EDGAR 10-K Filing

Company CIK: 899394
Filing Year: 2023
Filename: 899394_10-K_2023_0001193125-23-088392.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
General
Harbor Diversified, Inc. (“Harbor”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a non-operating entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, for purposes of this Annual Report on Form 10-K for the year ended December 31, 2022 (this “Annual Report”), disclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations, operations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the “Company,” “we,” “us,” or “our.” Where reference is intended to refer only to Harbor, it is referred to as “Harbor.”
Regional jets provide short and medium-haul scheduled flights that connect outlying communities with larger cities and act as “feeders” for domestic and international hubs. The lower trip costs of regional jets, along with the competitive nature of capacity purchase agreement bidding processes, provide significant value to major airlines. Regional airlines play a daily, essential role in the U.S. air travel system. According to the 2022 Regional Airline Association Annual Report, in 2021 (i) 41% of all scheduled passenger departures in the United States were operated by regional airlines, (ii) of all the U.S. airports with scheduled passenger air service, 67% were served exclusively by regional airlines and (iii) Air Wisconsin was the ninth largest regional airline in the United States, as measured by passenger enplanements, and its flights accounted for approximately 2.78% of all passengers carried on U.S. regional airlines.
During the year ended December 31, 2022, Air Wisconsin had a fleet of 63 CRJ-200 regional jets covered under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”). Pursuant to the United capacity purchase agreement, United agreed to purchase the capacity of Air Wisconsin’s regional jets covered by the agreement, which Air Wisconsin operated as United Express, with a presence at both Chicago O’Hare and Washington-Dulles international airports, two of United’s key domestic hubs. More than 99.9% of our operating revenues for the years ended December 31, 2022 and December 31, 2021 was derived from operations associated with the United capacity purchase agreement.
Subject to certain limited exceptions, Air Wisconsin is entitled to receive under the United capacity purchase agreement fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The United capacity purchase agreement has the effect of protecting Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access.
In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, modified certain scheduling requirements and settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the agreement. In April 2021, Air Wisconsin entered into a second amendment to the United capacity purchase agreement, which addressed the scheduling of block hours after a certain date.
In October 2022, United delivered a wind-down schedule that provided for the withdrawal of aircraft from coverage under the United capacity purchase agreement beginning in March 2023 and continuing through November 2023.
A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. In October 2022, United initiated arbitration under the United capacity purchase agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. As of December 31, 2022, the aggregate amount of such obligations was approximately $47.9 million. Air Wisconsin expects that, unless the parties reach a settlement before then, the arbitration hearing will occur in July 2023 and that the arbitrators will make their award in August 2023. In December 2022 and February 2023, Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the United capacity purchase agreement. In accordance with the termination provisions of the United capacity purchase agreement, and in response to Air Wisconsin’s first termination notice, United delivered a revised wind-down schedule in January 2023. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until early June 2023, at which time all of Air Wisconsin’s remaining aircraft would be withdrawn from the agreement, and Air Wisconsin would cease flying for United.
In August 2022, Air Wisconsin entered into a capacity purchase agreement (the “American capacity purchase agreement”) with American Airlines, Inc. (“American”), which was subsequently amended in February 2023 and March 2023, pursuant to which Air Wisconsin agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations, which is scheduled to occur by early June 2023.
Certain Trends and Uncertainties Affecting Our Business and Industry
Personnel Shortages
Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the COVID-19 pandemic, these shortages were temporarily abated. However, as flight demand increased through the year ended December 31, 2022, these shortages have become acute, particularly for regional airlines such as Air Wisconsin, due to a number of factors, including retirements and employees seeking opportunities at mainline carriers and in other industries. For the year ended December 31, 2022, pilot attrition and the increasing costs associated with hiring and retaining pilots adversely affected our business and financial condition.
A significant factor exacerbating the pilot shortage for regional airlines is the demand for pilots at major airlines, which significantly reduced their pilot ranks during the COVID-19 pandemic and are now attempting to increase their capacity to meet the increasing passenger demand for air travel as the pandemic has moderated. Regional airlines such as Air Wisconsin are a primary source of pilots for the major airlines. The major airlines typically hire captains, rather than first officers, from the regional airlines. This creates an imbalance between captains and first officers. For most regional airlines today, including Air Wisconsin, the immediate shortage is not for pilots generally, but for captains. This problem is expected to take months or years to grow out of because the lack of a captain to pair with a first officer in the cockpit limits the rate at which the first officer can accumulate the 1,000 hours of flying needed to upgrade to the captain level.
The COVID-19 Pandemic
Beginning in early 2020, the COVID-19 pandemic adversely affected the commercial aviation industry generally and our business, financial condition and results of operations as a result of travel restrictions, a drop in passenger demand, and business slowdowns. Passenger demand has been increasing, but it remains below 2019 levels. In addition, several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. As of the date of this filing, ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines, and Compass Airlines, each of which are domestic, regional, or charter airlines, have filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited their operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain. The extent to which any new outbreak of COVID-19 or other infectious diseases will impact our industry, business, financial condition, and results of operations in the future is highly uncertain, and any similar outbreaks in the future could have a material adverse effect on our business and operations.
Our Business Strategy
Provide Reliable and Efficient Regional Airline Services
Our primary business strategy currently consists of serving United, through the end of the term of the United capacity purchase agreement, and American and their customers through Air Wisconsin’s provision of regional airline services. We strive to serve as an efficient and reliable provider of flight services and to provide a high level of service to American, United and their customers in accordance with the capacity purchase agreements. We believe that as a result of factors such as increased demand for air transportation and pilot shortages there will continue to be strong demand from major airlines for regional air services, and we seek to position Air Wisconsin to take advantage of this anticipated demand.
Maintain a Profitable Business Operation
We seek to maintain a profitable business while operating pursuant to the United and the American capacity purchase agreements. To do so requires that we focus on a disciplined cost control approach through responsible outsourcing of certain operating functions and diligent control of corporate and administrative costs, implementing company-wide efforts to improve our cost position. We also seek to earn incentive payments pursuant to the American and United capacity purchase agreements and to avoid penalty payments, based upon our operational performance and the results of customer satisfaction surveys.
Provide an Attractive Career Opportunity
We strive to provide our employees competitive pay and benefit packages and to offer a positive and supportive work environment to make Air Wisconsin an attractive place to work and build a career.
Provide a Smooth Transition to Flying for Our New Partner American
We commenced flying operations for American in March 2023 and will continue transitioning aircraft from service to United to American through early June 2023, at which time American will become Air Wisconsin’s sole airline partner. Although we are currently in arbitration with United, our goal is to effect the transition in service from United to American as smoothly as possible. However, many factors affecting the transition are not in our control, so we can provide no assurance that the transition will be smooth.
Aircraft Fleet
As of December 31, 2022, Air Wisconsin owned 64 CRJ-200 regional jets, all of which were manufactured by Bombardier, Inc. (“Bombardier”). The CRJ-200 regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.
United Capacity Purchase Agreement
United and Air Wisconsin entered into the United capacity purchase agreement in February 2017 pursuant to which United agreed to purchase the capacity of the Air Wisconsin CRJ-200 regional jets covered under the agreement. Air Wisconsin commenced flying under the United capacity purchase agreement in September 2017. As of December 31, 2022, all of Air Wisconsin’s regional jets were available to support Air Wisconsin’s obligations under the United capacity purchase agreement.
United sets the flight schedules for covered aircraft, subject to certain reasonable operating constraints. United also establishes all fares, controls route selection, pricing, seat inventories, and marketing, collects all revenue, and provides airport landing slots, terminal facilities and ground handling services for any flights operated by Air Wisconsin pursuant to the agreement. Air Wisconsin provides the flight and cabin crew and is responsible for dispatch and operational control of each covered aircraft as well as any required maintenance. When providing the flight services under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks and aircraft paint scheme.
In exchange for providing the flight services under the United capacity purchase agreement, Air Wisconsin is entitled to receive a fixed payment for the covered aircraft and a fixed payment for each departure and block hour flown. Air Wisconsin can also earn incentive payments, and is subject to penalty payments, based upon its operational performance and the results of customer satisfaction surveys. In addition, the first amendment to the United capacity purchase agreement, entered into in October 2020, provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. United also reimburses Air Wisconsin for certain costs on an actual basis, including aviation insurance, aircraft property tax per aircraft and air navigation fees. Costs relating to fuel and certain landing fees owed by Air Wisconsin are directly paid to suppliers by United.
The United capacity purchase agreement prohibits Air Wisconsin from paying dividends or making other distributions of its earnings, in each case in excess of an amount that would result in Air Wisconsin’s available cash balance being less than a specified amount, other than dividends or distributions made for certain specified purposes.
As noted above, a dispute between United and Air Wisconsin exists with respect to certain amounts owed to Air Wisconsin under the United capacity purchase agreement, and United has initiated arbitration. We cannot predict the outcome of this dispute or the related arbitration. Air Wisconsin delivered a notice of termination in December 2022. A wind-down period has commenced, and Air Wisconsin anticipates that all of its aircraft will cease to be covered by the United capacity purchase agreement and it will cease all flying operations for United in early June 2023.
American Capacity Purchase Agreement
In August 2022, Air Wisconsin entered into a new five year capacity purchase agreement with American, pursuant to which Air Wisconsin has agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American. Initially, Air Wisconsin will provide regional airline services for American primarily based at Chicago O’Hare, one of American’s key domestic hubs, with possible future expansion to other hubs. Air Wisconsin’s flights will be operated as American Eagle. In February 2023, American and Air Wisconsin entered into a first amendment to the American capacity purchase agreement which revised compensation rates for 2023 through 2027 and obligated American to a fixed payment to assist Air Wisconsin with current pilot compensation.
American will pay Air Wisconsin a fixed daily amount for each aircraft covered under the American capacity purchase agreement (subject to Air Wisconsin’s ability to meet certain block hour utilization thresholds), a fixed payment for each departure, and a fixed payment for each block hour flown, in each case subject to annual increases during the term of the agreement. Air Wisconsin will also be eligible to receive incentive compensation, and will be required to pay rebates, upon the achievement of, or failure to achieve, certain pre-established performance criteria. Air Wisconsin is responsible for certain customary costs relating to the flight operation and maintenance of the covered aircraft along with other customary controllable expenses, including expenses associated with flight crews, line maintenance and overhead. American will reimburse Air Wisconsin for certain customary costs and expenses incurred in connection with Air Wisconsin’s flight operations, including fuel, ground handling, landing and air traffic control, changes to livery and branding, aircraft and passenger liability insurance, property taxes and systems support. American has the right to schedule all aircraft covered by the agreement, including determining route selection and frequency, and the timing of scheduled arrivals and departures, in each case subject to certain scheduling parameters. American also has the right to determine and publish fares and to establish seat inventories, overbooking levels, and allocation of seats among fare categories. Furthermore, American will provide all ground handling services, including gate and ticket counter activities, baggage handling, cargo handling, aircraft loading/unloading services, passenger ticketing, and aircraft cabin cleaning. American has the right to all revenues resulting from the sale of passenger tickets associated with the covered aircraft and all other sources of revenue associated with the operation of the covered aircraft, including revenues relating to baggage charges, food and beverage sales and ticket change fees. Similar to the United capacity purchase agreement, the American capacity purchase agreement protects Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers.
The American capacity purchase agreement provides that the parties may discuss the possibility of adding CRJ-700 regional jets to Air Wisconsin’s fleet for the purpose of providing regional airline services under the agreement, but neither party is under any obligation with respect to these additional aircraft.
Up to 40 CRJ-200 regional aircraft will initially be covered by the American capacity purchase agreement, subject to an implementation schedule whereby a specified number of aircraft will become available each month commencing in March 2023 and continuing through no later than October 2023. Subject to the satisfaction of certain conditions, Air Wisconsin can accelerate the implementation schedule. Air Wisconsin may also add up to 20 CRJ-200s as covered aircraft under the agreement subject to satisfying certain minimum block hour utilization thresholds (resulting in an aggregate of up to 60 covered aircraft under the agreement). Except as otherwise permitted in the agreement, the aircraft covered by the agreement may only be used by Air Wisconsin to provide regional airline services for American and may not be used by Air Wisconsin for any other purpose, including flight operations for any other airline. In addition, Air Wisconsin is subject to certain limitations on its ability to use aircraft not covered by the agreement in certain passenger operations.
Unless earlier terminated, the American capacity purchase agreement is effective for each aircraft covered by the agreement for five years from the implementation date for such aircraft. The agreement is subject to early termination and covered aircraft are subject to withdrawal under various circumstances, which include, among others, the occurrence of the following events:
•
Subject to certain terms and conditions, either party has the right to terminate the agreement (i) upon the insolvency of the other party, (ii) upon a material breach by the other party, (iii) upon a monetary breach by the other party, (iv) if, after a specified period, there are fewer than a specified number of aircraft covered by the agreement, or (v) at any time following the second anniversary of the earlier of the implementation date of the 40th aircraft covered under the agreement and December 31, 2023.
•
American has the right to terminate the agreement or withdraw certain aircraft from the agreement if (i) Air Wisconsin’s Federal Aviation Administration (“FAA”) or United States Department of Transportation (“DOT”) certification is suspended, revoked or materially impaired, (ii) a change of control of Air Wisconsin has occurred, (iii) Air Wisconsin fails to maintain certain insurance coverage, (iv) a force majeure event occurs and is continuing, (v) a labor dispute occurs and is continuing, (vi) there is a material safety issue with Air Wisconsin’s flight operations, or (vii) Air Wisconsin operates the aircraft covered by the agreement for another air carrier.
In addition, American has the right to withdraw certain aircraft if Air Wisconsin’s controllable completion rate or controllable on time departure rate are below a specified threshold for a specified period of time.
Available Seat Miles
The following table summarizes Air Wisconsin’s available seat miles (“ASMs”) flown and contract revenues recognized under the United capacity purchase agreement for the years ended December 31, 2022 and December 31, 2021, respectively:
Year Ended
December 31,
Year Ended
December 31,
(dollars in thousands)
Available Seat Miles
1,253,896
1,310,157
Contract Revenues
280,737
247,519
Maintenance and Repairs
Airlines are subject to extensive regulation. Air Wisconsin has an FAA mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance and component service. Air Wisconsin also outsources certain aircraft, engine and other component maintenance functions. To procure these services, Air Wisconsin uses competitive bidding among qualified vendors.
Line maintenance consists of routine daily and weekly scheduled maintenance checks on Air Wisconsin’s aircraft. Line maintenance is performed at certain locations throughout Air Wisconsin’s operation and represents the majority of the maintenance Air Wisconsin performs. Heavy maintenance consists of a series of major airframe maintenance checks that can take from one to six weeks to accomplish, on average, across Air Wisconsin’s fleet. Component service includes engine overhauls and engine performance restoration events, which are quite extensive and can take several months. We maintain an inventory of spare engines at both Air Wisconsin and Lotus to provide for continued operations during scheduled and unscheduled engine maintenance events. Air Wisconsin provides maintenance services for its CRJ-200 regional jets and for its owned and leased engines and equipment.
Competition
The airline industry is highly competitive. We consider Air Wisconsin’s primary competition to be those U.S. regional airlines that currently have or compete for capacity purchase agreements with major airlines. Air Wisconsin’s competition includes nearly every other domestic regional airline, including CommutAir; Endeavor, Inc. (owned by Delta); Envoy Air, Inc., PSA Airlines, Inc. and Piedmont Airlines, Inc. (Envoy, PSA and Piedmont are owned by American); GoJet Airlines, LLC; Horizon Air Industries, Inc. (owned by Alaska Air Group, Inc.); Mesa Airlines, Inc.; Republic Airways Holdings Inc.; and SkyWest Inc.
We believe that major airlines typically select regional airline partners based on the following criteria: aircraft type, ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors.
Certain Air Wisconsin competitors are larger and have significantly greater financial and other resources than Air Wisconsin. In addition, certain of these competitors may have capacity purchase agreement terms that are more favorable than the American or United capacity purchase agreements. Moreover, economic downturns, including as a result of the COVID-19 pandemic, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional carriers which has resulted in changes to the competitive landscape.
Aircraft Fuel
Each of the United capacity purchase agreement and the American capacity purchase agreement provides that United or American sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the applicable agreement.
Insurance
Air Wisconsin maintains insurance policies we believe are of types customary for the airline industry and as required by the DOT, lessors and other financing parties, and United and American under the terms of the applicable capacity purchase agreement. The policies principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors’ and officers’ liability; fiduciary liability; workers’ compensation and employer’s liability; and war risk (terrorism). Although we currently believe Air Wisconsin’s insurance coverage is adequate, we cannot be certain that the amount of such coverage will not change or that Air Wisconsin will not bear substantial losses from incidents or accidents.
Employees
Our continued success is partly dependent on Air Wisconsin’s ability to continue to attract and retain qualified personnel. As of December 31, 2022, Air Wisconsin employed 1,085 employees, of which 1,044 were full-time employees, 41 were part-time employees, and 813 were represented by unions.
Union Groups
Number
of Union
Employees
Representative
Collective
Bargaining
Agreement
Amendable Date
Pilots
Air Line Pilots Association, International
November 21, 2022
Flight Attendants
Association of Flight Attendants
October 1, 2022
Dispatchers
Transport Workers Union of America
November 1, 2020
Mechanics and Aircraft Cleaners
International Association of Machinists and Aerospace Workers AFL-CIO
September 20, 2023
Clerical, Office, Fleet and Passenger Service
International Association of Machinists and Aerospace Workers AFL-CIO
September 20, 2022
Air Wisconsin has never been the subject of a labor strike or labor action that materially impacted its operations.
FAA regulations require pilots to have an Airline Transport Pilot license with specific ratings for the aircraft to be flown and to be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance, and aircraft inspection must also meet experience standards prescribed by FAA regulations. All employees performing a safety-sensitive function are subject to pre-employment, random, and post-accident drug testing.
Air Wisconsin maintains relationships with various flight and maintenance institutions across the country that are focused on developing the next generation of aviation professionals. It typically recruits pilots and mechanics who have completed required coursework from accredited flight or maintenance programs and have obtained applicable certifications. Air Wisconsin also provides internship opportunities to individuals in the process of completing their coursework and training for aviation maintenance. These roles provide hands-on experience for the students and prepares them for other opportunities within Air Wisconsin.
Our approach is to hire the best qualified individuals, regardless of race, religion, gender, national origin, disability, sexual orientation or similar classifications. We believe every employee brings unique education, skills and life experiences to Air Wisconsin that supplement our ability to achieve our commitment to excellence to our customers and passengers. As part of our commitment to diversity, we have created ongoing opportunities to highlight employees from different cultures on internal and external websites, and we have participated in events and provided sponsorships for diversity organizations focused on aviation.
Safety and Security
We are committed to the safety and security of Air Wisconsin’s passengers and employees and to complying with safety and security requirements. Air Wisconsin has taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of its operations. Some of these efforts include aircraft security and surveillance and securing of cockpit doors. Additionally, Air Wisconsin has increased its aircraft cleaning procedures both between flights and overnight. Enhanced cleaning measures are intended to ensure that frequently touched surfaces, such as armrests, tray tables and seatbelts, are routinely and comprehensively cleaned utilizing disinfectants to prevent transmission of COVID-19 and other contagions. An increased supply of sanitizing wipes and hand sanitizer onboard Air Wisconsin’s aircraft is available to aid its crewmembers in efforts to keep the aircraft clean and disinfected.
Air Wisconsin’s ongoing focus on safety and security relies on training Air Wisconsin’s employees to proper standards and providing them with the tools and equipment they need to perform their job functions in a safe and efficient manner. Safety and security in the workplace targets several areas of Air Wisconsin’s operation, including dispatch, flight operations, ground operations, and maintenance.
Air Wisconsin aims to achieve the highest degree of safety and security within its industry through the implementation of a corporate-wide Safety Management System supporting its organizational culture that holds safety and security as essential core values. Air Wisconsin continually works to create and foster a culture of safety, security and compliance that proactively identifies and manages risks to the operation and workplace before they can become injuries, incidents or accidents. All Air Wisconsin employees are required to maintain the highest levels of safety and security throughout its operation and organization and to proactively identify and immediately report hazards, safety concerns and incidents as well as any behavior that violates Air Wisconsin’s policies, regulatory requirements, laws and industry standards.
The Transportation Security Administration (“TSA”) is responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports. Air Wisconsin is currently in compliance with the directives issued by the TSA and maintains active, open lines of communication with the TSA to ensure proper standards for security of its personnel, equipment and facilities are exercised throughout its operation.
Government Regulation
Aviation Regulation
The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required for airlines to provide domestic and foreign air transportation. International routes and international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline’s ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the foreign country and the carrier’s ability to obtain the necessary authority from the DOT and the applicable foreign government.
The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. Air Wisconsin currently holds an air carrier certificate with Federal Aviation Regulation Part-121 operation specifications.
Foreign Ownership
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled directly and indirectly by citizens of the United States. The restrictions imposed by federal law and regulations currently require that at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States, as defined in the Federal Aviation Act and interpreted by the DOT, that Harbor’s Chief Executive Officer, Air Wisconsin’s President and Chief Executive Officer, and at least two-thirds of the members of Air Wisconsin’s board of managers and Harbor’s board of directors and other managing officers be citizens of the United States, and that Air Wisconsin and Harbor be under the actual control of citizens of the United States. In addition, at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled, directly and indirectly, by citizens of the United States and no more than 49% of its equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country. No more than 25% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have not entered into an “open skies” air transport agreement with the U.S. We are currently in compliance with these ownership provisions. In addition, Harbor’s amended and restated certificate of incorporation and Harbor’s amended and restated bylaws currently prohibit the transfer of any shares of Harbor’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation Section 1.382-2T(g)) of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of our then-outstanding capital stock. These restrictions on the transfer of Harbor’s capital stock inhibit the acquisition of control of Air Wisconsin by any foreign citizen.
Consumer Protection Regulation
The DOT also has jurisdiction over certain consumer protection matters related to air transportation. This covers unfair or deceptive practices, unfair methods of competition, advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints and transportation of passengers with disabilities. The DOT has adopted consumer protection rules regulating lengthy tarmac delays, chronically delayed flights, codeshare disclosure and undisclosed display bias. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and wet-leasing agreements (where one airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions. In the future, the DOT may adopt additional regulations that increase the costs of Air Wisconsin’s operations or otherwise adversely impact our financial performance.
Environmental Regulation
We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
The Environmental Protection Agency regulates operations, including air carrier operations, which affect the quality of air in the United States. Concern about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in the United States and abroad.
Federal law recognizes the right of airport operators with special noise problems to implement local noise abatement procedures so long as those procedures do not interfere unreasonably with interstate and foreign commerce and the national air transportation system. These restrictions can include limiting nighttime operations, directing specific aircraft operational procedures during takeoff and initial climb, and limiting the overall number of flights at an airport.
Air Wisconsin remains committed to lowering its environmental footprint while continuing to offer safe and reliable service to its customers and the communities it serves. Through the use of software and training, Air Wisconsin manages its fuel usage in an effort to conserve fuel and reduce emissions. When possible, Air Wisconsin mitigates fuel usage by taxiing with the use of a single engine, improving the efficiency of aircraft routing, and using ground power when an aircraft is parked at the gate. Air Wisconsin has also implemented recycling initiatives and has worked aggressively to reduce its reliance on paper manuals and logs.
Trademarks
Air Wisconsin, the Air Wisconsin logo, and its other registered or common law trade names, trademarks, or service marks appearing in this Annual Report are Air Wisconsin’s intellectual property. This Annual Report contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report.
Organizational Structure
Harbor is a non-operating holding company that is the parent of a consolidated group of five subsidiaries: AWAC, Air Wisconsin, Lotus, AWF, and Therapeutics. The subsidiaries, other than Air Wisconsin, are described below:
AWAC Aviation, Inc.
AWAC is a holding company and the sole member of Air Wisconsin. Air Wisconsin’s business and operations are described in detail throughout this Annual Report.
Lotus Aviation Leasing, LLC
Lotus was established to acquire and lease flight equipment to Air Wisconsin to support its flight operations. As of December 31, 2022, Lotus owned 47 engines. Lotus has no other material assets or operations.
Air Wisconsin Funding LLC
AWF was established to provide flight equipment financing to Air Wisconsin. As of December 31, 2022, Air Wisconsin had an outstanding balance of approximately $0.1 million, under a $35.0 million credit facility with AWF. AWF has a first priority security interest in the flight equipment purchased with the loan proceeds. AWF has no other material assets or operations.
Harbor Therapeutics, Inc.
Therapeutics is a non-operating entity with no material assets.
Corporate Information
Harbor is a Delaware corporation headquartered in Appleton, WI. It was originally formed in November 1992 as Initial Acquisition Corp. In March 1997, Initial Acquisition Corp. was merged with Hollis-Eden, Inc., becoming Hollis-Eden Pharmaceuticals, Inc. In February 2010, Hollis-Eden Pharmaceuticals, Inc. was merged with its wholly owned subsidiary and renamed
Harbor BioSciences, Inc. In January 2012, Harbor acquired 80% of the issued and outstanding capital stock of AWAC from Amun LLC (“Amun”), and in January 2016 Harbor acquired the remaining 20% of the issued and outstanding capital stock of AWAC from Amun. AWAC owns all of the equity interests of Air Wisconsin. In February 2012, Harbor BioSciences, Inc. was merged with its wholly owned subsidiary and renamed Harbor Diversified, Inc.
Public Reporting Obligation
Notwithstanding that Harbor is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, Harbor does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, Harbor is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. If Harbor becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which could result in Harbor no longer being required to file SEC reports.

---

ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in Harbor’s common stock involves substantial risk. Harbor’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of Harbor’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, refer to “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report.
Risks Related to Our Business
If the transition from the United capacity purchase agreement to the American capacity purchase agreement is delayed or more difficult than expected, our business could be significantly negatively impacted.
A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. In December 2022 and February 2023, Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the agreement. In accordance with the termination provisions of the agreement, and in response to Air Wisconsin’s first termination notice, United delivered a revised wind-down schedule in January 2023. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until early June 2023, at which time all of Air Wisconsin’s remaining aircraft would be withdrawn from the agreement, and Air Wisconsin would cease flying for United. Notwithstanding the provision of the agreed wind-down schedule, the sixth amendment does not resolve the ongoing dispute in which United has contested Air Wisconsin’s right to terminate the United capacity purchase agreement, which remains subject to the arbitration. The existence of the dispute could significantly complicate the transition of aircraft from the provision of services to United to the provision of services to American, which could have a material adverse effect on our business, financial condition and results of operations. An adverse determination in the arbitration could have a material adverse effect on our business, financial condition and results of operations.
