y
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2023
OR
For the transition period from______________ to ___________.
Commission file number 001-38626
MESA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
410 NORTH 44TH STREET, SUITE 700
PHOENIX, ARIZONA 85008
(Address of principal executive offices)
85-0302351
(I.R.S. Employer Identification No.)
85008
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant's telephone number, including area code
(602) 685-4000
Title of Each Class
Common Stock, no par value
Trading Symbol(s)
MESA
Name of Each Exchange of Which Registered
Nasdaq Global Select Market
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has led a report on and attestation to its management’s assessment of the effectiveness of its internal control over nancial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting rm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's
executive officers during the relevant recovery period pursuant to §240.10-D-1(b). ☐
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, 2023, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value the voting and non-voting stock held by non-
affiliates of the registrant was approximately $96,267,679.
As of December 27, 2023, the registrant had 40,940,326 shares of common stock, no par value per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement relating to its 2024 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K
where indicated. The Registrant’s definitive proxy statement for its 2024 annual meeting of shareholders will be filed with the Securities and Exchange Commission within 120 days after the
end of the Registrant’s fiscal year to which this report relates.
MESA AIR GROUP, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2023
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Signatures
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
2
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137
138
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Many of the forward-
looking statements are located in Part II, Item 7 of this Form 10-K under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement
that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future,"
"anticipates," "believes," "estimates," "expects", "intends," "plans," "predicts," "will," "would," "should," "could," "can," "may," and similar terms.
Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in
Part I, Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors." Unless otherwise stated, references to particular years,
quarters, months, or periods refer to our fiscal years ended September 30 and the associated quarters, months, and periods of those fiscal
years. Each of the terms "the Company," "Mesa Airlines," "Mesa," "we," "us," and "our" as used herein refer collectively to Mesa Air Group,
Inc. and its wholly owned subsidiaries, unless otherwise stated. We do not assume any obligation to revise or update any forward-looking
statements.
The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ
materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our
expectations include:
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
▪
public health epidemics or pandemics such as COVID-19;
the severity, magnitude, and duration of the COVID-19 pandemic, including impacts of the pandemic and of business’ and
governments’ responses to the pandemic on our operations and personnel, and on demand for air travel;
the supply and retention of qualified airline pilots and mechanics and associated costs;
the volatility of pilot and mechanic attrition;
dependence on, and changes to, or non-renewal of, our capacity purchase and flight services agreements;
failure to meet certain operational performance targets in our capacity purchase and flight services agreements, which could
result in termination of those agreements;
increases in our labor costs;
reduced utilization (the percentage derived from dividing (i) the number of block hours actually flown during a given month under
a particular agreement by (ii) the maximum number of block hours that could be flown during such month under the particular
agreement) under our capacity agreement;
the direct operation of regional jets by United Airlines, Inc. ("United");
the financial strength of United and its ability to successfully manage its businesses through the unprecedented decline in air
travel attributable to the COVID-19 pandemic or any other public health epidemic;
restrictions under our Amended and Restated United CPA to enter into new regional air carrier service agreements, excluding
our existing Flight Services Agreement with DHL, which restrictions will remain in place until the earlier to occur of (i) January 1,
2026 and (ii) the Company's satisfaction of certain Performance Milestones (as defined in the Amended and Restated United
CPA);
our significant amount of debt and other contractual obligations;
our compliance with ongoing financial covenants under our credit facilities;
our ability to keep costs low and execute our growth strategies; and
the effects of extreme or severe weather conditions that impacts our ability to complete scheduled flights.
3
Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports we have filed with the SEC
may be further amplified by the impact of the shortage of pilots. While we may elect to update these forward-looking statements at some
point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to
the extent required by applicable law.
4
PART I
ITEM 1. BUSINESS
General
Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa," the "Company," "we," "our," or "us") is the holding company of Mesa
Airlines, a regional air carrier providing scheduled passenger service to 86 cities in 36 states, the District of Columbia, Canada, Cuba, and
Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of September 30, 2023, Mesa operated a fleet
of 80 regional aircraft consisting of 54 E-175 aircraft and 26 CRJ-900 aircraft with approximately 296 daily departures, four 737 cargo aircraft
and approximately 2,303 employees. Mesa’s fleet were conducted under our Capacity Purchase Agreements ("CPAs") and Flight Services
Agreement ("FSA"), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either United
Express or DHL Express flights pursuant to the terms of the CPA entered into United Airlines, Inc. ("United") and FSA with DHL Network
Operations (USA), Inc. ("DHL") (each, our “major partner”). Prior to the wind-down and termination of the Company's CPA with American
Airlines, Inc. ("American") on April 3, 2023, Mesa also operated flights as American Eagle. All of the Company’s consolidated contract
revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from operations associated with the
American CPA prior to April 3, 2023, the United CPA, DHL FSA, and leases of aircraft to a third party.
Under the CPA with United (the "United CPA") and FSA with DHL (the "DHL FSA"), we operated or maintained as operational spares a
fleet of 120 aircraft as of September 30, 2023. We also lease two aircraft to a third party as of September 30, 2023. We operate 54 E-175
and 26 CRJ-900 aircraft under our United CPA, and four Boeing 737-400F aircraft under our DHL FSA. For our fiscal year ended September
30, 2023, approximately 23% of our revenues were earned under the American CPA, approximately 73% were earned under the United CPA,
approximately 1% were earned from leases of aircraft to a third party and approximately 3% were earned under the DHL FSA. All of the
Company’s consolidated contract revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from
operations associated with the American CPA, the United CPA, FSA, and leases of aircraft to a third party.
The United CPA involves a revenue-guarantee arrangement whereby United pays fixed-fees for each aircraft under contract,
departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi
time), and reimbursement of certain direct operating expenses in exchange for providing flight services. United also pays certain expenses
directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of the CPA, United controls route selection, pricing,
and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we
receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses
including fueling and airport fees are paid directly by DHL.
Regional aircraft are optimal for short- and medium-haul scheduled flights that connect outlying communities with larger cities and act
as "feeders" for domestic and international hubs. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times
when load factors on larger jets are low. The lower trip costs and operating efficiencies of regional aircraft, along with the competitive nature
of the CPA bidding process, provide significant value to major airlines.
Impact of Pilot Shortage and Transition of Operations to United
During our twelve months ended September 30, 2023, the severity of the pilot shortage, elevated pilot attrition, the transition of our
operations with American to United, and increasing costs associated with pilot wages adversely impacted our financial results, cash flows,
financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and attrition is the demand for
pilots at major carriers, which are hiring at an accelerated rate. These airlines now seek to increase their capacity to meet the growing
demand for air travel. A primary source of pilots for the major U.S. passenger and cargo carriers
5
are the U.S. regional airlines. As a result of the pilot shortage and attrition, the Company has increased overall hourly pay of nearly 118% for
captains and 172% for new-hire first officers.
As a result of pilot shortage, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under
our CPAs. During the twelve months ended September 30, 2023, these challenges resulted in a negative impact on the Company’s financial
results highlighted by cash flows used in operations of $24.1 million and net loss of $120.1 million including a non-cash impairment charge of
$54.3 million related to the Company designating 14 CRJ-900 aircraft as held for sale and our customer relationship intangible asset. These
conditions and events raised substantial doubt about our ability to continue to fund our operations and meet our debt obligations over the
next twelve months.
To address such concerns, management developed and implemented several material changes to our business designed to ensure
the Company could continue to fund its operations and meet its debt obligations over the next twelve months. The Company implemented
the following measures during the year ended September 30, 2023, and through the date of issuance of the financial statements.
•
•
•
•
•
We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. We
entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related engines. One
agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total of
$18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these
transactions expected to be approximately $(12.1) million.
We entered into an agreement to sell 11 CRJ-900 aircraft to a third party. The Company has closed the sale of seven of the
aircraft which generated $21.0 million in gross proceeds and approximately $1.5 million in net proceeds after partial debt
reduction on the UST Loan. Subsequent to September 30, 2023, we closed the sale of the remaining four CRJ-900 aircraft to
the third party for gross proceeds of $12.0 million. Net proceeds from the sale of all four aircraft was $6.5 million after partial
debt reduction of our loan with the United States Department of the Treasury ("UST Loan").
We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven
CRJ-900 aircraft which began January 2023 through December 2024, providing approximately $14.0 million of liquidity.
Additionally, the junior noteholder, MHIRJ, agreed to forgive approximately $5.0 million in principal contingent upon the
repayment of $4.2 million in principal by December 31, 2023.
We entered into an agreement to sell seven surplus CRJ-900 aircraft to American. The Company has closed the sale of three of
the aircraft which generated approximately $29.7 million in gross proceeds and approximately $2.4 million in net proceeds after
partial debt reduction. Subsequent to September 30, 2023, the Company closed the sale of the remaining four CRJ-900 aircraft
to American for gross proceeds of $41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the
retirement of the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ
for a total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note.
We established and drew upon a new line of credit with United totaling $25.5 million. The United line of credit contains an
additional deemed prepayment of $15 million with potential forgiveness upon the achievement of a certain number of block
hours flown as well as maintaining a 99.3% controllable completion factor ("CCF") over any rolling four-month period from April
2023 through December 2024. As of November 2023, the foregoing milestones have been achieved for such rolling four-month
period. As a result, $9 million of the $15 million will be deemed prepaid one business day following the repayment of the
Effective Date Bridge Loan discussed elsewhere herein. We consider it likely that we will achieve additional forgiveness in fiscal
year 2024. Subsequently, this facility was amended to permit the Company to re-draw approximately $7.9 million of the Effective
Date Bridge Loan previously repaid and increased the amount of Revolving Commitments from $30.7 million to $50.7 million.
See Note 10 for a discussion of the line of credit and amount drawn as well as discussion on the deemed prepayment.
6
•
•
•
•
•
•
On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United
CPA and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA
Amendments"), respectively. The January 2024 United CPA Amendments provide additional liquidity and certain other
amendments described below:
o
o
o
Increased CPA rates, retroactive to October 1, 2023 through December 2024, which are projected to generate
approximately $63.5 million in incremental revenue over the next twelve months.
Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the
United CPA) from the United CPA.
Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as
defined in the United CPA) to June 30, 2024.
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit
and Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension
and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the
"January 2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the
following:
o
o
o
o
o
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from
the sale, assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital
stock of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to
certain conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30,
2023, and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter
ending March 31, 2024.
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for
borrowings under the Credit Agreement.
Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such
engines as collateral for the United credit facility for a specified period of time.
On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines
and related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and
provide additional liquidity to fund operations and current debt obligations as they come due. The transaction is expected to
close by the end of March 2024.
Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23
engines for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close
by the end of December 2024.
In addition to already executed agreements to sell aircraft, the Company is actively seeking arrangements to sell other surplus
assets primarily related to the CRJ fleet including aircraft, engines, and spare parts to reduce debt and optimize operations.
We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level
of flight activity.
7
The Company believes the plans and initiatives outlined above have effectively alleviated the substantial doubt and will allow the
Company to meet its cash obligations for the next twelve months following the issuance of its financial statements. The forecast of
undiscounted cash flows prepared to determine if the Company has the ability to meet its cash obligations over the next twelve months was
prepared with significant judgment and estimates of future cash flows based on projections of CPA and FSA block hours, maintenance
events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected.
As of September 30, 2023, the Company has $163.6 million of principal maturity payments on long-term debt due within the next
twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity
created from the additional measures identified above. If our plans are not realized, we intend to explore additional opportunities to create
liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months. The Company
continues to monitor covenant compliance with its lenders as any noncompliance could have a material impact on the Company’s financial
position, cash flows and results of operations. See Sources and Uses of Cash in “Part II. Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for additional disclosure.
COVID-19 Pandemic
Beginning in fiscal 2020, COVID-19 surfaced in nearly all regions around the world and resulted in travel restrictions and business
slowdowns or shutdowns in affected areas. The COVID-19 pandemic negatively affected our revenue and operating results during fiscal
years 2023, 2022, 2021, and 2020. Any similar outbreaks in the future may have a material impact on our financial condition, liquidity, and
results of operations in future periods. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for a discussion regarding the impact of the COVID-19 pandemic on our financial results. Also, see “Part I. Item 1A. Risk
Factors” for a discussion of the risks and uncertainties associated with the COVID-19 pandemic.
Our Business Strategy
Our business strategy consists of the following elements:
Maintain Low-Cost Structure
We have established ourselves as a low cost provider of regional airline and cargo flight services. We intend to continue our
disciplined cost control approach through responsible outsourcing of certain operating functions, by flying large regional aircraft with
associated lower maintenance costs and common flight crews across fleet types, and through the diligent control of corporate and
administrative costs by implementing company-wide efforts to improve our cost structure.
Attractive Work Opportunities
We believe our employees have been, and will continue to be, a key to our success. We intend to continue to offer competitive
compensation packages, foster a positive and supportive work environment and provide opportunities to fly state-of-the-art, large-gauged
regional jets to differentiate us from other carriers and make us an attractive place to work and build a career.
Aircraft Fleet
We fly only large regional jets manufactured by Bombardier Aerospace (“Bombardier”) and Embraer S.A. ("Embraer"), as well as 737
cargo jets manufactured by Boeing. Mitsubishi Heavy Industries (“MHI”), who acquired the CRJ business from Bombardier, and Embraer are
the primary manufacturers of regional jets operated in the United States, which allows us to enjoy operational, recruiting and cost advantages
over other regional airlines that operate smaller regional aircraft from less prominent manufacturers.
8
As of September 30, 2023, we had 120 aircraft (owned and leased) consisting of the following:
United Express
DHL Express
Held for sale
Leased to third party
Subtotal
Unassigned
Total
Embraer
Regional
Jet-175
(70-76 seats)
Canadair
Regional
Jet-700
(50-70 seats)
Canadair
Regional
Jet-900
(76-79
seats)
Boeing 737
(Cargo)
Total
54
—
—
—
54
6
60
—
—
2
2
—
2
26
—
15
—
41
13
54
—
4
—
—
4
—
4
80
4
15
2
101
19
120
(1)
As of September 30, 2023, the Company has 15 CRJ-900 aircraft classified as assets held for sale.
The following table lists the aircraft we own and lease as of September 30, 2023 and the passenger capacity of such aircraft:
Type of Aircraft
E-175 Regional Jet
CRJ-900 Regional Jet
CRJ-700 Regional Jet
Boeing 737 Cargo Jet
Total
Owned
Leased
Total
18
54
—
—
72
(2)
(3)
42
—
2
4
48
Passenger
Capacity
70-76
76-79
50-70
60
54
2
4
120
(2)
(3)
All 42 of these E-175 aircraft are owned by United and leased to us at nominal amounts.
Three of these Boeing 737 aircraft are subleased to us by DHL at nominal amounts and the fourth aircraft is leased to us by a third
party.
MHI and Embraer regional jets are among the quietest commercial jets currently available and offer many of the amenities of larger
commercial jet aircraft, including flight attendant service, a stand-up cabin, overhead and under seat storage, lavatories and in-flight snack
and beverage service. The speed of MHI and Embraer regional jets is comparable to larger aircraft operated by major airlines, and they have
a range of approximately 1,600 miles and 2,100 miles, respectively. We do not currently have any existing arrangements with MHI or
Embraer to acquire additional aircraft.
Capacity Purchase and Flight Services Agreements
Our agreements consist of the following:
▪
▪
Operation of E-175 and CRJ-900 under our United CPA;
Operation of Boeing 737 aircraft under our DHL FSA.
The financial arrangements between the Company and its major partners include a revenue-guarantee arrangement. Under these
revenue-guarantee provisions, our major partners pay us a fixed minimum monthly amount per aircraft under contract, plus additional
amounts related to departures and block hours flown. We also receive direct reimbursement of certain operating expenses, including
insurance. Other expenses, including fuel and ground operations are directly paid to suppliers by our major partners. We believe we are in
material compliance with the terms of our United CPA and DHL FSA.
9
We benefit from the revenue guarantee arrangement under our United CPA and DHL FSA because we are sheltered, to an extent,
from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, fluctuations in number of
passengers and fuel prices. However, we do not benefit from positive trends in ticket prices (including ancillary revenue programs), the
number of passengers enplaned, or reductions in fuel prices. United retains all revenue collected from passengers carried on our flights. In
providing regional flying under our CPA, and cargo flying under our FSA, we use the logos, service marks and aircraft paint schemes of our
major partners.
The following table summarizes our available seat miles ("ASMs") flown and contract revenue recognized under our CPAs for our fiscal
years ended September 30, 2023 and 2022, respectively:
American
United
Other
Total
Year Ended September 30, 2023
Year Ended September 30, 2022
Available
Seat Miles
Contract
Revenue
(in thousands)
790,513
3,444,900
—
4,235,413
$
$
$
$
107,019
294,129
20,150
421,298
¢
¢
¢
Contract
Revenue
per ASM
(in cents)
Available
Seat Miles
Contract
Revenue
(in thousands)
2,668,953 $
4,005,795 $
— $
6,674,748 $
234,184 ¢
207,003 ¢
37,295
478,482 ¢
13.54
8.54
—
9.95
Contract
Revenue
per ASM
(in cents)
8.77
5.17
—
7.17
American Capacity Purchase Agreement
In December 2022, we entered into Amendment No. 11 (the “American Amendment”) to our Amended and Restated Capacity
Purchase Agreement previously entered into in November 2020 (as theretofore amended, the "American CPA"). The American Amendment
provided for the termination and wind-down of the American CPA by April 3, 2023 (the “Wind-down Period”), at which time all Covered
Aircraft (as defined in the American CPA) were removed from the American CPA. In March 2023, we began to transition aircraft operated
under the American CPA to the United CPA. The American CPA was previously set to expire by its terms on December 31, 2025.
Under the terms of the American Amendment, during the Wind-down Period (i) we continued to receive a fixed minimum monthly
amount per aircraft covered by the American CPA, plus additional amounts based on the number of flights and block hours flown during each
month, subject to adjustment based on the Company’s controllable completion rate and certain other factors, and (ii) American agreed not to
exercise certain termination or withdrawal rights under the American CPA if we failed to meet certain operational performance targets for the
three consecutive month period ending January 31, 2023.
No Material Breach (as defined in the American CPA) occurred that would have required the payment of liquidated damages. Pursuant
to the American Amendment, as no material breaches occurred during the wind-down period, American agreed to waive Mesa’s failure to
meet certain past operational performance targets and other requirements, which triggered termination and withdrawal rights for American
pursuant to the terms of American CPA. All CCF targets were met during the Wind-down Period, and there were no penalties associated with
that performance metric. The parties executed a written mutual release of all claims and acknowledgment that no Material Breaches
occurred.
United Capacity Purchase Agreement
Under the United CPA, we have the ability to fly up to 80 aircraft for United. The aircraft can be a mix of any number of E-175 or CRJ-
900 aircraft so long as the number of aircraft operating at any given time does not exceed 80. As of September 30, 2023 we operated 54 E-
175 and 26 CRJ-900 aircraft under our Third Amended and Restated CPA with United dated December 27, 2022, which amended and
restated the Second Amended and Restated CPA dated November 4, 2020 (as amended, the “United CPA” or the "Amended and Restated
United CPA"). Under the United CPA, United owns 42 of our 60 E-175 aircraft. The E-175 aircraft owned by United and leased to us have
terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. Additionally, United leased 20 E-
175LL aircraft
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to us at nominal amounts during the year ended September 30, 2023. The E-175LL aircraft were removed from the CPA beginning in
February 2023, with the last E-175LL aircraft being removed in April 2023.
In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract
plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys.
United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other
expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
United reimburses us on a pass-through basis for certain costs related to heavy airframe and engine maintenance, landing gear,
auxiliary power units ("APUs") and component maintenance for the aircraft owned by United. Our United CPA permits United, subject to
certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft
from service, by giving us notice of 90 days or more. If United elects to terminate our United CPA in its entirety or permanently remove select
aircraft from service, we are permitted to return any of the affected aircraft leased from United at no cost to us. In addition, if United removes
any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated, at our option, to assume the aircraft
ownership and associated debt with respect to such aircraft through the end of the term of the United CPA.
On December 27, 2022, we entered into the Amended and Restated United CPA, which provides, among other things, for the following
amended terms:
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▪
▪
▪
▪
▪
▪
The addition of up to 38 CRJ-900 aircraft to be operated by the Company on behalf of United under the Amended and Restated
United CPA, dependent on the number of E-175 aircraft the Company is operating. As of September 30, 2023, we operated 24
CRJ-900 aircraft under our Amended and Restated United CPA;
An increase in rates to cover the Company’s pilot pay increases instituted in September 2022, effective through September 2025;
United to be responsible for all costs associated with converting the CRJ-900 aircraft for operation in United’s network;
Terms providing that United may remove the CRJ-900 aircraft from the scope of the United CPA, subject to certain notice and
other requirements;
United’s existing utilization waiver for the Company’s operation of E-175LL Covered Aircraft (as defined in the United CPA) to be
extended to December 31, 2023;
The extension of existing monthly operational performance incentives; and
An agreement by the Company to not enter into new regional air carrier service agreements, excluding the Company’s existing
agreement with DHL, and provided that this restriction shall not apply from and after the earlier to occur of (i) January 1, 2026 and
(ii) the Company's satisfaction of certain Performance Milestones (as defined in the Amended and Restated United CPA).
Additionally, in January 2023, in consideration for entering in the Amended and Restated United CPA and providing the revolving line
of credit, discussed in Note 10, the Company (i) granted United the right to designate one individual to the Company's board of directors (the
"United Designee"), which occurred effective May 2, 2023 with the appointment of Jonathan Ireland and (ii) issued to United 4,042,061
shares of the Company’s common stock equal to approximately 10% of the Company’s then issued and outstanding capital stock on such
date (the "United Shares"). United's board designee rights will terminate at such time as United's equity ownership in the Company falls
below five percent (5%) of the Company's issued and outstanding stock.
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United was also granted pre-emptive rights relating to the issuance of any equity securities by the Company and certain registration
rights, set forth in a definitive registration rights agreement with United, granting United customary demand registration rights in respect of
publicly registered offerings of the Company, subject to usual and customary exceptions and limitations. See also Note 18 for a discussion
regarding the amendment to the Company's bylaws as it relates to the Amended and Restated United CPA.
Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine
years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement.
During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and terminated the leases on the 18 CRJ-700
aircraft, which have all subsequently been sold.
Our United CPA is subject to early termination prior to its expiration in various circumstances including:
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If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain
circumstances;
If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United,
subject to 30 days' notice and cure rights;
If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the
agreement;
If we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling
another air carrier;
United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in
its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more; and
If United elects to terminate our United CPA in its entirety or permanently remove aircraft from service, we are permitted to return
any of the affected E-175 aircraft leased from United at no cost to us.
DHL Flight Services Agreement
On December 20, 2019, we entered into a FSA with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate four Boeing
737 aircraft to provide cargo air transportation services as of September 30, 2023. In exchange for providing cargo flight services, we receive
a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty
based on timeliness and completion performance. Ground support expenses including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and one 737-800F and subleases them to us at nominal amounts. DHL
reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and
overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs.
Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid
directly to suppliers by DHL or otherwise reimbursed if incurred by us. A third Boeing 737-400F aircraft is leased to us under an operating
lease by a third party.
The DHL FSA expires five years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL
has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.
Our DHL FSA is subject to the following termination rights prior to its expiration:
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▪
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If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to
certain notice and cure rights;
If either party is declared bankrupt or insolvent;
If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days;
At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days' written notice.
If we fail to comply with performance standards for three consecutive measurement periods.
If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a
specified number of days;
Upon a change in control or ownership of the Company; and
DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate
services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.
Maintenance and Repairs
Airlines are subject to extensive regulation. We have a FAA mandated and approved maintenance program. Aircraft maintenance and
repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy
maintenance, and component service. We also outsource certain aircraft maintenance and other operating functions. We use competitive
bidding among qualified vendors to procure these services. We have long-term maintenance contracts with AAR to provide fixed-rate parts
procurement and component overhaul services for our aircraft fleet. Under these agreements, AAR provides maintenance and engineering
services on any aircraft that we designate during the term of the agreement, along with access to a spare parts inventory pool, in exchange
for a fixed monthly fee.
Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft. Line maintenance is performed
at certain locations throughout our system and represents the majority of and most extensive maintenance we perform. Major airframe
maintenance checks consist of a series of more complex tasks that can take from one to four weeks to accomplish and typically are required
approximately every 28 months, on average, across our fleet. Engine overhauls and engine performance restoration events are quite
extensive and can take two months. We maintain an inventory of spare engines to provide for continued operations during engine
maintenance events. We expect to begin the initial planned engine maintenance overhauls on our new engine fleet approximately four to six
years after the date of manufacture and introduction into our fleet, with subsequent engine maintenance every four to six years thereafter.
Due to our current fleet size, we believe outsourcing all of our heavy maintenance, engine restoration, and major part repair is more
economical than performing this work using our internal maintenance team.
Competition
We consider our primary competition to be U.S. regional airlines that currently hold or compete for CPAs for passenger services with
major airlines. Our competition includes, therefore, nearly every other domestic regional airline, including Air Wisconsin Airlines Corporation;
Commuetair, Inc. ("Commuteair"); Endeavor Air, Inc. (owned by Delta) ("Endeavor"); Envoy Air, Inc. ("Envoy"), PSA Airlines, Inc. ("PSA") and
Piedmont Airlines, Inc. ("Piedmont") (Envoy, PSA and Piedmont are owned by American); Horizon Air Industries, Inc. (owned by Alaska Air
Group, Inc.) ("Horizon"); SkyWest Inc., parent of SkyWest Airlines, Inc.; Republic Airways Holdings Inc.; and Trans States Airlines, Inc.
Major airlines typically offer CPAs to regional airlines on the basis of the following criteria: availability of labor resources; proposed
contract economic terms; reliable and on-time flight operations; corporate financial resources including ability to procure and finance aircraft;
customer service levels; and other factors.
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Certain of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, economic
downturns, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations, and business
combinations among major and regional carriers. The effect of economic downturns is somewhat mitigated by our reliance on a CPA with
revenue-guarantee provisions, but the renewal and continued profitability of our partnership with United is not guaranteed.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year since the airline industry is
subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of
our aircraft in the summer months and are unfavorably affected by increased fleet maintenance and by inclement weather during the winter
months.
Aircraft Fuel
Our CPA and FSA provide that our major partners source, procure, and directly pay third-party vendors for all fuel used in the
performance of those agreements. Accordingly, we do not recognize fuel expenses or revenues for flying under our CPA and FSA and we
face very limited exposure to fuel price fluctuations.
Insurance
We maintain insurance policies that we believe are of types customary in the airline industry and as required by the DOT, lessors and
other financing parties, and our major partners under the terms of our CPA and FSA. The policies principally provide liability coverage for
public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors' and officers' liability; advertiser
and media liability; cyber risk liability; fiduciary; workers' compensation and employer's liability; and war risk (terrorism). Although we currently
believe our insurance coverage is adequate, we cannot assure you that the amount of such coverage will not be changed or that we will not
be forced to bear substantial losses from accidents.
Human Capital Management
As of September 30, 2023, we employed approximately 2,303 employees, consisting of 807 pilots or pilot recruits, 647 flight
attendants, 32 flight dispatchers, 483 maintenance employees and 334 employees in administrative or other roles. Our continued success is
partly dependent on our ability to continue to attract and retain qualified personnel. We have never been the subject of a labor strike or labor
action that materially impacted our operations.
FAA regulations require pilots to have an Airline Transport Pilot ("ATP") license with specific ratings for the aircraft to be flown, and to
be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent
training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for
specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to
approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance,
and aircraft inspection must also meet experience standards prescribed by FAA regulations. All safety-sensitive employees are subject to
pre-employment, random, and post-accident drug testing.
The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and
maintenance technicians. In addition, as is common with most of our competitors, we have faced considerable turnover of our employees.
Regional airline pilots, flight attendants, and maintenance technicians often leave to work for larger airlines, which generally offer higher
salaries and better benefit programs than regional airlines are financially able to offer. Should the turnover of employees,
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particularly pilots and maintenance technicians continue at the rate that has occurred over the recent past and/or, sharply increase, the result
will be significantly higher training costs than otherwise would be necessary, as well as a shortage in the required number of applicable
personnel, and we may need to request a reduced flight schedule with our major partners, which may result in operational performance
penalties under our CPA or FSA. We cannot assure that we will be able to recruit, train and retain the qualified employees that we need to
carry out our expansion plans or replace departing employees.
As of September 30, 2023, approximately 63.1% of our employees were represented by labor unions under collective-bargaining
agreements, as set forth below. No other employees of ours or our subsidiaries are parties to any other collective bargaining agreement or
union contracts.
Employee Groups
Pilots
Flight Attendants
Dispatchers
Maintenance Department
Administrative
Number of
Employees
Representative
807 Air Line Pilots Association
647 Association of Flight Attendants
32
483
334
Labor
Agreement
Amendable
As of
10/17/2022
8/30/2022
The Railway Labor Act ("RLA") governs our relations with labor organizations. Under the RLA, the collective bargaining agreements
generally do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement,
they must notify the other party in the manner agreed to by the parties. Under the RLA, after receipt of such notice, the parties must meet for
direct negotiations, and if no agreement is reached, either party may request the National Mediation Board ("NMB") to appoint a federal
mediator. The RLA prescribes no set timetable for the direct negotiation and mediation process. It is not unusual for those processes to last
for many months, and even for a few years. If no agreement is reached in mediation, the NMB in its discretion may declare at some time that
an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to
arbitration. If arbitration is rejected by either party, a 30-day "cooling off" period commences. During that period (or after), a Presidential
Emergency Board ("PEB") may be established, which examines the parties' positions and recommends a solution. The PEB process lasts for
30 days and is followed by another "cooling off" period of 30 days. At the end of a "cooling off" period, unless an agreement is reached or
action is taken by Congress, the labor organization may strike and the airline may resort to "self-help," including the imposition of any or all of
its proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the authority to
prevent "self-help" by enacting legislation that, among other things, imposes a settlement on the parties. The table above sets forth our
employee groups and status of the collective bargaining agreements.
Refer to “Impact of COVID-19 Pandemic” included in “Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations” for information on human capital management actions taken by the Company in response to the COVID-19 pandemic.
Safety and Security
We are committed to the safety and security of our passengers and employees. We have taken many steps, both voluntarily and as
mandated by governmental authorities, to increase the safety of our operations. Some of the safety and security measures we have taken
with our major partners include aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage
screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security
requirements.
Our ongoing focus on safety relies on training our employees to proper standards and providing them with the tools and equipment
they require so they can perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our
operation including dispatch, flight operations and maintenance.
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The TSA and the U.S. Customs and Border Protection, each a division of the U.S. Department of Homeland Security, are responsible
for certain civil aviation security matters, including passenger and baggage screening at U.S. airports, and international passenger
prescreening prior to entry into or departure from U.S. international flights are subject to customs, border, immigration, and similar
requirements of equivalent foreign governmental agencies. We are currently in compliance with all directives issued by such agencies. We
maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for security of our personnel,
equipment and facilities are exercised throughout our operations.
Facilities
In addition to aircraft, we have office and maintenance facilities to support our operations. Each of our facilities are summarized in the
following table:
Type
Corporate Headquarters
Training Center
Parts/Stores
Hangar
Office, Hangar and Warehouse
Parts Storage
Hangar
Hangar
Hangar
Cargo Building
Warehouse
Warehouse, Office
Location
Phoenix, Arizona
Phoenix, Arizona
Phoenix, Arizona
Phoenix, Arizona
El Paso, Texas
Dallas, Texas
Houston, Texas
Louisville, Kentucky
Dulles, Washington
Dulles, Washington
Tucson, Arizona
Erlanger, Kentucky
Ownership
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Approximate
Square Feet
33,770
23,783
12,000
22,467
31,292
8,143
74,524
26,762
28,451
1,475
13,276
7,070
Our corporate headquarters and training facilities in Phoenix, Arizona are subject to long-term leases expiring on November 30, 2032
and May 31, 2025, respectively.
We believe our facilities are suitable and adequate for our current and anticipated needs.
Foreign Ownership
Under DOT regulations and federal law, we must be owned and controlled by U.S. citizens. The restrictions imposed by federal law
and regulations currently require that at least 75% of our voting stock must be owned and controlled, directly and indirectly, by persons or
entities who are U.S. citizens, as defined in the Federal Aviation Act, that our president and at least two-thirds of the members of our Board
of Directors and other managing officers be U.S. citizens, and that we be under the actual control of U.S. citizens. In addition, at least 51% of
our total outstanding stock must be owned and controlled by U.S. citizens and no more than 49% of our stock 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 between the United States and the applicable foreign country and to points beyond
the foreign country on flights serving the foreign country. We are currently in compliance with these ownership provisions.
Government Regulation
Aviation Regulation
The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to
certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries
involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required
for airlines to provide domestic and foreign air transportation. International routes and
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international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline's
ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the
foreign country and the carrier's ability to obtain the necessary authority from the DOT and the applicable foreign government.
The U.S. government has negotiated "open skies" agreements with many countries, which allow broad access between the United
States and the applicable foreign country. With certain other countries, however, the United States has a restricted air transportation
agreement. Our international flights to Mexico are governed by a bilateral air transport agreement which the DOT has determined has all of
the attributes of an "open skies" agreement. Our flights to Canada, and Cuba are governed by bilateral air transport agreements between the
United States and such countries. Changes in U.S., Mexican, Canadian or Cuban aviation policies could result in the alteration or termination
of the corresponding air transport agreement, or otherwise affect our operations to and from these countries. There is still a degree of
uncertainty about the future of scheduled commercial flight operations between the United States and Cuba as a result of changes in
diplomatic relations between the two governments, as well as travel and trade restrictions implemented by the U.S. government in 2017. We
are largely sheltered from the economic impact changes to existing "open skies" agreements or volatility in U.S., Mexican, Canadian, or
Cuban aviation polices because United controls route selection and scheduling under our CPA.
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 and other matters affecting air safety. The FAA requires each commercial
airline to obtain and hold an FAA air carrier certificate. We currently hold an FAR-121 air carrier certificate. In July 2013, as directed by the
U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increased the required
training time for new airline pilots (the "FAA Qualification Standards"). The FAA Qualification Standards, which became effective in August
2013, require first officers to hold an ATP certificate, requiring 1,500 hours total flight time as a pilot. Previously, first officers were required to
have only a commercial pilot certificate, which required 250 hours of flight time. The rule also mandates stricter rules to minimize pilot fatigue.
Airport Access
Flights at three major domestic airports are regulated through allocations of landing and takeoff authority (i.e., "slots" and "operating
authorizations") or similar regulatory mechanisms, which limit take-offs and landings at those airports. Each slot represents the authorization
to land at or take off from the particular airport during a specified time period. In the United States, the FAA currently regulates the allocation
of slots, slot exemptions, operating authorizations, or similar capacity allocation mechanisms at two of the airports we serve, Ronald Reagan
Washington National Airport (DCA) in Washington, D.C., and New York's LaGuardia Airport (LGA). In addition, John Wayne Airport (SNA) in
Orange County, California, has a locally imposed slot system. Our operations at these airports generally require the allocation of slots or
analogous regulatory authorizations, which are obtained by our major partners.
Consumer Protection Regulation
The DOT also has jurisdiction over certain economic issues affecting air transportation and consumer protection matters, including
unfair or deceptive practices and unfair methods of competition, lengthy tarmac delays, air carriers, airline advertising, denied boarding
compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints, and
transportation of passengers with disabilities. The DOT frequently adopts new consumer protection regulations, such as rules to protect
passengers addressing lengthy tarmac delays, chronically delayed flights, CPA disclosure and undisclosed display bias, and is reviewing
new guidelines to address the transparency of airline non-ticket fees and refunding baggage fees for delayed checked baggage. The DOT
also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a
flight operated by another airline) and wet-leasing agreements (where one airline provides aircraft and crew to another airline) between
carriers and regulates other economic matters such as slot transactions.
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Environmental Regulation
We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These
laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise.
We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not
currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material
environmental investigations related to our assets or properties.
Other Regulations
Airlines are also subject to various other federal, state, local, and foreign laws and regulations. For example, the U.S. Department of
Justice has jurisdiction over certain airline competition matters. Labor relations in the airline industry are generally governed by the RLA. The
privacy and security of passenger and employee data is regulated by various domestic and foreign laws and regulations.
The U.S. government and foreign governments may consider and adopt new laws, regulations, interpretations, and policies regarding
a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations,
interpretations, and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these
proposals or changes might have on our business.
Legal Proceedings
We are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2023, our
management believed the ultimate outcomes of other routine legal matters are not likely to have a material adverse effect on our financial
position, liquidity, or results of operations.
Corporate Information
We are a Nevada corporation with our principal executive office located in Phoenix, Arizona. We were founded in 1982 and
reincorporated in Nevada in 1996. In addition to operating Mesa Airlines, we also wholly own Mesa Air Group-Airline Inventory Management,
LLC. ("MAG-AIM"), an Arizona limited liability company, which was established to purchase, distribute and manage Mesa Airlines' inventory
of spare rotable and expendable parts. MAG-AIM's financial results are reflected in our consolidated financial statements.
Our principal executive offices are located at 410 North 44th Street, Suite 700, Phoenix, Arizona 85008, and our telephone number is
(602) 685-4000. Our website is located at www.mesa-air.com. The information on, or accessible through, our website does not constitute part
of, and is not incorporated into, this Annual Report on Form 10-K.
Mesa Airlines, the Mesa Airlines logo and our other registered or common law trade names, trademarks, or service marks appearing in
this Annual Report on Form 10-K are our intellectual property. This Annual Report on Form 10-K contains additional trade names,
trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of
other companies' trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these
companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report on Form 10-K.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the Securities
and Exchange Commission (the "SEC"). We are subject to the informational requirements of the Exchange Act, and we file or furnish reports,
proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at
http://investor.mesa-air.com/financial-information/sec-filings when such
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reports are available on the SEC's website. The SEC maintains a website that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at www.sec.gov. We periodically provide other information for investors on
our corporate website, www.mesa-air.com, and our investor relations website, investor.mesa-air.com. This includes press releases and other
information about financial performance, information on corporate governance and details related to our annual meeting of shareholders. The
information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further,
our references to website URLs are intended to be inactive textual references only.
19
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Certain factors may have a material adverse effect on our business,
financial condition, and results of operation. You should carefully consider the risks and uncertainties described below, together with all of the
other information included in this Annual Report on Form 10-K, including our financial statements and the related notes, and in our other
filings with the SEC. Our business, financial condition, operating results, cash flow, and prospects could be materially and adversely affected
by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your
investment.
Risk Factor Summary
The following is a summary of the material risk factors that could adversely affect our business, financial condition, and results of
operations:
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▪
▪
▪
▪
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▪
▪
▪
▪
▪
▪
▪
We are highly dependent on our agreements with our major partners and our operations may be negatively impacted if our
major partners experience events that negatively impact their financial strength or operations.
Reduced utilization levels of our aircraft under our agreements with our major partners would adversely impact our financial
results.
If United experiences events that negatively impact its financial strength or operations, our operations may be negatively
impacted.
We have a significant amount of debt and other contractual obligations, certain of which are subject to financial and other
covenants.
The potential impact of the deployment of 5G wireless telecommunications system to interfere with aviation equipment
The loss of key personnel or the inability to attract additional qualified personnel could adversely affect our business.
If the supply of pilots and mechanics to the airline industry remains constrained and pilot attrition continues to exceed historical
levels, our results of operations and financial condition would be negatively impacted.
Mechanic attrition and difficulty recruiting and retaining qualified maintenance technicians may negatively affect our operations
and financial condition.
Increases in our labor costs may adversely affect our business, results of operations, and financial condition.
United may expand its direct operation of regional jets or seek other independent airlines to service their regional aircraft needs.
We may be limited from expanding our flying within United's flight system.
The residual value of our owned aircraft may be less than estimated in our depreciation policies.
The amounts we receive under our agreements with our major partners may be less than the corresponding costs we incur.
Strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business and
reduce our profitability.
We face tail risk in that we have aircraft lease commitments that extend beyond our existing contractual terms on certain aircraft,
and may incur substantial maintenance costs as part of return obligations on leased aircraft.
We may incur substantial maintenance costs as part of our leased aircraft return obligations.
We may become involved in litigation that may materially adversely affect us.
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Disagreements regarding the interpretation of our agreements with our major partners could have an adverse effect on our
operating results and financial condition.
If we face problems with any of our third-party service providers, our operations could be adversely affected.
Maintenance costs will likely increase as the age of our jet fleet increases.
Regulatory changes or tariffs could negatively impact our business and financial condition.
The issuance of operating restrictions applicable to one of the fleet types we operate could negatively impact our business and
financial condition.
If we have a failure in our technology or security breaches of our information technology infrastructure our business and financial
condition may be adversely affected.
We are subject to various environmental and noise laws and regulations.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We may not be able to successfully implement our growth strategy, or make opportunistic acquisitions.
Our ability to obtain financing or access capital markets may be limited.
Negative publicity regarding our customer service could have a material adverse effect on our business, results of operations
and financial condition.
Risks associated with our presence in international emerging markets may materially adversely affect us.
Future public health threats similar to COVID-19 that negatively impact the demand for air travel could adversely impact our
business.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential
major partners.
We are subject to significant governmental regulation.
Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control
inefficiencies; adverse weather conditions, such as hurricanes or blizzards; increased security measures; new travel-related
taxes; or the outbreak of disease; any of which could have a material adverse effect on our business, results of operations, and
financial condition.
Terrorist activities or warnings have dramatically impacted the airline industry and are likely to continue to do so.
The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.
If our common stock is delisted from Nasdaq and is traded over-the-counter, your ability to trade and the market price of our
shares of common stock may be restricted and negatively impacted.
The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.
If securities or industry analysts do not publish research or reports about our business or publish negative reports about our
business, our stock price and trading volumes could decline.
Additional issuances of our common stock, whether by us or as a result of the exercise of our outstanding warrants, could
materially affect the value of our common stock.
Our corporate charter limits certain transfers of our stock, which could have an effect on the market price and liquidity of our
common stock.
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We currently do not intend to pay dividends on our common stock.
The requirements of being a public company may strain our resources, increase our operating costs and divert management’s
attention.
We are required to assess our internal control over financial reporting on an annual basis, and any future adverse findings from
such assessment could result in a loss of investor confidence in our financial reports and have a material adverse effect on our
business.
For a more complete discussion of the material risk factors relevant to us, see below.
Risks Related to Our Business
We are highly dependent on our agreements with our major partners.
We derive substantially all of our operating revenue from our CPA with United and previously with American. American accounted for
approximately 23% and 45% of our total revenue for our fiscal years ended September 30, 2023 and 2022, respectively. United accounted
for approximately 73% and 48% of our revenue for our fiscal years ended September 30, 2023 and 2022, respectively. Our American CPA
terminated and we ceased operating aircraft on behalf of American effective April 4, 2023. A termination of our United CPA would have a
material adverse effect on our business prospects, financial condition, results of operations, and cash flows. See “Item 1. Business” for
additional information on our CPAs with American and United.
