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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
        
    
    
    
to
        
    
    
    
.
Commission File Number
001-34584
 
 
HARBOR DIVERSIFIED, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
  
13-3697002
(State of incorporation)
  
(I.R.S. Employer
Identification No.)
W6390 Challenger Drive, Suite 203
Appleton, WI
  
54914-9120
(Address of principal executive offices)
  
(Zip Code)
(920)
749-4188
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
None
  
None
  
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer   ☐
Non-accelerated
filer		   ☒    Smaller reporting company   ☒
     Emerging growth company   ☐
If an emerging growth company, indicate by check if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☒
As of March 31, 2022, the registrant had 47,053,806 shares of common stock, $0.01 par value, outstanding, and 4,000,000 shares of Series C Convertible Redeemable Preferred Stock, $0.01 par value, outstanding, which are immediately convertible into an additional 16,500,000 shares of common stock. The registrant does not have any class of securities registered pursuant to Section 12(b) or Section 12(g) of the Exchange Act.
 
 
 
HARBOR DIVERSIFIED, INC.
QUARTERLY REPORT ON FORM
10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2022
TABLE OF CONTENTS
 
    
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form
10-Q
for the three months ended March 31, 2022 (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements relate to matters such as our industry, business plans and strategies, material contracts, key relationships, consumer behavior, flight schedules and completed flight activity, revenues, expenses, margins, profitability, tax liability, capital expenditures, liquidity, capital resources, and other business and operating information. Forward-looking statements include all statements that are not statements of historical facts, and can be identified by words such as “anticipate,” “approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases in this Quarterly Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting, and are subject to considerable risks and uncertainties, including without limitation:
 
  •  
the dependence of the business of our subsidiary, Air Wisconsin Airlines LLC (“Air Wisconsin”), on a capacity purchase agreement (the “United capacity purchase agreement”) with United Airlines, Inc. (“United”), given United is currently Air Wisconsin’s sole airline partner, particularly given the expiration of the United capacity purchase agreement by its terms in February 2023;
 
  •  
the possibility that United does not agree to enter into a new capacity purchase agreement or to extend the current United capacity purchase agreement on commercially reasonable terms or at all, that the parties fail to resolve existing or future disagreements relating to the agreement, or that United elects to terminate the agreement prior to the expiration of the term as a result of the occurrence of a termination event specified in the agreement;
 
  •  
the supply of qualified pilots and mechanics to the airline industry, attrition, and the costs associated with hiring and training qualified pilots and mechanics;
 
  •  
the announcement by three major airlines, including United, that they intend to significantly reduce or discontinue the use of single class
50-seat
aircraft, including the
CRJ-200
regional jet comprising Air Wisconsin’s fleet, which may limit Air Wisconsin’s opportunities to enter into a new capacity purchase agreement with United and its ability to enter into substitute arrangements with another airline partner;
 
  •  
the possibility that United could provide Air Wisconsin with inefficient flight schedules, or change the expected utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement;
 
  •  
the extent to which Air Wisconsin’s current growth opportunities and strategic operating plan are restricted based on factors impacting the airline industry;
 
  •  
the amounts Air Wisconsin is paid or reimbursed under the United capacity purchase agreement may be less than the costs incurred, particularly as labor costs increase in response to qualified pilot and mechanic shortages;
 
  •  
the significant portion of Air Wisconsin’s workforce that is represented by labor unions and the terms of its collective bargaining agreements;
 
  •  
aircraft and engine maintenance costs;
 
  •  
Air Wisconsin’s reliance on only one aircraft type, aircraft manufacturer and engine manufacturer, and the potential issuance of operating restrictions on this aircraft or engine type or occurrence of any aviation incident involving either this aircraft or engine type;
 
  •  
Air Wisconsin’s ability to obtain additional financing may be limited;
 
  •  
the impact of losing key personnel or inability to attract additional qualified personnel;
 
  •  
the negative impact of information technology security breaches and other such infrastructure disruptions on Air Wisconsin’s operations;
 
  •  
the duration and spread of the ongoing global
COVID-19
pandemic and its variants, and the related impact on the business, results of operations, financial condition and liquidity of Air Wisconsin and United, in particular, and the airline industry in general; and
 
  •  
the impact of the application of accounting guidance, including the requirement to defer a significant amount of revenue under the United capacity purchase agreement, on our financial condition and results of operations.
The forward-looking statements contained in this Quarterly Report are based on management’s current plans, estimates and expectations in light of information currently available to us, and they are subject to uncertainty and changes in circumstances. Actual results may differ materially from
 
1
our expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors” within this Quarterly Report and in the other reports we file with the Securities and Exchange Commission (“SEC”).
Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Should one or more of these risks or uncertainties materialize, or should any of our assumptions or estimates prove to be incorrect, our actual results may be different from, and potentially materially worse than, what we may have expressed or implied by these forward-looking statements. Comparisons of results for any current or prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Investors should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.
 
2
Harbor Diversified, Inc. and Subsidiaries
Consolidated Balance Sheets (in thousands, except shares and par value)
 
Part I. Financial Information
Item 1. Financial Statements
 
    
March 31, 2022
    
December 31, 2021
  
    
(unaudited)
        
Assets
                 
Current Assets
                 
Cash and cash equivalents
    $ 25,573     $ 37,170  
Restricted cash
      576       1,449  
Marketable securities
      136,178       138,370  
Accounts receivable, net
      15,680       7,422  
Notes receivable
      51,078       —    
Spare parts and supplies, net
      5,114       5,200  
Contract costs
      499       518  
Prepaid expenses and other
      1,834       4,174  
    
 
 
    
 
 
  
Total Current Assets
      236,532       194,303  
    
 
 
    
 
 
  
Property and Equipment
                 
Flight property and equipment
      260,926       259,720  
Ground property and equipment
      8,221       8,252  
Less accumulated depreciation and amortization
      (150,109 )      (143,313 ) 
    
 
 
    
 
 
  
Net Property and Equipment
      119,038       124,659  
    
 
 
    
 
 
  
Other Assets
                 
Operating lease
right-of-use
asset
      17,328       18,679  
Intangibles
      5,300       5,300  
Long-term deferred tax asset
      616       533  
Long-term investments
      4,275       4,275  
Long-term contract costs
      —         96  
Long-term notes receivable
      —         47,568  
Other
      1,805       3,988  
    
 
 
    
 
 
  
Total Other Assets
      29,324       80,439  
    
 
 
    
 
 
  
Total Assets
   
 
 384,894
 
   $ 399,401
 
    
 
 
    
 
 
  
Liabilities and Stockholders’ Equity
                 
Current Liabilities
                 
Accounts payable
    $ 15,797     $ 20,060  
Accrued payroll and employee benefits
      12,484       14,885  
Current portion of operating lease liability
      5,180       5,150  
Other accrued expenses
      228       172  
Contract liabilities
      6,917       8,098  
Deferred revenue
      40,102       35,792  
Income taxes payable
      751       —    
Current portion of long-term debt (stated principal amount of $3,500 at March 31, 2022 and December 31, 2021)
      5,845       5,880  
    
 
 
    
 
 
  
Total Current Liabilities
      87,304       90,037  
    
 
 
    
 
 
  
Other Long-Term Liabilities
                 
Long-term debt (stated principal amount of $56,000 at March 31, 2022 and December 31, 2021)
      61,110       61,670  
Long-term promissory note
      4,275       4,275  
Deferred tax liability
      653       688  
Long-term operating lease liability
      9,515       10,877  
Long-term contract liabilities
      —         1,326  
Deferred revenue, net of current portion
      —         9,046  
Other
      2,663       2,722  
    
 
 
    
 
 
  
Total Long-Term Liabilities
      78,216       90,604  
    
 
 
    
 
 
  
Total Liabilities
      165,520       180,641  
Commitments and Contingencies (Note 8)
             
Mezzanine Equity (Note 10)
                 
Series C Convertible Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at March 31, 2022 and December 31, 2021
      13,200       13,200  
Stockholders’ Equity
                 
Common Stock, $0.01 par value, 100,000,000 shares authorized, 55,481,140 shares issued at March 31, 2022 and December 31, 2021,
47,053,806
shares outstanding at March 31, 2022 and 53,316,299 shares outstanding at December 31, 2021
      555       555  
Additional
paid-in
capital
      286,262       287,429  
Retained deficit
      (69,881 )      (79,144 ) 
Treasury stock
      (10,762 )      (3,280 ) 
    
 
 
    
 
 
  
Total Stockholders’ Equity
      206,174       205,560  
    
 
 
    
 
 
  
Total Liabilities and Stockholders’ Equity
    $ 384,894     $ 399,401  
    
 
 
    
 
 
  
See accompanying condensed notes to unaudited consolidated financial statements.
 
3
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except per share amounts)
 
 
    
Three Months Ended

March 31,
  
    
2022
     2021  
              
    
(unaudited)
  
Operating Revenues
                 
Contract revenues
    $ 66,968     $ 49,756  
Contract services and other
      7       18  
    
 
 
    
 
 
  
Total Operating Revenues
      66,975       49,774  
    
 
 
    
 
 
  
Operating Expenses
                 
Payroll and related costs
      26,601       22,751  
Aircraft fuel and oil
      51       13  
Aircraft maintenance, materials and repairs
      14,501       11,072  
Aircraft rent
      —         23  
Other rents
      1,613       922  
Depreciation, amortization and obsolescence
      6,644       6,500  
Payroll Support Program
      —         (27,914 ) 
Purchased services and other
      3,765       3,150  
    
 
 
    
 
 
  
Total Operating Expenses
      53,175       16,517  
    
 
 
    
 
 
  
Income From Operations
      13,800       33,257  
    
 
 
    
 
 
  
Other (Expense) Income
                 
Interest income
      574       370  
Interest expense
      —         (362 ) 
Loss on marketable securities
      (2,423 )      (57 ) 
Other, net
      210       —    
    
 
 
    
 
 
  
Total Other (Expense) Income
      (1,639 )      (49 ) 
    
 
 
    
 
 
  
Net Income Before Taxes
      12,161       33,208  
Income Tax Expense
      2,898       7,983  
    
 
 
    
 
 
  
Net Income
    $ 9,263     $ 25,225  
Preferred stock dividends
      198       198  
    
 
 
    
 
 
  
Net income available to common stockholders
    $ 9,065       25,027  
    
 
 
    
 
 
  
Basic Earnings per share
    $ 0.19     $ 0.46  
Diluted Earnings per share
    $ 0.14     $ 0.35  
Weighted Average Common Shares:
                 
Basic
      47,638       54,863  
Diluted
      64 535       71,662  
See accompanying condensed notes to unaudited consolidated financial statements.
 
4
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (in thousands)
 
 
     Mezzanine Equity -
Series C
Convertible
Redeemable
Preferred Stock		      Common Stock                           
     Shares      Amount      Shares     Treasury
Stock		      Amount      Additional
Paid-In

Capital		     Retained
Deficit		     Cost of
Treasury
Stock		     Total
Stockholders’
Equity		  
Balance, December 31, 2021
      4,000      $ 13,200        53,316       2,165      $ 555      $ 287,429     $ (79,144 )    $ (3,280 )    $ 205,560  
Net income
      —          —          —         —          —          —         9,263       —         9,263  
Dividends
      —          —          —         —          —          (198 )      —         —         (198 ) 
Cancellation of stock option
      —          —          —         —          —          (969 )      —         —         (969 ) 
Treasury stock purchases
      —          —          (6,262 )      6,262        —          —         —         (7,482 )      (7,482 ) 
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, March 31, 2022 (unaudited)
      4,000      $ 13,200        47,054       8,427      $ 555      $ 286,262       $ (69,881 )    $ (10,762 )    $ 206,174  
    
 
 
     
 
 
     
 
 
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
 
     Mezzanine Equity -
Series C
Convertible
Redeemable
Preferred Stock		      Common Stock                           
     Shares      Amount      Shares      Treasury
Stock		      Amount      Additional
Paid-In

Capital		     Retained
Deficit		     Cost of
Treasury
Stock		     Total
Stockholders’
Equity		  
Balance, December 31, 2020
      4,000      $ 13,200        54,863        618      $ 555      $ 288,221     $ (171,770 )    $ (481 )    $ 116,525  
Net income
      —          —          —          —          —          —         25,225       —         25,225  
Dividends
      —          —          —          —          —          (198 )      —               —         (198 ) 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, March 31, 2021 (unaudited)
      4,000      $ 13,200        54,863           618      $ 555      $ 288,023     $ (146,545 )    $ (481 )    $ 141,552  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
See accompanying condensed notes to unaudited consolidated financial statements.
 
