Mesa Airlines(MESA) - 2022 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section warns about the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements subject to known and unknown risks, uncertainties, and other important factors that may cause actual results to differ materially[7] - Key factors that could cause actual results to differ include public health epidemics (like COVID-19), pilot and mechanic supply/retention, volatility of attrition, dependence on capacity purchase agreements, failure to meet operational targets, increased labor costs, reduced aircraft utilization, financial strength of major partners, debt levels, and ability to keep costs low[9] PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements This section presents Mesa Air Group, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive income (loss), statements of stockholders' equity, and statements of cash flows for the periods ended June 30, 2022 and September 30, 2021, along with accompanying notes Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and stockholders' equity from September 30, 2021, to June 30, 2022, primarily driven by a reduction in cash and cash equivalents and retained earnings, alongside an increase in assets held for sale | Metric | June 30, 2022 (in thousands) | September 30, 2021 (in thousands) | Change (in thousands) | | :--------------------------------- | :----------------------------- | :-------------------------------- | :-------------------- | | Total assets | $1,320,185 | $1,456,597 | $(136,412) | | Total liabilities | $897,149 | $968,550 | $(71,401) | | Total stockholders' equity | $423,036 | $488,047 | $(65,011) | | Cash and cash equivalents | $54,448 | $120,517 | $(66,069) | | Assets held for sale | $36,528 | $— | $36,528 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the three months ended June 30, 2022, the company reported a net loss of $10.0 million, a significant decline from a net income of $4.3 million in the prior year, primarily due to the absence of government grant recognition and increased operating expenses. For the nine months ended June 30, 2022, a net loss of $67.0 million was recorded, compared to a net income of $24.1 million in the same period last year, largely impacted by asset impairment charges and the lack of government grants | Metric (in thousands) | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | Change (YoY) | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | Change (YoY) | | :------------------------------------ | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Total operating revenues | $134,397 | $125,157 | 7.4% | $405,367 | $372,808 | 8.7% | | Total operating expenses | $134,184 | $110,783 | 21.1% | $453,895 | $314,701 | 44.2% | | Operating income (loss) | $213 | $14,374 | (98.5%) | $(48,528) | $58,107 | (183.5%) | | Net income (loss) | $(9,985) | $4,276 | (333.3%) | $(67,042) | $24,083 | (378.4%) | | Basic EPS | $(0.28) | $0.12 | (333.3%) | $(1.86) | $0.68 | (373.5%) | | Diluted EPS | $(0.28) | $0.11 | (354.5%) | $(1.86) | $0.62 | (400.0%) | - Government grant recognition, which offset operating expenses by $26.1 million in Q2 2021 and $93.4 million in the first nine months of 2021, was $0 in the corresponding 2022 periods, significantly impacting profitability[13] - Impairment of assets held for sale was $39.5 million for the nine months ended June 30, 2022, compared to $0 in the prior year, contributing to the net loss[13] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $488.0 million at September 30, 2021, to $423.0 million at June 30, 2022, primarily due to a net loss of $67.0 million for the nine months ended June 30, 2022, partially offset by stock compensation expense and employee share purchases | Metric (in thousands) | September 30, 2021 | June 30, 2022 | Change | | :------------------------------------ | :----------------- | :------------ | :------- | | Common Stock and Additional Paid-In Capital | $256,372 | $258,403 | $2,031 | | Retained Earnings | $231,675 | $164,633 | $(67,042) | | Total Stockholders' Equity | $488,047 | $423,036 | $(65,011) | - The company reported a net loss of $67.0 million for the nine months ended June 30, 2022, which directly reduced retained earnings[18] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased from $131.2 million in the nine months ended June 30, 2021, to $13.6 million in the same period of 2022, primarily due to the net loss and changes in working capital. Investing activities saw increased cash usage, while financing activities also used more