The American capacity purchase agreement provides that a certain number of aircraft each month, commencing in March 2023, will begin flying scheduled flights for American. Before an aircraft can operate flights for American, that aircraft must first be removed from the provisions of the United capacity purchase agreement pursuant to the wind-down schedule and modified to meet American’s requirements. During the period from the withdrawal of an aircraft from the provisions of the United capacity purchase agreement until it becomes covered by the provisions of the American capacity purchase agreement, that aircraft will not generate revenues from either United or American. The transition of aircraft from the United capacity purchase agreement to the American capacity purchase agreement is subject to many factors, including the cooperation of United and the availability of vendors to paint the aircraft in the livery required by the American capacity purchase agreement, some of which are not within Air Wisconsin’s control. There can be no assurance that this transition will proceed smoothly, and unexpected delays in the transition could have a material adverse effect on our business, financial condition and results of operations.
Once all of Air Wisconsin’s aircraft have been withdrawn from the United capacity purchase agreement, our business will be highly dependent on the American capacity purchase agreement because American will be Air Wisconsin’s sole airline partner.
Prior to March 2023, we derived nearly all of our operating revenues from the United capacity purchase agreement because United was Air Wisconsin’s sole airline partner, accounting for approximately 99.9% of our operating revenues. Upon the transition of Air Wisconsin’s aircraft to American, we will derive nearly all of our operating revenues from the American capacity purchase agreement because American will be Air Wisconsin’s sole airline partner and will account for nearly all of our operating revenues.
Pursuant to the American capacity purchase agreement, American is permitted to terminate the agreement prior to the expiration of its term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s inability to operate a certain number of aircraft, Air Wisconsin’s failure to meet certain operating benchmarks for specified periods and certain changes of control of Air Wisconsin. In addition, American and Air Wisconsin each have the right to terminate the agreement for any reason after a certain date prior to the specified termination date. If American terminates the American capacity purchase agreement, our business, financial condition, results of operations and liquidity could be significantly negatively impacted, unless Air Wisconsin is able to enter into satisfactory substitute arrangements for the utilization of its aircraft.
Any events that negatively impact the financial or operating performance of American could have a material adverse effect on our business, financial condition and results of operations. American could be materially and adversely impacted, directly or indirectly, by new variants of COVID-19 or a long-term COVID-19 pandemic or other infectious diseases, by worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates and inflation. If American were to experience significant financial difficulties as a result of these or other reasons, it could negatively impact American’s ability to meet its financial obligations under the American capacity purchase agreement or alter its business strategy as it applies to regional airlines. Further, if American were to become bankrupt, the American capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations.
Air Wisconsin may experience difficulty hiring, training and retaining a sufficient number of qualified pilots and mechanics, which may negatively affect Air Wisconsin’s operations and our financial condition.
Historically, the supply of qualified pilots to the airline industry has been limited, which has created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the Federal Aviation Administration (the “FAA”) issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations and correspondingly increasing Air Wisconsin’s labor costs.
As a result of the significant decline in passenger demand and drastically reduced flight departures during the early stage of the COVID-19 pandemic, there was no shortage of qualified pilots in the airline industry. During the first two years of the COVID-19 pandemic, for many reasons, such as reduced flying opportunities, travel restrictions and COVID-19 vaccine mandates, many pilots decided to retire or seek employment in other industries. However, as passenger demand for air travel has increased, Air Wisconsin has experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from voluntary retirement decisions. Air Wisconsin has also experienced challenges with pilot attrition to other airlines. Air Wisconsin has historically expended significant resources to recruit and train pilots, including as a result of recent significant upward pressure on pilot compensation at certain regional airlines and limited availability of flight simulators and instructors. Air Wisconsin recently increased its pilot compensation and may continue to experience additional cost increases in the future. Since neither United nor American is required to increase the amounts it pays to Air Wisconsin as Air Wisconsin increases the amount of pilot compensation, these increases could have an adverse impact on our financial condition and operating results.
Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during the COVID-19 pandemic, and the hiring needs of other airlines. There is also a risk that some mechanics may have decided to leave the airline industry or may decide to do so in the future. Air Wisconsin recently increased its mechanic wages along with offering other hiring incentives and may continue to experience additional cost increases in the future. If Air Wisconsin is unable to hire and retain a sufficient number of qualified mechanics, it could have an adverse impact on our business and operations.
If future pilot or mechanic attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to continue to increase its labor costs to attract and retain sufficient qualified pilots and mechanics or it may be unable to fly the number of flights scheduled under the United and American capacity purchase agreements, which may result in penalties under the agreements that would negatively impact Air Wisconsin’s operations and our financial condition.
Disagreements regarding the interpretation of our capacity purchase agreements could have an adverse effect on our operating results and financial condition.
Contractual agreements, such as our capacity purchase agreements, are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Currently, a dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. As of December 31, 2022, the aggregate amount in dispute was approximately $47.9 million. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts as claimed by Air Wisconsin. The arbitration could result in substantial costs and a diversion of management’s attention and resources, and there is always a chance of an unfavorable determination by the arbitrators, which could harm our business, financial condition and results of operations. If a dispute were to develop under the American capacity purchase agreement, that could also have an adverse effect on our business, financial condition and results of operations.
If United or American provides Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsin’s aircraft under the applicable capacity purchase agreement, our business, financial condition and results of operations may be adversely affected.
Under the terms of the United and American capacity purchase agreements, United and American have the ability to schedule Air Wisconsin’s flights in any manner that serves their purposes, subject to certain reasonable operating constraints which do not prevent them from scheduling Air Wisconsin’s flights in a manner Air Wisconsin deems inefficient. From time to time, United has scheduled Air Wisconsin’s flights in a manner that created operational inefficiencies for Air Wisconsin, such as by building in long crew layovers or overnights, which caused crew staffing issues and resulted in limited crew availability to fly other scheduled Air Wisconsin flights, or by providing Air Wisconsin with flight schedules that were inconsistent with Air Wisconsin’s existing operational footprint. It is possible that American will also schedule flights in a manner that Air Wisconsin deems inefficient. These actions have had and may continue to have a material adverse effect on our business, financial condition and results of operations.
Certain factors have led United in the past, and may lead United or American in the future, to modify the anticipated utilization of Air Wisconsin’s aircraft, some of which are beyond Air Wisconsin’s control. Any factors that continue to cause United or American to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results. The actual number of flights United or American schedules under the applicable capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated or which United or American initially communicated for the period.
Air Wisconsin’s current and future growth opportunities may be limited by a number of factors impacting American or the airline industry generally.
Growth opportunities within American’s current flight network may be limited by various factors, including “scope” clauses in its collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. These clauses could limit Air Wisconsin’s ability to operate larger aircraft for American, which would limit Air Wisconsin’s expansion opportunities. American is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.
Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including pilot and mechanic shortages, access to airport terminals and facilities, capital expenditures required to maintain or expand fleet operations, significant changes in fuel prices or other variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, we believe limited growth opportunities exist and as a result Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities.
The amounts Air Wisconsin receives under the United and American capacity purchase agreements may be less than the corresponding costs Air Wisconsin incurs.
Under the United and American capacity purchase agreements, a portion of the revenues Air Wisconsin receives is based upon predetermined rates calculated by reference to certain factors, such as the number of covered aircraft, the number of block hours flown and the number of departures. The primary operating costs intended to be compensated by the predetermined rates include, among other things, salaries and benefits, training costs, crew room costs, maintenance expenses, simulator and spare parts costs, and overhead costs. If Air Wisconsin’s costs for those items exceed the compensation paid under the applicable agreement, our financial position and operating results will be negatively affected. For example, Air Wisconsin has experienced, and may continue to experience, upward pressure on pilot and mechanic compensation as it seeks to attract and retain qualified staff. Any resulting compensation increases are not adjusted for by either the United capacity purchase agreement or the American capacity purchase agreement and, therefore, would negatively impact our operating results.
A significant portion of Air Wisconsin’s workforce is represented by labor unions, and the terms of Air Wisconsin’s collective bargaining agreements may increase our operating expenses and negatively impact our financial results.
A significant majority of Air Wisconsin’s employees are represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers AFL-CIO (“IAMAW”), and the Transport Workers Union of America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which are likely to result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any future agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.
Maintenance costs may increase further, and out-of-service periods may result in aircraft being unavailable for flying.
The average age of Air Wisconsin’s CRJ-200 regional jets as of December 31, 2022 was approximately 20.3 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of its operating expenses, and may result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under the United or American capacity purchase agreements. In addition, as noted above, there is an industry-wide shortage of aircraft mechanics. Air Wisconsin has increased its labor costs to attract and retain qualified mechanics. However, as passenger demand for air travel has increased and additional aircraft are brought back into service to address the increased demand, the turnaround time for routine and heavy maintenance has lengthened. As a result, Air Wisconsin has experienced, and may continue to experience, delays and increased costs in obtaining both in-house and third-party maintenance services. Any continued increase in Air Wisconsin’s maintenance costs or decreased revenues resulting from out-of-service periods could have a further adverse effect on our financial condition and operating results.
Air Wisconsin has entered into agreements with third-party service providers to provide various services required for its operations, including airframe, engine and component maintenance and IT services, and it expects to enter into additional similar agreements in the future. If its third-party service providers terminate their contracts, or do not provide timely or consistently sufficient parts or high-quality maintenance and support services, Air Wisconsin may not be able to replace them in a cost-efficient manner or in a manner timely enough to support its operational needs, which could have a material adverse effect on our business, financial condition, and results of operations.
Air Wisconsin currently operates only one aircraft type, and relies on one aircraft manufacturer and one engine manufacturer, and any operating restrictions or safety concerns applicable to this aircraft or engine type, or any failure to receive sufficient maintenance and support services from these manufacturers, would negatively impact our business and financial condition.
Air Wisconsin currently relies on a single aircraft type, the CRJ-200 regional jet, and a single engine type, the General Electric (“GE”) CF34-3B1 engine. The issuance of FAA or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type, or Air Wisconsin’s inability to obtain necessary parts and services related to this aircraft type or engine type, would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of the CRJ-200 regional jet or the GE CF34-3B1 engine, whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.
Air Wisconsin has been highly dependent upon Bombardier, as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts and related maintenance and support services to it in a timely manner. In June 2020, Bombardier consummated an agreement with Mitsubishi Heavy Industries, Ltd (“Mitsubishi”), pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of the CRJ-200 regional jet, such as type certificates, maintenance, support, refurbishment, marketing and sales activities. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE to provide required maintenance or support services, or as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines.
The residual value of our aircraft and engines may be less than estimated in our depreciation policies.
As of December 31, 2022, we had approximately $102.3 million of property, equipment and related assets, net of accumulated depreciation, of which $100.9 million relates to aircraft, engines and parts. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. For example, any of the following circumstances could cause us to reduce our estimates as to the useful life, residual value or cash flow potential of our aircraft or engines, which could require an impairment charge:
•
we add a new aircraft type to our fleet and reduce the number of our existing CRJ-200 aircraft,
•
the pilot shortage causes us to permanently retire some aircraft, or
•
a lack of demand for our aircraft or engine types reduces the proceeds we receive on disposition to less than we estimated.
If the estimated residual value of any of our aircraft, engines or parts is determined to be lower than the residual value assumptions used in our depreciation policies, the aircraft, engines or parts may be impaired and may result in a material reduction in their book value or we may need to prospectively modify our depreciation policies. An impairment on any of the aircraft, engines or parts or an increased level of depreciation expense resulting from a change to our depreciation policies could result in a material negative impact to our financial results.
Air Wisconsin’s ability to obtain additional financing may be limited, and, in the event Air Wisconsin is unable to repay its debt and other contractual obligations, our business, results of operations and financial condition may be adversely impacted.
The airline business is capital intensive. As of December 31, 2022, Air Wisconsin had approximately $61.2 million in total third-party debt, which was incurred in connection with the acquisition of aircraft and which is secured by substantially all of Air Wisconsin’s aircraft, engines and parts. Since the acquisition of such aircraft, Air Wisconsin has financed its operations primarily from cash flow. However, to the extent Air Wisconsin finances its activities or its pursuit of new opportunities with additional debt, it would become subject to additional debt service obligations, as well as additional covenants that may restrict its ability to pursue its business strategy or otherwise constrain its growth and operations. Air Wisconsin’s ability to pay its existing and any additional debt service obligations, in addition to the high level of fixed costs associated with operating a regional airline, will depend on its operating performance, cash flows and ability to secure adequate financing, which will in turn depend on, among other things, the success of its current business strategy, availability and cost of financing, as well as general economic and political conditions and other factors that may be beyond its control. We cannot be certain Air Wisconsin’s working capital and cash flows from operations will be sufficient to make its required payments under its debt and other contractual arrangements.
If Air Wisconsin is unable to pay its debts as they come due or fails to comply with its obligations under the agreements governing its debt, and is unable to obtain waivers of such defaults, its secured lender could foreclose on any of Air Wisconsin’s assets securing such debt. Additionally, a failure to pay Air Wisconsin’s property leases, debt or other fixed cost obligations, or a breach of its other contractual obligations, could result in a variety of further adverse consequences, including the exercise of remedies by its creditors and lessors, such as acceleration. In such a situation, Air Wisconsin may not be able to cure its breach, fulfill its contractual obligations, make required lease payments or otherwise cover its fixed costs, which could have a material adverse effect on our business, results of operations and financial condition.
In addition, the agreements that Air Wisconsin entered into with the Treasury for payroll support contain various covenants. If Air Wisconsin fails to comply with its surviving obligations under those agreements, it may be required to repay the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business.
The loss of key personnel upon whom Air Wisconsin depends to operate its business or the inability to attract additional qualified personnel could adversely affect our business.
Our future success depends on our ability to retain or attract highly qualified management, technical and other personnel. We may not be successful in retaining key personnel or in attracting other highly qualified personnel. Any inability to attract or retain qualified management personnel and other employees, or any significant increases in the costs associated with recruiting or retaining qualified employees, could have a material adverse effect on our business, results of operations and financial condition.
Information technology security breaches, hardware or software failures, or other information technology infrastructure disruptions may negatively impact Air Wisconsin’s business, operations and financial condition.
The performance and reliability of Air Wisconsin’s technology, the technology of United and American, and the technology of our third-party service providers, are critical to Air Wisconsin’s ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt Air Wisconsin’s internal network. Any individual, sustained or repeated failure of Air Wisconsin’s technology, or that of United, American or our third-party service providers, could impact Air Wisconsin’s ability to conduct its business, lower the utilization of Air Wisconsin’s aircraft and result in increased costs and penalties. Air Wisconsin’s technological systems, software and related data, those of United and American, and those supplied by our third-party service providers, may be vulnerable to a variety of sources of interruption or exploitation due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of Air Wisconsin’s ordinary business operations, it collects and stores, and will collect and store, sensitive data, including personal information of its employees and information of United and American. Air Wisconsin’s information systems are subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parties may attempt to gain access to Air Wisconsin’s systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. Air Wisconsin may not be able to prevent all data security breaches or misuse of data. The compromise of Air Wisconsin’s technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’, passengers’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and disruption to its operations, any or all of which could adversely affect our business and financial condition.
Risks Related to Our Industry
The airline industry is often negatively impacted by numerous factors that could have a material adverse effect on our business, results of operations and financial condition.
The airline business is affected by numerous factors, many of which are beyond Air Wisconsin’s control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, natural disasters, facility disruptions, acts of war or terrorism, cancellations, increased security measures, and the outbreak of disease. Factors that cause flight delays frustrate passengers, increase operating costs and decrease revenues, which in turn adversely affect profitability. Because Air Wisconsin’s revenues (other than the portion of its revenues based on the number of aircraft covered under the applicable capacity purchase agreement) depend primarily on Air Wisconsin’s completion of flights, and secondarily on service factors such as timeliness of departure and arrival, customer satisfaction, cancellations or delays, any of these factors could have a material adverse effect on our business, results of operations and financial condition.
In addition to the factors noted above, Air Wisconsin’s operations and our financial condition are currently affected, and may in the future be affected, by many other factors and conditions beyond Air Wisconsin’s control, including, among others:
•
the acute on-going shortage of qualified pilots and mechanics, and resulting increases in compensation and the continuing pressure to significantly increase wages in the industry;
•
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions;
•
changes in demand for airline travel or tourism, consumer preferences, or demographic trends;
•
changes in the competitive environment due to pricing, industry consolidation, or other factors;
•
labor disputes, strikes, work stoppages, or similar matters impacting employees; and
•
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation and changes in discretionary spending and consumer confidence.
The effect of the foregoing factors or conditions on Air Wisconsin’s operations is difficult to forecast; however, the occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.
The COVID-19 pandemic, and the outbreak of any other disease or similar public health threat that we may face in the future, could result in additional adverse effects on the business, operating results, financial condition and liquidity of Air Wisconsin, United and American.
With the onset of the COVID-19 pandemic, airlines experienced a significant decline in domestic and international demand. Passenger demand has been increasing, but it still remains below 2019 levels. In addition, a further outbreak of COVID-19 or an outbreak of another disease or similar public health threat, or any other event that would affect consumer demand for air travel or impose travel restrictions, could have a material adverse impact on our business, operating results, financial condition and liquidity, and those of United and American.
Several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines and Compass Airlines, each of which are or were domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased or severely limited operations due, at least in part, to the COVID-19 pandemic’s impact on their business.
High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on Air Wisconsin’s operating results and financial condition and liquidity.
Although the United and American capacity purchase agreements provide that United or American, as the case may be, sources, procures and directly pays third-party vendors for substantially all fuel used in the performance of the applicable agreement, aircraft fuel is critical to Air Wisconsin’s operations. The timely and adequate supply of fuel to meet operational demand depends on the continued availability of reliable fuel supply sources as well as related service and delivery infrastructure. Air Wisconsin can neither predict nor guarantee the continued timely availability of aircraft fuel throughout Air Wisconsin’s system. Supplies and prices of fuel are also impacted by factors, such as geopolitical events, economic growth indicators, fiscal/monetary policies, fuel tax policies, changes in regulations, environmental concerns and financial investments in energy markets. Both actual changes in these factors, as well as changes in related market expectations, have and may continue to drive rapid changes in fuel prices in short periods of time. Rising fuel prices may lead to increases in airline fares or fees that may not be sustainable, may reduce the general demand for air travel and may eventually impact the amount of flying that United or American schedules Air Wisconsin to perform. Any such schedule reductions may impact Air Wisconsin’s operating results. In addition, since single class 50-seat aircraft, such as those in Air Wisconsin’s fleet, are less fuel efficient than certain larger aircraft, increased fuel costs affects Air Wisconsin’s competitiveness in the industry.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.
The airline industry is highly competitive. Air Wisconsin competes primarily with other regional airlines, some of which are owned or operated by major airlines. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America, American Airlines and US Airways, Southwest and AirTran Airways, United and Continental Airlines and Delta and Northwest Airlines. Any additional consolidation or significant alliance activity within the airline industry, such as the American Airlines and Jet Blue Airways alliance or the recently announced acquisition of Spirit Airlines by Jet Blue Airways, if it receives necessary governmental approvals, could further limit the number of potential airline partners with whom Air Wisconsin could enter into commercial agreements. In addition, any further consolidation activity involving American, reduction in the size of its network or decision to reduce single class 50-seat aircraft such as the CRJ-200 regional jet could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to continue to provide service to American. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs, including as a result of long-term fleet strategy changes announced by several major carriers, could negatively impact Air Wisconsin’s future growth opportunities.
Terrorist activities or warnings have dramatically impacted the airline industry and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath negatively impacted the airline industry in general. If additional terrorist attacks are launched, there may be lasting consequences, which may include loss of life, property damage, increased security measures, higher insurance costs, increased concerns about future terrorist attacks and additional government regulation, among other factors. Additional terrorist attacks, and warnings that such attacks may occur, could negatively impact the airline industry and result in decreased passenger traffic, increased flight delays or cancellations, as well as increased security, fuel and other costs and whether or not involving Air Wisconsin’s aircraft, could have a material adverse impact on our business and operations. Increased global political instability, including the outbreak of war and hostilities, could result in an increased risk of terrorist activities.
The occurrence of an aviation accident or incident involving Air Wisconsin or its aircraft or engine type could negatively impact our business, financial condition and operating results.
An accident or incident involving Air Wisconsin’s aircraft could result in significant potential claims of injured passengers and others, as well as negative impacts on its operations resulting from the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. If substantial claims resulting from an accident are made in excess of our related liability insurance coverage, then our operational and financial results would be harmed. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that Air Wisconsin’s operations are less safe or reliable than other airlines, which could negatively impact our business, financial condition and operating results.
Given that Air Wisconsin currently operates a single aircraft and engine type, any accident or incident involving the CRJ-200 regional jet aircraft type or the GE CF-34 engine type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United or American, and our financial results. In addition, certain groundings of Air Wisconsin’s aircraft would provide American the right to terminate the American capacity purchase agreement.
Further, any accident or incident involving a CRJ-200 regional jet, regardless of the operator or geographic location of the incident, could cause a public perception that the aircraft type is less safe and reliable than other aircraft types, which could negatively impact our business, financial condition and operating results. Any such accident or incident could result in an acceleration of the implementation of fleet strategy changes by major air carriers that would reduce or eliminate the use of 50-seat aircraft, including the CRJ-200 regional jet.
Air Wisconsin is subject to significant governmental regulation and potential regulatory changes.
All air carriers, including Air Wisconsin, are subject to regulation by the U.S. Department of Transportation (“DOT”), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. In addition, airports and municipalities enact rules and regulations that affect Air Wisconsin’s operations. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsin’s aircraft for any reason may have a material adverse effect on Air Wisconsin’s operations and our financial condition. Further, Air Wisconsin’s business may be subject to additional costs as a result of potential regulatory changes, which additional costs could have an adverse effect on our operating results.
Air Wisconsin is subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.
Air Wisconsin is subject to federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require Air Wisconsin to reduce its emissions, secure carbon offset credits or otherwise pay for emissions, or make capital investments to modify certain aspects of its operations to reduce emissions. Future policy, legal, and regulatory developments relating to the protection of the environment could have a direct effect on Air Wisconsin’s operations (or an indirect effect through its third-party providers of parts or services or airport facilities at which it operates) and increase its costs and have a material adverse effect on its operations. Any such developments could have an adverse impact on our business, results of operations and financial condition.
Air Wisconsin is also subject to environmental laws and regulations that require it to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict and joint and several, meaning that Air Wisconsin could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of contamination directly attributable to it, which liability could have an adverse impact on our results of operations and financial condition.
The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of Harbor’s common stock.
Under DOT regulations and federal law, Air Wisconsin must be owned and controlled by citizens of the United States as that term is defined in the Federal Aviation Act and interpreted by the DOT. The restrictions imposed by federal law and regulations limit who can purchase Air Wisconsin’s equity securities in the following ways:
•
at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States;
•
at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled by U.S. citizens and no more than 49% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country; and
•
citizens of foreign countries that have not entered into “open skies” air transport agreements with the U.S. may hold no more than 25% of Air Wisconsin’s total outstanding equity securities.
The restrictions on foreign ownership of Air Wisconsin’s equity securities may impair or prevent a sale of common stock by a stockholder of Harbor and may adversely affect the trading price or trading volume of Harbor’s common stock.
General Risk Factors
Because the trading market for Harbor’s common stock is limited, the common stock may continue to be illiquid.
Although Harbor’s common stock is traded under the symbol “HRBR” on the OTC Market, the trading volume for the common stock has been and continues to be limited. Harbor has not listed, and does not currently intend to list, Harbor’s common stock for trading on any national securities exchange. Accordingly, we expect the common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the common stock may never develop or be sustained.
The price of Harbor’s common stock has been and may continue to be volatile.
The trading price of Harbor’s common stock has been volatile. We believe Harbor’s stock price will be subject to wide fluctuations in response to a variety of factors, including the following:
•
the outcome of the current arbitration of the dispute between United and Air Wisconsin;
•
the potential delay in or difficulties associated with the transition of Air Wisconsin’s aircraft from the United capacity purchase agreement to the American capacity purchase agreement;
•
market perceptions and speculation as to differences between the United capacity purchase agreement and the American capacity purchase agreement;
•
the industry-wide pilot and mechanic shortages;
•
future announcements regarding fleet strategy changes by major air carriers, including any decision to reduce or eliminate single class 50-seat aircraft;
•
actual or anticipated fluctuations in our financial and operating results from period to period;
•
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation, and changes in discretionary spending and consumer confidence;
•
the impact of the COVID-19 pandemic or other pandemics and widespread outbreaks of communicable diseases on passenger demand for air travel, consumer behavior and tourism;
•
the repayment, restructuring or refinancing of Air Wisconsin’s debt obligations and our actual or perceived need for additional capital;
•
market perceptions about our financial stability and the financial stability of Air Wisconsin’s business partners;
•
market perceptions regarding Air Wisconsin’s operating performance, reliability and customer service, and the operating performance, reliability and customer service of its business partners and competitors;
•
factors and perceptions impacting the airline industry generally, including future passenger demand for air travel;
•
announcements of significant contracts, acquisitions or divestitures by us or Air Wisconsin’s competitors;
•
bankruptcies or other financial issues impacting Air Wisconsin’s business partners or competitors;
•
threatened or actual litigation and government investigations;
•
changes in the regulatory environment impacting Air Wisconsin’s business and industry;
•
purchases or sales of shares of Harbor’s common stock pursuant to Harbor’s publicly announced stock repurchase program or otherwise;
•
the illiquidity of Harbor’s common stock;
•
speculative trading practices of Harbor’s stockholders and other market participants;
•
perceptions about securities that are traded on the OTC Market;
•
the impact of the application of accounting guidance; and
•
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions.
In recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by companies across industries. These changes may occur without regard to the financial condition or operating performance of the affected companies. Accordingly, the price of Harbor’s common stock could fluctuate based upon factors that have little or nothing to do with Harbor, and these fluctuations could materially reduce the trading price of Harbor’s common stock.
The concentration of ownership of Harbor’s capital stock among a small number of stockholders could allow such stockholders to exert significant influence over the Company’s business plans and strategic objectives, control all matters submitted to Harbor’s stockholders for approval, or deter a change in control transaction, any of which could negatively affect the trading price or trading volume of its common stock.
As of December 31, 2022, Harbor had 45,219,737 shares of common stock outstanding. As of the same date, Amun LLC (“Amun”) held 20,000,000 shares of Harbor’s common stock, representing approximately 32.4% of the fully diluted shares of capital stock of Harbor, and Southshore Aircraft Holdings, LLC, through its affiliates (together, “Southshore”), held shares of Harbor’s Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), which are immediately convertible into 16,500,000 shares of common stock, representing approximately 26.7% of the fully diluted shares of capital stock of Harbor (in each case assuming the full conversion of the Series C Preferred into common stock).
