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Summary of Significant Accounting Policies
 9 Months Ended
Sep. 30, 2023
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements (the "condensed consolidated financial statements") have been prepared, without audit, in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of Harbor Diversified, Inc. (“Harbor”) and its subsidiaries (collectively, the “Company”).
Harbor is a non-operating holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), which is a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is a non-operating entity with no material assets.
The condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly in all material respects the financial condition and results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. All of the dollar and share amounts set forth in these condensed notes to condensed consolidated financial statements are presented in thousands except per share and par value amounts.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Harbor’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on April 3, 2023 (“2022 Annual Report”). As a result of numerous factors, including those discussed throughout this Quarterly Report, the results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other reporting period.
Description of Operations
The Company has principal lines of business focused on (1) providing regional air services through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin, and (3) providing flight equipment financing to Air Wisconsin. Additionally, Air Wisconsin is continuing to explore aircraft leasing opportunities.
The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier. For the three months ended September 30, 2023, Air Wisconsin was engaged in the business of providing scheduled passenger service for American Airlines, Inc. ("American") under a capacity purchase agreement ("American capacity purchase agreement") which was entered into in August 2022. Prior to early June 2023, Air Wisconsin was also engaged in the business of providing scheduled passenger service for United Airlines, Inc. (“United”) under a capacity purchase agreement (“United capacity purchase agreement”) which was entered into in February 2017 and which terminated in early June 2023. Air Wisconsin has provided scheduled passenger service for American since March 1, 2023. Pursuant to the American capacity purchase agreement, Air Wisconsin agreed to provide up to 60 CRJ-200 regional jet aircraft for regional airline services for American. The American capacity purchase agreement also provides that the parties may discuss the possibility of adding CRJ-700 regional jets to Air Wisconsin’s fleet for the purpose of providing regional airline services under the agreement, but neither party is currently under any obligation with respect to these aircraft.
American became Air Wisconsin’s sole airline partner when all its aircraft were removed from United’s flying operations in early June 2023. As of September 30, 2023, Air Wisconsin had 45 aircraft in service for American under the American capacity purchase agreement.
For additional information, refer to Note 3, Capacity Purchase Agreements with United and American.
Contract Revenues
For the three and nine months ended September 30, 2023, approximately 0.1% and 50.1%, respectively, of the Company’s operating revenues were derived from operations associated with the United capacity purchase agreement and approximately 99.7% and 49.7%, respectively, of the Company’s operating revenues were derived from operations associated with the American capacity purchase agreement.
In performing an analysis of the United capacity purchase agreement and the American capacity purchase agreement within the framework of Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”) and Financial Accounting Standards Board (“FASB”) ASU No. 606, Revenue from Contracts with Customers (“Topic 606”), the Company determined that a portion of the payments it receives under the capacity purchase agreements that is designed to reimburse Air Wisconsin for use of a certain number of aircraft, which is referred to as “right of use,” is considered lease revenue. All other revenue received by Air Wisconsin under the capacity purchase agreements is considered non-lease revenue. After consideration of the lease and non-lease components, within the context of Topic 842, the Company determined the non-lease component to be the predominant component of each capacity purchase agreement and elected a practical expedient to not separate the lease and non-lease components. Therefore, all compensation received by Air Wisconsin pursuant to the United capacity purchase agreement and the American capacity purchase agreement has been accounted for under Topic 606.
The Company has recognized revenue under each capacity purchase agreement over time as services are provided. Under each agreement, Air Wisconsin is entitled to receive a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per covered aircraft per day (subject to Air Wisconsin’s ability to meet certain block hour utilization thresholds), in each case subject to annual increases during the term of the agreement. Air Wisconsin’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. Each agreement also provides for the reimbursement to Air Wisconsin of certain direct operating expenses, such as certain insurance premiums and property taxes.
Prior to the termination of the United capacity purchase agreement in early June 2023, United made provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments were then subsequently reconciled with United based on actual completed flight activity. As of the date of this filing, these payments were reconciled through June 2023, the last month of United operations. As of September 30, 2023, Air Wisconsin believes, but United disputes, that United owes Air Wisconsin $30,149, of which $29,509 is recorded in receivables, net on the condensed consolidated balance sheets. For additional information, refer to Note 3, Capacity Purchase Agreements with United and American and Note 8, Commitments and Contingencies.
American makes provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments are subsequently reconciled with American based on actual completed flight activity. As of the date of this filing, payments through September 2023 have been reconciled. As of September 30, 2023, American owed Air Wisconsin approximately $608, which is recorded in receivables, net, on the condensed consolidated balance sheets.
Prior to the termination of the United capacity purchase agreement in early June 2023, Air Wisconsin was eligible to receive incentive payments, or was required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time performance, and customer satisfaction ratings. The incentives were defined in the agreement, and performance was measured on a monthly basis. At the end of each month during the term of the agreement, Air Wisconsin calculated the incentives achieved, or penalties payable, during that period and recognized revenue accordingly, subject to the variable constraint guidance under Topic 606. Final reconciliations have been completed with United through June 2023. Air Wisconsin has received net payments of $(6) and $1,236 for the three and nine months ended September 30, 2023, respectively, as compared to $2,137 and $5,443 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, Air Wisconsin had no amount recorded as part of receivables, net, on the condensed consolidated balance sheets related to net incentive amounts. As of December 31, 2022, Air Wisconsin recorded $2,307 as part of receivables, net, in the condensed consolidated balance sheets related to net incentive amounts.
