Latest 10-K filed 10/24/2024 · Compared against 4/3/2023
Chat is set up on each filing report page.
Ask about this filing, its industry, or sector trends.
AI responses are generated from filing and peer context and may contain errors.
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 Harbors common stock involves substantial risk. Harbors 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 Harbors 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, please refer to Cautionary Note Regarding Forward-Looking Statements withiin this Annual Report.
Risks Related to Our Business
If thAir Wisconsin may continue transition from the Unito experience difficulty hiring, training and retaining a sufficient number of qualified capacity purpilots and mechase agreement to the American capacity purchasnics, which may negatively affect Air Wisconsins operations and our financial condition.
Historically, the supply of qualified pilots to the agreement is delayed or moreirline industry has been limited, which has created difficult than expected, our business could be signiy hiring, training and retaining a sufficantly negatively impacted.
A dispute exists under the United capacity purchase agreement with respecient number of qualified pilots. In July 2013, the FAA issued stringent pilot qualification and crew member flight to certrain recurring amounts owestandards, which increased to Air Wisconsin by United. In October 2022, United initiated arbitrhe required training time for new airline pilots (the FAA Qualification under Standards), and the agreement and requested a declarationFAA also mandated stricter rules to minimize pilot fatigue, increasing that it does not owe any of the amounts claime number of pilots required to be employed byfor Air Wisconsin. In December 2022s operations and February 2023,correspondingly increasing Air Wisconsin sent United notices of terminations labor costs.
During the first two years of the agreement. In the arbitration, United hCOVID-19 pandemic, for many reasons, such as contested Air Wisconsins right to terminate the agrereduced flying opportunities, early retirement. In accordance with the termina benefits offered by some airlines, travel restriction provisions of the agreement, and in responses and COVID-19 vaccine mandates, many pilots decided to Air Wisconsins first termination notice, United delivered a reviretire or seek employment in other industries. As passenger demand for air travel has increased wind-down schedule , Air Wisconsin January 2023. Following and othe delivery of that revisr airlines have experienced schedule, in February 2023, the parties agreed, in a sixth amendment to the Unitchallenges hiring and maintaining sufficient numbers of qualified capacity purchase agreement, to a wind-down schedule that provides for pilots due to that attrition as well as historical factors, including the withdrawal of aircraft from the agreincreased flight hour requirement beginning in January 2023 s under the FAA Qualification Standards and continuing until early June 2023, at which time allthe statutory mandatory retirement age of 65. Air Wisconsins remaining aircraft would be has also experienced challenges withdrawn from pilot attrition to othe agreement, andr airlines. In addition, now that Air Wisconsin would ceaseis no longer flying for United. Notwithstanding, United could increase the provision of the agreed wind-down schedule, the sixth amendment does not resolve tnumber of Air Wisconsin pilots it hires, which could restrict the number of flights Air Wisconsin can fly for American. The ongoing dispute in which United has contestedpilot shortage is particularly critical at the captain level. Air Wisconsins right to terminate the United capacity purchase agreem has historically expended significant resources to recruit and train pilots, including as a result of recent, which remains subject to the arbitrat significant upward pressure on pilot compensation. The existence of the dispute could significantly complicate the transition of aircraft from at certain regional airlines and limited availability of flight simulators and instructors. As part of the provision of services to Unitcollective bargaining agreement Air Wisconsin entered into the provision of services to American, whichwith its pilot group in October 2023, Air Wisconsin has increased its pilot compensation substantially, but it could have antinues to evaluate the pilot market and material adverse effect on our business, financial conditiony continue to experience additional cost increases in the future. Since the American capacity purchase agreement does not require and resul increase in the amounts of operatipaid to Air Wiscons. Ain adverse determinatios Air Wisconsin increases the arbitrmount of pilot compensation c, these increases could have a material an adverse effeimpact on our business, financial condition and results of ooperations.ng results.
17
Under
Tthe American capacity purchase agreement provides that a certain number of aircraf, American is required to pay Air Wisconsin a fixed amount each month, commencing in March 2023, will begin flying schedul for each covered aircraft. However, no monthly payment is required flights for American. Beforeor aircraft that do not meet certain minimum block hour utilization thresholds, an aircraft can operate flights for d in certain circumstances American, that aircraft must first be can elect to removed from the provisions of the United capacity purchas those aircraft from coverage under the agreement pursuant to the wind-down schedule and modified. Accordingly, if Air Wisconsin is not able to meet Americanshire and requiremtain a sufficients. During the period from the number of pilots, it withdrawal of anll not receive compensation for all aircraft from othe provisions ofrwise covered by the UnitedAmerican capacity purchase agreement untiland it becomes covemay suffer a red by the provisions ofuction in the American capacity purchasnumber of aircraft covered by the agreement, that aircraft will not generate revenues from either Uniteeither of which could have an adverse impact on our business and or American. The transition of aircraft from the Unitperations.
Air Wisconsin has also recently experienced capacidifficulty purchase agreementhiring and retaining qualified mechanics to the American capacity purchase agreement is subject service its aircraft, due to many a variety of factors, including the cooperatvoluntary retirement decision of United ands, decisions not to return after furloughs during the availability of vendorCOVID-19 pandemic, decisions to paintleave the aircraft in line industry, and the hiring needs of othe livery required by the American capacity purcr airlines. There is also a risk that more mechanics may decide to leave the airline industry. Air Wisconsin hase agreement, some of which are not increased its mechanic wages, along within Air Wisconsins offering other hiring incentives, and may control. There can be no assurancetinue to experience additional cost increases in that this transition will proceed smoothly,e future. If Air Wisconsin is unable to hire and unexpected delays in the transitionretain a sufficient number of qualified mechanics, it could have a materialn adverse effeimpact on our business, financial condition and resul and operations.
