Item 1. 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.
See accompanying notes to these condensed consolidated financial statements.
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 the holding company of Mesa Airlines, Inc. ("Mesa Airlines"), a regional air carrier providing scheduled flight service to 110 cities in 40 states, the District of Columbia, the Bahamas, and Mexico as well as cargo flight services out of Cincinnati/Northern Kentucky International Airport. As of March 31, 2022, Mesa’s fleet consisted of 168 aircraft which were operated under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services Agreement (“FSA”), leased to a third party, held for sale or maintained as operational spares, with approximately 349 daily departures and 2,800 employees. Mesa operates all of its flights as either American Eagle, United Express, or DHL Express flights pursuant to the terms of CPAs entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc. (“DHL”) (each, our “major partner”).
The CPAs 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 CPAs, 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 flight services. Ground support expenses including fueling and airport fees are paid directly by DHL.
American Capacity Purchase Agreement
As of March 31, 2022, we operated 40 CRJ-900 aircraft under an Amended and Restated Capacity Purchase Agreement with American dated November 19, 2020 (as amended, the “American CPA”). In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departure (“CD0”) and controllable flight completion (“CCF”) percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions as well as airport-related facilities and gates at American hubs and cities where we operate. The American CPA expires on December 31, 2025.
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 United States Federal Aviation Administration (“FAA”) or the United States Department of Transportation (“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 either our CCF or CD0 falls 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) 10 aircraft during calendar year 2021, (ii) five aircraft during each of calendar years 2022 and 2023, and (iii) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter American has the right to remove the remaining 20 aircraft. American also has the right and option to withdraw a specified number of aircraft upon each occurrence of the following:
|
• |
If our CCF falls below certain levels for a specified period of time, American may withdraw one aircraft; |
|
• |
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. |
For the months of November and December 2021 and January 2022, we did not meet the CCF or CD0 minimum performance levels under the American CPA. Under the terms of the American CPA, the 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 for the aircraft covered under the American CPA. American agreed to waive any default arising out of the failure to meet the CCF or CD0 performance levels in January, which eliminated 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 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 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 we fail to meet the CCF or CD0 minimum performance levels in subsequent two (2) consecutive month periods.
In March 2022, we amended our American CPA to, among other things, modify certain penalty and incentive compensation as defined in the American CPA.
United Capacity Purchase Agreement
As of March 31, 2022, we operated 60 E-175 and 20 E-175LL aircraft under a Second Amended and Restated Capacity Purchase Agreement with United dated November 4, 2020 (as amended, the “United CPA”). In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. United also reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"), and component maintenance for the E-175 aircraft owned by United. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
Under our United CPA, United owns 42 of the 60 E-175 aircraft and all of the E-175LL aircraft and leases them to us at nominal amounts. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. The E-175LL aircraft have terms expiring between 2032 and 2033.
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 March 31, 2022, have entered into agreements to lease 18 of our 20 CRJ-700 aircraft.
Our United CPA is subject to termination rights prior to its expiration in various circumstances 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; |
7
|
• |
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; |
|
• |
United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more; |
|
• |
If United elects to terminate our United 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 |
|
• |
Commencing five (5) years after the actual in-service date, United has the right to remove the E-175 aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the ten (10) year anniversary of the in-service date, certain accelerated margin payments. |
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 (2) Boeing 737-400F aircraft to provide cargo air transportation services. In exchange for providing cargo flight services, we receive a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two (2) Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us.
Our DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.
Our DHL FSA is subject to termination rights prior to its expiration in various circumstances including:
|
• |
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; |
|
• |
At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days’ written notice; |
|
• |
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; and |
|
• |
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. |
8
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 GAAP 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.
The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and may remain an emerging growth company until the last day of its fiscal year following the fifth anniversary of the Company’s initial public offering (“IPO”), subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Segment Reporting
As of March 31, 2022, 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 CPAs and FSA. Under the CPAs and FSA, 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 as 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 CPAs and FSA. 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.
9
We record deferred revenue when cash payments are received or are due from our major partners in advance of our performance. During the three and six months ended March 31, 2022, we recognized $0.8 million and $5.0 million of previously deferred revenue, respectively. Deferred revenue is recognized as flights are completed over the remaining terms of the respective contracts.
