.
Contract Liabilities
Contract liabilities consist of deferred credits for cost reimbursements from major airline partners related to aircraft modifications associated with capacity purchase agreements and pilot training. The deferred credits are recognized over time depicting the pattern of transfer of control of services resulting in ratable recognition of revenue over the remaining term of the capacity purchase agreements.
Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. The Company's total current and non-current deferred credit balances at December 31, 2018 and September 30, 2018 are $14.4 million and $15.4 million, respectively. The Company recognized $1.2 million and $1.0 million of the deferred credits to revenue in the condensed consolidated statement of operations during the three months ended December 31, 2018 and 2017, respectively.
Contract Assets
The Company recognizes assets from the costs incurred to fulfill a contract including aircraft painting and reconfiguration and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the condensed consolidated balance sheets. The Company's contract assets balances at December 31, 2018 and September 30, 2018 are $4.1 million and $4.6 million, respectively. Contract cost amortization was $0.5 million for the three months ended December 31, 2018 and 2017.
9
Use of Estimates
The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.
Maintenance Expense
The Company operates under a Federal Aviation Administration ("FAA") approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein the Company recognizes the expense when the maintenance work is completed, or over the repair period, if materially different. For leased aircraft, the Company is subject to lease return provisions that require a minimum portion of the "life" of an overhaul be remaining on the engine at the lease return date. The Company estimates the cost of maintenance lease return obligations and accrues such costs over the remaining lease term when the expense is probable and can be reasonably estimated.
Under the Company's aircraft operating lease agreements and FAA operating regulations, it is obligated to perform all required maintenance activities on its fleet, including component repairs, scheduled air frame checks and major engine restoration events. The Company estimates the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on estimates, which can be impacted by changes in utilization of its aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events consist of overhauls to major components.
Engine overhaul expense totaled $4.1 million, and $19.5 million for the three months ended December 31, 2018, and 2017, respectively, of which $1.5 million and $2.3 million, respectively, was pass-through expense. Airframe C-check expense totaled $1.5 million and $5.6 million for the three months ended December 31, 2018, and 2017, respectively, of which $0 million, and $3.0 million, respectively, was pass-through expense
.
3.
|
Recent Accounting Pronouncements
|
In May 2014, the FASB issued ASU ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("Topic 606"). Topic 606 establishes a new recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be entitled in exchange for those goods or services. On October 1, 2018, the Company adopted this ASU using the modified retrospective method. Under the new standard, the Company concluded that, in addition to the aircraft lease, the individual flights are distinct services and the flight services promised in the capacity purchase agreements represent a series of services that should be accounted for as a single performance obligation. Revenue is recognized over time as the flights are completed. The adoption of this ASU did not have an impact on recorded amounts when applied to the opening balance sheet as of October 1, 2018. The adoption did not impact the condensed consolidated financial statements presented other than the disclosures noted in Note 2.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"), which provides guidance related to the classification and measurement of financial instruments. The guidance primarily impacts the accounting for equity investments other than those accounted for using the equity method of accounting, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The accounting for other financial instruments, such as loans, investments in debt securities and financial liabilities is largely unchanged. The guidance is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The Company has adopted ASU 2016-01 effective October 1, 2018; the adoption of this standard did not have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which was subsequently amended and clarified and provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its condensed consolidated financial statements.
10
In March of 2016, the
FASB issued Accounting Standards Update No. 2016-09, Compensation - S
tock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). With this standard, all excess tax benefits and tax deficiencies are required to
be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regar
dless of whether the benefit reduces taxes payable in the current period. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 in the first quarter o
f the year ended September 30, 2018. This change in accounting principle has been applied on a modified retrospective transition method by means of a cumulative effect adjustment to equity as of the beginning of fiscal year 2018 as a cumulative-effect adju
stment increasing deferred tax assets by $0.4 million, increasing income tax expense by $0.3 million, and increasing retained earnings by $0.7 million. Adoption of ASU 2016-09 did not have any other material effect on the Company
'
s results of operations, f
inancial position or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard effective October 1, 2018; the adoption of this standard did not have a material impact on the financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), that requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted the standard effective October 1, 2018 and modified the presentation to include changes in restricted cash in the Company's Condensed Consolidated Statement of Cash Flows.