If future pilot or mechanic attrition rates outpace Air Wisconsins ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to continue to increase its of operations.
11
Olabor costs to attract and retain sufficient qualified pilots and mechanics, which would nce all of egatively impact our operating results. Air Wisconsins aircraft have been withdra may also be required to reduce the number of block hours flown fromunder the UnitedAmerican capacity purchase agreement, our business will be which would reduce our revenues and possibly trigger the payment of performance penalties.
Our business is highly dependent on the American capacity purchase agreement because American will beis now Air Wisconsins 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 Wisconsins sole airline partner, accounting for approximately 99.9% of our operat. Air Wisconsin ceased flying revenues. Upon the transition of Air Wisconsins aircraft to Americafor United in early June 2023. Since then, we willhave derived nearly all of our operating revenues from the American capacity purchase agreement becauseas American will beis currently Air Wisconsins 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 or remove aircraft that would otherwise be covered under the agreement prior to the expiration of its term in certain circumstances, including upon Air Wisconsins material breach of the agreement, Air Wisconsins inability to operate a certain number of aircraft, Air Wisconsins failure to meet certain operating performance 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 cwould be significantly negatively impacted, unless Air Wisconsin is able to enteand we would need to implement significant changes to our business strategy.
We depend on American electing to contract with us instead of operating its own regional jets or operating through its wholly owned regional subsidiaries, Envoy Air, PSA Airlines and Piedmont Airlines. We have no guarantee that American will choose to enter into satisfactory substitute arrangements for new contracts with us, or renew or extend the American capacity purchase agreement, instead of operating its own regional jets, allocating flying to its wholly-owned regional airlines, or contracting with competing regional airlines. A decision by American to phase out or limit the aircraft covered by the utilization of its aircraft. American capacity purchase agreement, to terminate the agreement, or to enter into similar agreements with our competitors would have a material adverse effect on our business, financial condition and results of operations.
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 ot 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 Americans 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 W
18
Disconsin may experience difficulty hiring, training and retaining a sufficient numbeagreements regarding the interpretation of our capacity purchase agreements could have an adverse effect on our of qualified pilots and mechanicperating results and financial condition.
Complex agreements, whisuch may negatively affect Air Wisconsins operas capacity purchase agreements, are subject to interpretations, and our financial condition.
Historically,disputes may arise if the parties apply different interpretations to such agreements. It is possible the supply of qualified pilotsat a dispute could arise with respect to the airline industry American capacity purchas been limited,e agreement which has created difficulty hiring, trainingcould have an adverse effect on our business, financial condition and retaining a sufficient numbersults of operations.
Prior to the termination of qualifithe United pilots. In July 2013, the Federal Aviation Administration (the FAA) issucapacity purchase agreement, a dispute arose pursuant to which Air Wisconsin claimed stringent pilot qualificatiothat United owed it certain and crew member flight training stmounts under the agreement. United denied that it owed those amounts andards, which increas claimed that Air Wisconsin improperly terminated the requireagreement and training time for new airline pilohat Air Wisconsin owed it certain amounts (for the FAA Qualificalleged wrongful termination Standards), and the FAA also mand. In October 2022, United initiated stricter rules to minimize pilot fatigue, increasingarbitration under the agreement. The arbitrators denied Air Wisconsins claims the number of piloat United owed it amounts requirunder the United to be employed forcapacity purchase agreement, and they denied Uniteds claim that Air Wisconsins operations and correspond breached the agreement by terminatingly increasing it and its claim that Air Wisconsins labor cost owed it damages.
As a result of , neithe significant decline in passengr party owes to the other demandparty and drastically reducy amounts claimed flight departures during the early stage of the COVID-19 pandemic, there was no shortage of qualified pilots in in the arbitration. However, the dispute required us to expend valuable management time and financial resources.
Maintenance costs and delays may increase furthe airline industry. During the first two years of the COVID-19 pr as Air Wisconsin's fleet continues to age, andemic, for out-of-service periods many reasons, such as reducedsult in aircraft being unavailable for flying opportunities, travel restricti.
Most of Air Wiscons and COVID-19 vaccine ins CRJ-200 regional jets were mandates, many pilots decided to retire or seek employment in other industries. However, as passenger demand for air travel has ufactured between 1999 and 2004. As Air Wisconsins fleet continues to age, its maintenance costs will likely increased, Air Wisconsin h, both on an absolute basis and as exa perienced challenges hircentage of its operating and mexpenses. Maintaining sufficient numbers of qualified pilotenance issues may result in out-of-service periods due to a number of factors, including the increased flight hour requirementsring which aircraft are dedicated to maintenance activities and unavailable for flying under the FAA Qualification Standards, the statutory mandatory retirement age of 65,American capacity purchase agreement. There are also industry-wide supply chain issues and attrition resulting from voluntaryparts shortages that have lengthened the time to complete retquirement decisions.d maintenance. These industry-wide issues could increase Air Wisconsin has also experies costs for maintenanced challenge and parts and possibly require it to renegotiate contracts with pilot attrition to other airlines. Air Wisconsin has historically expended significant resources to recruit and train pilots, third-party providers to ensure their continued support of our programs. In addition, as noted above, there is an industry-wide shortage of aircraft mechanics. Air Wisconsin has including as a result of recent signreased its labor costs to attract and retain qualificant upward pressure on pilot compensaed mechanics. However, as passenger demand for air travel has increased and addition at certain regional airlines al aircraft are brought back into service to address the increased demand limited availability of flight simulator, the turnaround time for routine and heavy maintenance has lengthened. As and instructors. result, Air Wisconsin recently increased its pilot compensation has experienced, and may continue to experience additional cost, delays and increasesd costs in the future. Since neither United nor American is required toobtaining both in-house and third-party maintenance services. Any continued increase the amounts it pays to in Air Wisconsin as Air Wisconsin ins maintenance costs or decreases the amount of pilot compensation, these increased revenues or delays resulting in out-of-service periods could continue to have an adverse impaeffect on our financial condition and operating results.