The deferred revenue balance as of March 31, 2022 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) |
|
$ |
714 |
|
2023 |
|
|
5,051 |
|
2024 |
|
|
9,330 |
|
2025 |
|
|
6,253 |
|
2026 |
|
|
3,673 |
|
Thereafter |
|
|
4,522 |
|
Total |
|
$ |
29,543 |
|
A portion of our compensation under our CPAs 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 this component of the compensation under these agreements is 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 CPAs is accounted for as an operating lease and is reflected as contract revenue in the condensed consolidated statements of operations. We recognized $39.5 million and $41.0 million of lease revenue for the three months ended March 31, 2022 and 2021, respectively, and $79.8 million and $90.5 million during the six months ended March 31, 2022 and 2021, respectively. We have not separately stated aircraft rental income in the condensed consolidated statements of operations because the use of the aircraft is not a separate activity from the total service provided under our CPAs.
We have entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease 18 CRJ-700 aircraft as of March 31, 2022. The lease agreements are accounted for as operating leases and have a term of nine (9) years beginning on the delivery date of each aircraft. Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet’s completion of qualifying maintenance events defined in the agreements. Lease revenue for fixed monthly rent payments is recognized ratably within contract revenue. Lease revenue for supplemental rent is deferred and recognized within contract revenue when it is probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term.
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 March 31, 2022, we recognized $14.7 million of lease incentive assets, net of amortization, and $11.5 million of related lease incentive obligations for reimbursement of certain aircraft maintenance costs defined within the lease agreements. Lease incentive assets are amortized on a straight-line basis and recognized as a reduction to lease revenue over the lease term.
Lease revenue recognized under the GoJet agreements, net of amortization of the lease incentive assets, was $6.8 million and $13.3 million for the three and six months ended March 31, 2022, respectively. Amounts deferred for supplemental rent payments totaled $1.9 million as of March 31, 2022.
The following table summarizes future minimum rental income under operating leases related to leased aircraft that had remaining non-cancelable lease terms as of March 31, 2022 (in thousands):
10
Periods Ending
September 30, |
|
Total Payments |
|
2022 (remainder of) |
|
$ |
9,828 |
|
2023 |
|
|
19,656 |
|
2024 |
|
|
19,656 |
|
2025 |
|
|
19,656 |
|
2026 |
|
|
19,656 |
|
Thereafter |
|
|
72,474 |
|
Total |
|
$ |
160,926 |
|
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.
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. Certain 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. In determining the present value of lease payments, we use either the implicit rate in the lease when it is readily determinable or our estimated incremental borrowing rate, based on information available at the lease commencement. Our lease terms 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 11% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. Additionally, any remaining ROU assets and lease liabilities are written off.
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, they 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 the 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 March 31, 2022 and September 30, 2021 were $4.4 million and $4.8 million, respectively. We recognized $0.2 million and $1.1 million of the deferred credits within contract revenue during the three months ended March 31, 2022 and 2021, respectively, and $0.4 million and $1.9 million during the six months ended March 31, 2022 and 2021, respectively.
11
Maintenance Expense
We operate under an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred.
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 $0.4 million and $0.0 million for the three months ended March 31, 2022 and 2021, respectively, and $0.6 million and $0.0 million for the six months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and September 30, 2021, our deferred heavy maintenance balance, net of accumulated amortization, was $5.3 million and $3.5 million, respectively.
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.
Engine overhaul expense totaled $4.8 million and $6.9 million for the three months ended March 31, 2022 and 2021, respectively, of which $4.6 million and $2.2 million, respectively, was pass-through expense. Engine overhaul expense totaled $10.1 million and $21.3 million for the six months ended March 31, 2022 and 2021, respectively, of which $8.4 million and $11.8 million, respectively, was pass-through expense. Airframe C-check expense totaled $4.7 million and $14.1 million for the three months ended March 31, 2022 and 2021, respectively, of which $0.5 million and $5.6 million, respectively, was pass-through expense. Airframe C-check expense totaled $13.8 million and $24.2 million for the six months ended March 31, 2022 and 2021, respectively, of which $0.5 million and $12.7 million, respectively, was pass-through expense.