The shares of Series C Preferred are generally authorized to vote with Harbor’s common stock. As a result, Amun and Southshore collectively control a majority of the voting power of Harbor’s outstanding capital stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Company’s business plans and strategic objectives, as well as to control all matters submitted to Harbor’s stockholders for approval. These stockholders may manage the Company’s business in ways with which certain investors may disagree and may be adverse to their interests. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control transaction, depriving Harbor’s stockholders of an opportunity to receive a premium for their investment, or otherwise negatively affecting the trading price or trading volume of Harbor’s common stock.
Mr. Bartlett, one of Harbor’s directors, may be deemed to be the beneficial owner of the shares of Harbor’s common stock held by Amun due to his status as a member of the board of managers of Amun and his ownership of equity interests in Amun. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore and his ownership of equity interests in Southshore. Accordingly, Mr. Bartlett may be able to exercise influence over decisions involving the voting or disposition of shares of Harbor’s capital stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.
Harbor may suspend its obligation to comply with SEC filing requirements in future periods and thereby cease filing reports and other information with the SEC, which could have the effect of reducing the trading volume and trading price of Harbor’s common stock.
In February 2012, Harbor’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending Harbor’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to the filing of our Annual Report on Form 10-K for the year ended December 31, 2019, the last periodic report filed by Harbor was the Annual Report on Form 10-K for the year ended December 31, 2011. As of January 1, 2020, Harbor no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act, requiring Harbor to resume filing reports and other information with the SEC pursuant to the Exchange Act.
The Company has incurred, and expects to continue to incur, significant direct and indirect costs, and diversion of management time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, the audit of the consolidated financial statements contained within its Annual Reports in accordance with SEC rules and Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002 (“SOX”).
Harbor would again become eligible to suspend its public reporting obligations if it (i) determines in accordance with applicable SEC rules it has fewer than 300 stockholders of record as of certain points in time, (ii) does not file registration statements pursuant to the Securities Act (which it does not currently intend to do), and (iii) meets certain other requirements under applicable SEC rules. If Harbor becomes eligible to suspend its public reporting obligations in future periods, it may elect to take the actions necessary to suspend those obligations, which would result in Harbor no longer being required to file SEC reports. If Harbor ceases filing reports and other information with the SEC, it would significantly reduce the amount of publicly available information about the Company and its business and operations, which could have the effect of reducing the trading volume and price of Harbor’s common stock.
Further, notwithstanding that Harbor is currently required to file certain reports and information with the SEC pursuant to Section 15(d) of the Exchange Act, Harbor does not have a class of securities registered pursuant to Section 12 of the Exchange Act. As a result, Harbor is not required to comply with, and does not intend to follow, certain disclosure requirements typically applicable to public reporting companies, including the requirement to file proxy statements, information statements, tender offer disclosures, and beneficial ownership filings. Accordingly, there may be significantly less information available about the Company, including its governance policies and ownership structure, than is available for other public reporting companies, which could have the effect of further reducing demand for Harbor’s common stock and the trading price.
Provisions in Harbor’s governing documents and the American capacity purchase agreement might deter acquisition bids, which could adversely affect the value of Harbor’s common stock.
Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, contain provisions that, among other things:
•
prohibit the transfer of any shares of Harbor’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation Section 1.382-T(g)) of Harbor’s then- outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of Harbor’s then-outstanding capital stock;
•
authorize the board of directors, without stockholder approval, to authorize and issue preferred stock with powers, preferences and rights that may be senior to Harbor’s common stock, that could dilute the interest of, or impair the voting power of, holders of Harbor’s common stock and could also have the effect of discouraging, delaying or preventing a change of control;
•
establish advance notice procedures that stockholders must comply with in order to nominate candidates to the board of directors and propose matters to be brought before an annual or special meeting of Harbor’s stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company;
•
give the board of directors exclusive authority to set the number of directors and increase or decrease the number of directors by one or more resolutions, which may prevent stockholders from being able to fill vacancies on the board of directors;
•
authorize a majority of the board of directors to appoint a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which may prevent stockholders from being able to fill vacancies on the board of directors; and
•
restrict the ability of stockholders to call special meetings of stockholders.
In addition, the American capacity purchase agreement provides that certain changes of control of Air Wisconsin give American the right to terminate the agreement.
These provisions may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial, any of which could also adversely affect the trading price of Harbor’s common stock.
Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, limit certain transfers of Harbor’s stock in order to preserve Harbor’s ability to use its net operating loss carryforwards, which could adversely affect the trading price of its common stock.
To reduce the risk of a potential adverse effect on Harbor’s ability to use its current or future net operating loss carryforwards for federal income tax purposes, Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of Harbor’s capital stock that could result in adverse tax consequences by impairing Harbor’s ability to utilize its net operating loss carryforwards. These transfer restrictions are subject to a number of rules and exceptions, and generally may only be repealed or amended by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Harbor’s capital stock. These transfer restrictions apply to the beneficial owners of the shares of Harbor’s capital stock. The transfer restrictions contained in Harbor’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for Harbor’s common stock, which may adversely affect the trading price. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial.
Harbor currently does not intend to pay dividends on its common stock and, consequently, the only opportunity to achieve a return on an investment in Harbor’s common stock may be the appreciation in value of Harbor’s common stock.
Harbor has not historically paid dividends on shares of its common stock and does not expect to pay dividends in the foreseeable future. The United capacity purchase agreement and Air Wisconsin’s credit agreements contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to Harbor. Any future determination by Harbor to pay dividends will be at the discretion of the board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements (or similar agreements), business prospects and such other factors as the board of directors deems relevant. Consequently, investors should consider that their only opportunity to achieve a positive return on their investment in Harbor’s common stock may be the appreciation in value of the common stock. However, as a result of numerous risks and uncertainties described in this Annual Report, the trading price may not appreciate and may decline significantly.
As a “smaller reporting company,” Harbor has availed itself of reduced disclosure requirements, which may make Harbor’s common stock less attractive to investors.
Harbor is a “smaller reporting company” under applicable SEC rules and regulations, and it will continue to be a “smaller reporting company” for so long as either (i) the market value of Harbor’s common stock held by non-affiliates as of the end of its most recently completed second quarter is less than $250 million or (ii) the market value of Harbor’s common stock held by non-affiliates is less than $700 million and the annual revenues of Harbor are less than $100 million during the most recently completed fiscal year. Because Amun and Southshore collectively hold a significant percentage of the fully diluted shares of capital stock of Harbor, it would require a significant increase in the market value of Harbor’s common stock for Harbor to no longer qualify as a “smaller reporting company.”
As a “smaller reporting company,” Harbor has relied on exemptions from certain disclosure requirements that are applicable to other public reporting companies. These exemptions include reduced financial disclosure and disclosure regarding executive compensation. Investors may find Harbor’s common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for Harbor’s common stock and negatively impact the trading price.
Complying with the requirements of public reporting companies under the Exchange Act, including the requirement for management to assess our disclosure controls and procedures and internal control over financial reporting, could increase our operating costs and divert management’s attention from executing our business strategy.
We are subject to the reporting requirements of Section 15(d) of the Exchange Act, which requires, among other things, that we file annual, quarterly, and current reports with the SEC with respect to our business, financial condition and results of operations. In addition, pursuant to SOX, we are required to assess the effectiveness of our disclosure controls and procedures and our internal control over financial reporting. Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs and increased demands on our management team. Significant additional resources and management oversight may be required to maintain and, as required, enhance our disclosure controls and procedures and internal control over financial reporting, which could have an adverse impact on our business and operating results.
Further, Harbor’s status as a public reporting company and the risks associated with being a public reporting company, could make it more difficult for us to attract and retain qualified members of the board of directors and executive officers, and it may increase the cost of their services.
We could identify material weaknesses or significant deficiencies in future periods.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. We cannot be certain that we will be successful in identifying, preventing or remediating future material weaknesses or significant deficiencies in internal control over financial reporting, which failure could result in material misstatements of our annual or interim consolidated financial statements. Any such misstatements of our financial statements could lead to restatements of our financial statements, which could result in an adverse impact to our financial results and a decline in the trading price of Harbor’s common stock.
Stock repurchases could increase the volatility of the trading price of Harbor’s common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.
The board of directors has adopted a stock repurchase program pursuant to which Harbor may repurchase shares of its common stock from time to time. Since the inception of the program in March 2021 through December 31, 2022, Harbor has purchased approximately 9.6 million shares of its common stock pursuant to the program. Although the board of directors has authorized the repurchase program, and Harbor has completed the purchase of shares of common stock, it does not obligate us to repurchase any additional dollar amount or number of shares, and the program may be modified, suspended or terminated at any time and for any reason. The additional number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Our ability to repurchase shares may also be limited by restrictive covenants in future borrowing arrangements we may enter into from time to time. Repurchases of Harbor’s common stock could increase the volatility of the trading price and reduce the trading volume, either of which could have a negative impact on the trading price. Similarly, the future announcement of the termination or suspension of the repurchase program, or our decision not to utilize the full authorized repurchase amount under the repurchase program, could result in a decrease in the trading price. There can be no assurance that any repurchases we do elect to make will enhance stockholder value because the market price of Harbor’s common stock may decline below the levels at which we repurchased shares. Although the repurchase program is intended to enhance long-term stockholder value, we cannot guarantee that it will do so.
Harbor may be at increased risk of securities class action and other litigation.
In the past, securities class action litigation has been instituted against companies following periods of volatility in the overall market and in the price of a company’s securities. If Harbor faces such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business, financial condition and results of operations. As a result of our compliance with Exchange Act reporting obligations, a significant amount of information regarding our business and operations, including our financial condition and operating results, is publicly available, which may result in threatened or actual litigation or other disputes with our stockholders, our employees or other constituents. If such claims are successful, our business and results of operations could suffer and, even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.
If securities or industry analysts do not publish reports about our business, an active trading market for Harbor’s common stock may not develop.
The extent of any trading market for Harbor’s common stock will depend, in part, on any research and reports that securities or industry analysts publish about us or our business. Analyst coverage of the Company is limited and does not appear to be consistently produced, and investors should not purchase Harbor’s common stock with the expectation that we will have analyst coverage, or that an active trading market for Harbor’s common stock will be developed or sustained.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Aircraft Fleet
As of December 31, 2022, Air Wisconsin owned 64 CRJ-200 regional jets. The CRJ-200 regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, limited overhead and under seat storage, a lavatory and a galley that allows for in-flight snack and beverage service. The CRJ-200 regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.
The following table summarizes Air Wisconsin’s ASMs flown and contract revenue recognized under the United capacity purchase agreement for the years ended December 31, 2022 and December 31, 2021, respectively.
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
(in thousands, except in cents)
(in thousands, except in cents)
1,253,896
$ 280,737
¢ 22.39
1,310,157
$ 247,519
¢ 18.89
Facilities
In addition to aircraft, Air Wisconsin has offices, crew bases and maintenance facilities to support its operations. All of Air Wisconsin’s material facilities (other than those provided by United under the United capacity purchase agreement) held as of December 31, 2022 are summarized in the following table:
Type
Location
Ownership
Approximate
Square Footage
Corporate Headquarters
Appleton, WI
Leased
20,140
Maintenance Hangar
Appleton, WI
Leased
37,200
Disaster Recovery Center
Appleton, WI
Leased
2,560
Maintenance Hangar
Dayton, OH
Leased
21,500
Maintenance Hangar
Milwaukee, WI
Leased
60,000
Crew Base
Dayton, OH
Leased
1,685
In July 2003, Air Wisconsin financed the Milwaukee maintenance hangar through the issuance of approximately $4.3 million principal amount of City of Milwaukee, Wisconsin variable rate industrial development bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest and payable semiannually. 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.
We believe Air Wisconsin’s facilities are suitable and adequate for its current and anticipated needs.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various investigative inquiries, legal proceedings and other disputes arising from or related to matters incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, regulatory and contractual matters. Although the results of such investigative inquiries, legal proceedings and other
disputes cannot be predicted with certainty, we believe that we are not currently a party to any matters which, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows. However, regardless of the merit of any matters raised or the ultimate outcome, investigative inquiries, legal proceedings and other disputes may generally have an adverse impact on us as a result of defense and settlement costs, diversion of management resources, and other factors.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is currently traded on the OTC Market under the symbol “HRBR.” The Company has not listed, and does not currently intend to list, the Company’s common stock for trading on any national securities exchange. Accordingly, we expect the Company’s common stock to continue to be illiquid for the foreseeable future. Investors should be aware that an active trading market for the Company’s common stock may never develop or be sustained.
Holders of Record
As of February 13, 2023, there were approximately 391 holders of record of the Company’s common stock. Because many of the Company’s shares of common stock are held by brokers and other institutions on behalf of stockholders, not all of which are known to the Company, the Company is unable to provide the exact number of stockholders represented by these record holders.
The transfer agent and registrar for the Company’s common stock is American Stock Transfer & Trust Company, LLC.
Dividends
The Company has not declared or paid any cash dividends on its capital stock. The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends to the Company. As a result, the source of any future dividends may be limited to existing cash available at the Company and from its subsidiaries other than Air Wisconsin. Any future determination to pay dividends will be at the discretion of the Company’s board of directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future credit agreements or capacity purchase agreements, business prospects and such other factors as the Company’s board of directors deems relevant.
Unregistered Sales of Equity Securities
There were no unregistered sales of the Company’s equity securities during the year ended December 31, 2022.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On March 30, 2021, the Company’s board of directors adopted a stock repurchase program pursuant to which the Company could repurchase up to $1.0 million of shares of its common stock from time to time during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.
Below is a summary of stock repurchase activity under the Company’s stock repurchase program during the three months ended December 31, 2022:
Total number
of shares
purchased
(1)
Average
price
paid per
share
Dollar value of
shares
repurchased
Approximate
dollar value of
shares
remaining
available
under stock
repurchase
program
October 1 - October 31, 2022
24,798
$ 2.50
$ 62,010
$ 4,622,837
November 1 - November 30, 2022
104,478
$ 2.34
$ 244,236
$ 5,378,601
December 1 - December 31, 2022
303,253
$ 2.19
$ 664,160
$ 5,714,441
Total
432,529
$ 2.24
$ 970,406
$ 5,714,441
(1) All of the reported shares were repurchased pursuant to the Company’s publicly announced stock repurchase program. In addition, all of the reported shares were purchased pursuant to a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act and in compliance with Rule 10b-18 under the Exchange Act.
The Company acquired 8,096,562 shares of its common stock pursuant to the stock repurchase program during the year ended December 31, 2022.
In January 2022, the Company entered into an agreement with a group of affiliated stockholders, pursuant to which the Company agreed to repurchase an aggregate of 5,437,500 shares of common stock for a purchase price equal to $5,655,190 pursuant to the settlement of a claim the Company had against the stockholders.
In April 2022, the Company entered into an agreement with one of its stockholders under the stock repurchase program pursuant to which it repurchased 122,361 shares of common stock for a purchase price equal to the average of the high and low trading prices of the common stock on the previous trading day, or $2.40 per share, for a total purchase price of approximately $0.3 million.
No “affiliated purchaser” of the Company acquired any shares of the Company’s equity securities during the fiscal year ended December 31, 2022.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements, accompanying notes, and other financial information included within this Annual Report on Form 10-K for the year ended December 31, 2022 (this “Annual Report”). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Annual Report, particularly in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
Harbor Diversified, Inc. (“Harbor”) is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a non-operating entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, for purposes of this Annual Report on Form 10-K for the year ended December 31, 2022 (this “Annual Report”), disclosures relating to activities of Air Wisconsin also apply to Harbor unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the “Company,” “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as “Harbor.”
During the year ended December 31, 2022, Air Wisconsin had a fleet of 63 CRJ-200 regional jets covered under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”). Pursuant to the United capacity purchase agreement, United agreed to purchase the capacity of Air Wisconsin’s regional jets covered by the agreement, which Air Wisconsin operated as United Express, with a presence at both Chicago O’Hare and Washington-Dulles international airports, two of United’s key domestic hubs. In providing regional flying under the United capacity purchase agreement, Air Wisconsin uses United’s logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United provides Air Wisconsin with ground support services and gate access. More than 99.9% of our operating revenues for the years ended December 31, 2022 and December 31, 2021 was derived from operations associated with the United capacity purchase agreement.
Subject to certain limited exceptions, Air Wisconsin is entitled to receive, under the United capacity purchase agreement, fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In addition, Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time performance, and customer satisfaction ratings. The United capacity purchase agreement protects Air Wisconsin, to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers.
In October 2020, Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, modified certain scheduling requirements and settled certain disputes that had existed between United and Air Wisconsin over amounts owed to Air Wisconsin under the agreement. In April 2021, Air Wisconsin and United entered into a second amendment to the United capacity purchase agreement, which addressed the scheduling of block hours after a certain date. In October 2022, United delivered a wind-down schedule that provided for the withdrawal of aircraft from coverage under the United capacity purchase agreement beginning in March 2023 and continuing through November 2023.
A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. In October 2022, United initiated arbitration under the United capacity purchase agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. Air Wisconsin expects that, unless the parties reach a settlement before then, the arbitration hearing will occur in July 2023 and that the arbitrators will make their award in August 2023. In December 2022 and February 2023, Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the agreement. In accordance with the termination provisions of the agreement, and in response to Air Wisconsin’s first termination notice, United delivered a revised wind-down schedule in January 2023. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until June 2023, at which time all of Air Wisconsin’s remaining aircraft would be withdrawn from the agreement, and Air Wisconsin would cease flying for United.
As of December 31, 2022, the aggregate amount in dispute was approximately $47.9 million. As Air Wisconsin and United are in the early stages of arbitration, Air Wisconsin cannot, with any degree of certainty, estimate the likely outcome of the arbitration including any potential award of the disputed amounts. Air Wisconsin, however, maintains that it has a strong position and is entitled to the disputed amounts under the terms of the United capacity purchase agreement. As a result, the Company has recognized all disputed amounts through December 31, 2022.
In August 2022, Air Wisconsin entered into a new five-year capacity purchase agreement (the “American capacity purchase agreement”) with American Airlines, Inc. (“American”), which was subsequently amended in February 2023 and March 2023, pursuant to which Air Wisconsin agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations, which is scheduled to occur by early June 2023.
For additional information regarding the risks associated with the dispute with United and the transition from the United capacity purchase agreement to the American capacity purchase agreement, refer to the section entitled “Risk Factors” within this Annual Report.
Labor Shortages
Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the COVID-19 pandemic, the shortage was temporarily abated. However, as flight demand has increased, labor shortages within the airline industry have become acute, particularly for regional airlines such as Air Wisconsin. The shortage is particularly critical at the captain level, since it can take as long as two years to replace a captain, taking into account training time and experience required at the first officer level before a pilot can be elevated to the rank of captain.
Pilot shortages within the airline industry are the result of a number of factors, including personnel seeking opportunities with larger airlines where compensation may be substantially higher, the number of pilots at major airlines reaching retirement age, upward pressure on wages and bonuses at other regional carriers and within other industries, and the proliferation of cargo and low-cost carriers that have increased demand for pilots. In the past several months, these and other factors have caused our pilot attrition rates to be higher than our ability to hire and retain replacement pilots, resulting in our inability to consistently achieve block hours in line with pre-pandemic levels. To address the diminished supply of qualified pilot candidates, regional airlines, including Air Wisconsin, have implemented significant pilot wage and bonus increases, which has substantially increased our labor costs and may continue to negatively impact our results of operations and financial condition. If we are unable to maintain a sufficient number of qualified pilots to operate our scheduled flights, it could lead to reduced flight schedules, which would further impact our financial condition.
In addition to pilots, Air Wisconsin’s operations rely on the availability of other qualified personnel, including maintenance technicians. As a result of global supply chain constraints and inflationary pressures, as well as increased flying levels, Air Wisconsin has experienced increased costs of certain maintenance activities and delays in obtaining third-party maintenance services, which has been compounded by difficulty recruiting and retaining qualified mechanics. Mechanic shortages within the industry have resulted from several factors, including larger airlines offering higher salaries and more extensive benefit programs, greater demand for mechanics across the airline industry, and upward pressure on wages in other industries. We anticipate these drivers will continue to place upward pressure on our operating costs.
Impact of Competitive Environment
Several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. As of the date of this filing, ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines, and Compass Airlines, each of which are or were domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain.
Paycheck Protection Program
In April 2020, Air Wisconsin received a $10.0 million loan (the “SBA Loan”) under the small business Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the Small Business Administration (“SBA”). The entire $10.1 million principal amount and accrued interest was forgiven in August 2021, which was recorded as a gain on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2021.
Payroll Support Program
In April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (the “PSP-1 Agreement”) with respect to payroll support (“Treasury Payroll Support”) from the U.S. Department of the Treasury (“Treasury”) under a program (“Payroll Support Program”) provided by the CARES Act, pursuant to which Air Wisconsin received approximately $42.2 million.
In December 2020, the federal Consolidated Appropriations Act of 2021 (“PSP Extension Law”) was adopted, which provided additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement with the Treasury (the “PSP-2 Agreement”), pursuant to which Air Wisconsin received approximately $33.0 million.
In March 2021, the federal American Rescue Plan Act of 2021 (“American Rescue Plan”) was adopted, which provided further payroll support to eligible air carriers. In June 2021, pursuant to the American Rescue Plan, the Treasury entered into a Payroll Support Program 3 Agreement with Air Wisconsin (the “PSP-3 Agreement” and, together with the PSP-1 Agreement and the PSP-2 Agreement, the “PSP Agreements”), pursuant to which Air Wisconsin received approximately $33.3 million.
The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. If Air Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. The Treasury’s Office of the Inspector General (“OIG”) commenced a routine audit of Air Wisconsin’s compliance with the terms of the PSP-1 Agreement. As of the date of this filing, Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit. No such audits have been initiated by the Treasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing.
Employee Retention Credit
Air Wisconsin recorded an employee retention credit in 2021 in the aggregate amount of approximately $1.1 million pursuant to the CARES Act for payroll expenses incurred during the second, third, and fourth quarters of 2020. A credit of $0.2 million for one of the three eligible quarters was received in 2022 and the remaining credits were received in January 2023.
2022 Financial Highlights
For the year ended December 31, 2022, we had total operating revenues of $280.9 million, a 13.4% increase, compared to $247.6 million for the year ended December 31, 2021. Net income for the year ended December 31, 2022 was $39.1 million, or net income of $0.83 per basic share and $0.61 per diluted share, compared to net income of $92.6 million, or net income of $1.69 per basic share and $1.29 per diluted share, for the year ended December 31, 2021. For additional information, refer to Note 12, Earnings per Share and Equity, and Note 13, Stock Option, in our audited consolidated financial statements included in this Annual Report.
Revenue
The number of aircraft we have in scheduled service and the block hours and departures we generate from our flights are primary drivers of our revenues under the United capacity purchase agreement. Primarily as a result of the pilot shortage, block hours decreased from 116,081 during the year ended December 31, 2021 to 107,666 during the year ended December 31, 2022, or by 7.2%, and departures decreased from 80,927 in 2021 to 70,280 in 2022, or by 13.2%.
Although our block hours and departures decreased during the year ended December 31, 2022 compared to the year ended December 31, 2021, leading to a decrease in variable revenue of $7.1 million for 2022 when compared to 2021, overall revenues from the United capacity purchase agreement increased by 13.4% to $280.7 million primarily due to recognition of previously deferred revenues. Air Wisconsin deferred revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the COVID-19 pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of revenues, and it anticipates continuing to do so through the wind-down period under the United capacity purchase agreement (wind-down period). Accordingly, during the year ended December 31, 2022, Air Wisconsin recognized $35.1 million of revenues that were previously deferred, compared to recognizing $3.3 million for the year ended December 31, 2021, or an increase of $31.8 million. Air Wisconsin also recognized $6.4 million in incentive revenue for the year ended December 31, 2022, compared to $3.0 million for the year ended December 31, 2021, or an increase of $3.4 million. As a result of the stand ready performance obligation, which was a part of the October 2020 amendment to the United capacity purchase agreement, we recognized $18.0 million of revenue during the year ended December 31, 2022, compared to $15.1 million of revenue during the year ended December 31, 2021, or an increase of $2.9 million, resulting from the payment or accrual by United to Air Wisconsin based on certain scheduling benchmarks. Further, as a result of an increase to the fixed revenue rate in January 2022, fixed revenues increased approximately $2.6 million. Increases in variable revenue rates in January 2022 for departures and block hours were offset by the decrease in block hours and departures as noted above. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Contract Revenues, in our audited consolidated financial statements included in this Annual Report.
For additional information, also refer to the section entitled “Critical Accounting Policies - Revenue Recognition.”
Operating Expenses
Our total operating expenses increased $82.6 million, or 58.0%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. We did not record any amount in payroll support grants received from the Treasury as an offset to our operating expenses during the year ended December 31, 2022 compared to $66.3 million for the year ended December 31, 2021. Increasing costs for aircraft maintenance and personnel shortages resulted in an $11.0 million increase in aircraft maintenance and repair costs. We also did not record an employee retention credit to offset our operating expenses for the year ended December 31, 2022, compared to $1.1 million recorded for the year ended December 31, 2021. When combined with an increase of approximately $1.9 million in employee benefits and other payroll costs, payroll and related expense increased $3.0 million, or 2.8%. The additional increase of $2.4 million for the year ended December 31, 2022 compared to December 31, 2021 is primarily due to an increase of $1.1 million, or 21.2%, in rental costs, mostly simulator rent, and an increase in cost for purchased services and other of $1.5 million, or 10.8%. For additional information, refer to the section entitled “-Results of Operations-Operating Expenses.”
Stock Repurchase Program
Harbor’s board of directors has adopted a stock repurchase program pursuant to which Harbor could initially repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. Harbor may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule 10b5-1 under the Exchange Act, or subject to Rule 10b-18 under the Exchange Act. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. Harbor acquired 8,096,562 shares of its common stock pursuant to the stock repurchase program during the year ended December 31, 2022.
Economic Conditions, Challenges and Risks Impacting Financial Results
Although the United capacity purchase agreement has reduced, and the American capacity purchase agreement will reduce, Air Wisconsin’s exposure to certain risks, its operating and business performance is driven by various factors that typically affect regional airlines and their markets, including factors that affect the broader airline and travel industries. The following key factors, in addition to the impact of the COVID-19 pandemic, may materially affect our future performance.