5
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
 
 
    
Three Months Ended
March 31,
  
    
2022
     2021  
              
    
(unaudited)
  
Cash Flows From Operating Activities
                 
Net income
    $ 9,263     $ 25,225  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                 
Depreciation, amortization and obsolescence allowance
      6,644       6,500  
Amortization of contract costs
      (1,066 )      (661 ) 
Amortization of engine overhauls
      616       298  
Deferred income taxes
      (118 )      163  
(Gain) loss on disposition of property and equipment
      (2 )      49  
Loss on marketable securities
      2,423       57  
Changes in operating assets and liabilities:
                 
Accounts receivable
      (8,258 )      (14,193 ) 
Notes receivable
      (3,510 )      (7,235 ) 
Federal tax receivable
      —         (3,026 ) 
Spare parts and supplies
      (229 )      211  
Prepaid expenses and other
      4,523       (1,256 ) 
Operating lease
right-of-use
asset
      19       96  
Accounts payable
      (4,263 )      609  
Accrued payroll and employee benefits
      (2,401 )      (510 ) 
Other accrued expenses
      56       33  
Long-term deferred revenue
      (9,046 )      355  
Contract liabilities
      (1,441 )      (312 ) 
Deferred revenue
      4,310       7,556  
Income taxes payable
      751       763  
Other long-term liabilities
      (59 )      24  
    
 
 
    
 
 
  
Net Cash (Used in) Provided by Operating Activities
      (1,788 )      14,746  
    
 
 
    
 
 
  
Cash Flows From Investing Activities
                 
Additions to property and equipment
      (1,210 )      (163 ) 
Proceeds on disposition of property and equipment
      3       4  
Purchase of marketable securities
      (231 )      (20,000 ) 
    
 
 
    
 
 
  
Net Cash Used in Investing Activities
      (1,438 )      (20,159 ) 
    
 
 
    
 
 
  
Cash Flows From Financing Activities
                 
Repayments of long-term debt
      (595 )      (700 ) 
Dividends paid
      (198 )      (198 ) 
Cancellation of stock option
      (969 )      —    
Repurchased stock
      (7,482 )      —    
    
 
 
    
 
 
  
Net Cash Used in Financing Activities
      (9,244 )      (898 ) 
    
 
 
    
 
 
  
Decrease in Cash, Cash Equivalents and Restricted Cash
      (12,470 )      (6,311 ) 
Cash, Cash Equivalents and Restricted Cash, beginning of period
      38,619       131,193  
    
 
 
    
 
 
  
Cash, Cash Equivalents and Restricted Cash, end of period
    $ 26,149     $ 124,882  
    
 
 
    
 
 
  
See accompanying condensed notes to unaudited consolidated financial statements.
See Note 11 for supplemental cash flow information.
 
6
Harbor Diversified, Inc. and Subsidiaries
Condensed Notes to Consolidated Financial Statements (in thousands, except shares and per share amounts)
 
1. 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 Harbor Diversified, Inc. (Harbor) and subsidiaries (collectively, the Company).
Harbor
is a non-operating holding company
that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which
is a non-operating entity with
no material assets.
The consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. The consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly in all material respects the financial condition and results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. All of the dollar and share amounts set forth in these condensed notes to consolidated financial statements are presented in thousands except per share and par value amounts.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Harbor’s Annual Report on Form
10-K
for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022 (2021 Annual Report). Due in part to the significant impacts to the Company’s business and industry from the industry-wide pilot shortage and the global coronavirus
(COVID-19)
pandemic, in addition to other factors, the results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for any other reporting period.
Description of Operations
The Company has principal lines of business focused on (1) providing regional air services through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin, and (3) providing flight equipment financing to Air Wisconsin.
The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement (United capacity purchase agreement) with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020, April 2021 and April 2022. United is currently Air Wisconsin’s sole airline partner. For additional information, refer to Note 3,
Capacity Purchase Agreement with United.
Air Wisconsin operates as a United Express carrier with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs.
Contract Revenues
The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. United pays Air Wisconsin a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with incentive payments available, and penalties payable, based on the achievement, or failure to achieve, certain performance criteria. Under the agreement, Air Wisconsin’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The agreement also provides for the reimbursement to Air Wisconsin of certain direct operating expenses such as hull and liability insurance, property taxes and Canadian navigational fees.
United makes provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments are subsequently reconciled with United based on actual completed flight activity. As of the date of this filing, these payments are reconciled
 
7
through December 2021. As of March 31, 2022, United owed Air Wisconsin $5,066 pursuant to the United capacity purchase agreement, which is recorded in accounts receivable, net, on the consolidated balance sheets. United has disputed that it owes a portion of that amount.
Under the United capacity purchase agreement, Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion,
on-time
performance, and customer satisfaction ratings. The incentives are defined in the agreement and performance is measured on a monthly basis. At the end of each month during the term of the agreement, Air Wisconsin calculates the incentives achieved, or penalties payable, during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 606,
Revenue from Contracts with Customers
(Topic 606). Although the final reconciliations have not been completed for all periods, after considering operational performance related to expected incentive and penalty payments, Air Wisconsin has received, or is likely to receive, incentive payments, net of penalties, of $777 and $1,819 for the three months ended March 31, 2022 and 2021, respectively, under the United capacity purchase agreement.
Under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the
COVID-19
pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so through February 2023, the end of the contract period. Accordingly, during the three months ended March 31, 2022, Air Wisconsin recognized $4,736 of fixed revenues that were previously deferred, compared to a deferral of $7,911 of fixed revenues in the three months ended March 31, 2021. Air Wisconsin’s deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed over the remaining contract term. The deferred fixed revenues as of March 31, 2022 and 2021 were $40,102 and $35,792, respectively.
Consistent with the discussion above, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, Air Wisconsin also recognized increased
non-refundable
upfront fee revenues and increased fulfillment costs, both of which are amortized over the remaining term of the United capacity purchase agreement in proportion to the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods. During the three months ended March 31, 2022, Air Wisconsin recorded $1,066 of revenue from upfront fees and $114 of fulfillment costs, compared to $661 in revenue from upfront fees and $71 of fulfillment costs for the three months ended March 31, 2021. The deferred upfront fee revenue, in the amount of $4,654, is recorded as part of contract liabilities on the consolidated balance sheets.
As part of the October 2020 amendment to the United capacity purchase agreement (CPA Amendment), United issued a note receivable to Air Wisconsin in the amount of $11,048 along with a cash settlement of $670, of which $4,410 was deferred as of December 31, 2020, with the remaining portion to be recognized in proportion to the number of flights expected to be completed in subsequent periods. In October 2021, in accordance with the CPA Amendment, Air Wisconsin received $294 from United for the opening of a crew base, of which $73 was deferred as of December 31, 2021. For the three months ended March 31, 2022, Air Wisconsin recorded $519 of revenue related to these items, compared to $313 of revenue related to these items for the three months ended March 31, 2021. The deferred CPA Amendment revenue, in the amount of $2,263, is recorded as part of contract liabilities on the consolidated balance sheets.
The timing of the recognition of deferred fixed revenues,
non-refundable
upfront fee revenue, fulfillment costs, and deferred CPA Amendment revenue in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown over the contract term.
The amount of revenues recognized for the three months ended March 31, 2022 that were previously recorded as contract liabilities were $6,321.
The CPA Amendment provided, among other things, for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours resulting from the
COVID-19
pandemic in 2020, and consistent with the terms of the CPA Amendment, management determined that, from an accounting perspective, a new performance obligation was created by United, requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United “stand ready” rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation will be recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment. For the three months ended March 31, 2022 and 2021, Air Wisconsin
 
8
recorded $3,509 and $7,235, respectively, in revenue related to this performance obligation. Under the CPA Amendment, United pays this amount by the delivery of a note due at the end of the contract term in February 2023. Therefore, this amount was recorded in notes receivable on the consolidated balance sheets. The notes receivable contain a significant financing component and any interest income is separately reported in the consolidated statements of operations. As of March 31, 2022, these notes totaled $51,078, bore interest at the rate of 4.5%, and had a maturity date of February 28, 2023. As of March 31, 2022, interest receivable on these notes totaled $2,710.​​​​​​​
Other Revenues
Other revenues primarily consist of the sales of parts to other airlines and are immaterial in all periods presented. The transaction price for the sale of these parts generally is fair market value.
Restricted Cash
As of March 31, 2022, the Company had a restricted cash balance of $576. A portion of the balance secures a credit facility for the issuance of letters of credit guaranteeing the performance of Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies. The remaining portion is cash held for the repurchase of shares under Harbor’s stock repurchase program. For additional information, refer to Note 8,
Commitments and Contingencies
and Note 13,
Stock Repurchase Program.
Marketable Securities
The Company’s equity security investments, consisting of exchange-traded funds and mutual funds, are recorded at fair value based on quoted market prices (level 1) in marketable securities on the consolidated balance sheets, in accordance with the guidance in ASC Topic 321,
Investments-Equity Securities
, with the change in fair value during the period included in the consolidated statements of operations. As of March 31, 2022 the fair value of the Company’s marketable securities was $136,178.
The calculation of net unrealized gains and losses that relate to marketable securities held as of March 31, 2022 is as follows:
 
Net losses recognized during the three months ended March 31, 2022 on equity securities
    $ (2,423 ) 
Less: Net gains and losses recognized during the period on equity securities sold during the three months ended March 31, 2022
      —    
    
 
 
  
Unrealized losses recognized during the reporting period on equity securities still held at March 31, 2022
    $ (2,423 ) 
    
 
 
  
The calculation of net unrealized gains and losses that relate to marketable securities held as of March 31, 2021 is as follows:
 
Net losses recognized during the three months ended March 31, 2021 on equity securities
    $ (57 ) 
Less: Net gains and losses recognized during the period on equity securities sold during the three months ended March 31, 2021
      —    
    
 
 
  
Unrealized losses recognized during the reporting period on equity securities still held at March 31, 2021
    $ (57 ) 
    
 
 
  
 
9
Property and Equipment
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
 
Assets    Depreciable Life    Current Residual Value  
Aircraft
    7 years    $ 50  
Rotable parts
    7 years      10 % 
Spare engines
    7 years    $ 25  
Ground equipment
    up to 10 years      0 % 
Office equipment
    up to 10 years      0 % 
Leasehold improvements
    Shorter of asset or lease life      0 % 
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop visit. Lotus’ engine maintenance costs are expensed.
Depreciation expense as of March 31, 2022 and 2021 was $6,315 and $6,249, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations.
Impairment of Long-Lived and Intangible Assets
The Company evaluates long-lived and intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived and intangible assets and determined that no quantitative impairment tests were required to be performed as of March 31, 2022.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would
more-likely-than-not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2018. With a few exceptions, the Company is no longer subject to state or local income tax examinations for years prior to 2017. As of March 31, 2022, the Company had no outstanding tax examinations.
Concentration of Customer Risk
United is currently Air Wisconsin’s sole airline partner. Substantially all the Company’s revenues in the three months ended March 31, 2022 and 2021 were derived from the United capacity purchase agreement. For additional information, refer to Note 3,
Capacity Purchase Agreement with United
.
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
 
10
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, marketable securities, accounts receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments, with the exception of marketable securities, are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Marketable securities are reported at fair value based on quoted market prices. Long-term investments are
held-to-maturity
debt securities and are reported at amortized cost.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price).
Fair Value Measurement
(Topic 820) establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:
Level 1—Quoted market prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3—Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations each reporting period, and it is possible that an asset or liability may be classified differently from year to year.
The tables below set forth the Company’s classification of marketable securities and long-term investments as of:
 
    
March 31, 2022
  
    
Total
     
Level 1
     
Level 2
     
Level 3
  
Marketable securities – exchange-traded funds
    $ 111,851      $ 111,851      $ —        $ —    
Marketable securities – mutual funds
      24,327        24,327        —          —    
Long-term investments – bonds (see Note 6)
      4,275        —          4,275        —    
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 140,453      $ 136,178      $ 4,275      $ —    
    
 
 
     
 
 
     
 
 
     
 
 
  
 
    
March 31, 2021
  
    
Total
     
Level 1
     
Level 2
     
Level 3
  
Marketable securities – exchange-traded funds
    $ 19,943      $ 19,943      $ —        $ —    
Long-term investments – bonds (see Note 6)
      4,275        —          4,275        —    
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 24,218      $ 19,943      $ 4,275      $ —    
    
 
 
     
 
 
     
 
 
     
 
 
  
Reclassification
Certain operating expenses previously recorded in purchased services and other in the consolidated statement of operations for the three months ended March 31, 2021, have been reclassified to aircraft maintenance, materials and repairs to conform to the presentation for the three month period ended March 31, 2022, with no effect on net income. The reclassification relates to certain third party maintenance activities.
Certain current liabilities previously recorded in contract liabilities in the consolidated balance sheets as of December 31, 2021 have been reclassified to deferred revenue to conform to the presentation as of March 31, 2022. As a result of this change, the consolidated statements of cash flows also required a reclassification from contract liabilities to deferred revenues in the
Cash Flows from Operating Activities
section of the consolidated statements of cash flows.
Upcoming Accounting Pronouncement
In June 2016, FASB issued ASU
2016-13,
Financial
Instruments
—Credit Losses
(Topic 326):
Measurement of Credit Losses on Financial Instruments
(ASU
2016-13).
ASU
2016-13
introduces a new accounting model known as Current 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
 