Assets Held for Sale
We classify assets as held for sale when our management approves and commits to a formal plan of sale that is probable of being completed within one year. Assets designated as held for sale are recorded at the lower of their current carrying value or their fair market value, less costs to sell, beginning in the period in which the assets meet the criteria to be classified as held for sale. See Note 6 for further discussion of our assets classified as held for sale as of March 31, 2022.
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 March 31, 2022, 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.
12
Significant customers are those which represent more than 10% of our total revenue or net accounts receivable balance at each respective balance sheet date. All of our revenue for the three and six months ended March 31, 2022 and 2021 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 March 31, 2022 and September 30, 2021 was derived from these agreements.
American accounted for approximately 46% and 45% of our total revenue for the three months ended March 31, 2022 and 2021, respectively, and 46% and 46% of our total revenue for the six months ended March 31, 2022 and 2021, respectively. United accounted for approximately 47% and 53% of our total revenue for the three months ended March 31, 2022 and 2021, respectively, and 48% and 52% of our total revenue for the six months ended March 31, 2022 and 2021, respectively. A termination of either the American or United CPA would have a material adverse effect on our business prospects, financial condition, results of operations, and cash flows.
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. Our allowance for doubtful accounts was not material as of March 31, 2022 or September 30, 2021. If our ability to collect these receivables and the financial viability of our major partners is materially different than estimated, our estimate of the allowance for credit losses could be materially impacted.
Information about our intangible assets as of March 31, 2022 and September 30, 2021, is as follows (in thousands):
|
|
March 31, |
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Customer relationship |
|
$ |
43,800 |
|
|
$ |
43,800 |
|
Accumulated amortization |
|
|
(37,519 |
) |
|
|
(37,008 |
) |
Net carrying value |
|
$ |
6,281 |
|
|
$ |
6,792 |
|
Total amortization expense recognized was $0.3 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively, and $0.5 million and $0.6 million for the six months ended March 31, 2022 and 2021, respectively. We expect to record amortization expense of $0.5 million for the remainder of 2022, and $0.9 million, $0.8 million, $0.7 million, and $0.6 million for fiscal years 2023, 2024, 2025 and 2026, respectively, and $2.8 million of amortization expense thereafter.
As of March 31, 2022, our intangible assets’ remaining weighted average term is 13.5 years.
During the three months ended March 31, 2022, our management committed to a formal plan to sell certain of our CRJ-900 and CRJ-200 aircraft. The aircraft are expected to be disposed of via sale within the next 12 months. Accordingly, we determined the aircraft met the criteria to be classified as assets held for sale and have separately presented them in our condensed consolidated balance sheet at the lower of their current carrying value or their fair market value less costs to sell. The fair values are based upon observable and unobservable inputs, including recent purchase offers and market trends and conditions. The assumptions used to determine the fair value of our assets held for sale are subject to inherent uncertainty and could produce a wide range of outcomes which we will continue to monitor in future periods as new information becomes available. Prior to the ultimate sale of the assets, subsequent changes in our estimate of the fair value of our assets held for sale will be recorded as a gain or loss with a corresponding adjustment to the assets’ carrying value. In connection with the classification of these assets as held for sale, we recorded impairment losses of $39.5 million, which are reflected within impairment of assets held for sale in our condensed consolidated statements of operations and comprehensive loss.
