Notes to Consolidated Financial Statements
1.
|
Organization and Operations
|
The Company
Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary operates as a regional air carrier, providing scheduled passenger service and cargo flight service. As of September 30, 2021, the Company served 129 cities in 39 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport, and operated under the Company’s Capacity Purchase Agreements, Flight Services Agreement or as operational spares, a fleet of 153 aircraft with approximately 507 daily departures. As of September 30, 2021, Company also leased 14 aircraft to a third party.
The Company's operations are conducted by its regional airline subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), providing passenger flight services to major air carriers under capacity purchase agreements and cargo flight services under a flight services agreement. Mesa Airlines operates as American Eagle under a capacity purchase agreement with American Airlines, Inc. ("American"), as United Express under a capacity purchase agreement with United Airlines, Inc. ("United"), and as DHL Express under a flight services agreement with DHL Network Operations (USA), Inc. (“DHL”). All of the Company's consolidated contract revenues for the fiscal years ended September 30, 2021, 2020 and 2019 were derived from operations associated with these two capacity purchase agreements, flight services agreement, and leases of aircraft to a third party.
The financial arrangements between the Company and its major partners involve a revenue-guarantee arrangement (i.e. a "capacity purchase agreement") whereby the major partner pays a monthly guaranteed amount 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 certain landing fees. Under the terms of these capacity purchase agreements, the major partner 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 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 these shares raised gross proceeds of approximately $124,247,820. The Company did not receive any proceeds from the sale of the Option Shares by the selling shareholders.
79
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") (see Note 13: "Share-Based Compensation"), 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.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world significantly reduced demand for air travel beginning in our fiscal year 2020. This reduction in demand had an unprecedented and materially adverse impact on our revenues and financial position in the prior year that continued into fiscal year 2021. The Company has seen increased demand for air travel in fiscal year 2021 resulting from lessening of travel and gathering restrictions in the United States, particularly in the second half of our fiscal year; however as the duration of the impact of the pandemic remains uncertain, the pandemic has continued to negatively impact demand for air travel. Since a portion of the consideration we receive under our capacity purchase agreements is fixed, the impact to Mesa from the COVID-19 pandemic was partially mitigated. In addition, we have limited exposure to fluctuations in passenger traffic, ticket, and fuel prices under the terms of our capacity purchase agreements with American and United. While our fixed contract consideration remained mostly unchanged, the variable revenue based on number of block hours was significantly reduced beginning in the last few weeks in March and during the remainder of fiscal year 2020, as well as the first half of fiscal year 2021. The funds the Company received under the Payroll Support Program (and related extensions) and its Loan and Guarantee Agreement with the U.S. Treasury, coupled with the Company’s diligent cost saving measures, helped to partially offset the negative impacts of COVID-19 on the Company’s business. Additionally, the Company introduced cost saving initiatives in the prior period which contributed to current period liquidity as the demand for air travel increased during fiscal 2021. As described in Note 3: “Contract Revenue and Pass-through and Other Revenue”, a portion of the Company’s reduced labor costs resulting from government assistance was passed on to our major partners in the form of temporary rate reductions during the 2021 fiscal year.
Balance Sheet, Cash Flow and Liquidity. As of September 30, 2021, our cash and cash equivalents totaled $120.5 million. Beginning in the prior year, we took the following actions to increase liquidity and strengthen our financial position:
|
▪
|
Drew $23.0 million from our previously undrawn revolving credit facility with CIT Bank, N.A.
|
|
▪
|
In April 2020, we were granted $92.5 million in emergency relief through the Payroll Support Program of the CARES Act, which was received as of September 30, 2020. In September 2020, we were notified that, based on funding availability, recipients that were currently in compliance with signed payroll support program agreements would receive an approximate 2% increase in their award amount. As a result, we were granted an additional $2.7 million for a total grant of $95.2 million, which was received in October 2020. We utilized $83.8 million of these proceeds to offset payroll expenses in the year ended September 30, 2020 and the remaining $11.4 million was utilized in Q1 2021. During fiscal year 2021, we received aggregate proceeds of $56.0 million and $52.2 million under Payroll Support Program Extensions PSP2 and PSP3, respectively, all of which was utilized and recognized as an offset to payroll expenses in the current fiscal year.
|
|
▪
|
The CARES Act also provided for up to $25 billion in secured loans to the airline industry. In October 2020, the Company entered into a five-year Loan and Guarantee Agreement (the “Treasury Loan”) with the U.S. Department of the Treasury which provided the Company with a secured loan facility to borrow up to $200.0 million under the CARES Act. On October 30,
|
80
|
|
2020, the Company borrowed $43.0 million under the Treasury Loan and on November 13, 2020, the Company borrowed an additional $152.0 million for a total of $195.0 million. No further borrowings are available under the Treasury Loan. All borrowings under the Treasury Loan bear interest at an annual rate based on Adjusted LIBO (as defined in the Loan Agreement) plus 3.5%. Accrued interest on the loans is payable in arrears on the first business day following the 14th day of each March, June, September and December (beginning with December 15, 2020), and on the maturity date. The proceeds were used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. As described in Note 9, the Treasury Loan is subject to certain financial and other covenants.
|
American Capacity Purchase Agreement
As of September 30, 2021, the Company operated 40 CRJ-900 aircraft for American under a capacity purchase agreement (the “American CPA”). In exchange for providing flight services under our American CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.
On November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement (the “Amended and Restated American CPA” or the “American CPA”) which was effective as of January 1, 2021 and amended and restated the Code Share and Revenue Sharing Agreement dated as of March 20, 2001 (as amended, supplemented and modified, the “Existing CPA”), between Mesa Airlines and American. The Amended and Restated American CPA included the following amendments to the Existing CPA:
|
▪
|
Extended the American CPA for a five-year term, commencing January 1, 2021 to December 31, 2025;
|
|
▪
|
Reduced the number of aircraft operated under the agreement to 40 CRJ-900 aircraft; and
|
|
▪
|
Provided American the option in its sole discretion to withdraw up to: (a) 10 aircraft during calendar year 2021, (b) 5 aircraft during each of calendar years 2022 and 2023, and (c) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter American has the right to remove the last 20 aircraft.
|
During fiscal year 2021, we entered into amendments to the Amended and Restated American CPA. The amendments reflect the following:
|
▪
|
The addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) 3 aircraft, from January 5, 2021 to March 3, 2021, (ii) increasing to a total of 5 aircraft, from March 4, 2021 to May 5, 2021, (iii) decreasing to a total of 3 aircraft, from May 6, 2021 to June 2, 2021, and (iv) increasing to a total of 5 aircraft, from June 3, 2021 to August 17, 2021.
|
|
▪
|
A temporary reduction in certain rates for the period December 2020 through September 2021.
|
|
▪
|
The waiver of the operational performance metrics for the month of August 2021, and extension of the deadline for completing certain cabin interior and refurbishment requirements as defined in the American CPA to December 31, 2021.
|
81
|
▪
|
Increases to incentive and penalty compensation under the American CPA, effective beginning in October 2021.
|
Our American CPA is subject to termination prior to its expiration, subject to our right to cure, 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;
|
|
▪
|
Failure by us or American to perform the covenants, conditions, or provisions of our American CPA, subject to 15 days' notice and cure rights;
|
|
▪
|
If we are required by the FAA or the DOT to suspend operations and we have not resumed operations within three business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft, American may terminate the agreement;
|
|
▪
|
If our controllable flight completion factor (“CCF”) or controllable on time departures (“CD0”) fall below certain levels for a specified period of time, subject to our right to cure;
|
|
▪
|
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.
|
Our American CPA is also subject to withdrawal rights, in addition to the withdrawal rights discussed above, providing American with the right and option to withdraw one aircraft upon each occurrence of the following:
|
▪
|
If our CCF falls below certain levels for a specified period of time;
|
|
▪
|
If our CD0 falls below certain levels for a specified period of time; or
|
|
▪
|
Failure to meet certain cabin interior and refurbishment requirements as defined in the American CPA.
|
American had a 0.0%, 0.0% and 7.1% ownership interest in the Company, calculated on a fully diluted basis as of September 30, 2021, 2020 and 2019, respectively. The related party amounts presented on the consolidated statements of operations and comprehensive income pertain to American as of and for the year ended September 30, 2019.