11
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 will also apply to receivables arising from revenue transactions such as contract assets and accounts receivable. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU
2016-13
is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company is currently evaluating the impact ASU
2016-13
will have on its consolidated financial statements.
2. Liquidity
The Company’s ability to meet its liquidity needs is dependent upon its cash, cash equivalents and marketable securities balances and its ability to generate cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company currently believes its available working capital and anticipated cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months from the date of this filing. However, there can be no assurance that the Company will be able to generate sufficient cash flows from operations, or that additional funds will be available, to meet its future liquidity needs.
Reduction in Block Hours
Public concerns about
the COVID-19 virus,
as well as the various governmental guidelines and restrictions adopted to limit the spread of
the COVID-19 virus,
have had a material adverse impact on passenger demand for air travel since the beginning of the pandemic. While demand has generally increased since the beginning stages of the pandemic as a result of the easing of certain of these guidelines and restrictions, as well as reduced incidence of the virus and expanded availability and adoption of vaccines, passenger demand has not returned to
pre-pandemic
levels which, together with the industry-wide pilot shortage, has prevented Air Wisconsin from consistently achieving block hours in line with
pre-pandemic
levels.
United Capacity Purchase Agreement
Since a portion of the Company’s revenues is fixed due to the structure of the United capacity purchase agreement, the impact of the COVID-19 pandemic on the Company’s financial position has been partially mitigated or offset. However, if United does not pay the full amount required under the agreement, whether due to its own financial disruption resulting from the COVID-19 pandemic, as a result of a dispute with Air Wisconsin, or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition and liquidity. Currently, a dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. As of March 31, 2022, the amount in dispute was approximately
$9,371. 
The Company believes that United’s claims have no support under the United capacity purchase agreement, however the outcome cannot be predicted. The Company has recognized all disputed amounts through March 31, 2022 in the consolidated financial statements. 
The fixed amount received under the United capacity purchase agreement is based on a fixed contractual rate and number of covered aircraft, while variable revenue earned is based on the number of block hours and departures. Since the onset of the pandemic, variable revenues have been significantly reduced due to the lower number of flights relative to historical levels. In addition, a portion of the fixed amount of revenue has been deferred based on future expected flight activity, since fixed revenue is allocated over current and expected future departures through the end of the contract term. Due to a recent increase in completed flights, and based on projected future completed flight activity, Air Wisconsin has begun to reverse the prior deferral of revenues and anticipates continuing to do so through the end of the contract period. For additional information, refer to Note 1,
 Summary of Significant Accounting Policies
.
Paycheck Protection Program
Air Wisconsin’s receipt of governmental assistance has mitigated to some extent the adverse impacts of the
COVID-19
pandemic on the Company’s financial condition, results of operations and liquidity.
In April 2020, Air Wisconsin received a $10,000 loan (SBA Loan) under the small business Paycheck Protection Program (PPP) established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and administered by the Small Business Administration (SBA). Under the CARES Act, Air Wisconsin applied for forgiveness of the SBA Loan, and the SBA granted forgiveness of all principal and accrued interest on the SBA Loan in August 2021 in the amount of $10,135, which was recorded as gain on extinguishment of debt in the consolidated statements of operations for the year ended December 31, 2021 included within our 2021 Annual Report.
 
12
Payroll Support Program
In April 2020, Air Wisconsin entered into a Payroll Support Program
Agreement (PSP-1 Agreement)
with respect to payroll support (Treasury Payroll Support) from the U.S. Department of the Treasury (Treasury) under a program (Payroll Support Program) provided by the CARES Act. Pursuant to
the PSP-1 Agreement,
Air Wisconsin received approximately $42,185, all of which was received in the year ended December 31, 2020. In December 2020, the federal Consolidated Appropriations Act of 2021 (PSP Extension Law) was adopted, which provided for additional payroll support to eligible air carriers.
In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement with the Treasury
(the PSP-2 Agreement),
which is substantially similar to
the PSP-1 Agreement.
Air Wisconsin received approximately $32,987 pursuant to
the PSP-2 Agreement,
all of which was received in the year ended December 31, 2021. In March 2021, the federal American Rescue Plan Act of 2021 (American Rescue Plan) was adopted, which provided further payroll support to eligible air carriers.
In June 2021, pursuant to the American Rescue Plan, Air Wisconsin entered into a Payroll Support Program 3 Agreement with the Treasury
(the PSP-3 Agreement
and, together with
the PSP-1 Agreement
and
the PSP-2 Agreement,
the PSP Agreements), which is substantially similar to
the PSP-1 Agreement
and
the PSP-2 Agreement.
Air Wisconsin received approximately $33,329 pursuant to
the PSP-3 Agreement,
all of which was received in the year ended December 31, 2021.
The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, (ii) Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee’s pay rates or benefits without that employee’s consent, in any case prior to certain dates, (iii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv) Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neither Air Wisconsin nor any of its affiliates can purchase an equity security of Air Wisconsin or any direct or indirect parent company of Air Wisconsin that is listed on a national securities exchange prior to certain dates. If Air Wisconsin fails to comply with its obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on the Company’s business. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of
the PSP-1 Agreement.
No such audits have been initiated by the Treasury under
the PSP-2 Agreement
or PSP-3 Agreement
as of the date of this filing. For additional information, refer to Note 8,
 Commitments and Contingencies.
The proceeds of the Treasury Payroll Support under the PSP Agreements were recorded in cash and cash equivalents when received and were recognized as a contra-expense under Payroll Support Program in the consolidated statements of operations for the periods for which the funds were intended to offset payroll expenses. As all amounts were recognized at December 31, 2021; Air Wisconsin did not recognize a reduction in operating expense in the three months ended March 31, 2022, as compared to $27,914 for the three months ended March 31, 2021.
3. Capacity Purchase Agreement with United
In February 2017, Air Wisconsin entered into the United capacity purchase agreement with United to operate up to
65 CRJ-200 regional
jet aircraft. In October 2020, Air Wisconsin entered into the CPA Amendment, which among other things, set the number of aircraft covered by the agreement at 63. In April 2021, Air Wisconsin and United entered into a second amendment to the United capacity purchase agreement which addressed the scheduling of block hours during the remaining term of the
agreement
. In April 2022, Air Wisconsin and United entered into a third amendment to the United capacity purchase agreement which addressed the date by which United must provide a wind-down schedule for the period following the expiration of the term of the agreement. The term of the United capacity purchase agreement ends in 
February 2023
. Air Wisconsin and United are in active negotiations regarding the extension of the agreement or the execution of a new agreement, however there can be no assurance that any agreement will be reached.
4. Property and Equipment
As of March 31, 2022, Air Wisconsin owned 64
CRJ-200
regional jets.
5. Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2022 was 23.8%. The Company’s effective tax rate for the three months ended March 31, 2022 varied from the federal statutory rate of 21.0% primarily due to the impact of state income taxes and permanent differences between financial statement and taxable income.
The Company’s effective tax rate for the three months ended March 31, 2021 was 24.0%. The Company’s effective tax rate for the three months ended March 31, 2021 varied from the federal statutory rate of 21.0% primarily due to the impact of state taxes and permanent differences between financial statement and taxable income.
 
13
6. Debt
Long-Term Debt
Long-term debt consists of the following (with interest rates, as of the dates presented):
 
    
March 31,
2022
      December 31,
2021		  
Notes, due December 31, 2025 (4.0%)
    $ 66,955      $ 67,550  
Less: current maturities
      5,845        5,880  
    
 
 
     
 
 
  
Total Long-Term Debt
    $ 61,110      $ 61,670  
    
 
 
     
 
 
  
Maturities of long-term debt for the periods subsequent to March 31, 2022, are as follows:
 
Fiscal Year
   
Amount
  
April 2022 through December 2022
    $ 5,285  
2023
      9,170  
2024
      8,890  
2025
      43,610  
    
 
 
  
Total
    $ 66,955  
    
 
 
  
The debt agreements include, among other provisions, certain covenants. As of March 31, 2022, and March 31, 2021, Air Wisconsin was in compliance with the covenants included in each of its debt agreements.
For additional information regarding Long-Term Debt, refer to Note 6,
Debt,
within our 2021 Annual Report.
Long-Term Promissory Note
In July 2003, Air Wisconsin financed a hangar through the issuance of $4,275 City of Milwaukee, Wisconsin variable rate Industrial Development Bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash, and interest was payable semiannually on each May 1 and November 1. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the consolidated balance sheets. The hangar is accounted for as a
right-of-use
asset with a value of $2,720 as of March 31, 2022. For additional information, refer to Note 1,
Fair Value of Financial Instruments
.
7. Lease Obligations
Air Wisconsin has operating leases with terms greater than twelve months for training simulators and facility space including office space and maintenance facilities. The remaining lease terms for training simulators and facility space vary from 1 month to 12 years. For leases with durations longer than 12 months, the Company recorded the related operating lease
right-of-use
asset and operating lease liability at the present value of the lease payments over the lease term. The Company used Air Wisconsin’s incremental borrowing rate to discount the lease payments based on information available at lease conception. Air Wisconsin’s operating leases with lease rates that are variable based on operating costs, use of the facilities or other variable factors are excluded from the Company’s
right-of-use
assets and operating lease liabilities in accordance with the applicable accounting guidance.
Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
Certain leases contain an option to extend or terminate the lease agreement. The Company evaluates each option prior to its expiration and may or may not exercise such option depending on conditions present at the time. At the inception of the lease, if it is reasonably certain that the Company will exercise an option to extend or terminate a lease, the Company considers the option in determining the classification and measurement of the lease. The Company expects that in the normal course of business operating leases that expire will be renewed or replaced by other leases.
As of March 31, 2022, the
Company’s right-of-use assets
were $17,328, current maturities of operating lease liabilities were $5,180, and noncurrent lease liabilities were $9,515. During the three months ended March 31, 2022, the Company paid $1,490 in operating lease payments.
 
14
The table below presents operating lease related terms and discount rates as of March 31, 2022:
 
Weighted-average remaining lease term
      3.47 years  
Weighted-average discount rate
      5.41%  
Components of lease costs were as follows for the dates presented:
 
    
Three Months Ended
March 31,
  
    
2022
      2021  
Operating lease costs
    $ 1,474      $ 766  
Short-term lease costs
      104        146  
Variable lease costs
      35        33  
    
 
 
     
 
 
  
Total Lease Costs
    $ 1,613      $ 945  
    
 
 
     
 
 
  
As of March 31, 2022, Air Wisconsin leased or subleased certain training simulators and facilities for terms of greater than 12 months. Rent expense recorded under all operating leases, inclusive of engine leases, was $1,613 and $945 for the three months ended March 31, 2022 and March 31, 2021, respectively.
The following table summarizes the future minimum rental payments required under operating leases that had initial or
remaining non-cancelable lease
terms greater than one year as of March 31, 2022:
 
Fiscal Year
   
Amount
  
April 2022 through December 2022
    $ 4,558  
2023
      5,832  
2024
      3,356  
2025
      2,645  
2026
      147  
Thereafter
      511  
    
 
 
  
Total lease payments
      17,049  
Less imputed interest
      (2,354 ) 
    
 
 
  
Total Lease Liabilities
    $ 14,695  
    
 
 
  
8. Commitments and Contingencies
Legal Matters
The Company is subject to certain legal proceedings, which it considers routine to its business activities. As of March 31, 2022, the Company believes, after consultation with legal counsel, that the ultimate outcome of such legal proceedings, whether individually or in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
Treasury Payroll Support Program Audit
In September 2020, the Treasury’s Office of Inspector General (OIG) commenced a routine audit in connection with Air Wisconsin’s receipt of funds under the
PSP-1
Agreement. The audit focused, among other things, on certain calculations used to determine the amount of Treasury Payroll Support Air Wisconsin was entitled to receive under the program. Air Wisconsin has disputed in good faith the Treasury’s interpretation of certain provisions of the application for Treasury Payroll Support and the
PSP-1
Agreement, as well as the Treasury’s guidance regarding the Payroll Support Program. As of the date of this filing, Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit. Nevertheless, the Treasury subsequently entered into the
PSP-2
Agreement and the
PSP-3
Agreement with Air Wisconsin, has paid to Air Wisconsin the amounts to be paid under the
PSP-2
Agreement and the
PSP-3
Agreement, and has not required Air Wisconsin to refund any amounts it received under the
PSP-1
Agreement.
Standby Letters of Credit
As of March 31, 2022, Air Wisconsin had six outstanding letters of credit in the aggregate amount of $372 to guarantee the performance of its obligations under certain lease agreements, airport agreements and insurance policies. Air Wisconsin maintained a credit facility with a borrowing capacity of $372 for the issuance of such letters of credit as needed to support its operations. A significant portion of Air Wisconsin’s restricted cash balance secures the credit facility.
 
