MESA AIR GROUP INC - Quarter Report: 2022 December (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-38626

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)


Nevada		85-0302351
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

410 North 44th Street, Suite 700 Phoenix, Arizona 85008		85008
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (602) 685-4000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MESA	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 7, 2023, the registrant had 40,420,611 shares of common stock, no par value per share, issued and outstanding.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2

Condensed Consolidated Balance Sheets	2

Condensed Consolidated Statements of Operations and Comprehensive Loss	3

Condensed Consolidated Statements of Stockholders' Equity	4

Condensed Consolidated Statements of Cash Flows	5

Notes to Condensed Consolidated Financial Statements	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	37

Item 4. Controls and Procedures	38

PART II – OTHER INFORMATION	39

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3. Defaults Upon Senior Securities	39

Item 4. Mine Safety Disclosures	39

Item 5. Other Information	39

Item 6. Exhibits	39

SIGNATURES	41

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

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 Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed with the Securities and Exchange Commission on December 29, 2022. 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 refers 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 by (ii) the maximum number of block hours that could be flown during such month under our capacity purchase agreements;

▪

the direct operation of regional jets by our major partners;

▪

the financial strength of our major partners and their ability to successfully manage their 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 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; and

▪

our ability to keep costs low and execute our growth strategies.

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 global impact of the COVID-19 pandemic. 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.

Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)


	December 31,		September 30,
	2022		2022
ASSETS
Current assets:
Cash and cash equivalents	$	56,077	$	57,683
Restricted cash		3,343		3,342
Receivables, net		13,115		3,978
Expendable parts and supplies, net		25,509		26,715
Prepaid expenses and other current assets		3,953		6,616
Total current assets		101,997		98,334

Property and equipment, net		945,545		865,254
Intangible assets, net		—		3,842
Lease and equipment deposits		1,781		6,085
Operating lease right-of-use assets		11,896		43,090
Deferred heavy maintenance, net		10,311		9,707
Assets held for sale		73,000		73,000
Other assets		14,984		16,290
Total assets	$	1,159,514	$	1,115,602

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and finance leases	$	88,802	$	97,218
Current portion of deferred revenue		1,204		385
Current maturities of operating leases		5,354		17,233
Accounts payable		51,257		59,386
Accrued compensation		9,097		11,255
Other accrued expenses		30,561		29,000
Total current liabilities		186,275		214,477
Noncurrent liabilities:
Long-term debt and finance leases, excluding current portion		597,816		502,517
Noncurrent operating lease liabilities		9,533		16,732
Deferred credits		2,869		3,082
Deferred income taxes		16,705		17,719
Deferred revenue, net of current portion		17,607		23,682
Other noncurrent liabilities		28,938		29,219
Total noncurrent liabilities		673,468		592,951
Total liabilities		859,743		807,428
Commitments and contingencies (Note 16)
Stockholders' equity:
Common stock of no par value and additional paid-in capital, 125,000,000 shares authorized; 36,378,550 (2023) and 36,376,897 (2022) shares issued and outstanding, 4,899,497 (2023) and 4,899,497 (2022) warrants issued and outstanding		259,864		259,177
Retained earnings		39,907		48,997
Total stockholders' equity		299,771		308,174
Total liabilities and stockholders' equity	$	1,159,514	$	1,115,602

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts) (Unaudited)


	Three Months Ended December 31,
	2022			2021
Operating revenues:
Contract revenue	$	128,450		$	136,894
Pass-through and other revenue		18,723			10,863
Total operating revenues		147,173			147,757

Operating expenses:
Flight operations		58,320			47,598
Maintenance		48,287			58,981
Aircraft rent		4,083			9,586
General and administrative		13,988			12,578
Depreciation and amortization		15,203			21,028
Intangible asset impairment		3,719			—
Other operating expenses		1,126			1,972
Total operating expenses		144,726			151,743
Operating income (loss)		2,447			(3,986	)
Other income (expense), net:
Interest expense		(11,276	)		(7,930	)
Interest income		71			51
Loss on investments, net		(1,679	)		(6,462	)
Other income (expense), net		417			(59	)
Total other expense, net		(12,467	)		(14,400	)
Loss before taxes		(10,020	)		(18,386	)
Income tax benefit		(930	)		(4,112	)
Net loss and comprehensive loss	$	(9,090	)	$	(14,274	)
Net loss per share attributable to
common shareholders
Basic	$	(0.25	)	$	(0.40	)
Diluted	$	(0.25	)	$	(0.40	)
Weighted-average common shares outstanding
Basic		36,378			35,963
Diluted		36,378			35,963

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)


	Three Months Ended December 31, 2021
						Common
						Stock and
						Additional
	Number of			Number of		Paid-In			Retained
	Shares			Warrants		Capital			Earnings			Total
Balance at September 30, 2021		35,958,759			4,899,497	$	256,372		$	231,675		$	488,047

Stock compensation expense		—			—		716			—			716
Repurchased shares		(2,275	)		—		(15	)		—			(15	)
Restricted shares issued		7,500			—		—			—			—
Net loss		—			—		—			(14,274	)		(14,274	)
Balance at December 31, 2021		35,963,984			4,899,497	$	257,073		$	217,401		$	474,474


	Three Months Ended December 31, 2022
						Common
						Stock and
						Additional
	Number of			Number of		Paid-In			Retained
	Shares			Warrants		Capital			Earnings			Total
Balance at September 30, 2022		36,376,897			4,899,497	$	259,177		$	48,997		$	308,174

Stock compensation expense		—			—		688			—			688
Repurchased shares		(847	)		—		(1	)		—			(1	)
Restricted shares issued		2,500			—		—			—			—
Net loss		—			—		—			(9,090	)		(9,090	)
Balance at December 31, 2022		36,378,550			4,899,497	$	259,864		$	39,907		$	299,771

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


	Three Months Ended December 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(9,090	)	$	(14,274	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Depreciation and amortization		15,203			21,028
Stock compensation expense		688			716
Loss on investments, net		1,679			6,462
Deferred income taxes		(1,014	)		(4,224	)
Amortization of deferred credits		(213	)		(213	)
Amortization of debt discount and issuance costs and accretion of interest into long-term debt		1,379			3,199
Intangible asset impairment		3,719			—
Other		55			243
Changes in assets and liabilities:
Receivables		(9,137	)		248
Expendable parts and supplies		1,150			(978	)
Prepaid expenses and other operating assets and liabilities		2,290			2,094
Accounts payable		(7,008	)		174
Deferred revenue		(5,256	)		(4,184	)
Accrued expenses and other liabilities		(656	)		(4,868	)
Operating lease right-of-use assets and liabilities		177			(672	)
Net cash provided by (used in) operating activities		(6,034	)		4,751

Cash flows from investing activities:
Capital expenditures		(16,740	)		(19,775	)
Investments in equity securities		—			(200	)
Refund (payment) of equipment and other deposits		131			(6,954	)
Net cash used in investing activities		(16,609	)		(26,929	)

Cash flows from financing activities:
Proceeds from long-term debt		39,000			30,811
Principal payments on long-term debt and finance leases		(17,544	)		(24,510	)
Payments of debt and warrant issuance costs		(417	)		(2,293	)
Repurchase of stock		(1	)		(15	)
Net cash provided by financing activities		21,038			3,993

Net change in cash, cash equivalents and restricted cash		(1,605	)		(18,185	)
Cash, cash equivalents and restricted cash at beginning of period		61,025			123,867
Cash, cash equivalents and restricted cash at end of period	$	59,420		$	105,682

Supplemental cash flow information
Cash paid for interest	$	7,763		$	2,815
Operating lease payments in operating cash flows	$	4,679		$	10,152
Supplemental non-cash operating activities
Right-of-use assets obtained in exchange for lease liabilities	$	236		$	4,190
Supplemental non-cash financing activities
Finance lease obtained in exchange for lease liability	$	76,185		$	—
Investments in warrants to purchase common stock	$	—		$	100
Accrued capital expenditures	$	—		$	1,722

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is the holding company of Mesa Airlines, a regional air carrier providing scheduled passenger service to 106 cities in 42 states, the District of Columbia, the Bahamas, Cuba, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of December 31, 2022, Mesa operated a fleet of 158 aircraft with approximately 293 daily departures and 2,478 employees. 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 American Eagle, United Express, or DHL Express flights pursuant to the terms of CPAs entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc. (“DHL”) (each, our “major partner”). All of the Company’s consolidated contract revenues for the three months ended December 31, 2022 and 2021 were derived from operations associated with these two (2) CPAs, FSA, and leases of aircraft to a third party.

The CPAs between us and our major partners involve a revenue-guarantee arrangement whereby the major partners pay fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these CPAs, the major partners control 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 three months ended December 31, 2022 and fiscal year ended September 30, 2022, the severity of the pilot shortage, elevated pilot attrition, 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 three months ended December 31, 2022, these challenges resulted in a negative impact on the Company’s financial results highlighted by cash flows used in operations of $6.0 million and net loss of $9.1 million including a non-cash impairment charge related to the Company’s American intangible asset of $3.7 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligation in the next twelve months.