Transition from the United Capacity Purchase Agreement to the American Capacity Purchase Agreement. Air Wisconsin commenced flying for American under the American capacity purchase agreement in March of 2023, and it will continue flying for United under the United capacity purchase agreement until early June 2023. Certain inefficiencies are inevitable in the process of winding down flying for United and ramping up flying for American. Aircraft that are withdrawn from the United capacity purchase agreement cannot be immediately inducted into service for American, and Air Wisconsin will receive no revenue for any aircraft during the period after it has been withdrawn from the United capacity purchase agreement until it has been inducted into service under the American capacity purchase agreement.
Pilot Shortage. An industry wide pilot shortage has existed for many years. Air Wisconsin, like most of its peers, has not been able to hire and retain a sufficient number of pilots to crew all of its aircraft. This has limited the number of flights it could fly under the United capacity purchase agreement. Under the American capacity purchase agreement, Air Wisconsin will not be able to induct an aircraft into service for American unless it has sufficient crew to satisfy certain block hour requirements, which will have an adverse effect on our revenues.
Arbitration. Currently, a dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. As of December 31, 2022, the aggregate amount in dispute was approximately $47.9 million. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts as claimed by Air Wisconsin. The arbitration could result in substantial costs and a diversion of management’s attention and resources, and there is always a chance of an unfavorable determination by the arbitrators, which could harm our business, financial condition and results of operations.
Industry Volatility. The airline industry is volatile and affected by numerous factors, such as tourist activity, consumer confidence, discretionary spending, fare initiatives, fuel prices, labor actions, global pandemics, outbreak of war or hostilities, changes in governmental regulations, government sanctions, changes in taxes and fees, and weather. These factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. Historically, capacity purchase agreements shelter regional airlines from some of these factors.
Competition. The airline industry is highly competitive. Air Wisconsin competes principally with other regional airlines. We believe that major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: aircraft fleet type; ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors. The American capacity purchase agreement has several provisions that provide for early termination. If the agreement is terminated early, Air Wisconsin’s ability to enter into a commercial agreement with another major airline partner will depend, in significant part, on Air Wisconsin’s ability to maintain a cost structure competitive with other regional air carriers, attract and retain qualified pilots, and maintain operational reliability. However, we continue to believe there will be strong demand from major airlines for regional air services, and we seek to continue to position Air Wisconsin to take advantage of this anticipated demand.
Maintenance Contracts, Costs and Timing. Air Wisconsin’s employees perform routine airframe and engine maintenance along with periodic inspections of equipment at its maintenance facilities. It also uses third-party vendors for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for Air Wisconsin’s aircraft. As of December 31, 2022, the average age of Air Wisconsin’s CRJ-200 regional jets was approximately 20.3 years. We expect that maintenance costs will increase as its fleet continues to age. We use the direct expense method of accounting for Air Wisconsin’s maintenance of airframes, rotable parts, and normal recurring maintenance and for Lotus’ maintenance of engines, pursuant to which we recognize the expense when the maintenance work is completed. We use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit. While Air Wisconsin keeps a record of expected maintenance events, the actual timing and costs of maintenance expense are subject to variables, such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs.
Aircraft Leases. During the years ended December 31, 2022 and December 31, 2021, none of Air Wisconsin’s operational aircraft were under lease agreements.
Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of December 31, 2022, Air Wisconsin had 1,044 full-time employees and 41 part-time employees, for a total of 1,085 employees, of which 813 were represented by unions. Air Wisconsin’s collective bargaining agreement with its pilots, represented by the Airline Pilots Association, became amendable in November 2022, its collective bargaining agreement with its flight attendants, represented by the Association of Flight Attendants-CWA, became amendable in October 2022, and its collective bargaining agreement with its clerical, office fleet and passenger service employees, represented by the International Association of Machinists and Aerospace Workers AFL-CIO, became amendable in September 2022. Air Wisconsin’s collective bargaining agreement with its dispatchers represented by the Transport Workers Union of America, is amendable and is in mediated negotiations. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with Air Wisconsin’s unionized employees may adversely affect Air Wisconsin’s ability to conduct business.
Availability and Training of Qualified Pilots. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. These changes dramatically reduced the supply of qualified pilot candidates eligible for hiring by the airline industry and, in response, regional airlines, including Air Wisconsin, implemented significant pilot wage and bonus increases. In recent years, Air Wisconsin experienced a significant increase in pilot attrition, and our results of operations may be negatively impacted if Air Wisconsin is unable to hire and train pilots in a timely manner.
For additional information, refer to the section entitled “Risk Factors” within this Annual Report for a discussion of the general and specific factors and trends affecting our business and results of operations.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year because the airline industry is subject to seasonal fluctuations and general economic conditions. While Air Wisconsin’s operations can be negatively impacted by factors outside of its control, including inclement weather, the United and American capacity purchase agreements mitigate some of the risks associated with seasonal fluctuations.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations.
Operating Revenues
Our consolidated operating revenues consist primarily of contract revenues from flight services.
Contract Revenues. Contract revenues consist of the fixed monthly amounts per aircraft received pursuant to the United capacity purchase agreement, along with the additional amounts received based on the number of departures and block hours flown. The United capacity purchase agreement includes provisional cash payments four times per month based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. In addition, contract revenues in 2022 and 2021 include the impact of the amendment to the United capacity purchase agreement that Air Wisconsin entered into in October 2020 which, among other things, provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The same amendment provides that these accruals are to be evidenced by notes receivable from United to Air Wisconsin, although such notes for the fourth quarter of 2021, the first through fourth quarters of 2022, and a portion of first quarter 2023 are subject to the dispute between United and Air Wisconsin.
Contract Services and Other. Contract services and other revenue are not material and primarily consist of the sale of parts.
Operating Expenses
Our consolidated operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related costs primarily relate to wages, benefits and payroll taxes for all Air Wisconsin’s employees, as well as costs related to lodging of our flight crews and crew training expenses.
Aircraft Fuel and Oil. Substantially all aircraft fuel and related fueling costs for flying under the United capacity purchase agreement are directly paid and supplied by United; we do not record any revenue or expense for such fuel. We include the cost of aircraft oil, which we are responsible for under the United capacity purchase agreement, although that expense is not material.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs include costs related to airframe and rotable overhauls, normal recurring maintenance and the cost of aircraft materials and parts related to Air Wisconsin’s CRJ-200 regional jets and the cost of engine maintenance by Lotus. With the exception of engine overhauls by Air Wisconsin, we record these costs using the direct expense method of accounting, pursuant to which the expense is recognized when the maintenance work is completed. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary from period to period. We capitalize Air Wisconsin’s engine overhaul costs, and the amortization expense is included in aircraft maintenance, materials and repairs using the deferral method of accounting; Air Wisconsin’s engine overhaul costs are amortized over the estimated useful life of the overhaul measured in engine cycles remaining until the next scheduled shop visit.
Aircraft Rent. Aircraft rent includes costs related to non-operational aircraft leased for the purpose of adding an aircraft type rating to Air Wisconsin’s operating certificate.
Other Rents. Other rents include expenses related to leased engines, costs related to leased flight simulators used to train Air Wisconsin’s pilots, and building rents such as crew and maintenance bases and corporate office space.
Depreciation, Amortization and Obsolescence. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and rotable parts depreciation. Obsolescence expense is a periodic non-cash charge primarily related to the provision for obsolescence on our expendable aircraft parts.
Payroll Support Program. The payroll support program ended in 2021, and thus there are no amounts recorded for the year ended December 31, 2022. For the year ended December 31, 2021, the proceeds of the Treasury Payroll Support received pursuant to the PSP Agreements were recorded in cash and cash equivalents when received and were recognized as a reduction in expense over the periods that the funds were intended to offset payroll expenses. For the year ended December 31, 2021, Air Wisconsin received and recognized approximately $66.3 million under the Payroll Support Program.
Purchased Services and Other. Purchased services and other expense primarily includes information technology systems, legal fees, professional and technical fees, insurance and property taxes and other administrative expenses. The majority of insurance and property taxes are pass-through costs to United.
Other (Expense) Income, Net
Interest Income. Interest income includes interest income earned on our cash and cash equivalents balance, notes receivable due from United, and investment income on our marketable securities.
Interest Expense. Interest expense in 2022 was immaterial. Interest expense in 2021 was interest primarily relating to Air Wisconsin’s debt under the Aircraft Credit Agreements and certain other credit agreements, which were paid in full during 2021.
Loss on Marketable Securities. Loss on marketable securities was $8.8 million and $1.2 million for the years ended December 31, 2022 and December 31, 2021, respectively. The loss reflects the change in the market value of our marketable securities for the years ended December 31, 2022 and December 31, 2021, and the sales of securities for the year ended December 31, 2021.
Gain on Extinguishment of Debt. Gain on extinguishment of debt was $0.1 million and $10.4 million for the years ended December 31, 2022 and December 31, 2021, respectively. A gain of $0.1 million resulted from the prepayment of debt for the year ended December 31, 2022, and a gain of $10.1 million resulted from the forgiveness of the SBA Loan with the remainder attributable to the prepayment of debt for the year ended December 31, 2021. For additional information refer to Note 6, Debt, in our audited consolidated financial statements included in this Annual Report.
Other. Other income (expense) includes income (expense) derived from activities not classified in any other area of the consolidated statements of operations.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (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 the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the board of directors. The chief operating decision maker 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 operate as one operating and reportable segment.
Results of Operations
Comparison of the Years Ended December 31, 2022 and December 31, 2021
We had operating income of $55.9 million in the year ended December 31, 2022, compared to $105.2 million in the year ended December 31, 2021. In the year ended December 31, 2022, we had net income of $39.1 million compared to $92.6 million in the year ended December 31, 2021.
The following table sets forth our major operational statistics and the associated percentage changes for the periods presented:
Year Ended
December 31,
Change
Operating Data:
Available Seat Miles (“ASMs”) (in thousands)
1,253,896
1,310,157
(56,261 )
(4.3% )
Actual Block Hours
107,666
116,081
(8,415 )
(7.2% )
Actual Departures
70,280
80,927
(10,647 )
(13.2% )
Revenue Passenger Miles (“RPMs”) (in thousands)
1,053,754
1,041,763
11,991
1.2%
Average Stage Length (in miles)
11.6%
Contract Revenue Per Available Seat Mile (in cents)
22.39 ¢
18.89 ¢
3.50 ¢
18.5%
Passengers
2,859,047
3,082,394
(223,347 )
(7.2% )
The decrease in ASMs, block hours, departures, and passengers during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the industry-wide pilot shortage which resulted in a significantly lower number of flights. The increase in contract revenue per available seat mile during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to an increase in deferred revenue recognized in 2022.
Operating Revenues
The following table sets forth our operating revenues and the associated dollar and percentage changes for the periods presented:
Year Ended
December 31,
Change
Operating Revenues ($ in thousands):
Contract Revenues
$ 280,737
$ 247,519
$ 33,218
13.4%
Contract Services and Other
110.0%
Total Operating Revenues
$ 280,863
$ 247,579
$ 33,284
13.4%
Total operating revenues increased $33.3 million, or 13.4%, during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to an increase in the recognition of previously deferred revenues in the amount of $31.8 million, an increase of $3.4 million for performance incentives, and an increase of $2.9 million for the stand ready performance obligation. As a result of an increase to the fixed revenue rate in January 2022, fixed revenues increased approximately $2.6 million. Increases in variable revenue rates in January 2022 for departures and block hours were offset by the reduced flight activity due to the industry-wide pilot shortage, as illustrated in the table above for operating data, causing variable revenue to decrease $7.1 million overall. Refer to Note 1, Summary of Significant Accounting Policies for additional information regarding the stand ready performance obligation.
Operating Expenses
The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented:
Year Ended
December 31,
Change
Operating Expenses ($ in thousands):
Payroll and Related Costs
$ 109,831
$ 106,881
$ 2,950
2.8%
Aircraft Fuel and Oil
(2 )
(1.2% )
Aircraft Maintenance, Materials and Repairs
67,096
56,145
10,951
19.5%
Aircraft Rent
-
(67 )
(100.0% )
Other Rents
6,582
5,375
1,207
22.5%
Depreciation, Amortization and Obsolescence
26,327
26,552
(225 )
(0.8% )
Purchased Services and Other
14,992
13,535
1,457
10.8%
Payroll Support Program
-
(66,316 )
66,316
100.0%
Total Operating Expenses
$ 224,997
$ 142,410
$ 82,587
58.0%
Our consolidated operating expenses consist of the following items:
Payroll and Related Costs. Payroll and related costs increased $3.0 million, or 2.8%, to $109.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase was primarily driven by increases in pilot bonuses of $1.9 million, an increase in employee benefits of $1.3 million, an increase in payroll taxes of $1.1 million due to employee retention credits recorded in 2021, $0.5 million in personnel expenses and $0.3 million for general management wages. This was offset by an over-all decrease in wages of $1.6 million for pilots and flight attendants in operations, training, and per diem, and $0.5 million decrease in maintenance employee wages.
Aircraft Fuel and Oil. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the years ended December 31, 2022 and December 31, 2021 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the years ended December 31, 2022 and December 31, 2021.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs costs increased $11.0 million, or 19.5%, to $67.1 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily as a result of an increase in airframe repairs and materials purchases of $5.9 million and $4.1 million, respectively, an increase in engine overhaul amortization of $0.8 million, and increases in freight and scrap expenses of $0.7 million, offset by a decrease in engine repairs and contract rebates of $0.6 million. The increases were largely driven by higher maintenance rates and a greater reliance on third-party maintenance providers due to the ongoing labor shortage. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Other Rents. Other rents expense increased $1.2 million, or 22.5%, to $6.6 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily as a result of an increase in flight simulator rent of $1.0 million and an increase in facilities rent of $0.2 million.
Depreciation, Amortization and Obsolescence. Depreciation, amortization and obsolescence expense was relatively unchanged for the year ended December 31, 2022, compared to the year ended December 31, 2021.
Payroll Support Program. The contra-expense for the Payroll Support Program decreased $66.3 million, or 100%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to the cessation of the Payroll Support Program in 2021.
Purchased Services and Other. Purchased services and other expense increased $1.5 million, or 10.8%, to $15.0 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase was primarily due to increases in professional and technical fees of $0.9 million, technology fees and maintenance of $0.4 million, and legal fees of $0.3 million. For additional information, refer to Note 1, Summary of Significant Accounting Policies - Reclassification.
Other (Expense) Income
Interest Income. Interest income increased $2.5 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase was primarily due to an increase in interest earned on marketable securities of $2.2 million and an increase in interest earned on the notes receivable due from United of $0.3 million.
Interest Expense. Interest expense decreased $0.8 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to the significant prepayments of debt made in 2021.
Loss on Marketable Securities. Loss on marketable securities increased $7.7 million for the year ended December 31, 2022, compared to the year ended December 31, 2021, due to a decrease in the market value of marketable securities.
Gain on Extinguishment of Debt. Gain on extinguishment of debt decreased $10.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease is primarily due to the forgiveness of the SBA Loan in August 2021 of $10.1 million.
Other, Net. Other income and expense was immaterial and relatively unchanged for the year ended December 31, 2022, compared to the year ended December 31, 2021.
Net Income
Net income for the year ended December 31, 2022 was $39.1 million, or $0.83 per basic share and $0.61 per diluted share, compared to net income of $92.6 million, or $1.69 per basic share and $1.29 per diluted share, for the year ended December 31, 2021. For additional information, refer to Note 10, Earnings Per Share and Equity, in our consolidated financial statements included in this Annual Report.
The decrease in net income for the year ended December 31, 2022, when compared to the year ended December 31, 2021, primarily resulted from an increase in overall operating expenses consisting primarily of maintenance expenses and no contra-expense related to the Payroll Support Program, under which we ceased receiving support in 2021. The decrease in net income is also attributable to a decrease in gain on extinguishment of debt and increased losses on investments in marketable securities.
Income Taxes
In the year ended December 31, 2022, our effective tax rate was 27.7%, compared to 21.5% in the year ended December 31, 2021. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our deferred tax assets.
We recorded an income tax provision of $15.0 million and $25.4 million for the years ended December 31, 2022 and December 31, 2021, respectively.
The income tax provision for the year ended December 31, 2022 resulted in an effective tax rate of 27.7%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes, permanent differences between financial statement and taxable income, and valuation allowances recorded against deferred tax assets. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.
The income tax provision for the year ended December 31, 2021 resulted in an effective tax rate of 21.5%, which differed from the U.S. federal statutory rate of 21% primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in state apportionment and statutory rates.
As of December 31, 2022, we did not have a federal net operating loss carryforward. Our state net operating loss carryforward was approximately $1.3 million. The state net operating losses expire beginning in 2040, with some states having either longer expiration periods or none at all.
For additional information, refer to Note 5, Income Taxes, in our consolidated financial statements included in this Annual Report.
Liquidity and Capital Resources
Air Wisconsin’s departures and block hours in 2022 were below pre-COVID-19 levels, generally due to the industry-wide pilot shortage. We are taking actions based on currently available information to address the changing business environment; however, we cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on our business.
Sources and Uses of Cash
Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities, and Air Wisconsin’s cash flows from operations. As of December 31, 2022, our cash and cash equivalents balance was $33.3 million and we held $153.8 million of marketable securities. For the year ended December 31, 2022, cash provided by operations was $45.0 million. On November 4, 2022, United prepaid to Air Wisconsin $50.1 million to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, issued pursuant to the first amendment to the United capacity purchase agreement. In the near term, we expect to fund our liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances. For additional information, refer to Note 1, Contract Revenue.
Air Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, and maintenance costs, and payment of debt service obligations, including principal and interest payments. Our
cash needs vary from period to period primarily based on the timing and costs of significant maintenance events and increased labor costs due to shortages of qualified pilots and mechanics. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment for Air Wisconsin. During the year ended December 31, 2022, we had $5.5 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
Air Wisconsin’s ability to service its long-term debt obligations and business development efforts depends, in part, on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. If Air Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As of December 31, 2022, Air Wisconsin had $9.2 million of short-term debt, and $52.1 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to “ - Debt and Credit Facilities” within this Annual Report.
The United capacity purchase agreement and Air Wisconsin’s credit agreements with its lender contain restrictions that limit Air Wisconsin’s ability to pay, or prohibit it from paying, dividends or distributions to Harbor.
We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
Restricted Cash
As of December 31, 2022, in addition to cash and cash equivalents of $33.3 million, the Company had $0.8 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Cash Flows
The following table presents information regarding our cash flows for each of the periods presented ($ in thousands):
Year Ended
December 31,
Change
Net cash provided by operating activities
$ 45,034
$ 94,213
$ (49,179 )
(52.2% )
Net cash used in investing activities
(29,732 )
(143,135 )
113,403
79.2%
Net cash used in financing activities
(19,739 )
(43,652 )
23,913
54.8%
Cash Flows Provided by Operating Activities
During the year ended December 31, 2022, our cash flows provided by operating activities were $45.0 million. We had net income of $39.1 million. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of $24.7 million, notes receivable of $28.1 million, loss on marketable securities of $8.8 million, deferred income taxes payable of $8.0 million, and prepaid and other expenses of $3.4 million, offset by decreases in cash primarily related to deferred revenues of $28.3 million, accounts receivable of $32.9 million, contract liabilities of $3.1 million, and accrued payroll and employee benefits of $1.9 million.
During the year ended December 31, 2021, our net cash flows provided by operating activities were $94.2 million. We had net income of $92.6 million, which was primarily due to increased revenues as a result of the increase in demand for air travel, and lower overall expenses. Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of $24.9 million, accounts payable of $8.3 million, and deferred revenues of $12.8 million, partially offset by decreases in cash primarily related to the gain on extinguishment of debt of $10.4 million, contract liabilities of $11.9 million, notes receivable of $15.1 million, and deferred income taxes of $6.0 million.
Cash Flows Used in Investing Activities
During the year ended December 31, 2022, our cash flows used in investing activities were $29.7 million of which $24.3 million was for investments in marketable securities and $5.5 million for additions to property and equipment.
During the year ended December 31, 2021, our cash flows used in investing activities were $143.1 million, of which $139.5 million was from investments in marketable securities and $3.6 million for additions to property and equipment.
Cash Flows Used in Financing Activities
During the year ended December 31, 2022, our cash flows used in financing activities were $19.7 million, reflecting $6.3 million in repayments of long-term debt, $0.8 million of dividends paid on preferred stock, $1.0 million for the cancellation of a stock option, and $11.7 million to repurchase shares of our common stock.
During the year ended December 31, 2021, our cash flows used in financing activities were $43.7 million, reflecting $40.1 million in repayments of long-term debt, $0.8 million of dividends paid on preferred stock, and $2.8 million to repurchase shares of our common stock.
Commitments and Contractual Obligations
In September 2022, Air Wisconsin prepaid approximately $0.4 million of debt outstanding under the Aircraft Notes due December 31, 2025. The prepayment under the Aircraft Notes resulted in a $0.1 million gain on extinguishment of debt due to the decrease in previously expected future undiscounted cash flows used in determining the carrying value of the debt.
As of December 31, 2022, Air Wisconsin had $73.8 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of $55.6 million in long-term notes payable related to owned aircraft used in continuing operations. As of December 31, 2022, Air Wisconsin also had $12.6 million of operating lease obligations primarily related to certain training simulators and facilities. Air Wisconsin’s debt obligations set forth below include an aggregate of $5.6 million in projected interest costs through 2027 and thereafter.
The following table sets forth our cash obligations for the periods presented ($ in thousands):
Payment Due for
Year Ended
December 31,
(in thousands)
Total
Thereafter
Aircraft Notes Principal
$ 55,600
$ 7,000
$ 7,000
$ 41,600
$ -
$ -
$ -
Aircraft Notes Interest
$ 5,622
$ 2,154
$ 1,874
$ 1,594
$ -
$ -
$ -
Operating Lease Obligations
$ 11,892
$ 5,580
$ 3,222
$ 2,487
$
$
$
Total
$ 73,114
$ 14,734
$ 12,096
$ 45,681
$
$
$
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million and certain additional amounts may be due based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As of December 31, 2022, all of Air Wisconsin’s long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to Note 6, Debt, in our audited consolidated financial statements included in this Annual Report.
Series C Convertible Redeemable Preferred Stock
In January 2020, Harbor completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three CRJ-200 regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of Harbor’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred”) with an aggregate value of $13.2 million, or $3.30 per share (the “Series C Issue Price”). Air Wisconsin had leased each of these CRJ-200 regional jets and GE engines from Southshore. In January 2020, Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.
The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the board of directors (the “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 (the “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 (the “PIK Dividends”).
Each share of Series C Preferred was initially convertible at the election of the holders, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (as defined below) by $0.80, subject to certain adjustments set forth in the Certificate of Designations (the “Conversion Price”). The Conversion Price as of the date of this filing is $0.15091. The Conversion Price may be subject to further adjustment as described in the Certificate of Designations.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80 (the “Conversion Cap”), plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of March 17, 2023, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 26.9% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. Harbor may redeem all, but not less than all, of the Conversion Cap Excess Shares at any time upon notice to the holders for a cash payment in an amount equal to the Series C Liquidation Amount per share.
In the event of any liquidation, dissolution or winding up of Harbor or a sale of Harbor, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of Harbor to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the “Series C Liquidation Amount”).
On March 30, 2022, June 30, 2022, September 30, 2022, and December 30, 2022, the board of directors declared a Preferential Dividend of $198 on the Series C Preferred, which was paid on March 31, 2022, June 30, 2022, September 30, 2022 and December 30, 2022, respectively.
Based on the applicable accounting guidance, Harbor is required to apply the “if-converted” method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets in our audited consolidated financial statements included in this Annual Report.
Debt and Credit Facilities
Aircraft Credit Agreements
In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 CRJ-200 regional jets through the issuance of senior aircraft notes to a loan trustee on behalf of a senior lender (the “Lender”) and subordinated aircraft notes to the loan trustee on behalf of a subordinated lender. The senior aircraft notes and the subordinated aircraft notes were governed by seven credit agreements. Prior to December 2018, the Lender acquired all of the subordinated aircraft notes from the subordinated lender.
In December 2018, Air Wisconsin entered into a debt restructuring arrangement with the Lender, as holder of all of the senior aircraft notes and subordinated aircraft notes, and a loan trustee for the Lender (the “Loan Trustee”). The seven original credit agreements were amended and restated as part of that restructuring, and those seven amended and restated credit agreements (the “Aircraft Credit Agreements”) remain in effect. Prior to the restructuring, the aggregate outstanding principal amount of the senior aircraft notes and the subordinated aircraft notes was approximately $246.8 million. Pursuant to the restructuring, the outstanding principal and accrued interest on the subordinated aircraft notes were forgiven and deemed paid in full, and the senior aircraft notes outstanding under the original credit agreements were cancelled and exchanged for notes in an outstanding principal amount of $70.0 million. All principal on the senior aircraft notes in excess of $70.0 million and all interest accrued on the senior aircraft notes prior to December 24, 2018 were forgiven and deemed paid in full. The notes issued under the Aircraft Credit Agreements (the “Aircraft Notes”) bear interest at the rate of 4% per annum and mature on December 31, 2025. Interest on the Aircraft Notes is paid quarterly. The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million with certain additional amounts payable based on excess cash flow. Each Aircraft Note issued pursuant to an Aircraft Credit Agreement is secured by each aircraft acquired with the proceeds of any of the original seven credit agreements and by certain spare aircraft, spare engines and spare parts.
The Aircraft Credit Agreements contain covenants that, subject to exceptions described in the Aircraft Credit Agreements, (i) require Air Wisconsin to provide certain financial and other information, (ii) provide certain inspection rights to the Loan Trustee, (iii) restrict Air Wisconsin’s ability to consolidate with or merge into any other person or sell, convey, lease or otherwise transfer all or substantially all of its assets to any other person, (iv) restrict Air Wisconsin’s ability to make payments to its affiliates, and (v) grant to the Loan Trustee security interests in certain after-acquired aircraft, spare engines and spare parts. The Aircraft Credit Agreements also contain customary events of default, including, without limitation: (a) payment defaults, (b) breach of covenants, (c) breach of representations and warranties, (d) cross-defaults, (e) certain bankruptcy-related defaults, (f) the occurrence of certain judgments, and (g) loss of first priority security interest in certain collateral. As of December 31, 2022, Air Wisconsin was in compliance with the covenants under the Aircraft Credit Agreements, and no event of default existed under the Aircraft Credit Agreements. Neither Harbor nor any of its other subsidiaries has guaranteed or provided any other credit support with respect to the Aircraft Notes or other obligations of Air Wisconsin under the Aircraft Credit Agreements.
Paycheck Protection Program
In April 2020, Air Wisconsin received the $10.0 million SBA Loan under the PPP established under the CARES Act and administered by the SBA. The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, lease payments, and utility payments. The entire principal amount and accrued interest were forgiven in August 2021, which was recorded as gain on extinguishment of debt in the consolidated statements of operations.