At December 31, 2018, the Company had capacity purchase agreements with American and United. All of the Company's condensed consolidated revenue for the three months ended December 31, 2018 and 2017 and accounts receivable at the end of each of these periods was derived from these agreements. The terms of both the American and United capacity purchase agreements are not aligned with the lease obligations on the aircraft performing services under such agreements.
Amounts billed by the Company under capacity purchase agreements are subject to the Company's interpretation of the applicable capacity purchase agreement and are subject to audit by the Company's major airline partners. Periodically, the Company's major airline partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major airline partner. As such, the Company periodically reviews amounts past due and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $1.3 million at December 31, 2018 and September 30, 2018. If the Company's ability to collect these receivables and the financial viability of its partners is materially different than estimated, the Company's estimate of the allowance could be materially impacted.
American accounted for approximately 53% of the Company's total revenue for the three months ended December 31, 2018 and 2017. United accounted for approximately 47% of the Company's revenue for the three months ended December 31, 2018 and 2017. A termination of either the American or the United capacity purchase agreement would have a material adverse effect on the Company's business prospects, financial condition, results of operations, and cash flows.
11
Information about the intangible assets of the Company at December 31, 2018 and September 30, 2018, were as follows (in thousands):
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Customer relationship
|
|
$
|
43,800
|
|
|
$
|
43,800
|
|
Accumulated amortization
|
|
|
(32,911
|
)
|
|
|
(32,459
|
)
|
|
|
$
|
10,889
|
|
|
$
|
11,341
|
|
Total amortization expense recognized was approximately $0.5 million and $0.1 million for the three months ended December 31, 2018 and 2017, respectively. The Company expects to record amortization expense of $1.4 million for the remainder of 2019, and $1.5 million, $1.2 million, $1.0 million, $0.9 million for fiscal years 2020, 2021, 2022, and 2023 respectively.
6
.
|
Balance Sheet Information
|
Certain significant amounts included in the Company's condensed consolidated balance sheet as of December 31, 2018 and September 30, 2018, consisted of the following (in thousands):
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Expendable parts and supplies, net
|
|
|
|
|
|
|
|
|
Expendable parts and supplies
|
|
$
|
20,830
|
|
|
$
|
18,907
|
|
Less obsolescence and other
|
|
|
(3,428
|
)
|
|
|
(3,249
|
)
|
|
|
$
|
17,402
|
|
|
$
|
15,658
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
Prepaid aircraft rent
|
|
$
|
33,849
|
|
|
$
|
30,267
|
|
Unutilized manufacturer credits
|
|
|
4,500
|
|
|
|
4,500
|
|
Deferred offering and reimbursed costs
|
|
|
1,925
|
|
|
|
1,945
|
|
Other
|
|
|
2,744
|
|
|
|
4,202
|
|
|
|
$
|
43,018
|
|
|
$
|
40,914
|
|
Property and equipment—net
|
|
|
|
|
|
|
|
|
Aircraft and other flight equipment substantially
pledged
|
|
$
|
1,516,680
|
|
|
$
|
1,502,940
|
|
Other equipment
|
|
|
3,707
|
|
|
|
3,721
|
|
Leasehold improvements
|
|
|
2,836
|
|
|
|
2,754
|
|
Vehicles
|
|
|
842
|
|
|
|
692
|
|
Building
|
|
|
699
|
|
|
|
699
|
|
Furniture and fixtures
|
|
|
287
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
1,525,051
|
|
|
|
1,511,093
|
|
Less accumulated depreciation
|
|
|
(277,267
|
)
|
|
|
(260,264
|
)
|
|
|
$
|
1,247,784
|
|
|
$
|
1,250,829
|
|
|
|
|
|
|
|
|
|
|
Other accrued expenses
|
|
|
|
|
|
|
|
|
Accrued property taxes
|
|
$
|
7,272
|
|
|
$
|
6,981
|
|
Accrued interest
|
|
|
7,742
|
|
|
|
6,118
|
|
Accrued vacation
|
|
|
5,557
|
|
|
|
5,470
|
|
Accrued wheels, brakes and tires
|
|
|
1,459
|
|
|
|
1,452
|
|
Other
|
|
|
8,987
|
|
|
|
9,675
|
|
|
|
$
|
31,017
|
|
|
$
|
29,696
|
|
12
Depreciation expense totaled approximately
$18.0
million and
$15.8
million for the three months ended December 31, 2018 and 2017, respectively.