15
Cash Obligations
The following table sets forth the Company’s cash obligations for the periods presented:
 
    
Total
     
April

through

December

2022
     
2023
     
2024
     
2025
     
2026
     
Thereafter
  
Aircraft Notes Principal
    $ 59,500      $ 3,500      $ 7,000      $ 7,000      $ 42,000      $ —        $ —    
Aircraft Notes Interest
      7,455        1,785        2,170        1,890        1,610        —          —    
Operating Lease Obligations
      17,049        4,558        5,832        3,356        2,645        147        511  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 84,004      $ 9,843      $ 15,002      $ 12,246      $ 46,255      $ 147      $ 511  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3,500, and certain additional amounts may be payable based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes in June 2021, no semi-annual installments are due prior to December 31, 2022. As of March 31, 2022, all of the Company’s long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes, refer to Note 6,
Debt,
and the section entitled “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
”
within our 2021 Annual Report.
9. Related-Party Transactions
Resource Holdings Associates (Resource Holdings) provides AWAC and Air Wisconsin with financial advisory and management services pursuant to an agreement entered into in January 2012. AWAC paid a total of $60 to Resource Holdings for the three months ended March 31, 2022 and March 31, 2021, plus the reimbursement of certain
out-of-pocket
expenses. In June 2021, the board of directors agreed to require Harbor to pay Resource Holdings an annual fee of $150, payable monthly, which amount is in addition to the amount paid to Resource Holdings by AWAC. Harbor paid an aggregate of $38 to Resource Holdings for the three months ended March 31, 2022. For additional information, refer to “
Certain Relationships and Related Transactions, and Director Independence
” within our 2021 Annual Report.
10. Earnings Per Share and Equity
Calculations of net income per common share for the dates presented were as follows:
 
    
Three Months Ended
March 31,
  
    
2022
      2021  
Net income
    $ 9,263      $ 25,225  
Preferred stock dividends
      198        198  
    
 
 
     
 
 
  
Net income applicable to common stockholders
      9,065        25,027  
    
 
 
     
 
 
  
Weighted average common shares outstanding
                  
Shares used in calculating basic earnings per share
      47,638        54,863  
Stock option
      397        299  
Series C Preferred
      16,500        16,500  
    
 
 
     
 
 
  
Shares used in calculating diluted earnings per share
      64,535        71,662  
    
 
 
     
 
 
  
Earnings allocated to common stockholders per common share
                  
Basic
    $ 0.19      $ 0.46  
Diluted
    $ 0.14      $ 0.35  
Basic earnings per share of common stock is computed by dividing the net income applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period.
 
16
Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding assuming the conversion of the Series C Preferred into an aggregate of 16,500 shares of common stock under the
if-converted
method, and the exercise of a stock option granted in 2015 into 397
shares of common stock under the treasury stock method for the three months ended March 31, 2022. In March 2022, Harbor entered into an agreement with the holder of the stock option to cancel the option in exchange for
$969. The stock option is included in computing diluted earnings per share under the treasury stock method for the portion of the reporting period during which it was outstanding.
Series C Preferred
In January 2020, Harbor issued 4,000 shares of the Series C Preferred. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred are set forth in the Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock (Certificate of Designations), which Harbor filed with the Secretary of State of the State of Delaware.
Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (Conversion Price). The adjusted Conversion Price as of the date of this filing is $0.15091.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted into common stock pursuant to the limitation described herein (Conversion Cap Excess Shares), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends in an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (Conversion Cap Excess Dividends). As of March 31, 2022, 755 shares of the Series C Preferred were immediately convertible into 16,500 shares of common stock (representing 26.0% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares.
In the event of any liquidation, dissolution or winding up of Harbor, or a sale of Harbor, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of Harbor to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (Series C Liquidation Amount).
On March 30, 2022, the board of directors declared a dividend of $198 on the Series C Preferred, which was paid on March 31, 2022.
Based on the applicable accounting guidance, Harbor is required to apply
the “if-converted” method
to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480,
 Distinguishing Liabilities from Equity
. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.
Excluded Stock Options
In January 2022, Harbor granted a group of affiliated stockholders options to sell additional shares of Harbor’s common stock owned by the stockholders at fixed prices. As these options were out-of-the-money during the three month period ended March 31, 2022, they would have an anti-dilutive effect on the calculation of earnings per share and thus are not included in the calculation above. For additional information regarding these options, refer to Note 13,
Stock Repurchase Program
, within this Quarterly Report.
11. Supplemental Cash Flow Information
Cash payments for interest for the three months ended March 31, 2022 and March 31, 2021 were $595 and $1,037, respectively. Cash payments for income taxes for the three months ended March 31, 2022 and March 31, 2021 were $6 and $10,083, respectively. Cash payments included in the measurement of lease liabilities related to operating leases were $1,490 and $700 for the three months ended March 31, 2022 and March 31, 2021, respectively.
 
17
12. Intangible Assets
Intangible assets consist of the following as of the dates presented:
 
    
March 31, 2022
      December 31, 2021  
    
Gross Carrying Amount
      Gross Carrying Amount  
Trade names and air carrier certificate
      5,300        5,300  
    
 
 
     
 
 
  
Total
    $ 5,300      $ 5,300  
    
 
 
     
 
 
  
13. Stock Repurchase Program
On March 30, 2021, the board of directors adopted a stock repurchase program pursuant to which Harbor was initially authorized to repurchase up to $1,000 of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1,000 per calendar month thereafter. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. Harbor acquired a total of 6,262 shares of its common stock pursuant to the stock repurchase program in the three months ended March 31, 2022.
In January 2022, Harbor entered into an agreement with a group of affiliated stockholders pursuant to which Harbor agreed to repurchase an aggregate of 5,437,500 shares of common stock for a purchase price of $5,655 pursuant to the settlement of a legal claim Harbor had against the stockholders. As part of the transaction, Harbor also granted to the stockholders three options to sell additional shares of Harbor’s common stock owned by the stockholders at fixed prices.
 
The first option provided the right to require Harbor to purchase up to 1,600,000 shares at a price of $1.95 from January 1, 2022 through and including February 15, 2022. The second option provided the right to require Harbor to purchase up to 1,000,000 shares at a price of $1.90 from February 16, 2022 through and including March 31, 2022. The third option provided the right to require Harbor to purchase 500,000 shares at a price of $1.85 from April 1, 2022 through and including May 15, 2022. As of March 31, 2022, the first two options had expired without exercise. 
For additional information, refer to Part II, Item 2, “
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
” within this Quarterly Report.
14. Subsequent Events
The Company evaluated its consolidated financial statements included in this Quarterly Report for subsequent events through May 9, 2022, the date the consolidated financial statements were available to be issued. The following subsequent event is noted:
 
  •  
In April 2022, Air Wisconsin and United entered into a third amendment to the United capacity purchase agreement which addressed the date by which United must provide a wind-down schedule for the period following the expiration of the term of the agreement.
 
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related condensed notes included in this Quarterly Report, and with the audited consolidated financial statements, accompanying notes, and the other financial information included within the Annual Report on Form
10-K
for the year ended December 31, 2021 (our “2021 Annual Report”). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Quarterly Report, particularly in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
Harbor Diversified, Inc. (“Harbor”) is
a non-operating
holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is
a non-operating entity
with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, disclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the “Company,” “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as “Harbor.”
For the three months ended March 31, 2022, Air Wisconsin operated a fleet of
64 CRJ-200 regional
jets under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access. More than 99% of our operating revenues for the three months ended March 31, 2022 was derived from operations associated with the United capacity purchase agreement.
Subject to certain limited exceptions, the United capacity purchase agreement provides Air Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. Air Wisconsin is also eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion,
on-time
performance, and customer satisfaction ratings. Furthermore, the agreement provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement has the effect of protecting Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers.
In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, provided relief on certain scheduling requirements and settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the United capacity purchase agreement. In April 2021, Air Wisconsin and United entered into a second amendment to the United capacity purchase agreement which addressed the scheduling of block hours after a certain date. In April 2022, Air Wisconsin and United entered into a third amendment to the United capacity purchase agreement which addressed the date by which United must provide a wind-down schedule for the period following the expiration of the term of the agreement. The United capacity purchase agreement expires in February 2023. Air Wisconsin and United are in active negotiations regarding the extension of the agreement or the execution of a new agreement.
Currently, a dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. As of March 31, 2022, the amount in dispute was approximately $9.4 million. The Company believes that United’s claims have no support under the United capacity purchase agreement, however the outcome cannot be predicted. The Company has recognized all disputed amounts through March 31, 2022 in the consolidated financial statements.
 
19
Focus on Safety for Employees and Passengers
The safety and well-being of our employees and passengers are our priority. Throughout
the COVID-19 pandemic,
Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by the Centers for Disease Control and Prevention, including working with United to:
 
  •  
enhance Air Wisconsin’s aircraft cleaning and sanitation procedures;
 
  •  
provide gloves, masks, and other personal protective equipment for crew members;
 
  •  
provide options to Air Wisconsin’s employees who are diagnosed with
COVID-19,
including pay protection and extended leave options;
 
  •  
provide financial incentive to employees to encourage vaccination and booster shots;
 
  •  
implement workforce social distancing, mask requirements and other protection measures, and enhanced cleaning of our facilities; and
 
  •  
provide regular, ongoing communication regarding impacts of the
COVID-19
pandemic, including health and safety protocols and procedures.
Labor Shortages
Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by
the COVID-19 pandemic,
the shortage was temporarily abated. However, as flight demand increased, the shortage has become acute, particularly for regional airlines such as Air Wisconsin due to a number of factors, including retirements and employees seeking opportunities at mainline carriers and in other industries. For example, while Air Wisconsin’s monthly departures and scheduled block hours generally increased from June 2020 until October 2021, they rarely
reached pre-pandemic levels
and have declined slightly since October 2021, mostly as a result of pilot shortages.
Impact on Competitive Environment
Several regional and larger carriers have ceased operations as a direct or indirect result of
the COVID-19 pandemic.
As of the date of this filing, ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines, and Compass Airlines, each of which are domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain.
Paycheck Protection Program
In April 2020, Air Wisconsin received a $10.0 million loan (“SBA Loan”) under the small business Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the Small Business Administration (“SBA”). The entire principal amount and accrued interest were forgiven in August 2021 in the amount of $10.1 million, which was recorded as gain on extinguishment of debt in the audited consolidated statements of operations included within our 2021 Annual Report.
Payroll Support Program
In April 2020, Air Wisconsin entered into a Payroll Support Program
Agreement (“PSP-1 Agreement”)
with respect to payroll support (“Treasury Payroll Support”) from the U.S. Department of the Treasury (“Treasury”) under a program (“Payroll Support Program”) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $42.2 million, all of which was received in 2020. The Treasury’s Office of the Inspector General (OIG) commenced a routine audit of Air Wisconsin’s compliance with the terms of
the PSP-1 Agreement.
As of the date of this filing, Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit.
In December 2020, the federal Consolidated Appropriations Act of 2021 (“PSP Extension Law”) was adopted, which provided for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement with the Treasury
(the “PSP-2 Agreement”),
which is substantially similar to
the PSP-1 Agreement.
Air Wisconsin received approximately $33.0 million pursuant to
the PSP-2 Agreement,
all of which was received in 2021.
In March 2021, the federal American Rescue Plan Act of 2021 (“American Rescue Plan”) was adopted, which provided further payroll support to eligible air carriers. In June 2021, pursuant to the American Rescue Plan, the Treasury entered into a Payroll Support Program 3 Agreement with Air
 
20
Wisconsin
(the “PSP-3 Agreement”
and, together with
the PSP-1 Agreement
and
the PSP-2 Agreement,
the “PSP Agreements”), which is substantially similar to
the PSP-1 Agreement
and
the PSP-2 Agreement.
Air Wisconsin received approximately $33.3 million pursuant to
the PSP-3 Agreement,
all of which was received in 2021.
The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries, and benefits, (ii) Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee’s pay rates or benefits without that employee’s consent, in any case prior to certain dates, (iii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv) Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neither Air Wisconsin nor any of its affiliates can purchase an equity security of Air Wisconsin, or any direct or indirect parent company of Air Wisconsin, that is listed on a national securities exchange prior to certain dates. If Air Wisconsin fails to comply with its obligations under these agreements, it may be required to repay some or all of the funds provided to it under these agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.
For additional information, refer to Note 8,
 Commitments and Contingencies,
 in our audited consolidated financial statements within our 2021 Annual Report.
Employee Retention Credit
Air Wisconsin received an employee retention credit of approximately $1.1 million in 2021 pursuant to the CARES Act for payroll expenses incurred in 2020.
Economic Conditions, Challenges and Risks Impacting Financial Results
For a discussion of the general and specific factors and trends affecting our business and results of operations, see “
Management’s Discussion and Analysis of Financial Condition and Results of Operations
” within our 2021 Annual Report.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and the Three Months Ended March 31, 2021
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented.
 