United Capacity Purchase Agreement
As of September 30, 2021, we operated 20 E-175LL and 60 E-175 aircraft for United under our United Capacity Purchase Agreement (the “United CPA”). In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
Under our United CPA, United owns 42 of the 60 E-175 and all of the E-175LL aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"), and component maintenance for the aircraft owned by United.
82
On November 26, 2019, we amended and restated our United CPA to, among other things, incorporate the terms of the 14 prior amendments to the CPA and to extend the term thereof through the addition of twenty (20) new Embraer E-175LL aircraft to the scope of the CPA. These new aircraft were to be financed and owned by us and operated for a period of twelve (12) years from the in-service date. Deliveries of the new E-175LL aircraft were scheduled to begin in May 2020. In March 2020, the deliveries of the new E-175LL aircraft were negotiated between United and Embraer to begin in September 2020 and be completed by the quarter ended June 30, 2021. Deliveries of all twenty of the E-175LL aircraft took place during our fiscal year 2021.
In addition to adding the 20 new E-175LL aircraft to the United CPA, we extended the term of our 42 E-175 aircraft leased from United for an additional five (5) years, which now expire between 2024 and 2028. The Company also owns 18 E-175 aircraft that expire in 2028. As part of the amended and restated 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 September 30, 2021, had entered into agreements to lease 14 of the 20 CRJ-700 aircraft.
On November 4, 2020, we amended and restated our United CPA to, among other things, amend the ownership by United, in lieu of Mesa, of the 20 E-175LL aircraft. The new aircraft are financed by United and leased to the Company at nominal amounts to operate for a period of twelve (12) years from the aircraft acceptance and in-service date, expiring between November 2032 and June 2033. We agreed to adjusted rates to account for the change in ownership of the E-175LL aircraft, relief from certain provisions related to minimum utilization until December 31, 2021, and an additional right of United to remove one or more E-175LL aircraft in the event that Mesa fails to meet certain financial covenants. We also agreed to a one-time provision for United to prepay $81.5 million under the United CPA for future performance by Mesa (the “Prepayment”) and the application of certain discounts to certain payment obligations of United under the United CPA. Weekly payments under the United CPA were discounted following the Prepayment, with $65.1 million of the Prepayment earned during our first and second quarters of fiscal 2021 and the remaining $16.4 million repaid to United during the second quarter of fiscal 2021. The terms of the Prepayment also included affirmative and negative covenants and events of default customary for transactions of this type. Proceeds from the Prepayment were used to retire debt on certain airframes and engines that serve as collateral under the term loan facility provided to Mesa Airlines by the U.S. Treasury.
In September 2021, we amended our United CPA to, among other things, adjust certain rates to account for the change in ownership of the E-175LL aircraft, and provide for temporary reduced rates during periods in which the Company receives government assistance.
Our United CPA is subject to termination rights prior to its expiration, including:
|
▪
|
By United if certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;
|
|
▪
|
By United if we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to thirty (30) days' notice and cure rights;
|
|
▪
|
If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement;
|
|
▪
|
By United 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
|
83
|
▪
|
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, the Company entered into a Flight Services Agreement (“FSA”) with DHL. Under the terms of this agreement, Mesa operates two Boeing 737-400F aircraft to provide cargo air transportation services to DHL. In exchange for providing such services, the Company receives a fee per block hour with a minimum block hour guarantee. The Company is eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including LLPs, landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by the Company.
The 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 following termination rights prior to its expiration:
|
▪
|
At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 day’s written notice.
|
|
▪
|
Failure to comply with performance standards for three consecutive measurement periods.
|
|
▪
|
DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications of certain immaterial prior period amounts have been made to conform to the current period presentation.
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 our 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 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
84
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.
Use of Estimates
The preparation of the Company's 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 consolidated financial statements. Actual results could differ from those estimates.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280, "Segment Reporting," we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flying services in accordance with our capacity purchase agreements and flight services agreement.
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. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. He bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.
All of our operating revenue in our 2021, 2020 and 2019 fiscal years was derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party. It is currently impractical to provide certain information on our revenue from our customers for each of our services and geographic information on our revenues and long-lived assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash
Restricted cash primarily includes deposits in trust accounts to collateralize letters of credit and to fund workers' compensation claims, landing fees, and other business needs. Restricted cash is stated at cost, which approximates fair value.
The Company has an agreement with a financial institution for a $6.0 million letter of credit facility to issue letters of credit for landing fees, workers' compensation insurance, and other business needs. Pursuant to such agreement, $3.4 million and $3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of September 30, 2021 and 2020, respectively, which are classified as restricted cash.
Expendable Parts and Supplies
Expendable parts and supplies are stated at cost, less an allowance for obsolescence. The Company provides an allowance for obsolescence for such parts and supplies over the useful life of its aircraft after considering the useful life of each aircraft fleet, the estimated cost of expendable parts
85
expected to be on hand at the end of the useful life, and the estimated salvage value of the parts. This allowance was $3.2 million and $2.8 million as of September 30, 2021 and 2020, respectively.
Property and Equipment
Property and equipment are stated at cost, net of manufacturer incentives, and depreciated over their estimated useful lives to their estimated salvage values, which are 20% for aircraft and rotable spare parts, using the straight-line method.
Estimated useful lives of the various classifications of property and equipment are as follows:
Property and Equipment
|
|
Estimated Useful Life
|
Buildings
|
|
30 years
|
Aircraft
|
|
25 years from the manufacture date
|
Flight equipment
|
|
7-20 years
|
Equipment
|
|
5-9 years
|
Furniture and fixtures
|
|
3-5 years
|
Vehicles
|
|
5 years
|
Rotable spare parts
|
|
Life of the aircraft or term of the lease, whichever is less
|
Leasehold improvements
|
|
Life of the aircraft or term of the lease, whichever is less
|
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if (i) the undiscounted future cash flows are found to be less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value. The Company recognized no impairment charges on property and equipment or other long-lived assets for the years ended September 30, 2021 and 2020.
Fair Value Measurements
The Company accounts for assets and liabilities in accordance with accounting standards that define fair value and establish a consistent framework for measuring fair value on either a recurring or a nonrecurring basis. 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.
|
Debt Financing Costs
Debt financing costs consist of payments made to issue debt related to the purchase of aircraft, flight equipment, and certain flight equipment maintenance costs. The Company defers the costs and
86
amortizes them to interest expense over the term of the debt agreement. Debt financing costs related to a recognized debt liability are presented as a direct deduction from the carrying amount of the related long-term debt on the consolidated balance sheet. Debt financing costs with no related recognized debt liability are presented as assets, with the current portion included in prepaid expenses and other current assets and the noncurrent portion included in other assets on the consolidated balance sheet.
Unutilized Manufacturer Credits
Manufacturer credits received in connection with aircraft purchases that can be used for the future purchase of certain goods and services are recorded as a prepaid asset based on the value of the credits expected to be utilized, and the Company reduces the asset as the credits are utilized to fund such purchases. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets on the consolidated balance sheet.
Intangible Assets
Customer relationships are amortized over their estimated life useful lives. In accordance with ASC 360, Property, Plant, and Equipment, an intangible asset with a finite life that is being amortized is reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset and if the carrying amount of the asset exceeds fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value.
Other Assets
Other noncurrent assets primarily consist of the non-current portion of lease incentives related to our aircraft which Mesa leases to third parties and investments in equity securities.
Lease incentives represent amounts paid or payable by Mesa to the lessee and are amortized as a reduction of lease revenue over the term of the lease. The current portion of the lease incentive assets is included in prepaid expenses and other current assets, and the non-current portion is included in other assets on the consolidated balance sheet.