The Company recorded amortization of the unfavorable lease liability for approximately $1.5 million and $1.7 million for the three months ended December 31, 2018 and 2017, respectively, as a reduction to lease expense.
7
.
|
Fair Value Measurements
|
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. Marketable securities are reported at fair value based on market quoted prices in the condensed consolidated balance sheets.
The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions):
|
|
December 31, 2018
|
|
|
September 30, 2018
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Long-term debt, including current maturities
(1)
|
|
$
|
891.7
|
|
|
$
|
889.2
|
|
|
$
|
930.2
|
|
|
$
|
926.2
|
|
(1)
|
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs.
|
13
8
.
|
Long-Term Debt and Other Borrowings
|
Long-term debt as of December 31, 2018 and September 30, 2018, consisted of the following (in thousands):
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
aircraft, due 2019
(1)(2)
|
|
$
|
1,780
|
|
|
$
|
4,428
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
aircraft, due 2022
(3)(4)
|
|
|
63,784
|
|
|
|
69,340
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
aircraft, due 2024
(5)
|
|
|
69,231
|
|
|
|
72,438
|
|
Senior and subordinated notes payable to secured parties, collateralized
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2027
(6)
|
|
|
119,701
|
|
|
|
122,591
|
|
Notes payable to secured parties, collateralized by the underlying
|
|
|
|
|
|
|
|
|
aircraft, due 2028
(7)
|
|
|
209,240
|
|
|
|
209,240
|
|
Senior and subordinated notes payable to secured parties, collateralized
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2028
(8)
|
|
|
163,734
|
|
|
|
167,269
|
|
Senior and subordinated notes payable to secured parties, collateralized
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2022
(17)
|
|
|
89,440
|
|
|
|
95,060
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
equipment, due 2022
(9)
|
|
|
84,872
|
|
|
|
88,162
|
|
Senior and subordinated notes payable to secured parties, collateralized
|
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2022
(10)
|
|
|
59,467
|
|
|
|
63,403
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
equipment, due 2020
(11)
|
|
|
2,903
|
|
|
|
3,318
|
|
Notes payable to financial institution due 2020
(12)
|
|
|
3,852
|
|
|
|
4,360
|
|
Notes payable to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
equipment, due 2020
(13)
|
|
|
12,159
|
|
|
|
14,971
|
|
Notes payable to financial institution due 2019
(14)
|
|
|
2,088
|
|
|
|
5,896
|
|
Working capital draw loan, collateralized by certain flight equipment
|
|
|
|
|
|
|
|
|
and spare parts
(15)
|
|
|
—
|
|
|
|
—
|
|
Other obligations due to financial institution, collateralized by the underlying
|
|
|
|
|
|
|
|
|
equipment, due 2023
(16)
|
|
|
9,441
|
|
|
|
9,731
|
|
Total long-term debt
|
|
|
891,692
|
|
|
|
930,207
|
|
Less current portion
|
|
|
(149,842
|
)
|
|
|
(155,170
|
)
|
Less unamortized debt issuance costs
|
|
|
(14,011
|
)
|
|
|
(14,860
|
)
|
Long-term debt—excluding current portion
|
|
$
|
727,839
|
|
|
$
|
760,177
|
|
(1)
|
In fiscal 2005, the Company financed five CRJ-900 aircraft with $118 million in debt. The debt bears interest at the monthly London Inter-bank Offered Rate ("LIBOR"), plus 3% (5.503% at December 31, 2018) and requires monthly principal and interest payments.
|
(2)
|
In fiscal 2004, the Company financed five CRJ-700 and nine CRJ 900 aircraft with $254.7 million in debt. The debt bears interest at the monthly LIBOR plus 3% (5.503% at December 31, 2018) and requires monthly principal and interest payments.
|
(3)
|
In fiscal 2007, the Company financed three CRJ-900 and three CRJ-700 aircraft for $120.3 million. The debt bears interest at the monthly LIBOR plus 2.25% (4.753% at December 31, 2018) and requires monthly principal and interest payments.
|
(4)
|
In fiscal 2014, the Company financed 10 CRJ-900 aircraft for $88.4 million. The debt bears interest at the monthly LIBOR plus a spread ranging from 1.95% to 7.25% (4.453% to 9.753% at December 31, 2018) and requires monthly principal and interest payments.
|
(5)
|
In fiscal 2014, the Company financed eight CRJ-900 aircraft with $114.5 million in debt. The debt bears interest at 5% and requires monthly principal and interest payments.