cash, leading to a net decrease in cash, cash equivalents, and restricted cash | Metric (in thousands) | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | Change | | :------------------------------------------ | :--------------------------- | :--------------------------- | :------- | | Net cash provided by operating activities | $13,584 | $131,212 | $(117,628) | | Net cash used in investing activities | $(40,384) | $(17,039) | $(23,345) | | Net cash used in financing activities | $(39,271) | $(33,264) | $(6,007) | | Net change in cash, cash equivalents and restricted cash | $(66,071) | $80,909 | $(146,980) | | Cash, cash equivalents and restricted cash at end of period | $57,796 | $183,750 | $(125,954) | - The significant decrease in operating cash flow is largely attributed to a net loss of $67.0 million in 2022 compared to a net income of $24.1 million in 2021, and a $39.5 million impairment of assets held for sale[21][226] - Capital expenditures increased from $10.7 million in 2021 to $33.2 million in 2022, primarily for spare engines, rotable parts, and other equipment[21][229] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the condensed consolidated financial statements, covering the company's organization, significant accounting policies, financial instrument details, debt obligations, equity, and various commitments and contingencies Note 1. Organization and Operations Mesa Air Group, Inc. operates as a regional air carrier under Capacity Purchase Agreements (CPAs) with American Airlines and United Airlines, and a Flight Services Agreement (FSA) with DHL, providing scheduled passenger and cargo services. The company is actively addressing a significant pilot shortage through various initiatives, including increased training capacity and pilot incentives, while also managing liquidity through asset sales and debt refinancing plans - As of June 30, 2022, Mesa's fleet consisted of 168 aircraft, operating approximately 360 daily departures with 2,600 employees[23] - The company operates flights as American Eagle, United Express, or DHL Express, under revenue-guarantee arrangements that reduce exposure to fluctuations in passenger traffic, fares, and fuel prices[23][24] - The pilot shortage has significantly impacted block hour production and financial results, leading to actions such as expanding training capacity, implementing bonus programs, and broadening the United Aviate program[25][27][28] - Mesa plans to address $112.8 million in debt maturities within the next 12 months by utilizing cash on hand, operating cash flows, monetizing 18 CRJ-700 aircraft, refinancing its revolving credit facility, and further amending CPAs[30] - Mesa did not meet CCF or CD0 minimum performance levels under the American CPA for May and June 2022, giving American the right to remove aircraft, though American has not yet exercised these rights. Subsequent to June 30, 2022, Amendment No. 10 reset the measurement periods[36] - For April, May, and June 2022, Mesa did not meet CCF and CA minimum performance levels under the DHL FSA, but management received a waiver[45] Note 2. Summary of Significant Accounting Policies This note outlines the accounting principles used in preparing the condensed consolidated financial statements, including GAAP conformity, consolidation policies, segment reporting (single segment), use of estimates, and revenue recognition for contract and pass-through revenues, as well as lease accounting - The company operates as a single operating and reportable segment, as the Chief Operating Decision Maker evaluates performance and allocates resources based on consolidated financial information[50] - Contract revenue is recognized when service is provided, based on fixed monthly amounts per aircraft, flights, and block hours, including aircraft rental revenue from GoJet Airlines LLC[52][59] - Pass-through revenue includes reimbursements for direct expenses like passenger liability and hull insurance, property taxes, landing fees, and major maintenance on aircraft leased from major partners[53] | Deferred Revenue Recognition (in thousands) | Total Revenue | | :---------------------------------------- | :------------ | | 2022 (remainder of) | $106 | | 2023 | $759 | | 2024 | $4,860 | | 2025 | $8,282 | | 2026 | $3,984 | | Thereafter | $4,729 | | Total | $22,720 | - Lease revenue recognized under GoJet agreements, net of amortization of lease incentive assets, was $7.1 million and $20.3 million for the three and nine months ended June 30, 2022, respectively, significantly