Payroll Support Program
In April 2020, Air Wisconsin entered into the PSP-1 Agreement with the Treasury for payroll support under the CARES Act and received approximately $42.2 million, all of which was received in the year ended December 31, 2020. In March 2021, Air Wisconsin entered into the PSP-2 Agreement with the Treasury for payroll support under the PSP Extension Law and received approximately $33.0 million, all of which was received in the year ended December 31, 2021. In June 2021 the Treasury entered into the PSP-3 Agreement with Air Wisconsin for payroll support under the American Rescue Plan, and Air Wisconsin received approximately $33.3 million, all of which was received in the year ended December 31, 2021.
The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. If Air Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on the Company’s business. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the PSP-1 Agreement. No such audits have been initiated by the Treasury under the PSP-2 Agreement or PSP-3 Agreement as of the date of this filing. For additional information, refer to Note 8, Commitments and Contingencies, in our consolidated financial statements included in this Annual Report.
Maintenance Commitments
Air Wisconsin has entered into two non-exclusive heavy maintenance services agreements for certain maintenance, repair and modification services with respect to airframes owned or operated by Air Wisconsin, and one exclusive engine maintenance agreement to perform certain maintenance, repair, restoration, overhaul, modification and other services on aircraft engines owned or operated by Air Wisconsin. Two of the non-exclusive heavy maintenance services agreements are subject to certain escalation of labor rates, one had an initial term that has been extended through September 2026, and the other has an initial term through May 2024 but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions as during the initial term. The exclusive engine maintenance agreement is subject to an annual escalation and had an initial term through May 2021. Air Wisconsin exercised its right to extend the term through May 2023. No additional renewal options are available under the current agreement.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
We have no off-balance sheet arrangements that would have or are reasonably likely to have a material current or future effect on our financial condition, results of operations or liquidity.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require
management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss below. Our critical accounting policies relate to revenue recognition, long-lived assets, and income tax. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates.
We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1, Summary of Significant Accounting Policies, in our audited consolidated financial statements included in this Annual Report.
Revenue Recognition
Because our flights are distinct services that have the same pattern of transfer to the customer, satisfied over time with the measure of progress for each flight deemed to be substantially the same, the flight services promised in the United capacity purchase agreement represent a series of services that are accounted for as a single performance obligation. Therefore, our contract revenues are recognized when service is provided and our performance obligation is determined on a per completed flight basis. The performance obligation of each completed flight is measured using departures. In addition, as a result of an amendment to the United capacity purchase agreement in October 2020 (the “CPA Amendment”), management determined that, from an accounting perspective, a new performance obligation was created by United, requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United “stand ready” rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation is being recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment.
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 payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the COVID-19 pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so through June 1, 2023, the end of the contract period. Accordingly, during the year ended December 31, 2022, Air Wisconsin recognized $28.3 million of fixed revenues that were previously deferred, compared to a deferral of $1.6 million of fixed revenues in the year ended December 31, 2021. Air Wisconsin’s deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed over the remaining contract term. With respect to the stand ready performance obligation, for the years ended December 31, 2022 and December 31, 2021, Air Wisconsin recorded $18.0 million and $15.1 million in revenue, respectively.
Our revenues could be impacted by a number of factors, such as our flight schedules, terminations, labor shortages, weather, our estimates used to determine the amount of revenue we defer under the United capacity purchase agreement, and any incentive payments or performance penalties under the United capacity purchase agreement. Under that agreement, Air Wisconsin is eligible to receive incentive compensation or pay performance penalties upon the achievement of, or failure to achieve, certain performance criteria. The incentives and penalties are defined in the agreement and are measured and determined on a monthly basis. At the end of each month, Air Wisconsin calculates the incentives achieved, net of any penalties, during that period and recognizes revenue attributable to the agreement accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 606, Revenue from Contracts with Customers (Topic 606).
The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis.
Other revenue is immaterial and primarily consist of the sales of parts to other airlines. The transaction price for the sale of these parts occurs at fair market value.
Long-Lived Assets
As of December 31, 2022, we had approximately $102.3 million of property and equipment and related assets net of accumulated depreciation. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. When considering whether or not impairment of long-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Factors that may impact our estimates used for depreciation include anticipated useful lives and estimated residual values. Estimates may be impacted by future economic uncertainties. At December 31, 2022, 63 of Air Wisconsin’s aircraft were subject to the United capacity purchase agreement.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States and various states. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2019. With a few exceptions, the Company is no longer subject to state, and local income tax examinations for the years prior to 2018. As of December 31, 2022, the Company had no outstanding tax examinations.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2022, Harbor had no indebtedness, and Air Wisconsin had $61.2 million in secured indebtedness, including $9.2 million of short-term indebtedness and $52.1 million of long-term indebtedness. As of December 31, 2022 and December 31, 2021, all of Air Wisconsin’s indebtedness was subject to fixed interest rates. As a result, a hypothetical change in market interest rates would have no impact on the interest expense incurred by Air Wisconsin.
We have not generated or incurred, and do not expect to generate or incur, revenue or expenses in foreign currencies. As a result, we have not been, and do not expect to be, subject to foreign currency exchange risk.
Although airplane fuel is typically a material cost incurred by airlines, pursuant to both the United capacity purchase agreement and the American capacity purchase agreement, United and American source, procure and directly pay third-party vendors for substantially all fuel used in the performance of the respective agreement. As a result, the effect of the capacity purchase agreements is to insulate Air Wisconsin from volatility related to changes in fuel prices.
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. However, if Air Wisconsin’s costs become subject to significant inflationary pressures, including as a result of upward pressure on pilot and other labor wages and third-party vendor costs, it may not be able to fully offset or recover such increased costs under the United capacity purchase agreement and American capacity purchase agreement. Its inability or failure to do so could harm our business, financial condition and operating results.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s consolidated financial statements as of and for the years ended December 31, 2022 and December 31, 2021, and the Report of Independent Registered Public Accounting Firm, are included in this Annual Report as set forth in the index.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID. Number 248) Grant Thornton LLP
Financial Statements
Consolidated Balance Sheets
47-48
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
52-68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Harbor Diversified, Inc. and Subsidiaries
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Harbor Diversified, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2022, and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Collectability of disputed receivable balances from United Airlines
As described further in Notes 3 and 8 to the consolidated financial statements, Air Wisconsin LLC (“Air Wisconsin”) and United Airlines (“United”) entered into a capacity purchase agreement (“CPA”) beginning in 2017. Subject to certain limited exceptions, Air Wisconsin is entitled to receive, under the CPA, fixed daily revenue for each aircraft covered under the CPA, in exchange for providing regional flying service for United. In October 2020, Air Wisconsin entered into an amendment to the United CPA (“CPA, as amended”) that required Air Wisconsin to stand ready to deliver flight services, which is calculated based on the terms in the CPA Amendment. Currently, a dispute exists with respect to the number of covered aircraft for which United is required to pay the contractual rate and with respect to certain quarterly note obligations related to the stand ready performance obligation owed to Air Wisconsin. In October 2022, United initiated arbitration under the CPA, as amended, and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. As of December 31, 2022, the consolidated financial statements include disputed accounts receivable from United for approximately $28.1 million as well as disputed notes receivables, including interest on notes receivable, of approximately $19.8 million, in accordance with the terms of the CPA, as amended (herein referred to as “disputed United receivables”). We identified the collectability of these disputed United receivables associated with the CPA, as amended, as a critical audit matter.
The principal consideration for our determination that the collectability of the disputed United receivables is a critical audit matter is the high degree of complexity associated with evaluating management’s conclusion that the amounts in dispute with United are collectable. Given that the dispute is largely dependent upon the determination from arbitration described in the consolidated financial statements, management’s qualitative evaluation of the collectability of the disputed United receivables and the determination of the potential award of the disputed amounts owed to Air Wisconsin by United required a high degree of auditor judgment to assess the reasonableness of management’s conclusion.
Our audit procedures related to the disputed United receivables included the following, among others.
•
We recalculated the disputed United receivables as of December 31, 2022, based on the terms of the CPA, as amended.
•
We inquired of management, internal and external legal counsel to gain an understanding of the relevant facts and circumstances related to matters in dispute, United’s appeals with respect to amounts in dispute, Air Wisconsin’s position and counterclaims, and the status of the related arbitration.
•
We obtained and read the relevant transaction and legal documents, including the CPA agreement and related amendments, United’s arbitration notice, Air Wisconsin’s answer and counterclaims, and other letters between Air Wisconsin and United in connection with the ongoing dispute.
•
We evaluated responses to inquiry letters sent to internal and external legal counsel for additional information related to the dispute.
•
We evaluated the reasonableness of management’s conclusions regarding the collectability of the disputed United receivables.
•
We assessed the sufficiency of management’s disclosures related to the disputed United receivables and related arbitration, including United’s intent to meet its payment obligations is largely dependent upon the resolution of arbitration and that the disputed receivables may not be collectable.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Milwaukee, Wisconsin
March 31, 2023
Harbor Diversified, Inc. and Subsidiaries
Consolidated Balance Sheets (in thousands, except share values)
December
31,
Assets
Current Assets
Cash and cash equivalents
$
33,333
$ 37,170
Restricted cash
1,449
Marketable securities
153,827
138,370
Accounts receivable, less allowances of $18 as of December 31, 2022 and $40 as of December 31, 2021
40,341
7,422
Notes receivable
19,452
-
Spare parts and supplies, less allowances of $11,764 as of December 31, 2022 and $10,819 as of December 31, 2021
4,579
5,200
Contract costs
Prepaid expenses and other
3,732
4,174
Total Current Assets
256,256
194,303
Property and Equipment
Flight property and equipment
263,970
259,720
Ground property and equipment
8,055
8,252
Less accumulated depreciation and amortization
(169,766
)
(143,313 )
Net Property and Equipment
102,259
124,659
Other Assets
Operating lease right-of-use
asset
13,480
18,679
Intangibles
5,300
5,300
Long-term deferred tax assets
-
Long-term investments
4,275
4,275
Long-term contract costs
-
Long-term notes receivable
-
47,568
Other
1,077
3,988
Total Other Assets
24,132
80,439
Total Assets
$
382,647
$ 399,401
See accompanying notes to consolidated financial statements.
Harbor Diversified, Inc. and Subsidiaries
Consolidated Balance Sheets (in thousands, except share values)
December
31,
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
$
20,165
$ 20,060
Accrued payroll and employee benefits
12,989
14,885
Current portion of operating lease liability
5,091
5,150
Other accrued expenses
Contract liabilities
1,985
8,098
Deferred revenues
16,561
35,792
Current portion of long-term debt (stated principal amount of $7,000 as of December 31, 2022 and $3,500 as of December 31, 2021)
9,154
5,880
Total Current Liabilities
66,082
90,037
Other Liabilities
Long-term debt (stated principal amount of $48,600 as of December 31, 2022 and $56,000 as of December 31, 2021)
52,068
61,670
Long-term promissory note
4,275
4,275
Deferred tax liability
7,990
Long-term operating lease liability
5,849
10,877
Long-term contract liabilities
-
1,326
Deferred revenues, net of current portion
-
9,046
Other
1,977
2,722
Total Long-Term Liabilities
72,159
90,604
Commitments and Contingencies (Note 8)
Mezzanine Equity
Series C Convertible Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at December 31, 2022 and December 31, 2021
13,200
13,200
Stockholders’ Equity
Common Stock, $0.01 par value, 100,000,000 shares authorized, 55,481,140 shares issued at December 31, 2022 and December 31, 2021, 45,219,737 shares outstanding at December 31, 2022 and 53,316,299 shares outstanding at December 31, 2021
Additional paid-in
capital
285,668
287,429
Retained deficit
(40,034
)
(79,144 )
Treasury stock
(14,983
)
(3,280 )
Total Stockholders’ Equity
231,206
205,560
Total Liabilities and Stockholders’ Equity
$
382,647
$ 399,401
See accompanying notes to consolidated financial statements.
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Operations (in thousands, except share values)
Year ended December
31,
Operating Revenues
Contract revenues
$
280,737
$ 247,519
Contract services and other
Total Operating Revenues
280,863
247,579
Operating Expenses
Payroll and related costs
109,831
106,881
Aircraft fuel and oil
Aircraft maintenance, materials and repairs
67,096
56,145
Aircraft rent
-
Other rents
6,582
5,375
Depreciation, amortization and obsolescence
26,327
26,552
Purchased services and other
14,992
13,535
Payroll Support Program
-
(66,316 )
Total Operating Expenses
224,997
142,410
Income From Operations
55,866
105,169
Other (Expense) Income
Interest income
7,024
4,520
Interest expense
(3
)
(847 )
Loss on marketable securities
(8,826
)
(1,158 )
Gain on extinguishment of debt
10,363
Other, net
(11
)
-
Total Other (Expense) Income
(1,763
)
12,878
Net Income Before Taxes
54,103
118,047
Income Tax Expense
14,993
25,421
Net Income
$
39,110
$ 92,626
Preferred stock dividends
$
$
Net income available to common stockholders
$
38,318
$ 91,834
Basic earnings per share
$
0.83
$ 1.69
Diluted earnings per share
$
0.61
$ 1.29
Weighted average common shares:
Basic
46,359
54,321
Diluted
62,957
71,249
See accompanying notes to consolidated financial statements.
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (in thousands)
Mezzanine Equity -
Series C
Convertible
Redeemable
Preferred Stock
Common Stock
Shares
Amount
Shares
Repurchased
Stock
Amount
Additional
Paid-In
Capital
Retained
Deficit
Cost of
Repurchased
Stock
Total
Stockholders’
Equity
Balance, December 31, 2020
4,000
$ 13,200
54,863
$
$ 288,221
$ (171,770 )
$ (481 )
$ 116,525
Net income
-
-
-
-
-
-
92,626
-
92,626
Preferred stock dividends
-
-
-
-
-
(792 )
-
-
(792 )
Repurchased stock
-
-
(1,547 )
1,547
-
-
-
(2,799 )
(2,799 )
Balance, December 31, 2021
4,000
$ 13,200
53,316
2,165
$
$ 287,429
$ (79,144 )
$ (3,280 )
$ 205,560
Net income
-
-
-
-
-
-
39,110
-
39,110
Preferred stock dividends
-
-
-
-
-
(792 )
-
-
(792 )
Repurchase of stock options
(969 )
(969 )
Repurchased stock
-
-
(8,096 )
8,096
-
-
-
(11,703 )
(11,703 )
Balance, December 31, 2022
4,000
$ 13,200
45,220
10,261
$
$ 285,668
$ (40,034 )
$ (14,983 )
$ 231,206
See accompanying notes to consolidated financial statements
.
Harbor Diversified, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
Year ended December
31,
Cash Flows from Operating Activities
Net income
$
39,110
$ 92,626
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and obsolescence allowance
26,327
26,552
Amortization of contract costs
(4,385
)
(3,593 )
Amortization of engine overhauls
2,757
1,901
Deferred income taxes
7,954
(6,045 )
Loss (gain) on disposition of property and equipment
(298 )
Loss on marketable securities
8,826
1,158
Gain on extinguishment of debt
(53
)
(10,363 )
Changes in operating assets and liabilities:
Accounts receivable
(32,919
)
2,294
Notes receivable
28,116
(15,128 )
Spare parts and supplies
(324
)
(433 )
Prepaid expenses and other
3,353
(3,803 )
Operating lease right-of-use
asset
Accounts payable
8,287
Accrued payroll and employee benefits
(1,896
)
Other accrued expenses
(35
)
(173 )
Long-term deferred revenues
(9,046
)
(21,674 )
Contract liabilities
(3,054
)
(707 )
Deferred revenues
(19,231
)
23,293
Income taxes payable
-
(107 )
Other long-term liabilities
(864
)
Net Cash Provided by Operating Activities
45,034
94,213
Cash Flows from Investing Activities
Additions to property and equipment
(5,513
)
(3,637 )
Proceeds on disposition of property and equipment
Purchase of marketable securities
(24,283
)
(267,157 )
Sale of marketable securities
-
127,629
Net Cash Used in Investing Activities
(29,732
)
(143,135 )
Cash Flows from Financing Activities
Repayments of long-term debt
(6,275
)
(40,061 )
Dividends paid on preferred stock
(792
)
(792 )
Repurchase of stock options
(969
)
-
Repurchase of common stock
(11,703
)
(2,799 )
Net Cash Used in Financing Activities
(19,739
)
(43,652 )
Decrease in Cash, Cash Equivalents and Restricted Cash
(4,437
)
(92,574 )
Cash, Cash Equivalents and Restricted Cash, beginning of year
38,619
131,193
Cash, Cash Equivalents and Restricted Cash, end of year
$
34,182
$ 38,619
See accompanying notes to consolidated financial statements.
See Note 14 for supplemental cash flow information.
Harbor Diversified, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in thousands)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Harbor Diversified, Inc. (Harbor) and its subsidiaries (collectively, the Company).
Harbor is a non-operating holding company
that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), which is the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which is a non-operating entity with
no material assets.
Description of Operations
The Company has principal lines of business focused on (1) providing regional air services through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin, and (3) providing flight equipment financing to Air Wisconsin. Additionally, Air Wisconsin is continuing to explore aircraft leasing opportunities and entered into its first short-term aircraft lease in September 2022.
The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier. For the year ended December 31, 2022, Air Wisconsin was engaged in the business of providing scheduled passenger service solely for United Airlines, Inc. (United) under a capacity purchase agreement (United capacity purchase agreement) that was entered into in February 2017 and amended in October 2020, April 2021, April 2022, June 2022, September 2022 and February 2023. Air Wisconsin will cease flying for United in early June 2023.
In August 2022 Air Wisconsin entered into a separate capacity purchase agreement (American capacity purchase agreement) with American Airlines, Inc. (American), which was subsequently amended in February 2023 and March 2023, pursuant to which Air Wisconsin has agreed to provide up to 60 CRJ-200
regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations.
For additional information, refer to Note 3, Capacity Purchase Agreements with United and American
.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (ASC) 280, “Segment Reporting
,” we are not organized around specific services or geographic regions. For the year ended December 31, 2022, we operated in one service line providing scheduled flying services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the board of directors. The chief operating decision maker 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 operate as one operating and reportable segment.
As further discussed below, substantially all of our operating revenues in the years ended December 31, 2022 and December 31, 2021 were derived from operations associated with United.
Contract Revenues
More than 99.9% of the Company’s operating revenues for the years ended December 31, 2022 and December 31, 2021 were derived from operations associated with the United capacity purchase agreement. In performing an analysis of the United capacity purchase agreement within the framework of ASC 842 and ASC 606, the Company determined a portion of its compensation designed to reimburse Air Wisconsin for use of a certain number of aircraft, or “right of use,” is considered lease revenue. All other revenue received by Air Wisconsin is considered non-lease revenue. After consideration of the lease and non-lease components based on stand-alone selling prices, the Company determined the non-lease component to be the predominant component of the United capacity purchase agreement and, as such, elected a practical expedient to not separate the lease and non-lease components. Therefore, all compensation received by Air Wisconsin pursuant to the United capacity purchase agreement is accounted for under ASC 606.
The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. Under the agreement, Air Wisconsin is entitled to receive a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day. Under the agreement, Air Wisconsin’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The agreement also provides for the reimbursement to Air Wisconsin of certain direct operating expenses such as hull and liability insurance, property taxes and Canadian navigational fees.
United makes provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments are subsequently reconciled with United based on actual completed flight activity. As of the date of this filing, these payments are reconciled through October 2022. Subject to final reconciliation of the provisional cash payments for the periods after October 31, 2022, as of December 31, 2022, United owed Air Wisconsin approximately $
29,435, which is recorded in accounts receivable, net, on the consolidated balance sheets. United is disputing that it owes $28,071 of this amount. For additional information regarding the dispute with United, refer to Note 8, Commitments and Contingencies
.
Under the United capacity purchase agreement, Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time
performance, and customer satisfaction ratings. The incentives are defined in the agreement, and performance is measured on a monthly basis. At the end of each month during the term of the agreement, Air Wisconsin calculates the incentives achieved, or penalties payable, during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 606, Revenue from Contracts with Customers (Topic 606). Although the final reconciliations have not been completed for periods after October 2022, after considering operational performance related to expected incentive and penalty payments, Air Wisconsin has received, or is likely to receive, net payments of $6,420 for the year ended December 31, 2022 as compared to $3,028 for the year ended December 31, 2021. As of December 31, 2022, Air Wisconsin recorded $2,307 as part of accounts receivable, net, on the consolidated balance sheets related to net incentive amounts. As of December 31, 2021, Air Wisconsin recorded a liability of $
117 as part of contract liabilities on the consolidated balance sheets related to net penalties owed to United.
Under the United capacity purchase agreement, Air Wisconsin is entitled to receive a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the COVID-19
pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so through the wind-down period under the United capacity purchase agreement (wind-down period). Accordingly, during the year ended December 31, 2022, Air Wisconsin recognized $28,277 of fixed revenues that were previously deferred, compared to a deferral of $1,618 of fixed revenues in the year ended December 31, 2021. Air Wisconsin’s deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term, including the wind-down period, based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed through the end of the wind-down period. As of December 31, 2022 and December 31, 2021, deferred fixed revenues in the amount of $16,561 and $44,838, respectively, were recorded as part of deferred revenues on the consolidated balance sheets. For additional information regarding the wind-down schedule with United, refer to Note 2, Liquidity
.
Consistent with the discussion above, for the year ended December 31, 2022, as compared to the year ended December 31, 2021, Air Wisconsin also recognized increased non-refundable
upfront fee revenues and increased fulfillment costs, both of which are amortized over the remaining term of the United capacity purchase agreement in proportion to the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods. During the year ended December 31, 2022, Air Wisconsin recorded $4,385 of revenue from upfront fees and $470 of fulfillment costs, compared to $3,593 in revenue from upfront fees and $385 of fulfillment costs for the year ended December 31, 2021. As of December 31, 2022, deferred upfront fee revenue in the amount of $1,335 is recorded as part of contract liabilities on the consolidated balance sheets.
As part of the October 2020 amendment to the United capacity purchase agreement (CPA Amendment), United made a cash settlement payment of $670 and issued a note receivable to Air Wisconsin in the amount of $11,048, of which $4,410 was deferred as of December 31, 2020, with the remaining portion to be recognized in proportion to the number of flights expected to be completed in subsequent periods through the end of the wind-down period. In October 2021, in accordance with the CPA Amendment, Air Wisconsin received $294 from United for the opening of a crew base, of which $73 was deferred as of December 31, 2021. For the year ended December 31, 2022, Air Wisconsin recorded $2,132 of revenue related to these items, compared to $1,923 of revenue related to these items for the year ended December 31, 2021. As of December 31, 2022, deferred CPA Amendment revenue in the amount of $650 is recorded as part of contract liabilities on the consolidated balance sheets.
The timing of the recognition of deferred fixed revenue, non-refundable
upfront fee revenue, fulfillment costs, and deferred CPA Amendment revenue in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown through the end of the wind-down period.
The amount of revenues recognized for the year ended December 31, 2022 that were previously recorded as contract liabilities were $6,517.
The CPA Amendment provided, among other things, for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours resulting from the COVID-19
pandemic in 2020, and consistent with the terms of the CPA Amendment, management determined that, from an accounting perspective, a new performance obligation was created by United, requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United “stand ready” rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation is being recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment. For the year ended December 31, 2022, Air Wisconsin recorded $18,023 in revenue related to this performance obligation compared to $15,128 for the year ended December 31, 2021. Under the CPA Amendment, United is required to accrue this amount and, upon request by Air Wisconsin, deliver a note evidencing this amount each quarter. Therefore, this amount is recorded in notes receivable on the consolidated balance sheets. The notes receivable contain a significant financing component and any interest income is separately reported in the consolidated statements of operations. United has disputed that it owes these amounts in respect of certain quarters and has refused to deliver notes for those quarters. On November 4, 2022, United prepaid to Air Wisconsin $50,126 to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, pursuant to the CPA Amendment in respect of the period of the second quarter 2020 through the third quarter 2021 and the $11,048 note receivable described above. As of December 31, 2022, the principal amount of the unpaid disputed notes totaled $19,452, bore interest at the rate of 4.5%, and had a maturity date of February 28, 2023. As of December 31, 2022, interest receivable on the disputed notes totaled $335 and is recorded in accounts receivable, net on the consolidated balance sheets. For additional information regarding the dispute with United, refer to Note 8, Commitments and Contingencies
.
Other Revenues
Other revenues primarily consist of the sales of parts to other airlines and aircraft lease payments. These other revenues are immaterial in all periods presented. The transaction price for these other revenues generally is fair market value.
Cash and Cash Equivalents
Money market funds and investments and deposits with an original maturity of three months or less when acquired are considered cash and cash equivalents.
Restricted Cash
As of December 31, 2022 and December 31, 2021, the Company had a restricted cash balance of $849 and $1,449, respectively. A portion of the balance secures a credit facility for the issuance of letters of credit guaranteeing the performance of Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies. The remaining portion is cash held for the repurchase of shares under Harbor’s stock repurchase program. For additional information, refer to Note 8, Commitments and Contingencies
and Note 16, Stock Repurchase Program.
Marketable Securities
The Company’s equity security investments, consisting of exchange-traded funds and mutual funds, are recorded at fair value based on quoted market prices (Level 1) in marketable securities on the consolidated balance sheets, in accordance with the guidance in ASC Topic 321, Investments-Equity Securities
, with the change in fair value during the period included in the consolidated statements of operations. As of December 31, 2022 and December 31, 2021, the fair value of the Company’s marketable securities was $153,827 and $138,370, respectively.
The calculation of net unrealized gains and losses that relate to marketable securities held as of December 31, 2022 and December 31, 2021 is as follows:
Year Ended
December 31,
Year Ended
December 31,
Net losses recognized during the period on equity securities
$
(8,826
)
$ (1,158 )
Less: Net gains recognized during the period on equity securities sold during the period
-
Unrealized losses recognized during the period on equity securities held as of the end of the period
$
(8,826
)
$ (1,160 )
Spare Parts and Supplies
Expendable parts are stated at average cost less an obsolescence allowance. The Company provides for an allowance for obsolescence after considering the useful life of the aircraft fleet, the estimated cost of expendable parts expected to be on hand at the end of the useful life and the estimated salvage value of the parts. This allowance is based on management estimates and is subject to change. Expendable parts are charged to expense when used. Expendable parts that are repairable are returned to inventory at the average cost of comparable parts, less a reserve for scrap. Supplies are stated at average cost.