To address the events that gave rise to such concerns, management developed and implemented the following material changes to its business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next twelve months. In addition to successfully implementing these effective measures, the Company expects to develop and implement additional measures aimed at addressing periods beyond the next twelve months.

•

During the fourth quarter 2022, the Company reached an agreement with ALPA which increased overall pilot hourly pay by nearly 118% for captains and 172% for new-hire first officers. As a result of this agreement, we have experienced reduced attrition rates and attracted new pilots.

•

The Company and American have agreed to terminate and complete a wind-down of the American CPA. This will ultimately eliminate financial penalties incurred under the American CPA. In December 2022, we entered into Amendment No.11 to our American CPA that includes, among other things, disclosure regarding the wind-down of our operations with American and the termination of the American CPA.

•

In December 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United which amended and restated the existing United CPA. This agreement increases block hour revenues to cover increased wages agreed to with ALPA and adds CRJ 900 aircraft currently operating under the American CPA.

•

We entered into an agreement with United to sell 18 CRJ-700 aircraft during the fiscal year ended September 30, 2022, of which ten (10) were sold. The approximate net proceeds from the sale in the prior period was $36.8 million after retirement of debt. The sale of the remaining eight (8) aircraft that are classified as assets held for sale at December 31, 2022, as discussed in Note 6, closed during January 2023. The approximate net proceeds from the sale after retirement of debt is $8.0 million.

•

We entered into an agreement with a third party to sell 11 of our CRJ-900 aircraft and one (1) CRJ-200 aircraft to raise capital and retire debt, as discussed in Note 6. The approximate net proceeds of the sale are expected to be $8.2 million after retirement of debt.

•

We entered into an agreement to sell 30 spare engines to United to raise capital and retire debt. The approximate gross proceeds from the sale are expected to be $80 million and will retire debt of $26.4 million. See Note 16 for a discussion of the engine sale agreement transaction and closing deliverables.

•

We established and drew upon a new line of credit with United totaling $25.5 million. See Note 9 for a discussion of the line of credit and amount drawn.

•

We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven CRJ-900 NextGen aircraft for the period of January 2023 through December 2024, providing up to $14 million of liquidity. Additionally, the junior noteholder, MHIRJ, agreed to reduce its loan amount by approximately $5 million.

•

We entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 CRJ-900 aircraft at lease termination by a total of $25 million.

•

We established the Mesa Pilot Development Program (the "MPD Program") to increase the pilot supply to Mesa. We have entered into an agreement to purchase up to 29 state-of-the-art Pipistrel Alpha Trainer 2 aircraft. This new fleet will be the backbone of our MPD Program to help commercial pilots accelerate their accumulation of flight hours to reach the minimum flight hours required by FAA and then be hired by Mesa. As part of the program, pilots will be provided with the opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flights costs of $25 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 ATP certificate.

•

We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition.

•

We expanded the United Aviate program participation to include all pilots flying for Mesa. Previously, pilots had to fly under the United Express contract for a minimum of two (2) years to qualify for the flow through to United Airlines. Now, all pilots regardless of contract, are eligible to flow through to United Airlines enhancing Mesa's ability to attract and retain pilots.

•

We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity.

The plans and initiatives outlined above have effectively alleviated pressure on financial performance. While we continue to implement and monitor our plans and initiatives, there is no guarantee that these will continue to be effective and achieve their desired objectives.

As of December 31, 2022, the Company has $88.8 million of short-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 we have achieved as outlined above.

American Capacity Purchase Agreement

As of December 31, 2022, the Company operated 42 CRJ-900 aircraft under an Amended and Restated Capacity Purchase Agreement with American dated November 19, 2020 (as amended, the “American CPA”). In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departure (“CD0”) and controllable flight completion factor (“CCF”) percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions as well as airport-related facilities and gates at American hubs and cities where we operate.

In December 2022, we entered into Amendment No. 11 (the “AA Amendment”) to the American CPA. The AA Amendment provides 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) will be removed from the American CPA. In March 2023, we will begin 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 AA Amendment, during the Wind-down Period (i) we will continue 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 has agreed not to exercise certain termination or withdrawal rights under the American CPA if we fail to meet certain operational performance targets for the three (3) consecutive month period ending January 31, 2023.

Provided we comply with the terms of the American CPA during the Wind-down Period and no Material Breach (as defined in the American CPA) has occurred, American has also 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. Failure to meet CCF targets in any given month during the Wind-down Period will result in a penalty for each performance metric that falls below an allotted threshold.

The AA Amendment provides for liquidated damages (the “Liquidated Damages Claim”) payable to American in the event of a Material Breach (as defined in the American CPA) of the American CPA or a repudiation by us of our obligations under the American CPA.

So long as we have not caused any Material Breaches during the Wind-Down Period, then immediately upon the expiration thereof, the parties have agreed to execute a written mutual release of all claims and acknowledgment that no Material Breaches have occurred under the American CPA (including, without limitation, any Liquidated Damages Claim).

United Capacity Purchase Agreement

During the quarter ended December 31, 2022, we operated 60 E-175 and 20 E-175LL aircraft under our Second Amended and Restated Capacity Purchase Agreement with United dated November 4, 2020 (as amended, the “United CPA” or the "Second Amended and Restated Capacity Purchase Agreement"). Under the United CPA, United owns 42 of the 60 E-175 aircraft and all of the E-175LL aircraft and leases them to us at nominal amounts. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. The E-175LL aircraft have terms expiring in 2032 and 2033.

In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. United also reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"), and component maintenance for the E-175 aircraft owned by United. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.

Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement, and as of December 31, 2022, we have leased 10 CRJ-700 aircraft. During August of 2022, we committed to a formal plan to sell 18 CRJ-700 aircraft. As of December 31, 2022, we sold 10 of the 18 CRJ-700 aircraft. See Note 6 for further discussion of the eight (8) remaining CRJ-700 aircraft classified as held for sale.

Our United CPA is subject to termination prior to its expiration, including under the following circumstances:

•

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.

On December 27, 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United (as amended and restated, the “Amended and Restated United CPA”), which amends and restates the Second Amended and Restated Capacity Purchase Agreement. The Amended and Restated United CPA 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;

•

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 E175LL 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).

In January 2023, in consideration for entering into the Amended and Restated United CPA and providing the revolving line of credit, discussed in Note 9, the Company agreed to (i) grant United the right to designate one individual (the “United Designee”) to be appointed to the Company’s board of directors, and (ii) issue to United shares of our common stock equal to ten percent (10.0%) of the Company’s issued and outstanding shares on a fully diluted basis as of the date of such issuance (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 (5.0%).

United was also granted pre-emptive rights relating to the issuance of any equity securities by the Company and certain registration rights, set fourth 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 17 for a discussion regarding the amendment to the Company's bylaws as it relates to the Amended and Restated United CPA.

DHL Flight Services Agreement

On December 20, 2019, we entered into a Flight Services Agreement with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate three (3) Boeing 737-400F aircraft to provide cargo air transportation services as of December 31, 2022. 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 (2) Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us. The third Boeing 737-400F aircraft is leased to us as an operating lease by a third party.

The DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one (1) 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 (3) 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.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications of certain immaterial prior period amounts have been made to conform to the current period presentation.

These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as of and for the year ended September 30, 2022 included in the Company's Annual Report on Form 10-K for the year ended September 30, 2022 on file with the U.S. Securities and Exchange Commission (the "SEC"). Information and footnote disclosures normally included in financial statements have been condensed or omitted in these condensed consolidated financial statements pursuant to the rules and regulations of the SEC and GAAP. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented.

Segment Reporting

As of December 31, 2022, our chief operating decision maker was the Chief Executive Officer. While we operate under two separate capacity purchase agreements and a flight services agreement, we do not manage our business based on any performance measure at the individual contract level. Our chief operating decision maker uses consolidated financial information to evaluate our performance and allocate resources, which is the same basis on which he communicates our results and performance to our Board of Directors. Accordingly, we have a single operating and reportable segment.

Use of Estimates

The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.

Contract Revenue and Pass-through and Other Revenue

We recognize contract revenue when the service is provided under our CPAs and FSA. Under the CPAs and FSA, our major partners generally pay for each departure, flight hour or block hour incurred, and an amount per aircraft in service each month with additional incentives or penalties based on flight completion, on-time performance, and other operating metrics. Our performance obligation is met as each flight is completed, and revenue is recognized and reflected in contract revenue.

We recognize pass-through revenue when the service is provided under our CPAs and FSA. Pass-through revenue represents reimbursements for certain direct expenses incurred including passenger liability and hull insurance, property taxes, other direct costs defined within the agreements, and major maintenance on aircraft leased from our major partners at nominal rates. Our performance obligation is met when each flight is completed or as the maintenance services are performed, and revenue is recognized and reflected in pass-through and other revenue.

We record deferred revenue when cash payments are received or are due from our major partners in advance of our performance. During the three months ended December 31, 2022, we recognized $5.3 million of previously deferred revenue. Deferred revenue is recognized as flights are completed over the remaining terms of the respective contracts.

