HRBR Harbor Diversified Inc (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2020

OR

For the transition period from                  to                 .

Commission File Number 001-34584

Registrant’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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.

If an emerging growth company, indicate by check if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of December 31, 2020, the registrant had 54,863,305 shares of common stock, $0.01 par value, outstanding and 4,000,000 shares of Series C Convertible Redeemable Preferred Stock, $0.01 par value, outstanding. The registrant does not have any class of securities registered pursuant to Section 12(b) or Section 12(g) of the Exchange Act.

HARBOR DIVERSIFIED, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (this “Quarterly Report”), includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements include all statements that are not statements of historical facts and can be identified by words such as “anticipate,” “approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Quarterly Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting, and are subject to considerable risks and uncertainties, including without limitation:

The forward-looking statements contained in this Quarterly Report are based on management’s current plans, estimates and expectations in light of information currently available to us, and they are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control, as well as the other factors described in the section entitled “Risk Factors” within our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on July 10, 2020 (the “2019 Annual Report”), this Quarterly Report, and in the other reports we file with the Securities and Exchange Commission.

1

Additional factors or events that could cause our actual results to differ may also emerge from time to time, and it is not possible for us to predict all of them. Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Should one or more of these risks or uncertainties materialize, or should any of our assumptions or estimates prove to be incorrect, our actual results may be different from, and potentially materially worse than, what we may have expressed or implied by these forward-looking statements. Investors should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. We qualify all of our forward-looking statements by these disclaimers.

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Harbor Diversified, Inc. and Subsidiaries

Consolidated Balance Sheets (amounts in thousands, except shares and par value)

See accompanying condensed notes to consolidated financial statements.

4

See accompanying condensed notes to consolidated financial statements.

5

See accompanying condensed notes to consolidated financial statements.

See Note 12 for supplemental cash flow information.

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Harbor Diversified, Inc. and Subsidiaries

Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Under the United capacity purchase agreement, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreement and are determined and measured on a monthly basis. At the end of each month during the term of the agreement, the Company calculates the incentives achieved during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606).

As discussed above, under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payment on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin completed a lower number of flights in the three months ended September 30, 2020 than in periods prior to the three months ended March 31, 2020, and lower than it expects to complete in subsequent periods, resulting in the Company deferring $15,422 of revenue attributed to the fixed amount per aircraft received during the three months ended September 30, 2020. The current portion of the deferred revenue, in the amount of $8,701, is recorded as part of contract liabilities, and the long-term portion of the deferred revenue, in the amount of $29,205, is recorded as deferred revenue on the consolidated balance sheets. Due to the lower number of flights during the three months ended September 30, 2020, Air Wisconsin also recognized a lower amount of non-refundable upfront fee revenue, as well as lower fulfillment costs, both of which are being amortized over the remaining term of the agreement in proportion to flights flown. For the three months ended September 30, 2020, Air Wisconsin recorded $496 of revenue from upfront fees and $53 of fulfillment costs, compared to $933 and $100 for the three months ended September 30, 2019, respectively. For the nine months ended September 30, 2020, Air Wisconsin recorded $1,701 of revenue from upfront fees and $182 of fulfillment costs, compared to $2,793 and $300 for the nine months ended September 30, 2019, respectively. The Company anticipates that Air Wisconsin’s flight levels will increase over the remaining term of the agreement compared to the three months ended September 30, 2020. The Company’s deferred revenue, upfront fee revenue and fulfillment costs will be recognized based on Air Wisconsin’s completed flight levels each period relative to the anticipated flight levels over subsequent periods during the remaining term of the agreement. However, the timing of the recognition of these items in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown in the same period.

The amount of revenue recognized in the three months ended September 30, 2020 that was previously recorded as a contract liability is $496.

Other revenues are immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts generally is fair market value.

Impairment of Long-Lived and Intangible Assets

The Company evaluates long-lived and intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding matters such as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived and intangible assets and determined that no quantitative impairment tests were needed as of September 30, 2020.