Property and Equipment
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
Assets
Depreciable Life
Current Residual Value
Aircraft
7 years
$
Rotable parts
7 years
10%
Spare engines
7 years
$
Ground equipment
up to 10 years
0%
Office equipment
up to 10 years
0%
Leasehold improvements
Shorter of asset or lease life
0%
The table below sets forth the original cost of the Company’s fixed assets and accumulated depreciation as of the dates presented. The table excludes construction in process of $2,237
and $3,573
for the years ended December 31, 2022 and December 31, 2021, respectively.
For the years ended:
December 31, 2022
December 31, 2021
Assets
Original
Cost
Accumulated
Depreciation/
Amortization
Original
Cost
Accumulated
Depreciation/
Amortization
Aircraft
70,089
40,544
70,178
31,319
Engines
163,708
103,834
157,510
86,339
Rotable parts
27,936
18,655
28,459
18,834
Ground equipment
2,718
2,063
2,555
1,868
Office equipment
4,519
4,218
4,509
4,130
Leasehold improvements
1,188
269,788
169,766
264,399
143,313
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop visit. Lotus’ engine maintenance costs are expensed.
Depreciation expense in the years ended December 31, 2022 and December 31, 2021 was $24,911 and $24,997, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations.
Impairment of Long-Lived Assets and Indefinite-Lived Intangible Assets
The Company evaluates long-lived assets and indefinite-lived intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and indefinite-lived intangible assets and determined that no quantitative impairment tests were required to be performed as of December 31, 2022 and December 31, 2021.
Maintenance
The Company operates its aircraft under a continuous inspection and maintenance program. Generally, the normal cost of recurring maintenance is expensed when incurred. However, we use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not
sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2019. With a few exceptions, the Company is no longer subject to state or local income tax examinations for years prior to 2018. As of December 31, 2022, the Company had no outstanding tax examinations.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company accrued $62 and $57 for the payment of interest and penalties at December 31, 2022 and December 31, 2021, respectively.
Comprehensive Income
The Company does not have any components of comprehensive income and, as of December 31, 2022 and December 31, 2021, comprehensive income is equal to net income reported in the consolidated statements of operations.
Concentration of Credit Risk and Customer Risk
Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are held by financial institutions in the United States and accounts receivable. The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, the Company believes that minimal credit risk exists with respect to these financial institutions. As of December 31, 2022, in addition to cash and cash equivalents of $33.3 million, the Company had $0.8 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.
Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at each respective balance sheet date. Substantially all of the Company’s consolidated revenue for the years ended December 31, 2022, and December 31, 2021, and accounts receivable and notes receivable at the end of both years were derived from the United capacity purchase agreement.
Air Wisconsin entered into the American capacity purchase agreement in August 2022 and commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations; and at that point, substantially all of the Company’s revenues will be derived from the American capacity purchase agreement.
Neither United’s nor American’s obligations to pay Air Wisconsin the amounts required to be paid under the applicable capacity purchase agreement are collateralized.
For additional information, refer to Note 3, Capacity Purchase Agreements with United and American
.
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, marketable securities, accounts receivable, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments, with the exception of marketable securities, are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of interest rates available to the Company for similar obligations. Marketable securities are reported at fair value based on quoted market prices. Long-term investments are held-to-maturity
debt securities and are reported at amortized cost.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). Fair Value Measurement
(Topic 820) establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations each reporting period, and it is possible that an asset or liability may be classified differently from year to year.
The tables below set forth the Company’s classification of marketable securities and long-term investments as of the dates presented:
December 31, 2022
Total
Level 1
Level 2
Level 3
Marketable securities - exchange-traded funds
$ 109,178
$ 109,178
$ -
$ -
Marketable securities - mutual funds
44,649
44,649
-
-
Long-term investments - bonds (see Note 6)
4,275
-
4,275
-
Total
$ 158,102
$ 153,827
$ 4,275
$ -
December 31, 2021
Total
Level 1
Level 2
Level 3
Marketable securities - exchange-traded funds
$ 113,936
$ 113,936
$ -
$ -
Marketable securities - mutual funds
24,434
24,434
-
-
Long-term investments - bonds (see Note 6)
4,275
-
4,275
-
Total
$ 142,645
$ 138,370
$ 4,275
$ -
Reclassifications
Certain operating expenses previously recorded in purchased services and other in the consolidated statements of operations in the amount of $12,403 for the year ended December 31, 2021, have been reclassified to aircraft maintenance, materials and repairs to conform to the presentation for the year ended December 31, 2022, with no effect on net income. The reclassification relates to certain third party maintenance activities.
Certain non-operating
income previously recorded in other, net in the consolidated statements of operations in the amount of $2,496 for the year ended December 31, 2021, has been reclassified to interest income to conform to the presentation for the year ended December 31, 2022, with no effect on net income. The reclassification relates to income on marketable securities.
Certain current liabilities previously recorded in contract liabilities in the consolidated balance sheets as of December 31, 2021 have been reclassified to deferred revenue in the amount of $35,792 to conform to the presentation as of December 31, 2022. As a result of this change, the consolidated statements of cash flows also required a reclassification from contract liabilities in the amount of $35,792 to deferred revenues in the Cash Flows from Operating Activities
section of the consolidated statements of cash flows.
Upcoming Accounting Pronouncement
In June 2016, FASB issued ASU 2016-13,
Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments
(ASU 2016-13).
ASU 2016-13
introduces a new accounting model known as Current Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss 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 believes the adoption of this standard will not have a material impact on its consolidated financial statements.
2. Liquidity
The Company’s ability to meet its liquidity needs is dependent upon its cash, cash equivalents and marketable securities balances and its ability to generate cash flows from operations in the future in amounts sufficient to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company currently believes its available working capital and anticipated cash flows from operations will be sufficient to meet the Company’s liquidity requirements for at least the next 12 months from the date of this filing. However, there can be no assurance that the Company will be able to generate sufficient cash flows from operations, or that additional funds will be available, to meet its future liquidity needs, particularly if United fails to pay disputed amounts owed to Air Wisconsin pursuant to the United capacity purchase agreement or if the transition of Air Wisconsin’s aircraft to the American capacity purchase agreement is delayed or more difficult than currently anticipated.
Reduced Block Hours
Since the beginning of the COVID-19
pandemic, Air Wisconsin has experienced significantly reduced block hours relative to historical levels, both as a result of the pandemic and the prevailing industry-wide pilot shortage. Although the disruption in passenger demand due to the pandemic has largely subsided, the pilot shortage is expected to continue for the foreseeable future and is currently the leading factor preventing Air Wisconsin from consistently achieving block hours in line with pre-pandemic
levels.
In addition, Air Wisconsin expects that its block hours will be temporarily reduced as a result of the transition from flying for United to flying for American. Before any Air Wisconsin aircraft can be available to operate flights for American, that aircraft must first be removed from service under the United capacity purchase agreement, painted to meet the livery requirements of the American capacity purchase agreement and otherwise modified to meet such requirements. During the period from the withdrawal of an aircraft from service under the United capacity purchase agreement until it is placed into service under the American capacity purchase agreement, that aircraft will not generate revenues from either United or American. The period of time that an aircraft will not be covered by either capacity purchase agreement depends on Air Wisconsin’s ability to induct aircraft into service for American, which is not entirely within Air Wisconsin’s control and is subject to many factors, including the time it will take to cause the aircraft to meet the requirements of the American capacity purchase agreement, the painting of the aircraft (which generally has a span time of at least two weeks) and the availability of pilots. There can be no assurance that this transition will proceed smoothly, and unexpected delays in or costs associated with the transition could have a material adverse effect on the Company’s business, financial condition and results of operations.
For additional information, refer to Part I, Item 1, “Business
-American Capacity Purchase Agreement
” within this Annual Report.
United Capacity Purchase Agreement
The fixed amount Air Wisconsin is entitled to receive under the United capacity purchase agreement is based on a fixed contractual rate and number of covered aircraft, although there is currently a dispute with United as to the number of covered aircraft for which United is required to pay the fixed contractual rate. In October 2022, United initiated arbitration with respect to this dispute. The arbitration process is on-going.
Variable revenue may be earned based on the number of block hours and departures. Since the onset of the COVID-19
pandemic and with the continuing pilot shortage, variable revenues have been significantly reduced due to the lower number of flights relative to historical levels. However, the impact of the COVID-19
pandemic and pilot shortage on the Company’s financial position has been partially mitigated or offset by the fixed revenue under the United capacity purchase agreement and by funds received under the Paycheck Protection Program and the Payroll Support Program described below. If United does not pay the full amount Air Wisconsin believes it is required to pay under the agreement, as a result of the current dispute with Air Wisconsin, or otherwise, the Company could experience a significant adverse effect on its results of operations, financial condition and liquidity. For additional information regarding the United capacity purchase agreement dispute, refer to Note 8, Commitments and Contingencies
.
A portion of the fixed amount of revenue had been deferred based on future expected flight activity, since fixed revenue is allocated over current and expected future departures through the end of the contract term, including the wind-down period. Beginning with the third quarter of 2021, Air Wisconsin began to reverse prior deferred revenue based on increased completed flights and projected future completed flight activity, and anticipates continuing to do so through the end of the wind-down period. For additional information, refer to Note 1,
Summary of Significant Accounting Policies
.
Governmental Assistance
Air Wisconsin’s receipt of governmental assistance mitigated to some extent the adverse impacts of the COVID-19
pandemic on the Company’s financial condition, results of operations and liquidity.
In April 2020, Air Wisconsin received a $10,000 loan (SBA Loan) under the small business Paycheck Protection Program established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and administered by the Small Business Administration (SBA). Under the CARES Act, Air Wisconsin applied for forgiveness of the SBA Loan, and the SBA granted forgiveness of all principal and accrued interest on the SBA Loan in August 2021 in the amount of $10,135, which was recorded as gain on extinguishment of debt in the audited consolidated statements of operations for the year ended December 31, 2021 included within the 2021 Annual Report.
In April 2020, Air Wisconsin entered into a Payroll Support Program Agreement (PSP-1 Agreement)
with respect to payroll support (Treasury Payroll Support) from the U.S. Department of the Treasury (Treasury) under a program (Payroll Support Program) provided by the CARES Act. Pursuant to the PSP-1 Agreement,
Air Wisconsin received approximately $42,185, all of which was received in the year ended December 31, 2020.
In December 2020, the federal Consolidated Appropriations Act of 2021 (PSP Extension Law) was adopted, which provided for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement with the Treasury (the PSP-2 Agreement),
which is substantially similar to the PSP-1 Agreement.
Air Wisconsin received approximately $32,987 pursuant to the PSP-2 Agreement,
all of which was received in the year ended December 31, 2021.
In March 2021, the federal American Rescue Plan Act of 2021 (American Rescue Plan) was adopted, which provided further payroll support to eligible air carriers. In June 2021, pursuant to the American Rescue Plan, Air Wisconsin entered into a Payroll Support Program 3 Agreement with the Treasury (the PSP-3 Agreement
and, together with the PSP-1 Agreement
and the PSP-2 Agreement,
the PSP Agreements), which is substantially similar to the PSP-1 Agreement
and the PSP-2 Agreement.
Air Wisconsin received approximately $33,329 pursuant to the PSP-3 Agreement,
all of which was received in the year ended December 31, 2021.
The PSP Agreements contain various covenants, some of which have expired. The surviving covenants require that (i) the payroll support proceeds must have been used exclusively for the payment of wages, salaries and benefits, and (ii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps. If Air Wisconsin failed to comply with any of its expired obligations or failed or fails to comply with any of its continuing obligations under these agreements, it may be required to repay some or all of the funds provided to it under the PSP Agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on the Company’s business. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the PSP-1 Agreement.
No such audits have been initiated by the Treasury under the PSP-2 Agreement or PSP-3 Agreement
as of the date of this filing. For additional information, refer to Note 8,
Commitments and Contingencies.
The proceeds of the Treasury Payroll Support under the PSP Agreements were recorded in cash and cash equivalents when received and were recognized as a contra-expense under Payroll Support Program in the consolidated statements of operations for the periods
for which the funds were intended to offset payroll expenses. As all amounts were recognized at December 31, 2021, Air Wisconsin did not recognize a reduction in operating expense in the year ended December 31, 2022, as compared to $66,316 for the year ended December 31, 2021.
3. Capacity Purchase Agreements with United and American
In February 2017, Air Wisconsin entered into the United capacity purchase agreement. A dispute exists under the agreement with respect to certain recurring amounts owed to Air Wisconsin by United. In October 2022, United initiated arbitration under the United capacity purchase agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. Air Wisconsin expects that, unless the parties reach a settlement before then, the arbitration hearing will occur in July 2023 and that the arbitrators will make their award in August 2023. In December 2022 and February 2023, Air Wisconsin sent United notices of termination of the agreement. In the arbitration, United has contested Air Wisconsin’s right to terminate the agreement. In accordance with the termination provisions of the agreement, and in response to Air Wisconsin’s first termination notice, United delivered in January 2023 a revised wind-down schedule. Following the delivery of that revised schedule, in February 2023, the parties agreed, in a sixth amendment to the United capacity purchase agreement, to a replacement wind-down schedule that provides for the withdrawal of aircraft from the agreement beginning in January 2023 and continuing until early June 2023, at which time all of Air Wisconsin’s remaining aircraft will be withdrawn from the agreement, and Air Wisconsin will cease flying for United. For its revenue calculations, Air Wisconsin has assumed that it will cease flying for United in June 2023. For additional information, refer to Note 8, Commitments and Contingencies.
In August 2022, Air Wisconsin entered into the American capacity purchase agreement, pursuant to which Air Wisconsin has agreed to provide up to 60 CRJ-200
regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations, which is scheduled to occur in early June 2023. In February 2023, American and Air Wisconsin entered into a first amendment to the American capacity purchase agreement which revised compensation rates for 2023 through 2027 and obligated American to a fixed payment to assist Air Wisconsin with current pilot compensation.
4. Property and Equipment
As of December 31, 2022, Air Wisconsin owned 64 CRJ-200
regional jets.
5. Income Taxes
The income tax provision consists of the following:
Year ended December
31,
Current Expense
Federal
$
6,498
$ 27,084
State
4,382
Total Current Expense
7,039
31,466
Deferred Expense (Benefit)
Federal
6,910
(5,405 )
State
1,044
(640 )
Total Deferred Expense (Benefit)
7,954
(6,045 )
Income Tax Expense
$
14,993
$ 25,421
The following is a reconciliation between a federal income tax rate of 21% and the effective tax rate which is derived by dividing the provision for income taxes by the income before the provision for income taxes:
Year ended December 31,
Computed provision for income taxes at the statutory rate
$
11,362
$ 24,790
Increase (decrease) in income taxes resulting from:
State income tax provision, net of federal income tax benefit
1,189
2,757
Non-deductible
expenses
Tax exempt income
-
(2,100 )
Valuation allowance changes affecting the provision for income taxes
2,375
-
Return to provision adjustments
-
Other, net
(2
)
(78 )
Provision for income taxes
$
14,993
$ 25,421
As of December 31, 2022 and December 31, 2021, the Company’s deferred tax assets were primarily the result of deferred revenues which have previously been included in taxable income and accruals and reserves that have not yet been deducted in determining taxable income. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2022 and December 31, 2021, the Company achieved three years of cumulative pretax ordinary income. In addition, the projection of taxable income in future periods led management to believe that there is sufficient positive evidence to conclude that it is more likely than not that deferred tax assets that are ordinary in nature are realizable. Therefore, no valuation allowance is necessary as of December 31, 2022 with respect to deferred tax assets that are ordinary in nature.
For the year ended December 31, 2022, the Company recorded a valuation allowance of $2,375 against deferred tax assets that are capital in nature and consist of an unrealized loss on investments. As of December 31, 2022, the Company sustained three years of cumulative pretax capital losses. In addition, management considered other positive and negative evidence when assessing whether a valuation allowance was necessary against deferred tax assets that were capital in nature. The negative evidence outweighed positive evidence, leading management to conclude that a valuation allowance was necessary as of December 31, 2022.
Deferred tax assets and liabilities reflect temporary differences between financial and tax reporting. Significant components of deferred tax assets and liabilities are as follows:
December
31,
Deferred Tax Assets
Accruals and reserves not currently deductible
$
5,294
$ 5,647
State NOL carryovers
Accrued and deferred compensation
1,987
2,562
Prepaid items
Lease liability
1,033
Contract liability
1,215
Deferred revenues
4,094
11,328
Unrealized loss on investments
2,375
Other
1,240
1,266
Subtotal before valuation allowance
16,148
24,239
Less: valuation allowance
(2,375
)
-
Total Deferred Tax Assets
13,773
24,239
Deferred Tax Liabilities
Property and equipment
(20,475
)
(22,607 )
Right-of-use
asset
(1,282
)
(1,663 )
Other
(6
)
(124 )
Total Deferred Tax Liabilities
(21,763
)
(24,394 )
Net Deferred Income Tax Liabilities
$
(7,990
)
$ (155 )
At December 31, 2022 and December 31, 2021, the Company had no federal net operating losses, and state net operating losses of approximately $1,280 and $731, respectively. As of December 31, 2022, the estimated effective tax rate applicable to the federal and state net operating losses is 21.0% and 5.5%, respectively. Federal net operating losses are not subject to an expiration date but are subject to an 80% of taxable income limitation after 2020, while the Company expects the state net operating losses to begin to expire in 2040. State net operating losses differ with respect to expiration dates and limitations dependent on state specific regulations. The Company has no ongoing federal or state examinations. Federal tax years 2019, 2020, and 2021 are open to examination.
Under ASC Topic 740, the accounting guidance related to uncertain tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2022 and December 31, 2021 is as follows:
December
31,
Unrecognized tax benefits at the beginning of the year
$
$
Gross increases - current year tax provisions
-
Gross decreases - lapse of statute
-
(59 )
Unrecognized tax benefits at the end of the year
$
$
Interest and penalties in year-end
balance
$
$
6. Debt
Long-Term Debt
Long-term debt consists of the following (with interest rates, as of the dates presented):
December
31,
Notes, due December 31, 2025, 4.0%(a)
$
61,222
$
67,550
Less: current maturities
9,154
5,880
Long-term debt
$
52,068
$
61,670
(a) In December 2018, Air Wisconsin entered into a debt restructuring agreement with a lender (Lender), which held certain senior aircraft notes and subordinated aircraft notes. The senior aircraft notes were exchanged for notes in an aggregate principal amount of $70,000 (Aircraft Notes) and the maturity date was extended to December 31, 2025. The aggregate principal amount of the senior aircraft notes in excess of $70,000, the entire outstanding principal balance of the subordinated aircraft notes and all accrued interest were cancelled. Air Wisconsin concluded the restructuring should be classified as a troubled debt restructuring. As such, the future undiscounted interest payments were capitalized as part of the carrying value. As of December 31, 2022 and December 31, 2021, the future undiscounted interest payments that were capitalized as part of the debt were $5,622 and $8,050, respectively. There is mandatory amortization of the Aircraft Notes in the aggregate amount of $3,500 semi-annually, and certain additional mandatory prepayments based on excess cash flow are required. The Aircraft Notes are secured by Air Wisconsin’s owned aircraft and certain spare engines and spare parts. The carrying amount of the collateral exceeds the value of the debt.
In September 2022, Air Wisconsin prepaid approximately $400 of debt outstanding under the Aircraft Notes due December 31, 2025. The prepayment under the Aircraft Notes resulted in a $53 gain on extinguishment of debt due to the decrease in previously expected future undiscounted cash flows used in determining the carrying value of the debt.
Maturities of long-term debt for the years subsequent to December 31, 2022, are as follows:
Fiscal Year
Amount
$ 9,154
8,874
43,194
Total
$ 61,222
The debt agreements include, among other provisions, certain covenants. At December 31, 2022 and December 31, 2021, Air Wisconsin was in compliance with the covenants of all of its debt agreements.
As of December 31, 2022, all of the Company’s long-term debt was subject to fixed interest rates.
Long-Term Promissory Note
In July 2003, Air Wisconsin financed a hangar through the issuance of $4,275 City of Milwaukee, Wisconsin variable rate Industrial Development Bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest and payable semiannually on each May 1 and November 1. In May 2006, Air
Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the consolidated balance sheets. The hangar is accounted for as a right-of-use
asset with a value of $2,547 and $2,778 as of December 31, 2022 and December 31, 2021, respectively.
7. Lease Obligations
The Company reviewed all contracts and service agreements in effect in 2022 for criteria meeting the definition of a lease within the framework of ASC 842 and ASC 606. Those that were determined to be a lease may contain both a lease and a non-lease component. In those instances, the Company elected to account for such components as a single lease component. The Company’s operating lease activities are recorded in operating lease right-of-use assets, current portion of operating lease liability, and long-term operating lease liability in the consolidated balance sheets. Air Wisconsin has operating leases with terms greater than twelve months for training simulators and facility space including office space and maintenance facilities. The remaining lease terms for training simulators and facility space vary from six months to
11 years. For leases of 12 months or less, the Company elected a short-term lease practical expedient for all leases, regardless of the underlying class of asset, that allows the lessee to not recognize a lease right-of-use asset or lease liability. As a result, the Company recognized lease payments for short-term leases as an expense on a straight-line basis over the lease term. For leases with durations longer than 12 months, the Company recorded the related operating lease right-of-use
asset and operating lease liability at the present value of the lease payments over the lease term. The Company used Air Wisconsin’s incremental borrowing rate to discount the lease payments based on information available at lease inception. Air Wisconsin’s operating leases with lease rates that are variable based on operating costs, use of the facilities, or other variable factors were excluded from the Company’s right-of-use
assets and operating lease liabilities in accordance with the applicable accounting guidance. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
Certain leases contain an option to extend or terminate the lease agreement. The Company evaluates each option prior to its expiration and may or may not exercise such option depending on conditions present at the time. At the inception of the lease, if it is reasonably certain that the Company will exercise an option to extend or terminate a lease, the Company considers the option in determining the classification and measurement of the lease. The Company expects that in the normal course of business operating leases that expire will be renewed or replaced by other leases.
As of December 31, 2022, the Company’s right-of-use
assets were $13,480, the Company’s current maturities of operating lease liabilities were $5,091, and the Company’s noncurrent lease liabilities were $5,849. During the years ended December 31, 2022 and December 31, 2021, the Company paid $5,881 and $4,714, respectively, in operating lease payments reflected as a reduction from operating cash flows.
The table below presents operating lease related terms and discount rates as of December 31, 2022:
Weighted-average remaining lease term
2.93 years
Weighted-average discount rate
5.73 %
Components of lease costs were as follows for the years ended December 31,
Operating lease costs
$
5,862
$
4,809
Short-term lease costs
Variable lease costs
Total Lease Costs
$
6,582
$
5,442
As of December 31, 2022 and December 31, 2021, Air Wisconsin leased or subleased certain training simulators and facilities for terms of greater than 12 months. Certain leases are subject to non-cancellable
lease terms or may include variable rate increases tied to the consumer price index. One of our leases also provides that Air Wisconsin reimburse the Lessor for Air Wisconsin’s pro-rata
share of taxes and other operating expenses applicable to the leased property. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases. Rent expense recorded under all operating leases, inclusive of engine leases, was $6,582 and $5,442 in the years ended December 31, 2022 and December 31, 2021, respectively.
The following table summarizes the future minimum rental payments required under operating leases that had initial or remaining non-cancelable
lease terms greater than twelve months as of December 31, 2022:
Fiscal Year
Amount
$ 5,580
3,222
2,487
Thereafter
Total lease payments
11,892
Less imputed interest
(952 )
Total Lease Liabilities
$ 10,940
8. Commitments and Contingencies
Legal Matters
The Company is subject to certain legal proceedings, which it considers routine to its business activities. As of December 31, 2022, the Company believes, after consultation with legal counsel, that the ultimate outcome of such legal proceedings, whether individually or in the aggregate, is not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.
United Capacity Purchase Agreement Dispute
A dispute exists under the United capacity purchase agreement with respect to certain recurring amounts owed to Air Wisconsin by United. As of December 31, 2022, the aggregate amount in dispute was approximately $47,858. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the disputed amounts as claimed by Air Wisconsin. As Air Wisconsin and United are in the early stages of arbitration, Air Wisconsin cannot, with any degree of certainty, estimate the likely outcome of the arbitration including any potential award of the disputed amounts. Air Wisconsin, however, maintains that it has a strong position and is entitled to the disputed amounts under the terms of the United capacity purchase agreement. As a result, the Company has recognized all disputed amounts through December 31, 2022.
Treasury Payroll Support Program Audit
In September 2020, the Treasury’s Office of Inspector General (OIG) commenced a routine audit in connection with Air Wisconsin’s receipt of funds under the PSP-1
Agreement. The audit focused, among other things, on certain calculations used to determine the amount of Treasury Payroll Support Air Wisconsin was entitled to receive under the program. Air Wisconsin has disputed in good faith the Treasury’s interpretation of certain provisions of the application for Treasury Payroll Support and the PSP-1
Agreement, as well as the Treasury’s guidance regarding the Payroll Support Program. As of the date of this filing, Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit. Nevertheless, the Treasury subsequently entered into the PSP-2
Agreement and the PSP-3
Agreement with Air Wisconsin, has paid to Air Wisconsin the amounts to be paid under the PSP-2
Agreement and the PSP-3
Agreement, and has not required Air Wisconsin to refund any amounts it received under the PSP-1
Agreement.
Standby Letters of Credit
As of December 31, 2022, Air Wisconsin had six outstanding letters of credit in the aggregate amount of $372 to guarantee the performance of its obligations under certain lease agreements, airport agreements and insurance policies. As of December 31, 2022, Air Wisconsin maintained a credit facility with a borrowing capacity of $374 for the issuance of such letters of credit as needed to support its operations. A significant portion of Air Wisconsin’s restricted cash balance secures the credit facility.
Cash Obligations
The following table sets forth the Company’s cash obligations for the periods presented:
Payment Due for Year Ending
December 31,
Total
Thereafter
Aircraft Notes Principal
$ 55,600
$ 7,000
$ 7,000
$ 41,600
$ -
$ -
$ -
Aircraft Notes Interest
$ 5,622
$ 2,154
$ 1,874
$ 1,594
$ -
$ -
$ -
Operating Lease Obligations
$ 11,892
$ 5,580
$ 3,222
$ 2,487
$
$
$
Total
$ 73,114
$ 14,734
$ 12,096
$ 45,681
$
$
$
The principal amount of the Aircraft Notes is payable in semi-annual installments of $3,500, and certain additional amounts may be payable based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes in June 2021, no semi-annual installments were due prior to
December 31, 2022. As of December 31, 2022, all of the Company’s long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes, refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities
”
within this Annual Report and Note 6, Debt
.