Air Wisconsin has also recently experienced difficulty entered into agreements with thiring and retaining qualified mechanicd-party service providers to service its aircraft, due to a variety of factorprovide various services required for its operations, including voluntary retirement decisions, decisions not to return after furloughs during the COVID-19 pairframe, engine and component maintenance and telecommunications andemic IT services, and the hiring needs of other airlines. There is also a risk it expects to enter into additional similar agreements in the future. If its that some mechanics may have decird-party service provided to leavrs terminate the airline industryir contracts, or may decide to do so in the future. Air Wisdo not provide timely or consin recstently increased its mechanic wages along with offering othesufficient parts or hiring incentives andigh-quality may continue to experieintenance additional cost increases in the future. If nd support services, Air Wisconsin is unmay not be able to hire and retareplace them in a sucost-efficient numbmanner of qualified mechanicr in a manner timely enough to support its operational needs, itwhich could have ana material adverse impaeffect on our business and o, financial condition, and results of operations.
12
IfAmericans decision to eliminate future pilot or mechanic attrirom its fleet all single-class 50-seat aircraft by 2030 may result in the termination rates outof the American capace ity purchase agreement, limit Air Wisconsins ability to hireopportunities for growth with American, and retain qualified pilots and mechanics, Air Wisconsin may need to continue to increasemake it more difficult to enter into substitute arrangements with another airline.
American has announced that its labor costs to attract and retain sufficient qualified pilots and mechanics or it may be unable to flyong-term fleet strategy involves eliminating from its fleet by 2030 all single class 50-seat aircraft, which includes the CRJ-200 regional jet comprising the numberAir Wisconsin fleet. As a result of flights scheduled undethis decision American could decide to terminate, or the United and o not renew or extend, the American capacity purchase agreements, which may result in penaltie. If that were to occur, our business would be significantly impacted, it is under the agreements thatlikely we would negatively impact Air Wisconsinhave an immediate source of revenues operations and ourr earnings to offset the financial condition.
Disagreeimpact, and we may need to implements regarding the interpret significant changes to our business strategy. Alternation of our capacity purchasvely, American could agree to extend the 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, but on terms materially different from the current agreement. United Airlines has also announced that it intends to significantly reduce the number of single class 50-seat aircraft in its fleet, and disputDelta Airlines may arise ihas retired all of the parties apply different interpretations single class 50-seat aircraft in its fleet. Therefore, Air Wisconsin may not be able to enter into thsubstitute agrerrangements. Currently, a dispute exists under t with other airlines, and any arrangements it is able to secure may not be as favorable to us as the Unitedcurrent American capacity purchase agreement with respect to certain re. Since our primary business strategy curring amounts owed to Air Wisconently involves flying sin by United. As of December 31, 2022gle class 50-seat aircraft, the aggregate ampublicly annount in dispute was approximately $47.9 million. In October 2022, United initiated arbitration under the agreemeced fleet strategy changes by several major carriers, including Air Wisconsins sole airline partner, represent and reques substantial risk to our business.
19
Inted a declararruptions or disruption ths in service at it does not owan American hub airport could have any of the disputed amounts as claimed by material adverse impact on our operations.
Currently, Air Wisconsin. The arbitrat provides region could result in substantial costs and a diversal airline services for American primarily based at Chicago OHare Internation of managements attenal Airport. A significant interruption or disruption and resources, and in service in Chicago or anothere is alw American hub resulting from air traffic control delays a chance of an unfavorable determin, weather conditions, natural disasters, growth constraints, relation bys with the arbitratird-party vendors, which could harm our businessfailure of computer systems, financial condiacility disruption ands, labor results of operlations. If a dispute , powere to develop under the American capacity purchase agreement, that supplies, fuel supplies, terrorist activities, or otherwise could also have an adresult in a severse effect e disruption of our business, financial condition and results of operations.
If United or and financial condition.
If American continues to provides Air Wisconsin with inefficient flight schedules, or makes certain changes to the expected utilization of Air Wisconsins aircraft under the applAmericablen 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 haves the ability to schedule Air Wisconsins flights in any manner that serves theirits purposes, subject to certain reasonable operatscheduling constraints which do not prevent them from schproceduling Air Wisconsins flights in a manner Air Wisconsin deems inefficient. From timres. American may continue to time, United has scheduled Air Wisconsins flights in a manner that createds operational inefficiencies for Air Wisconsin, such as by building in long crew layovers or overnights, which could 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 weare inconsistent with Air Wisconsins existing operational footprint. It is possible that American will alsoThese schedule flights in a manner that Air Wisconsin deems ineing inefficient. These actions have had and may continue to cies could 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 d American in the future, tto modify the anticipated utilization of Air Wisconsins aircraft, some of which are beyond Air Wisconsins control. Any factors that continue to cause United or American to schedule the utilization of Air Wisconsins 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 applAmericablen 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 Wisconsins current and future growth opportunities may be limited by a number of factors impacting American or the airline industry generally.