The deferred revenue balance as of December 31, 2022 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (in thousands):


Periods Ending December 31,	Total Revenue
2023 (remainder of)	$	691
2024		3,214
2025		4,810
2026		4,024
2027		3,675
Thereafter		2,397
Total	$	18,811

A portion of our compensation under our CPAs with American and United is designed to reimburse the Company for certain aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest expense or aircraft lease expense costs while the aircraft is under contract. We have concluded this component of the compensation under these agreements is lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period of time. We account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing our estimate of the stand-alone selling prices.

The lease revenue associated with our CPAs is accounted for as an operating lease and is reflected as contract revenue in the condensed consolidated statements of operations and comprehensive loss. We recognized $41.1 million and $40.3 million of lease revenue for the three months ended December 31, 2022 and 2021, respectively. We have not separately stated aircraft rental income in the condensed consolidated statements of operations and comprehensive loss because the use of the aircraft is not a separate activity from the total service provided under our CPAs.

Historically, the Company has lease agreements with GoJet Airlines LLC (“GoJet”) to lease 20 CRJ-700 aircraft. The lease agreements are accounted for as operating leases and have a term of nine (9) years beginning on the delivery date of each aircraft. Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet’s completion of qualifying maintenance events defined in the agreements. Lease revenue for fixed monthly rent payments is recognized ratably within contract revenue. Lease revenue for supplemental rent is deferred and recognized within contract revenue when it is probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term.

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 leases have specified lease return condition requirements and we maintain 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.

During fiscal year 2022, the Company terminated its lease agreement with GoJet to lease 18 of the 20 CRJ-700 aircraft and classified the 18 aircraft as assets held for sale, of which ten (10) were sold. The sale of the remaining eight (8) aircraft assets held for sale (see Note 6) closed in January 2023. The remaining two (2) lease agreements are accounted for as finance leases.

The following table summarizes future minimum rental income under operating leases related to leased aircraft that had remaining non-cancelable lease terms as of December 31, 2022 (in thousands):


Periods Ending December 31,	Total Payments
2023 (remainder of)	$	1,638
2024		2,184
2025		2,184
2026		2,184
2027		2,184
Thereafter		8,008
Total	$	18,382

Leases

We determine if an arrangement is a lease at inception. As a lessee, we have lease agreements with lease and non-lease components and have elected to account for such components as a single lease component. Our operating lease activities are recorded in operating lease right-of-use assets, current maturities of operating leases, and noncurrent operating lease liabilities in the condensed consolidated balance sheets. Finance leases are reflected in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion in the condensed consolidated balance sheets.

Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Certain variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. In determining the present value of lease payments, we use either the implicit rate in the lease when it is readily determinable or our estimated incremental borrowing rate, based on information available at the lease commencement. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis over the lease term, while finance leases result in a front-loaded expense pattern.

As a lessee, we have elected a short-term lease practical expedient on all classes of underlying assets, permitting us to not apply the recognition requirements of ASC 842 to leases with terms of 12 months or less.

We lease, at nominal rates, certain aircraft from United and DHL under our United CPA and DHL FSA, which are excluded from operating lease assets and liabilities as they do not represent embedded leases under ASC 842. Other than such leases at nominal amounts, approximately 11% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. Additionally, any remaining ROU assets and lease liabilities are written off.

The majority of our leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to us; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which we do not participate, we are not at risk for losses and are not considered the primary beneficiary. Management believes that our maximum exposure under these leases is the remaining lease payments.

Contract Liabilities

Contract liabilities consist of deferred credits for cost reimbursements from major partners related to aircraft modifications and pilot training associated with capacity purchase agreements. The deferred credits are recognized over time depicting the pattern of the transfer of control of services resulting in ratable recognition of revenue over the remaining term of the capacity purchase agreements.

Current and non-current deferred credits are recorded in other accrued expenses and non-current deferred credits in the condensed consolidated balance sheets. Our total current and non-current deferred credit balances at December 31, 2022 and September 30, 2022 were $3.7 million and $3.9 million, respectively. We recognized $0.2 million and $0.2 million of the deferred credits within contract revenue during the three months ended December 31, 2022 and 2021, respectively.

Maintenance Expense

We operate under an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred.

We account for heavy maintenance and major overhaul costs on our owned E-175 fleet under the deferral method whereby the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. Amortization of heavy maintenance and major overhaul costs charged to depreciation and amortization expense was $0.8 million and $0.2 million for the three months ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and September 30, 2022, our deferred heavy maintenance balance, net of accumulated amortization, was $10.3 million and $9.7 million, respectively.

We account for heavy maintenance and major overhaul costs for all other fleets under the direct expense method whereby costs are expensed to maintenance expense as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms.

Engine overhaul expense totaled $8.7 million and $5.3 million for the three months ended December 31, 2022 and 2021, respectively, of which $8.7 million and $3.8 million, respectively, was pass-through expense. Airframe C-check expense totaled $5.1 million and $9.1 million for the three months ended December 31, 2022 and 2021, respectively, of which $4.4 million and $0.0 million, respectively, was pass-through expense.

Assets Held for Sale

We classify assets as held for sale when our management approves and commits to a formal plan of sale that is probable of being completed within one year. Assets designated as held for sale are recorded at the lower of their current carrying value or their fair market value, less costs to sell, beginning in the period in which the assets meet the criteria to be classified as held for sale. See Note 6 for further discussion of our assets classified as held for sale as of December 31, 2022.

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. Optional expedients can be applied through December 31, 2024. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.

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.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are primarily held by financial institutions in the United States and accounts receivable. Amounts on deposit with a financial institution may at times exceed federally insured limits. We maintain our cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions.

As of December 31, 2022, we had $3.3 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, $3.3 million of outstanding letters of credit are required to be collateralized by amounts on deposit.

Significant customers are those which represent more than 10% of our total revenue or net accounts receivable balance at each respective balance sheet date. All of our revenue for the three months ended December 31, 2022 and 2021 was derived from the American and United CPAs, DHL FSA, and from leases of our CRJ-700 aircraft to GoJet. Substantially all of our accounts receivable at December 31, 2022 and September 30, 2022 was derived from these agreements.

American accounted for approximately 45% and 45% of our total revenue for the three months ended December 31, 2022 and 2021, respectively. United accounted for approximately 50% and 49% of our total revenue for the three months ended December 31, 2022 and 2021, respectively. In December 2022, the Company entered into the AA Amendment that provides for the termination and wind-down of the American CPA by April 3, 2023. Also in December 2022, the Company entered into the Amended and Restated United CPA, which transitions the aircraft previously operated under the American CPA to be operated under the Amended and Restated United CPA as of April 2023, refer to Note 1 for further discussion regarding both amendments. A termination of the United CPA would have a material adverse effect on our business prospects, financial condition, results of operations, and cash flows.

Amounts billed under our agreements are subject to our interpretation of the applicable agreement and are subject to audit by our major partners. Periodically, our major partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major partner. As such, we review amounts due based on historical collection trends, the financial condition of the major partners, and current external market factors and record a reserve for amounts estimated to be uncollectible in accordance with the applicable guidance for expected credit losses. Our allowance for doubtful accounts was not material as of December 31, 2022 or September 30, 2022. If our ability to collect these receivables and the financial viability of our major partners is materially different than estimated, our estimate of the allowance for credit losses could be materially impacted.

Intangible Assets

Information about our intangible assets as of December 31, 2022 and September 30, 2022, is as follows (in thousands):


	December 31,			September 30,
	2022			2022
Customer relationship	$	43,800		$	43,800
Accumulated amortization		(38,152	)		(38,029	)
Impairment		(5,648	)		(1,929	)
Net carrying value	$	—		$	3,842

Total amortization expense recognized was $0.1 million and $0.3 million for the three months ended December 31, 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 three months ended December 31, 2022, 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 the remainder of 2023 and thereafter.

As of December 31, 2022, our intangible assets’ remaining amortization term is 0.0 years.

Assets Held for Sale

During 2022, our management committed to a formal plan to sell certain of our CRJ-900, CRJ-200, and CRJ-700 aircraft. Accordingly, we determined the aircraft met the criteria to be classified as assets held for sale and have separately presented them in our condensed consolidated balance sheet at the lower of their current carrying value or their fair market value less costs to sell. The fair values are based upon observable and unobservable inputs, including recent purchase offers and market trends and conditions. The assumptions used to determine the fair value of our assets held for sale are subject to inherent uncertainty and could produce a wide range of outcomes which we will continue to monitor in future periods as new information becomes available. Prior to the ultimate sale of the assets, subsequent changes in our estimate of the fair value of our assets held for sale will be recorded as a gain or loss with a corresponding adjustment to the assets’ carrying value.

As of December 31, 2022, the Company has 11 CRJ-900 aircraft, eight (8) CRJ-700 aircraft, and one (1) CRJ-200 aircraft that are classified as assets held for sale with a net book value of $73.0 million, which is reflected within assets held for sale on our condensed consolidated balance sheet.