If our United CPA is terminated or not renewed, we would be significantly impacted and likely would not have an immediate source of
revenue or earnings to offset such loss. United is not under any obligation to renew its CPA with us. A termination or expiration of this
agreement would have a material adverse effect on our financial condition, cash flows, ability to satisfy debt and lease obligations, operating
revenues, and net income unless we are able to enter into satisfactory substitute arrangements for the utilization of the affected aircraft by
other airline partners, or, alternatively, obtain the airport facilities, gates, ticketing and ground services and make the other arrangements
necessary to fly as an independent airline. We may not be able to enter into substitute CPAs, and any such arrangements we might secure
may not be as favorable to us as our current agreements. Operating an airline independently from our major partners would be a significant
departure from our business plan and would likely require significant time and resources, which may not be available to us when needed.
Reduced utilization levels of our aircraft under our United CPA would have a material adverse impact our results of operations and
financial condition.
Historically, our major partners have utilized our flight operations at levels at or near the maximum capacity of our fleet allocations
under the applicable CPA agreements. As previously reported, we operated at significantly lower block hours during fiscal 2020 and fiscal
2021 due to the COVID pandemic.
Notwithstanding the increase in demand for air travel during the second half of fiscal 2021 and thereafter, in recent periods our high
level of pilot attrition and pilot training output limitations has resulted in a reduction of our block hours flown. If we continue to experience
pilot attrition above historic levels, we may experience further reductions in the block hours flown under our United CPA, and we may not be
able to maintain operating efficiencies previously obtained, each of which would negatively impact our operating results and financial
condition. In August 2022, we entered into a Letter of Agreement with the Airline Pilots Association (“ALPA”), which provided for increased
overall hourly pay increases of nearly 118% for captains and 172% for new-hire first officers. These pay increases have positively impacted
our ability to attract, hire, and retain pilots in fiscal 2023, and attrition levels have dropped to a pre-COVID level. However, there can be no
assurance that we will be able to adequately address the pilot attrition issues or that our major partners will increase the utilization of our
aircraft to historical levels in future periods if we do experience an improvement in pilot attrition. If pilot attrition persists, we may experience
additional declines in utilization levels, which would in turn have a material adverse impact on our financial condition and results of
operations.
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Our United CPA does not require United to schedule any specified minimum level of flight operations for our aircraft. Additionally,
United may remove aircraft from our United CPA with 90 days' prior notice to us. While United pays us a fixed monthly revenue amount for
each aircraft under contract, a significant reduction in the utilization levels of our fleet in the future or removal of aircraft from our United CPA
at United's election could reduce our revenues based on the number of flights and block hours flown for United.
Continued challenges with hiring, training, and retaining replacement pilots may lead to reduced utilization levels of our aircraft and
additional penalties under our CPA and our operations and financial results could be materially and adversely impacted. Additionally, United
may change routes and frequencies of flights, which can negatively impact our operating efficiencies. Changes in schedules may increase
our flight costs, which could exceed the reimbursed rates paid by United. Reduced utilization levels of our aircraft or other changes to our
schedules under our CPA would adversely impact our operating results and financial condition.
If United experiences events that negatively impact its financial strength or operations, our operations also may be negatively
impacted.
We may be directly affected by the financial and operating strength of United. Any events, such as new pandemics, that negatively
impact the financial strength of United or have a long-term effect on the use of United by airline travelers would likely have a material adverse
effect on our business, financial condition, and results of operations. In the event of a decrease in United's financial or operational strength,
United may seek to reduce, or be unable to make, the payments due to us under the United CPA. In addition, in some cases, they may
reduce utilization of our aircraft. Although we receive guaranteed monthly revenue for each aircraft under contract and a fixed fee for each
block hour or flight actually flown, United is not required to schedule any specified level of flight operations for our aircraft. If United becomes
bankrupt, our agreement with them may not be assumed in bankruptcy and could be terminated. This and other events, which are outside of
our control, could have a material adverse effect on our business, financial condition, and results of operations. In addition, any negative
events that impact other regional carriers and that affect public perception of such carriers generally could also have a material adverse
effect on our business, financial condition, and results of operations.
We have a significant amount of debt and other contractual obligations that could impair our liquidity and thereby harm our
business, results of operations and financial condition.
The airline business is a capital-intensive business and, as a result, we are highly leveraged. As of September 30, 2023, we had
approximately $538.3 million in total long-term principal balance (including current portion of $163.6 million, of which $57.7 million pertain to
finance lease obligations) and $20.1 million available for borrowing under our United Revolving Credit Facility. Substantially all of our long-
term debt was incurred in connection with the acquisition of aircraft and aircraft engines. During our fiscal years ended September 30, 2023,
2022, and 2021, our principal debt service payments totaled $203.0 million, $114.9 million, and $271.0 million, respectively.
We also have significant long-term lease obligations, primarily relating to our aircraft fleet, office space, and other facilities. As of
September 30, 2023, we had one aircraft under operating leases (excluding aircraft leased at nominal amounts from United and DHL) in
addition to other leases of facilities and equipment, with an average remaining term of 6.1 years. As of September 30, 2023, future minimum
lease payments due under all long-term operating leases were approximately $15.2 million and future debt service obligations were $619.5
million, including finance lease obligations and interest payments.
The Company's substantial level of indebtedness, non-investment grade credit ratings, and the availability of Company assets as
collateral for future loans or other indebtedness, which available collateral would be reduced under other future liquidity-raising transactions
and was reduced during our fiscal year ended September 30, 2021 as a result of CARES Act loan program borrowings, may make it difficult
for the Company to raise additional capital if required to meet its liquidity needs on acceptable terms, or at all.
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Although the Company's cash flows from operations and its available capital, including the proceeds from financing transactions, have
been sufficient to meet its obligations and commitments to date, the material uncertainties arising from the impact of the pilot shortage and
attrition and ongoing transition of American operations to United earlier this year raised substantial doubt as to the Company’s ability to
continue as a going concern. The Company is evaluating strategies to obtain the required additional funding for future operations. These
strategies may include, but are not limited to, obtaining equity financing, issuing debt, entering into other financing arrangements,
restructuring of operations to grow revenues and decrease expenses, or selling the aircraft held for sale and our equity investments.
We cannot assure you that our operations will generate sufficient cash flow to make our required payments, or that we will be able to
obtain financing to acquire additional aircraft or make other capital expenditures necessary for expansion. Our ability to pay the high level of
fixed costs associated with our contractual obligations will depend on our operating performance, cash flow, and ability to secure adequate
financing, which will in turn depend on, among other things, the success of our current business strategy, the U.S. economy, availability and
cost of financing, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The
amount of our fixed obligations could have a material adverse effect on our business, results of operations and financial condition. The
degree to which we are leveraged could have important consequences to holders of our securities, including the following:
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we must dedicate a substantial portion of cash flow from operations to the payment of principal and interest on applicable
indebtedness which, in turn, reduces funds available for operations and capital expenditures;
our flexibility in planning for, or reacting to, changes in the markets in which we compete may be limited;
we may be at a competitive disadvantage relative to our competitors with less indebtedness;
we are rendered more vulnerable to general adverse economic and industry conditions;
we are exposed to increased interest rate risk given that a majority of our indebtedness obligations are at variable interest rates;
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our credit ratings may be reduced, and our debt and equity securities may significantly decrease in value.
Additionally, failure to pay our operating leases, debt or other fixed cost obligations or a breach of our contractual obligations could
result in a variety of further adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is
unlikely that we would be able to cure our breach, fulfill our obligations, make required lease payments, or otherwise cover our fixed costs,
which would have a material adverse effect on our business, results of operations and financial condition. In addition, several of the
Company's debt agreements contain affirmative and negative covenants that, among other things, restrict the ability of the Company and its
subsidiaries to enter into, create, incur, assume, or suffer to exist any liens. See “Part II, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations” of this report for additional information regarding the Company's liquidity and capital
resources as of September 30, 2023.
The deployment of 5G communications systems by telecommunication service providers could interfere with aviation equipment,
potentially creating a material adverse effect on our business, results of operations, and financial condition.
On January 17, 2022, certain major airlines warned the United States federal government of potential adverse impacts of deploying
new 5G communications systems including interfering with airplane operational and safety equipment. This could result in the cancellation of
flights, diminishing safety measures, and damage to equipment. Any of these consequences could result in an adverse effect on our results
of operations. The DOT and FAA have required that all United States carriers install radio altimeters
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that are tolerant to 5G systems by February 2024. It is uncertain whether the DOT or FAA will impose additional restrictions that could have
an adverse effect on our operations.
We are required to comply with certain ongoing financial and other covenants under certain credit facilities and leases, and if we
fail to meet those covenants or otherwise suffer a default thereunder, our lenders and lessors may accelerate the payment of such
obligations.
Under our (i) credit and guaranty agreement with United (the "United Revolving Credit Facility"), we are required to comply with a
minimum consolidated interest and rental coverage ratio at the end of each fiscal quarter during the term of such credit facility, (ii) credit
agreement with EDC, we are required to comply with a minimum fixed charge coverage ratio at the end of each fiscal quarter during the term
of such credit facility, (iii) aircraft lease facility ("RASPRO Lease Facility") with RASPRO we are required to comply with minimum current
ratio and debt ratio covenants and a minimum available cash covenant until all amounts outstanding thereunder have been paid in full, and
(iv) loan and guarantee agreement with the U.S. Department of the Treasury (the "UST Loan"), we are required to comply with a minimum
collateral coverage ratio, measured monthly during the term of such credit facility, and a minimum liquidity level, measured at the close of any
business day during the term of such credit facility.
Failure to comply with the terms of these credit facilities and financing arrangements and the ongoing financial and other covenants
thereunder would result in an event of default (as defined in the applicable credit facility and financing agreement) and, to the extent the
applicable lenders so elect, an acceleration of our existing indebtedness following the expiration of any applicable cure periods, causing such
debt to be immediately due and payable. Acceleration of such indebtedness would also trigger cross-default clauses under our other
indebtedness. It could also result in the termination of all commitments to extend further credit under the United Revolving Credit Facility. We
currently do not have sufficient liquidity to repay all of our outstanding debt in full if such debt were accelerated. If we are unable to pay our
debts as they come due, or obtain waivers for such payments, our secured lenders could foreclose on any assets securing such debt. These
events could materially adversely affect our business, results of operations and financial condition.
The loss of key personnel upon whom we depend on to operate our business or the inability to attract additional qualified
personnel could adversely affect our business.
We believe that our future success will depend in large part 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. Among other
things, the CARES Act imposes significant restrictions on executive compensation, which will remain in place through the date that is one
year after the amounts outstanding under our Loan and Guarantee Agreement with the U.S. Department of the Treasury are fully repaid.
Such restrictions, over time, will likely result in lower executive compensation in the airline industry than is prevailing in other industries which
may present retention challenges in the case of executives presented with alternative, non-airline opportunities. Any inability to retain or
attract significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of
operations, and financial condition.
If the supply of pilots to the airline industry remains constrained and pilot attrition continues to exceed historical levels, our results
of operations and financial condition would be negatively impacted.
In prior periods, the FAA Qualification Standards (and associated regulations) related to pilot qualification and flight training standards
discussed in “Item 1. Government Regulation” dramatically reduced the supply of qualified pilot candidates and negatively impacted our
ability to hire pilots at a rate sufficient to support required utilization levels under our CPAs, resulting in certain cases issuing credits to United,
temporarily removing aircraft from service under a CPA, or performance penalties.
More recently, our operations have continued to be negatively impacted by the severity of the pilot shortages that have plagued the
airline industry as whole, and by the associated elevated pilot attrition that
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we believe has disproportionately impacted regional airlines, including us. Our pilots continue to be recruited by other carriers, primarily the
major carriers and heavy equipment cargo operators, which generally offer higher salaries and more extensive benefit programs. The
magnitude of this attrition in fiscal 2023 created significant backlogs in training, further exacerbating an already challenging environment.
These events have had, and continue to have, a negative impact on pilot scheduling, work hours, and the number of pilots required to
support our operations.
There has been significant press coverage during fiscal 2023 regarding the issues stemming from the pilot shortages (namely flight
cancellations and delays by the major carriers), with no airline being immune to the issues created by the pilot shortage or the associated
negative press. We have taken important steps to further attract, hire and retain qualified pilots, including the implementation of significant
pilot wage and bonus increases, pilot retention initiatives, increases in training capacity, and other cost efficiency initiatives. Since
implementing these measures, attrition rates have returned to pre-covid levels, and we have been able to hire qualified pilots at a rate
sufficient to fill available classroom training spaces. No assurance can be given that the measures we have taken or may take in the future
will enable us to attract, hire and train pilots at a rate necessary to support our operations.
In August 2022, we entered into a Letter of Agreement with the Airline Pilots Association (“ALPA”), which provided for increased overall
hourly pay increases of nearly 118% for captains and 172% for new-hire first officers. These pay increases have positively impacted our
ability to attract, hire, and retain pilots in fiscal 2023, and attrition levels have dropped to a pre-COVID level.
In addition to the foregoing, our pilot premium wage and bonus initiatives have substantially increased our labor costs and continue to
negatively impact our operations and financial condition. Other regional air carriers have implemented similar measures, which has only
served to increase the competition for qualified pilots and the costs associated with hiring pilots. As part of our Amended and Restated
United CPA, United has increased rates to cover our pilot pay increases instituted in September 2022. As such, these increased costs have
not materially and adversely impact our financial condition and results of operations.
If the high levels of pilot attrition return and we are unable to attract, hire and retain pilots at a rate sufficient to support required
utilization levels under our CPA, we may be required to issue credits or provide offsets to United, as we have done in the past, and to
reduced flight schedules with United, which has resulted in and may continue to result in monetary performance penalties under our CPA, as
well as give rise to the ability of United in certain circumstances to elect to remove aircraft from the scope of our CPA. Should any of these
events arise in the future, they could have a material and adverse impact on our financial condition and results of operations.
Mechanic attrition, together with difficulty recruiting and retaining qualified maintenance technicians, may negatively affect our
operations and financial condition.
Our operations rely on qualified personnel, including maintenance technicians. Our maintenance technicians may seek employment at
mainline airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines are financially able to offer.
Should the turnover of maintenance technicians increase, we may not be able to hire sufficient maintenance technicians to replace those
leaving. Additionally, FAA regulations regarding personnel certification and qualifications, and potential future changes in FAA regulations,
could limit the number of qualified new entrants that we could hire. In the event we are unable to hire and retain qualified mechanics, our
business and financial condition could be adversely affected.
Increases in our labor costs, which constitute a substantial portion of our total operating costs, may adversely affect our business,
results of operations and financial condition.
As a result of the FAA Qualification Standards, the supply of qualified pilots has been dramatically reduced. This shortage of pilots has
driven up our pilot salaries and sign-on bonuses and resulted in a material increase in our labor costs. A continued shortage of pilots could
require us to further increase our labor costs, which could result in a material reduction in our earnings.
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United may expand its direct operation of regional jets or seek other independent airlines to service their regional aircraft needs,
thus limiting the expansion of our relationships with them.
We depend on United electing to contract with us instead of operating their own regional jets or operating their own "captive" regional
airlines through wholly owned subsidiaries. Currently, the captive regional airlines include Endeavor (owned by Delta), Envoy (owned by
American), PSA (owned by American), Piedmont (owned by American), and Horizon (owned by Alaska). These major airlines possess the
financial and other resources to acquire and operate their own regional jets, create, or grow their own captive regional airlines, or acquire
other regional air carriers instead of entering into contracts with us. We have no guarantee that in the future United will choose to enter into
contracts with us, or renew their existing agreements with us, instead of operating their own regional jets, allocating flying to their captive
regional airlines, or entering into relationships with competing regional airlines. A decision by United to phase out or limit our CPA or to enter
into similar agreements with our competitors would have a material adverse effect on our business, financial condition, or results of
operations.
We may be limited from expanding our flying within United flight systems and there are constraints on our ability to provide
services to airlines other than United.
Additional growth opportunities within United's flight system are limited by various factors, including a limited number of independent
regional aircraft that United can operate in its regional network due to "scope" clauses in the current collective bargaining agreements with
their pilots that restrict the number and size of regional jets that may be operated in their flight systems not flown by their pilots. Except as
contemplated by our existing agreement, we cannot be sure that United will contract with us to fly any additional aircraft.
We may not have additional growth opportunities or may agree to modifications to our agreement that reduce certain benefits to us in
order to obtain additional aircraft, or for other reasons. Given the competitive nature of the airline industry, we believe limited growth
opportunities may result in competitors accepting reduced margins and less favorable contract terms in order to secure new or additional
capacity purchase operations. Even if we are offered growth opportunities by United, those opportunities may involve economic terms or
financing commitments that are unacceptable to us. Additionally, United may reduce the number of regional jets in its system by not renewing
or extending existing flying arrangements with regional operators or transitioning those flying arrangements to their own captive regional
carriers. Any one or more of these factors may reduce or eliminate our ability to expand our flight operations with United.
Additionally, our CPA limits our ability to provide regional flying services to other airlines in certain major airport hubs of United. These
restrictions may make us a less attractive partner to other major airlines whose regional flying needs do not align with our geographical
restrictions.
The residual value of our owned aircraft may be less than estimated in our depreciation policies.
As of September 30, 2023, we had approximately $698.0 million of property and equipment and related assets, net of accumulated
depreciation, of which $569.9 million relates to owned aircraft. In accounting for these long-lived assets, we make estimates about the
expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair
value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant
decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow
losses associated with the use of the long-lived assets. In the event the estimated residual value of any of our aircraft types is determined to
be lower than the residual value assumptions used in our depreciation policies, the applicable aircraft type in our fleet may be impaired and
may result in a material reduction in the book value of applicable aircraft types we operate or we may need to prospectively modify our
depreciation policies. An impairment on any of the aircraft types we operate or an increased level of depreciation expense resulting from a
change to our depreciation policies could result in a material negative impact to our financial results. For our fiscal year ended September 30,
2023, we recognized approximately $50.6 million of impairment losses on our owned aircraft and related assets. See Note 8 – “Balance
Sheet Information” in the notes to the audited
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consolidated financial statements included in this Annual Report on Form 10-K for further discussion of our impairment of long-lived assets.
The amounts we receive under our agreements may be less than the corresponding costs we incur.
Under our CPA with United and FSA with DHL, a portion of our compensation is based upon pre-determined rates typically applied to
production statistics (such as departures and block hours flown). The primary operating costs intended to be compensated by the pre-
determined rates include labor costs, including crew training costs, certain aircraft maintenance expenses and overhead costs. During our
fiscal year ended September 30, 2023, approximately $77.5 million, or 13.4%, of our operating costs under our agreements were pass-
through costs, excluding fuel which is paid directly to suppliers by our major partners. If our operating costs for labor, aircraft maintenance
and overhead costs exceed the compensation earned from our pre-determined rates under our agreements, our financial position and
operating results will be negatively affected. During our fiscal year ended September 30, 2023, the revenue received under our CPA was not
adequate to cover all corresponding costs incurred.
Strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business and
reduce our profitability.
As of September 30, 2023, approximately 63.1% of our workforce was represented by labor unions, including the Air Line Pilots
Association, International ("ALPA") and the Association of Flight Attendants ("AFA"). In August 2022, we entered into a Letter of Agreement
with the ALPA, which provided for increased overall hourly pay increases of nearly 118% for captains and 172% for new-hire first officers.
These pay increases have positively impacted our ability to attract, hire, and retain pilots in fiscal 2023, and attrition levels have dropped to a
pre-COVID level.
The inability to negotiate acceptable contracts with existing unions or with new unions could result in work stoppages by the affected
workers, lost revenues resulting from the cancellation of flights and increased operating costs as a result of higher wages or benefits paid to
union members. The terms and conditions of our 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 we can. In addition, if we are unable to reach agreement with any of our unionized work groups in future negotiations regarding
the terms of their collective bargaining agreements, we may be subject to work interruptions, stoppages, or shortages. We may also become
subject to additional collective bargaining agreements in the future as non-unionized workers may unionize. Our labor agreements with the
ALPA and AFA are amendable as of September 30, 2023. We are also subject to various ongoing employment disputes outside of the
collective bargaining agreements. We consider these disputes to not be material, but any current or future dispute could become material.
Relations between air carriers and labor unions in the United States are governed by the RLA. Under the RLA, collective bargaining
agreements generally contain "amendable dates" rather than expiration dates, and the RLA requires that a carrier maintain the existing terms
and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes
overseen by the NMB. This process continues until either the parties have reached agreement on a new collective bargaining agreement, or
the parties have been released to "self-help" by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the
NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.
Any strike, labor dispute or increased unionization among our employees could disrupt our operations, reduce our profitability, or
interfere with the ability of our management to focus on executing our business strategies. For example, if a labor strike were to continue for
a specified number of consecutive days or longer, United may have cause to terminate the CPA. As a result, our business, results of
operations and financial condition may be materially adversely affected.
We face tail risk in that we have aircraft lease commitments that extend beyond our existing contractual terms on certain aircraft.
We currently have aircraft with leases extending past the term of their corresponding agreement. We may not be successful in
extending the flying contract terms on these aircraft with our major partners. In
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that event, we intend to pursue alternative uses for those aircraft over the remaining portions of their leases including, but not limited to,
operating the aircraft with another major airline under a negotiated CPA, subleasing the aircraft to another operator or marketing them for
sale. Additionally, we may negotiate an early lease return agreement with an aircraft's lessor. In such event, we may incur cash and non-cash
early lease termination costs that would negatively impact our operations and financial condition. Additionally, if we are unable to extend a
flying contract with an existing major partner but reach an agreement to place an aircraft into service with a different major partner, we likely
will incur inefficiencies and incremental costs, such as changing the aircraft livery, which would negatively impact our financial results.
Furthermore, we have lease aircraft buyout obligations on certain aircraft due in March 2024 that we may not be able to meet. Our inability to
meet such buyout obligations could have a material adverse effect on our business, results of operations, and financial condition.
We may incur substantial maintenance costs as part of our leased aircraft return obligations.
Our aircraft lease agreements contain provisions that require us to return aircraft airframes and engines to the lessor in a specified
condition or pay an amount to the lessor based on the actual return condition of the equipment. These lease return costs are recorded in the
period in which they are incurred. We estimate the cost of maintenance lease return obligations and accrue such costs over the remaining
lease term when the expense is probable and can be reasonably estimated. Any unexpected increase in maintenance return costs may
negatively impact our financial position and results of operations.
We may become involved in litigation that may materially adversely affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our
business, including employment, commercial, product liability, class action, whistleblower and other litigation and claims, and governmental
and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management's attention and resources,
cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks,
expenses, and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims
or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a
material adverse effect on our business, results of operations and financial condition.
Disagreements regarding the interpretation of our agreements with our major partners could have an adverse effect on our
operating results and financial condition.
To the extent that we experience disagreements regarding the interpretation of our CPA or FSA, we will likely expend valuable
management time and financial resources in our efforts to resolve those disagreements. Those disagreements may result in litigation,
arbitration, settlement negotiations, or other proceedings. Furthermore, there can be no assurance that any or all of those proceedings, if
commenced, would be resolved in our favor or that we would be able to exercise sufficient leverage in any proceeding relative to our major
partner to achieve a favorable outcome. An unfavorable result in any such proceeding could have adverse financial consequences or require
us to modify our operations. Such disagreements and their consequences could have an adverse effect on our operating results and financial
condition.
We rely on third-party suppliers as the sole manufacturers of our aircraft and aircraft engines.
We depend upon MHI, Boeing, and Embraer as the sole manufacturers of our aircraft and GE as the sole manufacturer of our aircraft
engines. Our operations could be materially and adversely affected by the failure or inability of MHI, Boeing, Embraer or GE to provide
sufficient parts or related maintenance and support services to us in a timely manner, or the interruption of our flight operations as a result of
unscheduled or unanticipated maintenance requirements for our aircraft or engines.
Maintenance costs will likely increase as the age of our jet fleet increases.
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The average age of our E-175, CRJ-900, Boeing 737 and CRJ-700 type aircraft is approximately 7.9, 18.1, 30.0, and 16.4 years,
respectively. We have incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year
warranties and a limited number of heavy airframe checks and engine overhauls have occurred. Our maintenance costs will increase
significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and the E-175 warranties expire. In
addition, because our current aircraft were acquired over a relatively short period of time, significant maintenance events scheduled for these
aircraft will occur at roughly the same intervals, meaning we will incur our most expensive scheduled maintenance obligations across our
present fleet at approximately the same time. These more significant maintenance activities will result in out-of-service periods during which
aircraft are dedicated to maintenance activities and unavailable for flying under our agreements. Any unexpected increase in our
maintenance costs as our fleet ages or decreased revenues resulting from out-of-service periods could have an adverse effect on our cash
flows, operating results, and financial condition.
If we face problems with any of our third-party service providers, our operations could be adversely affected.
Our reliance upon others to provide essential services on behalf of our operations may limit our ability to control the efficiency and
timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our
operations, including aircraft maintenance, ground facilities and IT services, and expect to enter into additional similar agreements in the
future. In particular, we rely on AAR and Aviall to provide fixed-rate parts procurement and component overhaul services for our aircraft fleet
and GE to provide engine support. Our agreements with AAR, and other service providers, are subject to termination after notice. If our third-
party service providers terminate their contracts with us, or do not provide timely or consistently high-quality service, we may not be able to
replace them in a cost-efficient manner or in a manner timely enough to support our operational needs, which could have a material adverse
effect on our business, financial condition, and results of operations. In addition, our operations could be materially and adversely affected by
the failure or inability of AAR, Aviall or GE to provide sufficient parts or related maintenance and support services to us in a timely manner.
Regulatory changes or tariffs could negatively impact our business and financial condition.
We import a substantial portion of the equipment we utilize in our operations. For example, the sole manufacturers of our regional
aircraft, MHI and Embraer, are headquartered in Japan and Brazil, respectively. We cannot predict the impact of potential regulatory changes
or action by U.S. regulatory agencies, including the potential impact of tariffs or changes in international trade treaties on the cost and timing
of parts and aircraft. Our business may be subject to additional costs as a result of potential regulatory changes, which could have an
adverse effect on our operations and financial results.
The issuance of operating restrictions applicable to one of the fleet types we operate could negatively impact our business and
financial condition.
We rely on a limited number of aircraft types, including CRJ-700, CRJ-900, Boeing 737, and E-175 aircraft. The issuance of FAA or
manufacturer directives restricting or prohibiting the use of the aircraft types we operate could negatively impact our business and financial
results.
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If we have a failure in our technology or security breaches of our information technology infrastructure our business and financial
condition may be adversely affected.
The performance and reliability of our technology, and the technology of our major partners, are critical to our 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 our internal network. Any individual, sustained or repeated failure of our
technology or that of our major partners could impact our ability to conduct our business, lower the utilization of our aircraft and result in
increased costs. Our technological systems and related data, and those of our major partners, may be vulnerable to a variety of sources of
interruption 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 our ordinary business operations, we collect and store sensitive data, including personal information of our
employees and information of our major partners. Our information systems are subject to an increasing threat of continually evolving
cybersecurity risks. Unauthorized parties may attempt to gain access to our 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. We may not be able to prevent all data security breaches or misuse of data.
The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees' or business
partners' information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal
information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business and financial
condition.
We are 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.
We are subject to increasingly stringent 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 (including storm water 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. We are or may be subject to new or proposed laws and regulations that may have a direct effect (or indirect effect through
our third-party specialists or airport facilities at which we operate) on our operations. In addition, U.S. airport authorities are exploring ways to
limit de-icing fluid discharges. Any such existing, future, new or potential laws and regulations could have an adverse impact on our business,
results of operations, and financial condition.
Similarly, we are subject to environmental laws and regulations that require us 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, joint and several, meaning that we could be liable for the costs of cleaning up environmental
contamination regardless of fault or the amount of wastes directly attributable to us.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of September 30, 2023, we had aggregate federal and state net operating loss (“NOL”) carryforwards of approximately $562.6
million and $233.5 million, which expire in fiscal years 2027-2038 and 2022-2042, respectively. Approximately $194.2 million of our federal
NOL carryforwards are not subject to expiration. Our unused losses generally carry forward to offset future taxable income, if any, until such
unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. However, US federal net
operating losses generated in fiscal years 2018 and forward are not subject to expiration and, if not utilized by fiscal 2023, are only available
to offset eighty percent of taxable income
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each year due to changes in tax law attributable to the passage of Tax Cuts and Jobs Act. In addition, if a corporation undergoes an
"ownership change" (generally defined as a greater than 50% cumulative change in the equity ownership of certain shareholders over a
rolling three-year period) under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the corporation's ability to use
its pre- change net operating loss carryforwards and other pre-change tax attributes to offset future taxable income or taxes may be limited.
We have experienced ownership changes in the past and may experience ownership changes as a result of future changes in our stock
ownership (some of which changes may not be within our control). This, in turn, could materially reduce or eliminate our ability to use our
losses or tax attributes to offset future taxable income or tax and have an adverse effect on our future cash flows.
We may not be able to successfully implement our growth strategy.
Our growth strategy has historically included, among other things, providing regional flying to other airlines and/or entering into the
cargo and express shipping business. We face numerous challenges in implementing this growth strategy in the future, including our ability
to:
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provide regional flying to other airlines with hub cities that overlap with our existing airline partners; and
enter into relationships with third parties to carry their cargo on terms that are acceptable to us.
Our United CPA limits our ability to provide regional flying services to other airlines in certain major airport hubs of United. These
restrictions may make us a less attractive partner to other major airlines whose regional flying needs do not align with our geographical
restrictions.
The potential benefits of entering the air cargo and express shipping sector will depend substantially on our ability to enter into
additional relationships with integrated logistics companies and transition our existing business strategies into a new sector. We may be
unsuccessful in entering into relationships with integrated logistics companies to carry cargo on terms that are acceptable to us. Additionally,
our ability to transition our existing business strategies into a new sector may be costly, complex, and time-consuming, and our management
will have to devote substantial time and resources to such effort. As we transition into this new sector, we may experience difficulties or
delays in securing gate access and other airport services necessary to operate in the air cargo and express shipping sector. Our inability to
successfully implement our growth strategies could have a material adverse effect on our business, financial condition, and results of
operations and any assumptions underlying estimates of expected cost savings or expected revenues may be inaccurate.
We may not be able to make opportunistic acquisitions should we elect to do so as part of our growth strategy.
If we elect to pursue an acquisition, our ability to successfully implement this transaction would depend on a variety of factors,
including the approval of our acquisition target's major partners, obtaining financing on acceptable terms and compliance with the restrictions
contained in our debt agreements. If we need to obtain our lenders' consent prior to an acquisition, they may refuse to provide such consent
or condition their consent on our compliance with additional restrictive covenants that limit our operating flexibility. Acquisition transactions
involve risks, including those associated with integrating the operations or (as applicable) separately maintaining the operations, financial
reporting, disparate technologies and personnel of acquired companies; managing geographically dispersed operations; the diversion of
management's attention from other business concerns; unknown risks; and the potential loss of key employees. We may not successfully
integrate any businesses we may acquire in the future and may not achieve anticipated revenue and cost benefits relating to any such
transactions. Strategic transactions may be expensive, time consuming and may strain our resources. Strategic transactions may not be
accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one-
time write-offs of goodwill and amortization expenses of other intangible assets. In addition, strategic transactions that we may pursue could
result in dilutive issuances of equity securities.
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Our ability to obtain financing or access capital markets may be limited.
There are a number of factors that may limit our ability to raise financing or access capital markets in the future, including our
significant debt and future contractual obligations, our liquidity and credit status, our operating cash flows, the market conditions in the airline
industry, U.S. and global economic conditions, the general state of the capital markets and the financial position of the major providers of
commercial aircraft financing. We cannot assure you that we will be able to source external financing for future aircraft acquisitions or for
other significant capital needs, and if we are unable to source financing on acceptable terms, or unable to source financing at all, our
business could be materially adversely affected. To the extent we finance our activities with additional debt, we may become subject to
additional financial and other covenants that may restrict our ability to pursue our business strategy or otherwise constrain our growth and
operations.
Negative publicity regarding our customer service could have a material adverse effect on our business, results of operations and
financial condition.
Our business strategy includes the implementation of our major partners' brand and product in order to increase customer loyalty and
drive future ticket sales. In addition, we also receive certain amounts under our United CPA upon the results of passenger satisfaction
surveys. However, we may experience a high number of passenger complaints related to, among other things, our customer service. These
complaints, together with delayed and cancelled flights, and other service issues, are reported to the public by the DOT. If we do not meet our
major partners' expectations with respect to reliability and service, our and our major partners' brand and product could be negatively
impacted, which could result in customers deciding not to fly with our major partners or with us. If we are unable to provide consistently high-
quality customer service, it could have an adverse effect on our relationships with our major partners.
Risks associated with our presence in international emerging markets, including political or economic instability, and failure to
adequately comply with existing legal requirements, may materially adversely affect us.
Some of our target growth markets include countries with less developed economies, legal systems, financial markets and business
and political environments are vulnerable to economic and political disruptions, such as significant fluctuations in gross domestic product,
interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking
and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us now or in the
future and the resulting instability may have a material adverse effect on our business, results of operations and financial condition.
We emphasize compliance with all applicable laws and regulations and have implemented and continue to implement and refresh
policies, procedures and certain ongoing training of our employees, third-party specialists and partners with regard to business ethics and
key legal requirements; however, we cannot assure you that our employees, third-party specialists or partners will adhere to our code of
ethics, other policies or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate
recordkeeping and internal accounting practices to record our transactions accurately, we may be subject to sanctions. In the event we
believe or have reason to believe our employees, third-party specialists or partners have or may have violated applicable laws or regulations,
we may incur investigation costs, potential penalties and other related costs which in turn may materially adversely affect our reputation and
could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Our Industry
The outbreak and global spread of COVID-19 beginning in our 2020 fiscal year resulted in a severe decline in demand for air travel,
which has adversely impacted the business of our major partners, and in turn has had an adverse impact that has been material to our
business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health
threats that we may face in the future, could result in additional adverse effects on our business, operating results, financial condition, and
liquidity.
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The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major
partners.
The airline industry is highly competitive. We compete primarily with other regional airlines, some of which are owned by or operated
by major airlines. In certain instances, our competitors are larger than us and possess significantly greater financial and other resources than
we do. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America Inc.
in 2016, American and US Airways in 2013, Southwest Airlines Co. and AirTran Airways in 2011, United and Continental Airlines in 2010 and
Delta and Northwest Airlines in 2008. Any additional consolidation or significant alliance activity within the airline industry could further limit
the number of potential partners with whom we could enter into CPAs.
We are subject to significant governmental regulation.
All interstate air carriers, including us, are subject to regulation by the DOT, the FAA and other governmental agencies, as described in
“Item 1. Government Regulation.” We cannot predict whether we will be able to comply with all present and future laws, rules, regulations,
and certification requirements or that the cost of continued compliance will not have a material adverse effect on our operations. We incur
substantial costs in maintaining our current certifications and otherwise complying with the laws, rules, and regulations to which we are
subject. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of our aircraft for any
reason may have a material adverse effect on our operations. In addition to state and federal regulation, airports and municipalities enact
rules and regulations that affect our operations and require that we incur substantial on-going costs.
Airlines are often affected by factors beyond their control, including: air traffic congestion at airports; air traffic control
inefficiencies; adverse weather conditions, such as hurricanes or blizzards; increased security measures; new travel-related taxes;
or the outbreak of disease; any of which could have a material adverse effect on our business, results of operations, and financial
condition.
Like other airlines, our business is affected by factors beyond our control, including air traffic congestion at airports, air traffic control
inefficiencies, increased security measures, new travel-related taxes and fees, adverse weather conditions, natural disasters, and the
outbreak of disease. Factors that cause flight delays frustrate passengers and increase operating costs and decrease revenues, which in turn
could adversely affect profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the
FAA to operate that airspace in a safe, efficient, and affordable manner. The air traffic control system, which is operated by the FAA, faces
challenges in managing the growing demand for U.S. air travel. U.S. and foreign air-traffic controllers often rely on outdated technologies that
routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. In addition, there are currently
proposals before Congress that could potentially lead to the privatization of the United States' air traffic control system, which could adversely
affect our business. Further, implementation of the Next Generation Air Transport System by the FAA would result in changes to aircraft
routings and flight paths that could lead to increased noise complaints and lawsuits, resulting in increased costs. There are additional
proposals before Congress that would treat a wide range of consumer protection issues, including, among other things, proposals to regulate
seat size, which could increase the costs of doing business.
Adverse weather conditions and natural disasters, such as hurricanes, winter snowstorms, or earthquakes, can cause flight
cancellations or significant delays. Cancellations or delays due to adverse weather conditions or natural disasters, air traffic control problems
or inefficiencies, breaches in security or other factors may affect us to a greater degree than other, larger airlines that may be able to recover
more quickly from these events, and therefore could have a material adverse effect on our business, results of operations, and financial
condition to a greater degree than other air carriers. Any general reduction in airline passenger traffic could have a material adverse effect on
our business, results of operations, and financial condition.
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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 have negatively impacted the airline industry in general, including our
operations. If additional terrorist attacks are launched against the airline industry, there will be lasting consequences of the attacks, which
may include loss of life, property damage, increased security and insurance costs, increased concerns about future terrorist attacks,
increased government regulation and airport delays due to heightened security. We cannot provide any assurance that these events will not
harm the airline industry generally or our operations or financial condition in particular.
The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.
An accident or incident involving our aircraft could result in significant potential claims of injured passengers and others, as well as
repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. In the event of an accident, our
liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses from the
accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial
results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that our operations are less safe or
reliable than other airlines.
Risks Related to Owning Our Common Stock
We are currently not in compliance with the Nasdaq continued listing requirements. If we are unable to regain compliance with
Nasdaq’s listing requirements, our securities could be delisted, which could affect our common stock’s market price and liquidity
and reduce our ability to raise capital.
On November 3,2023, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC ("Nasdaq") indicating
that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet Nasdaq Listing
Rule 5450(a)(1), which requires listed companies to maintain a minimum bid price of at least $1.00 per share.
Nasdaq Listing Rule 5810(c)(3)(A) provides a compliance period of 180 calendar days, or until May 1, 2024, in which to regain
compliance with the minimum bid price requirement. If we evidence a closing bid price of at least $1.00 per share for a minimum of ten
consecutive business days during the 180-day compliance period, we will automatically regain compliance. In the event we do not regain
compliance with the $1.00 bid price requirement by May 1, 2024, we may be eligible for consideration of a second 180-day compliance
period. To qualify for this additional compliance period, the Company would be required to transfer the listing of the common stock to the
Nasdaq Capital Market. To qualify, the Company must meet the continued listing requirement for the applicable market value of publicly held
shares requirement and all other applicable initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid
price requirement. In addition, the Company would also be required to notify Nasdaq of its intent to cure the minimum bid price deficiency.
If we fail to regain compliance with the Nasdaq continued listing standards, Nasdaq will provide notice that our common stock will be
subject to delisting. We would then be entitled to appeal that determination to a Nasdaq hearings panel.
The notification has no immediate effect on the listing of our common stock on Nasdaq. We intend to monitor the closing bid price of
our common stock and consider our available options in the event the closing bid price of our common stock remains below $1.00 per share.
We cannot assure you that we will be able to regain compliance with Nasdaq listing standards. Our failure to continue to meet the
minimum bid requirement would result in our common stock being delisted
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from Nasdaq. We and holders of our securities could be materially adversely impacted if our securities are delisted from Nasdaq. In
particular:
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we may be unable to raise equity capital on acceptable terms or at all;
we may lose the confidence of our customers, which would jeopardize our ability to continue our business as currently
conducted;
the price of our common stock will likely decrease as a result of the loss of market efficiencies associated with Nasdaq and the
loss of federal preemption of state securities laws;
holders may be unable to sell or purchase our securities when they wish to do so;
we may become subject to stockholder litigation;
we may lose the interest of institutional investors in our common stock;
we may lose media and analyst coverage;
our common stock could be considered a “penny stock,” which would likely limit the level of trading activity in the secondary
market for our common stock; and
we would likely lose any active trading market for our common stock, as it may only be traded on one of the over-the-counter
markets, if at all.
The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.
The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control,
including: (i) announcements concerning our major partners, competitors, the airline industry, or the economy in general; (ii) strategic actions
by us, our major partners, or our competitors, such as acquisitions or restructurings; (iii) media reports and publications about the safety of
our aircraft or the types of aircraft we operate; (iv) new regulatory pronouncements and changes in regulatory guidelines; (v) announcements
concerning the availability of the types of aircraft we use; (vi) significant volatility in the market price and trading volume of companies in the
airline industry; (vii) changes in financial estimates or recommendations by securities analysts or failure to meet analysts' performance
expectations; (viii) sales of our common stock or other actions by insiders or investors with significant shareholdings, including sales by our
principal shareholders; and (ix) general market, political and other economic conditions; and (x) in response to the risk factors described in
this Annual Report on Form 10-K.
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of
particular companies. Broad market fluctuations may materially adversely affect the trading price of our common stock. In the past,
shareholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price
of their securities. Any similar litigation against us could result in substantial costs, divert management's attention and resources, and have a
material adverse effect on our business, results of operations and financial condition.
If securities or industry analysts do not publish research or reports about our business or publish negative reports about our
business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities and industry analysts may
publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable
research about our business, the trading price of our common stock would likely decline. If one or more of these analysts ceases to cover our
company or fails to publish reports on us regularly, demand for our stock could decrease, which may cause the trading price of our common
stock and the trading volume of our common stock to decline.
The value of our common stock may be materially adversely affected by additional issuances of common stock underlying our
outstanding warrants.
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As of September 30, 2023, we had outstanding warrants to purchase an aggregate of 4,899,497 shares of our common stock, all of
which were issued to the U.S. Treasury pursuant to the terms of the Loan and Guarantee Agreement dated October 30, 2020. The warrants
have a term of five years from the date of issuance and an initial exercise price of $3.98 per share. Any future warrant exercises by the U.S.
Treasury, or any authorized transferee of the U.S. Treasury, will be dilutive to our existing common shareholders. Sales of substantial
amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of
securities exercisable into our common stock, could adversely affect the prevailing price of our common stock.
Provisions in our charter documents might deter acquisition bids for us, which could adversely affect the price of our common
stock.