Growth opportunities within Americans 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 aircraftjets that may be operated in its flight systems that are not flown by its pilots. These clauses could limit Air Wisconsins ability to operate largeradditional aircraft for American, which would limit Air Wisconsins 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 Wisconsins 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.
13
T In addition, due to the stated intentions of the amounts major airlines to significantly reduce or retire their use of single class 50-seat aircraft, there may not be substitute flying opportunities with major airlines. Further, even if Air Wisconsin receives under the United and is offered the ability to pursue growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.
The amounts Air Wisconsin receives under the 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. American is not required to pay certain amounts with respect to aircraft that do not meet certain minimum block hour utilization thresholds. The primary operating costs intended to be compensated by
20
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 Wisconsins 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 The American capacity purchase agreement or the American capacity purchase agreementdoes not provide for adjustments for any resulting compensation increases and, therefore, wsuch increases could negatively impact our operating results.
A significant portionmajority of Air Wisconsins workforce is represented by labor unions, and the terms of Air Wisconsins collective bargaining agreements may increase our operating expenses and negatively impact our financial results.
A significant majority of Air Wisconsins 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 Wisconsins CRJ-200 regional jets as of December 31, 2022 was approximately 20.3 years. As Air Wisconsins fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a perc currentage 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 Wisconsins 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 maintenancely operates only one aircraft type, 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 arelies on one aircraft 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 reliesufacturer and on one aircraft manufacturer and one ene 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 Wisconsins 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 Wisconsins fleet, could result in concerns about Air Wisconsins fleet that could negatively impact our business.
14
Air Wisconsin has been highly dependent upon Bombardier, as the sole manufacturer of Air Wisconsins aircraft, and GE, as the sole manufacturer of Air Wisconsins 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 Bombardiers regional jet program, including all aspects of the CRJ-200 regional jet, such as type certificates, maintenance, support, refurbishment, marketing and sales activities. Air Wisconsins 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 Wisconsins aircraft or engines.
The residual value of our aircraft and , engines and parts 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 operating CRJ-200 regional jets;
|
|
|
|
|
|
|
|
21
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.
In addition, if Air Wisconsin were to reduce the number of CRJ-200 regional jets involved in its flying operations, Air Wisconsin may need to conduct quantitative tests for impairment of the CRJ-200 fleet and related assets. 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 theour 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 Wisconsins ability to obtain additional financing may be limi conducted, and, in the event Air Wisconsin is unable to a test for impairment of its fleet and repay its debt and other contractual obligatilated assets as of December 31, 2023.
Air Wiscons, our business, results of operations andins ability to obtain financial condition may be adversely impacted.
The airline business is capital intensive. As of ng on acceptable terms may be limited.
In December 31, 20222023, Air Wisconsin haprepaid approximately $61.2 million in totalt a discount all of its outstanding third-party dsecured debt, which was that had been incurred in connection with the acquisition of aircraft and , which is securresulted by substantially all of Air Wisconsins aircraft, engines and parts. Since the acin a significant reduction in its liquisition of such aircraft,dity. While Air Wisconsin typically has financed its operations primarily from through operating cash flow. Howevers, to the extent Air Wisconsin seeks to finances its future business activities or its pursuit of new oopportunities with additional debt, it would become subject to additional ddebt service obligations, as well as additional covenants that may restrict its ability to pursue its busibusiness strategy or otherwise constrain its growth and ooperations. Air Wisconsins ability to pay its existing and any additionalany future 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 Wisconsins working capital and cash flows from operations will continue to be sufficient to make its required payments under its debt and other contractual arrangements or to make debt service payments required by any new debt financing.
If Air Wisconsin is unable to pay its debts as they come due or fails to comply with its obligations under the any future debt agreements governing its debt, and is unable to obtain waivers of such defaults, its secured lender could foreclose on any of Air Wisconsins assets securing such debt. Additionally, a failure to pay Air Wisconsins property leases, future 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 during the COVID-19 pandemic for payroll support contained various covenants. If the Treasury determines that Air Wisconsin failsed 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.
15
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 Wisconsins business, operations and financial condition.
The performance and reliability of Air Wisconsins technology, the technology of United and , Americans, and the technology of our third-party service providers, are technology is critical to Air Wisconsins ability to compete effectively. Any internal technological error or, failure or large-scale external interruption in the teinformation systems, networks, hardware, software and technological infrastructure weAir Wisconsin depends on, such as U.S. air traffic control systems, power, telecommunications or the internet, m (collectively, IT Systems), may disrupt Air Wisconsin's internal network. Any individual, sustained or repeated failure of Air Wisconsins technology, or that of United, American or our third-party service providers, could impact Air Wisconsins ability to conduct, impact its ability to conduct its business and safely operate its bus
22
flinessghts, lower theits utilization of Air Wisconsins aircraft, and result in increased costs andor penalties. Air Wisconsins technological sIT Systems, software and related data, those of United and (including American, and systems or those suppliprovided by our third- party service providers,ies) may be vulnerable to a variety of sources of interruption or exploitation due to events beyond ourits control, including natural disasters, terrorist attacks, telecommunications or IT System failures, computer viruses, hackercyber criminals and other security issues.