up from $3.4 million and $4.0 million in the prior year periods[59] | Future Minimum Rental Income (in thousands) | Total Payments | | :---------------------------------------- | :------------- | | 2022 (remainder of) | $5,460 | | 2023 | $21,840 | | 2024 | $21,840 | | 2025 | $21,840 | | 2026 | $21,840 | | Thereafter | $82,733 | | Total | $175,553 | - Heavy maintenance and major overhaul costs for owned E-175 fleet are deferred and amortized, while other fleets use the direct expense method[70][71] Note 3. Recent Accounting Pronouncements The company adopted ASU No. 2019-12, Income Taxes, on October 1, 2021, with no material impact. It continues to evaluate ASU 2020-04, Reference Rate Reform, regarding contracts affected by LIBOR discontinuation - Adoption of ASU 2019-12 (Income Taxes) on October 1, 2021, had no material impact on the company[74] - The company is evaluating ASU 2020-04 (Reference Rate Reform) for contracts referencing LIBOR, with optional expedients available through December 31, 2022[75] Note 4. Concentrations of Credit Risk Mesa Air Group's revenue and accounts receivable are highly concentrated with American Airlines, United Airlines, DHL, and GoJet. American and United each accounted for approximately 45-52% of total revenue, making the termination of either CPA a material adverse risk - All revenue for the three and nine months ended June 30, 2022 and 2021, was derived from American and United CPAs, DHL FSA, and leases to GoJet[78] | Major Partner Revenue Concentration | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | American Airlines | 46% | 45% | 46% | 46% | | United Airlines | 47% | 51% | 48% | 52% | - Termination of either the American or United CPA would have a material adverse effect on the company's business, financial condition, results of operations, and cash flows[79] Note 5. Intangible Assets The company's intangible assets primarily consist of customer relationships, with a net carrying value of $6.0 million as of June 30, 2022, and a remaining amortization term of 13.3 years | Intangible Assets (in thousands) | June 30, 2022 | September 30, 2021 | | :----------------------------- | :------------ | :----------------- | | Customer relationship | $43,800 | $43,800 | | Accumulated amortization | $(37,774) | $(37,008) | | Net carrying value | $6,026 | $6,792 | - Total amortization expense was $0.3 million for the three months ended June 30, 2022 and 2021, and $0.8 million and $0.9 million for the nine months ended June 30, 2022 and 2021, respectively[81] - The remaining amortization term for intangible assets is 13.3 years as of June 30, 2022[82] Note 6. Assets Held for Sale During 2022, management committed to selling certain CRJ-900 and CRJ-200 aircraft, classifying them as assets held for sale and recording impairment losses of $39.5 million - The company recorded impairment losses of $39.5 million on assets held for sale (CRJ-900 and CRJ-200 aircraft) during the nine months ended June 30, 2022[83] - Assets held for sale are recorded at the lower of their current carrying value or fair market value less costs to sell, with fair values based on observable and unobservable inputs[83] Note 7. Balance Sheet Information This note provides detailed breakdowns of various balance sheet accounts, including expendable parts and supplies, prepaid expenses, property and equipment, other assets (including equity investments), and other accrued and noncurrent liabilities. The company recorded net losses on equity investments totaling $12.6 million for the nine months ended June 30, 2022 | Account (in thousands) | June 30, 2022 | September 30, 2021 | | :-------------------------------- | :------------ | :----------------- | | Expendable parts and supplies, net | $26,341 | $24,467 | | Prepaid expenses and other current assets | $7,234 | $6,885 | | Property and equipment, net | $1,072,826 | $1,151,891 | | Other assets | $29,686 | $36,121 | | Other accrued expenses | $32,322 | $33,657 | | Other noncurrent liabilities | $36,971 | $34,591 | - Depreciation of property and equipment totaled $59.9 million for the nine months ended June 30, 2022, down from $61.2 million in the prior year[85] - The company recognized total net losses on investments in equity securities of $12.6 million for the nine months ended June 30, 2022[90] - Investments include warrants in Archer Aviation, Inc. (eVTOL aircraft) and preferred stock in Heart Aerospace Incorporated (fully electric aircraft), and a warrant in a privately-held VTOL aircraft manufacturer[86][88][89] Note 8. Fair Value