Comprehensive Income

The Company does not have any components of comprehensive income; therefore, as of September 30, 2020 and September 30, 2019, respectively, comprehensive income was equal to net income reported in the consolidated statements of operations.

Concentration of Credit Risk

The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. As of September 30, 2020, there were no bank deposits that exceeded the FDIC insurance limits.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Concentration of Customer Risk

Substantially all the Company’s revenues for the three months and nine months ended September 30, 2020 and September 30, 2019 were derived from the United capacity purchase agreement. Refer to Note 3 for additional information.

Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Long-term investments are held-to-maturity debt securities and are reported at amortized cost.

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). Fair Value Measurement, Topic 820, establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:

Level 1—Quoted market prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 inputs that are either directly or indirectly observable.

Level 3—Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations annually, and it is possible that an asset or liability may be classified differently from year to year. However, the Company expects that changes in classifications between levels will be rare. The Company currently classifies money market funds and deposits as Level 1 and long-term investments as Level 2. There were no transfers between Level 1 and Level 2 investments during the three months and nine months ended September 30, 2020.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 introduces a new accounting model known as Current Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivable. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU 2016-13 is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

In August 2020, the FASB issued ASU No. 2020-06, Debt (Subtopic 470-20); Debt with Conversion and Other Options and Derivatives and Hedging (Subtopic 815-40) Contracts in Entity’s Own Equity (ASU 2020-06). ASU 2020-06 amends the guidance on convertible instruments and the derivatives scope exception for contracts and convertible instruments on an entity’s own equity. This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2020. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.

Reclassification

In accordance with ASU 2016-18, restricted cash on the Consolidated Statement of Cash flows for the nine months ended September 30, 2019, has been reclassified to be included in the beginning and ending balances of Cash and Cash Equivalents. The restricted cash was previously reported in the Cash Flows from Investing Activities section of the statement.

2. Liquidity

The Company’s ability to meet its liquidity needs is dependent upon generating cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. There can be no assurance that the Company’s operations will be sufficiently profitable, or that additional funds will be available, to meet its future liquidity needs.

Impact of the COVID-19 Pandemic

In January 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of a novel coronavirus, which is referred to as COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic.

In response to the significant reduction in demand for airline travel due to the COVID-19 pandemic, United announced and implemented large scale reductions in its domestic and international flight schedules and the flight schedules of its regional airline partners, including the Company. Given the fluid nature of the pandemic, the extent and length of the reduction in passenger demand for air travel are unknown, although the Company expects reduced demand relative to historical levels to continue for the foreseeable future. The COVID-19 pandemic has also resulted in federal, state, local and foreign governments adopting “shelter-in-place” and “stay-at-home” orders and guidelines, quarantine orders, travel restrictions, as well as other restrictions, which are expected to continue to be disruptive to the economy, and to continue to depress passenger demand for air travel. The Company has experienced, and expects to continue to experience, a significant reduction in operating revenues as a result of the reduction in its flight schedules from United. If passenger traffic does not return to pre-COVID-19 levels, there may be excess capacity in the airline industry that could lead to long-term reduced utilization or inefficient scheduling of the Company’s aircraft, which may have further adverse effects on the Company’s business, financial condition and results of operations.

Through notices given pursuant to the federal Worker Adjustment and Retraining Notification (WARN) Act, Air Wisconsin informed approximately 871 employees that they might be furloughed on October 1, 2020, due to the COVID-19 pandemic and the resulting decrease in passenger demand for air travel. On October 1, 2020, Air Wisconsin furloughed approximately 305 employees. As of the date of this Quarterly Report, Air Wisconsin has recalled 26 of those furloughed employees.

These furloughs could make it more challenging to recommence operations at the level of such operations prior to the COVID-19 pandemic.

The COVID-19 pandemic continues to evolve. As such, the ongoing impact that the pandemic will have on the Company’s financial condition, liquidity, and results of operations is highly uncertain. Management is actively monitoring the impact on the Company’s operations, suppliers, industry, and workforce. The Company is taking actions based on currently available information to address the changing business environment; however, it cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on its results of operations, financial condition, or liquidity.