Investments in equity securities with readily determinable fair values are adjusted to reflect the market value of the investments each reporting period, with corresponding gains and losses reflected in the statement of operations. Investments in equity securities without readily determinable values are measured at cost less impairment, if any, and are adjusted when there are observable prices of similar or identical investments from the same issuer.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records deferred tax assets for the value of benefits expected to be realized from the utilization of state and federal net operating loss carryforwards. The Company periodically reviews these assets to determine the likelihood of realization. To the extent the Company believes some portion of the benefit may not be realizable based on the available sources of income, an estimate of the unrealized position is made, and a valuation allowance is recorded. The Company and its consolidated subsidiaries file a consolidated federal income tax return.
87
Other Noncurrent Liabilities
Other noncurrent liabilities primarily consist of the non-current portion of lease incentive obligations and deposits related to the aircraft which Mesa leases to third parties and vendor credit liabilities for future purchases of electric aircraft.
Revenue Recognition
The Company recognizes revenue when the service is provided under its capacity purchase agreements and flight services agreement. Under these agreements, the Company’s major partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of departures and block hours or flight hours flown. The agreements also include reimbursement of certain direct 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, United reimburses the Company for heavy airframe and engine maintenance, landing gear maintenance, APU maintenance, and component maintenance. The Company also receives compensation under its 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 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 agreements. At the end of each period during the term of an agreement, the Company calculates the incentives or penalties achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable constraint guidance in accordance ASC 606. All revenue recognized under these contracts is presented as the gross amount billed to the major partners. See Note 3: “Contract Revenue and Pass-through and Other Revenue” for further information.
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 and flight services agreement are deemed to be distinct and the flight service promised in the 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 departures and block hours or flight 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 its customers.
A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. 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. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations.
88
The Company recognized $170.2 million, $208.9 million and $219.0 million of lease revenue for the year ended September 30, 2021, 2020, and 2019, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations because the use of the aircraft is not a separate activity of the total service provided under our capacity purchase agreements.
The Company's capacity purchase agreements and flight services agreement are renewable periodically and contain provisions pursuant to which the parties could terminate their respective agreements, or withdraw aircraft under their respective agreements, subject to certain conditions as described in Note 1. The agreements also contain terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The 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 agreements with its major partners, 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 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 variable constraint guidance within ASC 606.
The Company's agreements contain an option that allows its major partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. All of the Company's major 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 or flight services agreement. In addition, the Company's major 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 partners at no cost are presented net in its consolidated financial statements; hence, no amounts are recorded as revenue or operating expense for these items.
Contract Liabilities
Contract liabilities consist of deferred credits representing upfront payments received from major 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 the related services over the 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 consolidated balance sheets, respectively. The Company's total current and non-current deferred credit balances at September 30, 2021, September 30, 2020, and September 30, 2019 were $4.8 million, $8.5 million, and $12.1 million, respectively. The Company recognized $2.4 million, $3.7 million and $5.1 million of the deferred credits within contract revenue in the consolidated statements of operations during the year ended September 30, 2021, 2020, and 2019, respectively.
Contract Assets
The Company recognizes assets from the incremental costs incurred to obtain contracts with major partners including aircraft painting, aircraft 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 consolidated balance sheets. The Company's contract assets balances at September 30, 2021, September 30, 2020, and September 30, 2019 were $0.0 million, $2.0 million and $3.9 million, respectively. Contract cost amortization was $2.0 million, $1.9 million and $2.4 million for the year ended September 30, 2021, 2020, and 2019, respectively.
89
Maintenance Expense
The Company operates under an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred.
The Company accounts for heavy maintenance and major overhaul costs on its 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, $0.0 million, and $0.0 million for the fiscal year ended September 30, 2021, 2020, and 2019, respectively. At September 30, 2021 and September 30, 2020, the Company had a deferred heavy maintenance balance, net of accumulated amortization, of $3.5 million and $0.0 million, respectively. The Company accounts 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. Our maintenance policy is determined by fleet when major maintenance is incurred.
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 airframe 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 $31.4 million, $40.5 million and $30.0 million for the years ended September 30, 2021, 2020 and 2019, respectively, of which $16.8 million, $7.0 million, and $6.0 million, respectively, was pass-through expense. Airframe check expense totaled $51.1 million, $23.5 million and $17.2 million for the years ended September 30, 2021, 2020, and 2019, respectively, of which $20.5 million, $7.2 million, and $0.4 million, respectively, was pass-through expense.
Pursuant to the United CPA, United reimburses the Company for heavy maintenance on certain E-175 aircraft. Those reimbursements are included in pass-through and other revenue. See Note 1: "Organization and Operations" for further information.
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 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 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. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease
90
expense in the period incurred. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis over the lease term, while finance leases result in a front-loaded expense pattern.
As a lessee, we have elected a short-term lease practical expedient on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to leases with terms of 12 months or less.
Our capacity purchase agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the compensation under our capacity purchase agreements are designed to reimburse the Company, as lessor, for certain aircraft ownership costs of these aircraft. 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.
As discussed in Note 1, 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 nominal leases with our major partners, approximately 10% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major 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 will be written off.
The majority of the Company's leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which the Company does not participate, the Company is not at risk for losses and is not considered the primary beneficiary. Management believes that the Company's maximum exposure under these leases is the remaining lease payments.
In March 2021, the Company purchased a leased CRJ-900 aircraft prior to the expiration of the lease term resulting in the lease termination expenses of $4.5 million. Termination expenses primarily related to maintenance deposits on the aircraft that were no longer recoverable from the lessor upon termination of the lease.
Government Grant
In February 2021, the Company was granted $48.7 million in financial assistance by the U.S. Department of the Treasury under the Payroll Support Program Extension (“PSP2”) under the Consolidated Appropriations Act of 2021. In March 2021, the Company was notified that, based on funding availability, recipients that were currently in compliance with executed PSP agreements would receive an additional award amount. As a result, the Company received an additional $7.3 million through PSP2 in April 2021 for a total grant of $56.0 million. PSP2 funding was required to be used exclusively for the continuation of payment of employee wages, salaries, and benefits and was conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs from the date of the extension agreement through March 2021. Other conditions include prohibitions on share repurchases and dividends through March 2022 and certain limitations on executive compensation until October 2022. The Department of Transportation also has the authority until March 1, 2022 to require airlines that received payroll support program funds to maintain scheduled air service deemed necessary to any point served by the airline before March 1, 2020.
91
On April 15, 2021, the Company was notified by the U.S. Department of the Treasury that it was eligible to receive funds under the third Payroll Support Program (“PSP3”), which was created under the American Recovery Plan Act of 2021 (“ARP”), enacted on March 11, 2021. PSP3 provided additional funding for passenger air carriers and contractors that received financial assistance under PSP2. The funding must be used exclusively for the continuation of payment of employee wages, salaries, and benefits. The Company was granted $52.2 million and received the first PSP3 installment of $26.1 million in April 2021 and the second installment of $26.1 million in May 2021. These payments were conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through September 2021. Other conditions include prohibitions on share repurchases and dividends through September 2022 and certain limitations on executive compensation until April 2023.
For the years ended September 30, 2021 and 2020, the Company recognized $119.5 million and $83.8 million, respectively, for the payroll support government funds reflected within government grant recognition on the Company’s consolidated statement of operations. As of September 30, 2021 and 2020, there were $0 and $11.4 million, respectively, of deferred PSP funds representing payments received to offset future payroll costs reflected within other accrued liabilities in the consolidated balance sheets.
3.
|
Contract Revenue and Pass-through and Other Revenue
|
The Company recognizes contract revenue when the service is provided under its capacity purchase agreements and flight services agreement. Under the capacity purchase agreements and flight services agreement, our major partners generally pay for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion, on-time performance, and other operating metrics. The Company’s performance obligation is met when each flight is completed, and revenue is recognized and reflected in contract revenue.
The Company’s contract revenue also includes temporary rate reductions during fiscal year 2021 under our capacity purchase agreements. The basis for the reductions is temporary improvements in our cost structure being passed on to our major partners, primarily from lower labor costs due to the grants received under the Payroll Support Program and its extensions through the period ended September 30, 2021.
The Company recognizes pass-through revenue when the service is provided under its capacity purchase agreements and flight services agreement. Pass-through revenue represents reimbursements for certain direct expenses incurred including passenger liability and hull insurance, property taxes, other direct costs defined within the agreements, and major maintenance on aircraft leased at nominal rates. The Company’s performance obligation is met when each flight is completed or as the maintenance services are performed, and revenue is recognized and reflected in pass-through and other revenue.