Measurements The company's fair value measurements primarily relate to assets held for sale and investments in equity securities. The estimated fair value of total long-term debt (Level 3) was $585.9 million as of June 30, 2022, lower than its carrying value - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[92] | Long-Term Debt (in millions) | June 30, 2022 Carrying Value | June 30, 2022 Fair Value | September 30, 2021 Carrying Value | September 30, 2021 Fair Value | | :------------------------------------------ | :--------------------------- | :----------------------- | :-------------------------------- | :---------------------------- | | Long-term debt and finance leases, including current maturities | $653.4 | $585.9 | $670.3 | $676.8 | - The estimated fair value of debt is classified as Level 3 due to the use of unobservable inputs, and the discounted cash flow method is used for estimation[94] Note 9. Long-Term Debt, Finance Leases, and Other Borrowings Mesa's long-term debt, including current maturities, totaled $653.4 million as of June 30, 2022, collateralized by aircraft and equipment. Key debt instruments include EETC financing, a CIT revolving credit facility (extended to December 2022), and a secured loan facility from the U.S. Treasury. The company was in compliance with all debt covenants as of June 30, 2022, after amending the Treasury Loan's collateral coverage ratio | Long-Term Debt (in thousands) | June 30, 2022 | September 30, 2021 | | :------------------------------------------ | :------------ | :----------------- | | Gross long-term debt, including current maturities | $653,396 | $670,335 | | Less unamortized debt issuance costs | $(9,522) | $(9,295) | | Less notes payable warrants | $(7,867) | $(9,630) | | Net long-term debt, including current maturities | $636,007 | $651,410 | | Less current portion, net | $(112,776) | $(111,710) | | Net long-term debt | $523,231 | $539,700 | | Principal Maturities of Long-Term Debt (in thousands) | Total Principal | | :-------------------------------------------------- | :-------------- | | 2022 (remainder of) | $29,822 | | 2023 | $111,432 | | 2024 | $72,400 | | 2025 | $63,751 | | 2026 | $271,065 | | Thereafter | $104,926 | | Total | $653,396 | - The CIT revolving credit facility's maturity date was extended to December 31, 2022, and the minimum interest and rental coverage ratio covenant was lowered, ensuring compliance[107][108] - The U.S. Treasury Loan, totaling $195.0 million, matures in October 2025 and is secured by certain aircraft and equipment. The minimum collateral coverage ratio covenant was lowered to 1.5 to 1.0 through September 30, 2022, maintaining compliance[109][111][115] - In December 2021 and June 2022, the company financed $35.3 million for spare engine purchases, collateralized by the engines, with monthly principal and interest payments over six years[116] Note 10. Earnings Per Share For the three and nine months ended June 30, 2022, Mesa reported basic and diluted net losses per common share of $(0.28) and $(1.86), respectively, compared to positive EPS in the prior year, primarily due to net losses. Potentially dilutive shares were excluded from diluted EPS calculations in loss periods as their inclusion would be anti-dilutive | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | | :------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) attributable to Mesa Air Group | $(9,985) | $4,276 | $(67,042) | $24,083 | | Basic EPS | $(0.28) | $0.12 | $(1.86) | $0.68 | | Diluted EPS | $(0.28) | $0.11 | $(1.86) | $0.62 | | Basic weighted average common shares outstanding | 36,183 | 35,769 | 36,064 | 35,642 | | Diluted weighted average common shares outstanding | 36,183 | 39,513 | 36,064 | 38,811 | - In loss periods (Q2 and 9M 2022), incremental shares from warrants and restricted stock were excluded from diluted EPS calculations because their inclusion would have an anti-dilutive effect[121] Note 11. Common Stock As of June 30, 2022, 4,899,497 warrants to purchase common stock were issued and outstanding to the U.S. Treasury, with an exercise price of $3.98 per share. The company has not historically paid dividends, and current loan agreements restrict dividend payments - 4,899,497 warrants to purchase common stock were outstanding as of June 30, 2022, issued to the U.S. Treasury with an exercise price of $3.98 per share[123] - The company has not historically paid dividends, and current loan agreements (Treasury Loan and RASPRO Trust 2005 lease facility) restrict or prohibit dividend