In addition, as a part of Air Wisconsins ordinary business operations, it faces numerous and evolving cybersecurity risks that threaten the security, collects and stores,nfidentiality, integrity and will collect and store, sensitive dataavailability of its IT Systems, including personal information of its employees and informfrom diverse threat actors such as state-sponsored organization of United and American. Air Wisconsins information systems ares, opportunistic hackers and hacktivists, as well as through diverse attack vectors, subject to an increasing threat of evolving cybersecurity attacks. Unauthorized parch as social engineering/phishing, security breaches, malfeasance by insiders, human or technological error, computer viruses, malicious or destructive code, misconfigurations, bugs or other vulnerabilities may attempt to gain access in commercial software that is integrated into Air Wisconsins sys, Americans, or third-party service providers IT Systems or information, products or services, malware (including ransomware) and other attacks, including through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or attack or sabotage systems are constantly evolving, and may be diffic threat actors are becoming increasingly sophisticated in using techniques and tools including artificial intelligence that circumvent security controls, evade detection and remove forensic evidence. As a result Air Wisconsin may be unable to anticipate or to detect for , investigate, remediate or recover from attacks or incidents for long periods of time. Further, Air Wisconsin may not be able to prevent all data security breaches or, misuses of data. or other cybersecurity incidents.
The comre can be no assurance that our cybersecurity risk management promise of gram and processes, including Air Wisconsins policies, controls or procedures, will be fully implemented, complied with or effective in protecting our IT Systems. Because Air Wisconsins tec relies on third-party vendors and service providers for functions critical to its business, including information technology systeinfrastructure and services, successful cyberattacks that disrupt or result in unauthorized access to third-party IT Systems rescan materially impact its operations and financial resultis. Remote and hybrid working in the loss, disclosure, misappropriation of, or access to, employees, passengerarrangements at Air Wisconsin (and at many third-party service providers) also increase cybersecurity risks due to the challenges associated with managing remote computing assets and security vulnerabilities that are present in many non-corporate and home networks.
Certain Air Wisconsin third-party service providers have experienced cybersecurity incidents, and Air Wisconsin expect such incidents to continue in varying degrees. While to date no incidents have had a material impact on Air Wisconsins operations or business partnersour financial results, we cannot guarantee that material incidents will not occur in the future. Any cybersecurity information cocident or other adverse impact to the availability, integrity or confidentiality of Air Wisconsins IT Systems could rescompromise our ability to operate flights or technology systems, result in legal claims or proceedings, liaregulatory investigations and enforcement actions, liability or regulatory penalties under laws protecting the privacy of , disruption to its operations, damage to its reputation, and/or significant incident response, system restoration or remediation and future compliance costs. Any or all of the foregoing could adversely affect our business, results of opersonal inations and financial condition.
Laws, regulations and other requirements relating to the privacy, security and handling of information and disruptibout individuals, and the application and interpretation of those requirements, are constantly evolving. There has been heightened legal and regulatory focus on data privacy and security, including in relation to its opercybersecurity incidents, and it is possible that new laws or regulations, any or all or interpretations may require us to incur significant costs, implement new processes or change our handling of which information and business operations. Any failure or perceived failure to comply with laws, regulations and other requirements relating to the privacy, security and handling of information could adversely affectresult in legal claims or proceedings, regulatory investigations or enforcement actions. We could incur significant costs in investigating and defending such claims and, if found liable, pay significant damages or fines or be required to make changes to our business an. If any of these events were to occur, our business, results of operations, and financial condition. could be materially adversely affected.
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 Wisconsins control, including air traffic congestion at airports, air traffic control inefficiencies, adverse weather conditions, natural disasters, facility disruptions, acts of war or terrorism, cancellations, inincreased security measures, and the outbreak of disease. Factors that cause flight delays or cancellations frustrate passengers, increase operating costs and decrease revenues, which in turn adversely affect profitability. Because Air Wisconsins revenues (other than the portion of its revenues based on the number of aircraft covered under the applicable capacity purchase agreemdepend to a large extent) depend primarily on Air Wisconsins completion of flights, and se
23
condarily on service factors such as timeliness of departure and arrival, customer satisertain service faction, cancellations or delayors, 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 Wisconsins operations and our financial condition are currently affected, and may in the future be affected, by many other factors and conditions beyond Air Wisconsins control, including, among others:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Tthe effect of acute on-going shortage of qualified pilots and mechanics, and resulting increases in compensation and the continuing pressure to significantly increase wages in the foregoing factorindustry;
actual or potential changes in political conditions, including wars, outbreak of hostilities, terrorism, or government sanctions;
air traffic control delays or conditidisruptions;
changes in demand for airline travel or tourism, cons on Air Wisumer preferences, or demographic trends;
changes in the competitive environment due to pricing, industry consins operationolidation, or other factors;
labor disputes, strikes, work stoppages, or similar matters impacting employees;
although the FAA and the telecommunications is difficult to forecast; however, tndustry have reached an interim agreement with respect to 5G deployment, interference with aviation equipment from the deployment of 5G wireless telecommunications systems remains a risk and additional review will be required once the interim agreement expires; and
actual or potential changes in economic conditions, including rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates, inflation, changes in discretionary spending and consumer confidence.