13
7. |
Balance Sheet Information |
Certain significant amounts included in the condensed consolidated balance sheets consisted of the following (in thousands):
|
|
March 31, |
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Expendable parts and supplies, net: |
|
|
|
|
|
|
|
|
Expendable parts and supplies |
|
$ |
31,817 |
|
|
$ |
29,297 |
|
Less: obsolescence and other |
|
|
(5,562 |
) |
|
|
(4,830 |
) |
|
|
$ |
26,255 |
|
|
$ |
24,467 |
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
Prepaid aviation insurance |
|
$ |
2,236 |
|
|
$ |
2,171 |
|
Lease incentives |
|
|
1,792 |
|
|
|
1,445 |
|
Other |
|
|
3,580 |
|
|
|
3,269 |
|
|
|
$ |
7,608 |
|
|
$ |
6,885 |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Aircraft and other flight equipment |
|
$ |
1,507,441 |
|
|
$ |
1,611,544 |
|
Other equipment |
|
|
5,369 |
|
|
|
4,934 |
|
Leasehold improvements |
|
|
2,776 |
|
|
|
2,776 |
|
Vehicles |
|
|
950 |
|
|
|
1,184 |
|
Building |
|
|
699 |
|
|
|
699 |
|
Furniture and fixtures |
|
|
298 |
|
|
|
300 |
|
Total property and equipment |
|
|
1,517,533 |
|
|
|
1,621,437 |
|
Less: accumulated depreciation |
|
|
(453,184 |
) |
|
|
(469,546 |
) |
|
|
$ |
1,064,349 |
|
|
$ |
1,151,891 |
|
Other assets: |
|
|
|
|
|
|
|
|
Investments in equity securities |
|
$ |
19,904 |
|
|
$ |
25,149 |
|
Lease incentives |
|
|
12,904 |
|
|
|
10,957 |
|
Other |
|
|
65 |
|
|
|
15 |
|
|
|
$ |
32,873 |
|
|
$ |
36,121 |
|
Other accrued expenses: |
|
|
|
|
|
|
|
|
Accrued property taxes |
|
$ |
3,940 |
|
|
$ |
8,783 |
|
Accrued interest |
|
|
2,546 |
|
|
|
2,565 |
|
Accrued vacation |
|
|
5,190 |
|
|
|
5,936 |
|
Other |
|
|
19,730 |
|
|
|
16,373 |
|
|
|
$ |
31,406 |
|
|
$ |
33,657 |
|
Other noncurrent liabilities: |
|
|
|
|
|
|
|
|
Warrant liabilities |
|
$ |
25,225 |
|
|
$ |
21,964 |
|
Lease incentive obligations |
|
|
6,503 |
|
|
|
6,358 |
|
Other |
|
|
4,666 |
|
|
|
6,269 |
|
|
|
$ |
36,394 |
|
|
$ |
34,591 |
|
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 held and used existed and have determined that no charges were deemed necessary under applicable accounting standards as of March 31, 2022. Our assumptions about future conditions relevant to the assessment of potential impairment of our long-lived assets held and used 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 $20.1 million and $20.4 million for the three months ended March 31, 2022 and 2021, respectively, and $40.6 million and $40.6 million for the six months ended March 31, 2022 and 2021, respectively.
14
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 $16.4 million based on publicly available information as of the grant date. In September 2021, the merger between Archer and a special purpose acquisition company (“SPAC”) was completed, resulting in a readily determinable fair value of our investments in Archer. Accordingly, gains and losses associated with changes in the fair value of our investments in Archer are measured in earnings, in accordance with ASC 321, Investments – Equity Securities. In connection with the closing of the merger between Archer and the SPAC, we purchased 500,000 Class A common shares in Archer for $5.0 million, and obtained an additional warrant to purchase shares of Archer with a total grant date value of $5.6 million. All of our vested warrants have been exercised into shares of Archer common stock.
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.
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 $5.0 million of preferred stock in Heart Aerospace Incorporated (“Heart”), a privately held company. Our investment in Heart does not have a readily determinable fair value, so we account for the investment using the measurement alternative under ASC 321 and measure the investment at initial cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment, or other features that indicate a change to fair value is warranted. Any changes in fair value from the initial cost of the investment in preferred stock are recognized as increases or decreases on our balance sheet and as net gains or losses on investments in equity securities. The initial investment in preferred stock was measured at cost of $5.0 million.
In connection with a negotiated forward purchase contract for hybrid-electric vertical takeoff and landing (“VTOL”) aircraft executed in February 2022, we obtained a warrant giving us the right to acquire a number of shares of common stock in the privately-held manufacturer of the VTOL aircraft. These investments do not have a readily determinable fair value, so we account for them using the measurement alternative under ASC 321 and measure the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment or other features that indicate a discount to fair value is warranted. Any changes in fair value from the grant date value of the warrant assets will be recognized as increases or decreases to the investment on our balance sheet and as net gains or losses on investments equity securities. We estimated the initial warrant asset value to be $3.2 million based on prices of similar investments in the same issuer. The grant date value of the warrants, $3.2 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the VTOL aircraft contemplated in the related forward purchase agreement.