|
14
(6)
|
In fiscal 2015, the Company financed seven CRJ-900 aircraft with $170.2 million in debt. The senior notes payable of $151 million bear interest at m
onthly LIBOR plus 2.71% (
5.213%
at December 31, 2018) and require monthly principal and interest payments. The subordinated notes payable are
noninterest-bearing and become payable in full on the last day of the term of the notes. The Company has imputed an interest rate of 6.25% on the subordinated notes payable and recorded a related discount of $8.1 million, which is being accreted to intere
st expense over the term of the notes.
|
(7)
|
In fiscal 2016, the Company financed 10 E-175 aircraft with $246 million in debt under an EETC financing arrangement (see discussion below). The debt bears interest ranging from 4.75% to 6.25% and requires semi-annual principal and interest payments.
|
(8)
|
In fiscal 2016, the Company financed eight E-175 aircraft with $195.3 million in debt. The senior notes payable of $172 million bear interest at the three-month LIBOR plus a spread ranging from 2.20% to 2.32% (5.008% to 5.128% at December 31, 2018) and require quarterly principal and interest payments. The subordinated notes payable bear interest at 4.50% and require quarterly principal and interest payments.
|
(9)
|
In fiscal 2017, the Company financed certain flight equipment with $99.1 million in debt. The debt bears interest at the monthly LIBOR (rounded to the nearest 16th) plus 7.25% (9.753% at December 31, 2018) and requires monthly principal and interest payments.
|
(10)
|
In December 2017, the Company refinanced nine CRJ-900 aircraft with $74.9 million in debt. The senior notes payable of $46.9 million bear interest at the three-month LIBOR plus 3.50% (6.308% at December 31, 2018) and require quarterly principal and interest payments. The subordinated notes payable bear interest at the three-month LIBOR plus 4.50% (7.308% at December 31, 2018) and require quarterly principal and interest payments.
|
(11)
|
In fiscal 2015, the Company financed certain flight equipment with $8.3 million in debt. The debt bears interest at 5.163% and requires monthly principal and interest payments.
|
(12)
|
In fiscal 2015 and 2016, the Company financed certain flight equipment maintenance costs with $10.2 million in debt. The debt bears interest at the monthly LIBOR plus 3.07% (5.878% at December 31, 2018) and requires quarterly principal and interest payments.
|
(13)
|
In fiscal 2016 and 2017, the Company financed certain flight equipment maintenance costs with $11.9 million in debt. The debt bears interest at the three-month LIBOR plus a spread ranging from 2.93% to 2.96% (5.738% to 5.768% at December 31, 2018) and requires quarterly principal and interest payments. The debt is subject to a fixed charge ratio covenant. As of December 31, 2018, the Company was in compliance with this covenant.
|
(14)
|
In fiscal 2017, the Company financed certain flight equipment maintenance costs with $25 million in debt. The debt bears interest at the three-month LIBOR plus 3.30% (6.108% at December 31, 2018) and requires quarterly principal and interest payments. The debt is subject to a fixed charge ratio covenant. As of December 31, 2018, the Company was in compliance with this covenant.
|
(15)
|
In fiscal 2016, the Company obtained a $35 million working capital draw loan, which terminates in August 2019. Interest is assessed on drawn amounts at one-month LIBOR plus 4.25% (6.753% at December 31, 2018). As of December 31, 2018, there were no borrowings outstanding under this facility. The working capital draw loan is subject to an interest and rental coverage ratio covenant. As of December 31, 2018, the Company was in compliance with this covenant.
|
(16)
|
In February 2018, the Company leased two spare engines. The leases were determined to be capital as the leases contain a bargain purchase option at the end of the term. Imputed interest is 9.128% and the leases requires monthly payments.
|
(17)
|
In June 2018, the Company refinanced six CRJ-900 aircraft with $27.5 million in debt and financed nine CRJ-900 aircraft, which were previously leased, with $69.6 million in debt. The senior notes payable of $67.3 million bear interest at the three-month LIBOR plus 3.50% (6.308% at December 31, 2018) and require quarterly principal and interest payments. The subordinated notes payable bear interest at three month LIBOR plus 7.50% (10.308% at December 31, 2018) and require quarterly principal and interest payments.
|
Principal maturities of long-term debt as of December 31, 2018, and for each of the next five years are as follows (in thousands):
|
|
Total Principal
|
|
Periods Ending September 30,
|
|
Amount
|
|
Remainder of 2019
|
|
$
|
117,339
|
|
2020
|
|
|
150,467
|
|
2021
|
|
|
144,919
|
|
2022
|
|
|
141,917
|
|
2023
|
|
|
69,232
|
|
Thereafter
|
|
|
267,818
|
|
|
|
$
|
891,692
|
|
15
The net book value of collateralized aircraft and equipment as of December 31, 2018 was $1,140.7 million.