The occurrence of any or all of such factors or conditions could materially and adversely affect its operations and our financial condition.
The
New variants of COVID-19 pandemic, and, or 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 outbreakNew variants 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 regionas well 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 pandemics impact on their businesss those of American.
High and/or volatile fuel prices or significant disruptions in the supply of aircraft fuel could have a material adverse impact on Air Wisconsins operating results and financial condition and liquidity.
Although the United and American capacity purchase agreements provides that United or American, as the case may be, sources, procures and directly pay pays third-party vendors for substantially all fuel used in the performance of the applicable agreement, aircraft fuel is critical to Air Wisconsins 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 Wisconsins 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 Wisconsins operating results. In addition, since single class 50-seat aircraft, such as those in Air Wisconsins fleet, are less fuel efficient than certain larger aircraft, increased fuel costs affects Air Wisconsins competitiveness in the industry.
24
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, coul 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 sinaccelerate the implementation of its long-term fleet strategy to eliminate 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 opporesult in the termination of the American capacity purchase agreement and limit opportunities for Air Wisconsin to continue to provide service to American. Similarly, any further consolidation or restructuring of any major air carriers regional jet programs, including as a result of long-term fleet strategy changes announced by several major carriers, coul could negatively impact Air Wisconsins 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 Wisconsins 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.
17
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 Wisconsins 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 Wisconsins 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 Wisconsins aircraft could have an adverse impact on Air Wisconsins operations, its relationship with United or American, and our financial results. In addition, certain groundings of Air Wisconsins 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
25
addition, airports and municipalities enact rules and regulations that affect Air Wisconsins operations. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of Air Wisconsins aircraft for any reason may have a material adverse effect on Air Wisconsins operations and our financial condition. Further, Air Wisconsins 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 Wisconsins 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 contamination 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.
18
The requirement that Air Wisconsin remain a citizen of the United States limits the potential purchasers of Harbors 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 Wisconsins equity securities in the following ways:
|
|
|
|
|
|
|
|
|
|
|
|
at least 75% of Air Wisconsins 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 Wisconsins total outstanding equity securities must be owned and controlled by U.S. citizens and no more than 49% of Air Wisconsins 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 Wisconsins total outstanding equity securities.
The restrictions on foreign ownership of Air Wisconsins 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 Harbors common stock.
26
General Risk Factors
Because the trading market for Harbors common stock is limited, the common stock may continue to be illiquid.
Although Harbors 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 limitedlimited. The trading volume for the common stock has declined further following Harbors announcement that it intends to restate the previously issued consolidated financial statements for the Non-Reliance Periods. Harbor has not listed, and does not currently intend to list, Harbors 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 Harbor common stock may never develop or be sustained. , and that the restatement of the previously issued consolidated financial statements could have a prolonged negative impact on the trading volume of the common stock.
The price of Harbors common stock has been and may continue to be volatile.
The trading price of Harbors common stock has been volatile. We believe Harbors stock price will be subject to wide fluctuations in response to a variety of factors, including the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19the industry-wide pilot and mechanic shortages;
the effects of the outcome of the arbitration with United and the issuance of the United Arbitration Award;
future announcements regarding fleet strategy changes by major air carriers, including any decision to reduce or eliminate single class 50-seat aircraft or to accelerate the timing of any such changes;
actual or anticipated fluctuations in our financial and operating results from period to period;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the effect of the restatement of our previously issued consolidated financial statements and material weakness in our internal control over financial reporting;
actual or potential changes in economic conditions, including rising fuel and other commodity prices, increasing interest rates, inflation, changes in discretionary spending and consumer confidence, and recessionary concerns;
the impact of pandemics and widespread outbreaks of communicable diseases on passenger demand for air travel, consumer behavior and tourism;
our actual or perceived need for additional capital and the terms of any future debt financing or leasing arrangement;
market perceptions about our financial stability, in particular as a result of the restatement of its. previously issued consolidated financial statements, and the financial stability of American;
market perceptions regarding Air Wisconsins 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 Wisconsins competitors;
bankruptcies or other financial issues impacting Air Wisconsins business partners or competitors;
threatened or actual litigation and government investigations;
changes in the regulatory environment impacting Air Wisconsins business and industry;
|
|
|
|
27
purchases or sales of shares of Harbors common stock pursuant to Harbor's publicly announced stock repurchase program or otherwise;
the illiquidity of Harbors common stock, which has been negatively impacted by the restatement of our previously issued consolidated financial statements;
speculative trading practices of Harbors stockholders and other market participants;
perceptions about securities that are traded on the OTC Market;
the impact of new accounting pronouncements or updates to existing accounting standards; 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 Harbors 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 oand trading volume of Harbors common stock.
The concentration of ownership of Harbors capitalommon stock among a small number of stockholders could allow such stockholders to exert significant influence over the Companys business plans and strategic objectives, control all matters submitted to Harbors 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 DecSeptember 310, 20224, Harbor had 45,219,73758,534,309 shares of common stock outstanding. As of the same date, Amun LLC (Amun) held 20,000,000 shares of Harbors common stock, representing approximately 32.44.2% of the fully dilutedoutstanding shares of capital Harbor's common stock of Harbor, and Southshore Aircraft Holdings, LLC, through its affiliates (together, Southshore), held shares of Harbors Series C Convertible Redeemable Preferred Stock (Series C Preferred), which are immediately convertible into 16,500,000 shares of common stock, representing approximately 26.78.2% of the fully diluted shares of capital stock of Harbor (in each case assumoutstanding the full conversion of the Series C Preferred into common stock).