The Company records deferred revenue when cash payments are received or are due from our major partners in advance of the Company’s performance, including amounts that are refundable. The Company deferred $10.7 million and $23.8 million of revenue during the years ended September 30, 2021 and September 30, 2020, respectively, which was billed to and paid by our major partners. Deferred revenue is recognized as flights are completed over the remaining contract term.
The deferred revenue balance as of September 30, 2021 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (in thousands):
92
Periods Ending
|
|
|
|
|
September 30,
|
|
Total Revenue
|
|
2022
|
|
$
|
6,298
|
|
2023
|
|
|
10,210
|
|
2024
|
|
|
9,997
|
|
2025
|
|
|
4,974
|
|
2026
|
|
|
1,758
|
|
Thereafter
|
|
|
1,263
|
|
Total
|
|
$
|
34,500
|
|
A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. 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. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time.
The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations. The Company recognized $170.2 million, $208.9 million, and $219.0 million of lease revenue for the years ended September 30, 2021, 2020, and 2019, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations because the use of the aircraft is not a separate activity from the total service provided under our capacity purchase agreements.
The Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease 14 CRJ-700 aircraft as of September 30, 2021. 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 on a straight-line basis 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.
The Company mitigates the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases have specified lease return condition requirements and the Company maintains inspection rights under the leases. As of September 30, 2021, the Company recognized $12.4 million of lease incentive assets, net of amortization, and $9.7 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 $9.5 million for the year ended September 30, 2021. Amounts deferred for supplemental rent payments totaled $0.8 million as of September 30, 2021. The following table summarizes future minimum rental income under operating leases related to leased aircraft that had remaining non-cancelable lease terms as of September 30, 2021 (in thousands):
93
Periods Ending
September 30,
|
|
Total Payments
|
|
2022
|
|
$
|
15,288
|
|
2023
|
|
|
15,288
|
|
2024
|
|
|
15,288
|
|
2025
|
|
|
15,288
|
|
2026
|
|
|
15,288
|
|
Thereafter
|
|
|
54,467
|
|
Total
|
|
$
|
130,907
|
|
4.
|
Recent Accounting Pronouncements
|
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU introduced a new accounting model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard also applies to receivables arising from revenue transactions such as contract assets and accounts receivables. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. Our adoption of this guidance on a modified retrospective basis on October 1, 2020 did not have a material impact as credit losses have not been, and are not expected to be, significant based on historical collection trends, the financial condition of our major partners and external market factors.
In August 2018, the FASB issued new guidance aligning the accounting for implementation costs incurred in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance on a prospective basis on October 1, 2020. Amounts capitalized are immaterial.
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. The guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and interim periods within those fiscal periods. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
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 other reference rates expected to be discontinued. Optional expedients can be applied from March 12, 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
5.
|
Concentrations of Credit Risk
|
Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are primarily held by financial institutions in the United States and accounts receivable. Amounts on deposit with a financial institution may at times exceed federally insured limits. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions. As of September 30, 2021,
94
the Company 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.
Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at each respective balance sheet date. At September 30, 2021, the Company had capacity purchase agreements with American and United and a flight services agreement with DHL. Substantially all of the Company's consolidated revenue for the years ended September 30, 2021, 2020 and 2019 and accounts receivable at the end of September 30, 2021 and 2020 was derived from these agreements. In certain cases, the terms of these agreements are not aligned with the lease obligations on the aircraft performing services under such agreements.
Amounts billed by the Company under these agreements are subject to the Company's interpretation of the applicable agreement and are subject to audit by the Company's major partners. Periodically, the Company's 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, the Company reviews amounts due based on historical collection trends, the financial condition of major partners and current external market factors and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $0.3 million and $0.8 million at September 30, 2021 and 2020, respectively. If the Company's ability to collect these receivables and the financial viability of our major partners is materially different than estimated, the Company's estimate of the allowance could be materially impacted.
American accounted for approximately 45%, 52% and 53% of the Company's total revenue for the years ended September 30, 2021, 2020 and 2019, respectively. United accounted for approximately 52%, 48% and 47% of the Company's total revenue for the years ended September 30, 2021, 2020 and 2019, respectively. 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.
The Company monitors for any indicators of impairment of intangible assets. When certain conditions or changes in the economic situation exist, the assets may be impaired if the carrying amount of the assets is not recoverable and that carrying amount exceeds the asset’s fair value.
Information about the intangible assets of the Company at September 30, 2021 and 2020, is as follows (in thousands):
|
September 30,
|
|
|
September 30,
|
|
|
2021
|
|
|
2020
|
|
Customer relationship
|
$
|
43,800
|
|
|
$
|
43,800
|
|
Accumulated amortization
|
|
(37,008
|
)
|
|
|
(35,768
|
)
|
Net carrying value
|
$
|
6,792
|
|
|
$
|
8,032
|
|
Total amortization expense recognized was approximately $1.2 million, $1.5 million and $1.8 million for the fiscal years ended September 30, 2021, 2020 and 2019. The Company’s intangible assets have a remaining amortization period of 14 years. The Company expects to record amortization expense of $1.0 million, $0.9 million, $0.8 million, $0.7 million and $0.6 million for fiscal years 2022, 2023, 2024, 2025, and 2026, respectively, and $2.8 million of amortization expense thereafter.
95
7.
|
Balance Sheet Information
|
Certain significant amounts included in the Company's consolidated balance sheet as of September 30, 2021 and 2020, consisted of the following (in thousands):
|
September 30,
|
|
|
September 30,
|
|
|
2021
|
|
|
2020
|
|
Expendable parts and supplies, net:
|
|
|
|
|
|
|
|
Expendable parts and supplies
|
$
|
29,297
|
|
|
$
|
27,431
|
|
Less: obsolescence and other
|
|
(4,830
|
)
|
|
|
(4,460
|
)
|
|
$
|
24,467
|
|
|
$
|
22,971
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
Deferred offering and reimbursed costs
|
$
|
—
|
|
|
$
|
1,261
|
|
Prepaid aviation insurance
|
|
2,171
|
|
|
|
2,396
|
|
Other
|
|
4,714
|
|
|
|
12,410
|
|
|
$
|
6,885
|
|
|
$
|
16,067
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
Aircraft and other flight equipment
substantially pledged
|
$
|
1,611,544
|
|
|
$
|
1,596,174
|
|
Other equipment
|
|
4,934
|
|
|
|
5,147
|
|
Leasehold improvements
|
|
2,776
|
|
|
|
2,763
|
|
Vehicles
|
|
1,184
|
|
|
|
1,032
|
|
Building
|
|
699
|
|
|
|
699
|
|
Furniture and fixtures
|
|
300
|
|
|
|
302
|
|
Total property and equipment
|
|
1,621,437
|
|
|
|
1,606,117
|
|
Less: accumulated depreciation
|
|
(469,546
|
)
|
|
|
(393,702
|
)
|
|
$
|
1,151,891
|
|
|
$
|
1,212,415
|
|
Other assets:
|
|
|
|
|
|
|
|
Investments in equity securities
|
$
|
25,149
|
|
|
$
|
—
|
|
Lease incentives
|
|
10,957
|
|
|
|
—
|
|
Other
|
|
15
|
|
|
|
742
|
|
|
$
|
36,121
|
|
|
$
|
742
|
|
Other accrued expenses:
|
|
|
|
|
|
|
|
Accrued property taxes
|
$
|
8,783
|
|
|
$
|
11,354
|
|
Accrued interest
|
|
2,565
|
|
|
|
3,268
|
|
Accrued vacation
|
|
5,936
|
|
|
|
5,975
|
|
Deferred PSP payments
|
|
—
|
|
|
|
11,311
|
|
Other
|
|
16,373
|
|
|
|
13,570
|
|
|
$
|
33,657
|
|
|
$
|
45,478
|
|
Other noncurrent liabilities:
|
|
|
|
|
|
|
|
Warrant liabilities
|
$
|
21,964
|
|
|
$
|
—
|
|
Lease incentive obligations
|
|
6,358
|
|
|
|
—
|
|
Other
|
|
6,269
|
|
|
|
1,409
|
|
|
$
|
34,591
|
|
|
$
|
1,409
|
|
The Company monitors for any indicators of impairment of the long-lived fixed assets. When certain conditions or changes in the economic situation exist, the assets may be impaired and the carrying amount of the assets exceed its fair value. The assets are then tested for recoverability of carrying amount. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted 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.