    
Three Months Ended

March 31,
               
    
2022
      2021     
Change
  
Operating Data:
           
Available Seat Miles (ASMs) (in thousands)
      321,822        205,738        116,084       56.4 % 
Actual Block Hours
      28,534        19,600        8,934       45.6 % 
Actual Departures
      18,508        13,861        4,647       33.5 % 
Revenue Passenger Miles (RPMs) (in thousands)
      247,653        126,358        121,295       96.0 % 
Average Stage Length (in miles)
      357        308        49       15.9 % 
Contract Revenue Per Available Seat Mile (CRASM) (in cents)
      20.81 ¢       24.18 ¢       (3.37 )¢      (13.9 )% 
Passengers
      691,324        400,617        290,707       72.6 % 
The increase in ASMs, block hours, departures, RPMs and passengers during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the
COVID-19
pandemic.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the dates presented:
 
    
Three Months Ended

March 31,
                
    
2022
      2021     
Change
  
Operating Revenues ($ in thousands):
            
Contract Revenues
    $ 66,968      $ 49,756      $ 17,212        34.6 % 
Contract Services and Other
      7        18        (11 )       (61.1 )% 
  
 
 
     
 
 
     
 
 
     
 
 
  
Total Operating Revenues
    $ 66,975      $ 49,774      $ 17,201        34.6 % 
  
 
 
     
 
 
     
 
 
     
 
 
  
 
21
Total operating revenues increased $17.2 million, or 34.6%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the
COVID-19
pandemic.
Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
 
    
Three Months Ended

March 31,
                
    
2022
      2021     
Change
  
Operating Expenses ($ in thousands):
                                    
Payroll and Related Costs
    $ 26,601      $ 22,751      $ 3,850        16.9 % 
Aircraft Fuel and Oil
      51        13        38        292.3 % 
Aircraft Maintenance, Materials and Repairs
      14,501        11,072        3,429        31.0 % 
Aircraft Rent
      —          23        (23 )       (100.0 )% 
Other Rents
      1,613        922        691        74.9 % 
Depreciation, Amortization and Obsolescence
      6,644        6,500        144        2.2 % 
Payroll Support Program
      —          (27,914 )       27,914        100.0 % 
Purchased Services and Other
      3,765        3,150        615        19.5 % 
    
 
 
     
 
 
     
 
 
     
 
 
  
Total Operating Expenses
    $ 53,175      $ 16,517      $ 36,658        221.9 % 
    
 
 
     
 
 
     
 
 
     
 
 
  
Payroll and Related Costs
. Payroll and related costs increased $3.9 million, or 16.9%, to $26.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was primarily driven by an increase in crew wages, bonuses and training expenses of $1.6 million, an increase in personnel expenses, including per diem and crew rooms of $1.1 million, an increase in taxes and benefits of $0.9 million and an increase in maintenance wages of $0.1 million.
Aircraft Fuel and Oil
. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the three months ended March 31, 2022 and March 31, 2021 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the three months ended March 31, 2022 and March 31, 2021.
Aircraft Maintenance, Materials and Repairs
. Aircraft maintenance, materials and repairs costs increased $3.4 million, or 31.0%, to $14.5 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily as a result of an increase in required maintenance and repair activities due to an increase in flying attributable to increased passenger demand for air transportation. For additional information, refer to Note 1,
 Summary of Significant Accounting Policies – Reclassification
.
Aircraft Rent
. Aircraft rent expense decreased $0.02 million, or 100.0%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. There was no aircraft rent expense recorded in the three months ended March 31, 2022 because Air Wisconsin no longer had any aircraft under lease after June 2021.
Other Rents
. Other rents expense increased $0.7 million, or 74.9%, to $1.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was primarily due to an increase of $0.6 million in flight training simulator rental expense.
Depreciation, Amortization and Obsolescence
. Depreciation, amortization and obsolescence expense increased $0.1 million, or 2.2%, to $6.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was primarily due to the increase in obsolescence expense for spare parts.
Payroll Support Program
.
The contra-expense for the Payroll Support Program decreased $27.9 million, or 100%, for the three months ending March 31, 2022, compared to the three months ended March 31, 2021. There was no contra-expense recorded in the three months ended March 31, 2022 due to the cessation of the Payroll Support Program in 2021.
Purchased Services and Other
. Purchased services and other expense increased $0.6 million, or 19.5%, to $3.8 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. This increase was primarily due to an increase in professional and technical
 
22
services, consisting primarily of an aircraft records review and aircraft engineering services, of $0.5 million, and an increase in insurance expense of $0.1 million. For additional information, refer to Note 1,
 Summary of Significant Accounting Policies – Reclassification
.
Other (Expense) Income
Interest Income
. Interest income increased $0.2 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was primarily due to an increase in interest earned on the notes receivable due from United.
Interest Expense
. Interest expense decreased $0.4 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to the prepayment of debt in June 2021. For additional information, refer to “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities
” within our 2021 Annual Report.
Loss on Marketable Securities
.
Loss on marketable securities was $2.4 million for the three months ended March 31, 2022 and $0.06 for the three months ended March 31, 2021. The loss reflects the change in market value of marketable securities during the three months ended March 31, 2022 and 2021.
Other, Net
. Other income increased $0.2 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The other income consists of dividend income from investments in marketable securities.
Net Income
Net income for the three months ended March 31, 2022 was $9.3 million, or $0.19 per basic share and $0.14 per diluted share, compared to net income of $25.2 million, or $0.46 per basic share and $0.35 per diluted share, for the three months ended March 31, 2021. For additional information, refer to Note 10,
Earnings per Share
and Equity
, in our consolidated financial statements included in this Quarterly Report.
The decrease in net income for the three months ended March 31, 2022, when compared to the three months ended March 31, 2021, primarily resulted from an increase in overall operating expenses and specifically no contra-expense related to the Payroll Support Program, under which we ceased receiving support in 2021. Further, our operating expenses, including payroll and related costs, as well as aircraft maintenance and repair costs, significantly increased due to increased flying levels.
Income Taxes
In the three months ended March 31, 2022, our effective tax rate was 23.8%, compared to 24.0% for the three months ended March 31, 2021. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our deferred tax assets.
We recorded income tax expense of $2.9 million and $8.0 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
The income tax expense for the three months ended March 31, 2022 resulted in an effective tax rate of 23.8%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state income taxes and permanent differences between financial statement and taxable income.
The income tax expense for the three months ended March 31, 2021 resulted in an effective tax rate of 24.0%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state income taxes and permanent differences between financial statement and taxable income.
For additional information, refer to Note 5,
Income Taxes
, in our audited consolidated financial statements included within our 2021 Annual Report.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities, and Air Wisconsin’s cash flows from operations. As of March 31, 2022, our cash and cash equivalents balance was $25.6 million and we held $136.2 million of marketable securities. For the
 
23
three months ended March 31, 2022, we used cash in our operations of $1.8 million. In the near term, Air Wisconsin expects to fund its liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances.
Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, maintenance, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment for Air Wisconsin. During the three months ended March 31, 2022, we had $1.2 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
Air Wisconsin’s ability to service its long-term debt obligations and business development efforts depends on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. If Air Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As of March 31, 2022, Air Wisconsin had $5.8 million of short-term debt, and $61.1 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities
” within our 2021 Annual Report.
The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends or distributions to Harbor. In addition, the PSP Agreements prevent Air Wisconsin from paying dividends prior to certain dates.
We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
Restricted Cash
As of March 31, 2022, in addition to cash and cash equivalents of $25.6 million, the Company had $0.6 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of the periods presented ($ in thousands):
 
    
Three Months Ended
March 31,
                
    
2022
      2021     
Change
  
Net cash (used in) provided by operating activities
    $ (1,788 )     $ 14,746      $ (16,534 )       (112.1 )% 
Net cash used in investing activities
      (1,438 )       (20,159 )       18,721        (92.9 )% 
Net cash used in financing activities
      (9,244 )       (898 )       (8,346 )       929.4 % 
Cash Flows (Used in) Provided by Operating Activities
During the three months ended March 31, 2022, our cash flows used in operating activities were $1.8 million. We had net income of $9.3 million. Cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of $6.2 million, prepaid and other expenses of $4.5 million, deferred revenue of $4.3 million, and loss on marketable securities of $2.4 million, partially offset by decreases in cash primarily related to long-term deferred revenues of $9.0 million, notes receivable of $3.5 million, accounts receivable of $8.3 million, accrued payroll and benefits of $2.4 million, accounts payable of $4.3 million and contract liabilities of $1.4 million.
 
24
During the three months ended March 31, 2021, our cash flows provided by operating activities were $14.7 million. We had net income of $25.2 million, which primarily resulted from lower expenses as a result of payroll support received under the Payroll Support Program and reduced flying activity, further adjusted for increases in cash primarily related to depreciation and engine overhaul amortization of $6.8 million and deferred revenues of $7.6 million, partially offset by decreases in cash primarily related to accounts receivable of $14.2 million, notes receivable of $7.2 million, federal tax receivable of $3.0 million, and prepaid expenses of $1.3 million.
Cash Flows Used in Investing Activities
During the three months ended March 31, 2022, our cash flows used in investing activities were $1.4 million resulting primarily from additions to property and equipment.
During the three months ended March 31, 2021, our cash flows used in investing activities were $20.1 million resulting primarily from investments in marketable securities.
Cash Flows Used in Financing Activities
During the three months ended March 31, 2022, our cash flows used in financing activities were $9.2 million, reflecting $0.6 million in repayments of long-term debt, $0.2 million of dividends paid on preferred stock, $1.0 million for the cancellation of a stock option, and $7.5 million to repurchase shares of our common stock.
During the three months ended March 31, 2021, our cash flows used in financing activities were $0.9 million, reflecting $0.7 million in payments of long-term debt and $0.2 million of dividends paid on preferred stock.
Commitments and Contractual Obligations
For additional information regarding our commitments and contractual obligations, refer to the section entitled “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Commitments and Contractual Obligations
” within our 2021 Annual Report.
The following table sets forth our cash obligations for the periods presented ($ in thousands)
 
    
Total
     
April

through

December

2022
     
2023
     
2024
     
2025
     
2026
     
Thereafter
  
Aircraft Notes Principal
    $ 59,500      $ 3,500      $ 7,000      $ 7,000      $ 42,000      $ —      $ —  
Aircraft Notes Interest
      7,455        1,785        2,170        1,890        1,610        —          —    
Operating Lease Obligations
      17,049        4,558        5,832        3,356        2,645        147        511  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 84,004      $ 9,843      $ 15,002      $ 12,246      $ 46,255      $ 147      $ 511  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million and certain additional amounts may be due based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes in June 2021, no semi-annual installments are due prior to December 31, 2022. As of March 31, 2022, all of Air Wisconsin’s long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to the section entitled “
Management’s Discussion and Analysis of Financial Condition and Results of Operations”
within our 2021 Annual Report.
Series C Convertible Redeemable Preferred Stock
In January 2020, Harbor completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three
CRJ-200
regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of Harbor’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred”) with an aggregate value of $13.2 million, or $3.30 per share (the “Series C Issue Price”). Air Wisconsin had leased each of these
CRJ-200
regional jets and GE engines from Southshore. In January 2020, Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.
 
25
Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (the “Conversion Price”). The adjusted Conversion Price as of the date of this filing is $0.15091.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80 (the “Conversion Cap”), plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of March 31, 2022, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 26.0% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. For additional information related to the Series C Preferred, refer to our 2021 Annual Report.
On March 30, 2022, the board of directors declared a dividend of $198 on the Series C Preferred, which was paid on March 31, 2022.
Based on the applicable accounting guidance, Harbor is required to apply
the “if-converted” method
to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480,
 Distinguishing Liabilities from Equity
. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets included within this Quarterly Report.
Aircraft Operating Leases
As of March 31, 2022, Air Wisconsin had no operating aircraft remaining on lease.
Debt and Credit Facilities
For additional information regarding our debt and credit facilities, see “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Debt and Credit Facilities
” within our 2021 Annual Report.
Paycheck Protection Program
In April 2020, Air Wisconsin received the $10.0 million SBA Loan under the PPP established under the CARES Act and administered by the SBA. The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, lease payments, and utility payments. The entire principal amount and accrued interest was forgiven in August 2021.
Payroll Support Program
In April 2020, Air Wisconsin entered into the
PSP-1
Agreement with the Treasury for payroll support under the CARES Act and received approximately $42.2 million, all of which was received in the year ended December 31, 2020. In March 2021, Air Wisconsin entered into the
PSP-2
Agreement with the Treasury for payroll support under the PSP Extension Law and received approximately $33.0 million, all of which was received in the six months ended June 30, 2021. In June 2021 the Treasury entered into the
PSP-3
Agreement with Air Wisconsin for payroll support under the American Rescue Plan, and Air Wisconsin received approximately $33.3 million.
The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, (ii) Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee’s pay rates or benefits without that employee’s consent, in any case prior to certain dates, (iii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv) Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neither Air
 
26
Wisconsin nor any of its affiliates can purchase an equity security of Air Wisconsin or any direct or indirect parent company of Air Wisconsin that is listed on a national securities exchange prior to certain dates. If Air Wisconsin fails to comply with its obligations under the PSP Agreements, it may be required to repay some or all of the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. For additional information, refer to Note 8,
Commitments and Contingencies
, in our consolidated financial statements included in this Quarterly Report.
Maintenance Commitments
For additional information regarding our maintenance commitments, see “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Maintenance Commitments
” within our 2021 Annual Report.
Off-Balance
Sheet Arrangements
An
off-balance
sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
We have no
off-balance
sheet arrangements that would have a material current or future effect on the Company’s financial condition, results of operations or liquidity.
Critical Accounting Policies
and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies. Our critical accounting policies relate to revenue recognition, long-lived assets, and income tax. The application of these accounting policies involve the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. For additional information regarding our critical accounting policies, see “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies
” within our 2021 Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the information regarding market risk provided in the section entitled “
Quantitative and Qualitative Disclosures about Market Risk
” within our 2021 Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by
Rule 15d-15(b)
under the Exchange Act, our management, including our principal executive officer, principal financial officer and principal accounting officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 15d-15(e)
under the Exchange Act) as of March 31, 2022, the last day of the period covered by this Quarterly Report. Based on this evaluation, our management, including our principal executive officer, principal financial officer and principal accounting officer, concluded that, as of March 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Limitations on Effectiveness of Controls
Our management, including our principal executive officer, principal financial officer and principal accounting officer, does not expect that our disclosure controls and procedures, or our system of internal control over financial reporting, will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
 