The shshares 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 Harbors outstanding capitalommon stock and, therefore, are able to exercise significant influence over the establishment and implementation of the Companys business plans and strategic objectives, as well as to control all matters submitted to Harbors stockholders for approval. These stockholders may manage the Companys 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 Harbors stockholders of an opportunity to receive a premium for their investment, or otherwise negatively affecting the trading price or trading volume of Harbors common stock.
Mr. Bartlett, one of Harbors directors, may be deemed to be the beneficial owner of the shares of Harbors 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 PreferredHarbor's common stock 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 Harbors capitalommon stock. However, Mr. Bartlett does not control voting or investment decisions made by either Amun or Southshore.
20
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 Harbors common stock.
In February 2012, Harbors 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 Harbors 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 ourthe 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 tSection 15(d) of the Exchange Act.
28
The Company has incurred, and expects to continue to incur, significant direct and indirect costs, and diversion of managements 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). The Company has incurred and may continue to incur significant additional costs as a result of the restatement of its previously issued consolidated financial statements for the Non-Reliance Periods.
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 Harbors 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 o(b) or Section 12(g) 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 Harbors common stock and the trading price.
Provisions in As a result of the delay in filing this Annual Report due to the restatement of the previously issued consolidated financial statements for the Non-Reliance Periods, Harbor is not currently in compliance with its reporting obligations under Section 15(d) of the Exchange Act because it did not timely file all required periodic reports with the SEC. While Harbor currently intends to file all required periodic reports with the SEC and regain compliance with its reporting obligations, there can be no assurance as to the timing. Harbors failure to timely file all required periodic reports with the SEC, or to regain compliance with its reporting obligations, could cause reputational harm and have a material adverse impact on the trading volume and trading price of its common stock.
Provisions in Harbors governing documents and the American capacity purchase agreement might deter acquisition bids, which could adversely affect the value of Harbors common stock.
Harbors 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 Harbors capital stock that would result in: (i) any person or entity becoming a Five-Percent Stockholder (as defined under Treasury Regulation Section 1.3821
-T(g)) of Harbors 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 Harbors 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 Harbors common stock, that could dilute the interest of, or impair the voting power of, holders of Harbors 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 Harbors stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of the Company;
|
|
|
|
29
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 Harbors common stock.
Harbors amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, limit certain transfers of Harbors stock in order to preserve Harbors 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 Harbors ability to use its current or future net operating loss carryforwards for federal income tax purposes, Harbors amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of Harbors capital stock that could result in adverse tax consequences by impairing Harbors 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 Harbors capital stock. These transfer restrictions apply to the beneficial owners of the shares of Harbors capital stock. The transfer restrictions contained in Harbors amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for Harbors 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 Harbors common stock may be the appreciation in value of Harbors 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 Wisconsins credit agreements contain restrictions that limit Air Wisconsins ability to pay, or prohibit it from paying, dividends to Harbor. Any fAny 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)contractual restrictions, 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 Harbors 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 Harbors 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 Harbors 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 Harbors common stock held by non-affiliates is less than $700 million and theits annual revenues of Harbor arwere less than $100 million during the most recently completed fiscal year. Because Amun and Southshore collectively hold a significant percentage of the fully dilutedoutstanding shares of capitalommon stock of Harbor, it would require a significant increase in the market value of Harborsthe 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
30
regarding executive compensation. Investors may find Harbors common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for Harbors common stock and negatively impact the trading price.
22
As previously discussed, Harbor does not have a class of securities registered pursuant to Section 12(b) or 12(g) of the Exchange Act, which further reduces its disclosure obligations.
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 managements 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. As a result of the determination that the previously issued consolidated financial statements for the Non-Reliance Periods should no longer be relied upon and that such financial statements should be restated, we concluded that we had a material weakness in our internal control over financial reporting. As a result, we determined that our disclosure controls and procedures were not effective as of December 31, 2023.
Compliance with these various reporting and compliance obligations has substantially increased our legal and financial compliance costs and increased demands on our management team, in particular as a result of the restatement. Significant additional resources and management oversight may be required to maintain and, as required, e enhance our disclosure controls and procedures and internal control over financial reporting in response to the determination that we have a material weakness, which could have an adverse impact on our business and operating results.
Further, Harbors 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 deficie, as well as the cost of premiums for director and officer liability insurance.
The restatement of our previously issued consolidated financial statements has been time consuming and expensive and may subject us to additional risks and uncertainties, including loss of investor confidence, and the increased possibility of litigation and regulatory inquiries.
As discussed above, we have restated our audited consolidated financial statements as of and for the year ended December 31, 2022 and our interim unaudited consolidated financies in future periods.
Aal statements contained in the Quarterly Reports on Form 10-Q as of and for the first three quarters of the years ended December 31, 2022 and December 31, 2023, which has been time consuming and expensive. The restatement material weakness is a deficiency, or combinay result in a loss of investor confidence in the accuracy of our financial disclosures and cause reputational risks for our business. In addition, we have incurred, and may continue to incur, significant costs for accounting, audit and legal fees in connection of dewith or related to the restatement. For example, we have expended significiencies, in internant unanticipated fees for multiple accounting and legal advisors over a period of several months to assist with the application of technical control over financial reportiaccounting requirements. Finally, the restatement could subject us to additional risks and uncertainties, including the increased possibility of litigation, regulatory inquiries, or other matters. For example, we are aware of the filing sucof several lawsuits relating to the facts arising in connection with that e restatement. Regardless of there is a reasona merit of the claims raised, we expect to incur expenses, and for our management team to devote valuable possibilityresources, in connection with defending thatese claims.