96
We group assets at the capacity purchase agreement, flight services agreement, and fleet-type level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators exist with respect to any of the asset groups, we estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors.
The Company has assessed whether any impairment of its long-lived assets existed and has determined that no charges were deemed necessary under applicable accounting standards as of September 30, 2021. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
Property and Equipment, Net
Depreciation expense on property and equipment totaled $81.2 million, $80.8 million and $76.2 million for the years ended September 30, 2021, 2020, and 2019, respectively.
Other Assets
In connection with a negotiated forward purchase contract for electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”) executed in February 2021, we obtained equity warrant assets giving us the right to acquire a number shares of common stock in Archer Aviation, Inc. (“Archer”), which at the time of our initial investment was a private, venture-backed company. As the initial investment in Archer did not have a readily determinable fair value, we accounted for this investment using the measurement alternative under ASC 321 and measured 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 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.
The initial grant date value of the warrants, $16.4 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related aircraft purchase agreement.
In connection with closing of the merger between Archer and the SPAC described above, in September 2021, 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. The initial value of the warrants was recognized as a vendor credit liability within other noncurrent liabilities, and 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. Because these investments have readily determinable fair values, gains and losses resulting from changes in fair value of the investments are reflected in earnings, in accordance with ASC 321.
Losses on our investments in Archer totaled $6.8 million during the fiscal year ended September 30, 2021 and are reflected in loss on investments, net in our consolidated statement of operations.
The fair values of the Company’s investments in Archer are 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
97
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, in other income (expense), net. The initial investment in preferred stock was measured at cost of $5.0 million. There were no observable price changes or transactions as of September 30, 2021 and as such, no adjustments to the initial cost of the equity investment have been recorded.
Unfavorable Lease Liabilities
Prior to the Company’s adoption of Topic 842 on October 1, 2019, the Company recorded amortization of an unfavorable lease liability amounting to $5.7 million for the year ended September 30, 2019 as a reduction to lease expense. Upon the Company’s adoption of Topic 842, the unfavorable lease liability is now included in its ROU asset balance and amortized therein. During the year ended September 30, 2019 the Company wrote off $0.8 million of unfavorable lease liability related to the lease termination of its aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor (the "GECAS Lease Facility"), which was accounted for as lease termination expense.
8.
|
Fair Value Measurements
|
Apart from the equity investments described in Note 7, the Company did not measure any of its assets or liabilities at fair value on a recurring or nonrecurring basis as of September 30, 2021 and 2020.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable included on the consolidated balance sheets approximated fair value at September 30, 2021 and 2020 because of the immediate or short-term maturity of these financial instruments.
The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions):
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Long-term debt, including current maturities(1)
|
$
|
670.3
|
|
|
$
|
676.8
|
|
|
$
|
743.3
|
|
|
$
|
768.7
|
|
(1)
|
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs.
|
98
9.
|
Long-Term Debt, Finance Leases, and Other Borrowings
|
Long-term debt as of September 30, 2021 and 2020, consisted of the following (in thousands):
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Notes payable to financial institution, collateralized by the underlying
aircraft, due 2022(1)(2)
|
|
$
|
—
|
|
|
$
|
41,472
|
|
Notes payable to financial institution, collateralized by the underlying
aircraft, due 2024(3)
|
|
|
—
|
|
|
|
55,674
|
|
Senior and subordinated notes payable to secured parties, collateralized
by the underlying aircraft, due 2027(4)
|
|
|
86,551
|
|
|
|
105,887
|
|
Notes payable to secured parties, collateralized by the underlying
aircraft, due 2028(5)
|
|
|
152,100
|
|
|
|
172,137
|
|
Senior and subordinated notes payable to secured parties, collateralized
by the underlying aircraft, due 2028(6)
|
|
|
122,762
|
|
|
|
138,114
|
|
Senior and subordinated notes payable to secured parties, collateralized
by the underlying aircraft, due 2022(7)
|
|
|
—
|
|
|
|
47,319
|
|
Senior and subordinated notes payable to secured parties, collateralized
by the underlying aircraft, due 2022(8)
|
|
|
—
|
|
|
|
29,682
|
|
Notes payable to financial institution due 2020(9)
|
|
|
—
|
|
|
|
1,523
|
|
Notes payable to financial institution, collateralized by the underlying
equipment, due 2020(10)
|
|
|
—
|
|
|
|
4,182
|
|
Other obligations due to financial institution, collateralized by the
underlying equipment, due 2023(11)
|
|
|
4,581
|
|
|
|
6,864
|
|
Notes payable to financial institution, collateralized by the underlying
equipment, due 2024(12)
|
|
|
45,559
|
|
|
|
63,341
|
|
Notes payable to financial institution, collateralized by the underlying
aircraft, due 2023(13)
|
|
|
30,625
|
|
|
|
48,125
|
|
Notes payable to financial institution due 2023(14)
|
|
4,000
|
|
|
|
6,000
|
|
Revolving credit facility(15)
|
|
|
22,930
|
|
|
|
22,930
|
|
Notes payable to financial institution due 2025(16)
|
|
|
201,227
|
|
|
|
—
|
|
Gross long-term debt, including current maturities
|
|
|
670,335
|
|
|
|
743,250
|
|
Less unamortized debt issuance costs
|
|
|
(9,295
|
)
|
|
|
(11,526
|
)
|
Less notes payable warrants
|
|
|
(9,630
|
)
|
|
|
—
|
|
Net long-term debt, including current maturities
|
|
|
651,410
|
|
|
|
731,724
|
|
Less current portion, net of unamortized debt issuance costs
|
|
|
(111,710
|
)
|
|
|
(189,268
|
)
|
Net long-term debt
|
|
$
|
539,700
|
|
|
$
|
542,456
|
|
(1)
|
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% and requires monthly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(2)
|
In fiscal 2014, the Company financed ten CRJ-900 aircraft for $88.4 million. The debt bears interest at the monthly LIBOR plus 1.95% and requires monthly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(3)
|
In fiscal 2014, the Company financed eight CRJ-900 aircraft with $114.5 million in debt. The debt bears interest at 5.00% and requires monthly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(4)
|
In fiscal 2015, the Company financed seven CRJ-900 aircraft with $170.2 million in debt. The senior notes payable of $151.0 million bear interest at monthly LIBOR plus 2.71% and require monthly principal and interest payments. The subordinated notes payable is non-interest-bearing and becomes payable in full on the last day of the term of the notes. The Company has imputed an interest rate of 6.25% on the subordinated notes payable and recorded a related discount of $8.1 million, which is being accreted to interest expense over the term of the notes.
|
99
(5)
|
In fiscal 2016, the Company 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.
|
(6)
|
In fiscal 2016, the Company 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.
|
(7)
|
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 $65.8 million bear interest at the three-month LIBOR plus 3.50% and require quarterly principal and interest payments. The subordinated notes payable of $29.8 million bear interest at three-month LIBOR plus 7.50% and require quarterly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(8)
|
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% and require quarterly principal and interest payments. The subordinated notes payable bear interest at the three-month LIBOR plus 4.50% and require quarterly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(9)
|
In fiscal 2015 and 2016, the Company financed certain flight equipment maintenance costs with $10.2 million in debt. The debt bears interest at the three-month LIBOR plus 3.07% and requires quarterly principal and interest payments.
|
(10)
|
In fiscal 2016-2019, the Company financed certain flight equipment. The debt bears interest at the three-month LIBOR plus a spread ranging from 2.93% to 3.21% and requires quarterly principal and interest payments. The loan was paid in full during the quarter ended December 31, 2020.