payments[124] Note 12. Income Taxes The effective tax rate (ETR) for the three and nine months ended June 30, 2022, was 19.9% and 22.1% respectively, lower than the prior year, primarily due to stock compensation, state taxes, and changes in the valuation allowance against state net operating losses. The company maintains a valuation allowance on a portion of its state net operating losses | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Effective Tax Rate | 19.9% | 26.3% | 22.1% | 25.5% | - The ETR changes were primarily influenced by the vesting of stock compensation, state taxes, and adjustments to the valuation allowance against state net operating losses[125] - As of September 30, 2021, the company had federal and state net operating loss carryforwards of approximately $541.3 million and $235.7 million, respectively[127] Note 13. Share-Based Compensation and Stock Repurchases The company grants restricted stock units (RSUs) to employees and directors, with $3.8 million in unrecognized compensation cost remaining as of June 30, 2022. Share-based compensation expense was $0.7 million for the three months and $2.1 million for the nine months ended June 30, 2022. The company repurchased 132,151 shares for $0.4 million to cover tax obligations on vested equity awards | Restricted Share Activity (9 Months Ended June 30, 2022) | Number of Shares | Weighted Average Grant Date Fair Value | | :------------------------------------------------------- | :--------------- | :------------------------------------- | | Restricted shares unvested at September 30, 2021 | 1,006,206 | $6.22 | | Granted | 664,414 | $3.46 | | Vested | (412,226) | $6.28 | | Forfeited | (28,695) | $10.08 | | Restricted shares unvested at June 30, 2022 | 1,229,699 | $4.62 | - As of June 30, 2022, $3.8 million of total unrecognized compensation cost related to unvested share-based compensation is expected to be recognized over a weighted-average period of 1.6 years[129] - Share-based compensation expense was $0.7 million for the three months ended June 30, 2022, and $2.1 million for the nine months ended June 30, 2022[130] - The company repurchased 132,151 shares of common stock for $0.4 million to cover income tax obligations on vested employee equity awards during the nine months ended June 30, 2022[131] Note 14. Employee Stock Purchase Plan Under the 2019 ESPP, eligible employees can purchase ordinary shares at a 10% discount. As of June 30, 2022, 247,761 shares have been issued under the plan, with 53,567 purchased during the nine months ended June 30, 2022 - The 2019 ESPP allows eligible employees to purchase shares at a 10% discount[132] - As of June 30, 2022, 247,761 ordinary shares have been issued under the 2019 ESPP, with 53,567 shares purchased and issued during the nine months ended June 30, 2022[133] Note 15. Leases Mesa leases 20 aircraft, airport facilities, and other equipment under non-cancelable operating leases. Total lease costs for the nine months ended June 30, 2022, were $33.1 million, with a weighted average lease term of 3.8 years and a discount rate of 4.5%. An impairment of $0.2 million was recorded for an abandoned leased facility | Lease Costs (in thousands) | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | | :------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease costs | $9,534 | $9,194 | $28,678 | $28,599 | | Variable and short-term lease costs | $1,311 | $2,099 | $4,392 | $5,434 | | Total lease costs | $10,845 | $11,293 | $33,070 | $34,033 | - As of June 30, 2022, operating leases have a remaining weighted average lease term of 3.8 years and a weighted average discount rate of 4.5%[136] - A $0.2 million impairment of operating lease ROU assets was recorded during the nine months ended June 30, 2022, due to the abandonment of a leased facility[137] Note 16. Commitments and Contingencies Mesa has commitments to purchase ten new CF34-8C5 or CF34-8E5 engines for approximately $52.2 million, with seven already purchased. The company is also involved in two class action lawsuits related to its IPO, with a $5 million settlement in principle reached for the federal lawsuit, to be paid by insurance carriers. Additionally, Mesa has forward purchase contracts for eVTOL and fully electric aircraft, subject to future agreement on terms - The company committed to purchasing ten new CF34-8C5 or CF34-8E5 engines for approximately $52.2 million, with seven purchased as of June 30, 2022[138] - A $5 million settlement in principle has been reached for a federal class action lawsuit alleging