Since a portion of the Company’s revenue is fixed due to the structure of the United capacity purchase agreement, the impact of the COVID-19 pandemic on the Company’s financial position may be partially mitigated or offset. However, if United ceases to pay the full amount required under the agreement, whether due to its own financial disruption resulting from the COVID-19 pandemic, as a result of a dispute with the Company, or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition, and liquidity. While the fixed amount of revenue under the agreement remains mostly unchanged as it is based on a fixed contractual rate and number of covered aircraft, variable revenue earned based on the number of block hours and departures has been significantly reduced, and the Company may experience ongoing or further reductions.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

The travel restrictions and other initiatives adopted to limit the spread of the virus have had, and will continue to have, a material adverse impact on passenger demand for air travel. As a result of this decline in demand, and the subsequent capacity reductions by United, the Company’s approximately 1,759 scheduled block hours in June 2020 was approximately 88% less than its scheduled block hours in June 2019. While the Company’s monthly scheduled block hours have been gradually increasing on an absolute basis since June (approximately 2,206 in July 2020, 4,076 in August 2020, 5,205 in September 2020, 6,542 in October 2020, 6,936 in November 2020 and 6,298 in December 2020 and 6,300 in January 2021), the Company expects to continue to experience significantly reduced scheduled block hours on a comparative basis relative to historical levels (approximately 14,043 in July 2019, 14,041 in August 2019, 13,336 in September 2019, 14,608 in October 2019, 14,163 in November 2019, 14,527 in December 2019 and 14,500 in January 2020) for the foreseeable future.

Cost Reduction Initiatives

In response to these developments, the Company has implemented cost reduction initiatives seeking to mitigate the impact of the COVID-19 pandemic on the Company’s operations, financial condition and liquidity, while also protecting the safety of the Company’s customers and employees. These continuing measures include, but are not limited to, the following:

Deferral of Interest Payments

The Company’s primary lender agreed to defer approximately $5,000 of interest payments otherwise due to be paid during the period from March 31, 2020 through September 29, 2020, with all deferred amounts due in a lump sum payment on September 30, 2020, pursuant to the terms of a letter agreement dated March 30, 2020. All deferred amounts were paid on September 30, 2020. Refer to Note 6 for additional information.

CARES Act

In March 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

In addition to the cost reduction measures discussed above, in April 2020, Air Wisconsin applied to a lender for a $10,000 loan (SBA Loan) under the small business Paycheck Protection Program (PPP) established under the CARES Act and administered by the Small Business Administration (SBA). The entire loan amount was received by Air Wisconsin on April 13, 2020. The application for these funds required Air Wisconsin to certify in good faith that current economic uncertainty made the loan request necessary to support the ongoing operations of Air Wisconsin. Air Wisconsin was also required to certify that the loan funds would be used to retain workers and maintain payroll, or to make mortgage payments, lease payments, and utility payments. The SBA Loan bears interest at a rate of 1.0% per annum. The SBA Loan originally had a two-year term, and monthly principal and interest payments were originally deferred for six months after the date of the loan. Pursuant to the Flexibility Act signed into law in June 2020 (Flexibility Act), the maturity date may be, but has not yet been, extended to 2025, and the interest deferral has been extended to 2021. The SBA Loan may be prepaid at any time without penalty. Under the CARES Act, Air Wisconsin can apply for and be granted forgiveness for all or a portion of the SBA Loan. Such forgiveness, if any, will be determined, subject to limitations, based on the use of the loan proceeds for specified purposes, provided that not more than 40% of the forgiven amount may be for non-payroll costs. While Air Wisconsin believes that its use of the loan proceeds will meet the conditions for forgiveness of the SBA Loan, there can be no assurance that Air Wisconsin will obtain forgiveness of the loan in whole or in part.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

In addition, in April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (PSP Agreement) with respect to payroll support (Treasury Payroll Support) from the U.S. Department of Treasury (Treasury) under the payroll support program (Payroll Support Program) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin has received approximately $42,200 in the aggregate through October 1, 2020. The PSP Agreement contains various covenants, including that the proceeds from the Payroll Support Program must be used exclusively for the payment of wages, salaries and benefits, that Air Wisconsin could not involuntarily terminate or furlough any employee prior to October 1, 2020, and that Air Wisconsin could not reduce any employee’s pay rates or benefits prior to October 1, 2020, without that employee’s consent. If Air Wisconsin fails to comply with its obligations under the PSP Agreement, it may be required to repay the funds provided to it under that agreement. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. Treasury is currently conducting an audit of Air Wisconsin’s compliance with the terms of the agreement. For additional information, refer to Note 8.