Our second amended and restated articles of incorporation and amended and restated bylaws contain provisions that, among other
things:
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▪
▪
▪
▪
authorize our Board of Directors, without shareholder approval, to designate and fix the voting powers, designations,
preferences, limitations, restrictions, and relative rights of one or more series of preferred stock so designated, or right to acquire
such preferred stock;
dilute the interest of, or impair the voting power of, holders of our common stock and could also have the effect of discouraging,
delaying, or preventing a change of control;
establish advance notice procedures that shareholders must comply with in order to nominate candidates to our Board of
Directors and propose matters to be brought before an annual or special meeting of our shareholders, 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 our company;
authorize a majority of our Board of Directors to appoint a director to fill a vacancy created by the expansion of our Board of
Directors or the resignation, death or removal of a director, which may prevent shareholders from being able to fill vacancies on
our Board of Directors;
restrict the number of directors constituting our Board of Directors to within a set range, and give our Board of Directors
exclusive authority to increase or decrease the number of directors within such range, which may prevent shareholders from
being able to fill vacancies on our Board of Directors; and
restrict the ability of shareholders to call special meetings of shareholders.
Our corporate charter includes provisions limiting ownership by non-U.S. citizens.
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our second amended and restated articles of
incorporation restrict the ownership and voting of shares of our common stock by people and entities who are not "citizens of the United
States" as that term is defined in 49 U.S.C. § 40102(a). That statute defines "citizen of the United States" as, among other things, a U.S.
corporation, of which the president and at least two-thirds of the board of directors and other managing officers are individuals who are
citizens of the United States, which is under the actual control of citizens of the United States and in which at least 75% of the voting interest
is owned or controlled by persons who are citizens of the United States. Our second amended and restated articles of incorporation prohibit
any non-U.S. citizen from owning or controlling more than 24.9% of the aggregate votes of all outstanding shares of our common stock or
49.0% of the total number of outstanding shares of our capital stock. The restrictions imposed by the above-described ownership caps are
applied to each non-U.S. citizen in reverse chronological order based on the date of registration on our foreign stock record. At no time may
shares of our capital stock held by non-U.S. citizens be voted unless such shares are reflected on the foreign stock record. The voting rights
of non-U.S. citizens having voting control over any shares of our capital stock are subject to automatic suspension to the extent required to
ensure that we are in compliance with applicable law. In the event any transfer or issuance of shares of our capital stock to a non-U.S. citizen
would result in non-U.S. citizens owning more than the above-described cap amounts, such transfer or issuance will be void and of no effect.
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As of September 30, 2023, we had outstanding warrants to purchase 4,899,497 shares of our common stock, all of which were held by
the U.S. Treasury. We are currently in compliance with all applicable foreign ownership restrictions.
Our corporate charter limits certain transfers of our stock, which limits are intended to preserve our ability to use our net operating
loss carryforwards, and these limits could have an effect on the market price and liquidity of our common stock.
To reduce the risk of a potential adverse effect on our ability to use our net operating loss carryforwards for federal income tax
purposes, our second amended and restated articles of incorporation prohibit the transfer of any shares of our capital stock that would result
in (i) any person or entity owning 4.75% or more of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any
person or entity owning 4.75% or more of our then-outstanding capital stock. These transfer restrictions expire upon the earliest of (i) the
repeal of Section 382 of the Code or any successor statute if our Board of Directors determines that such restrictions are no longer
necessary to preserve our ability to use our net operating loss carryforwards, (ii) the beginning of a fiscal year to which our Board of Directors
determines that no net operating losses may be carried forward, or (iii) such other date as determined by our Board of Directors. These
transfer restrictions apply to the beneficial owner of the shares of our capital stock. The clients of an investment advisor are treated as the
beneficial owners of stock for this purpose if the clients have the right to receive dividends, if any, the power to acquire or dispose of the
shares of our capital stock, and the right to proceeds from the sale of our capital stock. Certain transactions approved by our Board of
Directors, such as mergers and consolidations meeting certain requirements set forth in our articles of incorporation, are exempt from the
above-described transfer restrictions. Our Board of Directors also has the ability to grant waivers, in its discretion, with respect to transfers of
our stock that would otherwise be prohibited.
The transfer restrictions contained in our second amended and restated articles of incorporation may impair or prevent a sale of
common stock by a shareholder and may adversely affect the price at which a shareholder can sell our common stock. 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 shareholders may consider beneficial, which could also adversely affect
the market price of our common stock. We cannot predict the effect that this provision in our second amended and restated articles of
incorporation may have on the market price of our common stock.
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on
your investment is if the price of our common stock appreciates.
We have not historically paid dividends on shares of our common stock and do not expect to pay dividends on such shares in the
foreseeable future. Additionally, our United CPA, certain of our aircraft lease facilities, and our loan with the U.S. Treasury contain restrictions
that limit our ability to or prohibit us from paying dividends to holders of our common stock. Any future determination to pay dividends will be
at the discretion of our Board of Directors and will depend on our results of operations, financial condition, capital requirements, restrictions
contained in current or future leases and financing instruments, business prospects and such other factors as our Board of Directors deems
relevant, including restrictions under applicable law. Consequently, your only opportunity to achieve a positive return on your investment in us
will be if the market price of our common stock appreciates.
General Risk Factors
The requirements of being a public company may strain our resources, increase our operating costs, divert management's
attention, and affect our ability to attract and retain qualified board members or executive officers.
We became a public company in August 2018. As a public company, we incur significant legal, accounting, and other expenses,
including costs associated with public company reporting requirements.
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We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall
Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC and the Nasdaq Global Select
Market. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We
expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming
and costly and divert management's time and attention from revenue-generating activities to compliance activities. It could also make it more
difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations
could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as
our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company,
we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We are required to assess our internal control over financial reporting on an annual basis, and any future adverse findings from
such assessment could result in a loss of investor confidence in our financial reports, result in significant expenses to remediate
any internal control deficiencies and have a material adverse effect on our business, results of operations and financial condition.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting for our fiscal year ended September 30, 2023 and each subsequent year. This
assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. As
of August 10, 2023, we are no longer an "emerging growth company," as defined in the JOBS Act. As such, our independent registered
public accounting firm is required to attest to the effectiveness of our internal control over financial reporting and we are required to disclose,
to the extent material, changes made in our internal control over financial reporting on a quarterly basis.
To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new
internal controls and procedures and hiring accounting or internal audit staff. Management assessed the effectiveness of our internal control
over financial reporting at September 30, 2023. In making these assessments, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our
assessments and those criteria, management determined that we maintained effective internal control over financial reporting as of
September 30, 2023.
In future periods, if we fail to achieve and maintain an effective internal control environment, it could result in material misstatements in
our financial statements and failure to meet our reporting obligations, which would likely cause investors to lose confidence in our reported
financial information and adversely impact our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
None.
39
ITEM 2. PROPERTIES
Flight Equipment
As of September 30, 2023, our aircraft fleet consisted of the following:
Aircraft Type
E-175 Regional Jet
CRJ-900 Regional Jet
CRJ-700 Regional Jet
Boeing 737 Cargo Jet
Total
Owned
Leased
Total
18
54
—
—
72
42
—
2
4
48
60
54
2
4
120
Passenger
Capacity
Flight
Range (miles)
Average
Cruising
Speed (mph)
Average
Age (years)
70-76
76-79
50-70
2,100
1,500
1,600
2,600
530
530
530
530
7.9
18.1
16.4
30.0
Several factors impact our fleet size, including contract expirations, lease expirations, growth opportunities and opportunities to
transition to an alternative airline partner. Below is a summary of our fleet by aircraft type. Our actual future fleet size and mix of aircraft types
will likely vary, and may vary materially, from our current fleet size.
▪
▪
▪
▪
E-175s – As of September 30, 2023, we operated 54 E-175 aircraft under our United CPA. As part of our Amended and
Restated United CPA, we agreed to extend the term of 42 of our E-175 aircraft (owned by United) for an additional five years
which will now expire between 2024 and 2028, subject to United's early termination rights. United also has the right to extend
the term of these aircraft for four additional three-year increments. In addition, 18 of the E-175 aircraft (owned by us) operating
under our United CPA expire between January 2028 and November 2028, subject to United's early termination rights. Our
United CPA permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate
the United CPA in its discretion, or remove aircraft from service, by giving us 90 days’ notice.
CRJ-900s – As of September 30, 2023, we operated 26 CRJ-900 aircraft under our United CPA and 28 CRJ-900 aircraft as
operational spares. As part of our Amended and Restated United CPA, we may operate up to 38 CRJ-900 aircraft on behalf of
United, dependent on the number of E-175 aircraft we are operating.
CRJ-700s – As of September 30, 2023, our fleet included two CRJ-700 aircraft which were leased to a third party.
Boeing 737 Cargo Jets – As of September 30, 2023, we leased one Bowing 737 aircraft from a third party and subleased three
Boeing 737 aircraft from DHL under our DHL FSA. The DHL FSA expires five years from the commencement date of the first
aircraft placed into service. The first revenue generating flight took place in October 2020.
40
Facilities
In addition to aircraft, we have office and maintenance facilities to support our operations. Each of our facilities are summarized in the
following table:
Type
Corporate Headquarters
Training Center
Parts/Stores
Hangar
Office, Hangar and Warehouse
Parts Storage
Hangar
Hangar
Hangar
Cargo Building
Warehouse
Warehouse, Office
Location
Phoenix, Arizona
Phoenix, Arizona
Phoenix, Arizona
Phoenix, Arizona
El Paso, Texas
Dallas, Texas
Houston, Texas
Louisville, Kentucky
Dulles, Washington
Dulles, Washington
Tucson, Arizona
Erlanger, Kentucky
Ownership
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Approximate
Square Feet
33,770
23,783
12,000
22,467
31,292
8,143
74,524
26,762
28,451
1,475
13,276
7,070
We believe our facilities are suitable and adequate for our current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2023, our
management believed the ultimate outcomes of other routine legal matters are not likely to have a material adverse effect on our financial
position, liquidity, or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
41
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock has traded on The Nasdaq Global Select Market under the symbol "MESA" since August 10, 2018. Prior to that
date, there was no public market for our common stock.
Holders of Record
As of December 26, 2023, there were approximately 84 holders of record of our common stock. Because many of our shares of
common stock are held by brokers and other institutions on behalf of stockholders, as a result, we are unable to estimate the total number of
stockholders represented by these record holders.
The transfer agent and registrar for our common stock is ComputerShare Trust Company, N.A.
Dividends
We have not declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not
expect to pay any cash dividends on our common stock for the foreseeable future. Additionally, our United CPA, certain of our aircraft lease
facilities, and our loan with the U.S. Treasury contain restrictions that limit our ability to or prohibit us from paying dividends to holders of our
common stock. Any determination to pay dividends in the future will be at the discretion of our Board of Directors, subject to applicable laws
and financial covenants, and will depend on our financial condition, operating results, capital requirements, general business conditions, and
other factors that our Board of Directors considers relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item with respect to our equity compensation plans is incorporated by reference to our definitive proxy
statement for our 2024 Annual Meeting of Shareholders ("2024 Proxy Statement") to be filed with the SEC within 120 days of our fiscal year
ended September 30, 2023.
42
Stock Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or "filed" with the SEC, nor shall
such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent we
specifically incorporate it by reference into such filing.
The following graph compares the cumulative total return on our common stock with that of the Nasdaq Stock Market (U.S.
Companies) and the Nasdaq Stock Market Transportation Index. The period shown commences on July 31, 2019, and ends on September
30, 2023, the end of our fiscal year. The graph assumes an investment of $100.00 in each of the above on the close of market on July 31,
2019. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future
stock price performance.
This performance graph is not deemed to be incorporated by reference into any of our other filings under the Exchange Act, or the
Securities Act, except to the extent we specifically incorporate it by reference into such filings.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended September 30, 2023, the Company repurchased a total of 10,443 shares of its common stock for $17
thousand to cover the income tax obligation on vested employee equity awards. The Company repurchased a total of 204,486 shares of its
common stock for $0.4 million to cover the income tax obligation on vested employee equity awards during the fiscal year ended September
30, 2023.
43
ITEM 6. [RESERVED]
44
ITEM 7. 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 consolidated
financial statements, the accompanying notes, and the other financial information included elsewhere in this Annual Report on Form 10-K.
The following discussion contains forward‑looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs.
Our actual results could differ materially from those discussed in the forward-looking statements below. Factors that could cause or
contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere in
this Annual Report on Form 10-K, particularly in the sections "Cautionary Notes Regarding Forward-Looking Statements" and Part I, Item 1A.
"Risk Factors" above.
Overview
Mesa Airlines is a regional air carrier providing scheduled passenger service to 86 cities in 36 states, the District of Columbia, Canada,
Cuba, and Mexico, as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either
United Express or DHL Express flights pursuant to the terms of capacity purchase agreement ("CPA") with United and a flight services
agreement ("FSA") with DHL. Prior to the wind-down and termination of our CPA with American Airlines, Inc. ("American") on April 3, 2023,
we also operated flights as American Eagle. We have a significant presence in several of United's key domestic hubs including Houston and
Washington-Dulles.
Under the United CPA and DHL FSA, we operated or maintained as operational spares a fleet of 120 aircraft with approximately 296
daily departures as of September 30, 2023. During 2022, we committed to a formal plan to sell certain of our CRJ-900 aircraft. We had 11
CRJ-900 aircraft, eight CRJ-700 aircraft, and one CRJ-200 aircraft remaining as held for sale from the fiscal year ended September 30, 2022,
and classified 14 CRJ-900 aircraft as assets held for sale during the fiscal year ended September 30, 2023. We completed the sale of seven
CRJ-900 aircraft, eight CRJ-700 aircraft, and one CRJ-200 aircraft remaining from fiscal year 2022 during the fiscal year ended September
30, 2023. Additionally, we completed the sale of three CRJ-900 aircraft that were classified as held for sale during the fiscal year ended
September 30, 2023, and 15 CRJ-900 aircraft remained as assets held for sale as of September 30, 2023. We also leased two CRJ-700
aircraft to a third party during the fiscal year. We operated 40 CRJ-900 aircraft under our American CPA prior to the wind-down and
termination of the CPA on April 3, 2023 and a mix of 20 E-175LL, 60 E-175, and 24 CRJ-900 aircraft under our United CPA. We operate
three Boeing 737-400F and one 737-800 aircraft under the DHL FSA. As of September 30, 2023, approximately 95% of our aircraft in
scheduled service were operated for United, and 5% were operated for DHL. All our operating revenue in our 2023, 2022, and 2021 fiscal
years were derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party.
Our long-term agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and
flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying and cargo services on
behalf of our major partners. Our CPAs and FSAs also shelter us from many of the elements that cause volatility in airline financial
performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our
CPAs, and cargo flight services under our FSA, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major
partners. United controls route selection, pricing, seat inventories, marketing, and scheduling, and provides us with ground support services,
airport landing slots and gate access.
Under our DHL FSA, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo services.
Ground support including fueling and airport fees are paid directly by DHL.
45
Glossary of Airline Terms
Set forth below is a glossary of industry terms used in this Annual Report on Form 10-K:
"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats
are flown.
"Average stage length" means the average number of statute miles flown per flight segment.
"Block hours" means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure
before take-off until the time of gate arrival at the destination.
"CRASM" means contract revenue divided by ASMs.
"DOT" means the United States Department of Transportation.
"FAA" means the United States Federal Aviation Administration.
"FTE" means full-time equivalent employee.
"Load factor" means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).
"NMB" means the National Mediation Board.
"Pass-through and other revenue" means costs from our major partners under our agreements that we equally recognize as both a
revenue and an expense, including passenger and hull insurance, aircraft property taxes, landing fees, catering and certain maintenance
costs related to our E-175 aircraft.
"Revenue Passenger Miles" or "RPMs" means the number of miles traveled by paying passengers.
"TSA" means the United States Transportation Security Administration.
"Utilization" means the percentage derived from dividing (i) the number of block hours actually flown during a given month under a
particular CPA by (ii) the maximum number of block hours that could be flown during such month under the particular CPA.
2023 Financial Highlights
For our fiscal year ended September 30, 2023, we had total operating revenues of $498.1 million, a 6.2% decrease, compared to
$531.0 million for our fiscal year ended September 30, 2022. Net loss for our fiscal year ended September 30, 2023 was $120.1 million, or
$3.04 per diluted share, compared to net loss of $182.7 million, or $5.06 per diluted share, for our fiscal year ended September 30, 2022.
During our fiscal year ended September 30, 2023, our completed block hours decreased by 82,564, or 30.4%, compared to our fiscal
year ended September 30, 2022.
46
Industry Trends
We believe our operating and business performance is driven by various factors that typically affect regional airlines and their markets,
including trends which affect the broader airline and travel industries, though the terms of our CPA and FSA reduce our exposure to
fluctuations in certain trends. The following key factors may materially affect our future performance.
Availability and Training of Qualified Pilots. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot
qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots
from 250 hours to 1,500 hours of flight time. With these changes, the supply of qualified pilot candidates eligible for hiring by the airline
industry has been dramatically reduced. To address the diminished supply of qualified pilot candidates, regional airlines implemented
significant pilot wage and bonus increases.
In more recent periods, our pilots continue to be recruited by other carriers, primarily the major carriers and heavy equipment cargo
operators, which generally offer higher salaries and more extensive benefit programs. The magnitude of this attrition in fiscal 2022 created
significant backlogs in training, further exacerbating an already challenging environment. These events have had, and continue to have a
negative impact on pilot scheduling, work hours, and the number of pilots required to support our operations.
In August 2022, we entered into a Letter of Agreement with the Airline Pilots Association (“ALPA”), which provided for increased overall
hourly pay increases of nearly 118% for captains and 172% for new-hire first officers. These pay increases have positively impacted our
ability to attract, hire, and retain pilots in fiscal 2023, and attrition levels have dropped to a pre-COVID level.
To further address the diminished supply of qualified pilots, we launched the Mesa Pilot Development Program (“MPD”). As part of this
program, on September 22, 2022, we purchased 29 Pipistrel Alpha Trainer 2 aircraft. We purchased an additional 25 Pipistrel Alpha Trainer 2
aircraft during the year ended September 30, 2023. This new fleet is the backbone of the MPD program, with pilots being provided with the
opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flight costs of $50 per hour, per pilot,
will be fully financed by us with zero interest, providing no upfront out-of-pocket expense for flight time while the candidate is accruing the
required hours to earn their Airline Transport Pilot (“ATP”) certificate. As part of candidates’ commitment to flying for Mesa Airlines, flight
costs will be repaid over three years during the term of their employment.
No assurance can be given that the measures we are currently taking or may take in the future will enable us to attract, hire and train
pilots at a rate necessary to support our operations.
Pilot and Mechanic Attrition. In recent years, we have experienced significant volatility in our attrition as a result of pilot wage and
bonus increases at other regional air carriers, the growth of cargo, low-cost and ultra-low-cost carriers, and the number of pilots at major
airlines reaching the statutory mandatory retirement age of 65 years. If our actual pilot attrition rates are materially different than our
projections, our operations and financial results could be materially and adversely affected. Although we target maintenance staffing levels
above our projected needs in order to account for attrition, which is widespread in the industry, from time to time we have experienced
attrition with our maintenance technicians, who have the option to seek employment at mainline airlines, which generally offer higher salaries
and more extensive benefit programs than regional airlines are financially able to offer. Attrition of maintenance technicians has sometimes
required us to supplement our staff with qualified temporary employees.
As discussed generally above, we implemented a new pay structure whereby as of September 15, 2022, we offer starting wages of
$100 an hour for entry-level first officers, and $150 an hour for first-year captains while captains with 20 years of experience will be paid $215
an hour to remain competitive and attract and retain experienced, qualified pilots.
47
Economic Conditions, Challenges and Risks
Market Volatility. The airline industry is volatile and affected by economic cycles and trends. Consumer confidence and discretionary
spending, spread of a virus, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions,
changes in governmental regulations on taxes and fees, weather and other factors have contributed to a number of reorganizations,
bankruptcies, liquidations, and business combinations among major and regional airlines. The effect of economic cycles and trends may be
somewhat mitigated by our reliance on CPAs. If, however, United experiences a prolonged decline in the number of passengers or is
negatively affected by low ticket prices or high fuel prices, it may seek rate reductions in future CPAs, or materially reduce our scheduled
flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the rates, number of
aircraft or utilization under our CPA.
Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are
determined by collective bargaining agreements. As of September 30, 2023, approximately 63.1% of our workforce was represented by the
ALPA and AFA. In August 2022, we entered into a three-year Letter of Agreement with ALPA, which provided for increased overall hourly pay
increases of nearly 118% for captains and 172% for new-hire first officers. These pay increases have positively impacted our ability to attract,
hire, and retain pilots in fiscal 2023, and attrition levels have dropped to a pre-COVID level. In September 2022, we entered into a Letter of
Agreement with AFA to extend the term of our agreement by two years. Our extension with AFA provided, among other things, an increase in
compensation for our flight attendants. The terms and conditions of our 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 we can. In addition, conflicts between airlines and their unions can lead to work slowdowns or stoppages. A
strike or other significant labor dispute with our unionized employees may adversely affect our ability to conduct business.
Impact of Pilot Shortage. During our twelve months ended September 30, 2023, the severity of the pilot shortage, elevated pilot
attrition, the transition of our operations with American to United, and increasing costs associated with pilot wages adversely impacted our
financial results, cash flows, financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and
attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate. These airlines now seek to increase their capacity
to meet the growing demand for air travel as the global pandemic has moderated. A primary source of pilots for the major U.S. passenger
and cargo carriers are the U.S. regional airlines.
As a result of pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational
shortfalls under our CPAs. During the twelve months ended September 30, 2023, these challenges resulted in a negative impact on the
Company’s financial results highlighted by cash flows used in operations of $24.1 million and net loss of $120.1 million including a non-cash
impairment charge of $54.3 million related to the Company designating 14 CRJ-900 aircraft as held for sale and our customer relationship
intangible asset. These conditions and events raised substantial doubt about our ability to continue to fund our operations and meet our debt
obligations over the next twelve months.
To address such concerns, management developed and implemented several material changes to our business designed to ensure
the Company could continue to fund its operations and meet its debt obligations over the next twelve months. The Company implemented
the following measures during the year ended September 30, 2023, and through the date of the issuance of the financial statements.
•
•
We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. We
entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related engines. One
agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total of
$18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these
transactions expected to be approximately $(12.1) million.
We entered into an agreement to sell 11 CRJ-900 aircraft to a third party. The Company has closed the sale of seven of the
aircraft which generated $21.0 million in gross proceeds and
48
•
•
•
•
•
approximately $1.5 million in net proceeds after partial debt reduction on the UST Loan. Subsequent to September 30, 2023, we
closed the sale of the remaining four CRJ-900 aircraft to the third party for gross proceeds of $12.0 million. Net proceeds from
the sale of all four aircraft was $6.5 million after partial debt reduction of our UST Loan.
We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven
CRJ-900 aircraft which began January 2023 through December 2024, providing approximately $14.0 million of liquidity.
Additionally, the junior noteholder, MHIRJ, agreed to forgive approximately $5.0 million in principal contingent upon the
repayment of $4.2 million in principal by December 31, 2023.
We entered into an agreement to sell seven surplus CRJ-900 aircraft to American. The Company has closed the sale of three of
the aircraft which generated approximately $29.7 million in gross proceeds and approximately $2.4 million in net proceeds after
partial debt reduction. Subsequent to September 30, 2023, the Company closed the sale of the remaining four CRJ-900 aircraft
to American for gross proceeds of $41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the
retirement of the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ
for a total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note.
We established and drew upon a new line of credit with United totaling $25.5 million. The United line of credit contains an
additional deemed prepayment of $15 million with potential forgiveness upon the achievement of a certain number of block
hours flown as well as maintaining a 99.3% controllable completion factor ("CCF") over any rolling four-month period from April
2023 through December 2024. As of November 2023, the foregoing milestones have been achieved for such rolling four-month
period. As a result, $9 million of the $15 million will be deemed prepaid one business day following the repayment of the
Effective Date Bridge Loan discussed elsewhere herein. We consider it likely that we will achieve additional forgiveness in fiscal
year 2024. Subsequently, this facility was amended to permit the Company to re-draw approximately $7.9 million of the Effective
Date Bridge Loan previously repaid and increased the amount of Revolving Commitments from $30.7 million to $50.7 million.
See Note 10 for a discussion of the line of credit and amount drawn as well as discussion on the deemed prepayment.
On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United
CPA and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA
Amendments"), respectively. The January 2024 United CPA Amendments provide additional liquidity and certain other
amendments described below:
o
o
o
Increased CPA rates, retroactive to October 1, 2023 through December 31, 2024, which are projected to generate
approximately $63.5 million in incremental revenue over the next twelve months.
Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the
United CPA) from the United CPA.
Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as
defined in the United CPA) to June 30, 2024.
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit
and Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension
United and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively,
the "January 2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for
the following:
o
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from
the sale,
49
assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
o
o
o
o
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital
stock of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to
certain conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30,
2023, and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter
ending March 31, 2024.
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for
borrowings under the Credit Agreement.
Loan payment requirements in connection with the sale of four specified aircraft engines and the addition of such engines
as collateral for the United credit facility for a specified period of time.
On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines
and related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and
provide additional liquidity to fund operations and current debt obligations as they come due. The transaction is expected to
close by the end of March 2024.
Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23
engines for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close
by the end of December 2024.
In addition to already executed agreements to sell aircraft, the Company is actively seeking arrangements to sell other surplus
assets primarily related to the CRJ fleet including aircraft, engines, and spare parts to reduce debt and optimize operations.
We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level
of flight activity.
•
•
•
•
The Company believes the plans and initiatives outlined above have effectively alleviated the substantial doubt and will allow the
Company to meet its cash obligations for the next twelve months following the issuance of its financial statements. The forecast of
undiscounted cash flows prepared to determine if the Company has the ability to meet its cash obligations over the next twelve months was
prepared with significant judgment and estimates of future cash flows based on projections of CPA and FSA block hours, maintenance
events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected.
Competition. The airline industry is highly competitive. We compete principally with other regional airlines. Major airlines typically
award CPAs to regional airlines based on the following criteria: ability to fly contracted schedules, availability of labor resources including
pilots, low operating cost, financial resources, geographical infrastructure, overall customer service levels relating to on-time arrival and flight
completion percentages, and the overall image of the regional airline. Our ability to renew our existing agreements and earn additional flying
opportunities in the future will depend, in significant part, on our ability to maintain a low-cost structure competitive with other regional air
carriers.
Maintenance Contracts, Costs and Timing. Our employees perform routine airframe and engine maintenance along with periodic
inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Aviall, MHI, GE, and
StandardAero, for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for
our aircraft fleet. As of September 30, 2023, $59.8 million of parts inventory was consigned to us by AAR and Aviall under long-term
contracts that is not reflected in our consolidated balance sheet.
50
The average age of our E-175, CRJ-900, Boeing 737, and CRJ-700 type aircraft is approximately 7.9, 18.1, 30.0, and 16.4 years,
respectively. Due to the relatively young age of our E-175 aircraft, they require less maintenance now than they will in the future. In prior
periods, we incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year warranties
and a limited number of heavy airframe checks and engine overhauls have occurred. As our E-175 aircraft age and these warranties expire,
we expect that maintenance costs will increase in absolute terms and as a percentage of revenue. In addition, because our current aircraft
were acquired over a relatively short period of time, significant maintenance events scheduled for these aircraft will occur at roughly the same
intervals, meaning we will incur our most expensive scheduled maintenance obligations across our present fleet at approximately the same
time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance
activities and unavailable for flying under our CPA.
We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, auxiliary power units
and landing gear for the majority of our fleets, with the exception of Mesa-owned E-175 aircraft. Heavy maintenance and major overhaul
costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next
scheduled heavy maintenance event. Normal recurring maintenance is expensed when the maintenance work is completed, or over the
repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. While we keep a
record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as
estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot
reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.
Aircraft Leasing and Finance Determinations. We have generally funded aircraft acquisitions through a combination of operating
leases and debt financing. Our determination to lease or finance the acquisition of aircraft may be influenced by a variety of factors, including
the preferences of our major partners, the strength of our balance sheet and credit profile and those of our major partners, the length and
terms of the available lease or financing alternatives, the applicable interest rates, and any lease return conditions. When possible, we prefer
to finance aircraft through debt rather than operating leases, due to lower operating costs, extended depreciation period, opportunity for
aircraft equity, absence of lease return conditions and greater flexibility in renewing the aircraft under our CPA with our major partner after
paying off the principal balance.
Subsequent to the initial acquisition of an aircraft, we may also refinance the aircraft or convert one form of financing to another (e.g.,
replacing an aircraft lease with debt financing). The purchase of leased aircraft allows us to lower our operating costs and avoid lease-related
use restrictions and return conditions.
As of September 30, 2023, we had 48 aircraft in our fleet under lease, including 42 E-175 aircraft owned by United and leased to us at
nominal amounts and three Boeing 737 cargo jets subleased to us by DHL at nominal amounts. The fourth Boeing 737 cargo jet and two
CRJ-700 aircraft are leased to us from third parties. In order to determine the proper classification of our leased aircraft as either operating
leases or finance leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value
of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by
management in making computations as required by existing accounting standards that determine whether the lease is classified as an
operating lease or a finance lease. Our aircraft leases classified as operating leases results in rental payments being charged to expense
over the terms of the related leases.
We are also subject to lease return provisions that require a minimum portion of eligible flight time for certain components remain when
the aircraft is returned at the lease expiration. We estimate the cost of maintenance lease return obligations and accrue such costs over the
remaining lease term when the expense is probable and can be reasonably estimated.
See "Risk Factors" for a discussion of these factors and other risks.
51
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year since the airline industry is
subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of
our aircraft in the summer months and are unfavorably affected by increased fleet maintenance and by inclement weather during the winter
months.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations and comprehensive (loss)
income.
Operating Revenues
Our consolidated operating revenues consist of contract revenue as well as pass-through and other revenue.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our CPA and FSA with our
major partners, along with the additional amounts received based on the number of flights and block hours flown, and rental revenue for
aircraft leased to a third party. Contract revenues we receive from our major partners are paid on a weekly basis and recognized over time
consistent with the delivery of service under our agreements.
Pass-Through and Other Revenue. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes,
landing fees, and other aircraft and traffic servicing costs received pursuant to our agreements with our major partners, as well as certain
maintenance costs related to United owned E-175 aircraft.
Operating Expenses
Our operating expenses consist of the following items:
Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight
attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews, and pilot training expenses.
Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our CPA and FSA, including aircraft
repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our CPAs were directly paid and supplied by our
major partners. The fuel and related cost for flying under our DHL FSA were directly paid and supplied by DHL. Accordingly, we do not record
an expense or the related revenue for fuel supplied by American and United for flying under our CPAs or DHL under our FSA except fuel
costs incurred for controllable ferry flights for American and United.
Maintenance. Maintenance expense includes costs related to engine overhauls, airframe, landing gear and normal recurring
maintenance, which includes pass-through maintenance costs related to our E-175 aircraft. Heavy maintenance and major overhaul costs on
our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled
heavy maintenance event. All other maintenance costs are expensed as incurred, except for certain maintenance contracts where labor and
materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs
incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the
service provider are charged to maintenance expense based on contractual payment terms. As a result of using the direct expense method
for heavy maintenance on the majority of our fleets, the timing of maintenance expense reflected in the financial statements may vary
significantly from period to period.
Aircraft Rent. Aircraft rent expense includes costs related to leased engines and aircraft.
52
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense includes expenses related to our CPAs and FSA, including aircraft
cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which
are reimbursable by our major partners.
General and Administrative. General and administrative expense includes insurance and taxes, the majority of which are pass-through
costs, non-operational administrative employee wages and related expenses, building rents, real property leases, utilities, legal, audit and
other administrative expenses.
Depreciation and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine, and equipment
depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.
Other Income (Expense), Net
Interest Expense. Interest expense is interest on our debt to finance purchases of aircraft, engines, and equipment, including
amortization of debt financing costs and discounts.
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Loss on Investments, Net. Loss on investments consists of losses on our investments in equity securities.
Other Expense. Other expense includes expense derived from activities not classified in any other area of the consolidated statements
of income.
Segment Reporting
Operating segments are defined as components of an enterprise about which discrete financial information is available that is
evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating
performance. In consideration of ASC 280, Segment Reporting, we are not organized around specific services or geographic regions. We
currently operate in one service line providing scheduled flight services in accordance with our CPAs and FSA.
While we operate under one CPA and one FSA, we do not manage our business based on any performance measure at the individual
contract level. Additionally, our CODM uses consolidated financial information to evaluate our performance, which is the same basis on which
he communicates our results and performance to our Board of Directors. The CODM bases all significant decisions regarding the allocation
of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature,
management has concluded that we are organized and operated as one operating and reportable segment.
Results of Operations
Comparison of our Fiscal Years Ended September 30, 2023 and 2022
We had an operating loss of $84.3 million in our year ended September 30, 2023, compared to an operating loss of $185.0 million in
our year ended September 30, 2022. In our year ended September 30, 2023, we had a net loss of $120.1 million compared to a net loss of
$182.7 million in our year ended September 30, 2022.
Our operating results for the year ended September 30, 2023 reflect an increase in flight operations expense resulting from the
implementation of the new pilot pay scale that began September 15, 2022 and increased pilot training. We also saw decreases in aircraft rent
due to the new agreement with RASPRO Trust entered into in December 2022 in which 15 of our CRJ-900 aircraft were reclassified from
operating leases to finance leases, and depreciation and amortization expense due to the reduced carrying value of our CRJ-900 aircraft
assets and aircraft in our fleet being classified as non-depreciable assets held for sale. Additionally, we recorded $54.3 million in impairment
charges related associated with designating 14
53
CRJ-900 aircraft as held for sale as well as our customer relationship intangible asset compared to impairment charges of $171.8 million in
impairment charges associated with certain long-lived assets as well as certain of our CRJ aircraft that were classified as held for sale in our
year ended September 30, 2022.
Operating Revenues
Operating revenues ($ in thousands):
Contract
Pass-through and other
Total operating revenues
Operating data:
Available seat miles—ASMs (thousands)
Block hours
Revenue passenger miles—RPMs
(thousands)
Average stage length (miles)
Contract revenue per available seat
mile—CRASM (in cents)
Passengers
Year Ended September 30,
2022
2023
$
$
421,298 $
76,767
498,065 $
478,482 $
52,519
531,001 $
Change
(57,184 )
24,248
(32,936 )
4,235,413
188,947
6,674,748
271,511
(2,439,335 )
(82,564 )
2,705,920
552
5,549,595
509
(2,843,675 )
43
¢
9.95 ¢
6,310,730
7.18 ¢
8,083,870
2.77
(1,773,140 )
(12.0 )%
46.2 %
(6.2 )%
(36.5 )%
(30.4 )%
(51.2 )%
8.4 %
38.6 %
(21.9 )%
(1)
The definitions of certain terms related to the airline industry used in the table can be found under "Glossary of Airline Terms" above.
Total operating revenue decreased by $32.9 million, or 6.2%, during our fiscal year ended September 30, 2023, compared to our fiscal
year ended September 30, 2022. Contract revenue decreased by $57.2 million, or 12.0% during our fiscal year September 30, 2023,
primarily driven by reduced block hours flown and fewer aircraft under contract compared to our fiscal year ended September 30, 2022,
partially offset by an increased United block hour compensation rate for our new pilot pay scale.
Operating Expenses
Operating expenses ($ in thousands):
Flight operations
Maintenance
Aircraft rent
General and administrative
Depreciation and amortization
Asset impairment
(Gain) on sale of assets
Other operating expenses
Total operating expenses
Operating data:
Available seat miles—ASMs
(thousands)
Block hours
Average stage length (miles)
Departures
Year Ended September 30,
2022
2023
$
$
216,748 $
199,648
6,200
48,765
60,359
54,343
(7,162 )
3,510
582,411 $
177,038 $
201,930
36,989
43,966
81,508
171,824
(4,723 )
7,471
716,003 $
Change
39,710
(2,282 )
(30,789 )
4,799
(21,149 )
(117,481 )
(2,439 )
(3,961 )
(133,592 )
4,235,413
188,947
552
103,675
6,674,748
271,511
509
137,625
(2,439,335 )
(82,564 )
43
(33,950 )
22.4 %
(1.1 )%
(83.2 )%
10.9 %
(25.9 )%
(68.4 )%
51.6 %
(53.0 )%
(18.7 )%
(36.5 )%
(30.4 )%
8.4 %
(24.7 )%
Flight Operations. Flight operations expense increased by $39.7 million, or 22.4%, to $216.7 million for our fiscal year ended
September 30, 2023, compared to our fiscal year ended September 30, 2022. The increase was primarily driven by the implementation of the
new pilot pay scale that began September 15, 2022 and increased pilot training.
54
Maintenance. Aircraft maintenance expense decreased $2.3 million, or 1.1%, to $199.6 million for our fiscal year ended September 30,
2023, compared to our fiscal year ended September 30, 2022. This decrease was primarily driven by a lower volume of airframe C-checks,
component contracts, rotable and expendable parts, and engine overhauls, partially offset by increases in pass-through engine overhauls
and airframe C-checks.
The following table presents information regarding our aircraft maintenance costs during our fiscal years ended September 30, 2023
and 2022:
Engine overhaul
Pass-through engine overhaul
C-check
Pass-through C-check
Component contracts
Rotable and expendable parts
Other pass-through
Labor and other
Total
Year Ended September 30,
2022
2023
$
$
444 $
31,911
6,451
16,926
20,102
20,566
16,431
86,817
199,648 $
1,924 $
21,710
18,910
3,173
26,223
26,967
20,358
82,665
201,930 $
Change
(1,480 )
10,201
(12,459 )
13,753
(6,121 )
(6,401 )
(3,927 )
4,152
(2,282 )
(76.9 )%
47.0 %
(65.9 )%
433.4 %
(23.3 )%
(23.7 )%
(19.3 )%
5.0 %
(1.1 )%
Aircraft Rent. Aircraft rent expense decreased by $30.8 million, or 83.2%, to $6.2 million for our fiscal year ended September 30, 2023,
compared to our fiscal year ended September 30, 2022. This decrease was due to the new agreement with RASPRO Trust entered into in
December 2022 in which 15 of our CRJ-900 aircraft were reclassified from operating leases to finance leases.
General and Administrative. General and administrative expense increased by 4.8 million, or 10.9%, to $48.8 million for our fiscal year
ended September 30, 2023, compared to our fiscal year ended September 30, 2022. This increase was primarily due to increased property
taxes, legal fees, and pass-through insurance.
Depreciation and Amortization. Depreciation and amortization expense decreased by $21.1 million, or 25.9%, to $60.4 million for our
fiscal year ended September 30, 2023, compared to our fiscal year ended September 30, 2022. The decrease is primarily due to aircraft in
our fleet being classified as non-depreciable assets held for sale and the reduced carrying value of our CRJ-900 aircraft assets that were
determined to be impaired during the prior fiscal year ended September 30, 2022.
Asset Impairment. Asset impairment expenses were $54.3 million for our year ended September 30, 2023, related to designating 14
CRJ-900 aircraft as held for sale as well as our customer relationship intangible asset compared to $171.8 million for our year ended
September 30, 2022 related to certain aircraft which were designated as held for sale as well as impairment charges on our long-lived asset
group for our CRJ-900 fleet.
Other Operating Expenses. Other operating expenses decreased by $4.0 million, or 53.0%, to $3.5 million for our fiscal year ended
September 30, 2023 compared to our fiscal year ended September 30, 2022. The decrease is primarily due to a decrease in fuel expense.
55
Other Expense
Other expense decreased by $5.2 million, or 10.4%, to $44.5 million for our fiscal year ended September 30, 2023, compared to our
fiscal year ended September 30, 2022. The decrease is primarily a result of a $5.4 million gain on investments in equity securities during our
fiscal year ended September 30, 2023 compared to a $13.7 million loss on investments in equity securities during our fiscal year ended
September 30, 2022, partially offset by an increase of $12.3 million in interest expense for our fiscal year ended September 30, 2023
compared to our fiscal year ended September 30, 2022.
Income Taxes
In our fiscal year ended September 30, 2023, our effective tax rate was 6.9% compared to 22.2% in our fiscal year ended September
30, 2022. 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 state net operating losses.
We recorded an income tax benefit of $8.7 million and $52.0 million for the fiscal years ended September 30, 2023 and 2022,
respectively.
The income tax provision for our fiscal year ended September 30, 2023 resulted in an effective tax rate of 6.9%, which differed from
the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and
taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state
net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
The income tax provision for our fiscal year ended September 30, 2022 resulted in an effective tax rate of 22.2%, which differed from
the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and
taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state
net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened
carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net
operating losses were generated.
As of September 30, 2023, we had aggregate federal and state net operating loss carryforwards of approximately $562.6 million and
$233.5 million, which expire in 2027-2038 and 2023-2043, respectively, with approximately $6.0 million of state net operating loss
carryforwards that expired in 2023. Approximately $194.2 million of our federal NOL carryforwards are not subject to expiration.
See Note 13 - "Income Taxes" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report
on Form 10-K.
56
Results of Operations
Comparison of our Fiscal Years Ended September 30, 2022 and 2021
Operating Revenues
Operating revenues ($ in thousands):
Contract
Pass-through and other
Total operating revenues
Operating data:
Available seat miles—ASMs (thousands)
Block hours
Revenue passenger miles—RPMs
(thousands)
Average stage length (miles)
Contract revenue per available seat
mile—CRASM (in cents)
Passengers
Year Ended September 30,
2021
2022
$
$
478,482 $
52,519
531,001 $
434,518 $
69,073
503,591 $
Change
43,964
(16,554 )
27,410
6,674,748
271,511
7,851,798
323,219
(1,177,050 )
(51,708 )
5,549,595
509
5,893,195
661
(343,600 )
(152 )
¢
7.18
¢
8,083,870
5.53
¢
8,881,431
1.65
(797,561 )
10.1 %
(24.0 )%
5.4 %
(15.0 )%
(16.0 )%
(5.8 )%
(23.0 )%
29.8 %
(9.0 )%
(1)
The definitions of certain terms related to the airline industry used in the table can be found under "Glossary of Airline Terms" above.
Total operating revenue increased by $27.4 million, or 5.4%, during our fiscal year ended September 30, 2022, compared to our fiscal
year ended September 30, 2021. Contract revenue increased by $44.0 million, or 10.1%, primarily due to normalized contractual rates from
United and recognition of higher deferred revenue, partially offset by reduced block hours flown and partner utilization penalties compared to
the twelve months ended September 30, 2021. The increase in rates compared to the twelve months ended September 30, 2021 is
attributable to temporarily reduced rates from United impacting the twelve months ended September 30, 2021 as a result of lower labor costs
due to government assistance received during the same period. Our pass-through and other revenue decreased during our fiscal year ended
September 30, 2022 by $16.6 million, or 24.0%, primarily due to an increase in pass-through maintenance related to our E-175 fleet.