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, 2018 Mesa has $209.2 million of equipment notes outstanding issued under the EETC financing included in long-term debt on the condensed consolidated balance sheets. The structure of the EETC financing consists of a pass-through trust created by Mesa to issue pass-through certificates, which represent fractional undivided interests in the pass-through trust and are not obligations of Mesa.
The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds.
Mesa evaluated whether the pass-through trust formed for its EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated. The pass-through trust was determined to be a VIE, however, the Company has determined that it does not have a variable interest in the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements.
On June 27, 2018, the Company refinanced $16.0 million of debt on six CRJ-900 aircraft (due in 2019), with $27.5 million of debt, resulting in net cash proceeds to the Company of $10.4 million after transaction related fees. The notes payable require quarterly payments of principal and interest through fiscal 2022 bearing interest at LIBOR plus 3.50%.
On June 28, 2018, the Company purchased nine CRJ-900 aircraft, which were previously leased under its aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor (the "GECAS Lease Facility"), for $76.5 million. The Company financed the aircraft purchase with $69.6 million in new debt and proceeds from the June 2018 refinancing of six CRJ-900 aircraft. The notes payable of $69.6 million require quarterly payments of principal and interest through fiscal 2022 bearing interest at LIBOR plus a spread ranging from 3.50% for the senior promissory notes to 7.50% for the subordinated promissory notes. The Company recorded non-cash lease termination expense of $15.1 million in connection with the lease buyout. Also, as part of the transaction, the Company (i) received $4.5 million of future goods and services credits and $5.6 million of loan forgiveness for loans with a maturity date in 2027 from the aircraft manufacturer, and (ii) mutually agreed with GE Capital Aviation Services LLC to terminate the GE Warrant to purchase 250,000 shares of common stock.
On August 14, 2018 the Company paid down the outstanding balance on the CIT Revolving Credit Facility of $25.7 million.
9
.
|
Earnings Per Share and Equity
|
Calculations of net income per common share attributable to Mesa Air Group were as follows (in thousands, except per share data):
|
|
Three Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net income attributable to Mesa Air Group
|
|
$
|
19,081
|
|
|
$
|
22,624
|
|
Basic weighted average common shares outstanding
|
|
|
23,903
|
|
|
|
11,294
|
|
Add: Incremental shares for:
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
10,609
|
|
|
|
12,076
|
|
Dilutive effect of restricted stock
|
|
|
309
|
|
|
|
189
|
|
Diluted weighted average common shares
outstanding
|
|
|
34,821
|
|
|
|
23,559
|
|
Net income per common share attributable to
Mesa Air Group:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
2.00
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.96
|
|
16
Basic income per common share is computed by dividing net income attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period.
The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income or loss per share calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested restricted stock and warrants would have an anti-dilutive effect. There were no anti-dilutive shares relating to restricted stock and exercise of warrants that were excluded from the calculation of diluted loss per share for the three months ended December 31, 2018 and 2017.
The Company previously issued warrants to third parties, which had a five-year term to be converted to common stock at an exercise price of $0.004 per share. Certain persons who are not U.S. citizens currently hold outstanding warrants to purchase shares of the Company's common stock. The warrants are not exercisable due to restrictions imposed by federal law requiring that no more than 24.9% of the Company's stock be voted, directly or indirectly, or controlled by persons who are not U.S. citizens. The warrants can be converted to common stock upon warrant holders demonstrating U.S. citizenship. During June 2018, the Company extended the term of outstanding warrants set to expire by five years (through fiscal year 2023). Any warrants that were not extended were forfeited.
On June 28, 2018, the Company agreed with GE Capital Aviation Services LLC ("GE Capital") to terminate a warrant to purchase 250,000 shares of common stock held by GE Capital.