federal securities law violations related to the IPO, to be paid by the company's D&O insurance carriers, pending preliminary and final court approval[142] - Mesa has forward purchase contracts for eVTOL aircraft with Archer Aviation ($200.0 million base commitment) and fully electric aircraft with Heart Aerospace ($1.2 billion maximum base commitment), both subject to future agreement on terms[145][146] Note 17. Subsequent Events Subsequent to June 30, 2022, Mesa amended its United CPA to temporarily modify operational performance metrics and commercial terms, and amended its American CPA to modify commercial terms, reset performance measurement periods, and adjust payable amounts - On July 22, 2022, the United CPA was amended to temporarily modify an operational performance metric and related incentives, and amend certain commercial terms[148] - On July 28, 2022, the American CPA was amended to modify commercial terms, reset the CCF and CD0 3-month measurement periods for termination rights to commence August 2022, and amend other payable amounts[149] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Mesa Air Group's financial condition and results of operations, highlighting the impact of the pilot shortage, changes in operating revenues and expenses, and liquidity management strategies. It also includes a discussion of non-GAAP financial measures Overview Mesa Airlines operates as a regional air carrier for American Eagle, United Express, and DHL Express, with a fleet of 168 aircraft as of June 30, 2022. Its CPAs and FSA provide guaranteed monthly revenue and expense reimbursements, shielding it from market volatility, but the company continues to be impacted by the COVID-19 pandemic and a significant pilot shortage - As of June 30, 2022, Mesa operated 168 aircraft, with 65% for United, 33% for American, and 2% for DHL[153] - CPAs and FSA provide guaranteed monthly revenue, fixed fees per block hour/flight, and reimbursement of certain direct operating expenses, limiting exposure to fuel prices, ticket prices, and passenger fluctuations[154][155] - The company continues to be impacted by the COVID-19 pandemic, including increased employee attrition and a decrease in qualified pilots, despite a moderate increase in air travel demand[156] Components of Results of Operations This section details the composition of Mesa's operating revenues (contract and pass-through) and operating expenses (flight operations, maintenance, aircraft rent, general and administrative, depreciation and amortization, impairment, other operating expenses, and government grant recognition), as well as other income/expense items. The company operates as a single reportable segment - Contract revenue includes fixed monthly amounts per aircraft, fees based on flights/block hours, and aircraft rental revenue[159] - Pass-through and other revenue covers reimbursements for passenger/hull insurance, property taxes, landing fees, and certain E-175 maintenance costs[160] - Flight operations expense includes pilot/flight attendant salaries, bonuses, benefits, and training[161] - Maintenance expense includes engine overhauls, airframe, landing gear, and routine maintenance, with heavy maintenance for owned E-175s deferred and amortized, while other fleets use the direct expense method[162] - Government grant recognition, which previously offset operating expenses, was $0 for the three and nine months ended June 30, 2022[164][184][200] - The company operates as a single operating and reportable segment, with the CODM using consolidated financial information for performance evaluation and resource allocation[170] Results of Operations For the three months ended June 30, 2022, operating income significantly decreased by 98.5% to $0.2 million, and the company reported a net loss of $10.0 million, primarily due to increased pilot training costs and the absence of government grant recognition. For the nine months ended June 30, 2022, an operating loss of $48.5 million was recorded, and a net loss of $67.0 million, driven by higher pilot wages and training, $39.5 million in asset impairment charges, and the lack of government grants Three Months Ended June 30, 2022 vs. 2021 | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Total operating revenues | $134,397 | $125,157 | $9,240 | 7.4% | | Contract revenue | $118,899 | $109,654 | $9,245 | 8.4% | | Pass-through and other revenue | $15,498 | $15,503 | $(5) | (0.0%) | | Total operating expenses | $134,184 | $110,783 | $23,401 | 21.1% | | Operating income (loss) | $213 | $14,374 | $(14,161) | (98.5%) | | Net income (loss) | $(9,985) | $4,276 | $(14,261) | (333.3%) | - Contract revenue increased by 8.4% due to normalized contractual rates and higher deferred revenue recognition, despite a 25.5% decrease in block hours flown[176] - Flight operations expense increased by 4.7% due to higher pilot training costs[177] - Maintenance expense decreased by 4.4% due to fewer airframe C-checks, partially offset by increased pass-through engine overhauls and labor costs[178] Nine Months Ended June 30, 2022 vs. 2021 | Metric (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Total operating revenues | $405,367 | $372,808 | $32,559 | 8.7% | | Contract revenue | $367,781 | $318,524 | $49,257 | 15.5% | | Pass-through and other revenue | $37,586 | $54,284 | $(16,698) | (30.8%) | | Total operating expenses | $453,895 | $314,701 | $139,194 | 44.2% | | Operating income (loss) | $(48,528) | $58,107 | $(106,635) | (183.5%) | | Net income (loss) | $(67,042) | $24,083 | $(91,125) | (378.4%) | - Flight operations expense increased by 15.2% due to higher pilot wages and training-related costs[192] - Impairment of assets held for sale was $39.5 million in 2022, compared to $0 in 2021, contributing significantly to the operating loss[198] - Other expense increased by 45.4% to $37.5 million, primarily due to $12.6 million in net losses on equity investments[201] Cautionary Statement Regarding Non-GAAP Measures This section defines and reconciles non-GAAP financial measures, Adjusted EBITDA and Adjusted EBITDAR, which management uses as valuation metrics in the airline industry. It also highlights their limitations as analytical tools, emphasizing they should not be considered substitutes for GAAP measures - Adjusted EBITDA is defined as net income or loss before interest, income taxes, depreciation and amortization, adjusted for gains/losses on investments, lease termination costs, impairment charges, and gains/losses on debt extinguishment[205] - Adjusted EBITDAR is defined as Adjusted EBITDA further adjusted for aircraft rent[206] | Metric (in thousands) | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | | :------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $(9,985) | $4,276 | $(67,042) | $24,083 | | Adjusted EBITDA | $20,108 | $35,279 | $52,855 | $124,162 | | Adjusted EBITDAR | $29,407 | $44,927 | $81,174 | $153,850 | - Adjusted EBITDA and Adjusted EBITDAR have limitations, including not reflecting cash expenditures, working capital needs, interest/principal payments, or cash requirements for asset replacements[207] Liquidity and Capital Resources Mesa's liquidity is significantly impacted by the ongoing pilot shortage and high attrition rates, which reduce block hours and increase costs. The company plans to meet $112.8 million in debt maturities within 12 months through cash on hand, operating cash flows, selling 18 CRJ-700 aircraft, refinancing its revolving credit facility, and amending CPAs. Net cash provided by operating activities decreased substantially to $13.6 million for the nine months ended June 30, 2022 - The pilot shortage and elevated attrition negatively impact financial results and block hour production, leading to further reductions in subsequent quarters[213] - Actions to increase liquidity include collaborating with major partners, expanding training capacity, implementing pilot bonus programs, and broadening the United Aviate program[214] - The company plans to meet $112.8 million in long-term debt principal maturity payments due within the next twelve months using cash on hand, operating cash flows, monetizing 18 CRJ-700 aircraft, refinancing its revolving credit facility, and further amending CPAs[216] - As of June 30, 2022, principal sources of liquidity were $54.4 million in cash and cash equivalents and $3.3 million in restricted cash[222] | Cash Flow (in thousands) | 9 Months Ended June 30, 2022 | 9 Months Ended June 30, 2021 | Change | | :------------------------------------------ | :--------------------------- | :--------------------------- | :------- | | Net cash provided by operating activities | $13,584 | $131,212 | $(117,628) | | Net cash used in investing activities | $(40,384) | $(17,039) | $(23,345) | | Net cash used in financing activities | $(39,271) | $(33,264) | $(6,007) | - The decrease in operating cash flow is attributed to a net loss of $67.0 million and a $39.5 million impairment of assets held for sale in 2022[226] Item 3. Quantitative and Qualitative Disclosures About Market Risk Mesa is exposed to interest rate