Operating Expenses
Operating expenses ($ in thousands):
Flight operations
Maintenance
Aircraft rent
General and administrative
Depreciation and amortization
Asset impairment
(Gain) on sale of assets
Government grant recognition
Other operating expenses
Total operating expenses
Operating data:
Available seat miles—ASMs (thousands)
Block hours
Average stage length (miles)
Departures
Year Ended September 30,
2021
2022
$
$
177,038 $
201,930
36,989
43,966
81,508
171,824
(4,723 )
—
7,471
716,003 $
162,137 $
217,646
39,345
49,855
82,847
—
—
(119,479 )
8,044
440,395 $
Change
14,901
(15,716 )
(2,356 )
(5,889 )
(1,339 )
171,824
(4,723 )
119,479
(573 )
275,608
6,674,748
271,511
509
137,625
7,851,798
323,219
661
160,019
(1,177,050 )
(51,708 )
(152 )
(22,394 )
9.2 %
(7.2 )%
(6.0 )%
(11.8 )%
(1.6 )%
100.0 %
100.0 %
(100.0 )%
(7.1 )%
62.6 %
(15.0 )%
(16.0 )%
(23.0 )%
(14.0 )%
57
Flight Operations. Flight operations expense increased by $14.9 million, or 9.2%, to $177.0 million for our fiscal year ended September
30, 2022, compared to our fiscal year ended September 30, 2021. The increase was primarily driven by an increase in pilot training costs.
Maintenance. Aircraft maintenance expense decreased $15.7 million, or 7.2%, to $201.9 million for our fiscal year ended September
30, 2022, compared to our fiscal year ended September 30, 2021. This decrease was primarily driven by a decrease in C-check expense,
Engine overhaul expense, and pass-through maintenance on our E-175 fleet due to overall fewer maintenance events. This decrease was
partially offset by an increase in labor and other costs. Total pass-through maintenance expenses reimbursed by our major partners
decreased by $8.1 million during fiscal year 2022, compared to fiscal year 2021.
The following table presents information regarding our aircraft maintenance costs during our fiscal years ended September 30, 2022
and 2021:
Engine overhaul
Pass-through engine overhaul
C-check
Pass-through C-check
Component contracts
Rotable and expendable parts
Other pass-through
Labor and other
Total
2022
2021
$
$
1,924 $
21,710
18,910
3,173
26,223
26,967
20,358
82,665
201,930 $
14,598 $
16,815
30,593
20,549
25,890
26,741
15,963
66,497
217,646 $
Change
(12,674 )
4,895
(11,683 )
(17,376 )
333
226
4,395
16,168
(15,716 )
(86.8 )%
29.1 %
(38.2 )%
(84.6 )%
1.3 %
0.8 %
27.5 %
24.3 %
(7.2 )%
Aircraft Rent. Aircraft rent expense decreased by $2.4 million, or 6.0%, to $37.0 million for our fiscal year ended September 30, 2022,
compared to our fiscal year ended September 30, 2021. This decrease was primarily attributable to a decrease in engine rent due to fewer
leased engines as well as a decrease in rent expense from aircraft leases due to the Company’s purchase of a previously leased aircraft in
March 2021.
General and Administrative. General and administrative expense decreased by $5.9 million, or 11.8%, to $44.0 million for our fiscal
year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. This decrease was primarily due to a decrease in
property taxes. For our fiscal years ended September 30, 2022 and 2021, $8.2 million and $15.1 million, respectively, of our insurance and
property tax expenses were reimbursed by our major partners.
Depreciation and Amortization. Depreciation and amortization expense decreased by $1.3 million, or 1.6%, to $81.5 million for our
fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. The decrease is primarily attributable to a
portion of our fleet being classified as held for sale during the twelve months ended September 30, 2022, offset by an increase in rotable
parts and spare engine depreciation expense as well as amortization of deferred heavy maintenance.
Asset Impairment. Asset impairment expenses were $62.1 million and $109.7 million for our assets held for sale and long-lived and
ROU assets, respectively, for our year ended September 30, 2022 compared to zero and zero for our year ended September 30, 2021. The
increase is attributable to impairment charges on certain CRJ aircraft, both held for sale and held for use, and intangible assets of customer
relationship during the year ended September 30, 2022.
Other Operating Expenses. Other operating expenses decreased by $0.6 million, or 7.1%, to $7.5 million for our fiscal year ended
September 30, 2022 compared to our fiscal year ended September 30, 2021. The decrease is primarily due to lease termination expense
which we incurred on a CRJ-900 aircraft purchased in March 2021 that was previously leased from a third party. The decrease is partially
offset by
58
loss associated with derecognition of lease incentive assets when the Company terminated the leases of CRJ-700 aircraft to GoJet during
the fiscal year ended September 30, 2022.
Government Grant Recognition. Government grant funds decreased by $119.5 million, or 100%, to zero for our fiscal year ended
September 30, 2022 compared to our fiscal year ended September 30, 2021. Under the Consolidated Appropriations Act, the government
provided the Company with a grant of $56.0 million in payroll support for the period of December 2020 through March 2021, and an
additional $52.2 million in payroll support under the American Recovery Plan Act for the period of April 2021 through September 2021. We
also received a total of $95.2 million under the CARES Act during the period April 2020 through October 2020, $83.8 million of which was
utilized during fiscal 2020 and $11.4 million of which was utilized and recognized as an offset to operating expenses during the first quarter of
fiscal year 2021. These government grant programs were no longer available during our fiscal year ended September 30, 2022.
Other Expense
Other expense increased by $8.9 million, or 21.8%, to $49.7 million for our fiscal year ended September 30, 2022, compared to our
fiscal year ended September 30, 2021. The increase is primarily a result of an increase in loss on investments in equity securities of $6.9
million as a result of a reduction in the market price of our investments in common stock and warrants of Archer Aviation, Inc. See Note 8 –
“Balance Sheet Information” in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form
10-K for further discussion of our investments in equity securities.
Income Taxes
In our fiscal year ended September 30, 2022, our effective tax rate was 22.2% compared to 26.0% in our fiscal year ended September
30, 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 state net operating losses.
We recorded an income tax (benefit) provision of $(52.0) million and $5.8 million for the fiscal years ended September 30, 2022 and
2021, respectively.
The income tax provision for our fiscal year ended September 30, 2022 resulted in an effective tax rate of 22.2%, which differed from
the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and
taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state
net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
The income tax provision for our fiscal year ended September 30, 2021 resulted in an effective tax rate of 26.0%, which differed from
the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and
taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state
net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened
carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net
operating losses were generated.
As of September 30, 2022, we had aggregate federal and state net operating loss carryforwards of approximately $591.4 million and
$247.0 million, which expire in 2027-2038 and 2022-2042, respectively, with approximately $1.1 million of state net operating loss
carryforwards that expired in 2022. Approximately $180.9 million of our federal NOL carryforwards are not subject to expiration.
59
See Note 13 - "Income Taxes" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report
on Form 10-K.
Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR in this Annual Report on Form 10-K, which are not recognized financial
measures under accounting principles generally accepted in the United States of America ("GAAP"), as supplemental disclosures because
our senior management believes that they are well-recognized valuation metrics in the airline industry that are frequently used by companies,
investors, securities analysts, and other interested parties in comparing companies in our industry.
Adjusted EBITDA. We define Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization,
adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of associated financing
fees.
Adjusted EBITDAR. We define Adjusted EBITDAR as net income or loss before interest, income taxes, depreciation and amortization,
and aircraft rent, adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of
associated financing fees.
You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In
evaluating Adjusted EBITDA and Adjusted EBITDAR, you should be aware that in the future we may incur expenses that are the same as or
similar to some of the adjustments in our presentation of Adjusted EBITDA and Adjusted EBITDAR. Gains and losses on investments, which
are presented as adjustments to EBITDA and EBITDAR because they are non-cash gains and losses driven by changes in stock prices and
other valuation techniques and are not reflective of our core operations, will occur in periods where the Company has investments in equity
securities with readily determinable fair values. Our presentation of Adjusted EBITDA and Adjusted EBITDAR should not be construed as an
inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the
presentation of Adjusted EBITDA or Adjusted EBITDAR and any such modification may be material.
Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures
include: (i) Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not
to be indicative of our ongoing operations; (ii) Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments; (iii) Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in,
or cash requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted EBITDAR do not reflect the interest expense, or the
cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future; (vi) Adjusted EBITDA and Adjusted
EBITDAR do not reflect gains and losses on investments, which are non-cash gains and losses but will occur in periods when there are
changes in the value of the Company’s investments in equity securities; and (vii) Adjusted EBITDA and Adjusted EBITDAR do not reflect any
cash requirements for such replacements and other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDAR
differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA and Adjusted
EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition,
Adjusted EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring
cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted EBITDA and Adjusted
EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue
reliance on this information.
60
Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net (loss) income to Adjusted EBITDA and Adjusted EBITDAR for the period presented:
Reconciliation:
Net loss
Income tax benefit
Loss before taxes
Unrealized (gain)/loss on investments, net
Adjustments
Adjusted loss before taxes
Interest expense
Interest income
Depreciation and amortization
(1)(2)(3)(4)(5)(6)(7)(8)(9)
Adjusted EBITDA
Aircraft rent
Adjusted EBITDAR
2023
Year Ended September 30,
2022
2021
$
$
$
(120,116 ) $
(8,745 )
(128,861 )
(5,408 )
48,357
(85,912 )
49,921
(146 )
60,359
24,222 $
6,200
30,422 $
(182,678 ) $
(51,990 )
(234,668 )
13,715
170,918
(50,035 )
35,289
(139 )
81,508
66,623 $
36,989
103,612 $
16,588
5,828
22,416
6,816
3,558
32,790
34,730
(365 )
82,847
150,002
39,345
189,347
(1)
(2)
$0.2 million and $4.5 million lease termination expense during the fiscal year ended September 30, 2022 and 2021, respectively.
$(0.4) million and $1.0 million (loss)/gain on debt extinguishment related to repayment of the Company's aircraft debts during the fiscal year ended
September 30, 2022 and 2021, respectively.
(3)
$109.7 million impairment loss related to our long-lived asset group for our CRJ-900 fleet during the fiscal year ended September 30, 2022.
$3.2 million loss from write off of lease incentive assets during the fiscal year ended September 30, 2022.
$3.7 million and $3.5 million impairment true-up loss on seven and 12 CRJ 900 aircraft Held for Sale during the fiscal year ended September 30, 2023 and
(4)
(5)
2022, respectively.
(6)
$7.2 million and $4.7 million gain on the sale of aircraft, engines, and other assets during the fiscal year ended September 30, 2023 and 2022,
respectively.
(7)
$46.9 million and $58.6 million impairment loss related to certain of our aircraft which were classified as held for sale during the fiscal year ended
September 30, 2023 and 2022, respectively.
(8)
$3.7 million impairment loss on intangible asset during the fiscal year ended September 30, 2023.
$1.2 million loss on deferred financing costs related to retirement of debts during the fiscal year ended September 30, 2023.
(9)
Liquidity and Capital Resources
As of September 30, 2023, the Company has $163.6 million of principal maturity payments on long-term debt due within the next
twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity
created from our plans to sell the remaining 15 CRJ-900 aircraft and other surplus assets, availability under our revolving credit facility with
United, and further amending our United CPA. If our plans are not realized, we will be required to explore additional opportunities to create
liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months. The Company
continues to monitor covenant compliance with its lenders as any noncompliance could have a material impact on the Company’s financial
position, cash flows and results of operations.
In June 2020, the Company amended its RASPRO aircraft agreement to defer a $4.0 million lease payment otherwise due in June
2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September 2021
through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor resulting
in no change to the related lease accounting.
On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with the U.S Treasury under the CARES Act. The
loan agreement provides for a secured term loan facility of up to $200.0 million (the “Treasury Loan” or "UST Loan"). On October 30, 2020,
the Company borrowed $43.0 million under the Treasury Loan and on November 13, 2020, the Company borrowed an additional $152.0
million. No additional sums are available for borrowing under the Treasury Loan. The obligations under the
61
Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, and tooling (collectively, the
“Collateral”). All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025 (the
“Maturity Date”) and all accrued interest is payable in arrears on the first business day following the 14th day of each March, June,
September and December (beginning with December 15, 2020), and on the Maturity Date. For the first 12 months, interest was paid-in-kind
by increasing the principal amount of the loan by the amount of such interest due on an interest payment date. The obligations under the
Treasury Loan are guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds may be used for general
corporate purposes and operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Treasury
Loan may be made, in whole or in part, without premium or penalty, at any time. Amounts prepaid may not be reborrowed. Mandatory
prepayments of amounts outstanding under the Treasury Loan are required, without premium or penalty, to the extent necessary to comply
with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and
certain insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Treasury Loan) occurs with respect
to Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan.
The Treasury Loan requires the Company, under certain circumstances, including within one business days prior to the last business
day of March and September of each year, beginning March 2021, to appraise the value of the Collateral and recalculate the collateral
coverage ratio. If the calculated collateral coverage ratio is less than 1.55 to 1.0, Mesa Airlines will be required either to provide additional
Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan or repay the term loans under the Treasury
Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at
least 1.55 to 1.0.
The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury
Loan also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on
dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and
acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on
lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on
employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation,
and requirements to maintain certain levels of scheduled service.
The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020. The Company
deferred approximately $5.5 million of such taxes, with 50% of the deferred amount repaid on December 31, 2021 and the remaining 50%
repaid on December 31, 2022.
We expect to meet our cash needs for the next twelve months with cash and cash equivalents, financing arrangements, proceeds from
the sale of aircraft, and cash flows from operations. As of September 30, 2023, we had $32.9 million in unrestricted liquidity. Though our
financial and operating results reflect the recovery in air travel demand during the second half of our 2021 fiscal year, we continue to monitor
the longer-term impact of the pandemic, including its adverse effect on customer demand for air travel, the general economy, and our major
partners. Should the effects of COVID-19, variants thereof or a similar pandemic continue long-term, our capital requirements and sources of
capital may be adversely impaired. See “Part II, Item 1A, Risk Factors” for additional discussion.
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft
and engine pre-delivery payments, maintenance, aircraft rent and debt service obligations, including principal and interest payments. Our
cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. Our principal sources of
liquidity are cash on hand, cash generated from operations and funds from external borrowings. In the near term, we expect to fund our
primary cash requirements through cash generated from operations and cash and cash equivalents on hand.
62
As discussed above, we entered into the Treasury Loan on October 30, 2020 pursuant to which we borrowed an aggregate of $195.0
million.
We believe that the key factors that could affect our internal and external sources of cash include:
▪
▪
Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of
changes in demand for our services, competitive pricing pressures, and our ability to achieve further reductions in operating
expenses; and
Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain
needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including
interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the
related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt
agreements in effect from time to time.
Our ability to service our long-term debt obligations, including our equipment notes, to remain in compliance with the various
covenants contained in our debt agreements and to fund our working capital, capital expenditures and business development efforts will
depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as
well as to other factors, some of which may be beyond our control.
If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our
longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices
acceptable to us.
We believe that cash flow from operating activities coupled with existing cash and cash equivalents, existing credit facilities, financing
arrangements, and anticipated asset sales, will be adequate to fund our operating and capital needs, as well as enable us to maintain
compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our
financial projections or business plans, our liquidity may be adversely impacted.
During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital
expenditures to reflect the current market conditions and our projected demand. Our capital expenditures, which includes purchases of spare
engines, aircraft, inventory, tools, vehicles, equipment and miscellaneous projects for the year ended September 30, 2023 were
approximately 7.4% of annual revenues. We expect to continue to incur capital expenditures to support our business activities. Future capital
expenditures may be impacted by events and transactions that are not currently forecasted.
As of September 30, 2023, our principal sources of liquidity were cash and cash equivalents of $32.9 million. In addition, we had
restricted cash of $3.1 million as of September 30, 2023. Restricted cash includes certificates of deposit that secure letters of credit issued
for particular airport authorities as required in certain lease agreements. Furthermore, as of September 30, 2023, we also had $470.6 million
in secured indebtedness incurred primarily in connection with our financing of aircraft. Our primary uses of liquidity are capital expenditures,
operating lease payments, and debt repayments. As of September 30, 2023, we had $105.8 million of short-term debt, excluding finance
leases, and $354.8 million of long-term debt excluding finance leases.
Sources of cash for our fiscal year ended September 30, 2023 were primarily cash flows used in operations of $24.1 million. The
negative cash flow from operations was driven by our net loss, an increase in receivables and inventory, and decreases in deferred revenue
and accrued expenses.
Debt and Other Obligations
As of September 30, 2023, we had $619.5 million of long-term debt (including principal and projected interest obligations) and finance
lease obligations (including current maturities). This amount consists of $346.4 million in notes payable principal payments related to owned
aircraft used in continuing operations, $73.1 million in notes payable principal payments related to spare engines and engine kits, $67.6
million in finance lease obligations, $51.1 million in principal outstanding under our working capital line of credit, and an aggregate of $81.3
million in projected interest costs through our fiscal 2027.
63
As of September 30, 2023, we had variable rate debt representing 56.4% of our total long-term debt. Actual interest commitments will
change based on the actual variable interest.
Operating Leases
We have significant long-term operating lease obligations primarily relating to our aircraft fleet, as well as leases of office and hangar
space. As of September 30, 2023, we had one aircraft on operating leases (excluding aircraft leased at nominal amount from United and
DHL) with remaining lease terms of up to 6.1 years. Future minimum lease payments due under all long-term operating leases were
approximately $15.2 million as of September 30, 2023.
A majority of our leased aircraft are leased through trusts formed for the sole purpose of purchasing, financing, and leasing aircraft to
us. Because these are single-owner trusts in which we do not participate, we are not at risk for losses and we are not considered the primary
beneficiary. We believe that our maximum exposure under the leases are the remaining lease payments and any return condition obligations.
RASPRO Lease Facility. On September 23, 2005, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO
as lessor, for 15 of our CRJ-900 aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid
quarterly on each aircraft. On each of March 10, 2014, June 5, 2014, and December 8, 2017, the RASPRO Lease Facility was amended to
defer certain payments of basic rent (the "Deferred Amounts"). Until the principal of and accrued interest on the Deferred Amounts are paid in
full: (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from
repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain a minimum of $35.0 million of cash, cash
equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports
containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio.
On June 5, 2020, the Company amended its RASPRO aircraft lease agreement to defer a $4.0 million lease payment otherwise due in
June 2020. Per the amended agreement, the Company is required to pay this amount over the period of September 2021 through March
2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor. This event is not a
lease modification and requires no changes to current accounting treatment.
Finance Leases
On February 7, 2018, Mesa Airlines, as lessee, entered into two agreements for the lease of two spare aircraft engines (the "Engine
Leases"). Basic rent on the engines is paid monthly and at the end of the lease term. At the end of the lease term, Mesa Airlines will have the
option to purchase both engines for a total of $1.8 million. The Engine Leases are reflected as finance lease obligations of $2.3 million on our
consolidated balance sheet as of September 30, 2022. The Engine Leases set forth specific redelivery requirements and conditions, but do
not contain operational or financial covenants.
On April 20, 2022, Mesa Airlines, as lessee, entered into another agreement for the lease of one spare aircraft engine. Basic rent on
this lease is paid monthly and at the end of the lease term. At the end of the lease term, Mesa Airlines will not have the option to purchase
the engine. This lease is reflected as finance lease obligations of $0.6 million on our consolidated balance sheet as of September 30, 2022.
On June 1, 2022, Mesa Airlines, as lessee, entered into two agreements for the lease of two CRJ-700 aircraft (the “Aircraft Leases”).
Basic rent on this lease is paid monthly and at the end of the lease term. At the end of the lease term, Mesa Airlines will have the option to
purchase both aircraft for a total of $1.5 million. The Aircraft Leases are reflected as finance lease obligations of $15.1 million on our
consolidated balance sheet as of September 30, 2022.
64
In December 2022, the Company entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 aircraft at lease
termination by a total of $25 million. Under the terms of the new agreement, the Company reclassified these leases as finance leases.
As of September 30, 2023, we had 17 aircraft and one engine on finance leases with remaining lease terms of up to 7.7 years. Future
minimum lease payments due under all long-term finance leases were approximately $67.6 million as of September 30, 2023.
Working Capital Line of Credit
In August 2016, we, as guarantor, our wholly owned subsidiaries, Mesa Airlines and MAG-AIM, as borrowers, CIT, as administrative
agent, and the lenders party thereto (the “CIT Lenders”), entered into the CIT Revolving Credit Facility, pursuant to which the CIT Lenders
committed to lend to Mesa Airlines and MAG-AIM revolving loans in the aggregate principal amount of up to $35.0 million. The borrowers'
and guarantor's obligations under the CIT Revolving Credit Facility are secured primarily by a first priority lien on certain engines, spare
parts, and related collateral, including engine warranties and proceeds of the foregoing. The CIT Revolving Credit Facility contains
affirmative, negative, and financial covenants that are typical in the industry for similar financings, including, but not limited to, covenants that,
subject to exceptions described in the CIT Revolving Credit Facility, restrict our ability and the ability of Mesa Airlines and MAG-AIM and their
subsidiaries to: (i) enter into, create, incur, assume or suffer to exist any liens; (ii) merge, dissolve, liquidate, consolidate or sell or transfer
substantially all of its assets; (iii) sell assets; (iv) enter into transactions with affiliates; (v) amend certain material agreements and
organizational documents; (vi) make consolidated unfinanced capital expenditures; or (viii) maintain a consolidated interest and rental
coverage ratio above the amount specified in the CIT Revolving Credit Facility. The CIT Revolving Credit Facility also includes customary
events of defaults, including but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties;
(iv) cross-defaults; (v) certain bankruptcy-related defaults; (vi) change of control; and (vii) revocation of instructions with respect to certain
controlled accounts.
On September 25, 2019, the Company extended the term on its $35.0 million working capital draw loan by three years, which now
terminates in December 2022. Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. In June 2020, $23.0 million was
drawn to cover operational needs. As of September 30, 2022, $15.6 million remained outstanding under the working capital draw loan.
On December 27, 2022, in connection with entering into the Amended and Restated United CPA, (i) United agreed to purchase and
assume all of First Citizens’ rights and obligations as a lender under the Existing Facility pursuant to an Assignment and Assumption
Agreement, (ii) United and CIT Bank agreed to amend the Existing Facility pursuant to an Amendment No. 1, dated December 27, 2022
(“Amendment No. 1”), and an Amendment No. 2, dated January 27, 2023 (“Amendment No. 2”; the Existing Facility as amended by
Amendment No. 1 and Amendment No. 2, the "Amended Facility"), and (iii) Wilmington Trust, National Association agreed to assume all of
CIT Bank’s rights and obligations as Administrative Agent pursuant to an Agency Resignation, Appointment and Assumption Agreement,
dated as of January 27, 2023. Amendment No. 1, among other things, extends the Maturity Date from the earlier to occur of November 30,
2028, or the date of the termination of the Amended and Restated United CPA; provides for a revolving loan of $10.0 million plus fees and
expenses, which is due January 31, 2024, subject to certain mandatory prepayment requirements; provides for Revolving Commitments
equal to $30.7 million plus the original principal amount of the $10 million revolving loan; amortization of the obligations outstanding under
the existing CIT Agreement commencing quarterly until March 31, 2025; and a covenant capping Restricted Payments (as defined in the
Amended Facility) at $5.0 million per fiscal year, a consolidated interest and rental coverage ratio of 1.00 to 1.00 covenant, and a Liquidity
(as defined in the Amended Facility) requirement of not less than $15.0 million at the close of any business day. Interest assessed under the
Amended Facility is 3.50% for Base Rate Loans and 4.50% for Term SOFR Loans (as such terms are defined in the Amended Facility).
Amendment No. 2, among other things, amends the definition of Controlled Account (as defined in the Amended Facility). Amounts borrowed
under this Amended Facility are secured by a collateral pool consisting of a combination of expendable parts, rotable parts and engines
65
and a pledge of the Company’s stock in certain aviation companies. United funded $25.5 million as of the closing date of Amendment No. 1,
to be used for general corporate purposes.
On September 6, 2023, the Company amended the existing United Credit Facility to (i) permit the Company to re-draw approximately
$7.9 million of the Effective Date Bridge Loan (as defined in the United Credit Facility) previously repaid; (ii) increased the amount of
Revolving Commitments (as defined in the United Credit Facility) from $30.7 million to $50.7 million, in each case, plus the original principal
amount of the Effective Date Bridge Loan and subject to the Borrowing Base (as defined in the United Credit Facility); and (iii) amended the
calculation of the Borrowing Base. Amounts borrowed under this facility bear interest at 3.50% for Base Rate Loans and 4.50% per annum
for Term SOFR Loans. Amounts borrowed under the Amended Credit Facility are secured by a collateral pool consisting of a combination of
expendable parts, rotable parts and engines, a pledge of certain of the Company’s bank accounts and a pledge of the Company’s stock in
certain aviation companies.
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit and
Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension ("Amendment No.
4") and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the "January
2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the following:
•
•
•
•
•
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from the sale,
assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital stock
of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to certain
conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30, 2023,
and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter ending March
31, 2024.
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for borrowings
under the Credit Agreement.
Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such engines as
collateral for the United credit facility for a specified period of time.
Engine Purchase Commitments
On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into
an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of 10 new CF34-8C5 or CF34-
8E5 engines with delivery dates starting from July 1, 2021 through November 30, 2022. During the quarter ended March 31, 2021, a $7.0
million non-refundable purchase deposit was made for the first five engines to be delivered in calendar 2021. The total purchase commitment
related to these 10 engines is approximately $52.2 million. As of September 30, 2023, we have purchased all of the engines pursuant to the
Amended and Restated Letter Agreement No. 13-3.
If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum
cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.
66
Electric Aircraft Forward Purchase Commitments
As described in Note 8, in February 2021, the Company entered into a forward purchase contract with Archer Aviation, Inc. (“Archer”)
for a number of electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL
aircraft is $200.0 million, with an option to purchase additional aircraft. The Company’s obligation to purchase the eVTOL aircraft is subject to
the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met.
As described in Note 8, in July 2021, the Company entered into a forward purchase contract with Heart Aerospace Incorporated
(“Heart”) for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is $1,200.0 million, with an option to
purchase additional aircraft. The Company’s obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the
future to a number of terms and conditions, which may or may not be met.
Maintenance Commitments
In August 2005, we entered into a ten-year agreement with AAR for the maintenance and repair of certain of our CRJ-200, CRJ-700,
and CRJ-900 aircraft. The agreement has since been amended to include a term extending through 2025, and to provide certain E-175
aircraft rotable spare parts with a term through December 2027. Under the agreements, we pay AAR a monthly access fee per aircraft for
certain consigned inventory as well as a fixed "cost per flight hour" fee on a monthly basis for repairs on certain repairable parts during the
term of the agreement, which fees are subject to annual adjustment based on increases in the cost of labor and component parts.
In July 2013, we entered into an engine maintenance contract with GE to perform heavy maintenance on certain CRJ-700, CRJ-900,
and E-175 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with GE's spare parts catalog for
engines. The engine maintenance contract extends through 2024.
In 2014, we entered into a ten-year contract with Aviall to provide maintenance and repair services on the wheels, brakes and tires of
our CRJ-700 and CRJ-900 aircraft. Under the agreement, we pay Aviall a fixed "cost per landing" fee for all landings of our aircraft during the
term of the agreement, which fee is subject to annual adjustment based on increases in the cost of labor and component parts.
We entered into an engine maintenance contract with StandardAero, which became effective on June 1, 2015, to perform heavy
maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance
with the GE's spare parts catalog for engines.
Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective
maintenance facilities. We also use third-party vendors, such as AAR, Ascent, Embraer, Aviall, and GE, for certain heavy airframe and
engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As of September 30, 2022,
$50.6 million of parts inventory was consigned to us by AAR and Aviall under long-term contracts that is not reflected on our balance sheet.
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The Company accounts for heavy maintenance and major overhaul costs on its owned E-175 fleet under the deferral method whereby
the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset
or the next scheduled heavy maintenance event. For all other fleets, we use the direct expense method of accounting for our maintenance of
regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the
maintenance work is completed, or over the repair period, if materially different, except for certain maintenance contracts where labor and
materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours . Costs
incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the
service provider are charged to maintenance expense based on contractual payment terms. Our maintenance policy is determined by fleet
when major maintenance is incurred. While we keep a record of expected maintenance events, the actual timing and costs of major engine
maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance
events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any
significant period of time.
Restricted Cash
As of September 30, 2023, we had $3.1 million in restricted cash. We have an agreement with a financial institution for a $6.0 million
letter of credit facility and to issue letters of credit for landing fees, worker's compensation insurance and other business needs. Pursuant to
such agreement, $3.1 million and $3.3 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of
September 30, 2023 and 2022, respectively, which are classified as restricted cash.
Cash Flows
The following table presents information regarding our cash flows for each of our fiscal years ended September 30, 2023, 2022, and
2021:
Net cash (used in) provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Net Cash Flow Provided by Operating Activities
2023
Year Ended September 30,
2022
$
$
(24,091 ) $
142,285
(143,147 )
(24,953 )
61,025
36,072 $
13,362 $
1,365
(77,569 )
(62,842 )
123,867
61,025 $
2021
132,871
(33,471 )
(78,374 )
21,026
102,841
123,867
Our primary source of cash from operating activities is cash collections from our major partners pursuant to our CPA and FSA. Our
primary uses of cash used in operating activities are for maintenance costs, personnel costs, operating lease payments, and interest
payments.
During our fiscal year ended September 30, 2023, we had cash flow used in operating activities of $24.1 million. We had net loss of
$120.1 million adjusted for the following significant non-cash items: asset impairment of $54.3 million, depreciation and amortization of $60.4
million, stock-based compensation expense of $2.3 million, deferred income taxes of $(9.3) million, net unrealized gains on investments in
equity securities of $(5.4) million, amortization of deferred credits of $1.5 million, amortization of debt discount and issuance costs and
accretion of interest of $6.3 million, loss on extinguishment of debt of $1.5 million, net gain on disposal of assets of $(7.2) million, and $2.2
million in net other operating cash flow adjustments. We had net change of $(10.7) million within other net operating assets and liabilities
largely driven by accrued liabilities, accounts payable, deferred revenue, receivables, and operating leases during our fiscal year ended
September 30, 2023.
During our fiscal year ended September 30, 2022, we had cash flow provided by operating activities of $13.4 million. We had net loss
of $182.7 million adjusted for the following significant non-cash items:
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asset impairment of $171.8 million, depreciation and amortization of $81.5 million, stock-based compensation expense of $2.8 million,
deferred income taxes of $(52.0) million, losses on investments in equity securities of $13.7 million, amortization of deferred credits of $(0.9)
million, amortization of debt discount and issuance costs and accretion of interest of $9.7 million, loss on extinguishment of debt of $0.4
million, gain on disposal of assets of $(4.7) million, provision for obsolete expendable parts and supplies of $0.6 million, and loss on lease
termination of $0.2 million. We had net change of $(26.8) million within other net operating assets and liabilities largely driven by accrued
liabilities, accounts payable, deferred revenue, receivables, and operating leases during our fiscal year ended September 30, 2022.
During our fiscal year ended September 30, 2021, we had cash flow provided by operating activities of $132.9 million. We had net
income of $16.6 million adjusted for the following significant non-cash items: depreciation and amortization of $82.8 million, stock-based
compensation expense of $3.1 million, deferred income taxes of $5.7 million, losses on investments in equity securities of $6.8 million,
amortization of deferred credits of $(2.4) million, amortization of debt discount and issuance costs and accretion of interest of $11.4 million,
gain on extinguishment of debt of $(1.0) million, and loss on lease termination of $4.5 million. We had net change of $4.8 million within other
net operating assets and liabilities largely driven by accrued liabilities, accounts payable, deferred revenue, receivables, and operating leases
during our fiscal year ended September 30, 2021.
Net Cash Flows Provided by (Used in) Investing Activities
Our investing activities generally consist of capital expenditures for aircraft and related flight equipment, deposits paid or returned for
equipment and other purchases, and strategic investments.
During our fiscal year ended September 30, 2023, our net cash flow provided by investing activities was $142.3 million. We invested
$15.8 million in spare engines, $2.2 million in aircraft, $13.4 million in inventory, $2.6 million in costs associated with transitioning CRJ-900
aircraft to United operations, and $2.6 million in tools, vehicles, equipment and other miscellaneous projects. Additionally, we received a total
of $178.6 million from the sale of aircraft and engines and received a $0.3 million in refunds on equipment and other deposits.
During our fiscal year ended September 30, 2022, our net cash flow provided by investing activities was $1.4 million. We invested
$16.7 million in spare engines, $2.2 million in aircraft, $18.4 million in inventory, $4.4 million in tools, vehicles, equipment and other
miscellaneous projects. and $7.6 million in net payments on equipment and other deposits. Additionally, we invested a total of $0.2 million in
equity securities and received a total of $50.0 million from sale of 10 CRJ-700 aircraft.
During our fiscal year ended September 30, 2021, our net cash flow used in investing activities was $33.5 million. We invested $3.5
million in spare engines, $1.6 million in aircraft, $9.9 million in inventory, $2.1 million in tools, vehicles, equipment and other miscellaneous
projects, and $6.3 million in net payments on equipment and other deposits. Additionally, we invested a total of $10.0 million in equity
securities.
Net Cash Flows Used in Financing Activities
Our financing activities generally consist of debt borrowings, principal repayments of debt, payment of debt financing costs, stock
repurchases, and proceeds received from issuing common stock under our ESPP.
During our fiscal year ended September 30, 2023, our net cash flow used in financing activities was $143.1 million. We received $60.9
million of proceeds from long-term debt. We made $203.0 million of principal repayments on long-term debt during the period. We incurred
$0.9 million of costs related to debt financing and $0.4 million of payments of tax withholding for restricted stock units. We received $0.3
million in proceeds from the issuance of common stock under our ESPP.
During our fiscal year ended September 30, 2022, our net cash flow used in financing activities was $77.6 million. We received $39.8
million of proceeds from borrowings under the Treasury Loan. We made
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$114.9 million of principal repayments on long-term debt during the period. We incurred $2.4 million of costs related to debt financing and
$0.5 million of payments of tax withholding for restricted stock units. We received $0.4 million in proceeds from the issuance of common
stock under our ESPP.
During our fiscal year ended September 30, 2021, our net cash flow used in financing activities was $78.4 million. We received $195.0
million of proceeds from borrowings under the Treasury Loan. We made $271.0 million of principal repayments on long-term debt during the
period. We incurred $1.3 million of costs related to debt financing and $1.5 million of payments of tax withholding for restricted stock units.
We received $0.5 million in proceeds from the issuance of common stock under our ESPP.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions
that affect our reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosure of contingent assets and liabilities.
To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations
would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the
circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting
estimates, which we discuss below.
The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are
more fully described in Note 2 - "Summary of Significant Accounting Policies" to the consolidated financial statements.
Leases
Effective October 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02" or “ASC 842”) which provides guidance
requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of
short-term leases with terms of less than 12 months. From a lessee perspective, our leases are classified as either finance or operating, with
classification affecting the pattern of expense recognition in the statement of income. We determine if an arrangement is a lease at inception.
Our operating lease activities are recorded in operating lease right-of-use (“ROU”) assets, current maturities of operating leases, and
noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, net, current
portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make
lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based
on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use
assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our
leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include
options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease
payments is recognized on a straight-line basis over the lease term.
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In addition to the aircraft we lease from United under our United CPA and from DHL under our DHL FSA, approximately 1% of our
aircraft are leased from third parties. Our aircraft operating lease results in rental payments being charged to expense over the term of the
related lease. In the event that we or the third party decides to exit the activity involving leased aircraft, losses may be incurred. In the event
that we exit an activity that results in exit losses, these losses are accrued as the aircraft is removed from operations for early termination
penalties, lease settle up, and other charges. Additionally, any remaining ROU assets and lease liabilities will be written off.
As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the
recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less).
From a lessor perspective, our CPAs identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A
portion of the compensation in the CPAs is designed to reimburse the Company for certain aircraft ownership costs of these aircraft. We
account for the non-lease component of our CPAs under ASC 606 and account for the lease component under ASC 842. We allocate the
consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost-
basis approach representing our estimate of the stand-alone selling prices.
The Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease CRJ-700 aircraft as of September 30, 2021.
The lease agreements are accounted for as operating leases and had a term of nine years beginning on the delivery date of each aircraft.
Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly
aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet’s completion of qualifying
maintenance events defined in the lease agreements. Lease revenue for fixed monthly rent payments is recognized on a straight-line basis
within contract revenue. Lease revenue for supplemental rent is deferred and recognized within contract revenue when it is probable that
amounts received will not be reimbursed for future qualifying maintenance events over the lease term. In August 2022, we committed to a
formal plan to sell 18 of our CRJ-700 aircraft and terminated the leases on such aircraft, which have all subsequently been sold. In
September 2022, we sold 10 CRJ-700 aircraft for $50.0 million. In January 2023, we sold the remaining eight CRJ-700 aircraft for $40.0
million.
Revenue Recognition
The Company recognizes revenue when the service is provided under its CPA and FSA. Under these agreements, the major partners
generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block
hours flown. The contracts also include reimbursement of certain costs incurred by the Company in performing flight services. These costs,
known as "pass-through costs," may include passenger liability and hull insurance as well as aircraft property taxes and other flight service
expenditures defined in our agreements with our major partners. Additionally, for the E-175 aircraft owned by United, the CPA provides that
United will reimburse the Company for heavy airframe and engine maintenance, landing gear, APUs and component maintenance. The
Company also receives compensation under its agreements for heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all
aircraft in scheduled service other than the E-175 aircraft owned by United. The contracts also include incentives and penalties based on
certain operational benchmarks. The Company is eligible to receive incentive compensation upon the achievement of certain performance
criteria defined in the agreements. At the end of each period during the term of an agreement, the Company calculates the incentives
achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable
constraint guidance under ASC 606. All revenue recognized under these contracts is presented as the gross amount billed to the major
partners.
Under the CPA and FSA, the Company has committed to perform various activities that can be generally classified into in-flight
services and maintenance services. When evaluating these services, the Company determined that the nature of its promise is to provide a
single integrated service, flight services, because its contracts require integration and assumption of risk associated with both services to
effectively deliver and provide the flights as scheduled over the contract term. Therefore, the in-flight services and
71
maintenance services are inputs to that combined integrated flight service. Both services occur over the term of the agreement and the
performance of maintenance services significantly affects the utility of the in-flight services. The Company's individual flights flown under the
CPA and FSA are deemed to be distinct and the flight service promised in the CPA and FSA represents a series of services that is accounted
for as a single performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore,
revenue is recognized when each flight is completed.
In allocating the transaction price, variable payments (i.e., billings based on flights and block hours flown, pass-through costs, etc.) that
relate specifically to the Company's efforts in performing flight services are recognized in the period in which the individual flight is completed.
The Company has concluded that allocating the variability directly to the individual flights results in an overall allocation meeting the
objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the Company to their
customers.
A portion of the Company's compensation under its CPAs with United and previously American is designed to reimburse the Company
for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be
lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. The lease
revenue associated with the Company's CPA is accounted for as an operating lease and is reflected as contract revenue on the Company's
consolidated statements of operations and comprehensive (loss) income. The Company recognized $144.7 million, $158.4 million, and
$170.2 million of lease revenue for the year ended September 30, 2023, 2022, and 2021, respectively. The Company has not separately
stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive (loss) income
because the use of the aircraft is not a separate activity of the total service provided.
The Company's CPA and FSA are renewable periodically and contain provisions pursuant to which the parties could terminate their
respective agreements, subject to certain conditions, as described in Note 1. The CPA and FSA also contain terms with respect to covered
aircraft, services provided, and compensation as described in Note 1. The CPA and FSA are amended from time to time to change, add, or
delete terms of the agreements.
The Company's revenues could be impacted by a number of factors, including amendment or termination of its CPA or FSA, contract
modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and
settlement of reimbursement disputes with the Company's major partners. In the event contracted rates are not finalized at a quarterly or
annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has an enforceable right, it
estimates the amount the Company expects to be entitled subject to the variable constraint guidance under ASC 606.
The Company's CPA and FSA contain an option that allows its major partners to assume the contractual responsibility for procuring
and providing the fuel necessary to operate the flights that it operates for them. The Company's major partners have exercised this option.
Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its CPAs or FSA. In
addition, the Company's major partners also provide, at no cost to the Company, certain ground handling and customer service functions, as
well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by the Company's major partners at
no cost are presented net in its consolidated financial statements; hence, no amounts are recorded for revenue or expense for these items.
The Company records deferred revenue when cash payments are received or are due from our major partners in advance of the
Company’s performance. The deferred revenue balance as of September 30, 2023 of $21.0 million (current and non-current portion)
represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance
obligations are satisfied (as flights are completed over the remaining contract term).
Property and Equipment
The Company’s property and equipment, which primarily consists of aircraft and related flight equipment, had a net book value of
$698.0 million as of September 30, 2023. The Company monitors for
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any indicators of impairment of its property and equipment and other long-lived assets whenever events or changes in circumstances
indicate that the related carrying amount may be impaired. Factors which could be indicators of impairment include, but are not limited to: (i)
significant adverse changes in the extent or manner in which an asset is being used, including permanently removing a long-lived asset or
assets from operations; (ii) significant changes in the estimated useful life of an asset; (iii) significant changes in estimated future cash flows
or a history of operating or cash flow losses; (iv) permanent and significant declines in market prices of an asset; and (v) changes to the
regulatory environment or business climate. The Company records an impairment loss if (i) the undiscounted future cash flows are found to
be less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If
an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value.
We group assets at the CPA and FSA level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators
exist with respect to any of our asset groups, we estimate future cash flows based on projections of capacity purchase or FSA, block hours,
maintenance events, labor costs and other relevant factors. The Company’s assumptions about future conditions are important to its
assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business and impact of
pilot shortage, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information
becomes available, and will update its analyses accordingly. If an asset group is impaired, the impairment loss recognized is the amount by
which the asset group’s carrying amount exceeds its fair value. We estimate fair values of aircraft and related assets using published
sources, appraisals, and bids received from third parties as available.
As a result of operating losses and the transition of operations from American to United, we evaluated our fleet for impairment as of
September 30, 2023, and determined that future cash flows from the operation of our fleet through the respective remaining useful life
exceeded the carrying value of the fleet. As such, no impairment charges were recorded to our fleet.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation
allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets
will be realized.