27
failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule
15d-15(f)
under the Exchange Act) that occurred during the three months ended March 31, 2022 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
28
Part II. Other Information
Item 1. Legal Proceedings
For information related to legal proceedings, refer to Note 8, Commitments and Contingencies, to our consolidated financial statements included within this Quarterly Report.
Item 1A. Risk Factors
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in the Company’s common stock involves substantial risk. The Company’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Quarterly Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of the Company’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to “Cautionary Note Regarding Forward-Looking Statements” within this Quarterly Report.
Risks Related to Our Business
Our current business is highly dependent on the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner. If United does not agree to extend the agreement or enter into a new agreement, or if the agreement is earlier terminated in accordance with its terms, our business would be significantly negatively impacted.
We derive nearly all of our operating revenues from the United capacity purchase agreement because United is currently Air Wisconsin’s sole airline partner. United accounts for approximately 99.9% of our operating revenues. The United capacity purchase agreement expires in February 2023. The parties are in active negotiations regarding the extension of the agreement or the execution of a new agreement. However, neither party is under any obligation to enter into a new or extended agreement, and we can provide no assurance that any new or extended agreement will be reached.
Pursuant to the United capacity purchase agreement, United is permitted to terminate the agreement prior to the expiration of the term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s controllable completion factor falling
below pre-determined levels
for a period of at least four consecutive months,
a non-carrier-specific grounding
of at least a specified number of Air Wisconsin’s aircraft, and certain changes of control of Air Wisconsin. No such termination event has occurred or exists as of the date of this filing. If United does not agree to enter into a new capacity purchase agreement, or if a termination event occurs and United exercises its right to terminate the agreement in accordance with its terms, our business would be significantly negatively impacted, unless we are able to enter into satisfactory substitute arrangements for the utilization of Air Wisconsin’s aircraft. We may not be able to enter into substitute arrangements, and any arrangements we are able to secure may not be as favorable to us as the current agreement.
Any events that negatively impact the financial or operating performance of United could have a material adverse effect on our business, financial condition and results of operations. United may be materially and adversely impacted, directly or indirectly, by new variants of COVID 19 or a long-term COVID 19 endemic, by worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates and inflation. If United were to experience significant financial difficulties as a result of these or other reasons, it could negatively impact United’s ability to meet its financial obligations under the United capacity purchase agreement or alter its business strategy as it applies to regional airlines. Further, if United were to become bankrupt, the United capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations.
Air Wisconsin may experience difficulty hiring, training and retaining a sufficient number of qualified pilots and mechanics, which may negatively affect Air Wisconsin’s operations and our financial condition.
Historically, the supply of qualified pilots to the airline industry has been limited, which has created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the Federal Aviation Administration (the “FAA”) issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations and correspondingly increasing Air Wisconsin’s labor costs.
 
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As a result of the significant decline in passenger demand and drastically reduced flight departures during the early stage of
the COVID-19 pandemic,
there was no shortage of qualified pilots in the airline industry. During the first two years of
the COVID-19 pandemic,
for many reasons, such as reduced flying opportunities, travel restrictions
and COVID-19 vaccine
mandates, many pilots decided to retire or seek employment in other industries. However, as passenger demand for air travel has increased, Air Wisconsin has experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from voluntary retirement decisions. Air Wisconsin has also experienced challenges with pilot attrition to other airlines. Air Wisconsin has historically expended significant resources to recruit and train pilots, including as a result of upward pressure on pilot compensation and limited availability of flight simulators and instructors, and Air Wisconsin may experience additional cost increases in the future, which could have an adverse impact on our financial condition and operating results.
Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during
the COVID-19 pandemic,
and the hiring needs of other airlines. There is also a risk that some mechanics may have decided to leave the airline industry or may decide to do so in the future. If Air Wisconsin is unable to hire and retain a sufficient number of qualified mechanics, it could have an adverse impact on its business and operations.
Even though passenger demand for air travel has been increasing, United has reduced the number of Air Wisconsin’s scheduled departures and block hours relative to 2019 levels. Part of the reduction is due to the fact that passenger demand has not returned to
pre-COVID-19
pandemic levels, but a significant part is due to a shortage of pilots. In the three months ended March 31, 2022, Air Wisconsin’s scheduled departures and block hours were approximately 18,955 and 30,871, respectively, as compared to scheduled departures and block hours of approximately 25,971 and 40,959, respectively, for the three months ended March 31, 2019. Air Wisconsin’s monthly departures and scheduled block hours generally increased from June 2020 until October 2021, but rarely
reached pre-pandemic levels
and have declined slightly since October 2021, mostly as a result of pilot shortages. There can be no assurance as to whether departures and scheduled block hours at Air Wisconsin will return
to pre-pandemic levels.
If future pilot or mechanic attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to increase its labor costs to attract and retain sufficient qualified pilots and mechanics or it may be unable to fly the number of flights required under the United capacity purchase agreement, which may result in penalties under the agreement that would negatively impact Air Wisconsin’s operations and our financial condition.
The announcements by United and other airlines that they intend to significantly reduce their use of single class
50-seat aircraft
may limit Air Wisconsin’s opportunities for growth with United and may make it difficult to enter into substitute arrangements with another airline.
In June 2021, United announced that its long-term fleet strategy involves significantly reducing, but not eliminating, the use of single
class 50-seat aircraft,
which includes
the CRJ-200 regional
jet comprising the Air Wisconsin fleet. In that announcement, United stated that its new fleet strategy would reduce single
class 50-seat aircraft
flight departures from 33% of United’s total departures down to approximately 10% by 2026. On April 21, 2022, during its first quarter earnings call, United announced that it intends to accelerate the timeline of the reduction of its single class
50-seat
aircraft flight departures primarily as a result of the acute pilot shortage at regional carriers. United has reduced its fleet of single class
50-seat
aircraft through actions it has taken with other regional airlines, such as ExpressJet Airlines, Inc. and Trans States Airlines, and it is possible that United might not agree to extend the United capacity purchase agreement, or enter into a new agreement, as part of its fleet planning process. If the agreement is not extended or a new agreement is not entered into, our business would be significantly impacted, and it is unlikely we would have an immediate source of revenues or earnings to offset the financial impact. Alternatively, United could agree to amend the agreement, but on terms materially different from the current agreement. American Airlines has also announced that it intends to significantly reduce the single
class 50-seat aircraft
in its fleet, and Delta Airlines has announced that it intends to retire all of the single
class 50-seat aircraft
in its fleet. Therefore, Air Wisconsin may not be able to enter into substitute arrangements with other airlines, and any arrangements it is able to secure may not be as favorable to us as the current United capacity purchase agreement. Since our primary business strategy currently involves flying single
class 50-seat aircraft,
the publicly announced fleet strategy changes by several major carriers, including Air Wisconsin’s sole airline partner, represent a substantial risk to our business.
Disagreements regarding the interpretation of the United capacity purchase agreement, as well as other business disputes with United, could have an adverse effect on our operating results and financial condition, and negatively impact Air Wisconsin’s relationship with United.
Contractual agreements, such as the United capacity purchase agreement, are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Currently, a dispute exists under the United capacity purchase agreement with respect to recurring
 
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amounts owed to Air Wisconsin by United. As of March 31, 2022, the amount in dispute was approximately $9.4 million. The Company believes that United’s claims have no support under the United capacity purchase agreement, however the outcome cannot be predicted. The Company has recognized all disputed amounts through March 31, 2022 in the consolidated financial statements. Failure to resolve this dispute could have an adverse effect on our business, financial condition and results of operations, as well as on our relationship with United which, in turn, could impact the negotiation of an extension to the United capacity purchase agreement or the execution of a new agreement with United.
To the extent Air Wisconsin experiences additional disagreements with United regarding the interpretation of the United capacity purchase agreement or otherwise, Air Wisconsin would be required to expend additional management time and financial resources to resolve them. Those disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. We cannot predict the outcome of disputes which may arise in the future on the terms of the United capacity purchase agreement or any future agreement we may enter into with United. An unfavorable resolution of a future dispute with United could require Air Wisconsin to modify the terms of the United capacity purchase agreement, enter into a new agreement with United, or change its business strategy, any of which could have a material adverse effect on our operating results and financial condition.
If United provides Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, our business, financial condition and results of operations may be adversely affected.
Under the terms of the United capacity purchase agreement, United has the ability to schedule Air Wisconsin’s flights in any manner that serves United’s purposes, subject to certain reasonable operating constraints which do not prevent United from scheduling Air Wisconsin’s flights in a manner Air Wisconsin deems inefficient. From time to time, United schedules Air Wisconsin’s flights in a manner that creates operational inefficiencies for Air Wisconsin, such as by building in long crew layovers or overnights, which can cause crew staffing issues and result in limited crew availability to fly other scheduled Air Wisconsin flights, or by providing Air Wisconsin with flight schedules that are inconsistent with Air Wisconsin’s existing operational footprint. These actions have had and may continue to have a material adverse effect on our business, financial condition and results of operations.
Certain factors have led, and may in the future lead, United to modify the anticipated utilization of Air Wisconsin’s aircraft, some of which are beyond Air Wisconsin’s control. Any factors that continue to cause United to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results. United has stated that it does not expect the recovery from
the COVID-19 pandemic
to follow a linear path and, as such, the actual number of flights United schedules under the United capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated or which United initially communicated for the period.
Air Wisconsin’s current and future growth opportunities may be limited by the United capacity purchase agreement or a number of factors impacting the airline industry.
In addition to the fleet strategy changes discussed above, growth opportunities within United’s current flight network may be limited by various factors, including “scope” clauses in United’s current collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots.    These clauses could limit Air Wisconsin’s ability to operate larger aircraft for United, which would limit Air Wisconsin’s expansion opportunities. United is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.
Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including pilot and mechanic shortages, access to airport terminals and facilities, capital expenditures required to maintain or expand fleet operations, significant changes in fuel prices or other variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, we believe limited growth opportunities exist and as a result Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities. Due to United’s stated intention to significantly reduce its use of single
class 50-seat aircraft,
there may not be any new or additional flying opportunities available to Air Wisconsin with United. In addition, due to American Airlines’ and Delta Airlines’ stated intentions to significantly reduce or retire their use of single
class 50-seat aircraft,
there may not be substitute flying opportunities with other major airlines. Further, even if Air Wisconsin is offered the ability to pursue growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.
 
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The amounts Air Wisconsin receives under the United capacity purchase agreement may be less than the corresponding costs Air Wisconsin incurs.
Under the United capacity purchase agreement, a portion of the revenues Air Wisconsin receives is based upon predetermined rates calculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. The primary operating costs intended to be compensated by the predetermined rates include salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs, and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid under the agreement, our financial position and operating results will be negatively affected. For example, Air Wisconsin has experienced upward pressure on pilot and mechanic compensation as it seeks to attract and retain qualified staff, which increases are not adjusted for by the United capacity purchase agreement and, therefore, negatively impact our operating results.
A significant portion of Air Wisconsin’s workforce is represented by labor unions, and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.
A significant majority of Air Wisconsin’s employees are represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace
Workers AFL-CIO (“IAMAW”),
and the Transport Workers Union of America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which may result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.
Maintenance costs may increase further,
and out-of-service periods
may result in aircraft being unavailable for flying.
The average age of Air
Wisconsin’s CRJ-200 regional
jets as of March 31, 2022 was approximately 19.6 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of its operating expenses, and may result
in out-of-service periods
during which aircraft are dedicated to maintenance activities and unavailable for flying under the United capacity purchase agreement. In addition, as noted above, there is an industry wide shortage of aircraft mechanics. Air Wisconsin has increased its labor costs to attract and retain qualified mechanics. However, as passenger demand for air travel has increased and additional aircraft are brought back into service to address the increased demand, the turnaround time for routine and heavy maintenance has lengthened. As a result, Air Wisconsin has experienced, and may continue to experience, delays and increased costs in obtaining
both in-house and
third party maintenance services. Any continued increase in Air Wisconsin’s maintenance costs or decreased revenues resulting
from out-of-service periods
could have a further adverse effect on our financial condition and operating results.
Air Wisconsin currently operates only one aircraft type, and relies on one aircraft manufacturer and one engine manufacturer, and any operating restrictions or safety concerns applicable to this aircraft or engine type, or any failure to receive sufficient maintenance and support services from these manufacturers, would negatively impact our business and financial condition.
Air Wisconsin currently relies on a single aircraft type,
the CRJ-200 regional
jet, and a single engine type, the General Electric
(“GE”) CF34-3B1 engine.
The issuance of FAA or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type, or Air Wisconsin’s inability to obtain necessary parts and services related to this aircraft type or engine type, would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of
the CRJ-200 regional
jet or the
GE CF34-3B1 engine,
whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.
Air Wisconsin has been highly dependent upon Bombardier, Inc. (“Bombardier”), as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts and related maintenance and support services to it in a timely manner. In June 2020, Bombardier consummated an agreement with Mitsubishi Heavy Industries, Ltd (“Mitsubishi”), pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of
the CRJ-200 regional
jet, such as type certificates, maintenance, support, refurbishment, marketing and sales activities. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE to provide required maintenance or support services, or as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines.
 