In July 2018, the Company's Board of Directors and Compensation Committee approved the issuance of shares of restricted common stock under its 2018 Equity Incentive Plan (the "2018 Plan") immediately following completion of the Company's IPO to certain of its employees and directors in exchange for the cancellation of existing restricted phantom stock units, unvested restricted shares and SARs. The shares of restricted common stock issued under the 2018 Plan in exchange for the cancellation of restricted phantom stock units, unvested restricted shares and SARs are subject to vesting on the same terms set forth in the prior vesting schedules and are not subject to acceleration in connection with the 2018 Plan issuances.
On August 8, 2018, the Company filed its Second Amended and Restated Articles of Incorporation, which, among other things: (i) effected a 2.5-for-1 stock split of its common stock; and (ii) increased the authorized number of shares of its common and preferred stock to 125,000,000 and 5,000,000, respectively. All references to share and per share amounts in the Company's condensed consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares.
The Company's shares of common stock were listed on The NASDAQ Global Select Market under the symbol "MESA" effective August 10, 2018. On August 14, 2018, the Company completed its IPO, in which it issued and sold 9,630,000 shares of common stock, no par value, at a public offering price of $12.00 per share (the "Firm Shares"). Additionally, in connection with the IPO, the Company granted the underwriters an option to purchase up to an additional 1,444,500 shares of common stock at the same price. On September 11, 2018, the Company closed the sale of 1,344,500 shares ("Option Shares") of its common stock, in connection with the partial exercise of the overallotment option granted to the underwriters in its IPO. Of the 1,344,500 Option Shares sold, 723,985 were purchased directly from the Company and the remaining 620,515 shares were purchased directly from the selling shareholders. The Firm Shares and Option Shares were sold to the public for a price of $12.00 per share. The aggregate gross proceeds to us from the IPO were approximately $124.2 million. The Company received $111.7 million in net proceeds after deducting $8.7 million of underwriting discounts and commissions and $3.8 million in offering costs.
The Company has not historically paid dividends on shares of its common stock. Additionally, the Company's aircraft lease facility (the "RASPRO" Lease Facility) with RASPRO Trust 2005, a pass-through trust and its aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor (the "GECAS Lease Facility") each contain restrictions that limit the Company's ability to or prohibit it from paying dividends to holders of its common stock.
The Company's effective tax rate (ETR) from continuing operations was 23.8% for the three months ended December 31, 2018, and (2,609.5)% for the three months ended December 31, 2017. The quarterly ETR was significantly different from the Company's prior year ETR primarily as a result of the comprehensive tax legislation commonly referred
17
to as the Tax Cuts and Jobs Act (the
"
Tax Act
"
) enacted by the U.S. government on December 22, 2017,
which
reduced
the Company
'
s
statutory federal tax rate from 35% to 21%. In addition,
the Company
'
s
rate varied slightly from prior years as a res
ult of state taxes, changes in the valuation allowance against state net operating losses, and changes in state apportionment and state statutory rates.
The Tax Act made broad and complex changes to the U.S. tax code that affected the Company's fiscal year ended September 30, 2018, including but not limited to (1) reducing the U.S. federal corporate tax rate, (2) changing rules related to uses and limitations of NOL carryforwards created in tax years beginning after December 31, 2017, (3) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized, and (4) altering bonus depreciation rules that will allow for full expensing of qualified property. The Tax Act reduced the federal corporate tax rate to 21% in the Company's fiscal year ended September 30, 2018 for the period beginning after December 31, 2017. For the fiscal year ending September 30, 2019, and onward, the applicable federal corporate tax rate is 21%.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The one year measurement period ended during the Company's first quarter ended December 31, 2018. As a result, the Company has finalized provisional amounts originally recorded in connection with the Tax Act.
In connection with the Company's initial analysis of the impact of the Tax Act, it has recorded a discrete net tax benefit of $22.4 million in the period ended September 30, 2018. The Company recorded the $22.4 million impact for the three months ended December 31, 2017, the first quarter of the fiscal year ended September 30, 2018. The Company has completed its accounting for the income tax effects of the Tax Act.