9. Retirement Plans
The Company has defined contribution retirement plans that cover substantially all employees. The Company contributes to these plans. Total expense under all plans for the years ended December 31, 2022 and December 31, 2021 was $3,767 and $4,358, respectively.
10. Related-Party Transactions
Resource Holdings Associates (Resource Holdings) provides AWAC and Air Wisconsin with financial advisory and management services pursuant to an agreement entered into in January 2012. AWAC paid a total of $240 to Resource Holdings for each of the years ended December 31, 2022 and December 31, 2021, plus the reimbursement of certain out-of-pocket
expenses. In June 2021, the board of directors agreed to require Harbor to pay Resource Holdings an annual fee of $150, payable monthly, which amount is in addition to the amount paid to Resource Holdings by AWAC. Harbor paid an aggregate of $150 and $113 to Resource Holdings for the years ended December 31, 2022 and December 31, 2021, respectively. For additional information, refer to the section entitled “Certain Relationships and Related Transactions, and Director Independence
” within this Annual Report.
11. Collective Bargaining Agreements
Air Wisconsin has five collective bargaining units. The Airline Pilots Association (ALPA) represents pilots. The Association of Flight Attendants-CWA
(AFA) represents flight attendants. The mechanics and the technical store clerks have two separate collective bargaining agreements that are both represented by the International Association of Machinists and Aerospace Workers AFL-CIO
(IAMAW). The Transport Workers Union of America (TWU) represents dispatchers.
As of December 31, 2022, Air Wisconsin was in mediated negotiations with TWU that represents dispatchers. The agreement with the TWU was amendable November 1, 2020, however the negotiation process did not begin until August 17, 2021. Air Wisconsin is in preliminary direct negotiations with ALPA and AFA, but mediated negotiations have not yet commenced. Air Wisconsin believes the resolution of its negotiations will not have a material impact on its financial position or operations.
Amendable dates for each bargaining unit are:
Bargaining Unit
Amendable Date
Percentage of Workforce
Pilots
November 21, 2022
43.5
%
Dispatchers
November 1, 2020
2.6
%
Mechanics
September 20, 2023
8.8
%
Technical store clerks
September 20, 2022
2.7
%
Flight attendants
October 1, 2022
17.4
%
12. Earnings Per Share and Equity
Calculations of net income per common share for the dates presented were as follows:
Year ended
December 31,
Year ended
December 31,
Net income
$
39,110
$ 92,626
Preferred stock dividends
Net income applicable to common stockholders
38,318
91,834
Weighted average common shares outstanding
Shares used in calculating basic earnings per share
46,359
54,321
Stock option
Series C Preferred
16,500
16,500
Shares used in calculating diluted earnings per share
62,957
71,249
Earnings allocated to common stockholders per common share
Basic
$
0.83
$ 1.69
Diluted
$
0.61
$ 1.29
Basic earnings per share of common stock is computed by dividing the net income applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding assuming the conversion of the Series C Preferred into an aggregate of 16,500 shares of common stock under the if-converted
method, and the exercise of a stock option granted in 2015 (the “2015 Option”) into 98 and 428 shares of common stock under the treasury stock method for the years ended December 31, 2022 and December 31, 2021, respectively. In March 2022, Harbor entered into an agreement with the holder to cancel the 2015 Option in exchange for $969. The shares underlying the 2015 Option are included in computing diluted earnings per share under the treasury stock method for the portion of the reporting period during which it was outstanding.
Series C Convertible Redeemable Preferred Stock
In January 2020, Harbor issued 4,000 shares of the Series C Preferred. The rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred are set forth in the Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock (Certificate of Designations), which Harbor filed with the Secretary of State of the State of Delaware.
The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the board of directors (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 was initially convertible at the election of the holders, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (as defined below) by $
0.80, subject to certain adjustments set forth in the Certificate of Designations (Conversion Price). The Conversion Price as of the date of this filing is $
0.15091. The Conversion Price may be subject to further adjustment as described in the Certificate of Designations.
The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted into common stock pursuant to the limitation described herein (Conversion Cap Excess Shares), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends in an amount per share equal to 0.5% of the Series C Liquidation Amount of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional
0.5% of the Series C Liquidation Amount in each subsequent quarter (Conversion Cap Excess Dividends). As of December 31, 2022, 755 shares of the Series C Preferred were immediately convertible into 16,500 shares of common stock (representing 26.7% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. Harbor may redeem all, but not less than all, of the Conversion Cap Excess Shares at any time upon notice to the holders for a cash payment in an amount equal to the Series C Liquidation Amount per share.
In the event of any liquidation, dissolution or winding up of Harbor or a sale of Harbor, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of Harbor to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (Series C Liquidation Amount).
On March 30, 2022, June 30, 2022, September 30, 2022, and December 30, 2022, the board of directors declared a Preferential Dividend of $
198 on the Series C Preferred, which was paid on March 31, 2022, June 30, 2022, September 30, 2022 and December 30, 2022, respectively.
Based on the applicable accounting guidance, Harbor is required to apply the “if-converted”
method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.
Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity
. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.
Excluded Stock Options
In January 2022, Harbor granted a group of affiliated stockholders options to sell additional shares of Harbor’s common stock owned by the stockholders at fixed prices. As these options expired out-of-the-money
during the year ended December 31, 2022, they would have had an anti-dilutive effect on the calculation of diluted earnings per share and thus are not included in the calculation above.
13. Stock Option
In 2015, Harbor issued a stock option (the 2015 Stock Option) to purchase 558,835 shares of its common stock at an exercise price of $0.21386 per share. The value of the 2015 Stock Option at the date of grant was deemed to be $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 December 31, 2021. In March 2022, the Company and the holder of the 2015 Stock Option entered into an agreement pursuant to which the 2015 Stock Option was cancelled and terminated in exchange for a cash payment by the Company of approximately $969.
14. Supplemental Cash Flow Information
Cash payments for interest for the years ended December 31, 2022 and December 31, 2021 were $2,375 and $3,337, respectively. Cash payments for income taxes for the years ended December 31, 2022 and December 31, 2021 were $7,925 and $33,956, respectively.
The following table provides a reconciliation of all cash and cash equivalents and restricted cash reported on the consolidated balance sheet that sum to the total of those same amounts shown in the consolidated statement of cash flows:
December 31, 2022
December 31, 2021
Cash and cash equivalents
$
33,333
$
37,170
Restricted cash
1,449
Total cash, cash equivalents, and restricted cash
$
34,182
$
38,619
15. Intangible Assets
Intangible assets consist of the following indefinite-lived assets as of the dates presented:
December 31,
Gross Carrying Amount
Gross Carrying Amount
Trade names and air carrier certificate
5,300
5,300
Total
$
5,300
$ 5,300
16. Stock Repurchase Program
On March 30, 2021, the board of directors adopted a stock repurchase program pursuant to which Harbor was initially authorized to repurchase up to $1,000 of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1,000 per calendar month thereafter. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. Harbor acquired a total of 8,096,562 shares of its common stock pursuant to the stock repurchase program in the year ended December 31, 2022. As of December 31, 2022, total cash of $475 is held for the repurchase of shares under Harbor’s stock repurchase program. This amount is included in restricted cash.
For additional information, refer to Part II, Item 5, “Purchases of Equity Securities by the Issuer and Affiliated Purchasers
.”
17. Subsequent Events
The Company evaluated its consolidated financial statements for the year ended December 31, 2022 for subsequent events through March 31, 2023, the date the financial statements were available to be issued. The following subsequent events are noted:
•
In February 2023, United and Air Wisconsin entered into a sixth amendment to the United capacity purchase agreement which provided a schedule for the withdrawal of aircraft from the agreement and provided the maximum number of block hours that Air Wisconsin could be scheduled to fly for United and American until early June 2023.
•
In February 2023, American and Air Wisconsin entered into a first amendment to the American capacity purchase agreement which revised compensation rates for 2023 through 2027 and obligated American to a fixed payment to assist Air Wisconsin with current pilot compensation.
•
In March 2023, Air Wisconsin commenced flying for American under the American capacity purchase agreement.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
As required by Rule 15d-15(b) under the Exchange Act, our management, under the supervision and with the participation of our principal executive officer, our principal financial officer and our principal accounting officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of December 31, 2022, the last day of the period covered by this Annual Report. Based on this evaluation, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, concluded that, as of December 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 15d-15(f) under the Exchange Act. Our management, under the supervision and with the participation of our principal executive officer, our principal financial officer and our principal accounting officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2022 (the end of our fiscal year), based on the framework and criteria established in the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, concluded that our internal control over financial reporting was effective as of December 31, 2022.
Limitations on Effectiveness of Controls
Our management, including our principal executive officer, principal financial officer and principal accounting officer, does not expect that our disclosure controls and procedures, or our system of internal control over financial reporting, will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No Attestation Report of the Registered Public Accounting Firm
As a “smaller reporting company,” we are not required to include an attestation report of our independent registered public accounting firm on our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Consistent with SEC rules and regulations, our executive officers include certain officers of our subsidiary, Air Wisconsin Airlines LLC (“Air Wisconsin”). The following table sets forth information concerning our executive officers and directors as of January 1, 2023:
Name
Age
Position
Executive Officers
Christine R. Deister
Chief Executive Officer and Secretary, Harbor Diversified, Inc.
Principal Executive Officer
Robert Binns
Chief Executive Officer and President, Air Wisconsin Airlines LLC
Liam Mackay
Chief Financial Officer, Air Wisconsin Airlines LLC
Principal Financial Officer
Gregg Garvey
Senior Vice President, Chief Accounting Officer and Treasurer, Air Wisconsin Airlines LLC
Principal Accounting Officer
Non-Employee Directors
Richard A. Bartlett
Director, Harbor Diversified, Inc.
Nolan Bederman(1)
Director, Harbor Diversified, Inc.
Kevin J. Degen(1)
Director, Harbor Diversified, Inc.
(1) Serves as a member of our audit committee.
Executive Officers
Christine R. Deister
Ms. Deister, 73, has served as the Company’s Chief Executive Officer and Secretary since March 2020. Ms. Deister has also served as Chief Financial Officer and Secretary of Lotus Aviation Leasing, LLC and Chief Financial Officer and Secretary of Air Wisconsin Funding LLC (“AWF”) since April 2020, as well as President, Secretary and a director of Harbor Therapeutics, Inc. since April 2020. Ms. Deister has served as Vice President of Special Projects for Air Wisconsin since April 2020 and also serves as Executive Vice President and a director of AWAC Aviation, Inc. (“AWAC”). Ms. Deister was initially appointed Chief Financial Officer and Secretary of the Company in March 2012, and was subsequently appointed President of the Company in July 2019. Previously, Ms. Deister served as President and Chief Executive Officer of Air Wisconsin from April 2015 until March 2019 and as Chief Executive Officer until March 2020. From November 2014 to April 2015, Ms. Deister served as Chief Commercial Officer of Air Wisconsin. From November 2004 to November 2014, Ms. Deister served as Executive Vice President and Chief Financial Officer of Air Wisconsin. Prior to Air Wisconsin, Ms. Deister served as Executive Vice President and Chief Financial Officer of Hawaiian Airlines from 2001 to November 2004. Prior to 2001, Ms. Deister held various executive roles with Trans World Airlines, including Senior Vice President of Finance and Treasurer.
Robert Binns
Mr. Binns, 58, has served as Air Wisconsin’s President since April 2019, and as its Chief Executive Officer since March 2020. Mr. Binns has also served as a member of the board of managers of Air Wisconsin and as Executive Vice President and a director of AWAC Aviation, Inc. (“AWAC”) since April 2020. Mr. Binns brings over 25 years of airline and industry-related leadership to these roles. Prior to joining Air Wisconsin, Mr. Binns was the Chief Executive Officer and member of the board of managers of Hybrid Enterprises, LLC, the exclusive reseller of Lockheed Martin’s hybrid airship, until December 2018 and held executive roles with Wivenhoe Aviation, LLC, from 2013 to 2015, Global Aviation Holdings, from 2004 to 2013, TransMeridian Airlines, from 2001 to 2004, Pegasus Aviation, from 1999 to 2001, and Trans World Airlines, from 1994 to 1999. Mr. Binns holds an M.B.A. from the University of Kansas, an M.A. in Political Behavior from Essex University in England, and a B.A. in History and Political Science from the University of Kansas.
Liam Mackay
Mr. Mackay, 39, has served as Air Wisconsin’s Chief Financial Officer since January 1, 2021. Prior to joining Air Wisconsin, Mr. Mackay served as Director, United Express Commercial Strategy at United, since 2019. From 2016 to 2019, Mr. Mackay served as Director, United Express Regional Partner Management at United, and from 2011 to 2016, he served as Senior Manager, Financial Analysis at United. Mr. Mackay graduated from The University of Western Ontario in 2005 with a Bachelor of Administrative & Commercial Studies in Commercial Aviation Management degree, and he obtained an M.B.A. in Aviation from Embry-Riddle Aeronautical University in 2007.
Gregg Garvey
Mr. Garvey, 57, has served as Air Wisconsin’s Senior Vice President, Chief Accounting Officer and Treasurer since October 2018, and has worked with Air Wisconsin in various roles since 1999. Mr. Garvey also serves as Vice President, Chief Financial Officer and Treasurer of AWAC. Prior to joining Air Wisconsin in 1999, Mr. Garvey served as a Tax Manager, Tax Supervisor, and Staff Accountant at Schenck & Associates (currently part of CliftonLarsonAllen LLP), a large regional public accounting firm in Appleton, Wisconsin. Mr. Garvey also held positions of Financial Analyst and Forecasting Accountant and Senior Tax Accountant at Repap Wisconsin, Inc., a paper company formerly located in Kimberly, Wisconsin. Mr. Garvey holds a B.B.A. in Accounting from the University of Wisconsin-Whitewater, an M.S. in Taxation from the University of Wisconsin-Milwaukee, and an M.B.A. from the University of Wisconsin-Oshkosh. Mr. Garvey is also a Certified Public Accountant.
Non-Employee Directors
Richard A. Bartlett
Mr. Bartlett, 65, has served on the Company’s board of directors since August 2011. Mr. Bartlett is the managing director of Resource Holdings, Ltd., a private equity firm located in New York, New York. He has served on the board of directors of numerous privately held and publicly traded companies across a wide variety of industries, including the board of directors of Air Wisconsin for more than 25 years. Mr. Bartlett served on the board of directors of US Airways, Inc. from 2005 to 2008. Prior to joining Resource Holdings, Ltd. in 1984, he served as a law clerk for an associate justice of the Supreme Court of the United States, and prior to that, for a senior judge of the U.S. Circuit Court for the District of Columbia. Mr. Bartlett received his J.D. from Yale Law School and his B.A. from Princeton University.
We believe Mr. Bartlett’s experience serving as a principal at a private equity firm for over 30 years, and on the boards of directors of multiple companies, including Air Wisconsin and US Airways, Inc., provides him with the skills necessary to understand business strategy and planning, financial statements, and board process and functions, all of which qualify him for service as a director.
Nolan Bederman
Mr. Bederman, 50, has served on the Company’s board of directors and on Air Wisconsin’s board of managers since March 2019. Mr. Bederman currently serves as a founder and Managing Partner of Bederman Capital Corp., a private equity firm. Prior to forming Bederman Capital Corp., Mr. Bederman served as partner and co-founder of Genuity Capital Partners from 2005 to 2013. Prior to Genuity Capital Partners, Mr. Bederman served as an executive director of private equity with CIBC Capital Partners from 2002 to 2004, and was promoted to Vice President of investment banking with Merrill Lynch & Co., where he served as a mergers and acquisitions advisor from 1998 to 2002. Mr. Bederman has served since 2013 as Chair, and since 2021 as Executive Chair, of the board of LifeSpeak, Inc., a public company. He has also served since 2016 as Chair of the board of Berkeley Street Holdings, Inc. Mr. Bederman received his J.D. and M.B.A. from the University of Toronto, and a B.A. in Economics from the University of Western Ontario.
We believe Mr. Bederman’s experience in private equity, and as the founder of multiple complex organizations, brings to the Company’s board of directors critical skills related to leadership, financial oversight, strategic planning and corporate governance, all of which qualify him for service as a director.
Kevin J. Degen
Mr. Degen, 65, has served on the Company’s board of directors and on Air Wisconsin’s board of managers since March 2019. Mr. Degen has served as a Vice President with Burnham Sterling & Company, a financial advisory firm since January 2023. Prior to that, Mr. Degen was a principal with Greencastle Advisors LLC, an advisory firm in the transportation sector, from 2010 to 2022. Prior to founding Greencastle, Mr. Degen was employed by Seabury Group LLC, an aviation advisory firm, from 2000 to 2009, where he was a Managing Director. Prior to Seabury Group, from 1996 to 1999, Mr. Degen served as Senior Vice President for Donaldson, Lufkin and Jenrette, an investment banking firm, and from 1993 to 1996, as a portfolio manager with Southport Management Group. Prior to Southport, Mr. Degen held various investment banking positions with Lehman Brothers, PaineWebber Inc., and E.F. Hutton Inc. from 1982 to 1992. Mr. Degen served as a director of START III USA LLC, an aircraft leasing SPV, from 2019 to 2022. Mr. Degen received an M.B.A. from Harvard Business School and a B.S. in Engineering from Princeton University.
We believe Mr. Degen’s extensive experience within the transportation sector, as well as his many years serving as an advisor and investment banker, provide him with industry experience, knowledge of complex organizations, and financial management and strategic planning skills, all of which qualify him for service as a director.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Board of Directors and Director Independence
The Company’s board of directors is presently comprised of three members. While the Company does not have a class of securities listed on a national securities exchange, the Company’s board of directors believes it is a good corporate governance practice to assess whether certain directors would qualify as “independent directors” for purposes of the Nasdaq Listing Rules (the “Nasdaq Rules”). The Company’s board of directors has considered the current “independent director” standards set forth in the Nasdaq Rules and has affirmatively determined that each of Messrs. Bederman and Degen do not have a relationship with the Company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and therefore qualify as “independent directors” under the Nasdaq Rules. Accordingly, a majority of the members of the Company’s board of directors qualify as “independent directors” as defined in the Nasdaq Rules.
Board Leadership Structure
The Company’s board of directors has not appointed a Chairman of the Board or a Lead Independent Director although it retains the discretion to do so. The Company’s board of directors believes this is the most appropriate leadership structure at this time given the current number of directors and the scope of the Company’s business and operations.
Board Role in Risk Oversight
The Company’s board of directors provides oversight with respect to our management of risk, both as a whole and through the audit committee. The Company’s board of directors typically reviews and discusses with management at each of its regular meetings information presented by management relating to our financial and operational results and outlook, including risks related to our business and operations. The audit committee oversees the management of risk as part of its responsibilities related to the oversight of the Company’s independent registered public accounting firm, and the review of the Company’s financial results and internal control over financial reporting.
Codes of Business Conduct and Ethics
We have adopted a code of business conduct and ethics (the “Code of Ethics”) applicable to our principal executive officer, principal financial officer, principal accounting officer and other officers that have a financial or operational oversight role, which is intended to comply with the requirements of Item 406 of Regulation S-K. We expect that any amendment to the Code of Ethics, or any waivers of its requirements applicable to our executive officers or directors, will be disclosed in the Company’s future filings under the Exchange Act. The Code of Ethics was previously filed as an exhibit to our SEC reports and is incorporated by reference to this Annual Report as Exhibit 14.1.
Meetings of the Board of Directors
During 2022, the Company’s board of directors held 12 regularly scheduled meetings and numerous additional meetings.
Board of Director Policies and Procedures
The Company’s board of directors has documented the Company’s corporate governance practices by adopting certain policies and procedures, including the Code of Ethics and the charter of the audit committee. The Code of Ethics generally restricts our directors, officers and employees from trading in the Company’s common stock, subject to limited exceptions. These policies and procedures are designed to ensure the Company’s board of directors, together with the audit committee, will have the necessary authority and governance frameworks in place to make decisions independent of the Company’s management.
Audit Committee
The Company has a standing audit committee of its board of directors. The audit committee oversees the Company’s corporate accounting and financial reporting process and the audits of the Company’s financial statements. For this purpose, the audit committee’s principal functions are to: (i) oversee the integrity of the Company’s financial statements, the audits of the Company’s financial statements conducted by the Company’s independent registered public accounting firm (“Independent Auditors”), the qualifications, independence and performance of the Independent Auditors, and compliance with legal, regulatory and disclosure requirements relating to the Company’s accounting and financial reporting processes; (ii) review the Company’s internal control over financial reporting; and (iii) facilitate communication among the Independent Auditors, the Company’s financial and senior management, and the board of directors of the Company. The audit committee is directly responsible for oversight of the work of the Independent Auditors, including resolution of any disagreements between management and the Independent Auditors regarding financial reporting or the application of accounting policies. This oversight includes review and discussion with management and the Independent Auditors of (i) the Company’s financial statements and the reports or information delivered to the audit committee by the Independent Auditors; and (ii) analyses prepared by management and the Independent Auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, as well as assessment of the Company’s system of internal control over financial reporting.
The audit committee is also responsible for the review, approval and monitoring of transactions involving the Company and any “related persons” (directors or executive officers, or stockholders owning 5.0% or greater of our outstanding capital stock, or any of their respective immediate family members) that involve amounts exceeding $120,000 in which a related person has a direct or indirect material interest.
The audit committee is presently comprised of two directors and operates under a written charter adopted by the Company’s board of directors. The Company’s board of directors reviews and assesses the adequacy of the audit committee’s written charter on an annual basis. The current members of the audit committee are Messrs. Bederman and Degen.
The Company’s board of directors regularly reviews the qualifications of the audit committee members and has determined that each of the audit committee members: (i) is “independent” as defined in Rule 10A-3 under the Exchange Act, (ii) is an “independent director” as defined under the Nasdaq Rules, (iii) has the ability to read and understand financial statements, and (iv) qualifies as an “audit committee financial expert” as defined in Item 407 of Regulation S-K. The latter determination is based on a qualitative assessment of each member’s level of knowledge and experience based on a number of factors.
During 2022, the audit committee held four regularly scheduled meetings and numerous additional meetings. Each of the members of the audit committee attended all of the meetings of the audit committee held during 2022.
Director Compensation
For service on the Company’s board of directors, each director receives a quarterly cash retainer in the amount of $20,000. For service on the audit committee, each member receives an additional quarterly cash retainer in the amount of $4,000. The directors are not paid additional amounts for attendance at Company board or committee meetings.
To the extent any director serves on the board of directors (or similar governing body) of any of our active subsidiaries, the director is typically paid a quarterly cash retainer in the amount of $2,500, which amount is in addition to amounts paid for service on the Company’s board of directors. Messrs. Bederman and Degen each serve on the board of managers of Air Wisconsin.
No current director has been granted any equity awards in connection with his service on the Company’s board of directors or the audit committee.
We reimburse reasonable expenses incurred in connection with attending meetings of the Company’s board of directors and the audit committee.
Director Compensation Table
The following table sets forth summary compensation information for our directors for the year ended December 31, 2022:
Name
Fees Earned
Or Paid in
Cash
($)(1)
All Other
Compensation
($)
Total
($)
Richard A. Bartlett
$ 80,000
-
$ 80,000
Nolan Bederman(2)
$ 106,000
-
$ 106,000
Kevin J. Degen(2)
$ 106,000
-
$ 106,000
(1) Each of the directors earned a quarterly cash retainer of $20,000 for each quarter of 2022 for serving on the Company’s board of directors.
(2) Messrs. Bederman and Degen each earned a quarterly cash retainer of $4,000 for each quarter of 2022 for serving on the audit committee, and a quarterly cash retainer of $2,500 for serving on the board of managers of Air Wisconsin.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
This narrative discussion of the compensation objectives, policies and arrangements that apply to our named executive officers is intended to be read in conjunction with, the Summary Compensation Table and related disclosures set forth below. As a “smaller reporting company,” we are eligible to comply with scaled executive compensation disclosure requirements under applicable SEC rules and regulations.
Named Executive Officers
Our named executive officers include our principal executive officer and our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2022. Consistent with SEC rules and regulations, our named executive officers include certain officers of our subsidiary, Air Wisconsin Airlines LLC, as indicated in the table below.
For the year ended December 31, 2022, our named executive officers were:
Named Executive Officer
Position
Christine R. Deister
Chief Executive Officer and Secretary, Harbor Diversified, Inc.
Principal Executive Officer
Robert Binns
Chief Executive Officer and President, Air Wisconsin Airlines LLC
Liam Mackay
Chief Financial Officer, Air Wisconsin Airlines LLC
Principal Financial Officer
Compensation Overview
The primary objective of our executive compensation program is to attract and retain executives with the skills necessary to lead us in achieving our strategic objectives and creating long-term value for our stockholders. We recognize that there is significant competition for talented executives, especially within the airline industry, and it can be particularly challenging for regional airlines to recruit executives and other key employees of the caliber necessary to achieve our goals. When making executive compensation decisions, the Company’s board of directors generally informs itself of the compensation amounts paid to executives at other regional airlines, although this is only one of several factors considered. We have not adopted an equity incentive plan, and have not historically granted equity awards to our named executive officers, which impacts both the aggregate value of compensation that we pay and the mix of compensation elements that we pay relative to other companies in our industry.
Compensation Objectives
When establishing executive compensation, the Company’s board of directors is guided by the following principles:
•
Attract, retain and incentivize executives with the background, experience and vision necessary to lead us in achieving our strategic objectives and creating long-term value for our stockholders;
•
Provide a total compensation package that is generally competitive with other companies in our industry that operate in similar geographic locations and are of a similar size and stage of growth; and
•
Tie a meaningful portion of the cash bonus opportunity to the achievement of individual and Company performance objectives that are important to the creation of long-term value for our stockholders, while retaining discretion to pay bonuses deemed appropriate by the Company’s board of directors.
Compensation Determinations
The members of the Company’s board of directors, which includes two independent directors, are responsible for overseeing our executive compensation program, based on their own experience, their understanding of our business and industry, and feedback from our senior executives. We have not appointed a separate compensation committee. In addition, we have not historically retained a compensation consultant, although we retain the right to do so in the future.
Elements of Compensation Program
In light of the compensation philosophy and objectives discussed above, the compensation program for our named executive officers generally consists of a base salary, a discretionary cash bonus, and other benefits as described below.
Base Salary
We pay base salaries to attract and retain talented executives with the necessary background, experience and vision required for our future growth and success. Base salaries are reviewed periodically and adjusted in response to factors such as title and responsibility level, individual contributions to achieving our strategic objectives, our operational and financial performance, and competitive pay practices within our industry.