The proceeds of the Treasury Payroll Support are recorded in cash and cash equivalents when received and will be recognized as a reduction in expense under “CARES Act Payroll Support Program” in the Company’s consolidated statements of operations over the periods that the funds are intended to offset payroll expenses. In the three months and nine months ended September 30, 2020, the Company received $20,499 and $40,998, respectively, under the Payroll Support Program.

In the three months and nine months ended September 30, 2020, the Company recognized $18,859 and $34,034, respectively, of the Treasury Payroll Support received as a reduction in expense on the Company’s consolidated statements of operations under “CARES Act Payroll Support Program” with the remaining $6,964 of the Treasury Payroll Support recorded as a deferred credit in current liabilities on the consolidated balance sheets. The Company expects to recognize the remainder of the Treasury Payroll Support as a reduction in expense by the end of 2020.

In light of the measures discussed above that the Company has implemented to mitigate the impact of the COVID-19 pandemic on its operations, financial condition and liquidity, the Company currently believes its available working capital and anticipated cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months from the date of filing this Quarterly Report.

3. Capacity Purchase Agreement with United

In February 2017, the Company entered into the United capacity purchase agreement to operate up to 65 CRJ-200 regional jet aircraft. In October 2020, the Company entered into an amendment to the agreement, which, among other things, set the number of aircraft covered by the agreement at 63. As amended, the initial term of the agreement is through February 2023, with an option at United’s election to extend for a period of no less than two years (and up to three years, in United’s discretion) and a second option at United’s election to extend for an additional two-year period, subject to mutual agreement by the Company and United as to compensation. For additional information, refer to Note 14.

4. Property and Equipment

The following presents the Company’s aircraft as of September 30, 2020 and September 30, 2019.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

In January 2020, the Company completed an asset acquisition from Southshore Leasing, LLC (Southshore Leasing), through its affiliates (the Southshore Affiliates and, together with Southshore Leasing, Southshore), of three CRJ-200 regional jets, each having two General Electric (GE) engines, plus five additional GE engines, in exchange for the issuance of shares of the Company’s Series C Convertible Redeemable Preferred Stock (Series C Preferred). The Company had leased each of these regional jets and engines prior to the acquisition. See Note 9 for additional information.

In May 2020, Air Wisconsin completed the acquisition of eight CRJ-200 regional jets, each having two GE engines, for $3,000. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition.

In September 2020, Air Wisconsin completed the acquisition of two CRJ-200 regional jets, each having two GE engines, for $818. Air Wisconsin had leased each of these regional jets and engines prior to the acquisition

5. Income Taxes

The Company’s effective tax rate for the three months ended September 30, 2020 was (0.2)%. The Company’s effective tax rate for the three months ended September 30, 2020 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes, the reversal of valuation allowances on federal and state deferred tax assets, and the impact of non-deductible expenses.

The Company’s effective tax rate for the nine months ended September 30, 2020 was (38.3)%. The Company’s effective tax rate for the nine months ended September 30, 2020 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes, the reversal of valuation allowances on federal and state deferred tax assets, and the impact of non-deductible expenses, which impacts were partially offset by a $0.9 million discrete tax benefit from a refund of alternative minimum tax credits available under the provisions of the CARES Act that occurred during the period.

The Company’s effective tax rate for the three months ended September 30, 2019 was (0.6)%. The Company’s effective tax rate for the three months ended September 30, 2019 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes, the impact of non-deductible expenses, and the creation of valuation allowances on state and federal deferred tax assets that occurred during the three months ended September 30, 2019.