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Air Wisconsin’s ability to obtain additional financing may be limited, and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.
The airline business is capital intensive. As of March 31, 2022, Air Wisconsin had approximately $67.0 million in total third-party debt, which was incurred in connection with the acquisition of aircraft and which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts. To the extent Air Wisconsin finances its activities with additional debt, it would become subject to additional debt service obligations, as well as additional covenants that may restrict its ability to pursue its business strategy or otherwise constrain its growth and operations. Air Wisconsin’s ability to pay the high level of fixed costs associated with operating a regional airline will, therefore, depend on its operating performance, cash flows and ability to secure adequate financing, which will in turn depend on, among other things, the success of its current business strategy, availability and cost of financing, as well as general economic and political conditions and other factors that may be beyond its control. We cannot be certain Air Wisconsin’s working capital and cash flows from operations will be sufficient to make its required payments under its debt and other contractual arrangements.
If Air Wisconsin is unable to pay its debts as they come due or fails to comply with its obligations under the agreements governing its debt, and is unable to obtain waivers of such defaults, its secured lender could foreclose on any of Air Wisconsin’s assets securing such debt. Additionally, a failure to pay Air Wisconsin’s property leases, debt or other fixed cost obligations, or a breach of its other contractual obligations, could result in a variety of further adverse consequences, including the exercise of remedies by its creditors and lessors, such as acceleration. In such a situation, Air Wisconsin may not be able to cure its breach, fulfill its contractual obligations, make required lease payments or otherwise cover its fixed costs, which could have a material adverse effect on our business, results of operations and financial condition.
In addition, the agreements that Air Wisconsin has entered into with the Treasury for payroll support contain various covenants. If Air Wisconsin fails to comply with its obligations under those agreements, it may be required to repay the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.
The loss of key personnel upon whom Air Wisconsin depends to operate its business or the inability to attract additional qualified personnel could adversely affect our business.
Our future success depends on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Any inability to attract or retain qualified management personnel and other employees, or any significant increases in the costs associated with recruiting or retaining qualified employees, would have a material adverse effect on our business, results of operations and financial condition.
Information technology security breaches, hardware or software failures, or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.
The performance and reliability of Air Wisconsin’s technology, the technology of United, and the technology of our third-party service providers, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United or our third-party service providers, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs and penalties. Air Wisconsin’s technological systems, software and related data, those of United, and those supplied by our third party service providers, may be vulnerable to a variety of sources of interruption or exploitation due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and stores sensitive data, including personal information of its employees and information of United. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations, any or all of which could adversely affect our business and financial condition.
 
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Risks Related to Our Industry
The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.
The airline business is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, facility disruptions, acts of war or terrorism, cancellations, increased security measures, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers increase operating costs and decrease revenues, which in turn adversely affect profitability. Because Air Wisconsin’s revenues (other than the portion of its revenues based on the number of aircraft covered under the United capacity purchase agreement) depend primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays, any of these factors could have a material adverse effect on our business, results of operations and financial condition.
In addition to the factors noted above, Air Wisconsin’s operations and our financial condition are currently affected, and may in the future be affected, by many other factors and conditions beyond Air Wisconsin’s control, including, among others:
 
  •  
the acute
on-going
shortage of qualified pilots and mechanics, and the increasing pressures to significantly increase wages;
 
  •  
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions;
 
  •  
changes in demand for airline travel or tourism, in consumer preferences, or demographic trends;
 
  •  
changes in the competitive environment due to pricing, industry consolidation, or other factors;
 
  •  
labor disputes, strikes, work stoppages, or similar matters impacting employees; and
 
  •  
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation and changes in discretionary spending and consumer confidence.
The effect of the foregoing factors or conditions on Air Wisconsin’s operations is difficult to forecast; however, the occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.
The COVID-19 pandemic,
and the outbreak of any other disease or similar public health threat that we may face in the future, could result in additional adverse effects on the business, operating results, financial condition and liquidity of Air Wisconsin and United.
United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic and international demand related to
the COVID-19 pandemic
during the first quarter of 2020. United has recently stated that it expects demand will remain slightly
below pre-pandemic levels
throughout 2022.In addition, a further outbreak
of COVID-19, including
spread of new variants that may be more contagious or virulent than prior versions or that may be resistant to currently approved vaccines, an outbreak of another disease or similar public health threat, or any other event that would affect consumer demand for air travel or impose travel restrictions, could have a material adverse impact on our business, operating results, financial condition and liquidity, and those of United.
Several regional and larger carriers have ceased operations as a direct or indirect result of
the COVID-19 pandemic.
ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased or severely limited operations due, at least in part, to
the COVID-19 pandemic’s
impact on their business.
High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on Air Wisconsin’s operating results and financial condition and liquidity.
Although the United capacity purchase agreement provides that United sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the agreement, aircraft fuel is critical to Air Wisconsin’s operations. The timely and adequate supply of fuel to meet operational demand depends on the continued availability of reliable fuel supply sources as well as related service and delivery infrastructure. Air Wisconsin can neither predict nor guarantee the continued timely availability of aircraft fuel throughout Air Wisconsin’s system. Supplies and prices of fuel are also impacted by factors, such as geopolitical events, economic growth indicators, fiscal/monetary policies, fuel tax policies, changes in regulations, environmental concerns and financial investments in energy markets. Both actual changes in these factors, as well as changes in related market expectations, can potentially drive rapid changes in fuel prices in short periods of time. Rising fuel prices may lead to increases in airline fares or
 
34
fees that may not be sustainable, may reduce the general demand for air travel and may eventually impact the amount of flying that United schedules Air Wisconsin to perform. Any such schedule reductions may impact Air Wisconsin’s operating results. In addition, since single class
50-seat
aircraft, such as those in Air Wisconsin’s fleet, are less fuel efficient than certain larger aircraft, increased fuel costs affects Air Wisconsin’s competitiveness in the industry.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.
The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America, American Airlines and US Airways, Southwest and AirTran Airways, United and Continental Airlines and Delta and Northwest Airlines. Any additional consolidation or significant alliance activity within the airline industry, such as the American Airlines and Jet Blue Airways alliance, could further limit the number of potential airline partners with whom Air Wisconsin could enter into commercial agreements. In addition, any further consolidation activity involving United, reduction in the size of its network or decision to accelerate the reduction of single
class 50-seat aircraft
such as
the CRJ-200 regional
jet could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to continue to provide service to United. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs, including as a result of long-term fleet strategy changes announced by several major carriers, could negatively impact Air Wisconsin’s future growth opportunities.
Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath negatively impacted the airline industry in general. If additional terrorist attacks are launched, there may be lasting consequences, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs and whether or not involving Air Wisconsin’s aircraft, could have a material adverse impact on our business and operations. Increased global political instability, including the outbreak of war and hostilities, could result in an increased risk of terrorist activities.
The occurrence of an aviation accident or incident involving Air Wisconsin or its aircraft type could negatively impact our business, financial condition and operating results.
An accident or incident involving Air Wisconsin’s aircraft could result in significant potential claims of injured passengers and others, as well as negative impacts on its operations resulting from the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. If substantial claims resulting from an accident are made in excess of our related liability insurance coverage, then our operational and financial results would be harmed. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Air Wisconsin’s operations are less safe or reliable than other airlines, which could negatively impact our business, financial condition and operating results.
Given that Air Wisconsin currently operates a single aircraft type, any accident or incident involving
the CRJ-200 regional
jet aircraft type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United, and our financial results. In addition,
certain non-carrier-specific groundings
of at least a specified number of Air Wisconsin’s aircraft would provide United the right to terminate the United capacity purchase agreement.
Further, any accident or incident involving
a CRJ-200 regional
jet, regardless of the operator or geographic location of the incident, could cause a public perception that the aircraft type is less safe and reliable than other aircraft types, which could negatively impact our business, financial condition and operating results. Any such accident or incident could result in an acceleration of the implementation of fleet strategy changes by major air carriers that would reduce or eliminate the use
of 50-seat
aircraft, including
the CRJ-200 regional
jet.
Air Wisconsin is subject to significant governmental regulation and potential regulatory changes.
All air carriers, including Air Wisconsin, are subject to regulation by the U.S. Department of Transportation (“DOT”), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements.
 
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In addition, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsin’s aircraft for any reason may have a material adverse effect on Air Wisconsin’s operations and our financial condition. Further, Air Wisconsin’s business may be subject to additional costs as a result of potential regulatory changes, which additional costs could have an adverse effect on our operating results.
Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.
Air Wisconsin is subject to federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require Air Wisconsin to reduce its emissions, secure carbon offset credits or otherwise pay for emissions, or make capital investments to modify certain aspects of its operations to reduce emissions. Future policy, legal, and regulatory developments relating to the protection of the environment could have a direct effect on its operations (or an indirect effect through its third-party providers of parts or services or airport facilities at which it operates) and increase its costs and have a material adverse effect on its operations. Any such developments could have an adverse impact on our business, results of operations and financial condition.
Air Wisconsin is also subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of contamination directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.
The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of the Company’s common stock.
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled by citizens of the United States as that term is defined in the Federal Aviation Act and interpreted by the DOT. The restrictions imposed by federal law and regulations limit who can purchase Air Wisconsin’s equity securities in the following ways:
 
  •  
at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States;
 
  •  
at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled by U.S. citizens and no more than 49% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country; and
 
  •  
citizens of foreign countries that have not entered into “open skies” air transport agreements with the U.S. may hold no more than 25% of Air Wisconsin’s total outstanding equity securities.
The restrictions on foreign ownership of Air Wisconsin’s equity securities may impair or prevent a sale of common stock by a stockholder of the Company and may adversely affect the trading price or trading volume of the Company’s common stock.
General Risk Factors
Because the trading market for the Company’s common stock is limited, the common stock may continue to be illiquid.
Although the Company’s common stock is traded under the symbol “HRBR” on the OTC Market, the trading volume for the common stock has been and continues to be limited. The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.
 
36
The price of the Company’s common stock has been and may continue to be volatile.
The trading price of the Company’s common stock has been volatile. We believe the Company’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:
 
  •  
the possibility that United will not agree to extend the United capacity purchase agreement or enter into a new agreement on commercially reasonable terms or at all, or that United elects to terminate the United capacity purchase agreement prior to the expiration of the term as a result of the occurrence of a termination event specified in the agreement;
 
  •  
market perceptions and speculation as to the future terms of any capacity purchase agreement we may enter into with United or any other airline partner;
 
  •  
the industry-wide pilot and mechanic shortages;
 
  •  
future announcements regarding fleet strategy changes by major air carriers, including regarding any decision to reduce or eliminate single class
50-seat
aircraft;
 
  •  
the impact of the
COVID-19
pandemic or other pandemics and widespread outbreaks of communicable diseases on passenger demand for air travel, consumer behavior and tourism;
 
  •  
actual or anticipated fluctuations in our financial and operating results from period to period;
 
  •  
the repayment, restructuring or refinancing of Air Wisconsin’s debt obligations and our actual or perceived need for additional capital;
 
  •  
market perceptions about our financial stability and the financial stability of Air Wisconsin’s business partners;
 
  •  
market perceptions regarding Air Wisconsin’s operating performance, reliability and customer service, and the operating performance, reliability and customer service of its business partners and competitors;
 
  •  
factors and perceptions impacting the airline industry generally, including future passenger demand for air travel;
 
  •  
announcements of significant contracts, acquisitions or divestitures by us or Air Wisconsin’s competitors, including any new or amended capacity purchase agreement with United or another airline partner;
 
  •  
bankruptcies or other financial issues impacting Air Wisconsin’s business partners or competitors;
 
  •  
threatened or actual litigation and government investigations;
 
  •  
changes in the regulatory environment impacting Air Wisconsin’s business and industry;
 
  •  
purchases or sales of shares of the Company’s common stock pursuant to the Company’s publicly announced stock repurchase program or otherwise;
 
  •  
the illiquidity of the Company’s common stock;
 
  •  
speculative trading practices of the Company’s stockholders and other market participants;
 
  •  
perceptions about securities that are traded on the OTC Market;
 
  •  
the impact of the application of accounting guidance;
 
  •  
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions; and
 
  •  
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation, and changes in discretionary spending and consumer confidence.
 