|
(11)
|
In February 2018, the Company 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.
|
(12)
|
In January 2019, the Company financed certain flight equipment with $91.2 million in debt. The debt bears interest at the monthly LIBOR plus 3.10% and requires monthly principal and interest payments.
|
(13)
|
In June 2019, the Company 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.
|
(14)
|
On September 27, 2019, the Company financed certain flight equipment for $8.0 million. The debt bears interest at the monthly LIBOR plus 5.00% and requires monthly principal and interest payments.
|
(15)
|
On September 25, 2019, the company extended the term on its $35.0 million working capital draw loan by three years, which now terminates in September 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. During fiscal year 2020, $23.0 million was drawn to cover operational needs, $22.9 million of which remained outstanding as of September 30, 2021.
|
(16)
|
On October 30, 2020, the Company 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, the Company borrowed $43.0 million and on November 13, 2020, the Company borrowed an additional $152.0 million. These amounts bear interest at the three-month LIBOR plus 3.50% which was paid-in-kind and capitalized into the balance of the loans for the first interest payment date on December 15, 2020. No further borrowings are available under the Loan and Guarantee Agreement.
|
100
Principal maturities of long-term debt as of September 30, 2021, and for each of the next five years are as follows (in thousands):
|
|
Total Principal
|
|
Periods Ending September 30,
|
|
Amount
|
|
2022
|
|
$
|
113,682
|
|
2023
|
|
|
89,462
|
|
2024
|
|
|
61,209
|
|
2025
|
|
|
56,526
|
|
2026
|
|
|
260,045
|
|
Thereafter
|
|
|
89,411
|
|
|
|
$
|
670,335
|
|
The net book value of collateralized aircraft and equipment as of September 30, 2021 was $1,027.9 million.
Enhanced Equipment Trust Certificate ("EETC")
In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. At September 30, 2021, Mesa has $152.1 million of equipment notes outstanding issued under the EETC financing included in long-term debt on the 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 is not the primary beneficiary of the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements.
On January 28, 2019, the Company entered into a Term Loan Agreement (the "Term Loan") pursuant to which the lenders thereunder lent the Company term loans in the aggregate principal amount of $91.2 million. Borrowings under the Term Loan bear interest at LIBOR plus 3.10%. This interest rate is significantly lower than the interest rate under the Company's Spare Engine Facility, which the Term Loan refinanced and replaced. The Spare Engine Facility accrued interest at LIBOR plus 7.25%. 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. The Company recorded a loss on extinguishment of debt of $3.6 million, due to a $1.9 million write-off of financing fees and $1.7 million in prepayment penalties, in connection with the repayment of the Spare Engine Facility in fiscal 2019.
On June 14, 2019, the Company completed the purchase of ten CRJ-700 aircraft, which were previously leased under the GECAS Lease Facility, for $70.0 million. The Company financed the aircraft purchase with $70.0 million in new debt. The notes payable of $70.0 million require monthly payments of principal and interest through fiscal 2023 bearing interest at LIBOR plus 5.00%. The Company recorded non-cash lease termination expense of $9.5 million in connection with the lease buyout in fiscal 2019.
On September 25, 2019, the Company extended the term on its $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%. In the 2nd quarter 2020, $23.0 million was drawn to cover operational needs.
101
As of September 30, 2021, $22.9 million of the draw loan remained outstanding. Future borrowings, if any, under this facility are subject to, among other things, the Company having sufficient unencumbered assets to meet the borrowing base requirements under the facility.
On September 27, 2019, the Company financed certain flight equipment for $8.0 million in new debt. The debt of $8.0 million require monthly payments of principal and interest through fiscal 2023 bearing interest at Libor plus 5.0%.
On April 9, 2020, the Company entered into a letter amendment with its lender, Export Development Canada (“EDC”), which provided for the deferral of scheduled principle payments beginning on March 19, 2020 through September 30, 2020. During fiscal 2020, the Company deferred $28.0 million of scheduled principal payments. On October 29, 2020 and November 12, 2020, the Company entered into subsequent letter amendments with EDC extending the principal deferrals through and including August 2, 2021. Amounts deferred were due in lump sum payment on August 2, 2021. There were no other amendments to the terms of the debt agreement with EDC resulting from the letter amendments. As further discussed below, the Company repaid $167.7 million of existing aircraft debt during the first quarter of fiscal 2021, which included repayment of $19.9 million of the previously deferred principal payments owed to EDC as of September 30, 2020.
On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with 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”). On October 30, 2020, the Company borrowed $43.0 million and on November 13, 2020, the Company borrowed an additional $152.0 million. No further borrowings are available under the Treasury Loan. The Company also issued warrants to purchase shares of common stock to the U.S. Treasury.
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 on the first business day following the 14th day of each March, June, September, and December, beginning with December 15, 2020.
All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025 (the “Maturity Date”). Interest is paid in kind by increasing the principal amount of the loan by the amount of such interest due on an interest payment date for the first 12 months of the loan. Mesa's obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, 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 CARES Act. Voluntary prepayments of loans under the Treasury Loan may be made, in whole or in part, by Mesa Airlines, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed. Mandatory prepayments of loans under the 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, Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan.
The Treasury Loan requires the Company, under certain circumstances, including within ten (10) business days prior to the last business day of March and September of each year beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0, Mesa Airlines will be required either to provide additional Collateral (which may include cash collateral) to secure its obligations under the 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.
102
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, the Company is required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service.
In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, the Company issued to the U.S. Treasury warrants to purchase an aggregate of 4,899,497 shares of the Company’s common stock at an exercise price of $3.98 per share, which was the closing price of the Common Stock on The Nasdaq Stock Market on April 9, 2020. The exercise price and number of shares of common stock issuable under the Warrants are subject to adjustment as a result of anti-dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. For accounting purposes, the fair value for the Warrant 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.
The Company incurred $3.1 million in debt issuance costs relating to the Treasury Loan. In accordance with the applicable guidance, Mesa allocated the debt issuance costs between the Treasury Loan and related warrants. At funding on October 30, 2020, the initial $43.0 million was recorded net of $0.7 million in capitalized debt issuance costs. At funding on November 13, 2020, the remaining $152.0 million was recorded net of $2.3 million in capitalized debt issuance costs. The remaining $0.1 million in debt issuance costs was allocated to the warrants as a reduction to the warrant value within additional paid-in capital. Debt issuance costs allocated to the debt are amortized into interest expense using the effective interest method over the term of the related loan.
Prior to the November 13, 2020 funding of the $152.0 million portion of the Treasury Loan, the Company repaid $167.7 million in existing aircraft debt covering 44 aircraft, including indebtedness under its (a) Senior Loan Agreements, dated June 27, 2018, (b) Junior Loan Agreements, also dated June 27, 2018, (c) Credit Agreements, dated January 31, 2007, April 16, 2014, and May 23, 2014, (d) Senior Loan Agreements, dated December 27, 2017, and (e) Junior Loan Agreements, also dated December 27, 2017 (collectively, “the EDC Loans”). The Company made payments totaling $164.2 million to repay the EDC Loans, consisting of principal of $167.7 million, and a $3.5 million discount on the balance owed. Additionally, in connection with the repayment, $2.5 million of unamortized original issue discount and deferred financing costs were recorded as a loss on debt extinguishment, resulting in a net gain on extinguishment of $1.0 million recorded within other income.
As of September 30, 2021, the Company is in compliance with all debt covenants.
103
Calculations of net income per common share were as follows (in thousands, except per share data):
|
Year Ended September 30,
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net income
|
$
|
16,588
|
|
|
$
|
27,464
|
|
|
$
|
47,580
|
|
Basic weighted average common shares
outstanding
|
|
35,713
|
|
|
|
35,237
|
|
|
|
34,764
|
|
Add: Incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
2,543
|
|
|
|
—
|
|
|
|
—
|
|
Dilutive effect of restricted stock
|
|
587
|
|
|
|
71
|
|
|
|
300
|
|
Diluted weighted average common shares
outstanding
|
|
38,843
|
|
|
|
35,308
|
|
|
|
35,064
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
|
$
|
0.78
|
|
|
$
|
1.37
|
|
Diluted
|
$
|
0.43
|
|
|
$
|
0.78
|
|
|
$
|
1.36
|
|
Basic income per common share is computed by dividing net income attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period.