The Company’s effective tax rate for the nine months ended September 30, 2019 was (1.8)%. The Company’s effective tax rate for the nine months ended September 30, 2019 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes, the impact of non-deductible expenses, and the creation of valuation allowances on state and federal deferred tax assets that occurred during the nine months ended September 30, 2019.

6. Debt

In April 2020, in connection with the PPP, Air Wisconsin issued to a lender a promissory note for an aggregate principal amount of $10,000. The amount outstanding under the note may be forgiven under certain circumstances. The Company has recorded the value of the promissory note on a relative fair value basis as $9,777 of long-term debt and $223 of current portion of long-term debt. Based on the Flexibility Act, the Company expects that principal and interest payments on the note will be deferred until August 2021, Air Wisconsin will commence payments in September 2021, and the maturity date will be April 2025. The repayment provisions of this note may be modified by the SBA. For additional information refer to Note 2.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

Deferral Agreement

On March 30, 2020, Air Wisconsin entered into a Letter Agreement with its primary lender to defer until September 30, 2020 all principal and interest payments on the Aircraft Notes and the Other Loans (as defined in the 2019 Annual Report) that would otherwise be due from March 31, 2020 through September 29, 2020. Under this agreement Air Wisconsin deferred a payment of $3,974 due in March 2020 and deferred a second payment of $1,118 due in June 2020. All deferred amounts were paid on September 30, 2020. For additional information, refer to Note 6 to the Company’s consolidated financial statements contained within the 2019 Annual Report. Maturities of long-term debt for the periods subsequent to September 30, 2020, are as follows:

The debt agreements include, among other provisions, certain non-financial covenants. At September 30, 2020 and September 30, 2019, Air Wisconsin was in compliance with the covenants of all of its debt agreements.

For a more detailed discussion of the Company’s long-term debt, refer to Note 6 to the Company’s consolidated financial statements contained within the 2019 Annual Report.

Long-Term Promissory Note

In July 2003, Air Wisconsin financed a hangar through the issuance of $4,275 City of Milwaukee, Wisconsin variable rate Industrial Development Bonds. The bonds mature on November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash, and interest was payable semiannually on each of May 1 and November 1. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the consolidated balance sheets. The hangar is accounted for as a right-of-use asset with a value of $3,068 as of September 30, 2020.

7. Lease Obligations

As of September 30, 2020, the Company’s right-of-use assets were $14,343, the Company’s current maturities of operating lease liabilities were $3,227, and the Company’s noncurrent lease liabilities were $8,214. During the nine months ended September 30, 2020, the Company paid $4,930 in operating lease payments.

The table below presents operating lease related terms and discount rates as of September 30, 2020:

Components of lease costs were as follows for the three and nine months ended September 30, 2020 and September 30, 2019:

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

As of September 30, 2020, Air Wisconsin leased or subleased certain training simulators and facilities for terms of greater than 12 months. The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms greater than one year as of September 30, 2020:

8. Commitments and Contingencies

Legal Matters

The Company is subject to certain legal actions, which it considers routine to its business activities. As of September 30, 2020, the Company believes, after consultation with legal counsel, that the ultimate outcome of such legal matters, whether individually or in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.

Treasury Audit

The Treasury’s Office of Inspector General (OIG) is conducting a routine audit in connection with Air Wisconsin’s receipt of funds under the Payroll Support Program. The audit has focused, among other things, on certain calculations used to determine the amount of Treasury Payroll Support Air Wisconsin was entitled to receive under the program. The audit is not yet complete, and Air Wisconsin has disputed in good faith Treasury’s interpretation of varying definitions and other provisions among Air Wisconsin’s application for Treasury Payroll Support, Treasury’s guidance regarding the Payroll Support Program and the PSP Agreement. Nevertheless, Air Wisconsin management believes, based on communications it has received from Treasury, that it is probable an amount will be due to the Treasury as a result of the ongoing audit. However, Air Wisconsin is not able to reasonably estimate, as of the date of filing of this Quarterly Report, the amount which OIG may ultimately determine to be due to the Treasury.