Total net losses on our investments in equity securities totaled $2.3 million and $8.7 million during the three and six months ended March 31, 2022, respectively, and are reflected in loss on investments, net in our condensed consolidated statement of operations. As of March 31, 2022, the aggregate carrying amount of our investments in equity securities was $19.9 million, and the carrying amount of our investments without readily determinable fair values was $9.0 million.
15
8. |
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:
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 our assets held for sale and investments in equity securities described in Notes 6 and 7, respectively, we did not measure any of our assets or liabilities at fair value on a recurring or nonrecurring basis as of March 31, 2022 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 total long-term debt, including current maturities, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
September 30, 2021 |
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Long-term debt and finance leases, including current maturities(1) |
$ |
652.0 |
|
|
$ |
609.7 |
|
|
$ |
670.3 |
|
|
$ |
676.8 |
|
(1) |
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs. |
16
9. |
Long-Term Debt, Finance Leases, and Other Borrowings |
Long-term debt as of March 31, 2022 and September 30, 2021, consisted of the following (in thousands):
|
|
March 31, |
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Senior and subordinated notes payable to secured parties, collateralized |
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2027(1) |
|
|
80,244 |
|
|
|
86,551 |
|
Notes payable to secured parties, collateralized by the underlying |
|
|
|
|
|
|
|
|
aircraft, due 2028(2) |
|
|
141,690 |
|
|
|
152,100 |
|
Senior and subordinated notes payable to secured parties, collateralized |
|
|
|
|
|
|
|
|
by the underlying aircraft, due 2028(3) |
|
|
114,883 |
|
|
|
122,762 |
|
Other obligations due to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
equipment, due 2023(4) |
|
|
3,448 |
|
|
|
4,581 |
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
equipment, due 2024(5) |
|
|
36,290 |
|
|
|
45,559 |
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
aircraft, due 2023(6) |
|
|
21,875 |
|
|
|
30,625 |
|
Notes payable to financial institution due 2023(7) |
|
|
3,000 |
|
|
|
4,000 |
|
Revolving credit facility(8) |
|
|
15,630 |
|
|
|
22,930 |
|
Notes payable to U.S. Treasury due 2025(9) |
|
|
204,947 |
|
|
|
201,227 |
|
Notes payable to financial institution, collateralized by the underlying |
|
|
|
|
|
|
|
|
equipment, due 2027(10) |
|
|
29,943 |
|
|
|
— |
|
Gross long-term debt, including current maturities |
|
|
651,950 |
|
|
|
670,335 |
|
Less unamortized debt issuance costs |
|
|
(10,368 |
) |
|
|
(9,295 |
) |
Less notes payable warrants |
|
|
(8,454 |
) |
|
|
(9,630 |
) |
Net long-term debt, including current maturities |
|
|
633,128 |
|
|
|
651,410 |
|
Less current portion, net of unamortized debt issuance costs |
|
|
(111,671 |
) |
|
|
(111,710 |
) |
Net long-term debt |
|
$ |
521,457 |
|
|
$ |
539,700 |
|
(1) |
In fiscal 2015, we financed seven CRJ-900 aircraft with $170.2 million in debt. The senior notes payable of $154.7 million bear interest at monthly LIBOR plus 2.71% 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. We imputed an interest rate of 6.25% on the subordinated notes payable and recorded a related discount of $8.1 million, which is being accreted to interest expense over the term of the notes. |
(2) |
In fiscal 2016, we financed ten E-175 aircraft with $246.0 million in debt under an EETC financing arrangement (see discussion below). The debt bears interest ranging from 4.75% to 6.25% and requires semi-annual principal and interest payments. |
(3) |
In fiscal 2016, we financed eight E-175 aircraft with $195.3 million in debt. The senior notes payable of $172.0 million bear interest at the three-month LIBOR plus a spread ranging from 2.20% to 2.32% and require quarterly principal and interest payments. The subordinated notes payable bear interest at 4.50% and require quarterly principal and interest payments. |
(4) |
In February 2018, we leased two spare engines. The leases were determined to be finance leases as the leases contain a bargain purchase option at the end of the term. Imputed interest is 9.128% and the leases require monthly payments. |
(5) |
In January 2019, we financed certain flight equipment with $91.2 million in debt. The debt bears interest at the monthly LIBOR plus 3.10% and requires monthly principal and interest payments. |
(6) |