The Company's accounting for the Tax Act was completed as follows:
Reduction of U.S. federal corporate tax rate: The Act reduces the corporate tax rate to 21%, effective January 1, 2018. In the fourth quarter of the period ended September 30, 2018, the Company completed its analysis to determine the effect of the reduction of the U.S. federal corporate tax rate and recorded an adjustment of $0.9 million from the amount recorded in the first quarter of the fiscal year. Consequently, the effect for the fiscal year ended September 30, 2018 was a decrease related to the Company's net deferred tax liabilities of $22.0 million, excluding the valuation allowance. The Company also calculated an increase to its valuation allowance of $0.5 million due to the rate change. The Company recorded a corresponding net adjustment to its deferred income tax benefit of $21.5 million for the period ended September 30, 2018 as part of its completion of the accounting for Tax Act.
Elimination of Corporate AMT and Refund of AMT Credits: For tax years beginning after December 31, 2017, the corporate AMT was repealed. The Act allows the use of existing corporate AMT credits to offset regular tax liability for tax years after December 31, 2017. AMT credits in excess of regular liability are refundable in the years 2018 through 2021. At December 31, 2018, the Company had $2.5 million of AMT credits, all of which is expected to be refunded. The Company has reclassified the AMT credits to long-term receivable. In the fourth quarter of the year ended September 30, 2018, the Company had accounted for a potential sequestration of its AMT credit receivable by recording a provisional tax expense of $0.1 million for the estimated sequestration amounts withheld from its AMT credit carryovers. As a result of the IRS's recent announcement regarding Section 53(e), the Company is no longer subject to the sequestration previously mandated, and has reversed the estimated $0.1 million sequestration accrual recorded for the tax year ended September 30, 2018, resulting in an income tax benefit of $0.1 million for the tax year ended September 30, 2019. This benefit was recorded in the three months ended December 31, 2018.
Valuation allowances: The Company determined whether the federal and state valuation allowance assessments were affected by various aspects of the Tax Act. Any corresponding determinations relating to changes in valuation allowances have, likewise, been completed with no changes identified with respect to the provisional amounts recorded.
As of September 30, 2018, the Company had aggregate federal and state net operating loss carryforwards of approximately $415.1 million and $199.6 million, respectively, which expire in 2027-2037 and 2019-2038, respectively. Approximately $0.9 million of state net operating loss carryforwards are expiring in 2019.
18
1
2
.
|
Share-Based Compensation
|
Restricted Stock
The restricted stock activity for the three months ended December 31, 2018 were summarized as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant Date
|
|
|
|
of Shares
|
|
|
Fair Value
|
|
Restricted shares unvested at September 30, 2018
|
|
|
1,250,625
|
|
|
$
|
9.59
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(14,217
|
)
|
|
$
|
12.00
|
|
Restricted shares unvested at December 31, 2018
|
|
|
1,236,408
|
|
|
$
|
9.56
|
|
As of December 31, 2018, there was $11.9 million, of total unrecognized compensation cost related to unvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.6 years.
Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. Share-based compensation expense for the three months ended December 31, 2018 and 2017 was $1.5 million and $0.5 million, respectively. Share-based compensation expenses are recorded in general and administrative expenses in the condensed consolidated statements of operations.
At December 31, 2018, the Company leased 28 aircraft under noncancelable operating leases with remaining terms of up to 5.25 years. The Company has the option to terminate certain leases at various times throughout the lease. The Company headquarters and other facility noncancelable operating leases have remaining terms of up to 7.00 years. The leases require the Company to pay all taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $19.1 million and $21.7 million for the three months ended December, 2018 and 2017, respectively.
Future minimum lease payments as of December 31, 2018, under noncancelable operating leases are as follows (in thousands):
Periods Ending
September 30,
|
|
Aircraft
|
|
|
Other
|
|
|
Total
|
|
Remainder of 2019
|
|
|
45,882
|
|
|
|
2,548
|
|
|
|
48,430
|
|
2020
|
|
|
45,534
|
|
|
|
1,943
|
|
|
|
47,477
|
|
2021
|
|
|
44,314
|
|
|
|
1,375
|
|
|
|
45,689
|
|
2022
|
|
|
29,751
|
|
|
|
1,339
|
|
|
|
31,090
|
|
2023
|
|
|
12,418
|
|
|
|
1,308
|
|
|
|
13,726
|
|
Thereafter
|
|
|
11,849
|
|
|
|
2,704
|
|
|
|
14,553
|
|
Total
|
|
$
|
189,748
|
|
|
$
|
11,217
|
|
|
$
|
200,965
|
|
The majority of the Company's leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which the Company does not participate, the Company is not at risk for losses and is not considered the primary beneficiary. Management believes that the Company's maximum exposure under these leases is the remaining lease payments.