The Company closed the sale of its eight (8) CRJ-700 aircraft in January 2023. The approximate net proceeds from the sale after retirement of debt is $8.0 million. The Company expects to close its sale of the 11 CRJ-900 and one (1) CRJ-200 during the three months ended March 31, 2023.

Balance Sheet Information

Certain significant amounts included in the condensed consolidated balance sheets consisted of the following (in thousands):


	December 31,			September 30,
	2022			2022
Expendable parts and supplies, net:
Expendable parts and supplies	$	32,013		$	31,913
Less: obsolescence and other		(6,504	)		(5,198	)
	$	25,509		$	26,715
Prepaid expenses and other current assets:
Prepaid aviation insurance	$	1,026		$	2,618
Prepaid vendors		906			1,310
Prepaid other insurance		798			1,268
Lease incentives		143			352
Prepaid fuel and other		1,080			1,068
	$	3,953		$	6,616
Property and equipment, net:
Aircraft and other flight equipment	$	1,354,137		$	1,260,143
Other equipment		5,709			5,577
Leasehold improvements		2,776			2,776
Vehicles		1,003			992
Building		777			777
Furniture and fixtures		298			298
Total property and equipment		1,364,700			1,270,563
Less: accumulated depreciation		(419,155	)		(405,309	)
	$	945,545		$	865,254
Other assets:
Investments in equity securities	$	13,408		$	15,178
Lease incentives		1,061			1,097
Other		515			15
	$	14,984		$	16,290
Other accrued expenses:
Accrued property taxes	$	6,066		$	5,866
Accrued interest		5,016			2,882
Accrued vacation		7,768			4,746
Accrued lodging		3,529			3,795
Accrued maintenance		2,154			1,453
Accrued liability on government payroll program		—			2,967
Accrued simulator costs		149			1,045
Accrued employee benefits		1,097			1,679
Accrued fleet operating expense		1,232			1,606
Other		3,550			2,961
	$	30,561		$	29,000
Other noncurrent liabilities:
Warrant liabilities	$	25,225		$	25,225
Lease incentive obligations		1,050			1,050
Long-term employee benefits		843			1,123
Other		1,820			1,821
	$	28,938		$	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 their 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 capacity purchase agreement, flight services agreement, and fleet-type level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators exist with respect to any of the asset groups, we estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors.

During the fiscal year ended September 30, 2022, due to the impacts of the pilot shortage and the pilot wage increase, the Company assessed whether any indicators of impairment existed in any of our long-lived asset groups. The Company concluded there was impairment of its American asset group and recorded it as asset impairment in our condensed consolidated statements of operations and comprehensive loss.

During the three months ended December 31, 2022, the Company qualitatively evaluated indictors of impairment and concluded that the remaining carrying value of the American intangible asset required impairment. The Company recognized a total impairment loss of $3.7 million related to the American intangible asset in the condensed consolidated statements of operations and comprehensive loss. The Company determined that no other indicators of impairment were present during the quarter and no further steps were determined to be necessary. The Company did not record any impairment losses related to its long-lived assets during the three months ended December 31, 2021.

The Company’s assumptions about future conditions relevant to the assessment of potential impairment of its long-lived assets, including the impact of the COVID-2019 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

Depreciation Expense on Property and Equipment:

Depreciation of property and equipment totaled $14.4 million and $20.5 million for the three months ended December 31, 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, Investments – Equity Securities, 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 values of the warrants, $16.4 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related aircraft purchase agreement.

In connection with closing of the merger between Archer and the SPAC described above, in September 2021, we purchased 500,000 Class A common shares in Archer for $5.0 million and obtained an additional warrant to purchase shares of Archer with a total grant date value of $5.6 million. The initial value of the warrants was recognized as a vendor credit liability within other noncurrent liabilities, and will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related aircraft purchase agreement. Because these investments have readily determinable fair values, gains and losses resulting from changes in fair value of the investments are reflected in earnings, in accordance with ASC 321. All of our vested warrants have been exercised into shares of Archer common stock.

The fair values of the Company’s investments in Archer are Level 1 within the fair value hierarchy as the values are determined using quoted prices for the equity securities.

In connection with a negotiated forward purchase contract for fully electric aircraft executed in July 2021, we obtained $5.0 million of preferred stock in Heart Aerospace Incorporated (“Heart”), a privately held company. Our investment in Heart does not have a readily determinable fair value, so we account for the investment using the measurement alternative under ASC 321 and measure the investment at initial cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment, or other features that indicate a change to fair value is warranted. Any changes in fair value from the initial cost of the investment in preferred stock are recognized as increases or decreases on our balance sheet and as net gains or losses on investments in equity securities. The initial investment in preferred stock was measured at cost of $5.0 million.

In connection with a negotiated forward purchase contract for hybrid-electric vertical takeoff and landing (“VTOL”) aircraft executed in February 2022, we obtained a warrant giving us the right to acquire a number of shares of common stock in the privately-held manufacturer of the VTOL aircraft. These investments do not have a readily determinable fair value, so we account for them using the measurement alternative under ASC 321 and measure the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment or other features that indicate a discount to fair value is warranted. Any changes in fair value from the grant date value of the warrant assets will be recognized as increases or decreases to the investment on our balance sheet and as net gains or losses on investments equity securities. We estimated the initial warrant asset value to be $3.2 million based on prices of similar investments in the same issuer. The grant date value of the warrants, $3.2 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the VTOL aircraft contemplated in the related forward purchase agreement.

Total net losses on our investments in equity securities totaled $1.7 million and $6.5 million during the three months ended December 31, 2022 and 2021, respectively, and are reflected in loss on investments, net in our condensed consolidated statements of operations and comprehensive loss. As of December 31, 2022, the aggregate carrying amount of our investments in equity securities was $13.4 million, and the carrying amount of our investments without readily determinable fair values was $9.0 million.

Fair Value Measurements

Fair value is an exit price representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Accounting standards include disclosure requirements relating to the fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels:


Level 1	—	Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2	—	Inputs, other than quoted prices in active markets, which are observable either directly or indirectly; and
Level 3	—	Unobservable inputs in which there is little or no market data, requiring an entity to develop its own assumptions.

Other than our assets held for sale and investments in equity securities described in Notes 6 and 7, respectively, we did not measure any of our assets or liabilities at fair value on a recurring or nonrecurring basis as of December 31, 2022 and September 30, 2022.

The carrying values reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments.

Our debt agreements are not traded on an active market. We have determined the estimated fair value of our debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. We utilize the discounted cash flow method to estimate the fair value of Level 3 debt.

The carrying value and estimated fair value of our total long-term debt, including current maturities, were as follows (in millions):



	December 31, 2022				September 30, 2022
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Long-term debt and finance leases, including current maturities(1)	$	701.3	$	635.6	$	615.3	$	541.7

(1) Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs.

Long-Term Debt, Finance Leases, and Other Borrowings

Long-term debt as of December 31, 2022 and September 30, 2022, consisted of the following (in thousands):


	December 31,			September 30,
	2022			2022

Senior and subordinated notes payable to secured parties, due in monthly installments, interest based on LIBOR plus interest spread at 2.71% through 2027, collateralized by the underlying aircraft	$	69,919		$	73,850
Notes payable to secured parties, due in semi-annual installments, interest based on LIBOR plus interest spread at 4.75% to 6.25% through 2028, collateralized by the underlying aircraft		131,010			131,010
Notes payable to secured parties, due in quarterly installments, interest based on LIBOR plus interest at spread 2.20% to 2.32% for senior note & 4.50% for subordinated note through 2028, collateralized by the underlying aircraft		102,802			106,865
Other obligations due to financial institution, monthly and/or quarterly interest due from 2022 through 2031, collateralized by the underlying equipment		80,117			18,038
Notes payable to financial institution, due in monthly installments, interest based on LIBOR plus interest spread at 3.10% through 2024, collateralized by the underlying equipment		21,891			26,758
Notes payable to financial institution, due in monthly installments, plus interest spread at 5.00% through 2023, secured by flight equipment		1,500			2,000
Revolving credit facility, monthly interest based on LIBOR plus interest spread at 3.50% through 2022, collateralized by the underlying equipment and investments		41,130			15,630
Notes payable to financial institution, quarterly interest based on LIBOR plus interest spread at 3.50% through 2027		204,947			204,947
Notes payable to financial institution, due in monthly installments, interest based on LIBOR plus interest spread at 4.24%, through 2027, collateralized by the underlying equipment		48,031			36,212
Gross long-term debt, including current maturities		701,347			615,310
Less unamortized debt issuance costs		(8,051	)		(8,303	)
Less notes payable warrants		(6,678	)		(7,272	)
Net long-term debt, including current maturities		686,618			599,735
Less current portion, net of unamortized debt issuance costs		(88,802	)		(97,218	)
Net long-term debt	$	597,816		$	502,517

Principal maturities of long-term debt as of December 31, 2022, and for each of the next five years are as follows (in thousands):


Periods Ending December 31,	Total Principal
2023 (remainder of)	$	73,863
2024		136,272
2025		64,952
2026		274,107
2027		81,106
Thereafter		71,047
	$	701,347

The carrying value of collateralized aircraft and equipment as of December 31, 2022 was approximately $869.2 million.