In June 2019, we financed ten CRJ-700 aircraft with $70.0 million in debt, which were previously leased. The debt bears interest at the monthly LIBOR plus 5.00% and requires monthly principal and interest payments. |
(7) |
In September 2019, we financed certain flight equipment for $8.0 million. The debt bears interest at the monthly LIBOR plus 5.00% and requires monthly principal and interest payments. |
(8) |
In September 2019, we extended the term on our $35.0 million working capital draw loan by three years, which now terminates in September 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. |
(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 $200.0 million that matures on October 30, 2025. On October 30, 2020, we borrowed $43.0 million and on November 13, 2020, we borrowed an additional $152.0 million. These amounts bear interest at the three-month LIBOR plus 3.50%. No further borrowings are available under the loan and guarantee agreement. |
17
(10) |
In December 2021, we financed the purchase of spare engines with $30.8 million in debt. The debt bears interest at monthly LIBOR plus 4.25% and requires monthly principal and interest payments over a term of six years. The financing arrangement allows for additional borrowings to finance future engine purchases. |
Principal maturities of long-term debt as of March 31, 2022, and for each of the next five years are as follows (in thousands):
Periods Ending
September 30, |
|
Total Principal |
|
2022 (remainder of) |
|
$ |
64,018 |
|
2023 |
|
|
94,670 |
|
2024 |
|
|
66,417 |
|
2025 |
|
|
61,734 |
|
2026 |
|
|
268,972 |
|
Thereafter |
|
|
96,139 |
|
|
|
$ |
651,950 |
|
The carrying value of collateralized aircraft and equipment as of March 31, 2022 was $1,029.7 million.
Enhanced Equipment Trust Certificate ("EETC")
In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. As of March 31, 2022, we had $141.7 million of equipment notes outstanding issued under the EETC financing included in long-term debt in 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.
We evaluated whether the pass-through trust formed for the EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated. We have determined we do not have a variable interest in 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 $35.0 million working capital draw loan by three years, which now terminates in September 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. As of March 31, 2022, the amount outstanding on the working capital draw loan was $15.6 million.
Our CIT revolving credit facility includes a minimum interest and rental coverage ratio covenant. In March and April 2022, we entered into amendments to the CIT revolving credit facility which lowered the minimum interest and rental coverage ratio covenant for the December 2021, March 2022, and June 2022 quarters. As a result, we are in compliance with this covenant.
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 $200.0 million that matures in October 2025 (“the Treasury Loan”). During the first quarter of fiscal 2021, we borrowed an aggregate of $195.0 million. No further borrowings are available under the Treasury Loan.
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) 3.50%. Accrued interest on the loans is payable in arrears, or paid-in-kind by increasing the principal balance of the loan by such interest payment, on the first business day following the 14th day of each March, June, September, and December.
18
All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025. Through March 31, 2022, interest on the Treasury Loan has been paid-in-kind by increasing the principal amount of the loan by the amount of such interest due on the interest payment date. Our obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, flight simulators, and tooling (collectively, the “Collateral”). The obligations under the Treasury Loan are guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds were used for general corporate purposes and operating expenses, to the extent permitted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Voluntary prepayments of the Treasury Loan may be made, in whole or in part, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed. Mandatory prepayments of the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral, and certain insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Treasury Loan) occurs with respect to Mesa Airlines, we will be required to repay the loans outstanding under the Treasury Loan.
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 1.6 to 1.0, we are required either to provide additional Collateral (which may include cash collateral) to secure the obligations under the Treasury Loan or repay the term loans under the Treasury Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.6 to 1.0.