Discretionary Cash Bonus
Historically, we have not adopted a formal non-equity incentive program as defined in SEC rules and regulations. Rather, we have typically paid discretionary cash bonuses to our named executive officers and other senior executives. The target bonus opportunity is generally expressed as a percentage of base salary, which varies by executive based on factors such as title, responsibility level and tenure. The actual amounts of these bonuses are generally based on a number of subjective factors such as: (i) individual contributions to achieving our strategic objectives, (ii) our actual operational and financial performance, and (iii) executive retention concerns. Examples of strategic objectives that have impacted historical bonus decisions include the restructuring of indebtedness, the negotiation of key customer agreements, the hiring and retention of pilots, and cash management goals.
While final determinations of bonus payments are made based on the consideration of a number of individual and Company performance factors, the bonus calculations are typically not formulaic and are therefore discretionary in nature. For additional information, refer to the section entitled “ -Summary Compensation Table” within this Annual Report.
Although the Company may implement a long-term cash incentive plan (“LTIP”) in the future to reward our senior executives, including our named executive officers, for the achievement of pre-determined strategic and operational objectives and the creation of long-term value, there is no current intent to do so.
Equity-Based Awards
We have not historically granted equity awards to our named executive officers, and our named executive officers do not currently own any shares of our common stock or any equity awards exercisable for or convertible into shares of our common stock. We have not adopted an equity incentive plan, although we retain the right to do so in the future. Further, the Code of Ethics generally restricts our officers from trading in the Company’s common stock.
Benefits
We offer a standard benefits package that we believe is necessary to attract and retain key executives. Our named executive officers are eligible to participate in our medical, dental, vision and other welfare benefit plans, such as long-term disability insurance and life insurance.
We maintain a 401(k) plan for the benefit of our eligible employees, including our named executive officers other than our Chief Executive Officer. Currently, we contribute up to 3% of a participant’s compensation, and, in addition, we match contributions made by participants in an amount up to 50% of the amount contributed by participants, on up to 8% of their compensation, subject to IRS limitations, provided that all Company contributions are discretionary.
For the year ended December 31, 2022, certain senior executives were also eligible to participate in our Supplemental Executive Savings Plan (“SESP”), which is a non-qualified deferred compensation retirement benefit plan. Pursuant to the SESP, we contribute, on a discretionary basis, an amount equal to the excess of the full amount of contributions to which the participant would have been entitled under our 401(k) plan, but for the IRS limitations on employer contributions, over the actual amount we contribute to the 401(k) plan for the participant.
Employment Agreements
We have entered into employment agreements with Mr. Binns and Mr. Mackay, each of which is summarized below. We have not entered into an employment agreement (or other similar agreement) with Ms. Deister or Mr. Garvey.
Binns Agreement
Air Wisconsin entered into an employment agreement with Mr. Binns (the “Binns Agreement”), pursuant to which he was initially appointed to serve as President of Air Wisconsin in April 2019. Mr. Binns was also appointed to serve as Chief Executive Officer of Air Wisconsin in March 2020. The Binns Agreement had an initial term of two years, from April 1, 2019 through April 1, 2021, and renews automatically for one-year renewal periods, subject to earlier termination in accordance with its terms.
The Binns Agreement currently provides for a minimum annual base salary of $425,000. The base salary amount may be increased by Air Wisconsin’s board of managers in its sole discretion.
Pursuant to the Binns Agreement, Mr. Binns is eligible to receive a cash bonus for each year during the term of the Binns Agreement, which shall be paid based on the achievement of certain individual and Company performance objectives, as well as certain other subjective factors, as determined by Air Wisconsin’s board of managers from time to time. To be eligible to receive the cash bonus, Mr. Binns is required to remain employed through the payment date. For the year ended December 31, 2021, Mr. Binns earned a cash bonus of $402,299, a portion of which was paid in March 2022, a portion of which was paid in October 2022, and the remainder of which will be paid in four equal annual installments. For the year ended December 31, 2022, Mr. Binns earned a cash bonus of $276,250, a portion of which was paid in March 2023, and the remainder of which will be paid in three equal annual installments.
As discussed above, the Company may in the future implement an LTIP to reward the senior executives for the achievement of strategic objectives and the creation of long-term value. Mr. Binns will be eligible to receive LTIP awards once adopted. Until such time as an LTIP is implemented, Mr. Binns is eligible to receive a long-term incentive award (the “LTI Award”), each year during the term of the Binns Agreement in an amount equal to the actual incentive bonus amount for the immediately prior year. For the year ended December 31, 2022, Mr. Binns earned an LTI Award of $276,250. The LTI Awards are payable in cash in four equal annual installments on each of the first four anniversaries of the grant date. To be eligible to receive any annual installment, Mr. Binns is required to remain employed on the relevant payment date. For additional information, refer to the section entitled “- Summary Compensation Table” within this Annual Report.
During the term of the Binns Agreement, Mr. Binns is eligible to participate in such medical, disability, life insurance and other employee benefit plans and programs as are in effect from time to time on the same basis as the other senior executives.
In the event of the termination of the Binns Agreement “Without Cause” or for “Good Reason” (each as defined in the Binns Agreement), Air Wisconsin shall pay to Mr. Binns: (i) any base salary that has been earned but remains unpaid as of the date of termination; and (ii) a severance payment equal to one year of base salary plus the amount of the actual cash bonus amount for the prior year, such payment to be made within 30 days after such termination. In addition, Mr. Binns shall be eligible to participate in benefit plans for one year following such termination. The Binns Agreement does not provide for any payments or benefits to be paid in connection with a change in control transaction (or similar transaction).
The Binns Agreement was amended in March 2021 primarily for the purpose of conforming certain payment provisions to the requirements of the agreements Air Wisconsin entered into with the Treasury for payroll support.
Mackay Agreement
Air Wisconsin entered into an employment agreement with Mr. Mackay (the “Mackay Agreement”) pursuant to which he was appointed to serve as the Chief Financial Officer of Air Wisconsin effective as of January 1, 2021. The Mackay Agreement provides Mr. Mackay with (i) an initial employment term of two years, from January 1, 2021 through December 31, 2022, with successive automatic one-year renewal periods, subject to earlier termination as described therein; (ii) a minimum annual base salary of $220,000, which may be increased by the board of managers in its sole discretion; (iii) a one-time sign-on bonus in the amount of $35,000, which is subject to forfeiture in certain circumstances as described therein; and (iv) such medical, disability, life insurance and other employee benefit plans and programs as are in effect from time to time on substantially the same terms as those available to the other senior executives of Air Wisconsin.
Pursuant to the Mackay Agreement, Mr. Mackay is also eligible to receive a cash bonus for each year during the term of the agreement based on the achievement of certain individual and Company performance objectives, as well as certain subjective factors, as determined by Air Wisconsin’s board of managers from time to time, with an initial target bonus in an amount equal to 50% of his base salary for the applicable year. The cash bonus earned with respect to a particular year will be paid no later than March 31 of the following year, so long as Mr. Mackay continues to be employed through the payment date.
In the event of the termination of the Mackay Agreement “Without Cause” or for “Good Reason” (each as defined in the agreement), Air Wisconsin shall pay to Mr. Mackay: (i) any base salary that has been earned but remains unpaid as of the date of
termination and (ii) a severance payment equal to one year of base salary plus the amount of the actual cash bonus paid for the prior year, such payment to be made within 30 days after the date of termination. In addition, Mr. Mackay shall be eligible to participate in employee benefit plans for one year following the date of termination. The Mackay Agreement does not provide for any payments or benefits to be paid in connection with a change in control transaction (or similar transaction).
Severance Agreements / Change in Control Agreements
Except as described under the section entitled “ -Employment Agreements” within this Annual Report, we currently do not have severance agreements or change in control agreements (or other similar agreements) with any of our named executive officers. However, we reserve the right to enter into these types of agreements with our named executive officers or other employees in the future.
Summary Compensation Table
The following table sets forth summary compensation information for our named executive officers for the year ended December 31, 2022:
Name and Title
Year
Salary
($)
Bonus
($)(1)
Non-Equity
Incentive Plan
Compensation
($)(2)
Stock
and
Options
Awards(3)
All Other
Compensation
($)(4)
Total
($)
Christine R. Deister
150,000
75,000
-
-
10,000
235,000
Chief Executive Officer and Secretary, Harbor Diversified, Inc.
150,000
75,000
-
-
10,000
235,000
Robert Binns
425,000
804,598 (5)
-
-
63,636
1,293,234
Chief Executive Officer and President, Air Wisconsin Airlines, LLC
425,000
552,500 (6)
-
-
73,560
1,051,060
Liam Mackay
220,000
208,249 (7)
-
-
64,001
492,250
Chief Financial Officer, Air Wisconsin Airlines, LLC
220,000
143,000 (8)
-
-
27,737
390,737
-
(1) The amounts in this column reflect the payment of discretionary cash bonuses to our named executive officers.
(2) We did not adopt a non-equity incentive plan, as defined in the applicable SEC rules and regulations, for 2022 or 2021.
(3) We have not granted any equity awards to our named executive officers and have not adopted an equity incentive plan.
(4) All other compensation for 2022 included the following:
(i) Ms. Deister: aggregate cash payments in the amount of $10,000 for services provided to the board of directors of AWAC (consistent with the amounts paid to the other directors);
(ii) Mr. Binns: (1) aggregate cash payments in the amount of $20,000 for services provided to the board of directors of AWAC and the board of managers of Air Wisconsin (consistent with the amounts paid to the other directors and managers), (2) $21,350 for our contributions pursuant to the 401(k) plan, (3) $19,588 for our contributions to the SESP, and (4) $12,622 for a personal travel allowance benefit (based on the incremental cost to the Company); and
(iii) Mr. Mackay: (1) $19,400 for our contributions pursuant to the 401(k) plan, (2) $2,400 for our contributions to the SESP and (3) $5,937 for a personal travel allowance benefit (based on the incremental cost to the Company).
(5) Of this amount, (i) $402,299 reflects a discretionary cash bonus that was earned by Mr. Binns for performance in 2021, of which $318,750 was paid in March 2022, a portion of which was paid in October 2022 and the balance of which will be paid in four equal annual installments through March 2026, and (ii) $402,299 reflects the issuance of an LTI Award, which is payable in cash in four equal annual installments on or about each of the first four anniversaries of the grant date. To be eligible to receive the cash bonus, Mr. Binns is required to remain employed through each relevant payment date.
(6) Of this amount, (i) $276,250 reflects a discretionary cash bonus that was earned by Mr. Binns for performance in 2022, $83,353 of which was paid in March 2023, $129,147 of which will be paid in April 2023 and the balance of which will be paid in three equal annual installments through March 2026, and (ii) $276,250 reflects the issuance of an LTI Award, which is payable in cash in four equal annual installments on or about each of the first four anniversaries of the grant date. To be eligible to receive any annual installment, Mr. Binns is required to remain employed through the relevant payment date.
(7) This amount reflects a discretionary cash bonus that was earned by Mr. Mackay for performance in 2021, of which $165,000 was paid in March 2022 and the balance of which will be paid in three equal annual installments through March 2025.
(8) This amount reflects a discretionary cash bonus that was earned by Mr. Mackay for performance in 2022, of which $110,000 was paid in March 2023 and the balance of which will be paid in three equal annual installments through March 2026.
For additional information, refer to the section entitled “Elements of Compensation Program - Discretionary Cash Bonus” and “ -Employment Agreements” within this Annual Report.
Outstanding Equity Awards at Fiscal Year End
As of December 31, 2022, none of our named executive officers held any outstanding equity awards to acquire shares of our common stock.
Equity Incentive Plans
We do not have outstanding any equity incentive plans, whether or not approved by our stockholders, pursuant to which any equity awards have been or may be issued to our directors, executive officers and other employees.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial ownership of the Company’s outstanding common stock as of March 17, 2023 by: (i) each of our directors; (ii) each of our named executive officers; (iii) all of our executive officers and directors as a group; and (iv) all those known to us to be beneficial owners of more than five percent of the Company’s outstanding common stock.
Beneficial ownership is determined in accordance with SEC rules and includes voting or investment power with respect to the securities. Shares of Common Stock that may be acquired by an individual or group within 60 days of March 17, 2023, including upon the exercise of options or the conversion of preferred stock, are deemed to be outstanding for the purpose of computing the percentage ownership of each stockholder.
Beneficial Ownership(1)(2)
Number of
Shares
Percentage
Greater than 5% Stockholders
Amun LLC
20,000,000
32.6 %
Southshore Aircraft Holdings, LLC(3)
16,500,000
26.9 %
Named Executive Officers and Directors
Christine R. Deister
-
-
Robert Binns
-
-
Liam Mackay
-
-
Kevin J. Degen
-
-
Nolan Bederman
-
-
Richard A. Bartlett(4)
36,500,000
59.5 %
All executive officers and directors as a group (6 persons)
36,500,000
59.5 %
(1) Unless otherwise indicated in the footnotes to this table, and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 44,811,419 shares of the Company’s outstanding common stock, and 4,000,000 shares of the Series C Preferred outstanding, in each case as of March 17, 2023.
(2) The address of each stockholder listed is W6390 Challenger Drive, Suite 203 Appleton, WI 54914-9120.
(3) Consists of 16,500,000 shares of the Company’s common stock issuable upon the conversion of shares of the Series C Preferred that are immediately convertible. Following the adjustment of the Conversion Price to $0.15091 per share, effective as of January 7, 2021, in accordance with the Conversion Cap set forth in the Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (the “Certificate of Designations”), 754,550 shares of the 4,000,000 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock, with the remaining 3,245,450 shares of Series C Preferred remaining outstanding as Conversion Cap Excess Shares as of the date of filing this Annual Report.
(4) Includes (i) 20,000,000 shares of the Company’s common stock held by Amun LLC (“Amun”) and (ii) 4,000,000 shares of the Series C Preferred held by Southshore that are immediately convertible into 16,500,000 shares of the Company’s common stock (based on the Conversion Price as of the date of filing of this Annual Report). The 20,000,000 shares of the Company’s common
stock held by Amun as of March 17, 2023 represent approximately 32.6% of the fully diluted shares of capital stock of the Company, and the shares of the Series C Preferred held by Southshore as of March 17, 2023 represent approximately 26.9% of the fully diluted shares of capital stock of the Company (in each case assuming the full conversion of the Series C Preferred into common stock). Mr. Bartlett, one of the Company’s directors, may be deemed to be the beneficial owner of the shares of the Company’s common stock held by Amun due to his status as a member of the board of managers of Amun, and his indirect ownership of 25.6% of the outstanding equity interests of Amun. However, Mr. Bartlett does not control voting or investment decisions made by Amun, which are made by the board of managers of Amun. Mr. Bartlett disclaims beneficial ownership of the shares held by Amun except to the extent of his pecuniary interest therein. In addition, Mr. Bartlett may be deemed to be the beneficial owner of the shares of the Series C Preferred held by Southshore due to his status as a member of the board of managers of Southshore and his indirect ownership of 25.6% of the outstanding equity interests of Southshore. However, Mr. Bartlett does not control voting or investment decisions made by Southshore, which are made by the board of managers of Southshore. Mr. Bartlett disclaims beneficial ownership of the shares held by Southshore except to the extent of his pecuniary interest therein.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Transactions
Other than the transactions discussed below, and the various compensation arrangements described in the section entitled “Executive Compensation” within this Annual Report, since January 1, 2021, there was not, and there is not currently proposed, any transaction or series of similar transactions to which we were or are expected to be a party for which the amount involved exceeds or is expected to exceed $120,000, and in which any director, executive officer, holder of more than 5% of the Company’s common stock or Series C Convertible Redeemable Preferred Stock (“Series C Preferred”), or any member of the immediate family of any of the foregoing, had or will have a direct or indirect material interest.
Transactions with Amun LLC and Resource Holdings Associates
Since January 2012, Amun has provided AWAC and Air Wisconsin with financial advisory and management services pursuant to a Stock Purchase Agreement entered into with Amun in January 2012 (the “Amun SPA”). In accordance with the Amun SPA, AWAC has paid a recurring monthly fee of $20,000 in exchange for Amun’s financial advisory and management services. Amun has assigned the payment of these fees to Resource Holdings Associates (“Resource Holdings”) such that AWAC paid a total of $240,000 to Resource Holdings in both 2022 and 2021. In June 2021, the Company’s board of directors agreed to pay Resource Holdings a recurring monthly fee of $12,500, effective April 1, 2021, which is in addition to the amount paid to Resource Holdings by AWAC. Harbor paid an aggregate of $150,000 to Resource Holdings for the year ended December 31, 2022.
Amun is owned and controlled by individuals who are current or former directors, managers and/or employees of the Company or its subsidiaries. Richard A. Bartlett, one of the Company’s directors, indirectly holds 25.6% of the outstanding equity interests of Amun. Geoffrey T. Crowley, who serves as a director of AWAC and an employee of Air Wisconsin, directly holds 12.4% of the outstanding equity interests of Amun. William P. Jordan and Patrick J. Thompson, each of whom is employed by Air Wisconsin, each directly hold 12.4% of the outstanding equity interest of Amun.
Resource Holdings is owned and controlled by individuals who are current or former directors, managers and/or employees of the Company or its subsidiaries. Richard A. Bartlett, one of the Company’s directors, indirectly holds 33.3% of the outstanding equity interests of Resource Holdings.
Transactions with Southshore Leasing, LLC and Southshore Affiliates
Southshore Leasing, LLC (“Southshore Leasing”), through its affiliates (the “Southshore Affiliates” and, together with Southshore Leasing, “Southshore”), leased aircraft and engines to Air Wisconsin pursuant to various operating lease agreements from April 2010 through January 2020.
Southshore is owned and controlled by individuals who are current or former directors, managers and/or employees of the Company or its subsidiaries. Richard A. Bartlett, one of the Company’s directors, directly or indirectly holds 25.6% of the outstanding equity interests of Southshore Leasing. Jerry M. Seslowe and John C. Shaw, each of whom served as a director of AWAC from December 2011 until his respective resignation in April 2020, and as a director of the Company from August 2011 until his respective resignation in March 2019, each directly or indirectly hold 17.6% of the outstanding equity interests of Southshore Leasing. Geoffrey T. Crowley, who serves as a director of AWAC and as an employee of Air Wisconsin, directly holds 12.4% of the outstanding equity interests of Southshore Leasing. William Jordan and Patrick Thompson, each of whom served as a director of AWAC from February 2017 until his respective resignation in April 2020, and is currently employed by Air Wisconsin, directly each holds 12.4% of the outstanding equity interests of Southshore Leasing.
Indemnification Agreements
The Company’s amended and restated certificate of incorporation compels indemnification of its directors to the extent permitted by the Delaware General Corporation Law, and its amended and restated bylaws provide for indemnification of the Company’s directors, officers, employees and other agents to the maximum extent permitted by Delaware General Corporation Law. In addition, the Company has entered into indemnification agreements with its directors and Chief Executive Officer containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify its directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND NON-AUDIT FEES
The following table represents aggregate fees billed to us for services related to the year ended December 31, 2022 and December 31, 2021 by Grant Thornton, LLP:
Year Ended
December 31,
Audit Fees(1)
$ 530,684
$ 463,028
Audit-Related Fees(2)
-
-
Tax Fees(3)
37,275
-
All Other Fees(4)
-
-
Total Fees
$ 567,959
$ 463,028
(1) Consists of fees for professional services rendered in connection with the audit of our consolidated financial statements included in this Annual Report, review of our quarterly financial statements, and services that are normally provided in connection with statutory and regulatory filings or engagements.
(2) Consists of fees for professional services for assurance and related services that are reasonably related to the performance of the audit of our financial statements and are not reported as Audit Fees, including audits of employee benefit plans and special procedures required to meet certain regulatory requirements.
(3) Consists of fees for professional services for tax compliance, tax advice and tax planning.
(4) Consists of fees for permitted professional services other than the services reported above.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The audit committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, internal control services, tax services and other services. The audit committee has adopted a policy for the pre-approval of services provided by our independent registered public accounting firm. The policy generally pre-approves specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of the audit committee’s approval of the scope of the engagement of the independent registered public accounting firm or on a case-by-case basis before the independent registered public accounting firm is engaged to provide each service.
During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, the audit committee requires specific pre-approval before engaging the independent registered public accounting firm.
For the year ended December 31, 2022, all audit and non-audit services provided by the independent registered public accounting firm were pre-approved.
The audit committee has determined that the rendering of the non-audit services described above by Grant Thornton LLP is compatible with maintaining the auditor’s independence.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report:
1. Consolidated Financial Statements
The financial statements filed as part of this Annual Report are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this Annual Report and are incorporated by reference herein.
2. Financial Statement Schedules
All schedules are omitted as the information is not required or is inapplicable, or the required information is presented in the consolidated financial statements or notes to the consolidated financial statements within this Annual Report.
3. Exhibits
The exhibits listed below are filed or furnished as part of this Annual Report.
EXHIBIT INDEX
INCORPORATED BY REFERENCE
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
3.1
Amended and Restated Certificate of Incorporation of Harbor Diversified, Inc. (as amended through December 31, 2019).
10-K
001-34584
3.1
July 10, 2020
3.2
Certificate of Designations, Preferences and Rights of Series C Convertible Redeemable Preferred Stock of Harbor Diversified, Inc.
10-K
001-34584
3.2
July 10, 2020
3.3
Amended and Restated Bylaws of Harbor Diversified, Inc. (a Delaware Corporation) (as amended through December 31, 2019).
10-K
001-34584
3.3
July 10, 2020
4.1
Description of Capital Stock of Harbor Diversified, Inc.
10-K
001-34584
4.1
July 10, 2020
4.2
Specimen Stock Certificate for Common Stock of Harbor Diversified, Inc.
10-K
001-34584
4.2
March 30, 2022
10.1#
Form of Indemnification Agreement.
10-K
001-34584
10.1
July 10, 2020
10.2.1#
Employment Agreement, dated March 20, 2019, between Air Wisconsin Airlines LLC and Robert Binns.
10-K
001-34584
10.3
July 10, 2020
10.2.2#
First Amendment to Employment Agreement, dated March 29, 2021, between Air Wisconsin Airlines LLC and Robert Binns.
10-K
001-34584
10.3.2
April 1, 2021
10.3#
Employment Agreement, dated January 1, 2021, between Air Wisconsin Airlines LLC and Liam Mackay.
10-K
01-34584
10.4
April 1, 2021
10.4.1+†
Capacity Purchase Agreement, dated February 26, 2017, between United Airlines, Inc. and Air Wisconsin Airlines LLC.
10-K
001-34584
10.4.1
July 10, 2020
10.4.2
Letter, dated March 31, 2020, from United Airlines, Inc. to Air Wisconsin Airlines LLC.
10-K
001-34584
10.4.2
July 10, 2020
10.4.3+†
First Amendment to Capacity Purchase Agreement, dated October 14, 2020, between United Airlines, Inc., Air Wisconsin Airlines LLC, AWAC Aviation, Inc., and Harbor Diversified, Inc.
10-K
001-34584
10.5.3
April 1, 2021
10.4.4†
Second Amendment to Capacity Purchase Agreement, dated April 23, 2021, between United Airlines, Inc. and Air Wisconsin Airlines LLC.
10-Q
001-34584
10.3
May 17, 2021
10.4.5*†
Sixth Amendment to Capacity Purchase Agreement, dated February 10, 2023, between United Airlines, Inc. and Air Wisconsin Airlines LLC.
10.5+
Purchase Agreement, dated January 17, 2020, among Harbor Diversified, Inc., Air Wisconsin Airlines LLC, and Southshore Aircraft Holdings, LLC.
10-K
001-34584
10.5
July 10, 2020
10.6
Note, dated April 6, 2020, payable by Air Wisconsin Airlines LLC to JPMorgan Chase Bank, N.A.
10-K
001-34584
10.6
July 10, 2020
10.7.1
Payroll Support Program Agreement, dated April 20, 2020, between Air Wisconsin Airlines LLC and the Department of the Treasury.
10-K
001-34584
10.7
July 10, 2020
10.7.2
Payroll Support Program Extension Agreement, dated March 23, 2021, between Air Wisconsin Airlines LLC and the Department of the Treasury.
10-K
001-34584
10.8.2
April 1, 2021
INCORPORATED BY REFERENCE
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
10.7.3
Payroll Support Program 3 Agreement, dated June 1, 2021, between Air Wisconsin Airlines LLC and the Department of the Treasury.
10-K
001-34584
10.8.3
March 30, 2022
10.8.1+
Restructuring Agreement, dated January 25, 2018, among Air Wisconsin Airlines LLC, the Lender, the Subordinated Note Holder, U.S. Bank National Association and Investissement Quebec.
10-K
001-34584
10.8.1
July 10, 2020
10.8.2
Form of Amended and Restated Credit Agreement, dated December 24, 2018, among Air Wisconsin Airlines LLC, U.S. Bank National Association and the Lender.
10-K
001-34584
10.8.2
July 10, 2020
10.9.1
Credit Agreement, dated June 5, 2017, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.1
July 10, 2020
10.9.2
Amendment No. 1 to Credit Agreement, dated December 24, 2018, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.2
July 10, 2020
10.9.3
Credit Agreement, dated January 25, 2018, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.3
July 10, 2020
10.9.4
Amendment No. 1 to Credit Agreement, dated December 24, 2018, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.4
July 10, 2020
10.9.5
Amendment No. 2 to Credit Agreement, dated April 24, 2019, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.5
July 10, 2020
10.9.6
Amendment No. 3 to Credit Agreement, dated June 20, 2019, between Air Wisconsin Airlines LLC and the Lender.
10-K
001-34584
10.9.6
July 10, 2020
10.10†
Capacity Purchase Agreement, dated August 19, 2022, between American Airlines, Inc. and Air Wisconsin Airlines LLC.
10-Q
001-34584
10.1
November 21, 2022
14.1
Code of Business Conduct and Ethics for Senior Financial Officers.
10-K
001-34584
14.1
July 10, 2020
21.1
List of Subsidiaries of Harbor Diversified, Inc.
10-K
001-34584
21.1
July 10, 2020
24.1*
Power of Attorney (included on the signature page hereto).
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
-
-
-
-
INCORPORATED BY REFERENCE
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
101.SCH*
XBRL Taxonomy Extension Schema Document.
-
-
-
-
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document.
-
-
-
-
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document.
-
-
-
-
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document.
-
-
-
-
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document.
-
-
-
-
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
** The certifications attached as Exhibit 32.1 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.
# Management contract or compensatory plan, contract or arrangement.
+ Certain schedules are omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally any omitted schedules to the SEC upon request.
† Certain confidential portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The registrant has determined that such redacted information is (i) not material, and (ii) would likely cause competitive harm to the registrant if publicly disclosed. The registrant agrees to furnish supplementally an unredacted copy of the exhibit to the SEC upon request.