Enhanced Equipment Trust Certificate ("EETC")

In December 2015, an Enhanced Equipment Trust Certificate ("EETC") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. As of December 31, 2022, we had $131.0 million of equipment notes outstanding issued under the EETC financing included in long-term debt in the condensed consolidated balance sheets. The structure of the EETC financing consists of a pass-through trust created by Mesa to issue pass-through certificates, which represent fractional undivided interests in the pass-through trust and are not obligations of Mesa.

The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds.

We evaluated whether the pass-through trust formed for the EETC financing is a Variable Interest Entity ("VIE") and required to be consolidated. We have determined we do not have a variable interest in the pass-through trust, and therefore, we have not consolidated the pass-through trust with our financial statements.

United Revolving Credit Facility

On June 30, 2022, we entered into a Second Amended and Restated Credit and Guaranty Agreement (the "Existing Facility") by and among Mesa Airlines and Mesa Air Group Airline Inventory Management, L.L.C., as borrowers, Mesa Air Group, as a Guarantor, the other guarantors party thereto from time to time, CIT Bank, a division of First-Citizens Bank & Trust Company ("CIT Bank”), as Administrative Agent, First-Citizens Bank & Trust Company (“First Citizens”), as a lender, and the other lenders from time to time party thereto, which was effective as of June 30, 2022 and extended the maturity date of the facility provided by such lenders to such borrowers pursuant to an Amended and Restated Credit and Guaranty Agreement, dated as of September 25, 2019 (as amended) by three (3) months to December 31, 2022.

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 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.

Loan Agreement with the United States Department of the Treasury

On October 30, 2020, we entered into a loan and guarantee agreement with the U.S. Department of the Treasury (the “U.S. Treasury”) for a secured loan facility of up to $200.0 million that matures in October 2025 (“the Treasury Loan”). During the first quarter of fiscal 2021, we borrowed an aggregate of $195.0 million. No further borrowings are available under the Treasury Loan.

The Treasury Loan bears interest at a variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b) 3.50%. Accrued interest on the loans is payable in arrears, or paid-in-kind by increasing the principal balance of the loan by such interest payment, on the first business day following the 14th day of each March, June, September, and December.

All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025. Commencing in June 2022, we initiated the payment of interest in lieu of increasing the principal amount of the loan. Our obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, flight simulators, and tooling (collectively, the “Collateral”). The obligations under the Treasury Loan are guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds were used for general corporate purposes and operating expenses, to the extent permitted by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Voluntary prepayments of the Treasury Loan may be made, in whole or in part, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed. Mandatory prepayments of the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral, and certain insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Treasury Loan) occurs with respect to Mesa Airlines, we will be required to repay the loans outstanding under the Treasury Loan.

The Treasury Loan requires us, under certain circumstances, including within ten (10) business days prior to the last business day of March and September of each year beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0, we are required either to provide additional Collateral (which may include cash collateral) to secure the obligations under the Treasury Loan or repay the term loans under the Treasury Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.6 to 1.0.

The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury Loan also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments, and acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on lobbying activities. Additionally, we are required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service.

In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, we issued to the U.S. Treasury warrants to purchase an aggregate of 4,899,497 shares of our common stock at an exercise price of $3.98 per share, which was the closing price of the common stock on April 9, 2020. The exercise price and number of shares of common stock issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at our option. The fair value of the warrants was estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Loan in the condensed consolidated balance sheets.

In December 2022, we entered into an agreement with the U.S. Treasury to lower the minimum collateral coverage ratio ("CCR") covenant to 1.55 to 1.0 effective through the maturity date of the Treasury Loan and waive the CCR covenant requirement with respect to the release of liens on Collateral. As a result of the lower CCR covenant, we are in compliance with this covenant as of December 31, 2022.

Spare Engine Financing

In December 2021, we entered into a loan agreement with a financing institution to finance certain purchases of spare engines via a newly formed limited liability company (“LLC”). The loan agreement provides for aggregate borrowings of up to $54.0 million through November 2022. In December 2021, we borrowed an aggregate of $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 4.24%. The borrowings are the obligation of the newly formed LLC and are guaranteed by Mesa Airlines, Inc..

The newly formed LLC, which is wholly owned by Mesa, was determined to be a VIE for which we are the primary beneficiary because we have the power to direct the activities of the LLC that most significantly impact the LLC’s economic performance and the obligation to absorb losses and right to receive benefits from the LLC in our capacity as sole member of the LLC and guarantor of the borrowings. Therefore, the LLC is consolidated in our financial statements and the borrowings are reflected as long-term debt in our condensed consolidated balance sheets.

The loan agreement contains a loan-to-value (“LTV”) financial covenant pursuant to which we are required to prepay certain amounts of the loan if the aggregate outstanding principal balance of the loan exceeds a specified percentage of the appraised value of the engines beginning in the 12th full month after closing and each June 1 and December 1 thereafter.

As of December 31, 2022, we were in compliance with all debt covenants.

10.

Earnings Per Share

Calculations of net loss per common share attributable to Mesa Air Group were as follows (in thousands, except per share data):


	Three Months Ended December 31,
	2022			2021
Net loss attributable to Mesa Air Group	$	(9,090	)	$	(14,274	)
Basic weighted average common shares outstanding		36,378			35,963
Add: Incremental shares for:
Dilutive effect of warrants		—			—
Dilutive effect of restricted stock		—			—
Diluted weighted average common shares outstanding		36,378			35,963
Net loss per common share attributable to Mesa Air Group:
Basic	$	(0.25	)	$	(0.40	)
Diluted	$	(0.25	)	$	(0.40	)

Basic income or loss per common share is computed by dividing net income or loss attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period.

The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is anti-dilutive under the treasury stock method are excluded from the diluted net income or loss per share calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested restricted stock and warrants would have an anti-dilutive effect.

The following number of weighted-average potentially dilutive shares were excluded from the calculation of diluted net loss per share because the effect of including such potentially dilutive shares would have been anti-dilutive:


	Three Months Ended December 31,
	2022		2021
Warrants		—		2,215
Restricted stock		—		341
		—		2,556

11.

Common Stock

As discussed in Note 9, we issued warrants to the U.S. Treasury to purchase shares of our common stock, no par value, at an exercise price of $3.98 per share. The exercise price and number of shares issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at our option. The warrants were accounted for within equity at a grant date fair value determined under the Black-Scholes option pricing model. As of December 31, 2022, 4,899,497 warrants were issued and outstanding.

We have not historically paid dividends on shares of our common stock. Additionally, the Treasury Loan and our aircraft lease facility with RASPRO Trust 2005, a pass-through trust, contain restrictions that limit our ability to or prohibit us from paying dividends to holders of our common stock.

12.

Income Taxes

Our effective tax rate (ETR) from continuing operations was 9.3% for the three months ended December 31, 2022 and 22.4% for the three months ended December 31, 2021. The Company’s ETR during the three months ended December 31, 2022 decreased from the prior year tax rate, primarily as a result of certain tax differences, state taxes, and changes in the valuation allowance against federal and state net operating losses.

We maintain a valuation allowance on a portion of our federal and 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, the Company had aggregate federal and state net operating loss carryforwards of approximately $591.4 million and $247.0 million, respectively, which expire in fiscal years 2027-2038 and 2023-2043, respectively. Approximately $6.3 million of state net operating loss carryforwards are expected to expire in the current fiscal year.

13.

Share-Based Compensation and Stock Repurchases

Restricted Stock

We grant restricted stock units (“RSUs”) as part of our long-term incentive compensation to employees and non-employee members of the Board of Directors. RSUs generally vest over a period of 3 to 5 years for employees and one year for members of the Board of Directors. The restricted common stock underlying RSUs are not deemed issued or outstanding upon grant, and do not carry any voting rights.

The restricted share activity for the three months ended December 31, 2022 is summarized as follows:


				Weighted-
				Average
	Number			Grant Date
	of Shares			Fair Value
Restricted shares unvested at September 30, 2022		1,172,493		$	4.43
Granted		—		$	—
Vested		(2,500	)	$	1.37
Forfeited		—		$	—
Restricted shares unvested at December 31, 2022		1,169,993		$	4.44

As of December 31, 2022, there was $3.7 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 1.8 years.

Compensation cost for share-based awards is recognized on a straight-line basis over the vesting period. Share-based compensation expense for the three months ended December 31, 2022 and 2021 was $0.7 million and $0.7 million, respectively.

We repurchased 847 shares of our common stock for $1.0 thousand to cover the income tax obligation on vested employee equity awards during the three months ended December 31, 2022.

14.

Employee Stock Purchase Plan

2019 ESPP

The Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan ("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 December 31, 2022, eligible employees purchased and we issued an aggregate of 304,137 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP.

15.

Leases

As of December 31, 2022, we leased 17 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The leases generally require us to pay all taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. We expect that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased.

Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $6.9 million and $11.8 million for the three months ended December 31, 2022 and 2021, respectively.