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.
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 4,899,497 shares of our common stock at an exercise price of $3.98 per share, which was the closing price of the common stock on April 9, 2020. The exercise price and number of shares of common stock issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at our option. The fair value of the warrants was estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Loan in the condensed consolidated balance sheet.
In April 2022, we entered into an agreement with the U.S. Treasury to lower the minimum collateral coverage ratio covenant to 1.5 to 1.0 through September 30, 2022. As a result, we are in compliance with this covenant as of March 31, 2022.
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 $54.0 million through November 2022. In December 2021, we borrowed an aggregate of $30.8 million under the loan agreement, which matures in December 2027. The borrowed amounts are collateralized by the underlying engines and require monthly principal and interest payments until maturity. Borrowings under the loan agreement bear interest at the monthly LIBOR plus 4.25%. The borrowings are the obligation of the newly-formed LLC and are guaranteed by Mesa Airlines, Inc.
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.
19
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 March 31, 2022, we were in compliance with all debt covenants.
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 March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net income (loss) attributable to Mesa Air Group |
|
$ |
(42,783 |
) |
|
$ |
5,689 |
|
|
$ |
(57,057 |
) |
|
$ |
19,807 |
|
Basic weighted average common shares outstanding |
|
|
36,048 |
|
|
|
35,628 |
|
|
|
36,005 |
|
|
|
35,579 |
|
Add: Incremental shares for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants |
|
|
— |
|
|
|
3,038 |
|
|
|
— |
|
|
|
2,183 |
|
Dilutive effect of restricted stock |
|
|
— |
|
|
|
766 |
|
|
|
— |
|
|
|
620 |
|
Diluted weighted average common shares outstanding |
|
|
36,048 |
|
|
|
39,432 |
|
|
|
36,005 |
|
|
|
38,382 |
|
Net income (loss) per common share attributable to Mesa Air Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.19 |
) |
|
$ |
0.16 |
|
|
$ |
(1.58 |
) |
|
$ |
0.56 |
|
Diluted |
|
$ |
(1.19 |
) |
|
$ |
0.14 |
|
|
$ |
(1.58 |
) |
|
$ |
0.52 |
|
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 anti-dilutive under the treasury stock method are 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.
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 March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Warrants |
|
|
818 |
|
|
|
— |
|
|
|
1,671 |
|
|
|
— |
|
Restricted stock |
|
|
84 |
|
|
|
— |
|
|
|
235 |
|
|
|
— |
|
|
|
|
902 |
|
|
|
— |
|
|
|
1,906 |
|
|
|
— |
|
As discussed in Note 9, we issued warrants to the U.S. Treasury to purchase shares of our common stock, no par value, at an exercise price of $3.98 per share. The exercise price and number of shares issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at our option. The warrants were accounted for within equity at a grant date fair value determined under the Black-Scholes option pricing model. As of March 31, 2022, 4,899,497 warrants were issued and outstanding.
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.
20
Our effective tax rate (ETR) from continuing operations was 22.4% and 22.4% for the three and six months ended March 31, 2022, respectively, and 24.9% and 25.3% for the three and six months ended March 31, 2021, respectively. Our ETR during the three and six months ended March 31, 2022 was different from the prior year tax rates primarily as a result of vesting of stock compensation, changes in the valuation allowance against state net operating losses, and changes in state statutory rates. For the six months ended March 31, 2022, 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.
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 $541.3 million and $235.7 million, respectively, which expire in fiscal years 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.
13. |
Share-Based Compensation and Stock Repurchases |
Restricted Stock
We grant 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 5 years for employees and one year for members of the Board of Directors. The restricted common stock underlying RSUs are not deemed issued or outstanding upon grant, and do not carry any voting rights.
The restricted share activity for the six months ended March 31, 2022 is summarized as follows:
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
|
of Shares |
|
|
Fair Value |
|
Restricted shares unvested at September 30, 2021 |
|
|
1,006,206 |
|
|
$ |
6.22 |
|
Granted |
|
|
187,993 |
|
|
|
4.72 |
|
Vested |
|
|
(130,094 |
) |
|
|
7.10 |
|
Forfeited |
|
|
(28,695 |
) |
|
|
10.08 |
|
Restricted shares unvested at March 31, 2022 |
|
|
1,035,410 |
|
|
$ |
5.73 |
|
As of March 31, 2022, there was $4.3 million of total unrecognized compensation cost related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.6 years.