Standby Letters of Credit

As of September 30, 2020, the Company had ten outstanding letters of credit in the aggregate amount of $810 to guarantee the performance of Company obligations under certain lease agreements and insurance policies. The Company’s restricted cash balance secures the letters of credit.

The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million commencing June 30, 2021, with certain additional amounts payable based on excess cash flow. No excess cash flow payments are anticipated in the above table. As of September 30, 2020, all of the Company’s long-term debt was subject to fixed interest rates.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

For additional information, refer to Note 8 to the Company’s consolidated financial statements contained within the 2019 Annual Report.

9. Related-Party Transactions

For the three months ended September 30, 2020 and September 30, 2019, the Company paid $60 and $967, respectively, pursuant to certain aircraft and engine leases with related parties and for other professional services. For the nine months ended September 30, 2020 and September 30, 2019, the Company paid $330 and $2,820, respectively, pursuant to certain aircraft and engine leases with related parties and for other professional services.

Southshore Leasing, through Southshore Aircraft Holdings, LLC and its affiliated entities (Southshore) leased aircraft and engines to Air Wisconsin pursuant to various operating lease agreements from April 2010 through January 2020. For the three months ended September 30, 2020, Air Wisconsin did not make any payments to Southshore due to the purchase in January 2020 described below. For the three months ended September 30, 2019, Air Wisconsin paid a total of approximately $907 to Southshore, consisting of approximately $498 for the lease of three aircraft, and approximately $409 for the lease of additional engines to support Air Wisconsin’s operations. For the nine months ended September 30, 2020, Air Wisconsin paid a total of approximately $150 to Southshore, consisting of approximately $66 for the lease of three aircraft, and approximately $84 for the lease of additional engines to support Air Wisconsin’s operations. For the nine months ended September 30, 2019, Air Wisconsin paid a total of approximately $2,640 to Southshore, consisting of approximately $1,429 for the lease of three aircraft, and approximately $1,211 for the lease of additional engines. Each of these aircraft and engines was acquired by the Company in the transaction described below.

In January 2020, the Company completed an acquisition from Southshore of three CRJ-200 regional jets, each having two GE engines, plus five additional GE engines, in exchange for the issuance of 4,000 shares of Series C Preferred with an aggregate value of $13,200, or $3.30 per share (Series C Issue Price), and the assumption of liabilities in the amount of $3,466. As of September 30, 2020, the shares of Series C Preferred were convertible into an aggregate of 16,500 shares of common stock. Refer to Note 10 for additional information.

From time to time, Air Wisconsin has also contracted for services to be performed on certain assets held by Southshore that were used in Air Wisconsin’s operations, pursuant to which Air Wisconsin received reimbursement from Southshore at the cost of such services. Because Air Wisconsin acted as an agent or an intermediary in facilitating such transactions, the amounts of any such transactions are not included in the amounts described above.

Resource Holdings Associates (Resource Holdings) has provided AWAC and Air Wisconsin with financial advisory and management services pursuant to an agreement entered into in January 2012. AWAC has paid a recurring monthly fee of $20 in exchange for these financial advisory and management services since January 2012. AWAC paid a total of $60 to Resource Holdings for each of the three months ended September 30, 2020 and September 30, 2019, and $180 to Resource Holdings for each of the nine months ended September 30, 2020 and September 30, 2019. See the section entitled, “Certain Relationships and Related Transactions, and Director Independence” in the 2019 Annual Report.

10. Earnings Per Share and Equity

Calculations of earnings (loss) per share of common stock, for the three and nine months ended September 30, 2020 and September 30, 2019 were as follows (in thousands, except per share data):

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Basic earnings (loss) per share of common stock is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period.

Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding assuming conversion of the stock options and Series C Preferred. In loss periods, dilutive shares associated with the 2015 Stock Option and the Series C Preferred were not included in the calculation above, as they would have an anti-dilutive effect on the calculation of earnings per share. For additional information, refer to Note 11.