In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies for
each taxing jurisdiction are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will
not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine we are more
likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related
portion of the valuation allowance will be recorded as a reduction to income tax expense.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position
taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the
tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more
likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to
be realized upon settlement. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in
facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of
audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income
tax expense in the period in which the change is made, which could have a material impact to our effective tax rate. See Note 13 - "Income
Taxes"
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in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. See
also "Management's Discussion and Analysis—Results of Operations—Income Taxes" for additional information.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 4 - "Recent Accounting Pronouncements" in the notes to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For a listing and discussion of our accounting policies, see Note 2 - "Summary of Significant Accounting Policies" in the notes to our
audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks in the ordinary course of our business. These risks include interest rate risk and, on a limited basis,
commodity price risk with respect to foreign exchange transactions. The adverse effects of changes in these markets could pose a potential
loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall
economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.
Interest Rate Risk. We are subject to market risk associated with changing interest rates on our variable rate long-term debt; the
variable interest rates are based on LIBOR. The interest rates applicable to variable rate notes may rise and increase the amount of interest
expense on our variable rate long-term debt. We do not purchase or hold any derivative instruments to protect against the effects of changes
in interest rates.
As of September 30, 2023, we had $303.8 million of variable rate debt including current maturities. A hypothetical 100 basis point
change in market interest rates would have increased interest expense by approximately $1.1 million in our fiscal year ended September 30,
2022.
As of September 30, 2023, we had $234.5 million of fixed rate debt, including current maturities. A hypothetical 100 basis point change
in market interest rates would not impact interest expense or have a material effect on the fair value of our fixed rate debt instruments as of
September 30, 2022.
Foreign Currency Risk. We have de minimis foreign currency risks related to our station operating expenses denominated in
currencies other than the U.S. dollar, primarily the Canadian dollar. Our revenue is U.S. dollar denominated. To date, foreign currency
transaction gains and losses have not been material to our financial statements, and we have not had a formal hedging program with respect
to foreign currency. A 10% increase or decrease in current exchange rates would not have a material effect on our financial results.
Fuel Price Risk. Unlike other airlines, our CPA and FSA largely shelter us from volatility related to fuel prices, which are directly paid
and supplied by our major partners.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive (Loss) Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
81
82
83
84
85
The information set forth below should be read together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing elsewhere in this Annual Report on Form 10-K.
76
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mesa Air Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Air Group, Inc. (the Company) as of September 30, 2022, the
related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash flows for each of the two
years in the period ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September
30, 2022 and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2022, in conformity
with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 2019 to 2023.
Phoenix, Arizona
December 29, 2022
77
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mesa Air Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Mesa Air Group, Inc. (the Company) as of September 30, 2023, the
related consolidated statements of operations and comprehensive (loss) income, stockholders' equity and cash flows for the year then
ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its
operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated January 26, 2024
expressed an opinion that the Company had not maintained effective internal control over financial reporting as of September 30, 2023,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013.
Emphasis of Matter related to Concentration of Revenue and Liquidity
As discussed in Notes 1, 2, 3 and 5 to the financial statements, the Company generates substantially all its revenues and liquidity from
United Airlines, Inc. under terms of a capacity purchase agreement and other agreements. The termination or modification of these
agreements may have significant adverse effects on the Company’s continuing operations and liquidity.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
Critical Audit Matter
78
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit
matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Forecasted Cash Flows Utilized in Assessment of Going Concern and Impairment of Long-lived Assets
As described in Notes 1 and 2 of the consolidated financial statements, the Company believes that cash on hand, ongoing cashflows from
operations, in addition to obtaining equity financing, issuing debt, entering into other financing arrangements, restructuring of operations to
grow revenues and decrease expenses, selling the aircraft held for sale and equity investments, is adequate to meet its cash obligations for
the next twelve months following the issuance of its financial statements. Accordingly, management has disclosed the factors that give rise
to initial concerns regarding the ability of the Company to continue as a going concern, as well as management’s plan and management’s
conclusion as to whether the plan is probable of being both implemented and effective in alleviating the conditions giving rise to substantial
doubt. The process involves the forecast of cash flows to determine whether the Company will have sufficient cash to continue operations
and repay debt as it becomes due.
In addition, to determine whether impairments exist for long-lived assets, including aircraft and other related assets used in operations,
among other things, the Company identified the asset groups at the capacity purchase agreement or flight services agreement level (i.e., the
lowest level for which there are identifiable cash flows). The Company assesses whether indicators of impairment are present for an asset
group and, when applicable, the Company evaluates recoverability of the asset group by comparing the undiscounted future cash flows to
the carrying amount of the asset group. The Company estimates future cash flows based on the projections of the capacity purchase
agreement or flight services agreement. In the event the asset group is not recoverable, an impairment charge is recorded and the asset
group’s carrying amount is reduced to its estimated fair value.
The forecast of undiscounted cashflows prepared to assess going concern and impairment of long-lived assets was prepared with significant
judgment and estimates of future cashflows based on projections of capacity purchase agreement block hours, maintenance events, labor
costs, and other relevant factors.
We identified management’s evaluation of undiscounted cash flows related to the assessment of going concern and impairment of long-lived
assets for the United capacity purchase agreement asset group as a critical audit matter. The undiscounted cash flows represent an estimate
that is subject to significant estimation uncertainty regarding the Company’s future cash flows and the risk of bias in management’s
judgments in estimating these cash flows. Auditing the undiscounted cash flows related to going concern and the impairment of long-lived
assets involves a high degree of auditor judgment and an increase in audit effort.
Our audit procedures related to testing management’s evaluation of undiscounted cash flows included the following, among others:
•
Evaluated the reasonableness of forecasted revenues and operating expenses, as well as management’s assumptions related to
sources and uses of cash. This testing included:
79
Developing an understanding of management’s plans for financing operations through discussions with management.
Evaluating probability of future asset sales to generate cash inflows through tracing expected future asset sales to binding purchase
agreements.
Developing an understanding of management’s expectations for future changes in revenue and expenses through discussions with
management, review of budgets, comparison of historical and projected block hours to be provided under capacity purchase
agreement, including information obtained from the customer, consideration of pilot attrition and number of current and projected
pilots, and consideration of the number of aircraft to provide services under the capacity purchase agreement.
Evaluating the reasonableness of forecasted revenues and expenses to historical results through comparison of historical block
hours provided under capacity purchase agreement, and direct and indirect expenses.
Evaluating the completeness of the disclosures related to management’s plans.
•
•
Evaluated the reasonableness of management’s estimate to remain in compliance with debt covenants, as of the balance sheet date
and through a year from issuance.
Evaluating the impact of the Company’s debt amendments subsequent to the balance sheet date and the amendments impact on cash
flows through a year from issuance.
/s/ RSM US LLP
We have served as the Company's auditor since 2023.
Phoenix, Arizona
January 26, 2024
80
MESA AIR GROUP, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
September 30,
2023
September 30,
2022
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Receivables, net ($4,016 and $85 from related party)
Expendable parts and supplies, net
Assets held for sale
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Lease and equipment deposits
Operating lease right-of-use assets
Deferred heavy maintenance, net
Assets held for sale
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and finance
leases ($20,500 and $0 from related party)
Current portion of deferred revenue
Current maturities of operating leases
Accounts payable
Accrued compensation
Other accrued expenses
Total current liabilities
Noncurrent liabilities:
Long-term debt and finance leases, excluding current
portion ($30,630 and $0 from related party)
Noncurrent operating lease liabilities
Deferred credits ($4,617 and $2,193 from related party)
Deferred income taxes
Deferred revenue, net of current portion
Other noncurrent liabilities
Total noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 17)
Stockholders' equity:
Common stock of no par value and additional paid-in
capital, 125,000,000 shares authorized; 40,940,326
(2023) and 36,376,897 (2022) shares issued and
outstanding, 4,899,497 (2023) and 4,899,497
(2022) warrants issued and outstanding
(Accumulated deficit)/Retained Earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
32,940 $
3,132
8,253
29,245
57,722
7,294
138,586
698,022
—
1,630
9,709
7,974
12,000
30,546
898,467 $
163,550 $
4,880
3,510
58,957
10,008
27,001
267,906
364,728
8,077
4,617
8,414
16,167
28,522
430,525
698,431
57,683
3,342
3,978
26,715
—
6,616
98,334
865,254
3,842
6,085
43,090
9,707
73,000
16,290
1,115,602
97,218
385
17,233
59,386
11,255
29,000
214,477
502,517
16,732
3,082
17,719
23,682
29,219
592,951
807,428
271,155
(71,119 )
200,036
898,467 $
$
259,177
48,997
308,174
1,115,602
See accompanying notes to these consolidated financial statements.
81
MESA AIR GROUP, INC.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(in thousands)
2023
Year Ended September 30,
2022
2021
Operating revenues:
Contract revenue (2023—$294,129, 2022—$207,003, and 2021—
$198,212 from related party)
Pass-through and other revenue
Total operating revenues
$
421,298 $
76,767
498,065
478,482 $
52,519
531,001
Operating expenses:
Flight operations
Maintenance
Aircraft rent
General and administrative
Depreciation and amortization
Lease termination
Asset impairment
(Gain) on sale of assets
Other operating expenses
Government grant recognition
Total operating expenses
Operating (loss)/income
Other income (expense), net:
Interest expense
Interest income
Unrealized gain/(loss) on investments, net
Other (expense)/income, net
Total other expense, net
(Loss)/income before taxes
Income tax (benefit)/expense
Net (loss)/income and comprehensive (loss)/income
Net loss per share attributable to
common shareholders
Basic
Diluted
Weighted-average common shares
outstanding
Basic
Diluted
216,748
199,648
6,200
48,765
60,359
—
54,343
(7,162 )
3,510
—
582,411
(84,346 )
(49,921 )
146
5,408
(148 )
(44,515 )
(128,861 )
(8,745 )
(120,116 ) $
177,038
201,930
36,989
43,966
81,508
233
171,824
(4,723 )
7,238
—
716,003
(185,002 )
(35,289 )
139
(13,715 )
(801 )
(49,666 )
(234,668 )
(51,990 )
(182,678 ) $
(3.04 ) $
(3.04 ) $
(5.06 ) $
(5.06 ) $
39,465
39,465
36,133
36,133
$
$
$
See accompanying notes to these consolidated financial statements.
82
434,518
69,073
503,591
162,137
217,646
39,345
49,855
82,847
4,508
—
—
3,536
(119,479 )
440,395
63,196
(34,730 )
365
(6,816 )
401
(40,780 )
22,416
5,828
16,588
0.46
0.43
35,713
38,843
MESA AIR GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
Number of
Number of
Common
Stock and
Additional
Paid-In
Retained
Earnings/(Accum
ulated Deficit)
Balance at September 30, 2020
Shares
35,526,918
Warrants
Capital
—
$
242,772
$
215,087
$
Total
457,859
Stock compensation expense
Payment of tax withholding for
RSUs
Issuance of warrants, net of issuance costs
Restricted shares issued
Employee share purchases
Net income
Balance at September 30, 2021
Stock compensation expense
Payment of tax withholding for
RSUs
Restricted shares issued
Employee share purchases
Net loss
Balance at September 30, 2022
Stock compensation expense
Payment of tax withholding for
RSUs
Restricted shares issued
United Stock Issuance
Employee share purchases
Net loss
Balance at September 30, 2023
—
—
3,126
—
3,126
(155,174 )
492,465
94,550
—
35,958,759
—
4,899,497
—
—
—
4,899,497
$
(1,486 )
11,489
—
471
—
256,372
$
—
—
—
—
16,588
231,675
$
—
—
2,761
(147,108 )
455,303
109,943
—
36,376,897
—
—
—
—
4,899,497
$
(455 )
100
399
—
259,177
$
—
—
2,275
(204,486 )
585,401
4,042,061
140,453
—
40,940,326
—
—
—
—
—
4,899,497
$
(363 )
—
9,782
284
—
271,155
$
—
—
—
—
(182,678 )
$
48,997
—
—
—
—
—
(120,116 )
(71,119 ) $
(1,486 )
11,489
—
471
16,588
488,047
2,761
(455 )
100
399
(182,678 )
308,174
2,275
(363 )
—
9,782
284
(120,116 )
200,036
See accompanying notes to these consolidated financial statements.
83
MESA AIR GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net (Loss)/Income
Adjustments to reconcile net loss to net cash flows provided by (used in)
operating activities:
Depreciation and amortization
Stock compensation expense
Unrealized (gain)/loss on investments, net
Deferred income taxes
Amortization of deferred credits
Amortization of debt discount and issuance costs and accretion of
interest into long-term debt
Asset impairment
(Gain)/Loss on sale of assets
Loss/(Gain) on extinguishment of debt
Other
Changes in assets and liabilities:
Receivables
Expendable parts and supplies
Prepaid expenses and other operating assets and liabilities
Accounts payable
Deferred heavy maintenance, net
Deferred revenue
Accrued expenses and other liabilities
Operating lease right-of-use assets and liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital expenditures
Investments in equity securities
Proceeds from sale of aircraft and engines
Refund (payment) of equipment and other deposits
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt and finance leases
Payments of debt and warrant issuance costs
Proceeds from issuance of common stock under ESPP
Payment of tax withholding for RSUs
Net cash used in financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental cash flow information
Cash paid for interest
Cash paid for income taxes, net
Operating lease payments in operating cash flows
Supplemental non-cash operating activities
Right-of-use assets obtained in exchange for lease liabilities
Supplemental non-cash financing activities
Finance lease obtained in exchange for lease liability
Acquisition of finance leases
Investments in warrants to purchase common stock
Accrued capital expenditures
Debt issuance cost related to loan agreement with U.S. Department of the Treasury
2023
Year Ended September 30,
2022
2021
$
(120,116 ) $
(182,678 ) $
16,588
60,359
2,275
(5,408 )
(9,304 )
1,535
6,324
54,343
(7,162 )
1,505
2,236
(4,275 )
(2,530 )
(769 )
496
(1,382 )
(3,020 )
(3,938 )
4,740
(24,091 )
(36,641 )
—
178,644
282
142,285
60,878
(203,029 )
(917 )
284
(363 )
(143,147 )
81,508
2,761
13,715
(52,221 )
(852 )
9,681
171,824
(4,723 )
397
867
(811 )
(2,882 )
(679 )
(2,772 )
(8,066 )
(10,432 )
(3,175 )
1,900
13,362
(40,814 )
(200 )
50,000
(7,621 )
1,365
39,811
(114,910 )
(2,414 )
399
(455 )
(77,569 )
(24,953 )
61,025
36,072
$
(62,842 )
123,867
61,025 $
38,410
419
9,476
$
$
$
24,895 $
487 $
36,262 $
82,847
3,126
6,816
5,665
(2,357 )
11,379
—
78
(950 )
4,888
10,545
(1,865 )
(56 )
7,861
(3,857 )
10,742
(8,911 )
(9,668 )
132,871
(17,149 )
(10,000 )
—
(6,322 )
(33,471 )
195,000
(271,033 )
(1,326 )
471
(1,486 )
(78,374 )
21,026
102,841
123,867
32,767
404
47,612
2,919
$
6,286 $
4,309
65,481
—
—
196
—
$
$
$
$
$
— $
15,122 $
3,260 $
1,121 $
— $
—
15,122
21,964
439
(1,887 )
$
$
$
$
$
$
$
$
$
$
See accompanying notes to these consolidated financial statements.
84
MESA AIR GROUP, INC.
Notes to Consolidated Financial Statements
1.
Organization and Operations
The Company
Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa", the "Company", "we", "our", or "us") is the holding company of
Mesa Airlines, a regional air carrier providing scheduled passenger service to 86 cities in 36 states, the District of Columbia, Canada, Cuba,
and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. Under the United CPA and DHL FSA, Mesa
operated or maintained as operational spares a fleet of 120 aircraft with approximately 296 daily departures and 2,303 employees as of
September 30, 2023. Mesa’s fleet were conducted under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services
Agreement (“FSA”), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either United
Express or DHL Express flights pursuant to the terms of the CPA entered into United Airlines, Inc. (“United”) and FSA with DHL Network
Operations (USA), Inc. (“DHL”) (each, our “major partner”). Prior to the wind-down and termination of the Company's CPA with American
Airlines, Inc. ("American") on April 3, 2023, Mesa also operated flights as American Eagle. All of the Company’s consolidated contract
revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from operations associated with the
American CPA prior to April 3, 2023, the United CPA, FSA, and leases of aircraft to a third party.
The United CPA involves a revenue-guarantee arrangement whereby United pays fixed-fees for each aircraft under contract,
departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi
time), and reimbursement of certain direct operating expenses in exchange for providing flight services. United also pays certain expenses
directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of the CPA, United controls route selection, pricing,
and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we
receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses
including fueling and airport fees are paid directly by DHL.
Impact of Pilot Shortage and Attrition
During our fiscal year ended September 30, 2023, the severity of the pilot shortage and attrition and increasing costs associated with
pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. These conditions and
events raised substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements
are issued. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring
at an accelerated rate to backfill the thousands of pilots whom they offered early retirements to at the beginning of the pandemic. These
airlines now seek to increase their capacity to meet the growing demand for air travel as the global pandemic has moderated. A primary
source of pilots for the major US passenger and cargo carriers are the US regional airlines. As a result of the pilot shortage and attrition, the
Company has increased overall hourly pay of nearly 118% for captains and 172% for new-hire first officers.
As a result of pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational
shortfalls under our CPAs. During the twelve months ended September 30, 2023, these challenges resulted in a negative impact on the
Company’s financial results highlighted by cash flows used in operations of $24.1 million and net loss of $120.1 million including a non-cash
impairment charge of $54.3 million related to the Company designating 14 CRJ-900 aircraft as held for sale and our customer relationship
intangible asset. These conditions and events raised substantial doubt about our ability to continue to fund our operations and meet our debt
obligations over the next twelve months.
To address such concerns, management developed and implemented several material changes to our business designed to ensure
the Company could continue to fund its operations and meet its debt
85
obligations over the next twelve months. The Company implemented the following measures during the year ended September 30, 2023, and
through the date of the issuance of the financial statements.
•
•
•
•
•
•
We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. We
entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related engines. One
agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total of
$18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these
transactions expected to be approximately $(12.1) million.
We entered into an agreement to sell 11 CRJ-900 aircraft to a third party. The Company has closed the sale of seven of the
aircraft which generated $21.0 million in gross proceeds and approximately $1.5 million in net proceeds after partial debt
reduction on the UST Loan. Subsequent to September 30, 2023, we closed the sale of the remaining four CRJ-900 aircraft to
the third party for gross proceeds of $12.0 million. Net proceeds from the sale of all four aircraft was $6.5 million after partial
debt reduction of our UST Loan.
We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven
CRJ-900 aircraft which began January 2023 through December 2024, providing approximately $14.0 million of liquidity.
Additionally, the junior noteholder, MHIRJ, agreed to forgive approximately $5.0 million in principal contingent upon the
repayment of $4.2 million in principal by December 31, 2023.
We entered into an agreement to sell seven surplus CRJ-900 aircraft to American. The Company has closed the sale of three of
the aircraft which generated approximately $29.7 million in gross proceeds and approximately $2.4 million in net proceeds after
partial debt reduction. Subsequent to September 30, 2023, the Company closed the sale of the remaining four CRJ-900 aircraft
to American for gross proceeds of $41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the
retirement of the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ
for a total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note.
We established and drew upon a new line of credit with United totaling $25.5 million. The United line of credit contains an
additional deemed prepayment of $15 million with potential forgiveness upon the achievement of a certain number of block
hours flown as well as maintaining a 99.3% controllable completion factor ("CCF") over any rolling four-month period from April
2023 through December 2024. As of November 2023, the foregoing milestones have been achieved for such rolling four-month
period. As a result, $9 million of the $15 million will be deemed prepaid one business day following the repayment of the
Effective Date Bridge Loan discussed elsewhere herein. We consider it likely that we will achieve additional forgiveness in fiscal
year 2024. Subsequently, this facility was amended to permit the Company to re-draw approximately $7.9 million of the Effective
Date Bridge Loan previously repaid and increased the amount of Revolving Commitments from $30.7 million to $50.7 million.
See Note 10 for a discussion of the line of credit and amount drawn as well as discussion on the deemed prepayment.
On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United
CPA and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA
Amendments"), respectively. The January 2024 United CPA Amendments provide additional liquidity and certain other
amendments described below
o
o
o
Increased CPA rates, retroactive to October 1, 2023 through December 31, 2024, which are projected to generate
approximately $63.5 million in incremental revenue over the next twelve months.
Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the
United CPA) from the United CPA.
Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as
defined in the United CPA) to June 30, 2024.
86
•
•
•
•
•
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit
and Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension
United and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively,
the "January 2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for
the following:
o
o
o
o
o
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from
the sale, assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital
stock of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to
certain conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30,
2023, and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter
ending March 31, 2024.
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for
borrowings under the Credit Agreement.
Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such
engines as collateral for the United credit facility for a specified period of time.
On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines
and related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and
provide additional liquidity to fund operations and current debt obligations as they come due. The transaction is expected to
close by the end of March 2024.
Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23
engines for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close
by the end of December 2024.
In addition to already executed agreements to sell aircraft, the Company is actively seeking arrangements to sell other surplus
assets primarily related to the CRJ fleet including aircraft, engines, and spare parts to reduce debt and optimize operations.
We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level
of flight activity.
The Company believes the plans and initiatives outlined above have effectively alleviated the substantial doubt and will allow the
Company to meet its cash obligations for the next twelve months following the issuance of its financial statements. The forecast of
undiscounted cash flows prepared to determine if the Company has the ability to meet its cash obligations over the next twelve months was
prepared with significant judgment and estimates of future cash flows based on projections of CPA and FSA block hours, maintenance
events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected.
As of September 30, 2023, the Company has $163.6 million of principal maturity payments on long-term debt due within the next
twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity
created from the additional measures identified above. If our plans are not realized, we intend to explore additional opportunities to create
liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months. The Company
continues to monitor covenant compliance with its lenders as any
87
noncompliance could have a material impact on the Company’s financial position, cash flows and results of operations.
Correction of Immaterial Misstatement
Subsequent to the issuance of the Company's 2022 consolidated financial statements, management determined that there was an
error regarding the classification of a $4.7 million gain on sale of assets for the year ended September 30, 2022. The gain on sale of assets
was previously reported as a non-operating gain when it should have been reported as part of operations. We have now reported the prior
year gain on sale of assets as part of operations, consistent with the current period classification. The error had no effect on the Company's
previously reported net income, earnings per share, or net cash flows from operating, investing, or financing activities for the year ended
September 30, 2022. Management evaluated the error considering both quantitative and qualitative factors and concluded it was immaterial
to previously issued financial statements.
Correction of Error (Unaudited)
Subsequent to the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, and in connection with the
preparation of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, the Company identified an approximately
$30.6 million balance sheet error associated with the classification of debt on the condensed consolidated balance sheet as of June 30,
2023. The error was due to certain covenant requirements that were not met under our Second Amended and Restated Credit and Guaranty
Agreement dated as of June 30, 2022, with United. The debt covenants consisted of the 12-month rolling consolidated interest and rental
coverage ratio covenants for the quarter ended June 30, 2023. As a result, approximately $30.6 million should have been classified as
current portion of long-term debt and finance leases on the condensed consolidated balance sheet as opposed to long-term debt and finance
leases, excluding current portion. In addition, the Company incorrectly stated in the going concern disclosures within the footnotes to our
financial statements included in the 3rd Quarter 10-Q that, as of June 30, 2023, the Company was in compliance with all of its debt
covenants.
Except as discussed above, the error had no impact on the Company's condensed consolidated balance sheet as of June 30, 2023.
The error also had no impact on the Company's condensed consolidated statements of operations, stockholders' equity, and cash flows for
the three-month and nine-month periods ended June 30, 2023. The following table shows the original reported balances and restated
balances reflecting the correction.
Current liabilities:
Current portion of long-term debt and finance leases
Total current liabilities
Noncurrent liabilities:
Long-term debt and finance leases, excluding current portion
Total noncurrent liabilities
Total liabilities
American Capacity Purchase Agreement
June 30, 2023 (Unaudited)
Reported
Adjustment
Restated
$
$
124,341 $
222,114
30,630 $
30,630
154,971
252,744
441,941 $
511,990
734,104
(30,630 ) $
(30,630 )
—
411,311
481,360
734,104
In December 2022, we entered into Amendment No. 11 (the “American Amendment”) to the American CPA. The American
Amendment provided for the termination and wind-down of the American CPA by April 3, 2023 (the “Wind-down Period”), at which time all
Covered Aircraft (as defined in the American CPA) were removed from the American CPA. In March 2023, we began to transition aircraft
operated under the American CPA to the United CPA. The American CPA was previously set to expire by its terms on December 31, 2025.
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Under the terms of the American Amendment, during the Wind-down Period (i) we continued to receive a fixed minimum monthly
amount per aircraft covered by the American CPA, plus additional amounts based on the number of flights and block hours flown during each
month, subject to adjustment based on the Company’s controllable completion rate and certain other factors, and (ii) American agreed not to
exercise certain termination or withdrawal rights under the American CPA if we failed to meet certain operational performance targets for the
three consecutive month period ending January 31, 2023.
No Material Breach (as defined in the American CPA) occurred that would have required the payment of liquidated damages. Pursuant
to the American Amendment, as no material breaches occurred during the wind-down period, American agreed to waive Mesa’s failure to
meet certain past operational performance targets and other requirements, which triggered termination and withdrawal rights for American
pursuant to the terms of American CPA. All CCF targets were met during the Wind-down Period, and there were no penalties associated with
that performance metric. The parties executed a written mutual release of all claims and acknowledgment that no Material Breaches
occurred.
United Capacity Purchase Agreement
Under the United CPA, we have the ability to fly up to 80 aircraft for United. The aircraft can be a mix of any number of E-175 or CRJ-
900 aircraft so long as the number of aircraft operating at any given time does not exceed 80. As of September 30, 2023 we operated 54 E-
175 and 26 CRJ-900 aircraft under our Third Amended and Restated CPA with United dated December 27, 2022, which amended and
restated the Second Amended and Restated CPA dated November 4, 2020 (as amended, the “United CPA” or the "Amended and Restated
United CPA"). Under the United CPA, United owns 42 of our 60 E-175 aircraft. The E-175 aircraft owned by United and leased to us have
terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. Additionally, United leased 20 E-
175LL aircraft to us at nominal amounts during the year ended September 30, 2023. The E-175LL aircraft were removed from the CPA
beginning in February 2023, with the last E-175LL aircraft being removed in April 2023.
In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract
plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys.
United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other
expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
United reimburses us on a pass-through basis for certain costs related to heavy airframe and engine maintenance, landing gear,
auxiliary power units ("APUs") and component maintenance for the aircraft owned by United. Our United CPA permits United, subject to
certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft
from service, by giving us notice of 90 days or more. If United elects to terminate our United CPA in its entirety or permanently remove select
aircraft from service, we are permitted to return any of the affected aircraft leased from United at no cost to us. In addition, if United removes
any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated, at our option, to assume the aircraft
ownership and associated debt with respect to such aircraft through the end of the term of the United CPA.
On December 27, 2022, we entered into the Amended and Restated United CPA, which provides, among other things, for the following
amended terms:
•
•
•
The addition of up to 38 CRJ-900 aircraft to be operated by the Company on behalf of United under the Amended and Restated
United CPA, dependent on the number of E-175 aircraft the Company is operating. As of September 30, 2023, we operated 24
CRJ-900 aircraft under our Amended and Restated United CPA;
An increase in rates to cover the Company’s pilot pay increases instituted in September 2022, effective through September 2025;
United to be responsible for all costs associated with converting the CRJ-900 aircraft for operation in United’s network;
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•
•
•
•
Terms providing that United may remove the CRJ-900 aircraft from the scope of the United CPA, subject to certain notice and
other requirements;
United’s existing utilization waiver for the Company’s operation of E-175LL Covered Aircraft (as defined in the United CPA) to be
extended to December 31, 2023;
The extension of existing monthly operational performance incentives; and
An agreement by the Company to not enter into new regional air carrier service agreements, excluding the Company’s existing
agreement with DHL, and provided that this restriction shall not apply from and after the earlier to occur of (i) January 1, 2026 and
(ii) the Company's satisfaction of certain Performance Milestones (as defined in the Amended and Restated United CPA).
Additionally, in January 2023, in consideration for entering in the Amended and Restated United CPA and providing the revolving line
of credit, discussed in Note 10, the Company (i) granted United the right to designate one individual to the Company's board of directors (the
"United Designee"), which occurred effective May 2, 2023 with the appointment of Jonathan Ireland and (ii) issued to United 4,042,061
shares of the Company’s common stock equal to approximately 10% of the Company’s issued and outstanding capital stock on such date
(the "United Shares"). United's board designee rights will terminate at such time as United's equity ownership in the Company falls below five
percent (5%) of the Company's issued and outstanding stock.
United was also granted pre-emptive rights relating to the issuance of any equity securities by the Company and certain registration
rights, set forth in a definitive registration rights agreement with United, granting United customary demand registration rights in respect of
publicly registered offerings of the Company, subject to usual and customary exceptions and limitations. See also Note 18 for a discussion
regarding the amendment to the Company's bylaws as it relates to the Amended and Restated United CPA.
Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine
years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement.
During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and terminated the leases on the 18 CRJ-700
aircraft, which have all subsequently been sold.
Our United CPA is subject to early termination prior to its expiration in various circumstances including:
•
•
•
•
•
•
If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain
circumstances;
If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United,
subject to 30 days' notice and cure rights;
If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the
agreement;
If we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling
another air carrier;
United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in
its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more; and
If United elects to terminate our United CPA in its entirety or permanently remove aircraft from service, we are permitted to return
any of the affected E-175 aircraft leased from United at no cost to us.
DHL Flight Services Agreement
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On December 20, 2019, we entered into a FSA with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate four Boeing
737 aircraft to provide cargo air transportation services as of September 30, 2023. In exchange for providing cargo flight services, we receive
a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty
based on timeliness and completion performance. Ground support expenses including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and one 737-800F and subleases them to us at nominal amounts. DHL
reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and
overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs.
Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid
directly to suppliers by DHL or otherwise reimbursed if incurred by us. A third Boeing 737-400F aircraft is leased to us under an operating
lease by a third party.
The DHL FSA expires five years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL
has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.
Our DHL FSA is subject to the following termination rights prior to its expiration:
•
•
•
•
•
•
•
•
If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to
certain notice and cure rights;
If either party is declared bankrupt or insolvent;
If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days;
At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days' written notice.
If we fail to comply with performance standards for three consecutive measurement periods.
If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a
specified number of days;
Upon a change in control or ownership of the Company; and
DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate
services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned operating subsidiaries. Any
reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles
as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting
Standards Board ("FASB"). All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going
concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company
generated a net loss of $120.1 million and cash flow used in operations of $24.1 million for the year ended September 30, 2023. As of
September 30, 2023,
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the Company had a working capital deficit of $129.3 million, an accumulated deficit of $71.1 million, and cash and cash equivalents of $32.9
million.
The Company is evaluating strategies to obtain the required additional funding for future operations. These strategies may include, but
are not limited to, obtaining equity financing, issuing debt, entering into other financing arrangements, restructuring of operations to grow
revenues and decrease expenses, or selling the aircraft held for sale and our equity investments.
Use of Estimates
The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In
consideration of ASC 280, "Segment Reporting," we are not organized around specific services or geographic regions. We currently
operate in one service line providing scheduled flying services in accordance with our CPAs and FSAs.
While we operate under a CPA and a FSA, we do not manage our business based on any performance measure at the individual
contract level. As of September 30, 2023, our chief operating decision maker ("CODM") was the Chief Executive Officer. Our CODM uses
consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and
performance to our Board of Directors. Our CODM bases all significant decisions regarding the allocation of our resources on a consolidated
basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are
organized and operated as one operating and reportable segment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash
equivalents.
Restricted Cash
Restricted cash primarily includes deposits in trust accounts to collateralize letters of credit and to fund workers' compensation claims,
landing fees, and other business needs. Restricted cash is stated at cost, which approximates fair value.
The Company has an agreement with a financial institution for a $6.0 million letter of credit facility to issue letters of credit for landing
fees, workers' compensation insurance, and other business needs. Pursuant to such agreement, $3.1 million and $3.3 million of outstanding
letters of credit are required to be collateralized by amounts on deposit as of September 30, 2023 and 2022, respectively, which are classified
as restricted cash.
Expendable Parts and Supplies
Expendable parts and supplies are stated at cost, less an allowance for obsolescence. The Company provides an allowance for
obsolescence for such parts and supplies over the useful life of its aircraft after considering the useful life of each aircraft fleet, the estimated
cost of expendable parts expected to be on hand at the end of the useful life, and the estimated salvage value of the parts. This allowance
for
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expendable parts account was $4.1 million and $3.8 million as of September 30, 2023 and 2022, respectively.
Property and Equipment
Property and equipment are stated at cost, net of manufacturer incentives, and depreciated over their estimated useful lives to their
estimated salvage values, which are 20% for aircraft and rotable spare parts, using the straight-line method.
Estimated useful lives of the various classifications of property and equipment are as follows:
Property and Equipment
Buildings
Aircraft
Flight equipment
Equipment
Furniture and fixtures
Vehicles
Rotable spare parts
Leasehold improvements
Estimated Useful Life
30 years
25 years from the manufacture date
7-20 years
5-9 years
3-5 years
5 years
Life of the aircraft or term of the lease, whichever is less
Life of the aircraft or term of the lease, whichever is less
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the
related carrying amount may be impaired. The Company records an impairment loss if (i) the undiscounted future cash flows are found to be
less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If an
impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value.
To determine whether impairments exist for aircraft and other related assets used in operations, we group assets at the CPA and FSA
level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity
purchase or FSA, block hours, maintenance events, labor costs and other relevant factors. If an asset group is impaired, the impairment loss
recognized is the amount by which the asset group's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using
published sources, appraisals and bids received from third parties, as available. Due to operating losses and the transition of operations from
American to United, we evaluated our United fleet as of September 30, 2023, and determined that future cash flows from the operation of our
fleet through the respective remaining useful life exceeded the carrying value of the fleet. As such, no impairment charges were recorded to
our fleet. The Company recognized impairment charges of zero, 109.7 million, and zero on property and equipment and other long-lived
assets for the years ended September 30, 2023, 2022, and 2021 respectively.
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Assets Held for Sale
We classify assets as held for sale when (i) our management approves and commits to a formal plan of sale that is probable of being
completed within one year; (ii) the asset is available for immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets; (iii) an active program to locate a buyer has been initiated; (iv) the asset is being actively marketed for
sale at a price that is reasonable in relation to its current fair value; and (v) actions required to complete the plan indicate that it is unlikely
that significant changes to the plan will be made or the plan will be withdrawn. Assets designated as held for sale are recorded at the lower of
their current carrying value or their fair market value, less costs to sell, beginning in the period in which the assets meet the criteria to be
classified as held for sale. If the market value, less costs to sell, is lower than the current carrying value, an impairment loss is recorded on
the asset designated as held for sale. The Company recognized impairment charges of $50.6 million, $62.1 million, and zero on assets
designated as held for sale for the years ended September 30, 2023, 2022, and 2021, respectively. See Note 7 – “Assets Held for Sale” for
further discussion of our assets classified as held for sale as of September 30, 2023
Fair Value Measurements
The Company accounts for assets and liabilities in accordance with accounting standards that define fair value and establish a
consistent framework for measuring fair value on either a recurring or a nonrecurring basis. Fair value is an exit price representing the
amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an
asset or liability.
Accounting standards include disclosure requirements relating to the fair values used for certain financial instruments and establish a
fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair
value are observable in the market. Each fair value measurement is reported in one of three levels:
•
•
•
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 – Unobservable inputs in which there is little or no market data, requiring an entity to develop its own assumptions.
Debt Financing Costs
Debt financing costs consist of payments made to issue debt related to the purchase of aircraft, flight equipment, and certain flight
equipment maintenance costs. The Company defers the costs and amortizes them to interest expense over the term of the debt agreement.
Debt financing costs related to a recognized debt liability are presented as a direct deduction from the carrying amount of the related long-
term debt on the consolidated balance sheet. Debt financing costs with no related recognized debt liability are presented as assets, with the
current portion included in prepaid expenses and other current assets and the noncurrent portion included in other assets on the
consolidated balance sheet.
Intangible Assets
Customer relationships are amortized over their estimated useful lives. In accordance with ASC 360, Property, Plant, and Equipment,
an intangible asset with a finite life that is being amortized is reviewed for impairment whenever events or changes in circumstances indicate
that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found
to be less than the carrying amount of the asset and if the carrying amount of the asset exceeds fair value. If an impairment loss has
occurred, a charge is recorded to reduce the carrying amount of the asset to its
94
estimated fair value. The Company recognized an impairment loss of $3.7 million, $1.9 million, and zero on intangible assets for the year
ended September 30, 2023, 2022, and 2021 respectively.
Other Assets
Other noncurrent assets primarily consist of the non-current portion of lease incentives related to aircraft which Mesa leases to third
parties and investments in equity securities.
Lease incentives represent amounts paid or payable by Mesa to the lessee and are amortized as a reduction of lease revenue over
the term of the lease. The current portion of the lease incentive assets is included in prepaid expenses and other current assets, and the non-
current portion is included in other assets on the consolidated balance sheet.
Investments in equity securities with readily determinable fair values are adjusted to reflect the market value of the investments each
reporting period, with corresponding gains and losses reflected in the statement of operations. Investments in equity securities without readily
determinable values are measured at cost less impairment, if any, and are adjusted when there are observable prices of similar or identical
investments from the same issuer.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company records deferred tax assets for the value of benefits expected to be realized from the utilization of state and federal net
operating loss carryforwards. The Company periodically reviews these assets to determine the likelihood of realization. To the extent the
Company believes some portion of the benefit may not be realizable based on the available sources of income, an estimate of the unrealized
position is made, and a valuation allowance is recorded. The Company and its consolidated subsidiaries file a consolidated federal income
tax return.
Other Noncurrent Liabilities
Other noncurrent liabilities primarily consist of the non-current portion of lease incentive obligations and deposits related to the aircraft
which Mesa leases to third parties and vendor credit liabilities for future purchases of electric aircraft.
Revenue Recognition
The Company recognizes revenue when the service is provided under its CPAs and FSAs. Under these agreements, the Company’s
major partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of
departures and block hours or flight hours flown. The agreements also include reimbursement of certain direct costs incurred by the
Company in performing flight services. These costs, known as "pass-through costs," may include passenger liability and hull insurance as
well as aircraft property taxes. Additionally, for the E-175 aircraft owned by United, United reimburses the Company for heavy airframe and
engine maintenance, landing gear maintenance, APU maintenance, and component maintenance. The Company also receives
compensation under its agreements for heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all aircraft in scheduled
service other than the E-175 aircraft owned by United. The contracts also include incentives and penalties based on certain operational
benchmarks. The Company is eligible to receive incentive compensation upon the achievement of certain performance criteria defined in the
agreements. At the end of each period during the term of an agreement, the Company calculates the incentives or penalties
95
achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable
constraint guidance in accordance ASC 606. All revenue recognized under these contracts is presented as the gross amount billed to the
major partners. See Note 3 - “Contract Revenue and Pass-through and Other Revenue” for further information.
The Company has committed to perform various activities that can be generally classified into in-flight services and maintenance
services. When evaluating these services, the Company determined that the nature of its promise is to provide a single integrated service,
flight services, because its contracts require integration and assumption of risk associated with both services to effectively deliver and
provide the flights as scheduled over the contract term. Therefore, the in-flight services and maintenance services are inputs to that
combined integrated flight service. Both the services occur over the term of the agreement and the performance of maintenance services
significantly effects the utility of the in-flight services. The Company's individual flights flown under the CPAs and FSAs are deemed to be
distinct and the flight service promised in the agreements represents a series of services that should be accounted for as a single
performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore, revenue is
recognized when each flight is completed.
In allocating the transaction price, variable payments (i.e., billings based on departures and block hours or flight hours flown, pass-
through costs, etc.) that relate specifically to the Company's efforts in performing flight services are recognized in the period in which the
individual flight is completed. The Company has concluded that allocating the variability directly to the individual flights results in an overall
allocation meeting the objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the
Company to its customers.
A portion of the Company's compensation under its CPAs with American and United is designed to reimburse the Company for certain
aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest expense or
aircraft lease expense costs while the aircraft is under contract. The Company has concluded that a component of its revenue under these
agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a
stated period-of-time. The lease revenue associated with the Company's CPAs is accounted for as an operating lease and is reflected as
contract revenue on the Company's consolidated statements of operations and comprehensive (loss) income.
The Company recognized $144.7 million, $158.4 million, and $170.2 million of lease revenue for the year ended September 30, 2023,
2022, and 2021, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated
statements of operations and comprehensive (loss) income because the use of the aircraft is not a separate activity of the total service
provided under our CPAs.
The Company's CPAs and FSAs are renewable periodically and contain provisions pursuant to which the parties could terminate their
respective agreements, or withdraw aircraft under their respective agreements, subject to certain conditions as described in Note 1. The
agreements also contain terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The
agreements are amended from time to time to change, add, or delete terms of the agreements.
The Company's revenues could be impacted by a number of factors, including amendment or termination of its agreements with its
major partners, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under
applicable agreements, and settlement of reimbursement disputes with the Company's major partners. In the event contracted rates are not
finalized at a quarterly or annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has
an enforceable right, it estimates the amount the Company expects to be entitled to that is subject to the variable constraint guidance within
ASC 606.
The Company's agreements contain an option that allows its major partners to assume the contractual responsibility for procuring and
providing the fuel necessary to operate the flights that it operates for them. All of the Company's major partners have exercised this option.
Accordingly, the Company does not record
96
an expense or revenue for fuel and related fueling costs for flying under its CPAs or FSA. In addition, the Company's major partners also
provide, at no cost to the Company, certain ground handling and customer service functions, as well as airport-related facilities and gates at
their hubs and other cities. Services and facilities provided by the Company's major partners at no cost are presented net in its consolidated
financial statements; hence, no amounts are recorded as revenue or operating expense for these items.
Contract Liabilities
Contract liabilities consist of deferred credits representing upfront payments received from major partners related to aircraft
modifications associated with CPAs and pilot training. The deferred credits are recognized over time depicting the pattern of transfer of the
related services over the term of the CPAs.
Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the consolidated
balance sheets, respectively. The Company's total current and non-current deferred credit balances at September 30, 2023 and September
30, 2022 were $5.1 million and $3.9 million, respectively. The Company recognized $1.7 million, $0.9 million, and $2.4 million of the deferred
credits within contract revenue in the consolidated statements of operations and comprehensive (loss) income during the year ended
September 30, 2023, 2022, and 2021, respectively.
Contract Assets
The Company recognizes assets from the incremental costs incurred to obtain contracts with major partners including aircraft painting,
aircraft reconfiguration, and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services
in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the consolidated balance sheets. The
Company's contract assets balance at September 30, 2023 and September 30, 2022 was approximately $8.8 million and zero, respectively.