The components of our operating lease costs were as follows (in thousands):


	Three Months Ended December 31,
	2022		2021
Operating lease costs	$	4,699	$	9,480
Variable and short-term lease costs		889		1,735
Interest expense on finance lease liabilities		274		100
Amortization expense of finance lease assets		1,046		533
Total lease costs	$	6,907	$	11,848

As of December 31, 2022, our operating leases have a remaining weighted average lease term of 6.0 years and our operating lease liabilities were measured using a weighted average discount rate of 4.8%.

Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups during the fiscal year ended September 30, 2022 and determined that only the asset group associated with the CRJ-900 fleet operating under the American CPA, discussed in Note 7, required impairment. As of the three months ended December 31, 2022, we determined zero further impairment is required within the asset group for the CRJ-900 fleet on our condensed consolidated statements of operations and comprehensive loss. Additionally, during the three months ended December 31, 2022, we recorded a zero impairment of certain operating lease ROU assets associated with the abandonment of a leased facility. The Company did not record any impairment losses related to its operating lease right-of-use assets during the three months ended December 31, 2021.

RASPRO Lease Facility

Historically, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO as lessor, for 15 of our CRJ-900 aircraft classified as operating leases. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid quarterly on each aircraft. During 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.

16.

Commitments and Contingencies

Engine Purchase and Sale Commitments

On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. We agreed to purchase and take delivery of ten (10) new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. The total purchase commitment related to these ten (10) engines is approximately $52.2 million. We also have options to purchase an additional ten (10) similar engines beyond 2022. As of December 31, 2022, we have received delivery of all ten (10) purchased engines pursuant to the Amended and Restated Letter Agreement No. 13-3.

On December 27, 2022, the Company entered into an Engine Sale Agreement with United. The Engine Sale Agreement provides for the sale by the Company to United of 30 GE aircraft engines, with gross proceeds of approximately $80.0 million. The Company expects the net proceeds from this sale to be approximately $53.6 million. The closing of the sale of each engine is subject to certain customary closing deliverables, including delivery of bills of sale and delivery receipts, confirmation of engine location, termination of any existing liens, and other deliverables customary for transactions of this type.

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 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.

With respect to the matters disclosed in Item 3: “Legal Proceedings”, we believe that the ultimate outcomes of the two (2) putative class action lawsuits and other such routine legal matters are not likely to have a material adverse effect on our financial position, liquidity, or results of operations. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

Electric Aircraft Forward Purchase Commitments

As described in Note 7, in February 2021, we entered into a forward purchase contract with Archer for a number of eVTOL aircraft. The aggregate base commitment for the eVTOL aircraft is $200.0 million, with an option to purchase additional aircraft. Our obligation to purchase the eVTOL aircraft is subject to the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met.

As described in Note 7, in July 2021, we entered into a forward purchase contract with Heart for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is $1,200.0 million, with an option to purchase additional aircraft. Our obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and conditions, which may or may not be met.

Other Commitments

We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.

17.

Subsequent Events

Amendments to Bylaws

On January 13, 2023, the Company’s Board of Directors approved a resolution to amend the Company’s Amended and Restated Bylaws (the “Bylaws”) in connection with the Company’s entry into the Amended and Restated United CPA, see Note 1, which provides United with the right to designate one (1) representative to be a member of the Board, provided that United holds at least five percent (5%) of the issued and outstanding shares of capital stock of the Company, and provided that such United Designee shall be subject to the reasonable approval of the Board. Until the earlier of January 1, 2026, or the Company’s entry into a definitive binding agreement for the performance of regional airline services with a major air carrier other than United, the Board shall not take, or make any recommendation to the stockholders of the Company with respect to several actions, including:

•

Merge or consolidate any of the Company’s subsidiaries with or into any other entity, or sell, transfer or dispose of all or substantially all of the assets of the Company;

•

Enter into a purchase transaction that would result in the cash balance of the Company to fall below a certain threshold;

•

Enter into new lines of business, provided that this restriction shall not apply from and after the first point in time, if any, after the satisfaction of certain performance milestones; or

•

Amend or modify the Bylaws or Articles of Incorporation of the Company that would alter, amend, or repeal any of the foregoing.

Also on January 13, 2023, pursuant to the terms of the United CPA, the Company issued to United 4,042,061 shares of the Company’s common stock, no par value per share, equal to 10% of the Company’s issued and outstanding capital stock on such date. As set forth in the United CPA, the Company also granted United preemptive rights to purchase its pro rata portion of any equity securities that the Company may propose to issue or sell to any person in the future.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. 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 these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections titled "Cautionary Notes Regarding Forward-Looking Statements" above and "Risk Factors" below.

Overview

Mesa Airlines is a regional air carrier providing scheduled passenger service to 106 cities in 42 states, the District of Columbia, the Bahamas, Cuba, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either American Eagle, United Express, or DHL Express flights pursuant to the terms of capacity purchase agreements (“CPAs”) entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”), and a Flight Services Agreement (“FSA”) with DHL Network Operations (USA), Inc. (“DHL”) (each, our "major partner"). We have a significant presence in several of our major partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.

As of December 31, 2022, our fleet consisted of 158 aircraft which we operated under our CPAs and FSA, leased to a third party, held for sale or maintained as spares, with approximately 293 daily departures. We operate 42 CRJ-900 aircraft under our American CPA and 60 E-175 and 20 E-175LL aircraft under our United CPA. We operate three (3) Boeing 737-400F aircraft under our DHL FSA. As of December 31, 2022, approximately 64% of our aircraft in scheduled service were operated for United, approximately 34% were operated for American and 2% were operated for DHL. All of our operating revenue in our three months ended December 31, 2022 was derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party.

Our CPAs provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour (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) and flights actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major partners. Our CPAs 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, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major partners. Our major partners control route selection, pricing, seat inventories, marketing and scheduling, and provide 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 monthly block hour guarantee in exchange for providing cargo flight services. Ground support including fueling and airport fees are paid directly by DHL.

Impact of the 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 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. Since a portion of our revenue is fixed due to the structure of our CPAs, the impact to Mesa from the COVID-19 pandemic has been partially mitigated. In addition, our exposure to fluctuations in passenger traffic, ticket and fuel prices is limited.

Components of Results of Operations

The following discussion summarizes the key components of our condensed consolidated statements of operations and comprehensive loss.

Operating Revenues

Our operating revenues consist primarily of contract revenue as well as pass-through and other revenues.

Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our CPAs 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 GoJet Airlines L.L.C.. Contract revenues we receive from our major partners are paid and recognized over time consistent with the delivery of service under our CPAs and FSA.

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 our 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.

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.

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.

Intangible Asset Impairment. Intangible asset impairment expense includes charges for impairments of our intangible assets, including changes in the fair value of intangible assets.

Other Operating Expenses. Other operating expenses primarily consists of fuel costs for flying we undertake outside of our CPAs and FSA (including aircraft re-positioning and maintenance) as well as costs for aircraft and traffic servicing, such as aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major partners. All aircraft fuel and related fueling costs for flying under our CPAs and FSA are directly paid and supplied by our major partners. Accordingly, we do not record an expense or pass-through revenue for fuel supplied by American and United for flying under our CPAs or DHL under our FSA.

Other Income (Expense), Net

Interest Expense. Interest expense is interest on our debt incurred 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 net losses on our investments in equity securities resulting from changes in the fair value of the equity securities.

Other Expense. Other expense includes expense derived from activities not classified in any other area of the condensed consolidated statements of operations and comprehensive loss.

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 two separate capacity purchase agreements and one flight services agreement, 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

Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021

We had operating income of $2.4 million in our three months ended December 31, 2022 compared to operating loss of $4.0 million in our three months ended December 31, 2021. In our three months ended December 31, 2022, we had net loss of $9.1 million compared to net loss of $14.3 million in our three months ended December 31, 2021.

Our operating results for the three months ended December 31, 2022 improved as a result of decreases in (i) maintenance expense, due to fewer C-checks, engine overhauls, parts, and component contracts during the quarter; (ii) aircraft rent expense, due to the reduced carrying value of our CRJ-900 aircraft lease liability that was determined to be impaired during fiscal year 2022; and (iii) depreciation and amortization expense, due to both the reduced carrying value of our CRJ-900 aircraft asset that was determined to be impaired during fiscal year 2022 and 20 aircraft in our fleet being classified as non-depreciable assets held for sale. These reductions in operating expense were offset by increases in flight operations expense, due to increased pilot training costs and the implementation of the new pilot pay scale that began on September 15, 2022; and intangible asset impairment expense recorded due to the wind-down of our American Airlines operations related to our American CPA and the related AA Amendment.

Operating Revenues


	Three Months Ended December 31,
	2022		2021		Change
Operating revenues ($ in thousands):
Contract	$	128,450	$	136,894	$	(8,444	)	(6.2	)%
Pass-through and other		18,723		10,863		7,860		72.4	%
Total operating revenues	$	147,173	$	147,757	$	(584	)	(0.4	)%

Operating data:
Available seat miles—ASMs (thousands)		1,175,745		2,104,621		(928,876	)	(44.1	)%
Block hours		50,940		86,079		(35,139	)	(40.8	)%
Revenue passenger miles—RPMs (thousands)		1,006,480		1,764,161		(757,681	)	(42.9	)%
Average stage length (miles)		565		644		(79	)	(12.3	)%
Contract revenue per available seat mile—CRASM (in cents)	¢	10.92	¢	6.50	¢	4.42		68.0	%
Passengers		1,746,376		2,693,468		(947,092	)	(35.2	)%

"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.