We have identified a material misweakness in our internal control over financial reporting, which could, if not effectively remediated, result in additional restatements of our annual or interimfinancial statements, and a failure to meet our reporting and financial obligations, each of which could adversely affect our results of operations and financial statcondition.
As discussed above, our managements would has concluded that we did not be prevented or detected on a timely basis maintain effective internal control over financial reporting as of December 31, 2023, due to a material weakness. The material weakness arose from our recognition of certain disputed revenues and related interest income under the United capacity purchase agreement. We cannot behave determined that the recognition of certain that weof the Disputed Amounts was inconsistent will be successful in identifying, prevth the technical requirements of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606). We are actively engaged in implementing ora remediating future on plan designed to address the material weaknesses or significant deficiencies in and are committed to remediating it as promptly as possible. Because of the inherent limitations in all control systems, no evaluation or strengthening of controls can provide absolute assurance that all control failures within the Company have been or will be detected. Accounting standards are complex, and are subject to changing guidance and differing internal control over financiarpretations. Notwithstanding the exertion of significant effort and resources to interpret and apply accounting standards (and any related guidance), it is
31
possibl reportinge that they may be misinterpreted or misapplied, or that prior interpretations may be reconsidered and changed, which failure coulmay result in technical accounting errors, as occurred with respect to our application of ASC 606. Any such accounting error could result in materiadditional missrestatements of our annual or interimpreviously issued consolidated financial statements. Any such misstatemccordingly, we cannot be certain that our efforts to remediate the identified material weakness will ensure effective internal control over financial reporting going forward.
Our currents conclusion regarding the effectiveness of our internal control over financial statements reporting, as well as any conclusion in any future period that our internal control over financial reporting is not effective, could lead to restatementcause investors to lose confidence in the accuracy and completeness of our financial statements, which coreports, the trading price or trading volume of Harbor's common stock to decline, the SEC or other regulatory authorities to investigate or sanction us, and additional lawsuits relating to the facts arising in connection with the restatement. Any failure to improve our internal control over financial reporting could result in an adverse impact to ou inhibit our ability to accurately report our financial condition and operating results.
We also face risks associated with the cost of establishing, maintaining and enhancing effective internal control over financial results and a decline porting. We have invested, and expect to continue to invest significant resources in future years, to develop and maintain the tradnecessary documentation and testing price ocedures required by Section 404(a) of Hthe Sarbors common stock. anes-Oxley Act. Ensuring we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort.
Stock repurchases could increase the volatility of the trading price of Harbors common stock, and we cannot guarantee that our stock repurchase program will enhance long-term stockholder value.
TheHarbor's board of directors has aadopted a stock repurchase program pursuant to which Harbor may repurchase shares of its common stock from time to time. SinceFrom the inception of the program in March 2021 through December 31, 20223, Harbor has purchased approximately 9.611.7 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 Companys 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 arrangedebt agreements or capacity purchase agreements (or similar agreements) we may enter into from time to time. Repurchases of Harbors common stock could increase the volatility of the trading price and reduce the trading volume of the common stock, 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 Harbors common stock may decline below the levels at which we repurchased shares. AlthoughWe cannot guarantee that the repurchase program is intended to enwill 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, sSecurities class action litigation hasmay been instituted against companies following periods of volatility in the overall market and in the price of a companys securities. If Harbor faces such litigation, it could result in substantial costs and a diversion of managements 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, ouemployees or other constituents. For examployees or other e, we are aware of the filing of several lawsuits relating to facts arising in connection with the restatement of our previously issued constituolidated financial statements. If such claims are successful, our business and results of operations could suffer and, e. Even if the claims do not result in litigation or arare resolved in our favor, these claims, and the time and resources necessary to resolve them, couldlawsuits could result in substantial costs and a divert the resourcession of our management an's attention, which could harm our business, financial condition and results of operations.
23
If securities or industry analysts do not publish reports about our business, an aor the Company does not issue press releases, an active trading market for Harbors common stock may not develop.
The extent of any trading market for Harbors common stock will depend, in part, on any research andthe content of any reports that securities or industry analysts publish about us our business, as well as any press releases or our businessther publications issued by the Company. Analyst coverage of the Company is has been extremely limited, and doeswe are not appear to be consistently producedware of any reputable analysts that cover the Company. In addition, it has not been the Company's policy to issue press releases, and the
32
Company does not intend to issue press releases for the foreseeable future. Investors should not purchase Harbors common stock with the expectation that we will have analyst coverage, or or that the Company will publish press releases, and should be aware that an actit the information available about our business may be significantly less than information about other public companies. In the absence of these reports or other publications, an active trading market for Harbors common stock willmay not develop or be developed or sustained.
|
sustained.
As discussed above, Harbor is not current in filing certain reports with the SEC as required pursuant to Section 15(d) of the Exchange Act. Harbors failure to be timely in its SEC reporting obligations could have a material adverse impact on the trading volume and trading price of the Harbor common stock.