risk on its variable-rate long-term debt, primarily based on LIBOR, which is phasing out. As of June 30, 2022, $471.4 million of debt was variable-rate, and a 100 basis point increase would affect interest expense by approximately $3.5 million for the nine months ended June 30, 2022. The company has de minimis foreign currency risk and is largely sheltered from fuel price risk by its agreements - As of June 30, 2022, the company had $471.4 million of variable-rate debt, and a hypothetical 100 basis point change in market interest rates would affect interest expense by approximately $3.5 million for the nine months ended June 30, 2022[239] - The majority of the company's debt arrangements are indexed to one- and three-month LIBOR, which will sunset on June 30, 2023, posing uncertainty regarding replacement rates[241][242] - The company has de minimis foreign currency risks and is largely sheltered from fuel price risk due to its agreements with major partners[243][244] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2022, and concluded they were effective. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2022[245] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2022[246] PART II – OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings Mesa is involved in two class action lawsuits alleging federal securities law violations related to its IPO. A $5 million settlement in principle has been reached for the federal lawsuit, to be paid by insurance carriers, pending court approval. Management believes other routine legal matters will not have a material adverse effect - The company is subject to two class action lawsuits alleging federal securities law violations in connection with its IPO[249] - A $5 million settlement in principle has been reached for the federal lawsuit, to be paid by the company's D&O insurance carriers, pending preliminary and final court approval[250] Item 1A. Risk Factors The company highlights ongoing risks, particularly the material adverse impact of reduced aircraft utilization and persistent pilot shortages, which have led to increased labor costs, training backlogs, and potential performance penalties or aircraft withdrawals under CPAs. The failure to refinance the CIT Revolving Credit Facility by December 2022 also poses a significant cross-default risk - Reduced aircraft utilization due to high pilot attrition and training limitations has negatively impacted operating results and financial condition[253][254] - The pilot shortage has created significant training backlogs, increased labor costs (wages, bonuses), and intensified competition for qualified pilots, with current hiring rates not keeping pace with attrition[255][257][259] - Persistent pilot attrition could lead to performance penalties, credits/offsets to major partners, reduced flight schedules, and the right for major partners to remove aircraft from CPAs[260] - Failure to pay or timely refinance the CIT Revolving Credit Facility (maturing December 31, 2022) would result in a default and trigger cross-default clauses under other indebtedness, potentially leading to acceleration of debt[261] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the nine months ended June 30, 2022, the company repurchased 132,151 shares of common stock for $0.4 million to cover income tax obligations on vested employee equity awards and warrant conversions | Metric | 9 Months Ended June 30, 2022 | | :---------------------------------------------------------------- | :--------------------------- | | Shares repurchased | 132,151 | | Cost of repurchased shares | $0.4 million | | Purpose | To cover income tax obligation on vested employee equity awards and warrant conversions | Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[263] Item 4. Mine Safety Disclosures Not applicable - This item is not applicable to the company[264] Item 5. Other Information No other information was reported - No other information was reported[265] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to Capacity Purchase Agreements with American Airlines and United Airlines, certifications of principal executive and financial officers, and XBRL documents - Exhibits include Amendment No. 8 and 9 to the American CPA, Amendment No. 3 to the United CPA, and certifications from the Principal Executive Officer and Principal Financial Officer[268] SIGNATURES This section contains the official signatures certifying the accuracy of the report - The report was signed by D. Torque Zubeck, Chief Financial Officer, on August 8, 2022[271]