"RPM" means the number of miles traveled by paying passengers.

Total operating revenue decreased by $0.6 million, or 0.4%, to $147.2 million for our three months ended December 31, 2022 as compared to our three months ended December 31, 2021. Contract revenue decreased by $8.4 million, or 6.2%, to $128.5 million primarily due to reduced block hours flown compared to the three months ended December 31, 2021, partially offset by an increased United block hour compensation rate for the new pilot pay scale. Our block hours flown during our three months ended December 31, 2022, decreased 40.8% compared to the three months ended December 31, 2021 due to a decrease in scheduled flying for our major partners across the E-175 and CRJ fleet. Our pass-through and other revenue increased $7.9 million, or 72.4%, to $18.7 million compared to our three months ended December 31, 2021 primarily due to an increase in pass-through maintenance related to our E-175 fleet.

Operating Expenses


	Three Months Ended December 31,
	2022		2021		Change
Operating expenses ($ in thousands):
Flight operations	$	58,320	$	47,598	$	10,722		22.5	%
Maintenance		48,287		58,981		(10,694	)	(18.1	)%
Aircraft rent		4,083		9,586		(5,503	)	(57.4	)%
General and administrative		13,988		12,578		1,410		11.2	%
Depreciation and amortization		15,203		21,028		(5,825	)	(27.7	)%
Intangible asset impairment		3,719		—		3,719		100.0	%
Other operating expenses		1,126		1,972		(846	)	(42.9	)%
Total operating expenses	$	144,726	$	151,743	$	(7,017	)	(4.6	)%

Operating data:
Available seat miles—ASMs (thousands)		1,175,745		2,104,621		(928,876	)	(44.1	)%
Block hours		50,940		86,079		(35,139	)	(40.8	)%
Average stage length (miles)		565		644		(79	)	(12.3	)%
Departures		27,776		43,447		(15,671	)	(36.1	)%

Flight Operations. Flight operations expense increased $10.7 million, or 22.5%, to $58.3 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021. The increase was primarily driven by the implementation of our new pilot pay scale and an increase in pilot training-related costs.

Maintenance. Aircraft maintenance expense decreased $10.7 million, or 18.1%, to $48.3 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021. This decrease was primarily driven by a lower volume of airframe C-checks, other pass-through, component contracts, rotable and expendable parts, and engine overhaul, partially offset by increases in pass-through engine overhauls and pass-through C-check maintenance expenses. Total pass-through maintenance expenses reimbursed by our major partners increased by $4.7 million during our three months ended December 31, 2022 compared to our three months ended December 31, 2021.

The following table presents information regarding our maintenance costs during the three months ended December 31, 2022 and 2021 (in thousands):


	Three Months Ended December 31,
	2022		2021		Change
Engine overhaul	$	45	$	1,529	$	(1,484	)	(97.1	)%
Pass-through engine overhaul		8,665		3,781		4,884		129.2	%
C-check		669		9,106		(8,437	)	(92.7	)%
Pass-through C-check		4,381		—		4,381		100.0	%
Component contracts		5,348		7,662		(2,314	)	(30.2	)%
Rotable and expendable parts		5,383		7,759		(2,376	)	(30.6	)%
Other pass-through		3,091		7,620		(4,529	)	59.4	%
Labor and other		20,705		21,524		(819	)	(3.8	)%
Total	$	48,287	$	58,981	$	(10,694	)	(18.1	)%

Aircraft Rent. Aircraft rent expense decreased $5.5 million, or 57.4%, to $4.1 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021. The decrease is primarily due to the reduced carrying value of our CRJ-900 aircraft lease liability that was determined to be impaired during the prior fiscal year ended September 30, 2022.

General and Administrative. General and administrative expense increased $1.4 million, or 11.2%, to $14.0 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021. The increase is driven by an increase in outside services.

Depreciation and Amortization. Depreciation and amortization expense decreased by $5.8 million, or 27.7%, to $15.2 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021 due to both 20 aircraft in our fleet being classified as non-depreciable assets held for sale and the reduced carrying value of our CRJ-900 aircraft asset that was determined to be impaired during the prior fiscal year ended September 30, 2022.

Intangible Asset Impairment. Intangible asset impairment expense increased by $3.7 million, or 100.0%, to $3.7 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021 due to the customer relationship write-off related to the American CPA.

Other Operating Expenses. Other operating expenses decreased $0.8 million, or 42.9%, to $1.1 million for our three months ended December 31, 2022 compared to our three months ended December 31, 2021. The decrease is primarily attributable to a decrease in fuel and aircraft servicing expense during the three months ended December 31, 2022.

Other Expense

Other expense decreased $1.9 million, or 13.4%, to $12.5 million for our three months ended December 31, 2022, compared to our three months ended December 31, 2021. The decrease is primarily attributable to a reduce of loss on investments in equity securities of $4.8 million, offset by an increase in interest expense due to both higher interest rates and greater outstanding finance lease principal balances.

Income Taxes

Our effective tax rate (ETR) from continuing operations was 9.3% for the three months ended December 31, 2022 and 22.4% for the three months ended December 31, 2021. Our ETR during the three months ended December 31, 2022 decreased from the prior year tax rate, primarily as a result of certain permanent tax differences, state taxes, and changes in the valuation allowance against federal and state net operating losses.

We continue to maintain a valuation allowance on a portion of our federal and 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, the Company had aggregate federal and state net operating loss carryforwards of $591.4 million and $247.0 million, respectively, which expire in 2027-2038 and 2023-2043, respectively. Approximately $6.2 million of state net operating loss carryforwards are expected to expire in the current year.

Cautionary Statement Regarding Non-GAAP Measures

We present Adjusted EBITDA and Adjusted EBITDAR, which are not recognized financial measures under GAAP, in this Quarterly Report on Form 10-Q 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, and depreciation and amortization, adjusted for gains and losses on investments, lease termination costs, impairment charges, and gains or losses on extinguishment of debt including 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, impairment charges, and gains or losses on extinguishment of debt including write-off of associated financing fees.

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 our 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.

Adjusted EBITDA and Adjusted EBITDAR

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDAR (in thousands):


	Three Months Ended December 31,
	2022			2021
Reconciliation:
Net loss	$	(9,090	)	$	(14,274	)
Income tax benefit		(930	)		(4,112	)
Loss before taxes		(10,020	)		(18,386	)
Loss on investments, net		1,679			6,462
Intangible asset impairment		3,719			—
Adjusted loss before taxes		(4,622	)		(11,924	)
Interest expense		11,276			7,930
Interest income		(71	)		(51	)
Depreciation and amortization		15,203			21,028
Adjusted EBITDA	$	21,786		$	16,983
Aircraft rent		4,083			9,586
Adjusted EBITDAR	$	25,869		$	26,569

Liquidity and Capital Resources

Impact of Pilot Shortage and Attrition

As a result of the pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. During the three months ended December 31, 2022, these challenges resulted in a negative impact on the Company’s financial results highlighted by cash flows used in operations of $6.0 million and net loss of $9.1 million including a non-cash impairment charge related to the Company’s American intangible asset of $3.7 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligations in the next twelve months.

•

We entered into an agreement with United to sell 18 CRJ-700 aircraft during the fiscal year ended September 30, 2022, of which ten (10) were sold. The approximate net proceeds from the sale in the prior period was $36.8 million after retirement of debt. The sale of the remaining eight (8) aircraft that are classified as assets held for sale at December 31, 2022, closed during January 2023. The approximate net proceeds from the sale after retirement of debt is $8.0 million.

•

We entered into an agreement with a third party to sell 11 of our CRJ-900 aircraft and one (1) CRJ-200 aircraft to raise capital and retire debt. The approximate net proceeds of the sale are expected to be $8.2 million after retirement of debt.

•

We established and drew upon a new line of credit with United totaling $25.5 million.

•

We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on all seven aircraft for the period of January 2023 through December 2024, providing up to $14 million of liquidity. Additionally, the junior noteholder, MHIRJ, agreed to reduce its loan amount by approximately $5 million.

•

We entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 CRJ-900 aircraft at lease termination by a total of $25 million.

•

We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition.

•

We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity.

Sources and Uses of Cash

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft 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.

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 requirements, 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 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.

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 are primarily directed toward our aircraft fleet and flight equipment including spare engines. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for the three months ended December 31, 2022 were approximately 0.9% of our revenue during the same period. We expect 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 December 31, 2022, our principal sources of liquidity were cash and cash equivalents of $56.1 million. In addition, we had restricted cash of $3.3 million as of December 31, 2022. As of December 31, 2022, we had $621.2 million in secured indebtedness incurred primarily in connection with our financing of 74 total aircraft and related equipment. As of December 31, 2022, we had $77.7 million of current debt, excluding finance leases, and $543.5 million of long-term debt excluding finance leases.