The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants (excluding warrants with a nominal conversion price) is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income 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 net income per share for the years ended September 30, 2021, 2020, and 2019.
The Company previously issued warrants to third parties, which had a five-year term to be converted to common stock at an exercise price of $0.004 per share. Persons who were not U.S. citizens held certain of these outstanding warrants. The warrants are exercisable if consistent with federal law, which requires that no more than 24.9% of the Company's stock be voted, directly or indirectly, or controlled by persons who are not U.S. citizens. The warrants can be converted to common stock upon warrant holders demonstrating U.S. citizenship or if consistent with above described federal law ownership limitations. In June 2018, the Company and holders agreed to extend the term of outstanding warrants set to expire by five years (through fiscal year 2023). By fiscal 2020, all outstanding warrants had been fully exercised.
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 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 stock appreciation rights (“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.
104
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 consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares.
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. We received $111.7 million in net proceeds after deducting $8.7 million of underwriting discounts and commissions and $3.6 million in offering costs.
On April 9, 2019, and pursuant to Section 4.4 of the 2018 Plan, the board of directors approved an increase in the number of shares authorized for issuance under the 2018 Plan by 1,000,000 shares of common stock resulting in a total of 3,500,000 authorized shares.
On October 30, 2020, the Company entered into the Loan and Guarantee Agreement (the “Treasury Loan”) with the U.S. Treasury and the Bank of New York Mellon, as Administrative and Collateral Agent, under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, the Company issued warrants to the U.S. Treasury to purchase shares of the Company’s common stock, no par value, at an exercise price of $3.98 per share (the “Exercise Price”), which was the closing price of the common stock on The Nasdaq Stock Market on April 9, 2020. The warrants were issued pursuant to the terms of a Treasury Warrant Agreement entered into by the Company and the U.S. Treasury. The exercise price and number of warrant shares issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. The warrants are accounted for within equity at a grant date fair value determined under the Black Scholes Option Pricing Model. As of September 30, 2021, 4,899,497 warrants were issued and outstanding.
The Company has not historically paid dividends on shares of its common stock. Additionally, the Treasury Loan and the Company's aircraft lease facility (the "RASPRO" Lease Facility) with RASPRO Trust 2005, a pass-through trust contains restrictions that limit the Company's ability to or prohibit it from paying dividends to holders of its common stock.
105
The provision for income taxes consists of the following:
|
|
Years Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(39
|
)
|
|
$
|
—
|
|
|
$
|
(138
|
)
|
State
|
|
|
202
|
|
|
|
297
|
|
|
|
341
|
|
|
|
$
|
163
|
|
|
$
|
297
|
|
|
$
|
203
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,494
|
|
|
|
8,404
|
|
|
|
13,238
|
|
State
|
|
|
1,171
|
|
|
|
830
|
|
|
|
2,265
|
|
|
|
$
|
5,665
|
|
|
$
|
9,234
|
|
|
$
|
15,503
|
|
Provision for income taxes
|
|
$
|
5,828
|
|
|
$
|
9,531
|
|
|
$
|
15,706
|
|
The reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:
|
|
Years Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Income tax expense at federal statutory rate
|
|
$
|
4,707
|
|
|
$
|
7,769
|
|
|
$
|
13,290
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
|
|
669
|
|
|
|
968
|
|
|
|
1,785
|
|
Nondeductible stock compensation expenses
|
|
|
(241
|
)
|
|
|
524
|
|
|
|
(21
|
)
|
Permanent items
|
|
|
292
|
|
|
|
314
|
|
|
|
261
|
|
Change in valuation allowances
|
|
|
(140
|
)
|
|
|
1,173
|
|
|
|
(50
|
)
|
162(m) limitation
|
|
|
12
|
|
|
|
14
|
|
|
|
119
|
|
Impact of changing rates on deferred tax assets
|
|
|
509
|
|
|
|
(2,313
|
)
|
|
|
484
|
|
Expired tax attributes
|
|
|
152
|
|
|
|
633
|
|
|
|
111
|
|
Other
|
|
|
(132
|
)
|
|
|
449
|
|
|
|
(273
|
)
|
Income tax expense
|
|
$
|
5,828
|
|
|
$
|
9,531
|
|
|
$
|
15,706
|
|
106
The components of the Company's deferred taxes as of September 30, 2021 and 2020 are as follows:
|
|
Years Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Net operating loss carryforwards
|
|
$
|
121,604
|
|
|
$
|
113,402
|
|
Deferred credits
|
|
|
899
|
|
|
|
1,485
|
|
Other accrued expenses
|
|
|
2,682
|
|
|
|
2,842
|
|
Prepaids and other
|
|
|
1,969
|
|
|
|
1,632
|
|
Warrant liabilities
|
|
|
5,018
|
|
|
|
—
|
|
State alternative minimum tax
|
|
|
1
|
|
|
|
1
|
|
Other reserves and estimated losses
|
|
|
729
|
|
|
|
641
|
|
Operating lease liabilities
|
|
|
15,226
|
|
|
|
24,263
|
|
Deferred revenue
|
|
|
1,439
|
|
|
|
—
|
|
Gross deferred tax assets
|
|
$
|
149,567
|
|
|
$
|
144,266
|
|
Less: valuation allowance
|
|
|
(2,922
|
)
|
|
|
(3,063
|
)
|
Total net deferred tax assets
|
|
$
|
146,645
|
|
|
$
|
141,203
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,552
|
)
|
|
|
(1,830
|
)
|
Operating lease right-of-use assets
|
|
|
(11,467
|
)
|
|
|
(19,210
|
)
|
Property and equipment
|
|
|
(200,105
|
)
|
|
|
(184,438
|
)
|
Unrealized losses on equity investments
|
|
|
(3,461
|
)
|
|
|
—
|
|
Total deferred tax liabilities
|
|
$
|
(216,585
|
)
|
|
$
|
(205,478
|
)
|
Net deferred tax liability
|
|
$
|
(69,940
|
)
|
|
$
|
(64,275
|
)
|
The Company has federal and state income tax NOL carryforwards of $541.3 million and $235.7 million, which expire in fiscal years 2027-2038 and 2021-2041, respectively. Approximately $130.7 million of our federal NOL carryforwards are not subject to expiration. These NOL carryovers are only available to offset 80% of taxable income in years in which they are utilized due to tax law changes as a result of the Tax Cuts and Jobs Act.
The Company believes that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $2.9 million as of September 30, 2021 and $3.1 million as of September 30, 2020 on the deferred tax assets related to these state NOL carryforwards. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of income tax expense.
The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of these unrecognized tax benefits.
Because of the change of ownership provisions of the Tax Reform Act of 1986, the use of a portion of our NOL and tax credit carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. The Company determined it had an ownership change in February of 2009. Based on the study conducted at that time, a portion of the federal NOLs were determined to be limited by IRC Section 382, resulting in the Company writing off a portion of its NOLs at that time. Additionally, the Company’s initial public offering in August of 2018 resulted in a change in ownership under Section 382 of the Internal Revenue Code. The Company completed an update to the analysis of any potential limitation on the use of its net operating losses under Section 382 for the fiscal year ended September 30, 2021. Based on such analysis, the Company does not believe any ownership changes during the review period will further limit its ability to use its current net operating losses to offset future taxable income, if any.
107
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
|
|
Years Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Unrecognized tax benefits — October 1
|
|
$
|
4,866
|
|
|
$
|
4,688
|
|
|
$
|
4,688
|
|
Gross decreases — tax positions in prior period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross increases — tax positions in prior period
|
|
|
—
|
|
|
|
178
|
|
|
|
—
|
|
Unrecognized tax benefits — September 30
|
|
$
|
4,866
|
|
|
$
|
4,866
|
|
|
$
|
4,688
|
|
The Company’s unrecognized tax benefits of $4.9 million, $4.9 million and $4.7 million as of September 30, 2021, 2020 and 2019, respectively, is included as an offset to the net deferred tax asset balance. If recognized, the balance of the uncertain tax benefits would impact the effective tax rate.