Contract cost amortization was approximately $1.0 million, zero, and $2.0 million for the year ended September 30, 2023, 2022, and 2021,
respectively.
Maintenance Expense
The Company operates under an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled
inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred.
The Company accounts for heavy maintenance and major overhaul costs on its owned E-175 fleet under the deferral method whereby
the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset
or the next scheduled heavy maintenance event. Amortization of heavy maintenance and major overhaul costs charged to depreciation and
amortization expense was approximately $3.1 million, $1.9 million, and $0.4 million for the fiscal year ended September 30, 2023, 2022, and
2021, respectively. At September 30, 2023 and September 30, 2022, the Company had a deferred heavy maintenance balance, net of
accumulated amortization, of approximately $8.0 and $9.7 million, respectively. The Company accounts for heavy maintenance and major
overhaul costs for all other fleets under the direct expense method whereby costs are expensed to maintenance expense as incurred, except
for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on
a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and
materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment
terms. Our maintenance policy is determined by fleet when major maintenance is incurred.
Under the Company's aircraft operating lease agreements and FAA operating regulations, it is obligated to perform all required
maintenance activities on its fleet, including component repairs, scheduled airframe checks and major engine restoration events. The
Company estimates the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated
maintenance
97
intervals, and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on
estimates, which can be impacted by changes in utilization of its aircraft, changes in government regulations and suggested manufacturer
maintenance intervals. Major maintenance events consist of overhauls to major components.
Engine overhaul expense totaled approximately $32.4 million, $23.6 million, and $31.4 million for the years ended September 30,
2023, 2022, and 2021, respectively, of which approximately $31.9 million, $21.7 million, and $16.8 million, respectively, was pass-through
expense. Airframe check expense totaled approximately $23.4 million, $22.1 million, and $51.1 million for the years ended September 30,
2023, 2022, and 2021, respectively, of which approximately $16.9 million, $3.2 million, and $20.5 million, respectively, was pass-through
expense.
Pursuant to the United CPA, United reimburses the Company for heavy maintenance on certain E-175 aircraft. Those reimbursements
are included in pass-through and other revenue. See Note 1 - "Organization and Operations" for further information.
Leases
We determine if an arrangement is a lease at inception. As a lessee, we have lease agreements with lease and non-lease components
and have elected to account for such components as a single lease component. Our operating lease activities are recorded in operating
lease right-of-use assets, current maturities of operating leases, and noncurrent operating lease liabilities in the consolidated balance sheets.
Finance leases are reflected in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and
finance leases, excluding current portion in the consolidated balance sheets.
Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease
commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the
calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the
period incurred. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the
information available at the lease commencement date in determining the present value of lease payments. We use the implicit rate when
readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise
that option. Operating lease costs are recognized on a straight-line basis over the lease term, while finance leases result in a front-loaded
expense pattern.
To determine whether impairments exist for aircraft and other related assets used in operations, we group assets, including ROU
assets, at the CPA or FSA level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based
on projections of CPA or FSA, block hours, maintenance events, labor costs and other relevant factors. As all of our aircraft leases besides
one with an insignificant value on our books are leased to us from United or DHL at nominal amounts and not recorded on our books, we did
not assess leased aircraft for impairment. The Company recorded impairment losses of zero, $10.5 million, and zero for the years ended
September 30, 2023, 2022, and 2021, respectively.
As a lessee, we have elected a short-term lease practical expedient on all classes of underlying assets, permitting us to not apply the
recognition requirements of this standard to leases with terms of 12 months or less.
Our CPAs identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the
compensation under our CPAs are designed to reimburse the Company, as lessor, for certain aircraft ownership costs of these aircraft. We
account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in
the contract
98
between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing
our estimate of the stand-alone selling prices.
As discussed in Note 1, we lease, at nominal rates, certain aircraft from United and DHL under our United CPA and DHL FSA, which
are excluded from operating lease assets and liabilities as they do not represent embedded leases under ASC 842. Other than nominal
leases with our major partners, approximately 1% of our aircraft are leased from third parties. Our aircraft classified as operating leases
results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners
decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these
losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges.
Additionally, any remaining ROU assets and lease liabilities will be written off.
3.
Contract Revenue and Pass-through and Other Revenue
The Company recognizes contract revenue when the service is provided under its CPA and FSA. Under the CPA and FSA, our major
partners generally pay for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from
takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight
completion, on-time performance, and other operating metrics. The Company’s performance obligation is met when each flight is completed,
and revenue is recognized and reflected in contract revenue.
The Company recognizes pass-through revenue when the service is provided under its CPA and FSA. Pass-through revenue
represents reimbursements for certain direct expenses incurred including passenger liability and hull insurance, property taxes, other direct
costs defined within the agreements, and major maintenance on aircraft leased at nominal rates. The Company’s performance obligation is
met when each flight is completed or as the maintenance services are performed, and revenue is recognized and reflected in pass-through
and other revenue.
The Company records deferred revenue when cash payments are received or are due from our major partners in advance of the
Company’s performance, including amounts that are refundable. The Company recognized approximately $3.0 million of previously deferred
revenue, and deferred $10.4 million of revenue during the years ended September 30, 2023 and 2022, respectively, which was billed to and
paid by our major partners. Deferred revenue is recognized as flights are completed over the remaining contract term.
The deferred revenue balance as of September 30, 2023 represents our aggregate remaining performance obligations that will be
recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as
follows (in thousands):
Periods Ending
September 30,
Total Revenue
2024
2025
2026
2027
2028
Thereafter
Total
$
$
4,880
5,281
4,199
3,835
2,008
844
21,047
A portion of the Company's compensation under its CPA with United and formerly American is designed to reimburse the Company for
certain aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest
expense or aircraft lease expense costs while the aircraft is under contract. The Company has concluded that a component of its revenue
under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of
aircraft over a stated period-of-time. We account for the non-lease component under ASC 606 and account for the lease component under
ASC 842. We allocate the
99
consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost
basis approach representing our estimate of the stand-alone selling prices.
The lease revenue associated with the Company's CPAs is accounted for as an operating lease and is reflected as contract revenue
on the Company's consolidated statements of operations and comprehensive (loss) income. The Company recognized approximately $144.7
million, $158.4 million, and $170.2 million of lease revenue for the years ended September 30, 2023, 2022, and 2021, respectively. The
Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and
comprehensive (loss) income because the use of the aircraft is not a separate activity from the total service provided under our CPAs.
Historically, the Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease CRJ-700 aircraft. The lease
agreements were accounted for as operating leases and had a term of nine years beginning on the delivery date of each aircraft. Under the
lease agreements, GoJet paid fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft
utilization at fixed rates. Supplemental rent payments were subject to reimbursement following GoJet’s completion of qualifying maintenance
events defined in the agreements. Lease revenue for fixed monthly rent payments were recognized on a straight-line basis within contract
revenue. Lease revenue for supplemental rent was deferred and recognized within contract revenue when it was probable that amounts
received will not be reimbursed for future qualifying maintenance events over the lease term.
The Company mitigated the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can
be operated by the Company in the event of a default. Additionally, the operating leases included specified lease return condition
requirements and the Company maintains inspection rights under the leases. Lease incentive obligations for reimbursements of certain
aircraft maintenance costs are recognized as lease incentive assets and were amortized on a straight-line basis and recognized as a
reduction to lease revenue over the lease term.
4.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). This ASU provides optional
expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by
the London Interbank Offered Rate (LIBOR), or another reference rate expected to be discontinued. The U.S. Federal Reserve, in
conjunction with the Alternative Reference Rates Committee, has determined that the U.S. dollar LIBOR will be replaced by the Secured
Overnight Financing Rate (SOFR) after June 30, 2023. Optional expedients can be applied through December 31, 2024. Under the
expedient, the Company will account for amendments to agreements as if the modification was not substantial. The new carrying amounts of
debts will consist of the carrying amount of the original debt and any additional fees associated with the modified debt instrument. A new
effective yield will be established based on the new carrying amount and revised cash flows.
In June 2022, the FASB issued new guidance to clarify the fair value measurement guidance for equity securities subject to contractual
restrictions that prohibit the sale of an equity security. Further, the guidance introduces new disclosure requirements for equity securities
subject to contractual sale restrictions that are measured at fair value. The standard will be effective for annual reporting periods beginning
after December 15, 2023, including interim reporting periods within those fiscal years. We are currently evaluating the impact that the new
guidance will have on our consolidated financial statements.
100
5.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash
equivalents that are primarily held by financial institutions in the United States and accounts receivable. Amounts on deposit with a financial
institution may at times exceed federally insured limits. The Company maintains its cash accounts with high credit quality financial institutions
and, accordingly, minimal credit risk exists with respect to the financial institutions. As of September 30, 2023, the Company had $3.1 million
in restricted cash. We have an agreement with a financial institution for a letter of credit facility and to issue letters of credit for particular
airport authorities, worker's compensation insurance, property and casualty insurance and other business needs as required in certain lease
agreements. Pursuant to the terms of this agreement, $3.1 million and $3.3 million of outstanding letters of credit are required to be
collateralized by amounts on deposit as of September 30, 2023 and 2022, respectively, which are classified as restricted cash.
Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at
each respective balance sheet date. At September 30, 2023, the Company had a CPA with United and a FSA with DHL. Substantially all of
the Company's consolidated revenue for the years ended September 30, 2023, 2022, and 2021 and accounts receivable at the end of
September 30, 2023 and 2022 was derived from these agreements as well as the CPA with American which was terminated on April 3, 2023.
In certain cases, the terms of these agreements are not aligned with the lease obligations on the aircraft performing services under such
agreements.
Amounts billed by the Company under these agreements are subject to the Company's interpretation of the applicable agreement and
are subject to audit by the Company's major partners. Periodically, the Company's major partners dispute amounts billed and pay amounts
less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the
applicable audit, but also upon the financial well-being of the major partner. As such, the Company reviews amounts due based on historical
collection trends, the financial condition of major partners and current external market factors and records a reserve for amounts estimated to
be uncollectible. The allowance for doubtful accounts was not material at September 30, 2023 and 2022, respectively. If the Company's
ability to collect these receivables and the financial viability of our major partners is materially different than estimated, the Company's
estimate of the allowance could be materially impacted.
American accounted for approximately 23%, 45%, and 45% of the Company's total revenue for the years ended September 30, 2023,
2022, and 2021, respectively. United accounted for approximately 73%, 48%, and 52% of the Company's total revenue for the years ended
September 30, 2023, 2022, and 2021, respectively. A termination of the United CPA would have a material adverse effect on the Company's
business prospects, financial condition, results of operations, and cash flows.
6.
Intangible Assets
The Company includes its intangible assets of customer relationship in the asset group associated with the CRJ-900 fleet operating
under the American CPA and monitors for any indicators of impairment of the asset group. When certain conditions or changes in the
economic situation exist, the asset group may be impaired if the carrying amount of the assets is not recoverable and that carrying amount
exceeds the asset group’s fair value. Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups
during the year ended September 30, 2023 and determined that the asset group for the CRJ-900 fleet operating under the American CPA
was impaired. As a result, the Company recognized an impairment loss of $3.7 million and $1.9 million on the customer relationship related
to the CRJ-900 fleet operating under the American CPA during the year ended September 30, 2023 and 2022, respectively, which was
recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income. The Company did not record
any impairment losses related to its intangible assets during the year ended September 30, 2021.
101
Information about the intangible assets of the Company at September 30, 2023 and 2022, is as follows (in thousands):
Customer relationship
Accumulated amortization
Impairment
Net carrying value
September 30,
2023
September 30,
2022
— $
—
—
— $
43,800
(38,029 )
(1,929 )
3,842
$
Total amortization expense recognized was approximately $0.1 million, $1.0 million, and $1.2 million, for the fiscal years ended
September 30, 2023, 2022, and 2021, respectively. The Company recognized an impairment loss of $3.7 million on the customer relationship
related to the American CPA during the year ended September 30, 2023, which was recorded in asset impairment on our condensed
consolidated statements of operations and comprehensive loss. Accordingly, we expect to record amortization expense of zero for fiscal year
2024 and thereafter.
7.
Assets Held for Sale
During the year ended September 30, 2023, management disposed of our remaining CRJ-200 aircraft and our remaining CRJ-700
aircraft besides two which are leased to a third party. Additionally, management continued our plan to sell certain of our CRJ-900 aircraft, and
determined that 14 CRJ-900 aircraft met the criteria to be classified as assets held for sale during the year ended September 30, 2023. We
have a total of 15 aircraft held for sale as of September 30, 2023, all of which are CRJ-900 aircraft. These aircraft are presented separately in
our condensed consolidated balance sheet at the lower of their current carrying value or their fair market value less costs to sell. The fair
values are based upon observable and unobservable inputs, including recent purchase offers and market trends and conditions. The
assumptions used to determine the fair value of our assets held for sale, excluding agreed upon purchase offers, are subject to inherent
uncertainty and could produce a wide range of outcomes which we will continue to monitor in future periods as new information becomes
available. Prior to the ultimate sale of the assets, subsequent changes in our estimate of the fair value of our assets held for sale will be
recorded as a gain or loss with a corresponding adjustment to the assets’ carrying value.
As of September 30, 2022, the Company had eight CRJ-700 classified as held for sale. During the year ended September 30, 2023,
the Company closed the sale of all eight CRJ-700 aircraft for gross proceeds of $40.0 million. Net proceeds from the sale after retirement of
debt was $8.0 million.
As of September 30, 2022, the Company had 11 CRJ-900 aircraft and one CRJ-200 aircraft classified as held for sale. During the year
ended September 30, 2023, the Company closed the sale of seven of the CRJ-900 aircraft to a third party for gross proceeds of $21.0
million. Net proceeds from the sale after partial debt reduction was $1.5 million. The sale of the remaining four CRJ-900 aircraft is expected
to close in January 2023 and generate another $12.0 million in gross proceeds. Additionally, our CRJ-200 aircraft classified as held for sale
as of September 30, 2022 was included in this deal. As the aircraft was fully depreciated, there was no loss recorded on the disposal.
During the year ended September 30, 2023, the Company entered into an agreement to sell seven surplus CRJ-900 aircraft to
American. As of September 30, 2023, the Company has closed the sale of three of the aircraft which generated approximately $29.7 million
in gross proceeds and approximately $2.4 million in net proceeds after partial debt reduction. Subsequent to September 30, 2023, the
Company closed the sale of the remaining four CRJ-900 aircraft to American for gross proceeds of $41.5 million. Net proceeds from the sale
of all four aircraft was $5.7 million after the retirement of the EDC Loan and MHIRJ junior note.
During the year ended September 30, 2023, the Company closed the sale of seven CRJ-900 aircraft to a third party. The proceeds of
$21 million from the sale of the CRJ-900 aircraft were used to pay down the Company's obligations under its UST Loan.
102
During the year ended September 30, 2023, the Company designated seven of our CRJ-900 aircraft under the agreement with
RASPRO Trust as held for sale.
Subsequent to September 30, 2023, we entered into an agreement with a third party to sell 12 surplus engines. The gross proceeds of
$56.0 million will be used to retire approximately $40.0 million in associated debt and provide additional liquidity to fund operations and
current debt obligations as they come due. The transaction is expected to close by the end of March 2024.
As of September 30, 2023, the Company has 15 CRJ-900 aircraft that are classified as assets held for sale with a net book value of
$69.7 million, $57.7 million of which is classified as current assets on our condensed consolidated balance sheet and $12.0 million of which
is classified as noncurrent assets on our condensed consolidated balance sheet.
103
8.
Balance Sheet Information
Certain significant amounts included in the Company's consolidated balance sheets as of September 30, 2023 and 2022, consisted of
the following (in thousands):
Expendable parts and supplies, net:
Expendable parts and supplies
Less: expendable parts warranty
Less: obsolescence
Prepaid expenses and other current assets:
Prepaid aviation insurance
Prepaid vendors
Prepaid other insurance
Lease incentives
Prepaid fuel and other
Property and equipment, net:
Aircraft and other flight equipment
Other equipment
Total property and equipment
Less: accumulated depreciation
Other assets:
Investments in equity securities
Lease incentives
Contract asset
Other
Other accrued expenses:
Accrued property taxes
Accrued interest
Accrued vacation
Accrued lodging
Accrued maintenance
Accrued liability on government payroll
program
Accrued simulator costs
Accrued employee benefits
Accrued fleet operating expense
Short term lease incentive liability
Other
Other noncurrent liabilities:
Warrant liabilities
Lease incentive obligations
Long-term employee benefits
Other
104
September 30,
2023
September 30,
2022
39,630 $
(6,295 )
(4,090 )
29,245 $
3,176 $
143
1,205
1,125
1,645
7,294 $
31,913
(1,373 )
(3,825 )
26,715
2,618
1,310
1,268
352
1,068
6,616
1,039,782 $
9,421
1,049,203
(351,181 )
698,022 $
1,260,143
10,420
1,270,563
(405,309 )
865,254
20,320 $
954
8,756
516
30,546 $
5,281 $
3,447
6,763
3,984
2,117
—
1,006
1,450
650
97
2,206
27,001 $
25,225 $
1,050
429
1,818
28,522 $
15,178
1,097
—
15
16,290
5,866
2,882
4,746
3,795
1,453
2,967
1,045
1,679
1,606
97
2,864
29,000
25,225
1,050
1,123
1,821
29,219
$
$
$
$
$
$
$
$
$
$
$
$
Impairment of long-lived assets
The Company monitors for any indicators of impairment of the long-lived fixed assets. When certain conditions or changes in the
economic situation exist, the assets may be impaired and the carrying amount of the assets exceed its fair value. The assets are then tested
for recoverability of carrying amount. The Company records impairment charges on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired, the undiscounted net cash flows estimated to be generated by those assets are less
than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value.
We group assets at the CPA and FSA level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators
exist with respect to any of the asset groups, we estimate future cash flows based on projections of capacity purchase or FSA, block hours,
maintenance events, labor costs and other relevant factors.
Due to operating losses and the transition of operations from American to United, the Company assessed whether any impairment of
its long-lived assets existed for our United fleet as of September 30, 2023. As future cash flows from the operation of our United fleet through
the respective remaining useful life exceeded the carrying value of the fleet, the Company determined that no impairment charges were
necessary for the United fleet. The asset group associated with the CRJ-900 fleet includes owned aircraft, leased aircraft, intangible assets of
customer relationship, and other relevant long-lived assets. The Company recorded impairment losses of zero, $116.6 million, and zero
related to its long-lived assets for the years ended September 30, 2023, 2022, and 2021, respectively.
The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets are
subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available,
and will update its analyses accordingly.
Depreciation Expense on Property and Equipment
Depreciation expense on property and equipment totaled $60.2 million, $80.5 million, and $81.2 million for the years ended September
30, 2023, 2022, and 2021, respectively.
Other Assets
In connection with a negotiated forward purchase contract for electrically-powered vertical takeoff and landing aircraft (“eVTOL
aircraft”) executed in February 2021, we obtained equity warrant assets giving us the right to acquire a number shares of common stock in
Archer Aviation, Inc. (“Archer”), which at the time of our initial investment was a private, venture-backed company. As the initial investment in
Archer did not have a readily determinable fair value, we accounted for this investment using the measurement alternative under ASC 321
and measured the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly
transactions for identical or similar investments from the same issuer. We estimated the initial equity warrant asset value to be $16.4 million
based on publicly available information as of the grant date. In September 2021, the merger between Archer and a special purpose
acquisition company (“SPAC”) was completed, resulting in a readily determinable fair value of our investments in Archer. Accordingly, gains
and losses associated with changes in the fair value of our investments in Archer are measured in earnings, in accordance with ASC 321.
The initial grant date value of the warrants, $16.4 million, was recognized as a vendor credit liability within other noncurrent liabilities.
The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft
contemplated in the related aircraft purchase agreement.
In connection with closing of the merger between Archer and the SPAC described above, in September 2021, we purchased 500,000
Class A common shares in Archer for $5.0 million, and obtained
105
an additional warrant to purchase shares of Archer with a total grant date value of $5.6 million. The initial value of the warrants was
recognized as a vendor credit liability within other noncurrent liabilities, and will be settled in the future, as a reduction of the acquisition date
value of the eVTOL aircraft contemplated in the related aircraft purchase agreement. Because these investments have readily determinable
fair values, gains and losses resulting from changes in fair value of the investments are reflected in earnings, in accordance with ASC 321.
All of our vested warrants have been exercised into shares of Archer common stock.
Gains/(losses) on our investments in Archer totaled $5.6 million and ($13.7) million during the fiscal years ended September 30, 2023
and 2022, respectively and are reflected in gain/(loss) on investments, net in our consolidated statement of operations.
The fair values of the Company’s investments in Archer are Level 1 within the fair value hierarchy as the values are determined using
quoted prices for the equity securities. The value of the Company's investment in Archer is $11.5 million as of September 30, 2023.
In connection with a negotiated forward purchase contract for fully electric aircraft executed in July 2021, we obtained $5.0 million of
preferred stock in Heart Aerospace Incorporated (“Heart”), a privately held company. Our investment in Heart does not have a readily
determinable fair value, so we account for the investment using the measurement alternative under ASC 321 and measure the investment at
initial cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or
similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but
not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected
operating performance, financing transactions subsequent to the acquisition of the investment, or other features that indicate a change to fair
value is warranted. Any changes in fair value from the initial cost of the investment in preferred stock are recognized as increases or
decreases on our balance sheet and as net gains or losses on investments in equity securities, in other income (expense), net. The initial
investment in preferred stock was measured at cost of $5.0 million. There were no identical or similar transactions during the fiscal year
ended September 30, 2023, and as such, no adjustments to the initial cost of the equity investment resulting from observable price changes
have been recorded at September 30, 2023.
The fair values of the Company’s investments in Heart are Level 3 within the fair value hierarchy as the values are determined using
unobservable inputs in which there is little or no market data, requiring the Company to develop our own assumptions. The value of the
Company's investment in Heart is $5.0 million as of September 30, 2023.
In connection with a negotiated forward purchase contract for hybrid-electric vertical takeoff and landing (“VTOL”) aircraft executed in
February 2022, we obtained a warrant giving us the right to acquire a number of shares of common stock in the privately-held manufacturer
of the VTOL aircraft. These investments do not have a readily determinable fair value, so we account for them using the measurement
alternative under ASC 321 and measure the investments at cost less impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting
the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for
comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment
or other features that indicate a discount to fair value is warranted. Any changes in fair value from the grant date value of the warrant assets
will be recognized as increases or decreases to the investment on our balance sheet and as net gains or losses on investments equity
securities. We estimated the initial warrant asset value to be $3.2 million based on prices of similar investments in the same issuer. The grant
date value of the warrants, $3.2 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the
warrant assets will be settled in the future, as a reduction of the acquisition date value of the VTOL aircraft contemplated in the related
forward purchase agreement.
106
The fair values of the Company’s investments in the privately-held manufacturer noted above are Level 3 within the fair value hierarchy
as the values are determined using unobservable inputs in which there is little or no market data, requiring the Company to develop our own
assumptions. The value of the Company's investment is $3.5 million as of September 30, 2023.
Total net gains/(losses) on our investments in equity securities totaled $5.4 million and ($13.7) million during the year ended
September 30, 2023 and 2022, respectively, and are reflected in gain/(loss) on investments, net in our consolidated statements of operations
and comprehensive (loss) income. As of September 30, 2023, the aggregate carrying amount of our investments in equity securities was
$20.3 million, and the carrying amount of our investments without readily determinable fair values was $8.8 million.
9.
Fair Value Measurements
Other than our assets held for sale, asset group associated with the CRJ-900 fleet, and investments in equity securities described in
Notes 7 and 8, respectively, we did not measure any of our assets or liabilities at fair value on a recurring or nonrecurring basis as of
September 30, 2023 and 2022.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable included on the
consolidated balance sheets approximated fair value at September 30, 2023 and 2022 because of the immediate or short-term maturity of
these financial instruments.
The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt
to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to
changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt.
The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions):
Long-term debt and finance leases, including
current maturities
(1)
$
538.3 $
493.6 $
615.3 $
541.7
September 30, 2023
September 30, 2022
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(1)
Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs.
107
10.
Long-Term Debt, Finance Leases, and Other Borrowings
Long-term debt as of September 30, 2023 and 2022, consisted of the following (in thousands):
Senior and subordinated notes payable to secured parties,
due in monthly installments, interest based on SOFR
plus interest spread at 2.71% through 2027,
collateralized by the underlying aircraft
Notes payable to secured parties, due in semi-annual installments,
interest based on SOFR plus interest spread at 4.75% to 6.25%
through 2028, collateralized by the underlying aircraft
Notes payable to secured parties, due in quarterly installments,
interest based on SOFR plus interest at spread 2.20% to 2.32%
for senior note & 4.50% for subordinated note through 2028,
collateralized by the underlying aircraft
Revolving credit facility, quarterly interest based on SOFR plus
interest spread at 4.50% through 2028, with incentives for up
to $15 million based on achieving certain performance metrics
United Bridge Loan - due in quarterly installments based on SOFR
plus interest spread at 4.50% through 2024
Other obligations due to financial institution, monthly and/or quarterly
interest due from 2022 through 2031, collateralized
by the underlying equipment
Notes payable to financial institution, due in monthly installments,
interest based on SOFR plus interest spread at 3.10% through
2024, collateralized by the underlying equipment
Notes payable to financial institution, due in monthly installments, plus
interest spread at 5.00% through 2023, secured by flight equipment
Notes payable to financial institution, due in monthly installments,
interest based on fixed interest of 7.50%, through 2027,
collateralized by the underlying equipment
Notes payable to financial institution, quarterly interest based
on SOFR plus interest spread at 3.50% through 2027
Gross long-term debt, including current maturities
Less unamortized debt issuance costs
Less notes payable warrants
Net long-term debt, including current maturities
Less current portion, net of unamortized debt issuance costs
Net long-term debt
September 30,
2023
September 30,
2022
$
39,018 $
73,850
108,815
131,010
90,401
106,865
40,630
10,500
15,630
—
67,637
18,038
1,075
—
41,098
139,100
538,274
(5,083 )
(4,913 )
528,278
(163,550 )
364,728 $
26,758
2,000
36,212
204,947
615,310
(8,303 )
(7,272 )
599,735
(97,218 )
502,517
$
Principal maturities of long-term debt as of September 30, 2023, and for each of the next five years are as follows (in thousands):
Periods Ending June 30,
Total Principal
2024
2025
2026
2027
2028
Thereafter
$
$
164,807
57,840
199,234
63,672
36,322
16,399
538,274
108
The net book value of collateralized aircraft and equipment as of September 30, 2023 was $660.4 million.
EDC Loan and MHIRJ Junior Note
In June 2015, we entered into seven separate credit agreements with EDC and junior noteholder, MHIRJ, to finance seven CRJ-900
aircraft with a maturity date of June 30, 2027. In November 2022, we entered into a letter amendment with EDC which provided for the
deferral of a portion of scheduled principal payments on our existing loan, beginning in January 2023 through December 2024. The total
amount originally scheduled to be deferred during the deferral period was approximately $14.0 million. The deferral of the scheduled principal
payments was originally scheduled to be repaid on the maturity date of June 30, 2027. Additionally, the junior noteholder, MHIRJ, agreed to
forgive approximately $5.0 million in principal contingent upon the repayment of $4.2 million in by December 31, 2023.
On May 31, 2023, we entered into an agreement with American (the "American Purchase Agreement") to sell all seven aircraft under
the EDC Loan and MHIRJ Junior note to American and eliminate the remaining associated debt. As of September 30, 2023, the sale of three
of the EDC aircraft has closed, and approximately $27.2 million of principal was eliminated with proceeds from the sale. A total of $34.6
million of principal between the senior and junior notes was paid off during fiscal year 2023.
As of September 30, 2023, we have $39.0 million outstanding on the EDC Loan and MHIRJ Junior note. Subsequent to September 30,
2023, we closed the sale of the remaining four CRJ-900 aircraft as part of the American Purchase Agreement, and used a portion of the
proceeds to retire the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ for a
total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note.
Enhanced Equipment Trust Certificate ("EETC")
In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through
certificates to obtain financing for new E-175 aircraft. $22.2 million in principal payments were made during the year, and as of September
30, 2023, Mesa has $108.8 million of equipment notes outstanding issued under the EETC financing included in long-term debt on the
consolidated balance sheets. The structure of the EETC financing consists of a pass-through trust created by Mesa to issue pass-through
certificates, which represent fractional undivided interests in the pass-through trust and are not obligations of Mesa.
The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and
secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-
through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to
the trust, which purchased such notes with a portion of the escrowed funds.
Mesa evaluated whether the pass-through trust formed for its EETC financing is a variable interest entity ("VIE") and required to be
consolidated. The pass-through trust was determined to be a VIE; however, the Company has determined that it is not the primary
beneficiary of the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements.
United Revolving Credit Facility
On December 27, 2022, in connection with entering into the Amended and Restated United CPA, (i) United agreed to purchase and
assume all of First Citizens’ rights and obligations as a lender under the Existing Facility pursuant to an Assignment and Assumption
Agreement, (ii) United and CIT Bank agreed to amend the Existing Facility pursuant to an Amendment No. 1, dated December 27, 2022
(“Amendment No. 1”), and an Amendment No. 2, dated January 27, 2023 (“Amendment No. 2”; the Existing Facility as amended by
Amendment No. 1 and Amendment No. 2, the "Amended Facility"), and (iii) Wilmington Trust,
109
National Association agreed to assume all of CIT Bank’s rights and obligations as Administrative Agent pursuant to an Agency Resignation,
Appointment and Assumption Agreement, dated as of January 27, 2023. Amendment No. 1, among other things, extends the Maturity Date
from the earlier to occur of November 30, 2028, or the date of the termination of the Amended and Restated United CPA; provides for a
revolving loan of $10.5 million plus fees and expenses, which is due January 31, 2024, subject to certain mandatory prepayment
requirements; provides for Revolving Commitments equal to $30.7 million plus the original principal amount of the $10.5 million revolving
loan; amortization of the obligations outstanding under the existing CIT Agreement commencing quarterly until March 31, 2025; and a
covenant capping Restricted Payments (as defined in the Amended Facility) at $5.0 million per fiscal year, a consolidated interest and rental
coverage ratio of 1.00 to 1.00 covenant, and a Liquidity (as defined in the Amended Facility) requirement of not less than $15.0 million at the
close of any business day. Interest assessed under the Amended Facility is 3.50% for Base Rate Loans and 4.50% for Term SOFR Loans
(as such terms are defined in the Amended Facility). Amendment No. 2, among other things, amends the definition of Controlled Account (as
defined in the Amended Facility). Amounts borrowed under this Amended Facility are secured by a collateral pool consisting of a combination
of expendable parts, rotable parts and engines and a pledge of the Company’s stock in certain aviation companies. United funded $25.5
million as of the closing date of Amendment No. 1, to be used for general corporate purposes.
The United line of credit contains an additional deemed prepayment of $15 million with potential forgiveness upon the achievement of
a certain number of block hours as well as maintaining a CCF of at least 99.3% over any rolling four-month period from January 2023
through December 2024. In order to earn forgiveness on the deemed prepayment, we must also have repaid the bridge loan in full. As of
September 30, 2023, we have achieved $9.0 million in forgiveness. However, as the bridge loan is still outstanding as of September 30,
2023, the forgiveness is not currently recognizable.
On September 6, 2023, the Company amended the existing United Credit Facility to (i) permit the Company to re-draw approximately
$7.9 million of the Effective Date Bridge Loan (as defined in the United Credit Facility) previously repaid; (ii) increased the amount of
Revolving Commitments (as defined in the United Credit Facility) from $30.7 million to $50.7 million, in each case, plus the original principal
amount of the Effective Date Bridge Loan and subject to the Borrowing Base (as defined in the United Credit Facility); and (iii) amended the
calculation of the Borrowing Base. Amounts borrowed under this facility bear interest at 3.50% for Base Rate Loans and 4.50% per annum
for Term SOFR Loans. Amounts borrowed under the Amended Credit Facility are secured by a collateral pool consisting of a combination of
expendable parts, rotable parts and engines, a pledge of certain of the Company’s bank accounts and a pledge of the Company’s stock in
certain aviation companies.
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit and
Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension ("Amendment No.
4") and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the "January
2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the following:
•
•
•
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from the sale,
assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital stock
of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to certain
conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30, 2023,
and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter ending March
31, 2024.
110
•
•
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for borrowings
under the Credit Agreement.
Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such engines as
collateral for the United credit facility for a specified period of time.
Loan Agreement with the United States Department of the Treasury
On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with U.S. Department of the Treasury (the “U.S.
Treasury”) for a secured loan facility of up to $200.0 million that matures in October 2025 (“the Treasury Loan”). On October 30, 2020, the
Company borrowed $43.0 million and on November 13, 2020, the Company borrowed an additional $152.0 million. No further borrowings are
available under the Treasury Loan. The Company also issued warrants to purchase shares of common stock to the U.S. Treasury.
The Treasury Loan bears interest at a variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve
Percentage plus (b) 3.50%. Accrued interest on the loans is payable in arrears on the first business day following the 14th day of each
March, June, September, and December, beginning with December 15, 2020.
All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025 (the
“Maturity Date”). Interest is paid in kind by increasing the principal amount of the loan by the amount of such interest due on an interest
payment date for the first 12 months of the loan. Mesa's obligations under the Treasury Loan are secured by certain aircraft, aircraft engines,
accounts receivable, ground service equipment, and tooling (collectively, the “Collateral”). The obligations under the Treasury Loan are
guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds were used for general corporate purposes and
operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Treasury Loan may be made, in
whole or in part, by Mesa Airlines, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed.
Mandatory prepayments of loans under the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with
the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and certain
insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Treasury Loan) occurs with respect to
Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan.
The Treasury Loan requires the Company, under certain circumstances, including within 10 business days prior to the last business
day of March and September of each year beginning March 2021, to appraise the value of the Collateral and recalculate the collateral
coverage ratio. If the calculated collateral coverage ratio is less than 1.55 to 1.0, Mesa Airlines will be required either to provide additional
Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan or repay the term loans under the Treasury
Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at
least 1.55 to 1.0.
The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury
Loan also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on
dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and
acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on
lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on
employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation,
and requirements to maintain certain levels of scheduled service.
111
In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under
the Treasury Loan, the Company issued to the U.S. Treasury warrants to purchase an aggregate of 4,899,497 shares of the Company’s
common stock at an exercise price of $3.98 per share, which was the closing price of the Common Stock on The Nasdaq Stock Market on
April 9, 2020. The exercise price and number of shares of common stock issuable under the Warrants are subject to adjustment as a result of
anti-dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on
the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s
option. For accounting purposes, the fair value for the Warrant was estimated using a Black-Scholes option pricing model and recorded in
stockholders' equity with an offsetting debt discount to the Treasury Loan in the consolidated balance sheet.
The Company incurred $3.1 million in debt issuance costs relating to the Treasury Loan. In accordance with the applicable guidance,
Mesa allocated the debt issuance costs between the Treasury Loan and related warrants. At funding on October 30, 2020, the initial $43.0
million was recorded net of $0.7 million in capitalized debt issuance costs. At funding on November 13, 2020, the remaining $152.0 million
was recorded net of $2.3 million in capitalized debt issuance costs. The remaining $0.1 million in debt issuance costs was allocated to the
warrants as a reduction to the warrant value within additional paid-in capital. Debt issuance costs allocated to the debt are amortized into
interest expense using the effective interest method over the term of the related loan.
Prior to the November 13, 2020 funding of the $152.0 million portion of the Treasury Loan, the Company repaid $167.7 million in
existing aircraft debt covering 44 aircraft, including indebtedness under its (a) Senior Loan Agreements, dated June 27, 2018, (b) Junior Loan
Agreements, also dated June 27, 2018, (c) Credit Agreements, dated January 31, 2007, April 16, 2014, and May 23, 2014, (d) Senior Loan
Agreements, dated December 27, 2017, and (e) Junior Loan Agreements, also dated December 27, 2017 (collectively, “the EDC Loans”).
The Company made payments totaling $164.2 million to repay the EDC Loans, consisting of principal of $167.7 million, and a $3.5 million
discount on the balance owed. Additionally, in connection with the repayment, $2.5 million of unamortized original issue discount and
deferred financing costs were recorded as a loss on debt extinguishment, resulting in a net gain on extinguishment of $1.0 million recorded
within other income.
As of September 30, 2023, Mesa has $139.1 million outstanding under the Treasury Loan. $65.8 million in principal payments were
made during the year.
Spare Engine Financing
In December 2021, we entered into a loan agreement with a financing institution to finance certain purchases of spare engines via a
newly formed limited liability company (“LLC”). The loan agreement provides for aggregate borrowings of up to $54.0 million through
November 2022. In December 2021, we borrowed an aggregate of $35.3 million under the loan agreement, which matures in December
2027. The borrowed amounts are collateralized by the underlying engines and require monthly principal and interest payments until maturity.
Borrowings under the loan agreement bear interest at the monthly LIBOR plus 4.25%. The borrowings are the obligation of the newly formed
LLC and are guaranteed by Mesa Airlines, Inc. Subsequent to September 30, 2023, we entered into an agreement with a third party to
purchase the 12 spare engines under the loan agreement. The transaction is expected to close by the end of March 2024, and will eliminate
all remaining debt under the loan agreement.
The newly formed LLC, which is wholly owned by Mesa, was determined to be a VIE for which we are the primary beneficiary because
we have the power to direct the activities of the LLC that most significantly impact the LLC’s economic performance and the obligation to
absorb losses and right to receive benefits from the LLC in our capacity as sole member of the LLC and guarantor of the borrowings.
Therefore, the LLC is consolidated in our financial statements and the borrowings are reflected as long-term debt in our consolidated balance
sheets.
112
The loan agreement contains a loan-to-value (“LTV”) financial covenant pursuant to which we are required to prepay certain amounts
of the loan if the aggregate outstanding principal balance of the loan exceeds a specified percentage of the appraised value of the engines
beginning in the 12th full month after closing and each June 1 and December 1 thereafter.
11.
Earnings Per Share
Calculations of net (loss) income per common share were as follows (in thousands, except per share data):
Net (loss)/income
Basic weighted average common
shares outstanding
Add: Incremental shares for:
Dilutive effect of warrants
Dilutive effect of restricted stock
Diluted weighted average common
shares outstanding
Net (loss)/income per common share
attributable to Mesa Air Group:
Basic
Diluted
2023
Year Ended September 30,
2022
2021
$
(120,116 ) $
(182,678 ) $
16,588
39,465
36,133
35,713
—
—
—
—
2,543
587
39,465
36,133
38,843
$
$
(3.04 ) $
(3.04 ) $
(5.06 ) $
(5.06 ) $
0.46
0.43
Basic (loss) income per common share is computed by dividing net (loss) income attributable to Mesa Air Group by the weighted
average number of common shares outstanding during the period.
The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants
(excluding warrants with a nominal conversion price) is calculated by applying the treasury stock method. Share-based awards and warrants
whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net (loss) income per share
calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested
restricted stock and warrants would have an anti-dilutive effect.
The following number of weighted-average potentially dilutive shares (in thousands) were excluded from the calculation of diluted net
(loss) income per share because the effect of including such potentially dilutive shares would have been anti-dilutive:
Warrants
Restricted stock
12. Common Stock
2023
Year Ended September 30,
2022
2021
—
—
—
758
106
864
—
In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under
the Treasury Loan, the Company issued warrants to the U.S. Treasury to purchase shares of the Company’s common stock, no par value, at
an exercise price of $3.98 per share (the “Exercise Price”), which was the closing price of the common stock on The Nasdaq Stock Market on
April 9, 2020. The warrants were issued pursuant to the terms of a Treasury Warrant Agreement entered into by the Company and the U.S.
Treasury. The exercise price and number of warrant shares issuable under the warrants are subject to adjustment as a result of anti-dilution
provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the
113
fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s
option. The warrants are accounted for within equity at a grant date fair value determined under the Black-Scholes Option Pricing Model. As
of September 30, 2023, 4,899,497 warrants were issued and outstanding. Subsequent changes in fair value are not recognized as long as
the warrants outstanding continue to be classified in equity.
The Company has not historically paid dividends on shares of its common stock. Additionally, the Treasury Loan and the Company's
aircraft lease facility (the "RASPRO" Lease Facility) with RASPRO Trust 2005, a pass-through trust contains restrictions that limit the
Company's ability to or prohibit it from paying dividends to holders of its common stock.
13.
Income Taxes
The provision for income taxes consists of the following:
Current
Federal
State
Deferred
Federal
State
(Benefit) provision for income taxes
2023
Year Ended September 30,
2022
(in thousands)
2021
$
$
$
$
— $
560
560 $
(7,392 )
(1,913 )
(9,305 ) $
(8,745 ) $
— $
231
231 $
(47,879 )
(4,342 )
(52,221 ) $
(51,990 ) $
(39 )
202
163
4,494
1,171
5,665
5,828
The reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:
Income tax (benefit) provision at federal statutory rate
(Reduction) increase in income taxes resulting from:
State taxes, net of federal tax benefit
Nondeductible stock compensation expenses
Permanent items
Change in valuation allowances
162(m) limitation
Impact of changing rates on deferred tax assets
Expired tax attributes
Other
Income tax (benefit) provision
2023
Year Ended September 30,
2022
(in thousands)
2021
$
(26,555 ) $
(49,280 ) $
4,707
(2,062 )
313
225
18,201
285
499
200
149
(8,745 ) $
(3,953 )
251
206
(22)
11
(247)
964
80
(51,990 ) $
669
(241)
292
(140)
12
509
152
(132 )
5,828
$
114
The components of the Company's deferred taxes as of September 30, 2023 and 2022 are as follows:
Net operating loss carryforwards
Deferred credits
Other accrued expenses
Prepaids and other
Warrant liabilities
State alternative minimum tax
Other reserves and estimated losses
Operating lease liabilities
Deferred revenue
Interest expense carryforward
Gross deferred tax assets
Less: valuation allowance
Total net deferred tax assets
Intangible assets
Operating lease right-of-use assets
Property and equipment
Unrealized gain on equity investments
Total deferred tax liabilities
Net deferred tax liabilities
Year Ended September 30,
2022
2023
(in thousands)
125,306 $
1,057
1,234
556
5,748
—
937
2,991
4,829
6,457
149,115 $
(21,102 )
128,013 $
—
(2,475 )
(131,805 )
(2,148 )
(136,427 ) $
(8,414 ) $
131,897
703
1,769
1,175
5,725
1
873
8,012
5,506
—
155,661
(2,901 )
152,760
(877 )
(2,055 )
(166,586 )
(961 )
(170,479 )
(17,719 )
$
$
$
$
$
The Company has federal and state income tax net operating losses (“NOL”) carryforwards of $562.6 million and $233.5 million, which
expire in fiscal years 2027-2038 and 2023-2043, respectively. Approximately $194.2 million of our federal NOL carryforwards are not subject
to expiration. These NOL carryovers are only available to offset 80% of taxable income in years in which they are utilized due to tax law
changes as a result of the Tax Cuts and Jobs Act. The Company also has $29.1 million of interest expense carryovers as a result of 163j
limitations as of September 30, 2023.