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 March 31, 2022 and 2021 was $0.7 million and $0.8 million, respectively, and for the six months ended March 31, 2022 and 2021 was $1.4 million and $1.7 million, respectively.
We repurchased 15,696 shares of our common stock for $0.1 million to cover the income tax obligation on vested employee equity awards during the six months ended March 31, 2022.
14. |
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 elect to contribute 1% to 15% of their eligible compensation during each semi-annual offering period to purchase Mesa Air Group, Inc. ordinary shares at a 10% discount.
A maximum of 500,000 Mesa Air Group, Inc. ordinary shares may be issued under the 2019 ESPP. As of March 31, 2022, eligible employees purchased and we issued an aggregate of 247,761 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP, 53,567 of which were purchased and issued during the three and six months ended March 31, 2022.
21
As of March 31, 2022, we leased 18 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The leases generally require us 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. We expect that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased.
Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $11.0 million and $11.3 million for the three months ended March 31, 2022 and 2021, respectively, and $22.2 million and $22.7 million for the six months ended March 31, 2022 and 2021, respectively.
The components of our operating lease costs were as follows (in thousands):
|
|
Three Months Ended March 31, |
|
|
Six Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Operating lease costs |
|
$ |
9,663 |
|
|
$ |
9,697 |
|
|
$ |
19,144 |
|
|
$ |
19,405 |
|
Variable and short-term lease costs |
|
|
1,346 |
|
|
|
1,646 |
|
|
|
3,081 |
|
|
|
3,335 |
|
Total lease costs |
|
$ |
11,009 |
|
|
$ |
11,343 |
|
|
$ |
22,225 |
|
|
$ |
22,740 |
|
As of March 31, 2022, our operating leases have a remaining weighted average lease term of 3.7 years and our operating lease liabilities were measured using a weighted average discount rate of 4.4%.
During the three and six months ended March 31, 2022, we recorded a $0.4 million impairment of certain operating lease ROU assets associated with the abandonment of a leased facility.
16. |
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. We agreed to purchase and take delivery of ten (10) new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. The total purchase commitment related to these ten (10) engines is approximately $52.2 million. We also have options to purchase an additional ten (10) similar engines beyond 2022. As of March 31, 2022, we have purchased five of the engines pursuant to the Amended and Restated Letter Agreement No. 13-3 with delivery of the remaining five (5) engines expected to take place during calendar year 2022.
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 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.
On March 2, 2022, the parties in the federal lawsuit attended a mediation and reached an agreement in principle to settle all claims asserted in that action for the sum of $5.0 million, which will be paid by the Company’s directors’ and officers’ insurance carriers. The settlement is subject to final documentation and preliminary and final approval by the federal court. The motion for preliminary approval must be filed on or before May 9, 2022. If preliminary and final approval is obtained, the claims of all putative class members, whether asserted in the federal or state actions, will be extinguished, unless and only to the extent that a particular class member takes affirmative steps to have its claims excluded.
In addition, we are subject to certain legal actions which we consider routine to our business activities.
22
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 7, in February 2021, we entered into a forward purchase contract with Archer for a number of eVTOL aircraft. The aggregate base commitment for the eVTOL aircraft is $200.0 million, with an option to purchase additional aircraft. Our obligation to purchase the eVTOL aircraft is subject to the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met.
As described in Note 7, 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 $1,200.0 million, with an option to purchase additional aircraft. Our obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and conditions, which may or may not be met.
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.
As described in Note 9, in April 2022 we entered into an agreement with the U.S. Treasury to lower the minimum collateral coverage ratio covenant to 1.5 to 1.0 through September 30, 2022.
As described in Note 9, in April 2022 we entered into an amendment to the CIT revolving credit facility which lowered the minimum financial ratio covenant for the March 2022 and June 2022 quarters.
23