The Company is involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings that the Company does not believe will have a material adverse effect upon its business, financial condition, or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.
19
1
5
.
|
Supplemental Disclosure
|
The Company adopted ASU 2016-18 on a retrospective basis during the quarter ended December 31, 2018. The following is a reconciliation of the captions in the Condensed Consolidated Balance Sheets to the Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
88,600
|
|
|
$
|
78,991
|
|
Restricted cash
|
|
|
3,644
|
|
|
|
3,828
|
|
Cash, cash equivalents, and restricted cash in
Condensed Consolidated Statement of Cash Flows
|
|
$
|
92,244
|
|
|
$
|
82,819
|
|
The restricted cash balance primarily includes deposits in trust accounts to collateralize letters of credit and to fund workers' compensation claims, landing fees, and other business needs.
On January 28, 2019, the Company entered into a Term Loan Agreement (the "Term Loan") pursuant to which the lenders committed to lend to the Company term loans in the aggregate principal amount of $91,200,000. Borrowings under the Term Loan will bear interest at LIBOR plus 3.10%. This interest rate applicable to the Term Loan is significantly lower than the Company's Spare Engine Facility (defined below), which the Term Loan refinances and replaces. The Spare Engine Facility accrued interest at LIBOR plus 7.25% plus a Yield Enhancement of 1.50% applied to scheduled principal repayments. The Term Loan has a term of five years, with principal and interest payments due monthly over the term of the loan in accordance with an amortization schedule.
Proceeds from the Term Loan were used to (1) repay amounts outstanding under its spare engine financing facility entered into in fiscal year 2017 (the "Spare Engine Facility"); (2) pay prepayment fees under the Spare Engine Facility; (3) pay accrued and unpaid interest expenses; and (4) finance six engines acquired in 2018. The obligations under the Term Loan are secured by a first priority lien on 27 aircraft engines (21 used engines securing the obligations under the Spare Engine Facility and the six new and used engines acquired by the Company in calendar year 2018) and related collateral, including engine warranties and proceeds of the foregoing.
On January 29, 2019, the Board of Directors of the Company ratified the entry by its wholly owned subsidiary, Mesa Airlines, into a term sheet (the "Term Sheet") with American Airlines, Inc. ("American"), which sets forth certain proposed amendments to the American Capacity Purchase Agreement. The parties agreed that the Term Sheet will remain in effect until the earliest to occur of the following: (1) the execution a definitive amendment to the American Capacity Purchase Agreement; (2) the date American provides a withdrawal notice with respect to six additional aircraft in connection with the Company's failure to meet certain performance criteria (as discussed below); (3) the date the Company exercises its option to withdraw aircraft from the American Capacity Purchase Agreement (as discussed below); and (4) the expiration or termination of such Capacity Purchase Agreement.
The amendments to the American Capacity Purchase Agreement include the following:
|
▪
|
The conversion of two aircraft to be utilized by Mesa Airlines as operational spares in Mesa's sole discretion throughout its system, resulting in a decrease in the number of aircraft operated by the Company under the American Capacity Purchase Agreement from 64 to 62, effective April 1, 2019. American has agreed to make certain additional monthly payments to the Company related to the two aircraft during the period April 2019 through December 2020.
|
|
▪
|
The parties also agreed to new and revised operational performance criteria under the American Capacity Purchase Agreement, which if exceeded, will result in the payment of additional incentive compensation to Mesa Airlines and, if not met, could result in up to six additional aircraft being removed from the American Capacity Purchase Agreement (as discussed below). The new and revised performance criteria will be measured on a rolling 60-day period (effective May 1, 2019) and 45-day period (effective September 1, 2019 and thereafter).
|
|
▪
|
The parties agreed that if at any time during the term of the Term Sheet the Company fails to comply with such revised/new operational performance metrics (as determined over the applicable rolling measurement periods), American will have the right to permanently withdraw one aircraft from the American Capacity Purchase
|
20
|
|
A
greement
and may not in any event withdraw more than two aircraft in any calendar month or six aircraft in total.
|
|
▪
|
In addition to American's rights, if at any time during the term of the Term Sheet the Company fails to comply with an applicable performance metric on two or more occasions, then upon the second occurrence and each subsequent failure, the Company has the right, exercisable in its discretion, to elect to permanently withdraw six aircraft from the American Capacity Purchase Agreement.
|
21