The Company cannot conclude that it is more likely than not that the benefit from certain federal and state NOL carryforwards will not
be realized. In recognition of this uncertainty, the Company has provided a valuation allowance of $21.1 million as of September 30, 2023
and $2.9 million as of September 30, 2022 on the deferred tax assets related to these state NOL carryforwards. If or when recognized, the
tax benefits related to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of income tax
expense.
The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets
recognized for those NOLs are presented net of these unrecognized tax benefits.
115
Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our NOL and tax credit
carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future
income tax liabilities. The Company determined it had an ownership change in February of 2009. Based on the study conducted at that time,
a portion of the federal NOLs were determined to be limited by IRC Section 382, resulting in the Company writing off a portion of its NOLs at
that time. Additionally, the Company’s initial public offering in August of 2018 resulted in a change in ownership under Section 382 of the
Internal Revenue Code. The Company completed an update to the analysis of any potential limitation on the use of its net operating losses
under Section 382 for the fiscal year ended September 30, 2023. Based on such analysis, the Company does not believe any ownership
changes during the review period will further limit its ability to use its current net operating losses to offset future taxable income, if any.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
Unrecognized tax benefits — October 1
Gross decreases — tax positions in prior period
Gross increases — tax positions in prior period
Unrecognized tax benefits — September 30
2023
Year Ended September 30,
2022
(in thousands)
2021
$
$
4,866 $
—
—
4,866 $
4,866 $
—
—
4,866 $
4,866
—
—
4,866
The Company’s unrecognized tax benefits of $4.9 million, $4.9 million and $4.9 million as of September 30, 2023, 2022, and 2021,
respectively, is included as an offset to the net deferred tax asset balance. If recognized, the balance of the uncertain tax benefits would
impact the effective tax rate.
We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded
accrued penalties or interest related to the unrecognized tax benefits noted above as the amounts would result in an adjustment to NOL
carryforwards.
We are subject to taxation in the United States and various states. As of September 30, 2023, the Company is no longer subject to
U.S. federal or state examinations by taxing authorities for fiscal years prior to 2003.
14.Share-Based Compensation
Restricted Stock
The Company grants restricted stock units ("RSUs") as part of its long-term incentive compensation to employees and non-employee
members of the Board of Directors. RSUs generally vest over a period of three to five years for employees and one year for members of the
Board of Directors. The restricted common stock underlying RSUs are not deemed issued or outstanding upon grant, and do not carry any
voting rights. RSUs are measured based on the fair market value of the underlying common stock on the grant date.
116
The restricted stock activity for our years ended September 30, 2023, 2022, and 2021 is summarized as follows:
2018 Plan
Restricted shares unvested at September 30, 2020
Granted
Vested
Forfeited
Restricted shares unvested at September 30, 2021
Granted
Vested
Forfeited
Restricted shares unvested at September 30, 2022
Granted
Vested
Forfeited
Restricted shares unvested at September 30, 2023
Number
of Shares
1,195,548 $
346,123 $
(492,465 ) $
(43,000 ) $
1,006,206 $
718,959 $
(455,303 ) $
(97,369 ) $
1,172,493 $
495,087 $
(585,755 ) $
(344,934 ) $
736,891 $
Weighted-
Average
Grant Date
Fair Value
5.47
9.53
6.89
4.57
6.22
3.20
6.13
2.97
4.43
2.43
4.58
4.05
3.35
As of September 30, 2023, there was $1.7 million of total unrecognized compensation cost related to unvested share-based
compensation arrangements, which is expected to be recognized over a weighted-average period of 1.3 years.
Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. The Company recognizes
forfeitures of share-based awards as they occur. Share-based compensation expense for the years ended September 30, 2023, 2022, and
2021 was approximately $2.3 million, $2.8 million, and $3.1 million, respectively. Share-based compensation expense is recorded in general
and administrative expenses in the consolidated statements of operations and comprehensive (loss) income.
The Company repurchased 204,486 shares of its common stock for approximately $0.4 million to cover the income tax obligation on
vested employee equity awards during the fiscal year ended September 30, 2023. The Company repurchased 147,108 shares of its common
stock for approximately $0.5 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the
fiscal year ended September 30, 2022. During the fiscal year ended September 30, 2021, the Company repurchased 155,174 shares of its
common stock for approximately $1.5 million to cover the income tax obligation on vested employee equity awards.
15.
Employee Stock Purchase Plan
2019 ESPP
The Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan (the "2019 ESPP") is a nonqualified plan that provides eligible
employees of Mesa Air Group, Inc. with an opportunity to purchase Mesa Air Group, Inc. ordinary shares through payroll deductions. Under
the 2019 ESPP, eligible employees may elect to contribute 1% to 15% of their eligible compensation during each semi-annual offering period
to purchase Mesa Air Group, Inc. ordinary shares at a 10% discount.
A maximum of 500,000 Mesa Air Group, Inc. ordinary shares may be issued under the 2019 ESPP. As of September 30, 2023, eligible
employees purchased and the Company issued an aggregate of 444,590 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP,
140,453 of which were purchased and issued during the current fiscal year.
117
16.
Leases
At September 30, 2023, the Company leased 18 aircraft, airport facilities, office space, and other property and equipment under non-
cancelable operating leases. The operating leases require the Company to pay taxes, maintenance, insurance, and other operating
expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. The
Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or
the property may be purchased rather than leased. Aggregate rental expense under all operating aircraft, equipment and facility leases
totaled approximately $12.2 million, $43.4 million, and $44.6 million for the year ended September 30, 2023, 2022, and 2021, respectively.
At September 30, 2023, the Company leased 15 aircraft and three spare engines under non-cancelable finance leases. Basic rent on
finance leases is paid monthly and at the end of the lease term. At the end of the lease term, the Company has the option to purchase the
aircraft and engines for most of the finance leases. These finance leases are reflected as finance lease obligations of $67.6 million on our
consolidated balance sheet as of September 30, 2023.
The components of our operating and finance lease costs were as follows (in thousands):
Operating lease costs
Variable and short-term lease costs
Interest expense on finance lease liabilities
Amortization expense of finance lease assets
Total lease costs
Year Ended September 30,
2022
2023
8,517 $
3,691
4,492
13,414
30,114 $
37,637
5,783
547
2,705
46,672
$
$
As of September 30, 2023, the Company’s operating lease right-of-use assets were $9.7 million, the Company’s current maturities of
operating lease liabilities were $3.5 million, and the Company’s noncurrent operating lease liabilities were $8.1 million. As of September 30,
2023, the Company’s current portion of finance lease liabilities were $57.7 million, and the Company’s noncurrent finance lease liabilities
were $9.9 million.
The Company’s operating lease payments included in operating cash flows for the year ended September 30, 2023 and 2022 were
approximately $9.5 million and $36.3 million, respectively. The Company’s finance lease interest payments included in operating cash flows
for the year ended September 30, 2023 and 2022 were $1.2 million and $0.3 million, respectively. The Company’s finance lease principal
payments included in financing cash flows for the year ended September 30, 2023 and 2022 were $15.1 million and $2.5 million,
respectively.
To determine whether impairments exist for aircraft and other related assets used in operations, we group assets, including ROU
assets, at the CPA or FSA level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based
on projections of CPA or FSA, block hours, maintenance events, labor costs and other relevant factors. As all of our aircraft leases besides
one with an insignificant value on our books are leased to us from United or DHL at nominal amounts and not recorded on our books, we did
not assess leased aircraft for impairment. The Company recorded impairment losses of zero, $10.5 million, and zero for the years ended
September 30, 2023, 2022, and 2021, respectively.
118
The table below presents the weighted average remaining terms and discount rates for our operating and finance leases as of
September 30, 2023:
As of September 30, 2023
Finance leases:
Weighted average remaining lease term
Weighted average discount rate
Operating leases:
Weighted average remaining lease term
Weighted average discount rate
2.17
3.4 %
6.1
5.6 %
The following table summarizes future minimum rental payments, primarily related to leased aircraft, required under operating and
finance leases that had initial or remaining non-cancelable lease terms as of September 30, 2023 (in thousands):
Periods Ending
September 30,
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: imputed interest
Amounts recorded in the consolidated balance sheet
Operating Leases Finance Leases
57,704
$
1,257
1,332
1,411
1,495
4,437
67,636
—
67,636
4,243 $
2,449
1,520
1,437
1,030
4,161
14,840
(3,253 )
11,587 $
$
RASPRO Lease Facility. On September 23, 2005, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO
as lessor, for 15 of our CRJ-900 aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid
quarterly on each aircraft. On each of March 10, 2014, June 5, 2014, and December 8, 2017, the RASPRO Lease Facility was amended to
defer certain payments of basic rent (the "Deferred Amounts"). Until the principal of and accrued interest on the Deferred Amounts are paid in
full: (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from
repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain a minimum of $35.0 million of cash, cash
equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports
containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio.
In June 2020, the Company amended its RASPRO aircraft lease agreement to defer a $4.0 million lease payment otherwise due in
June 2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September
2021 through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor and
accordingly, this was not a lease modification and required no changes to current accounting treatment.
In December 2022, the Company entered into an agreement with RASPRO Trust, reducing the buyout price on all 15 aircraft at lease
termination by a total of $25 million. Under the terms of the new agreement, the Company reclassified these leases as finance leases.
17. Commitments and Contingencies
Litigation
We are involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings which we
consider routine to our business activities on an ongoing basis. If we believe that a loss arising from such matters is probable and can be
reasonably estimated, we accrue the
119
estimated liability in our consolidated financial statements. If only a range of estimated losses can be determined, we accrue an amount
within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any
other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not
probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the
reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or
settlement) is not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we
have disclosed that fact. In assessing the materiality of a proceeding, we evaluate, among other factors, the amount of monetary damages
claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change
our business practices in a manner that could have a material adverse impact on our business.
As of September 30, 2023, we believed that the ultimate outcomes of routine legal matters are not likely to have a material adverse
effect on our financial position, liquidity, or results of operations.
Engine Purchase Commitments
On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into
an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of 10 new CF34-8C5 or CF34-
8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. During the quarter ended March 31, 2021, a $7.0
million non-refundable purchase deposit was made for the first five engines to be delivered in calendar year 2021. The Company has options
to purchase an additional 10 similar engines beyond 2022. The total purchase commitment related to these 10 engines is approximately
$52.2 million. As of September 30, 2023, we have purchased all of the engines pursuant to the Amended and Restated Letter Agreement
No. 13-3.
If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum
cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.
Electric Aircraft Forward Purchase Commitments
As described in Note 8, in February 2021, the Company entered into a forward purchase contract with Archer for a number of
electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL aircraft is $200.0
million, with an option to purchase additional aircraft. The Company’s obligation to purchase the eVTOL aircraft is subject to the Company
and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met.
As described in Note 8, in July 2021, the Company entered into a forward purchase contract with Heart for a number of fully electric
aircraft. The maximum aggregate base commitment for the aircraft is $1,200.0 million, with an option to purchase additional aircraft. The
Company’s obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and
conditions, which may or may not be met.
Other Commitments
We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase
contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date.
Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would
exist unless such a termination occurs.
120
18.
Subsequent Events
United Agreements
On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United CPA
and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA Amendments"), respectively.
The January 2024 United CPA Amendments provide additional liquidity and certain other amendments described below
•
•
•
Increased CPA rates, retroactive to October 1, 2023 through December 31, 2024, which are projected to generate approximately
$63.5 million in incremental revenue over the next twelve months.
Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the United
CPA) from the United CPA.
Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as defined in
the United CPA) to June 30, 2024.
On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit and
Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension ("Amendment No.
4") and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the "January
2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the following:
•
•
•
•
•
The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and
corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from the sale,
assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital stock
of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to certain
conditions.
The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30, 2023,
and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter ending March
31, 2024.
An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for borrowings
under the Credit Agreement.
Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such engines as
collateral for the United credit facility for a specified period of time.
American Purchase Agreement
Subsequent to September 30, 2023, we closed the sale of the four remaining CRJ-900 aircraft to American for gross proceeds of
$41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the retirement of the EDC Loan and the MHIRJ junior
noteholder debt. As part of our letter amendment entered into with MHIRJ in November 2022, approximately $5.0 million in principal was
forgiven upon the repayment of $4.2 million in principal before December 31, 2023.
Aircraft Purchase Agreement
Subsequent to September 30, 2023, we closed the sale of the remaining four CRJ-900 aircraft as part of an aircraft purchase
agreement to a third party for gross proceeds of $12.0 million. Net proceeds from the sale of all four aircraft was $6.5 million after partial debt
reduction of our UST Loan.
121
Engine Purchase Agreement
On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines and
related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and provide additional
liquidity to fund operations and current debt obligations as they come due. The transaction is expected to close by the end of March 2024.
Engine Purchase Commitment
Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23 engines
for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close by the end of
December 2024.
Airframe and Engine Purchase Commitments
We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. Subsequent
to September 30, 2023, we entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related
engines. One agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total
of $18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these transactions
expected to be approximately $(12.1) million.
122
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Under the supervision and with the participation of our management, including our Chief Executive Officer
“CEO” and Chief Financial Officer “CFO”, we performed an evaluation of our disclosure controls and procedures, which have been designed
to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported accurately and within the time periods specified in the SEC rules and forms. Our management, including our CEO
and CFO, concluded that, as of September 30, 2023, those controls and procedures were not effective at the reasonable assurance level to
ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the
design of disclosure controls and procedures must reflect the fact that there are resource constraints and management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative to their costs
Management's Annual Report on Internal Control Over Financial Reporting
As required by SEC rules and regulations implementing Section 404 of the Sarbanes-Oxley Act, our management is responsible for
establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
(1)
(2)
(3)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of our company,
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors, and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.
123
Because of its inherent limitations, internal control over financial reporting may not prevent or detect errors or misstatements in our
financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of management, we assessed the effectiveness of our internal control over financial
reporting at September 30, 2023. In making these assessments, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessments and
those criteria, management determined that we did not maintain effective internal control over financial reporting as of September 30, 2023
due to the material weaknesses described below.
A material weakness is a deficiency, or a 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 will not be prevented or detected on a timely
basis. Accordingly, a material weakness increases the risk that the financial information we report contains material errors. If we fail to
remediate these material weaknesses, determine that our internal controls over financial reporting are not effective, discover areas that need
improvement in the future or discover additional material weaknesses, these shortcomings could have an adverse effect on our business and
financial results.
As of September 30, 2023, we have identified two material weaknesses in internal controls in the areas of (i) information technology
general controls ("ITGCs"); and (ii) debt covenant compliance.
The material weakness relating to ITGCs related to ineffective ITGCs in the areas of user access management and program change
management – related to our inventory management system, PMI, and our Oracle financial reporting system. We believe that these control
deficiencies were a result of (i) insufficient documentation of information technology (“IT”) control processes such that the successful
operation of ITGCs was overly dependent upon knowledge and actions of certain qualified individuals for each IT system; (ii) insufficient
training of IT personnel on the operation and performance of their control responsibilities; and (iii) inadequate risk-assessment processes to
identify and assess IT environment changes and risks that could impact internal control over financial reporting. As a result of this material
weakness, manual and automated business process controls dependent on the affected ITGCs were ineffective because the controls had the
potential to be adversely impacted. Management performed additional analysis and test procedures as deemed necessary to ensure that our
financial statements included in this Form 10-K present fairly in all material respects our financial position, results of operations and cash
flows for the periods presented.
The material weakness in our internal controls over the review of debt covenant compliance related to the failure to monitor and review
debt compliance covenants. We believe that this control deficiency was a result of (i) inadequate performance of controls surrounding debt
covenant compliance and disclosure; (ii) insufficient knowledge of our amended credit agreement; and (iii) insufficient communication with
our lender regarding debt covenant compliance and obtaining waivers. This material weakness impacts other transactions that rely on the
review of debt covenants including our evaluation of going concern. As a result of this material weakness, there was a factual material
misstatement on the consolidated balance sheet and in our going concern disclosure and debt covenant compliance disclosures on Form 10-
Q for the period ended June 30, 2023.
Notwithstanding these material weaknesses, management has concluded that our audited consolidated financial statements included
in this Annual Report on Form 10-K are fairly stated in all material respects with U.S. GAAP for each of the periods presented herein.
Remediation of Material Weakness in Internal Control over Financial Reporting
In order to remediate the material weakness in internal control over financial reporting related to the ineffective operation of ITGCs
related to access management and program change management; we are in the process of implementing additional IT monitoring controls
and strengthening our process documentation over the access management and program change management domains of ITGCs.
124
In order to remediate the material weakness in internal control over financial reporting related to the review of debt covenant
compliance, the Company intends to have additional personnel perform debt covenant calculations and review our disclosure controls and
procedures in future periods.
To further remediate these material weaknesses, management, including the CEO and CFO, have reaffirmed, and re-emphasized the
importance of internal controls, control consciousness and a strong control environment. We also expect to continue to review, optimize and
enhance our financial reporting controls and procedures. These material weaknesses will not be considered remediated until the applicable
remediated control operates for a sufficient period of time and management has concluded, through testing, that this enhanced control is
operating effectively.
Changes in Internal Control Over Financial Reporting
Except as noted above, there were no changes in the Company’s internal control over financial reporting that occurred during the year
ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
125
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mesa Air Group, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Mesa Air Group, Inc.'s (the Company) internal control over financial reporting as of September 30, 2023, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013. In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control
criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2023, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheet as of September 30, 2023, the related consolidated statements of operations and comprehensive loss ,
stockholders' equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the
financial statements) of the Company and our report dated January 26, 2024 expressed an unqualified opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected
on a timely basis. The following material weaknesses have been identified and included in management's assessment:
Management identified a material weakness relating to ITGCs related to ineffective ITGCs in the areas of user access management and
program change management – related to the inventory management system, PMI, and the Oracle financial reporting system. These control
deficiencies were a result of (i) insufficient documentation of information technology (“IT”) control processes such that the successful
operation of ITGCs was overly dependent upon knowledge and actions of certain qualified individuals for each IT system; (ii) insufficient
training of IT personnel on the operation and performance of their control responsibilities; and (iii) inadequate risk-assessment processes to
identify and assess IT environment changes and risks that could impact internal control over financial reporting. As a result of this material
weakness, manual and automated business process controls dependent on the affected ITGCs were ineffective because the controls had the
potential to be adversely impacted.
Management also identified a material weakness over the review of debt covenant compliance related to the failure to monitor and review
debt compliance covenants. This control deficiency was a result of (i) inadequate performance of controls surrounding debt covenant
compliance and disclosure, (ii) insufficient knowledge of the amended credit agreement, and (iii) insufficient communication with the lender
regarding debt covenant compliance and obtaining waivers. This material weakness also impacts other transactions relying on the debt
covenant calculations, including considerations of going concern. As a result of this material weakness, there was a factual material
misstatement on the consolidated balance sheet and in the going concern disclosure and debt covenant compliance disclosures in the 10-Q
quarterly report ended June 30, 2023.
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2023
financial statements, and this report does not affect our report dated January 26, 2024 on those financial statements.
126
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Phoenix, Arizona
January 26, 2024
127
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
128
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be disclosed by this item is incorporated herein by reference to our 2024 Proxy Statement, which we
expect to file with the SEC within 120 days after the end of our fiscal year ended September 30, 2023.
We have a code of conduct and ethics that applies to all employees, including our principal executive officer and principal financial
officer, as well as
investor.mesa-air.com/corporate-
governance/governance-overview. We intend to disclose any changes in, or waivers from, this code by posting such information on the same
website or by filing a Current Report on Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or The Nasdaq
Global Select Market.
the members of our Board of Directors. The code
is available at
to
ITEM 11. EXECUTIVE COMPENSATION
The information required to be disclosed by this item is incorporated herein by reference to our 2024 Proxy Statement which we expect
to file with the SEC within 120 days after the end of our fiscal year ended September 30, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required to be disclosed by this item is incorporated herein by reference to our 2024 Proxy Statement which we expect
to file with the SEC within 120 days after the end of our fiscal year ended September 30, 2023.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required to be disclosed by this item is incorporated herein by reference to our 2024 Proxy Statement which we expect
to file with the SEC within 120 days after the end of our fiscal year ended September 30, 2023.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be disclosed by this item is incorporated herein by reference to our 2024 Proxy Statement which we expect
to file with the SEC within 120 days after the end of our fiscal year ended September 30, 2023.
129
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated Financial Statements
The following financial statements are filed as part of this report:
Report of Independent Registered Public Accounting Firm for the years ended September 30, 2023 and 2022 (PCAOB ID: 49 and 42,
respectively).
Consolidated Balance Sheets as of September 30, 2023 and 2022
Consolidated Statements of Operations and Comprehensive (loss) income for the years ended September 30, 2023, 2022, and 2021
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2023, 2022, and 2021
Consolidated Statements of Cash Flows for the years ended September 30, September 30, 2023, 2022, and 2021
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial
statements or notes to the consolidated financial statements under Part II, Item 8 of this Annual Report on Form 10-K.
3.
Exhibits
The exhibits listed below are filed as part of this Annual Report. References under the caption "Incorporated by Reference" to exhibits
or other filings indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same
and that the exhibit referred to is incorporated by reference. Management contracts and compensatory plans or arrangements filed as
exhibits to this Annual Report are identified by the “#” sign.
130
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
3.1
Second Amended and Restated Articles of Incorporation of the
Registrant
Incorporated by Reference
Date
Number
Filed
Herewith
August 14, 2018
3.1
Form
8-K
3.2
3.3
4.1
4.2
4.3
Second Amended and Restated Bylaws of the Registrant
8-K
December 10, 2020
3.1
Amendment to Second Amended and Restated Bylaws of Mesa Air
8-K
January 13, 2023
3.2
Group, Inc., effective as of January 13, 2023
Form of Common Stock Certificate
S-1/A
August 6, 2018
4.1
Description of Capital Stock
X
Warrant Agreement, dated October 30, 2020, between Mesa Air
Group, Inc. and the United States Department of the Treasury
10-K
December 14, 2020
4.3
4.4
Form of Warrant (incorporated by reference to Annex B to Exhibit
10-K
December 14, 2020
4.4
4.3)
10.1#
Mesa Air Group, Inc. 2018 Equity Incentive Plan and related forms
S-8
August 16, 2019
99.1
of agreement
10.2#
Form of Indemnification Agreement between the Registrant and
S-1
July 13, 2018
10.5
each of its directors and executive officers
10.3#
Amended and Restated Employment Agreement between the
S-1/A
July 30, 2018
10.7
Registrant and Jonathan G. Ornstein, dated July 26, 2018
10.4#
Amended and Restated Employment Agreement between the
S-1/A
July 30, 2018
10.8
Registrant and Michael J. Lotz, dated July 26, 2018
10.5#
Amended and Restated Employment Agreement between the
S-1/A
July 30, 2018
10.9
Registrant and Brian S. Gillman, dated July 26, 2018
10.6#
Employment Agreement between the Registrant and Torque Zubeck,
10-K
December 10, 2021
10.10
dated February 23, 2021
10.7.1††
Second Amended and Restated United Capacity Purchase
10-K
December 14, 2020 10.10.15
10.7.2††
10.7.3††
Agreement between United Airlines, Inc. and Mesa Airlines, Inc.
dated November 4, 2020
First Amendment to the Second Amended and Restated United
Capacity Purchase Agreement between United Airlines, Inc. and
Mesa Airlines, Inc. dated September 22, 2021
Second Amendment to the Second Amended and Restated United
Capacity Purchase Agreement between United Airlines, Inc. and
Mesa Airlines, Inc. dated February 4, 2022
131
10-K
December 10, 2021
10.11.4
10-Q
May 9, 2022
10.1
Exhibit
Number
10.7.4††
10.7.5††
10.7.6††
Exhibit Description
Form
Date
Number
Filed
Herewith
Incorporated by Reference
Third Amendment to the Second Amended and Restated United
Capacity Purchase Agreement between United Airlines, Inc. and
Mesa Airlines, Inc. dated July 11, 2022
Fourth Amendment to the Second Amended and Restated United
Capacity Purchase Agreement between United Airlines, Inc. and
Mesa Airlines, Inc. dated August 8, 2022
10-Q
August 8, 2022
10.3
10-K
December 29, 2022
10.7.5
Third Amended and Restated Capacity Purchase Agreement among
United Airlines, Inc., Mesa Airlines, Inc., and Mesa Air Group, Inc.,
dated December 27, 2022
10-Q
February 9, 2023
10.2
10.8††
Aircraft Purchase Agreement between Mesa Airlines, Inc. and
10-K
December 29, 2022
10.8
United Airlines, Inc. dated September 27, 2022
10.9.1††
10.9.2††
10.9.3††
10.9.4††
10.9.5††
10.9.6††
10.9.7††
Amended and Restated Capacity Purchase Agreement among the
Registrant, Mesa Airlines, Inc. and American Airlines, Inc. dated
November 19, 2020, effective as of January 1, 2021
First Amendment to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated November 19, 2020, effective January 1, 2021
10-Q
February 9, 2021
10.1.1
10-Q
February 9, 2021
10.1.2
Amendment No. 2 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated April 9, 2021
10-Q
August 9, 2021
10.2.1
Amendment No. 3 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated April 19, 2021
10-Q
August 9, 2021
10.2.2
Amendment No. 4 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated June 9, 2021
10-Q
August 9, 2021
10.2.3
Amendment No. 5 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated August 9, 2021
10-K
December 10, 2021
10.12.6
Amendment No.7 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated March 31, 2022
10-Q
May 9, 2022
10.12.8
132
Exhibit
Number
10.9.8††
Exhibit Description
Amendment No.8 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated June 10, 2022
Incorporated by Reference
Form
10-Q
Date
August 8, 2022
Number
10.12.9
Filed
Herewith
10.9.9††
Amendment No.9 to the Amended and Restated Capacity Purchase
Agreement among the Registrant, Mesa Airlines, Inc. and American
Airlines, Inc. dated June 20, 2022
10-Q
August 8, 2022
10.12.10
10.9.10††
Amendment No.10 to the Amended and Restated Capacity
10-K
December 29, 2022
Purchase Agreement among the Registrant, Mesa Airlines, Inc. and
American Airlines, Inc. dated July 28, 2022
10.9.11
Amendment No.11 to the Amended and Restated Capacity
10-Q
February 9, 2023
10.1
Purchase Agreement among the Registrant, Mesa Airlines, Inc. and
American Airlines, Inc. dated July 28, 2022
10.10.1
Credit and Guaranty Agreement among the Registrant, Mesa
S-1/A
July 30, 2018
10.12.1
Airlines, Inc., Mesa Air Group Airline Inventory Management, L.L.C.,
the other guarantors party thereto from time to time, CIT Bank, N.A.
and the other lenders party thereto, dated August 12, 2016
Amendment No. 1 to Credit Agreement among the Registrant, Mesa
Airlines, Inc., Mesa Air Group Airline Inventory Management, L.L.C.
and CIT Bank, N.A., dated June 5, 2017
Amendment No. 2 to Credit Agreement among the Registrant, Mesa
Airlines, Inc., Mesa Air Group Airline Inventory Management, L.L.C.
and CIT Bank, N.A., dated June 27, 2017
Amendment No. 3 to Credit Agreement among the Registrant, Mesa
Airlines, Inc., Mesa Air Group Airline Inventory Management, L.L.C.
and CIT Bank, N.A., dated September 19, 2017
Amendment No. 4 to Credit Agreement among the Registrant, Mesa
Airlines, Inc., Mesa Air Group Airline Inventory Management, L.L.C.
and CIT Bank, N.A., dated April 27, 2018
10.10.2
10.10.3
10.10.4
10.10.5
S-1/A
July 30, 2018
10.12.2
S-1/A
July 30, 2018
10.12.3
S-1/A
July 30, 2018
10.12.4
S-1/A
July 30, 2018
10.12.5
10.10.6††
Second Amended and Restated Credit and Guaranty Agreement,
among the Registrant, Mesa Airlines, Inc., Mesa Air Group Airline
Inventory Management, L.L.C. and CIT Bank, NA, dated as of June
30, 2022
10-Q
February 9, 2023
10.6
10.10.7††
Amendment No. 1 to Second Amended and Restated Credit and
10-Q
February 9, 2023
10.4
Guaranty Agreement, dated December 27, 2022
133
Exhibit
Number
10.10.8††
Amendment No. 2 to Second Amended and Restated Credit and
Guaranty Agreement, dated January 27, 2023
Exhibit Description
10.10.9††
Amendment No. 3 to Second Amended and Restated Credit and
Guaranty Agreement, dated September 6, 2023
Incorporated by Reference
Form
10-Q
Date
February 9, 2023
Number
10.5
Filed
Herewith
X
10.11.1
Mortgage and Security Agreement among Mesa Airlines, Inc., Mesa
Air Group Airline Inventory Management, L.L.C., the other grantors
referred to therein and CIT Bank, N.A., dated August 12, 2016
S-1/A
July 30, 2018
10.13.1
10.13
Credit Agreement between Mesa Airlines, Inc. and Export
S-1/A
July 30, 2018
10.16
Development Canada, dated August 12, 2015
10.14.1
Credit Agreement between Mesa Airlines, Inc. and Export
S-1/A
July 30, 2018
10.17.1
Development Canada, dated January 18, 2016
10.14.2
Amendment No. 1 to Credit Agreement between Mesa Airlines, Inc.
S-1/A
July 30, 2018
10.17.2
and Export Development Canada, dated March 30, 2017
10.14.3
Omnibus Amendment Agreement among the Registrant, Mesa
S-1/A
July 30, 2018
10.17.3
Airlines, Inc. and Export Development Canada, dated April 30, 2018
10.15
Credit Agreement between Mesa Airlines, Inc. and Export
S-1/A
July 30, 2018
10.18
Development Canada, dated June 27, 2016
10.16.1
Office Lease Agreement between the Registrant and DMB Property
DRS
May 7, 2018
10.20.1
Ventures Limited Partnership, dated October 16, 1998
10.16.2
10.16.3
First Amendment to Lease between the Registrant and DMB
Property Ventures Limited Partnership, dated March 9, 1999
DRS
May 7, 2018
10.20.2
Second Amendment to Lease between the Registrant and DMB
Property Ventures Limited Partnership, dated November 8, 1999
DRS
May 7, 2018
10.20.3
10.16.4
Lease Amendment Three between the Registrant and CMD Realty
DRS
May 7, 2018
10.20.4
Investment Fund IV, L.P., dated November 7, 2000
10.16.5
Lease Amendment Four between the Registrant and CMD Realty
DRS
May 7, 2018
10.20.5
Investment Fund IV, L.P., dated May 15, 2001
10.16.6
Lease Amendment Five between the Registrant and CMD Realty
DRS
May 7, 2018
10.20.6
Investment Fund IV, L.P., dated October 11, 2002
10.16.7
Lease Amendment Six between the Registrant and CMD Realty
DRS
May 7, 2018
10.20.7
Investment Fund IV, L.P., dated April 1, 2003
134
Exhibit
Number
Exhibit Description
10.16.8
Amended and Restated Lease Amendment Seven between the
Registrant and CMD Realty Investment Fund IV, L.P., dated April 15,
2005
Form
DRS
Incorporated by Reference
Date
Number
Filed
Herewith
May 7, 2018
10.20.8
10.16.9
Lease Amendment Eight between the Registrant and CMD Realty
DRS
May 7, 2018
10.20.9
Investment Fund IV, L.P., dated October 12, 2005
10.16.10
Lease Amendment Nine between the Registrant and Transwestern
DRS
May 7, 2018
10.20.10
Phoenix Gateway, L.L.C., dated November 4, 2010
10.16.11
Lease Amendment Eleven between the Registrant and Phoenix
DRS
May 7, 2018
10.20.11
Office Grand Avenue Partners, LLC, dated July 31, 2014
10.16.12
Lease Amendment Twelve between the Registrant and Phoenix
Office Grand Avenue Partners, LLC, dated November 20, 2014
DRS
May 7, 2018
10.20.12
10.17.1††
Letter Agreement No. 12 between the Registrant and General
10-K
December 14, 2020
10.20.1
Electric Company, acting through its GE-Aviation business unit,
dated October 22, 2019, and effective as of October 9, 2019
10.17.2††
Letter Agreement No. 13 between the Registrant and General
10-K
December 14, 2020
10.20.2
Electric Company, acting through its GE-Aviation business unit,
dated December 11, 2019, and effective as of December 13, 2019
10.17.3††
Letter Agreement No. 13-1 between the Registrant and General
Electric Company, acting through its GE-Aviation business unit,
dated March 26, 2020
8-K
March 31, 2020
10.1
10.17.4††
Letter Agreement No. 12-1 between the Registrant and General
Electric Company, acting through its GE-Aviation business unit,
dated March 26, 2020
8-K
March 31, 2020
10.2
10.17.5††
Amended and Restated Letter Agreement No. 13-2 between the
Registrant and General Electric Company, acting through its GE-
Aviation business unit, dated October 8, 2020
10-K
December 14, 2020
10.20.5
10.18.1
10.18.2
Loan and Guarantee Agreement, dated as of October 30, 2020,
among Mesa Airlines, Inc., as Borrower, the Guarantors party
thereto from time to time, the United States Department of the
Treasury, and The Bank of New York Mellon, as Administrative
Agent and Collateral Agent
Modification and Waiver Agreement, dated December 22, 2022,
among Mesa Airlines, Inc., as Borrower, the Guarantor parties
thereto from time to time, the United States Department of the
Treasurer, and the Bank of New York Mellon, as Administrative
Agent and Collateral Agent
135
10-K
December 14, 2020
10.22.1
10-Q
February 9, 2023
10.3
Exhibit
Number
Exhibit Description
10.19
Fourteenth Amendment to Lease between the Registrant and BOF
AZ Phoenix Gateway Center LLC, dated December 15, 2021
Incorporated by Reference
Form
10-Q
Date
February 9, 2022
Number
10.1
Filed
Herewith
10.20††
Engine Sale and Purchase Agreement, dated December 27, 2022
10-Q
February 9, 2023
10.7
21.1
23.1
23.2
List of subsidiaries of the Registrant
Consent of RSM US LLP
Consent of Ernst and Young LLP
31.1
Certification of Principal Executive Officer pursuant to Rule
13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to Rule
13(a)-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2*
Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
97
Clawback Policy
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and
contained in Exhibit 101)
X
X
X
X
X
X
X
X
X
X
X
X
X
X
* This certification will not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that
section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act,
except to the extent specifically incorporated by reference into such filing.
136
** The exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Registrant agrees to
furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon its request.
# Management contract or compensatory plan.
†† Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively
harmful if publicly disclosed.
ITEM 16. FORM 10-K SUMMARY
None.
137
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: January 26, 2024
MESA AIR GROUP, INC.
By:
/s/ Michael J. Lotz
Michael J. Lotz
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on January 26, 2024 by the
following persons on behalf of the registrant and in the capacities indicated.
Signature
Title
Date
Chairman, Chief Executive Officer and Director
January 26, 2024
/s/Jonathan G. Ornstein
Jonathan G. Ornstein
/s/Michael J. Lotz
Michael J. Lotz
/s/Ellen N. Artist
Ellen N. Artist
/s/Mitchell Gordon
Mitchell Gordon
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
/s/Dana J. Lockhart
Dana J. Lockhart
Director
/s/Harvey W. Schiller
Harvey W. Schiller
Director
/s/Spyridon Skiados
Spyridon Skiados
Director
Jonathan Ireland
Director
138
January 26, 2024
January 26, 2024
January 26, 2024
January 26, 2024
January 26, 2024
January 26, 2024
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
Mesa Air Group, Inc. (“Mesa,” “we,” “our,” or “us”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as
amended: our common stock.
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our capital stock is based upon our Second Amended and Restated Articles of Incorporation (our “Articles”) and
our Amended and Restated Bylaws (our “Bylaws”). The summary is not complete, and is qualified by reference to our Articles and our Bylaws, which are
filed as exhibits to this Annual Report on Form 10-K and are incorporated by reference herein. We encourage you to read our Articles, our Bylaws and the
applicable provisions of the Nevada Revised Statutes (the “NRS”) for additional information.
Authorized Shares of Capital Stock
Our authorized capital stock consists of 125,000,000 shares of common stock, no par value per share, and 5,000,000 shares of preferred stock, no par value
per share. As of September 30, 2023, there were 40,940,326 shares of common stock issued and outstanding and no shares of preferred stock issued and
outstanding. The outstanding shares of our common stock are duly authorized, validly issued, fully paid and nonassessable.
Listing
Our common stock trades on the Nasdaq Global Select Market under the symbol “MESA.”
Voting Rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the shareholders, including the election of
directors, subject to any exclusive voting or director designation rights of the holders of shares of any series of our preferred stock that we may designate in
the future. The rights, preferences and privileges that may be granted to holders of our preferred stock, were we to issue such preferred stock, could include
dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, any or all of which may be greater than the rights of common stock. Our issuance of preferred stock could adversely
affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In
addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of Mesa or other corporate action.
We have no present plan to issue any such shares of preferred stock, although our board of directors (our “Board”) has the authority to do so without any
action by our shareholders, and to fix the rights, preferences, privileges and restrictions of such preferred stock. Our shareholders do not have cumulative
voting rights in the election of directors.
Dividend Rights
Holders of our common stock are entitled to receive dividends, if any, as may be declared from time to time by our Board out of legally available funds,
subject to preferences that may be applicable to any then-outstanding preferred stock and limitations under certain of our existing credit facilities and the
NRS.
Rights upon Liquidation
In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to the net assets legally available for distribution to
shareholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-
outstanding shares of preferred stock.
Other Rights and Preferences
Except as noted in the following sentence, our common stock has no sinking fund, redemption provisions, or preemptive, conversion, subscription or
exchange rights. We have granted United Airlines, Inc. the right to purchase
its pro rata portion of any equity securities that the Company may from time to time propose to issue or sell to any person, excluding with respect to equity
securities issued in connection with (i) a grant to any existing or prospective consultants, employees, officers or directors pursuant to any stock option,
employee stock purchase or similar equity-based plans or other compensation agreement; (ii) any acquisition by the Company or any of its subsidiaries of
the stock, assets, properties or business of any person; (iii) a stock split, stock dividend or any similar recapitalization; or (iv) any issuance of warrants or
other similar rights to purchase the Company’s common stock to lenders or other institutional investors in any arm’s length transaction providing debt
financing to the Company or any of its subsidiaries. Holders of our common stock entitled to vote on a matter, other than with respect to the election of
directors, may only take action at special or annual meetings of the shareholders where the number of votes cast in favor of the action exceeds the number
of votes cast in opposition to the action, unless voting by classes or series is required for any action of the shareholders by the NRS, our Articles or our
Bylaws, in which case the number of votes cast in favor of the action by the voting power of each such class or series must exceed the number of votes cast
in opposition to the action by the voting power of each such class or series. Shareholders entitled to vote on the election of directors at a special or annual
meeting of the shareholders at which a quorum is present may elect directors by a plurality of the votes cast. We reserve the right at any time, and from
time to time, to amend, alter, change or repeal any provision contained in our Articles, with the exception of Article 11, in the manner, and subject to
approval by shareholders as now or hereafter prescribed by statute, and all rights conferred upon holders of our common stock are granted subject to this
reservation.
Transfer Agent and Registrar
ComputerShare is the transfer agent and registrar for our common stock and its telephone number is (212) 805-7100.
Certain Transfer Restrictions
Our Articles impose limits on certain transfers of our stock, which limits are intended to preserve our ability to use our net operating loss carryforwards.
Specifically, our Articles prohibit the transfer of any shares of our capital stock that would result in (i) any person or entity owning 4.75% or more of our
then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity owning 4.75% or more of our then-outstanding capital
stock. These transfer restrictions expire upon the earliest of (i) the repeal of Section 382 of the Internal Revenue Code of 1986, as amended, or any
successor statute if our Board determines that such restrictions are no longer necessary to preserve our ability to use our net operating loss carryforwards,
(ii) the beginning of a fiscal year to which our Board determines that no net operating losses may be carried forward, or (iii) such other date as determined
by our Board. These transfer restrictions apply to the beneficial owner of the shares of our capital stock. The clients of an investment advisor are treated as
the beneficial owners of stock for this purpose if the clients have the right to receive dividends, if any, the power to acquire or dispose of the shares of our
capital stock, and the right to proceeds from the sale of our capital stock. Certain transactions approved by our Board, such as mergers and consolidations
meeting certain requirements set forth in our Articles, are exempt from the above-described transfer restrictions. Our Board also has the ability to grant
waivers, in its discretion, with respect to transfers of our stock that would otherwise be prohibited. Our Board has agreed to waive the above-referenced
restrictions in our Articles to those persons or entities that acquire shares of our common stock in excess of the 4.75% threshold in this offering. Any
transfer of common stock in violation of these restrictions will be void and will be treated as if such transfer never occurred.
Limited Ownership and Voting by Foreign Owners
To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our Articles restrict the ownership and voting of shares of our
common stock by people and entities who are not “citizens of the United States” as that term is defined in 49 U.S.C. § 40102(a). That statute defines
“citizen of the United States” as, among other things, a U.S. corporation, of which the president and at least two-thirds of the board of directors and other
managing officers are individuals who are citizens of the United States, which is under the actual control of citizens of the United States and in which at
least 75% of the voting interest is owned or controlled by persons who are citizens of the United States. Our Articles prohibit any non-U.S. citizen from
owning or controlling more than 24.9% of the aggregate votes of all outstanding shares of our common stock or 49.0% of the total number of outstanding
shares of our capital stock. The restrictions imposed by the above-described ownership caps are applied to each non-U.S. citizen in reverse chronological
order based on the date of registration on our foreign stock record. At no time may shares of our capital stock held by non-U.S. citizens be voted unless
such shares are reflected on the foreign stock record. The voting rights of non-U.S. citizens having voting control over any shares of our capital stock are
subject to automatic suspension to the extent required to ensure that we are in compliance with applicable law. In the event any transfer or issuance of
shares of our capital stock to a non-U.S. citizen would result in non-U.S. citizens owning more than the above-described cap amounts, such transfer or
issuance will be void and of no effect.
Anti-Takeover Provisions of Our Articles, Our Bylaws and the NRS
Certain provisions of the NRS deter hostile takeovers. Specifically, NRS 78.411 through 78.444 prohibit a publicly held Nevada corporation from engaging
in a “combination” with an “interested stockholder” for a period of two years following the date the person first became an interested shareholder, unless
(with certain exceptions) the “combination” or the transaction by which the person became an interested shareholder is approved in a prescribed manner.