We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded accrued penalties or interest related to the unrecognized tax benefits noted above as the amounts would result in an adjustment to NOL carryforwards.
We are subject to taxation in the United States and various states. As of September 30, 2021, the Company is no longer subject to U.S. federal or state examinations by taxing authorities for fiscal years prior to 2001.
13.
|
Share-Based Compensation
|
Restricted Stock
In July 2018, the Company’s Board of Directors and Compensation Committee approved the issuance of shares of restricted common stock under its 2018 Plan immediately following the 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. There were 966,022 vested SARs which were cancelled, exchanged for shares of restricted common stock, and issued as restricted stock upon completion of the IPO. Immediately following the IPO, 2,249,147 shares were issued to certain of its employees and directors under the 2018 Plan in exchange for the cancellation of 491,915 unvested restricted phantom stock units, 491,198 unvested restricted shares issued under the 2011 and 2017 Plans and 1,266,034 SARs (966,022 vested and 300,012 unvested). The Company has the right to withhold shares to satisfy tax withholding obligations and the withheld shares become available for future grants. The shares are valued at the grant date based upon recent share transactions. In April 2019, the Company’s Board of Directors increased the number of authorized shares of common stock to management under the 2018 Plan from 2,500,000 to 3,500,000. The maximum aggregate number of shares of common stock that may be issued under our 2018 Plan will be cumulatively increased on January 1, 2020 and on each subsequent January 1 through and including January 1, 2028, by a number of shares equal to the smaller of (a) 1% of the number of shares issued and outstanding on the immediately preceding December 31, or (b) an amount determined by our Board. From inception of the 2018 Plan, 3,827,493 shares have been awarded, 2,748,042 shares have vested and 73,245 shares have been cancelled.
108
The restricted stock activity for our years ended September 30, 2021, 2020 and 2019 is summarized as follows:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Number
|
|
|
Grant Date
|
|
2018 Plan
|
of Shares
|
|
|
Fair Value
|
|
Restricted shares unvested at September 30,
2018
|
|
1,250,625
|
|
|
$
|
9.59
|
|
Granted
|
|
321,926
|
|
|
|
8.94
|
|
Vested
|
|
(701,582
|
)
|
|
|
9.25
|
|
Cancelled
|
|
(22,995
|
)
|
|
|
12.00
|
|
Restricted shares unvested at September 30,
2019
|
|
847,974
|
|
|
$
|
9.56
|
|
Granted
|
|
910,297
|
|
|
|
3.97
|
|
Vested
|
|
(555,473
|
)
|
|
|
9.21
|
|
Cancelled
|
|
(7,250
|
)
|
|
|
7.89
|
|
Restricted shares unvested at September 30,
2020
|
|
1,195,548
|
|
|
$
|
5.47
|
|
Granted
|
|
346,123
|
|
|
|
9.53
|
|
Vested
|
|
(492,465
|
)
|
|
|
6.89
|
|
Cancelled
|
|
(43,000
|
)
|
|
|
4.57
|
|
Restricted shares unvested at September 30,
2021
|
|
1,006,206
|
|
|
$
|
6.22
|
|
The Company has granted restricted stock units ("RSUs") as part of its long-term incentive compensation to employees and non-employee members of the Board of Directors. RSUs generally vest over a period of 3 to 5 years for employees and 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. RSUs are measured based on the fair market value of the underlying common stock on the grant date.
As of September 30, 2021, there was $5.1 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 1.9 years.
Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. The Company recognizes forfeitures of share-based awards as they occur. Share-based compensation expense for the years ended September 30, 2021, 2020, and 2019 was $3.1 million, $4.4 million, and $5.5 million, respectively. Share-based compensation expense is recorded in general and administrative expenses in the consolidated statements of operations.
The Company repurchased 155,174 shares of its common stock for $1.5 million to cover the income tax obligation on vested employee equity awards during the fiscal year ended September 30, 2021. The Company repurchased 142,439 shares of its common stock for $0.6 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the fiscal year ended September 30, 2020. During the fiscal year ended September 30, 2019, the Company repurchased 205,235 shares of its common stock for $1.9 million to cover the income tax obligation on vested employee equity awards.
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
109
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 September 30, 2021, eligible employees purchased and the Company issued an aggregate of 194,194 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP, 94,550 of which were purchased and issued during the current fiscal year.
At September 30, 2021, the Company leased 17 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The leases require the Company to pay taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased. Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $44.6 million, $51.4 million, and $57.3 million for the year ended September 30, 2021, 2020, and 2019, respectively.
The components of our operating lease costs were as follows (in thousands):
|
|
Year Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Operating lease costs
|
|
$
|
37,929
|
|
|
$
|
40,116
|
|
Variable and short-term lease costs
|
|
|
6,708
|
|
|
|
11,277
|
|
Total lease costs
|
|
$
|
44,637
|
|
|
$
|
51,393
|
|
As of September 30, 2021, the Company’s operating lease right-of-use assets were $93.1 million, the Company’s current maturities of operating lease liabilities were $32.7 million, and the Company’s noncurrent lease liabilities were $34.0 million.
The Company’s operating lease payments included in operating cash flows for the year ended September 30, 2021 and 2020 was $47.6 million and $44.2 million, respectively.
The table below presents the weighted average remaining terms and discount rates for our operating leases as of September 30, 2021:
As of September 30, 2021
|
|
|
|
|
Weighted average remaining lease term
|
|
2.7 years
|
|
Weighted average discount rate
|
|
|
4.2
|
%
|
110
The following table summarizes future minimum rental payments, primarily related to leased aircraft, required under operating leases that had initial or remaining non-cancelable lease terms as of September 30, 2021 (in thousands):
Periods Ending
September 30,
|
|
Total Maturities
|
|
2022
|
|
$
|
34,556
|
|
2023
|
|
|
17,070
|
|
2024
|
|
|
15,418
|
|
2025
|
|
|
2,129
|
|
2026
|
|
|
796
|
|
Total lease payments
|
|
|
69,969
|
|
Less: imputed interest
|
|
|
(3,326
|
)
|
Amounts recorded in the consolidated balance sheet
|
|
$
|
66,643
|
|
RASPRO Lease Facility. On September 23, 2005, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO as lessor, for 15 of our CRJ-900 aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid quarterly on each aircraft. On each of March 10, 2014, June 5, 2014, and December 8, 2017, the RASPRO Lease Facility was amended to defer certain payments of basic rent (the "Deferred Amounts"). Until the principal of and accrued interest on the Deferred Amounts are paid in full: (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain a minimum of $35.0 million of cash, cash equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio.
In June 2020, the Company amended its RASPRO aircraft lease agreement to defer a $4.0 million lease payment otherwise due in June 2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September 2021 through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor and accordingly, this was not a lease modification and required no changes to current accounting treatment. As of September 30, 2021, we were in compliance with the covenants in the RASPRO Lease Facility.
16.
|
Commitments and Contingencies
|
Litigation
The Company is subject to two putative class action lawsuits alleging federal securities law violations in connection with our IPO, one in the Superior Court of the State of Arizona and one in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement. The plaintiffs seek unspecified monetary damages and other relief. In addition, we are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2021, our management believed that the ultimate outcomes of the two putative class action lawsuits and such other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity, or results of operations.
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
111
upon its business, financial condition, or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings. See Item 3: “Legal Proceedings”.
Engine Purchase Commitments
On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of ten (10) new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. During the quarter ended March 31, 2021, a $7.0 million non-refundable purchase deposit was made for the first five engines to be delivered in calendar year 2021. The Company has options to purchase an additional ten (10) similar engines beyond 2022. The total purchase commitment related to these ten (10) engines is approximately $52.2 million. In July 2021, the Company completed the purchase of one engine.
If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.
Electric Aircraft Forward Purchase Commitments
As described in Note 7, in February 2021, the Company entered into a forward purchase contract with Archer for a number of electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL aircraft is $200.0 million, with an option to purchase additional aircraft. The Company’s 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, the Company 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. The Company’s 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.
112