Series C Preferred

In January 2020, the Company issued 4,000 shares of the Series C Preferred. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred are set forth in the Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock (Certificate of Designations), which the Company filed with the Secretary of State of the State of Delaware.

As of the date of this filing, the Series C Preferred is immediately convertible into 16,500 shares of common stock and accrues dividends at the rate of 6.0% per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors and paid by the Company (Preferential Dividends).

From and after December 31, 2023, upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (Dividend Ratchet). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (PIK Dividends).

Each share of Series C Preferred is initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (Conversion Price); provided, however, that the Certificate of Designations requires that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The “Reporting Adjustment Period” is the first 90-trading day period commencing on or after August 28, 2020 (which is the first trading day following the day that is 45 days following the date on which the Company provided notice to its stockholders of the filing of its 2019 Annual Report) during which an aggregate of at least 5.0% of the outstanding shares of common stock are traded.

The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (Conversion Cap Excess Shares), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends of an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (Conversion Cap Excess Dividends).

In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (Series C Liquidation Amount).

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date (as defined in the Certificate of Designations) or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800 shares of Series C Preferred are outstanding, and (d) December 31, 2024, the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (Redemption Price). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price.

In January 2020, the Company also entered into an Investors’ Rights Agreement with Southshore, pursuant to which the Company agreed, if requested by Southshore at any time following the 180-day period after the Company became subject to the reporting requirements under the Exchange Act, to file with the SEC a registration statement on a Form S-1 with respect to at least 40% of the common stock issuable upon conversion of the Series C Preferred then outstanding (or a lesser percent if the anticipated aggregate offering price, net of selling expenses, would exceed $10 million), along with other registration rights. All reasonable expenses related to any such registration shall be borne by the Company. The Investors’ Rights Agreement further provides that, whenever the members of the Board of Directors are to be elected, Southshore will vote so as to elect a majority of directors comprising the Board of Directors that qualify as independent directors.

On each of April 15, 2020, June 30, 2020, September 29, 2020 and December 30, 2020, the Board of Directors declared dividends of $165, $198, $198 and $198, respectively, on the Series C Preferred, which were paid on April 20, 2020, July 1, 2020, September 30, 2020, and December 31, 2020, respectively.

Based on the applicable accounting guidance, the Company is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.

The number of shares of common stock into which the Series C Preferred is convertible, as determined for purposes of calculating the net income (loss) per share of common stock, may not be consistent with the actual number of shares into which the Series C Preferred is convertible pursuant to the Certificate of Designations on any particular date.

As of September 30, 2020, pursuant to the Certificate of Designations, the Series C Preferred was convertible into an aggregate of 16,500 shares of common stock.

The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.

11. Stock Options

2015 Stock Option

In 2015, the Company issued a stock option (2015 Stock Option) to purchase 559 shares of common stock at an exercise price of approximately $0.21 per share. The value of the 2015 Stock Option at the date of grant was $0.07 per share based on a life of 7.0 years, a risk-free interest rate of 2.01% and expected volatility of 157.1%. The 2015 Stock Option was the only stock option outstanding as of September 30, 2020 and September 30, 2019.

After July 9, 2019, the 2015 Stock Option became fully exercisable. Prior to that date it could only be exercised based on the occurrence of certain events. The 2015 Stock Option terminates on the earlier to occur of July 9, 2022, or the occurrence of certain corporate transactions.

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

12. Supplemental Cash Flow Information

Cash payments for interest for the nine months ended September 30, 2020 and September 30, 2019 were $6,200 and $1,319, respectively. Cash payments for income taxes for the nine months ended September 30, 2020 and September 30, 2019 were $1 and $67, respectively. Cash payments included in the measurement of lease liabilities related to operating leases were $4,930 for the nine months ended September 30, 2020, and $26,539 for the nine months ended September 30, 2019.

13. Intangible Assets

Intangible assets at September 30, 2020 and December 31, 2019 consist of the following (in thousands):

14. Subsequent Events

The Company evaluated the financial statements included in this Quarterly Report for subsequent events through February 10, 2021, the date the financial statements were available to be issued. The following subsequent events are noted:

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Harbor Diversified, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

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