Generally, a “combination” includes a merger, asset or stock sale, or certain other transactions resulting in a financial benefit to the interested shareholder.
Generally, an “interested stockholder” is a person who, together with affiliates and associates, beneficially owns or within two years prior to becoming an
“interested shareholder” did own, 10% or more of a corporation’s voting power. Our Articles exclude us from the restrictions imposed by these statutes.
Nevada’s “acquisition of controlling interest” statutes, NRS 78.378 through 78.3793, contain provisions governing the acquisition of a controlling interest
in certain Nevada corporations. These “control share” laws provide generally that any person that acquires a “controlling interest” in certain Nevada
corporations may be denied voting rights, unless a majority of the disinterested stockholders of the corporation elects to restore such voting rights. These
statutes provide that a person acquires a “controlling interest” whenever a person acquires shares of a subject corporation that, but for the application of
these provisions of the NRS, would enable that person to exercise (1) one-fifth or more, but less than one-third, (2) one-third or more, but less than a
majority or (3) a majority or more, of all of the voting power of the corporation in the election of directors. Once an acquirer crosses one of these
thresholds, shares that it acquired in the transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring
person acquired or offered to acquire a controlling interest become “control shares” to which the voting restrictions described above apply. Our Articles
provide that these statutes do not apply to us or to any acquisition of our common stock.
Section 78.139 of the NRS, to which we are subject, provides that directors may resist a change or potential change in control if the directors, by majority
vote of a quorum, determine that the change is opposed to, or not in, the best interests of the corporation.
In order to ensure that our capacity purchase agreements are not subject to early termination, our Articles prohibit the sale, transfer or assignment of our
capital stock to the extent that such transfer would result in a change of control. Our Articles also grant our Board the ability to establish one or more series
of preferred stock (including convertible preferred stock), to determine, with respect to any series of preferred stock, the voting powers, designations,
preferences, limitations, restrictions and relative rights of each such series, and to authorize the issuance of shares of any such series, making it possible for
our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Mesa. These
and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of Mesa.
Certain confidential information contained in this document, marked by brackets, has been omitted because it (i) is not material and (ii)
would be competitively harmful if publicly disclosed
Exhibit 10.11
EXECUTION VERSION
AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED CREDIT AND GUARANTY AGREEMENT
AND AMENDMENT TO PLEDGE OF ACCOUNTS
This AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED CREDIT AND GUARANTY
AGREEMENT AND AMENDMENT TO PLEDGE OF ACCOUNTS, dated as of
September 6, 2023 (this “Amendment”), is entered into by and among Mesa Airlines, Inc., a Nevada corporation (“Mesa”),
Mesa Air Group Airline Inventory Management, L.L.C., an Arizona limited liability company (“Mesa Inventory
Management”, and together with Mesa being referred to herein, individually, as a “Borrower” and, collectively, as the
“Borrowers”), Mesa Air Group, Inc., a Nevada corporation (“Holdings”, and together with the Borrowers being referred to
herein, individually, as a “Loan Party” and, collectively, as the “Loan Parties”), as a Guarantor, the persons designated as
“Lenders” on the signature pages hereto (the “Lenders”), and Wilmington Trust, National Association (“WTNA”) (as
successor to CIT Bank, a division of First- Citizens Bank & Trust Company), in its capacity as Administrative Agent (in
such capacity, the “Administrative Agent”), and WTNA (as successor to First-Citizens Bank & Trust Company (as
successor by merger to CIT Bank, N.A.)), as collateral agent (in such capacity, the “Collateral Agent”).
PRELIMINARY STATEMENTS:
WHEREAS, the Borrowers, Holdings, the Lenders and the Administrative Agent are parties to the Second
Amended and Restated Credit and Guaranty Agreement, dated as of June 30, 2022 (as amended by Amendment No. 1 to
Second Amended and Restated Credit and Guaranty Agreement, dated as of December 27, 2022, and by Amendment No. 2
to Second Amended and Restated Credit and Guaranty Agreement, dated as of January 27, 2023, the “Existing
Agreement”, as further amended by this Amendment, the “Amended Agreement”, and as the Amended Agreement may
hereafter be amended, amended and restated, supplemented or otherwise modified from time to time, the “Credit
Agreement”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such
terms in the Amended Agreement.
WHEREAS, Holdings and the Collateral Agent are parties to the Pledge of Accounts, dated as of January 27, 2023
(the “Existing Account Pledge Agreement”, as amended by this Amendment, the “Amended Account Pledge Agreement”,
and as the Amended Account Pledge Agreement may hereafter be amended, amended and restated, supplemented or
otherwise modified from time to time, the “Account Pledge Agreement”).
WHEREAS, the Loan Parties desire to (a) amend the Existing Agreement (i) to increase the aggregate amount of
the Revolving Commitments (as defined in the Existing Agreement), (ii) to provide for the reborrowing by the Borrowers,
on the Amendment Effective Date (as defined below), of the portion of the Effective Date Bridge Loans that was previously
repaid by the Borrowers, and (iii) in certain other particulars, and (b) amend the Existing Account Pledge Agreement in
certain particulars, and each of the Borrowers, Holdings, the Lenders, the Administrative Agent and the Collateral Agent
have agreed to such amendments on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration (the receipt
and sufficiency of which are hereby acknowledged), the parties hereto hereby agree as follows:
SECTION 1. Amendments to Existing Agreement. The Existing Agreement is, (i) with respect to the amendment
described in this Section 1(g), effective as of August 31, 2023, and (ii) with respect to the other amendments described in
this Section 1, effective as of the Amendment Effective Date upon the satisfaction (or waiver in writing by the Lenders in
their sole discretion) of the conditions precedent set forth in Section 3 hereof, hereby amended as follows:
(a)
Section 1.01 of the Existing Agreement is hereby amended by adding the following new definitions in
appropriate alphabetical order:
“Adjusted CMV” [***]
“Additional Bridge Loan” [***]
“Amendment No. 3” means Amendment No. 3 to Second Amended and Restated Credit and
Guaranty Agreement and Amendment to Pledge of Accounts, dated as of September 6, 2023, by and
among the Borrowers, Holdings, the Lenders party thereto, the Administrative Agent and the Collateral
Agent.
“Amendment No. 3 Effective Date” means September 6, 2023.
“ASA CMV” means the “current market value” (as defined by the American Society of
Appraisers).
“CMV” [***]
“CMV Ratio” [***]
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“Initial Effective Date Bridge Loan” means a Revolving Loan to be made by the Revolving
Lenders to the Borrower Representative for the benefit of Borrowers on the Amendment No. 1 Effective
Date pursuant to Sections 2.01(b) and 2.02, in a principal amount [***].
“Secured Obligations” has the meaning assigned to such term in the Security Agreement.
(b)
Section 1.01 of the Existing Agreement is hereby amended by deleting the definitions of “Adjusted OLV”,
“ASA OLV”, “OLV” and “OLV Ratio” in their entirety.
(c)
The Existing Agreement is hereby amended by replacing each use of the term “OLV” with the defined term
“CMV”.
(d) The Existing Agreement is hereby amended by replacing each use of the term “OLV Ratio” with the defined
term “CMV Ratio”.
(e)
The definition of “Borrowing Base” contained in Section 1.01 of the Existing Agreement is hereby amended
and restated in its entirety to read as follows:
“Borrowing Base” means an amount equal to:
(a)
(b)
(c)
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(e)
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(d)
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(f)
The definition of “Effective Date Bridge Loan” contained in Section 1.01 of the Existing Agreement is
hereby amended and restated in its entirety to read as follows:
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“Effective Date Bridge Loan” means, collectively, the Initial Effective Date Bridge Loan and the
Additional Bridge Loan, which Revolving Loans shall be due and payable on the Effective Date Bridge
Loan Maturity Date pursuant to Section 2.07(c).
(g) The definition of “Effective Date Loans” contained in Section 1.01 of the Existing Agreement is hereby
amended and restated in its entirety to read as follows:
“Effective Date Loans” means, collectively, the Effective Date Revolving Loan and the Initial
Effective Date Bridge Loan.
(h) The last sentence of the definition of “Revolving Commitment” contained in Section 1.01 of the Existing
Agreement is hereby amended and restated in its entirety to read as follows:
[***]
(i)
end thereof:
Section 2.01 of the Existing Agreement is hereby amended by adding the following new subsection (d) at the
“(d) Additional Bridge Loan. Subject to Section 2.01(a) and the other terms and conditions set
forth herein, [***]
(j)
Section 2.07(c) of the Existing Agreement is hereby amended and restated in its entirety to read as follows:
“(c) Effective Date Bridge Loan. On the Effective Date Bridge Loan Maturity Date, the
Borrowers shall repay to the Administrative Agent, for the ratable benefit of the Lenders, the outstanding
principal amount of the Effective Date Bridge Loan. [***]
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(k)
Schedule 2.01 to the Existing Agreement is hereby replaced in its entirety with Exhibit A attached hereto.
SECTION 2. Amendments to Existing Account Pledge Agreement. The Existing Account Pledge Agreement is,
effective as of the Amendment Effective Date upon the satisfaction (or waiver in writing by the Lenders in their sole
discretion) of the conditions precedent set forth in Section 3 hereof, hereby amended by replacing each reference to the
defined term “Obligations” set forth therein (including, without limitation, each reference to such defined term set forth in
Sections 2, 3, 4, 5, 13, 14, 15(b) and 16 of the Existing Account Pledge Agreement) with the defined term “Secured
Obligations”.
SECTION 3. Conditions of Effectiveness of Amendment. The amendments to the Existing Agreement set forth in
Section 1 hereof and the amendments to the Existing Account Pledge Agreement set forth in Section 2 hereof shall, in each
case, become effective as of the date hereof upon the satisfaction (or waiver in writing by the Lenders in their sole
discretion) of the following conditions (such date being referred to herein as the “Amendment Effective Date”):
(a) Documents. The Administrative Agent shall have received the following documents, each document being
dated the date of receipt thereof by the Administrative Agent (which date shall be the same for all such documents, except
as otherwise specified below), in form and substance reasonably satisfactory to the Lenders:
(i) Amendment. Counterparts of this Amendment duly executed and delivered by each Loan Party, the
Administrative Agent, the Collateral Agent and each Lender.
(ii) Security Agreement Amendment. Counterparts of Amendment No. 2 to the Security Agreement,
substantially in the form of Exhibit B attached hereto, duly executed of each of the parties thereto. The Lenders
hereby authorize and direct the Collateral Agent to execute and deliver such Amendment No. 2 to the Security
Agreement.
(iii)Secretary’s Certificate. A certificate, from each Loan Party, duly executed by such Loan Party’s
secretary or assistant secretary, attaching thereto: (A) true, correct and complete copies of the Organization
Documents of each Loan Party as in full force and effect on the Amendment Effective Date, certified to be true
and complete as of a recent
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date by the appropriate Governmental Authority of the state or other jurisdiction of its incorporation or
organization, where applicable; (B) true, correct and complete copies of such resolutions or other action,
incumbency certificates and/or other certificates of Responsible Officers of each Loan Party as the Administrative
Agent or the Lenders may require evidencing the identity, authority and capacity of each Responsible Officer
thereof
(1) executing any agreement, certificate or other document required to be delivered hereby or (2) authorized to act
as a Responsible Officer in connection with this Amendment and the other Loan Documents to which such Loan
Party is a party; and (C) such documents and certifications as the Administrative Agent or the Lenders may
reasonably require to evidence that each Loan Party is duly organized or formed, and is validly existing, in good
standing and qualified to engage in business in its state of organization or formation, in the state in which its
principal place of business is located, and in each other state in which a failure to be so qualified would have a
Material Adverse Effect.
(iv)Closing Certificate. A certificate executed by a Responsible Officer of the Borrower Representative
certifying the accuracy of the statements set forth in Sections 3(b) and 3(c) hereof.
(b) Representations and Warranties. The representations and warranties of each Loan Party contained in the
Loan Documents (including, without limitation, Article 5 of the Amended Agreement and Section 4 of this Amendment)
shall be true and correct in all material respects (provided, that if any such representation and warranty is by its terms
qualified by concepts of materiality, such representation and warranty shall be true and correct in all respects) on and as of
the Amendment Effective Date as though made on and as of such date, except to the extent that any such representation and
warranty specifically refers to an earlier date, in which case such representation and warranty shall be true and correct as of
such earlier date, and except that the representations and warranties contained in subsections (a) and (b) of Section 5.05 of
the Amended Agreement shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b),
respectively, of Section 6.01 of the Amended Agreement.
(c) Default. Both before and immediately after giving effect to this Amendment and the transactions
contemplated hereby, no Default or Event of Default shall have occurred and be continuing.
(d) Expenses. The Administrative Agent and the Lenders shall have received, in immediately available funds,
reimbursement or payment of all reasonable costs and expenses of the Administrative Agent and the Lenders (including,
but not limited to, the reasonable fees and expenses of their respective counsel (including any local counsel)), respectively,
required to be reimbursed or paid by the Loan Parties hereunder or under any other Loan Document.
(e) Other Documents. The Administrative Agent and the Lenders shall have received such other certificates,
documents, instruments, agreements and information with respect to the Loan Parties and the transactions contemplated by
this Amendment as the Administrative Agent or the Lenders may reasonably request, in each case in form and substance
reasonably satisfactory to the Administrative Agent and the Lenders.
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SECTION 4. Representations and Warranties of the Loan Parties. Each Loan Party represents and warrants as
follows:
(a)
Each Loan Party (i) is a corporation or limited liability company duly organized or formed, validly existing
and in good standing under the Laws of the jurisdiction of its incorporation or organization, (ii) has all requisite power and
authority and all requisite Governmental Approvals to (A) own its assets and carry on its business and (B) execute and
deliver this Amendment and perform its obligations under each of this Amendment, the Amended Agreement and the
Amended Account Pledge Agreement, except where the failure to have such Governmental Approvals, either singularly or
in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, and (iii) is duly qualified and
licensed and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or
the conduct of its business requires such qualification or license, except to the extent that failure to do so could not
reasonably be expected to result in a Material Adverse Effect.
(b) The execution and delivery by each Loan Party of this Amendment, and the performance by each Loan Party
of this Amendment, the Amended Agreement and the Amended Account Pledge Agreement, have been duly authorized by
all necessary corporate or other organizational action, and do not (i) contravene the terms of any Loan Party’s Organization
Documents; (ii) conflict with or result in any breach or contravention of, or the creation of any Lien under, (A) any
Contractual Obligation to which any Loan Party is a party or (B) any order, injunction, writ or decree of any Governmental
Authority or any arbitral award to which any Loan Party or the Collateral of any Loan Party is subject; (iii) violate any Law
(including Regulation U or Regulation X issued by the FRB); or (iv) result in a limitation on any licenses, permits or other
Governmental Approvals applicable to the business, operations or properties of any Loan Party except, in each case under
clauses (ii), (iii) and (iv) above, to the extent such conflict, breach, contravention, violation or limitation could not be
reasonably expected to have a Material Adverse Effect.
(c) No approval, consent, exemption, authorization, or other action by, or notice to, or filing or registration with,
any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or
performance by, or enforcement against, any Loan Party of this Amendment, the Amended Agreement, the Amended
Account Pledge Agreement or any other Loan Document, other than (i) those that have already been obtained and are in
full force and effect, (ii) filings and registrations to perfect the Liens created by the Collateral Documents and (iii) those the
failure of which to obtain or make could not reasonably be expected to have a Material Adverse Effect.
(d)
(i) This Amendment has been duly executed and delivered by each Loan Party; and
(ii) each of this Amendment, the Amended Agreement and the Amended Account Pledge Agreement constitutes a legal,
valid and binding obligation of each Loan Party that is party thereto, enforceable against each such Loan Party in
accordance with its terms, except as enforceability may be limited by applicable Debtor Relief Laws or by equitable
principles relating to enforceability.
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(e) Both immediately before and immediately after giving effect to this Amendment and the transactions
contemplated thereby, no Default or Event of Default has occurred and is continuing.
SECTION 5. Limitation on Scope. Except as expressly amended hereby, all of the representations, warranties,
terms, covenants and conditions of the Existing Agreement, the Existing Account Pledge Agreement and the other Loan
Documents shall remain in full force and effect in accordance with their respective terms and are hereby in all respects
ratified and confirmed. The amendments set forth herein shall be limited precisely as provided for herein and shall not be
deemed to be a waiver of, amendment of, consent to departure from or modification of any term or provision of the Loan
Documents or any other document or instrument referred to therein or of any transaction or further or future action on the
part of the Loan Parties requiring the consent of the Administrative Agent or the Lenders except to the extent specifically
provided for herein. Except as expressly set forth herein, the Administrative Agent and the Lenders have not, and shall not
be deemed to have, waived any of their respective rights and remedies against the Loan Parties for any existing or future
Defaults or Events of Default. The Administrative Agent and the Lenders reserve the right to insist on strict compliance
with the terms of the Credit Agreement, the Account Pledge Agreement and the other Loan Documents, and each Loan
Party expressly acknowledges such reservation of rights. Any future or additional amendment of any provision of the
Credit Agreement, the Account Pledge Agreement or any other Loan Document shall be effective only if set forth in a
writing separate and distinct from this Amendment and executed by the appropriate parties in accordance with the terms
thereof.
SECTION 6. Reference to and Effect on the Existing Agreement and the Other Loan Documents.
(iv) Upon the effectiveness of this Amendment: (i) each reference in the Existing Agreement to “this
Agreement”, “hereunder”, “hereof” or words of like import referring to the Existing Agreement shall mean and be a
reference to the Credit Agreement; (ii) each reference in the Existing Account Pledge Agreement to “this Pledge”,
“hereunder”, “hereof” or words of like import referring to the Existing Account Pledge Agreement shall mean and be a
reference to the Account Pledge Agreement; and (iii) each reference in any other Loan Document to “the Credit
Agreement”, “the Account Pledge Agreement”, “thereunder”, “thereof” or words of like import referring to the Existing
Agreement or the Existing Account Pledge Agreement, as applicable, shall mean and be a reference to the Credit
Agreement or the Account Pledge Agreement, as applicable. This Amendment shall constitute a “Loan Document”
executed and delivered in connection with the transactions contemplated by the Credit Agreement.
(v)
The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of the Lenders, the Administrative Agent or the Collateral Agent under
the Existing Agreement, the Existing Account Pledge Agreement or any other Loan Document, nor constitute a waiver of
any provision of the Existing Agreement, the Existing Account Pledge Agreement or any other Loan Document. Without
limiting the generality of the foregoing, the Collateral Documents and all of the Collateral described therein do and shall
continue to secure the payment of all Obligations.
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SECTION 7. Costs and Expenses. [***]
SECTION 8. Post-Closing Obligations. No later than [***] after the Amendment Effective Date (or such later
date as may be agreed by the Lenders in their sole discretion), the Loan Parties shall deliver, or cause to be delivered, to the
Administrative Agent and the Lenders favorable opinions of (a) DLA Piper LLP (US), special counsel to the Loan Parties,
(b) Brownstein Hyatt Farber Schreck, LLP, special Nevada counsel to the Loan Parties, and (c) Daugherty, Fowler,
Peregrin, Haught & Jenson, Aviation Authority counsel to the Loan Parties, in each case, addressed to the Administrative
Agent, the Collateral Agent and the Lenders and in form and substance reasonably satisfactory to the Lenders. Failure to
provide any of the above-referenced opinions within such [***] period shall constitute an immediate Event of Default (with
no grace period) under the Credit Agreement.
SECTION 9. Execution in Counterparts. This Amendment may be executed in any number of counterparts (and
by different parties hereto in separate counterparts), each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed
signature page to this Amendment by facsimile or other electronic transmission (including, without limitation, by Adobe
portable document format file (also known as a “PDF” file)) shall be as effective as delivery of a manually signed
counterpart of this Amendment. The words “execution,” “executed,” “signed,” “signature,” “delivery,” and words of like
import in or relating to this Amendment or any document to be signed in connection with this Amendment and the
transactions contemplated hereby shall be deemed to include electronic signatures, deliveries or the keeping of records in
electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature,
physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as
provided for in any applicable Laws, including the Federal Electronic Signatures in Global and National Commerce Act,
the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic
Transactions Act; provided, that nothing herein shall require the Administrative Agent to accept electronic signatures in any
form or format without its prior written consent; provided, further, that, without limiting the foregoing, upon the request of
the Administrative Agent, any electronic signature shall be promptly followed by such manually executed counterpart.
SECTION 10. Governing Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK WITHOUT
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REGARD TO ANY CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION
OF THE LAWS OF ANY OTHER JURISDICTION.
SECTION 11. Miscellaneous. This Amendment shall be subject to the provisions of Sections 12.04, 12.05, 12.13,
12.14, 12.16(b), 12.17 and 12.19 of the Credit Agreement, each of which is incorporated by reference herein, mutatis
mutandis.
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DocuSign Envelope ID: 22802692-C59C-400E-B3E6-AAFDD3810CC2
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective
officers thereunto duly authorized, as of the date first above written.
MESA AIRLINES, INC.
By
Name: Brian S. Gillman
Title: Secretary
MESA AIR GROUP AIRLINE INVENTORY
MANAGEMENT, L.L.C.
By: Mesa Airlines, Inc., its sole member
By
Name: Brian S. Gillman
Title: Secretary MESA AIR
GROUP, INC.
By
Name: Brian S. Gillman
Title: Secretary
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WILMINGTON BANK, NATIONAL
ASSOCIATION, as Administrative Agent and Collateral Agent
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By
Name: Chad May
Title: Vice President
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UNITED AIRLINES, INC., as a Lender
By
Name: Gerry Laderman
DocuSign Envelope ID: 0AA8283F-0D3C-4CCC-A49F-527118533E2F
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(cid:0)
Title:
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EVP and CFO
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EXHIBIT A
SCHEDULE 2.01
Commitments and Pro Rata Shares
Lender
Revolving Commitment Amount
[***]
[***]
Revolving Commitment Pro
Rata Share
[***]
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EXHIBIT A
Form of Amendment No. 2 to Mortgage and Security Agreement (Mesa Spare Parts Facility) [Attached.]
EXHIBIT B
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EXHIBIT B
EXECUTION VERSION
AMENDMENT NO. 2 TO MORTGAGE AND SECURITY AGREEMENT (MESA SPARE PARTS
FACILITY)
This AMENDMENT NO. 2 TO MORTGAGE AND SECURITY AGREEMENT (MESA
SPARE PARTS FACILITY), dated as of September 6, 2023 (this “Amendment”), is entered into by and among Mesa
Airlines, Inc., a Nevada corporation (“Mesa”), Mesa Air Group Airline Inventory Management, L.L.C., an Arizona limited
liability company (“Mesa Inventory Management”, and together with Mesa being referred to herein, individually, as a
“Grantor” and, collectively, as the “Grantors”), and Wilmington Trust, National Association (“WTNA”) (as successor to
First-Citizens Bank & Trust Company (as successor by merger to CIT Bank, N.A.)), acting as administrative agent and
collateral agent (in such capacity, the “Collateral Agent”) for the Lenders.
PRELIMINARY STATEMENTS:
WHEREAS, the Grantors and the Collateral Agent are parties to that certain Mortgage and Security Agreement
(Mesa Spare Parts Facility), dated as of August 12, 2016 (the “Original Mortgage”, as amended, amended and restated,
supplemented or otherwise modified from time to time prior to the date hereof, the “Existing Agreement” (which is more
particularly described on Exhibit A attached hereto), as amended by this Amendment, the “Amended Agreement”, and as
the Amended Agreement may hereafter be amended, amended and restated, supplemented or otherwise modified from time
to time, the “Security Agreement”).
WHEREAS, the Grantors, Mesa Air Group, Inc., a Nevada corporation, as a Guarantor, the Lenders from time to
time party thereto, and WTNA, as Administrative Agent, are parties to that certain Second Amended and Restated Credit
and Guaranty Agreement, dated as of June 30, 2022 (as amended by (i) Amendment No. 1 to Second Amended and
Restated Credit and Guaranty Agreement, dated as of December 27, 2022, (ii) Amendment No. 2 to Second Amended and
Restated Credit and Guaranty Agreement, dated as of January 27, 2023, and (iii) Amendment No. 3 to Second Amended
and Restated Credit and Guaranty Agreement and Amendment to Pledge of Accounts, dated as of September 6, 2023
(“Amendment No. 3 to Credit Agreement”), and as further amended, amended and restated, supplemented or otherwise
modified from time to time, the “Credit Agreement”). Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed to such terms in the Amended Agreement or the Credit Agreement, as applicable.
WHEREAS, in connection with Amendment No. 3 to Credit Agreement and as a condition to the effectiveness
thereof, the Grantors are required to enter into this Amendment.
NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration (the receipt
and sufficiency of which are hereby acknowledged), the parties hereto hereby agree as follows:
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SECTION 1. Amendments to Existing Agreement. The Existing Agreement is, effective as of the date hereof and
subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a)
The definition of “Other Debt Obligations” contained in Section 1.01 of the Existing Agreement is hereby
amended and restated in its entirety to read as follows:
“Other Debt Obligations” means all debts, liabilities, obligations, covenants and duties of any
Loan Party or any of its Subsidiaries owed to United from time to time under (i) the United CPA, (ii) any
aircraft leases, engine leases or other operating leases of any Loan Party or any of its Subsidiaries with
United, and (iii) any agreement or instrument evidencing Indebtedness of any Loan Party or any of its
Subsidiaries held by United (other than the Obligations), whether direct or indirect (including those
acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising
and including interest and fees that accrue after the commencement by or against any Loan Party or any
Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in
such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
SECTION 2. Conditions of Effectiveness of Amendment. The amendments to the Existing Agreement set forth in
Section 1 hereof shall become effective as of the date hereof when, and only when, the Collateral Agent shall have received
counterparts of this Amendment duly executed by each of the parties hereto. The filing of this Amendment with the
Aviation Authority shall constitute evidence that the amendments to the Existing Agreement set forth in Section 1 hereof
are in effect.
SECTION 3. Representations and Warranties of the Grantors. Each Grantor represents and warrants as follows:
(a)
Each Grantor has all requisite power and authority and all requisite Governmental Approvals to execute and
deliver this Amendment and perform its obligations under each of this Amendment and the Amended Agreement, except
where the failure to have such Governmental Approvals, either singularly or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.
(b) The execution and delivery by each Grantor of this Amendment, and the performance by each Grantor of
this Amendment and the Amended Agreement, have been duly authorized by all necessary corporate or other
organizational action, and do not (i) contravene the terms of any Grantor’s Organization Documents; (ii) conflict with or
result in any breach or contravention of, or the creation of any Lien under, (A) any Contractual Obligation to which any
Grantor is a party or (B) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which
any Grantor or the Collateral of any Grantor is subject; (iii) violate any Law (including Regulation U or Regulation X
issued by the FRB); or (iv) result in a limitation on any licenses, permits or other Governmental Approvals applicable to the
business, operations or properties of any Grantor except, in each case under clauses (ii), (iii) and (iv) above, to the
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extent such conflict, breach, contravention, violation or limitation could not be reasonably expected to have a Material
Adverse Effect.
(c) No approval, consent, exemption, authorization, or other action by, or notice to, or filing or registration with,
any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or
performance by, or enforcement against, any Grantor of this Amendment or the Amended Agreement, other than (i) those
that have already been obtained and are in full force and effect, (ii) filings and registrations to perfect the Liens created by
the Amended Agreement and (iii) those the failure of which to obtain or make could not reasonably be expected to have a
Material Adverse Effect.
(d)
(i) This Amendment has been duly executed and delivered by each Grantor; and (ii) each of this Amendment
and the Amended Agreement constitutes a legal, valid and binding obligation of each Grantor that is party thereto,
enforceable against each such Grantor in accordance with its terms, except as enforceability may be limited by applicable
Debtor Relief Laws or by equitable principles relating to enforceability.
SECTION 4. Limitation on Scope. Except as expressly amended hereby, all of the representations, warranties,
terms, covenants and conditions of the Existing Agreement and the other Loan Documents shall remain in full force and
effect in accordance with their respective terms and are hereby in all respects ratified and confirmed. The amendments set
forth herein shall be limited precisely as provided for herein and shall not be deemed to be a waiver of, amendment of,
consent to departure from or modification of any term or provision of the Loan Documents or any other document or
instrument referred to therein or of any transaction or further or future action on the part of the Grantors requiring the
consent of the Collateral Agent or any other Secured Party except to the extent specifically provided for herein. Except as
expressly set forth herein, the Collateral Agent and the other Secured Parties have not, and shall not be deemed to have,
waived any of its rights and remedies against the Grantors for any existing or future Defaults or Events of Default. The
Collateral Agent and the other Secured Parties reserve the right to insist on strict compliance with the terms of the Security
Agreement and the other Loan Documents, and each Grantor expressly acknowledges such reservation of rights. Any future
or additional amendment of any provision of the Security Agreement or any other Loan Document shall be effective only if
set forth in a writing separate and distinct from this Amendment and executed by the appropriate parties in accordance with
the terms thereof.
SECTION 5. Reference to and Effect on the Existing Agreement and the Other Loan Documents.
(i) Upon the effectiveness of this Amendment: (i) each reference in the Existing Agreement to “this Mortgage”,
“hereunder”, “hereof” or words of like import referring to the Existing Agreement shall mean and be a reference to the
Security Agreement; and (ii) each reference in any other Loan Document to “the Security Agreement”, “the Mortgage”,
“thereunder”, “thereof” or words of like import referring to the Existing Agreement shall mean and be a reference to the
Security Agreement. This Amendment shall constitute a “Loan
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Document” executed and delivered in connection with the transactions contemplated by the Credit Agreement.
(ii) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of the Collateral Agent or any other Secured Party under the Existing
Agreement or any other Loan Document, nor constitute a waiver of any provision of the Existing Agreement or any other
Loan Document. Without limiting the generality of the foregoing, the Amended Agreement and all of the Collateral
described therein do and shall continue to secure the payment of all Obligations.
SECTION 6. Costs and Expenses. [***]
SECTION 7. Execution in Counterparts. This Amendment may be executed in any number of counterparts (and
by different parties hereto in separate counterparts), each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the same instrument. Delivery of an executed
signature page to this Amendment by facsimile or other electronic transmission (including, without limitation, by Adobe
portable document format file (also known as a “PDF” file)) shall be as effective as delivery of a manually signed
counterpart of this Amendment. The words “execution,” “executed,” “signed,” “signature,” “delivery,” and words of like
import in or relating to this Amendment or any document to be signed in connection with this Amendment and the
transactions contemplated hereby shall be deemed to include electronic signatures, deliveries or the keeping of records in
electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature,
physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as
provided for in any applicable Laws, including the Federal Electronic Signatures in Global and National Commerce Act,
the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic
Transactions Act; provided, that nothing herein shall require the Collateral Agent to accept electronic signatures in any
form or format without its prior written consent; provided, further, that, without limiting the foregoing, upon the request of
the Collateral Agent, any electronic signature shall be promptly followed by such manually executed counterpart.
SECTION 8. Governing Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK WITHOUT
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REGARD TO ANY CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION
OF THE LAWS OF ANY OTHER JURISDICTION.
SECTION 9. Miscellaneous. This Amendment shall be subject to the provisions of Sections 12.14, 12.16(b) and
12.17 of the Credit Agreement, each of which is incorporated by reference herein, mutatis mutandis.
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[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
DocuSign Envelope ID: 22802692-C59C-400E-B3E6-AAFDD3810CC2
S-1
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective
officers thereunto duly authorized, as of the date first above written.
MESA AIRLINES, INC.
By:
Name: Brian S. Gillman
Title: Secretary
MESA AIR GROUP AIRLINE INVENTORY
MANAGEMENT, L.L.C.
By: Mesa Airlines, Inc., is sole member
By:
Name: Brian S. Gillman
Title: Secretary
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DocuSign Envelope ID: F907169D-C7C6-468C-9116-9F8B2378728F
S-2
WILMINGTON TRUST, NATIONAL
ASSOCIATION, as Collateral Agent
By:
Name: Chad May
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DocuSign Envelope ID: F907169D-C7C6-468C-9116-9F8B2378728F
S-3
(cid:0)
Title:
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DocuSign Envelope ID: F907169D-C7C6-468C-9116-9F8B2378728F
S-4
Vice President
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DESCRIPTION OF EXISTING AGREEMENT:
EXHIBIT A
Mortgage and Security Agreement (Mesa Spare Parts Facility), dated as of August 12, 2016, by Mesa Airlines, Inc.
and Mesa Air Group Airline Inventory Management, L.L.C., as grantors, in favor of Wilmington Trust, National
Association (as successor to First-Citizens Bank & Trust Company (as successor by merger to CIT Bank, N.A.)), as
administrative agent and collateral agent, which was recorded by the Federal Aviation Administration on October 5, 2016
and assigned Conveyance No. CW010632, as supplemented by the following described instruments:
Instrument
Mortgage and Security
Agreement Supplement No. 1
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 2
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 3
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 4
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 5
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 6
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 7
(Mesa Spare Parts Facility)
Mortgage and Security
Agreement Supplement No. 8
(Mesa Spare Parts Facility)
Date of Instrument
FAA Recording Date
FAA Conveyance No.
08/30/16
10/05/16
CW010632
08/30/16
10/05/16
CW010632
11/23/16
12/16/16
NJ008907
09/27/19
10/30/19
LC013229
09/27/19
10/30/19
LC013230
04/23/20
05/27/20
LJ014394
12/30/20
03/09/21
CF013605
01/29/21
04/07/21
DT023131
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Mortgage and Security
Agreement Supplement No. 9
(Mesa Spare Parts Facility)
09/08/21
12/13/21
DP027766
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as of 12/27/22
04/11/23
WV009599
4
as of 1/27/23
06/07/23
SD027882
Amendment No. 1 to
Mortgage and Security
Agreement (Mesa Spare
Parts Facility)
Agency Resignation,
Appointment, Assignment
and Assumption Agreement,
among Wilmington Trust,
National Association, as
Successor Collateral Agent,
Mesa Airlines, Inc. and
Mease Air Group Airline
Inventory Management,
L.L.C., as Borrowers, Mesa
Air Group, Inc., and First-
Citizens Bank & Trust
Company, as Resigning
Collateral Agent
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List of Subsidiaries of Mesa Air Group, Inc.
Subsidiaries
Mesa Airlines, Inc.
Mesa Air Group—Airline Inventory Management, LLC
Exhibit 21.1
Jurisdiction of
Incorporation or
Organization
Nevada
Arizona
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (No. 333-251290 and 333-270450) on Form S-3 and by reference
in the Registration Statement (No. 333-233313 and 333-233314) on Form S-8 of Mesa Air Group, Inc. of our reports dated January 26, 2024,
relating to the consolidated financial statements, and the effectiveness of internal control over financial reporting (which report expresses an
adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of material weaknesses) of Mesa Air
Group, Inc., appearing in this Annual Report on Form 10-K of Mesa Air Group, Inc. for the year ended September 30, 2023.
/s/ RSM US LLP
Phoenix, Arizona
January 26, 2024
1
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-270450) of Mesa Air Group, Inc.,
(2) Registration Statement (Form S-3 No. 333-251290) of Mesa Air Group, Inc.,
(3) Registration Statement (Form S-8 No. 333-233314) pertaining to the Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan, and
(4) Registration Statement (Form S-8 No. 333-233313) pertaining to the Mesa Air Group, Inc. 2018 Equity Incentive Plan;
of our report dated December 29, 2022, with respect to the consolidated financial statements of Mesa Air Group, Inc. included in this Annual Report (Form
10-K) of Mesa Air Group, Inc. for the year ended September 30, 2023.
/s/ Ernst & Young LLP
Phoenix, Arizona
January 26, 2024
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jonathan G. Ornstein, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Mesa Air Group, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: January 26, 2024
/s/ JONATHAN G. ORNSTEIN
Jonathan G. Ornstein
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Lotz, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Mesa Air Group, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: January 26, 2024
/s/ Michael J. Lotz
Michael J. Lotz
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Jonathan G. Ornstein, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
my knowledge, the Annual Report on Form 10-K of Mesa Air Group, Inc. for the fiscal year ended September 30, 2023 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of Mesa Air Group, Inc.
Dated: January 26, 2024
/s/ JONATHAN G. ORNSTEIN
Jonathan G. Ornstein
Chairman and Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Lotz, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge, the Annual Report on Form 10-K of Mesa Air Group, Inc. for the fiscal year ended September 30, 2023 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of Mesa Air Group, Inc.
Dated: January 26, 2024
/s/ Michael J. Lotz
Michael J. Lotz
Chief Financial Officer
MESA AIR GROUP, INC.
POLICY FOR RECOVERY OF ERRONEOUSLY AWARDED INCENTIVE COMPENSATION
Exhibit 97
1. INTRODUCTION
(Adopted August 3, 2023)
Mesa Air Group, Inc. (the “Company”) is adopting this policy (this “Policy”) to provide for the Company’s recovery of certain
Incentive Compensation (as defined below) erroneously awarded to Affected Officers (as defined below) under certain circumstances.
This Policy is administered by the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the
“Board”). The Committee shall have full and final authority to make any and all determinations required or permitted under this Policy. Any
determination by the Committee with respect to this Policy shall be final, conclusive and binding on all parties. The Board may amend or
terminate this Policy at any time.
This Policy is intended to comply with Section 10D of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”),
Rule 10D-1 thereunder and the applicable rules of any national securities exchange on which the Company’s securities are listed (the
“Exchange”) and will be interpreted and administered consistent with that intent.
2. EFFECTIVE DATE
This Policy shall apply to all Incentive Compensation paid or awarded on or after the date of adoption of this Policy, and to the
extent permitted or required by applicable law.
3. DEFINITIONS
For purposes of this Policy, the following terms shall have the meanings set forth below:
“Affected Officer” means any current or former “officer” as defined in Exchange Act Rule 16a-1, and any other senior executives
as determined by the Committee.
“Erroneously Awarded Compensation” means the amount of Incentive Compensation received that exceeds the amount of
Incentive Compensation that otherwise would have been received had it been determined based on the Restatement, computed without regard
to any taxes paid. In the case of Incentive Compensation based on stock price or total shareholder return, where the amount of Erroneously
Awarded Compensation is not subject to mathematical recalculation directly from the information in the Restatement, the amount shall reflect
a reasonable estimate of the effect of the Restatement on the stock price or total shareholder return upon which the Incentive Compensation
was received, as determined by the Committee in its sole discretion. The Committee may determine the form and amount of Erroneously
Awarded Compensation in its sole discretion.
“Financial Reporting Measure” means any measure that is determined and presented in accordance with the accounting principles
used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures, whether or
not such measure is presented within the financial statements or included in a filing with the Securities and Exchange Commission. Stock
price and total shareholder return are Financial Reporting Measures.
“Incentive Compensation” means any compensation that is granted, earned or vested based in whole or in part on the attainment of
a Financial Reporting Measure. For purposes of clarity, base salaries, bonuses or equity awards paid solely upon satisfying one or more
subjective standards, strategic or operational measures, or continued employment are not considered Incentive Compensation, unless such
awards were granted, paid or vested based in part on a Financial Reporting Measure.
“Restatement” means an accounting restatement due to the material noncompliance of the Company with any financial reporting
requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial
statements that is material to the previously issued financial statements (i.e., a “Big R” restatement), or that would result in a material
misstatement if the error was corrected in the current period or left uncorrected in the current period (i.e., a “little r” restatement).
4. RECOVERY
If the Company is required to prepare a Restatement, the Company shall seek to recover and claw back from any Affected Officer
reasonably promptly the Erroneously Awarded Compensation that is received by the Affected Officer:
(i)
(ii)
(iii)
(iv)
after the person begins service as an Affected Officer;
who serves as an Affected Officer at any time during the performance period for that Incentive Compensation;
while the Company has a class of securities listed on the Exchange; and
during the three completed fiscal years immediately preceding the date on which the Company was required to prepare the
Restatement (including any transition period within or immediately following those years that results from a change in the
Company’s fiscal year, provided that a transition period of nine to 12 months will be deemed to be a completed fiscal
year).
For purposes of this Policy:
•
•
Erroneously Awarded Compensation is deemed to be received in the Company’s fiscal year during which the Financial
Reporting Measure specified in the Incentive Compensation is attained, even if the payment or grant of the Incentive
Compensation occurs after the end of that period; and
the date the Company is required to prepare a Restatement is the earlier of (x) the date the Board, the Committee or any
officer of the Company authorized to take such action concludes, or reasonably should have concluded, that the Company
is required to prepare the Restatement, or (y) the date a court, regulator, or other legally authorized body directs the
Company to prepare the Restatement.
For purposes of clarity, in no event shall the Company be required to award any Affected Officers an additional payment or other
compensation if the Restatement would have resulted in the grant, payment or vesting of Incentive Compensation that is greater than the
Incentive Compensation actually received by the Affected Officer. The recovery of Erroneously Awarded Compensation is not dependent on
if or when the Restatement is filed.
2
5. SOURCES OF RECOUPMENT
To the extent permitted by applicable law, the Committee may, in its discretion, seek recoupment from the Affected Officer(s)
through any means it determines, which may include any of the following sources: (i) prior Incentive Compensation payments; (ii) future
payments of Incentive Compensation; (iii) cancellation of outstanding Incentive Compensation; (iv) direct repayment; and (v) non-Incentive
Compensation or securities held by the Affected Officer. To the extent permitted by applicable law, the Company may offset such amount
against any compensation or other amounts owed by the Company to the Affected Officer.
6. LIMITED EXCEPTIONS TO RECOVERY
Notwithstanding the foregoing, the Committee, in its discretion, may choose to forgo recovery of Erroneously Awarded
Compensation under the following circumstances, provided that the Committee (or a majority of the independent members of the Board) has
made a determination that recovery would be impracticable because:
(i) The direct expense paid to a third party to assist in enforcing this Policy would exceed the recoverable amounts; provided that
the Company has made a reasonable attempt to recover such Erroneously Awarded Compensation, has documented such
attempt and has (to the extent required) provided that documentation to the Exchange;
(ii) Recovery would violate home country law where the law was adopted prior to November 28, 2022, and the Company
provides an opinion of home country counsel to that effect to the Exchange that is acceptable to the Exchange; or
(iii) Recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal
Revenue Code of 1986, as amended.
7. NO INDEMNIFICATION OR INSURANCE
The Company will not indemnify, insure or otherwise reimburse any Affected Officer against the recovery of Erroneously Awarded
Compensation.
8. NO IMPAIRMENT OF OTHER REMEDIES
This Policy does not preclude the Company from taking any other action to enforce an Affected Officer’s obligations to the
Company, including termination of employment, institution of civil proceedings, or reporting of any misconduct to appropriate government
authorities. This Policy is in addition to the requirements of Section 304 of the Sarbanes-Oxley Act of 2002 that are applicable to the
Company’s Chief Executive Officer and Chief Financial Officer.
3