37
In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by companies across industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of the Company’s common stock could fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations could materially reduce the trading price of the Company’s common stock.
The concentration of ownership of the Company’s capital stock among a small number of stockholders could allow such stockholders to exert significant influence over the Company’s business plans and strategic objectives, control all matters submitted to the Company’s stockholders for approval, or deter a change in control transaction, any of which could negatively affect the trading price or trading volume of its common stock.
As of March 31, 2022, the Company had 47,053,806 shares of common stock outstanding. As of the same date, Amun LLC (“Amun”) held 20,000,000 shares of the Company’s common stock, representing approximately 31.5% of the fully diluted shares of capital stock of the Company, and Southshore Aircraft Holdings, LLC, through its affiliates (together, “Southshore”), held shares of the Company’s Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), which are immediately convertible into 16,500,000 shares of common stock, representing approximately 26.0% of the fully diluted shares of capital stock of the Company (in each case assuming the full conversion of the Series C Preferred into common stock).
The shares of Series C Preferred are generally authorized to vote with the Company’s common stock. As a result, Amun and Southshore collectively control a majority of the voting power of the Company’s outstanding capital stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Company’s business plans and strategic objectives, as well as to control all matters submitted to the Company’s stockholders for approval. These stockholders may manage the Company’s business in ways with which certain investors may disagree and may be adverse to their interests. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control transaction, depriving the Company’s stockholders of an opportunity to receive a premium for their investment, or otherwise negatively affecting the trading price or trading volume of the Company’s common stock.
Mr. Bartlett, one of the Company’s directors, may be deemed to be the beneficial owner of the shares of the Company’s common stock held by Amun due to his status as a member of the board of managers of Amun and his ownership of equity interests in Amun. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore and his ownership of equity interests in Southshore. Accordingly, Mr. Bartlett may be able to exercise influence over decisions involving the voting or disposition of shares of the Company’s capital stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.
The Company may suspend its obligation to comply with SEC filing requirements in future periods, and thereby cease filing reports and other information with the SEC, which could have the effect of reducing the trading volume and trading price of the Company’s common stock.
In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to the filing of our Annual Report on
Form 10-K for
the year ended December 31, 2019, the last periodic report filed by the Company was the Annual Report on
Form 10-K for
the year ended December 31, 2011. As of January 1, 2020, the Company no longer met the eligibility criteria under
Rule 12h-3 of
the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act, requiring the Company to resume filing reports and other information with the SEC pursuant to the Exchange Act.
The Company has incurred significant direct and indirect costs, and diversion of management time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of Annual Reports on
Form 10-K, Quarterly
Reports on
Form 10-Q and
Current Reports on
Form 8-K, the
audit of the consolidated financial statements contained within its Annual Reports in accordance with SEC rules and Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002. The Company expects to incur significant additional costs relating to its public reporting obligations, which could have a negative impact on the Company’s results of operations.
The Company would again become eligible to suspend its public reporting obligations if it (i) determines in accordance with applicable SEC rules it has fewer than 300 stockholders of record as of certain points in time, (ii) does not file registration statements pursuant to the Securities Act (which it does not currently intend to do), and (iii) meets certain other requirements under applicable SEC rules. If the Company becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which would result in the Company no longer being required to file SEC reports. If the Company ceases filing reports and other information with the SEC, it would significantly reduce the amount of publicly available information about the Company and its business and operations, which could have the effect of reducing the trading volume and price of the Company’s common stock.
 
38
Further, notwithstanding that the Company is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, the Company does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, the Company is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. Accordingly, there may be significantly less information available about the Company, including its governance policies and ownership structure, than is available for other public reporting companies, which could have the effect of further reducing demand for the Company’s common stock and the trading price.
Provisions in the Company’s governing documents and the United capacity purchase agreement might deter acquisition bids, which could adversely affect the value of the Company’s common stock.
The Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, contain provisions that, among other things:
 
  •  
prohibit the transfer of any shares of the Company’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation
Section 1.382-T(g))
of the Company’s then- outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of the Company’s then-outstanding capital stock;
 
  •  
authorize the board of directors, without stockholder approval, to authorize and issue preferred stock with powers, preferences and rights that may be senior to the Company’s common stock, that could dilute the interest of, or impair the voting power of, holders of the Company’s common stock and could also have the effect of discouraging, delaying or preventing a change of control;
 
  •  
establish advance notice procedures that stockholders must comply with in order to nominate candidates to the board of directors and propose matters to be brought before an annual or special meeting of the Company’s stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company;
 
  •  
give the board of directors exclusive authority to set the number of directors and increase or decrease the number of directors by one or more resolutions, which may prevent stockholders from being able to fill vacancies on the board of directors;
 
  •  
authorize a majority of the board of directors to appoint a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which may prevent stockholders from being able to fill vacancies on the board of directors; and
 
  •  
restrict the ability of stockholders to call special meetings of stockholders.
In addition, the United capacity purchase agreement provides that a change of control of Air Wisconsin results in a termination event under the agreement, pursuant to which United may terminate the agreement.
These provisions may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial, any of which could also adversely affect the trading price of the Company’s common stock.
The Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, limit certain transfers of the Company’s stock in order to preserve the Company’s ability to use its net operating loss carryforwards, which could adversely affect the trading price of its common stock.
To reduce the risk of a potential adverse effect on the Company’s ability to use its current or future net operating loss carryforwards for federal income tax purposes, the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of the Company’s capital stock that could result in adverse tax consequences by impairing the Company’s ability to utilize its net operating loss carryforwards. These transfer restrictions are subject to a number of rules and exceptions, and generally may only be repealed or amended by the affirmative vote of the holders of at
least two-thirds of
the outstanding shares of the Company’s capital stock. These transfer restrictions apply to the beneficial owners of the shares of the Company’s capital stock. The transfer restrictions contained in the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for the Company’s common stock, which may adversely affect the trading price. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial.
 
39
The Company currently does not intend to pay dividends on its common stock and, consequently, the only opportunity to achieve a return on an investment in the Company’s common stock may be the appreciation in value of the Company’s common stock.
The Company has not historically paid dividends on shares of its common stock and does not expect to pay dividends in the foreseeable future. The United capacity purchase agreement, Air Wisconsin’s credit agreements, and the agreements that Air Wisconsin has entered into with the Treasury for payroll support each contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. Any future determination by the Company to pay dividends will be at the discretion of the board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements (or similar agreements), business prospects and such other factors as the board of directors deems relevant. Consequently, investors should consider that their only opportunity to achieve a positive return on their investment in the Company’s common stock may be the appreciation in value of the common stock. However, as a result of numerous risks and uncertainties described in this Quarterly Report, the trading price may not appreciate and may decline significantly.
As a “smaller reporting company,” the Company has availed itself of reduced disclosure requirements, which may make the Company’s common stock less attractive to investors.
The Company is a “smaller reporting company” under applicable SEC rules and regulations, and it will continue to be a “smaller reporting company” for so long as either (i) the market value of the Company’s common stock held
by non-affiliates as
of the end of its most recently completed second quarter is less than $250 million or (ii) the market value of the Company’s common stock held
by non-affiliates is
less than $700 million and the annual revenues of the Company are less than $100 million during the most recently completed fiscal year. Because Amun and Southshore collectively hold a significant percentage of the fully diluted shares of capital stock of the Company, it would require a significant increase in the market value of the Company’s common stock for the Company to no longer qualify as a “smaller reporting company.”
As a “smaller reporting company,” the Company has relied on exemptions from certain disclosure requirements that are applicable to other public reporting companies. These exemptions include reduced financial disclosure and disclosure regarding executive compensation. Investors may find the Company’s common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for the Company’s common stock and negatively impact the trading price.
Complying with the requirements of public reporting companies under the Exchange Act, including the requirement for management to assess our disclosure controls and procedures and internal control over financial reporting, could increase our operating costs and divert management’s attention from executing our business strategy.
We are subject to the reporting requirements of Section 15(d) of the Exchange Act, which requires, among other things, that we file annual, quarterly, and current reports with the SEC with respect to our business, financial condition and results of operations. In addition, pursuant to the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our disclosure controls and procedures and our internal control over financial reporting. Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs and increased demands on our management team. Significant additional resources and management oversight may be required to maintain and, as required, enhance our disclosure controls and procedures and internal control over financial reporting, which could have an adverse impact on our business and operating results.
Further, the Company’s status as a public reporting company has significantly increased the cost of its director and officer liability insurance, and the Company may be required to accept reduced coverage or incur substantially higher costs in the future to obtain similar coverage. These factors, or other risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the board of directors and executive officers, and it may increase the cost of their services.
We could identify material weaknesses or significant deficiencies in future periods.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. We cannot be certain that we will be successful in identifying, preventing or remediating future material weaknesses or significant deficiencies in internal control over financial reporting. Any newly identified material weaknesses could result in material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of the Company’s common stock.
 
40
We expect to continue to incur significant costs and diversion of management resources in an effort to continue to enhance our controls and procedures. These efforts may divert management’s attention from other business concerns, which could harm our business and results of operations.
Stock repurchases could increase the volatility of the trading price of the Company’s common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.
The board of directors has adopted a stock repurchase program pursuant to which the Company may repurchase shares of its common stock from time to time. Since the inception of the program in March 2021 through March 31, 2022, the Company has purchased approximately 7.8 million shares of its common stock pursuant to the program. Although the board of directors has authorized the repurchase program, and the Company has completed the purchase of shares of common stock, it does not obligate us to repurchase any additional dollar amount or number of shares, and the program may be modified, suspended or terminated at any time and for any reason. The additional number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Our ability to repurchase shares may also be limited by restrictive covenants in future borrowing arrangements we may enter into from time to time. Repurchases of the Company’s common stock could increase the volatility of the trading price and reduce the trading volume, either of which could have a negative impact on the trading price. Similarly, the future announcement of the termination or suspension of the repurchase program, or our decision not to utilize the full authorized repurchase amount under the repurchase program, could result in a decrease in the trading price. There can be no assurance that any repurchases we do elect to make will enhance stockholder value because the market price of the Company’s common stock may decline below the levels at which we repurchased shares. Although the repurchase program is intended to enhance long-term stockholder value, we cannot guarantee that it will do so.
The Company may be at increased risk of securities class action and other litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If the Company faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations. As a result of our compliance with Exchange Act reporting obligations, a significant amount of information regarding our business and operations, including our financial condition and operating results, is publicly available, which may result in threatened or actual litigation or other disputes with our stockholders, our employees or other constituents. If such claims are successful, our business and results of operations could suffer and, even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.
If securities or industry analysts do not publish reports about our business, an active trading market for the Company’s common stock may not develop.
The extent of any trading market for the Company’s common stock will depend, in part, on any research and reports that securities or industry analysts publish about us or our business. We are not currently aware of any analysts who cover the Company nor do we expect any analysts to commence coverage in the foreseeable future. Investors should not purchase the Company’s common stock with the expectation that we will have analyst coverage, or that an active trading market for the Company’s common stock will be developed or sustained.
 
41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 30, 2021, the board of directors adopted a stock repurchase program pursuant to which the Company was initially authorized to repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, depends on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to
Rule 10b5-1
under the Exchange Act, or subject to
Rule 10b-18
under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.
In January 2022, the Company entered into an agreement with a group of affiliated stockholders pursuant to which the Company agreed to repurchase an aggregate of 5,437,500 shares of common stock for a purchase price of $5,655,190 pursuant to the settlement of a legal claim the Company had against the stockholders.
No “affiliated purchaser” of the Company acquired any shares of the Company’s equity securities during the three months ended March 31, 2022.
Below is a summary of stock repurchase activity under the Company’s stock repurchase program during the three months ended March 31, 2022:
 
    
Total number

of shares

purchased
(1)
     
Average price

paid per share
     
Dollar value of

shares

repurchased
     
Approximate

dollar value of

shares remaining

available under

stock repurchase

program
  
January 1 – January 31, 2022
      5,736,920      $ 1.10      $ 6,314,627      $ 103,467  
February 1 – February 28, 2022
      248,648      $ 2.22      $ 551,676      $ 551,791  
March 1 – March 31, 2022
      276,925      $ 2.22      $ 614,928      $ 936,863  
Total
      6,262,493      $ 1.19      $ 7,481,231      $ 936,863  
 
(1)
All of the reported shares were repurchased pursuant to the Company’s publicly announced stock repurchase program. In addition, with the exception of the 5,437,500 purchased from stockholders as described above, all of the reported shares were purchased pursuant to a trading plan adopted pursuant to Rule
10b5-1
under the Exchange Act and in compliance with Rule
10b-18
under the Exchange Act.
 
42
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
 
        
Incorporated by Reference
  
Exhibit
Number
  
Exhibit Description
   
Form
     
File

No.
     
Exhibit
     
Filing

Date
     
Provided

Herewith
  
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  X  
31.2*   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  X  
32.1**   Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                  X  
101.INS   Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).                  X  
101.SCH   Inline XBRL Taxonomy Extension Schema Document.                  X  
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.                  X  
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.                  X  
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.                  X  
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.                  X  
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)               
 
*
Filed herewith.
**
The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form
10-Q
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and shall not be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing.
 
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
HARBOR DIVERSIFIED, INC.
Date: May 9, 2022     By:  
/s/
Christine R. Deister
      Christine R. Deister
      Chief Executive Officer and Secretary
      Harbor Diversified, Inc.
     
(Principal Executive Officer)
Date: May 9, 2022     By:  
/s/
Liam Mackay
      Liam Mackay
     
Chief Financial Officer
Air Wisconsin Airlines LLC
     
(Principal Financial Officer)
Date: May 9, 2022     By:  
/s/
Gregg Garvey
      Gregg Garvey
      Senior Vice President, Chief Accounting Officer and Treasurer
      Air Wisconsin Airlines LLC
     
(Principal Accounting Officer)
 
 
44
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