Restricted Cash

As of December 31, 2022, we had $3.3 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 term of this agreement, $3.3 million of outstanding letters of credit are required to be collateralized by amounts on deposit.

Cash Flows

The following table presents information regarding our cash flows for each of the three months ended December 31, 2022 and 2021 (in thousands):


	Three Months Ended December 31,
	2022			2021
Net cash provided by (used in) operating activities	$	(6,034	)	$	4,751
Net cash used in investing activities		(16,609	)		(26,929	)
Net cash provided by financing activities		21,038			3,993
Net decrease in cash, cash equivalents and restricted cash		(1,605	)		(18,185	)
Cash, cash equivalents and restricted cash at beginning of period		61,025			123,867
Cash, cash equivalents and restricted cash at end of period	$	59,420		$	105,682

Net Cash Provided by Operating Activities

Our primary source of cash from operating activities is cash collections from our major partners pursuant to our CPAs and FSA. Our primary uses of cash from operating activities are for maintenance costs, personnel costs, operating lease payments, and interest payments.

During our three months ended December 31, 2022, we had cash flow used in operating activities of $6.0 million. We had net loss of $9.1 million adjusted for the following significant non-cash items: depreciation and amortization of $15.2 million, stock-based compensation of $0.7 million, net losses on investments in equity securities of $1.7 million, deferred income taxes of $(1.0) million, amortization of deferred credits of $(0.2) million, amortization of debt discount and financing costs and accretion of interest of $1.4 million, and asset impairment of $3.7 million. We had a net change of $(18.4) million within other net operating assets and liabilities largely driven by decreases in accounts payable and receivables, which were offset primarily by an increase in accrued expenses and other liabilities.

During our three months ended December 31, 2021, we had cash flow provided by operating activities of $4.8 million. We had net loss of $14.3 million adjusted for the following significant non-cash items: depreciation and amortization of $21.0 million, stock-based compensation of $0.7 million, losses on investments in equity securities of $6.5 million, deferred income taxes of $(4.2) million, amortization of deferred credits of $(0.2) million, and amortization of debt discount and financing costs and accretion of interest of $3.2 million. We had a net change of $(8.2) million within other net operating assets and liabilities primarily due to changes in deferred revenue and accrued expenses and other liabilities.

Net Cash 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 three months ended December 31, 2022, net cash flow used in investing activities totaled $16.6 million. We invested $16.7 million in capital expenditures primarily consisting of spare engines, rotable parts, and other equipment, and $0.1 million in refunds of equipment and other deposits.

During our three months ended December 31, 2021, net cash flow used in investing activities totaled $26.9 million. We invested $19.8 million in capital expenditures primarily consisting of spare engines and other equipment, and $6.9 million in payments of equipment and other deposits. We invested a total of $0.2 million in equity securities of a private company.

Net Cash 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 three months ended December 31, 2022, net cash flow provided by financing activities was $21.0 million. We received $39.0 million of proceeds from long-term debt and made $17.5 million of principal repayments on long-term debt and paid $0.4 million of costs related to debt financing.

During our three months ended December 31, 2021, net cash flow provided by financing activities was $4.0 million. We received $30.8 million of proceeds from long-term debt. We made $24.5 million of principal repayments on long-term debt during the period and paid $2.3 million of costs related to debt financing.

Critical Accounting Estimates

We prepare our condensed 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.

The accompanying discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated interim financial statements included elsewhere in this Form 10-Q. We believe certain of our accounting estimates and policies are critical to understanding our financial position and results of operations. There

have been no material changes to the critical accounting estimates as explained in Part 1, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 under the heading "Critical Accounting Estimates."

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3: "Recent Accounting Pronouncements" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3. 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 December 31, 2022, we had $470.0 million of variable-rate debt, including current maturities. A hypothetical 100 basis point change in market interest rates would have affected interest expense by approximately $1.2 million in the three months ended December 31, 2022.

As of December 31, 2022, we had $231.3 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 December 31, 2022.

On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In December 2020, the administrator of LIBOR proposed to cease publication of certain LIBOR settings after December 2021 and to cease publication of the remainder of the LIBOR settings after June 2023. The majority of our debt arrangements are indexed to one- and three-month LIBOR, which will be sunset on June 30, 2023. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated based on repurchase agreements backed by Treasury securities, we cannot currently predict whether this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.

We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As of December 31, 2022, we had $462.4 million of borrowings based on LIBOR. The replacement of LIBOR with a comparable or successor rate could cause the amount of interest payable on our long-term debt to be different or higher than expected.

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 agreements largely shelter us from volatility related to fuel prices, which are directly paid and supplied by our major partners.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting and has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles. Under the supervision with the participation of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2022.

Update on Remediation of Previously Reported Material Weaknesses

Management identified material weaknesses in internal control over financial reporting for the period ended September 30, 2022 related to: (1) the application of the accounting for net operating loss carryforwards governed by the Tax Cuts and Jobs Act (TCJA) and (2) the accounting for the impairment of the assets.

Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over financial reporting. We intend to remediate these material weaknesses as soon as possible. Remediation efforts include:

Adding supplementary technical accounting personnel and continuing to engage with external technical accounting consultants to facilitate timely and accurate accounting for non-routine transactions.

Partnering with external consultants specializing in public company control compliance to assess and implement more timely operation of review controls and improve communications amongst the various stakeholders in the Company.

Notwithstanding the assessment that our internal controls over financial reporting are not effective and that material weaknesses exists, we believe we have employed supplementary procedures to ensure the financial statements contained in this report fairly present in all material respects, our financial position as of December 31, 2022 and September 30, 2022, and the results of operations and cash flows for the period ending December 31, 2022 and 2021.

Changes in Internal Control Over Financial Reporting

During the three months ended December 31, 2022, there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute 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 that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, 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. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to two (2) putative class action lawsuits alleging federal securities law violations in connection with its initial public offering in August 2018 (“IPO”) — one (1) in the Superior Court of the State of Arizona and one (1) in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement.

On March 2, 2022, the parties in the federal lawsuit attended a mediation and reached an agreement in principle to settle all claims asserted in that action for the sum of $5 million, which will be paid by the Company’s directors’ and officers’ insurance carriers. The settlement is subject to preliminary and final approval by the federal court. The motion for preliminary approval was filed on May 6, 2022, and no objections to the settlement were filed by the deadline for such objections. The parties are waiting for the Court to schedule a date for the preliminary approval hearing. If preliminary and final approval is obtained, the claims of all putative class members, whether asserted in the federal or state actions, will be extinguished, unless and only to the extent that a particular class member takes affirmative steps to have its claims excluded.

In addition, we are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2022, 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.

We are also involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings that we do not believe will have a material adverse effect upon our business, financial condition, or results of operations, although no assurance can begiven to the ultimate outcome of any such proceedings.

Item 1A. Risk Factors

We refer you to documents filed by us with the SEC, specifically "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled "Cautionary Statements Regarding Forward-looking Statements" of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and herein are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. There have been no material changes to the risk factors previously disclosed in our 2022 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company repurchased 847 shares of its common stock for $1.0 thousand to cover the income tax obligation on vested employee equity awards and warrant conversions during the three months ended December 31, 2022.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT INDEX


Exhibit No.		Exhibit Description
10.1**		Amendment No.11 to the Amended and Restated Capacity Purchase Agreement among the Registrant, Mesa Airlines, Inc. and American Airlines, Inc. dated December 16, 2022.

10.2**		Third Amended and Restated United Capacity Purchase Agreement between United Airlines, Inc. and Mesa Airlines, Inc. dated December 27, 2022.

10.3*		Modification and Waiver Agreement, dated as of December 22, 2022, of the Loan and Guarantee Agreement, dated as of October 30, 2020, among Mesa Airlines, Inc., as Borrower, the Guarantors party hereto from time to time, the United States Department of the Treasury, and The Bank of New York Mellon, as Administrative Agent and Collateral Agent.

10.4**		Amendment No. 1 to Second Amended and Restated Credit and Guaranty Agreement, dated as of December 27, 2022.

10.5**		Amendment No. 2 to Second Amended and Restated Credit and Guaranty Agreement, dated as of January 27, 2023.

10.6**		Second Amended and Restated Credit and Guaranty Agreement, dated as of June 30, 2022, among Mesa Airlines, Inc. and Mesa Air Group Airline Inventory Management, L.L.C., as the Borrowers, Mesa Air Group, Inc., as a Guarantor, the other Guarantors party hereto from time to time, CIT Bank, a division of First Citizens Bank & Trust Company, as Administrative Agent.

10.7**		Engine Sale and Purchase Agreement, dated December 27, 2022.

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

101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL 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 (embedded within the Inline XBRL document)

* This certification will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (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 of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

** 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MESA AIR GROUP, INC.

Date: February 9, 2023	By:	/s/ D. Torque Zubeck
		Torque Zubeck Chief Financial Officer (Principal Financial Officer)