Commencing in September 2023, Air Wisconsin became eligible under the American capacity purchase agreement to receive bonus payments, and may be required to pay rebates, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion, on-time performance, and customer satisfaction ratings. The bonus and rebate amounts are defined in the agreement, and performance will be measured on a monthly or quarterly basis. At the end of each month or quarter, Air Wisconsin will calculate the bonus amounts achieved, or rebates payable, during that period and recognize revenue accordingly, subject to the variable constraint guidance under Topic 606. As of
September 30, 2023, Air Wisconsin had not recorded any bonus or rebate amounts under the American capacity purchase agreement.
Under the United capacity purchase agreement, Air Wisconsin was entitled to receive a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognized revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the COVID-19 pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it continued to do so until the termination of the agreement in early June 2023. Accordingly, during the three and nine months ended September 30, 2023, Air Wisconsin recognized $0 and $16,561 of fixed revenues that were previously deferred, respectively, compared to a recognition of $5,180 and $22,548 of fixed revenues in the three and nine months ended September 30, 2022, respectively. As of September 30, 2023 and December 31, 2022, deferred fixed revenues in the amount of $0 and $16,561, respectively, were recorded as part of deferred revenues on the condensed consolidated balance sheets.
Under the United capacity purchase agreement, Air Wisconsin also recognized decreased non-refundable upfront fee revenues and increased fulfillment costs, both of which were amortized over the remaining term of the United capacity purchase agreement in proportion to the number of flights completed in the period relative to the number of flights expected to be completed in subsequent periods. During the three and nine months ended September 30, 2023, Air Wisconsin recorded $0 and $1,335 of revenue from upfront fees, respectively, and $0 and $143 of fulfillment costs, respectively, compared to $932 and $3,314 in revenue from upfront fees, respectively, and $100 and $355 of fulfillment costs for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023 and December 31, 2022, deferred upfront fee revenue in the amount of $0 and $1,335, respectively, is recorded as part of contract liabilities on the condensed consolidated balance sheets.
Under the American capacity purchase agreement, Air Wisconsin is entitled to receive a fixed amount per aircraft per day for each month during the term of the agreement based on a formula which takes into account pilot availability for any given month. Air Wisconsin will recognize this revenue related to the specific flight activity for the month in which the flights occur.
Under the American capacity purchase agreement, Air Wisconsin is also entitled to be reimbursed for certain startup costs ("non-refundable upfront fee revenue"), such as livery changes to the aircraft, to prepare the aircraft for American flight services. Through September 30, 2023, Air Wisconsin had incurred $3,998 in reimbursable costs, and it estimates that it will incur an additional $602 in reimbursable costs over the term of the American capacity purchase agreement. In accordance with GAAP, the Company will recognize revenue related to the total estimated non-refundable upfront fee revenue of $4,600 on a proportional basis taking into account the number of flights actually completed in the period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Accordingly, during the three and nine months ended September 30, 2023, Air Wisconsin recognized $193 and $319 of non-refundable upfront fee revenues, respectively, compared to a recognition of $0 of non-refundable upfront fee revenues in the three and nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, Air Wisconsin deferred $3,680, and $0, respectively, in non-refundable upfront fee revenues under the American capacity purchase agreement. Air Wisconsin’s deferred revenues related to the non-refundable upfront fee revenues under the American capacity purchase agreement will adjust over the remaining contract term, based on the actual expenses incurred that will be reimbursed and recognized based on the number of flights actually completed in the period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. As of September 30, 2023 and December 31, 2022, deferred non-refundable upfront fee revenues in the amount of $641 and $0, respectively, were netted as part of short-term contract assets, and $3,039 and $0, respectively, were recorded as part of long-term contract liabilities on the condensed consolidated balance sheets.
As noted above, Air Wisconsin incurred certain startup costs ("fulfillment costs") prior to the start of flying operations for American on March 1, 2023. These costs included changes to the livery, fuel costs, and certain training expenses. The total fulfillment costs incurred were $774. These costs will be amortized on a proportional basis taking into account the number of flights actually completed in the period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. For the three and nine months ended September 30, 2023, Air Wisconsin recorded $33 and $54, respectively, and $0 for the three and nine months ended September 30, 2022 for amortization expense related to fulfillment costs. As of September 30, 2023 and December 31, 2022, fulfillment costs of $108 and $0, respectively, are recorded as part of short-term contract costs, and $613 and $0, respectively, are recorded as part of long-term contract costs on the condensed consolidated balance sheets.
Under the American capacity purchase agreement, Air Wisconsin will also receive a monthly support fee and be reimbursed for heavy maintenance expenses based on the fixed covered per aircraft per day rate over the term of the agreement. In addition, amendments to the American capacity purchase agreement entered into by Air Wisconsin and American in February 2023 and November 2023 ("Amendment No. 1" and "Amendment No. 3", respectively) provided for a one-time payment to assist with increased costs related to pilot compensation and revised compensation rates assessed under the agreement from 2023 to 2028 to assist Air Wisconsin with pilot compensation and retention.. In accordance with GAAP, the Company recognizes revenue related to the monthly support fee, heavy maintenance revenue, and one-time pilot compensation assistance payment on a proportional basis taking into account the number of flights actually completed in the period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Accordingly, during the three and nine months ended September 30, 2023, Air Wisconsin recognized $1,946 and $3,206, respectively, of revenue related to the one-time assistance payment, the estimated monthly support fee and the heavy maintenance revenues, compared to $0 for the three and nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, revenues related to the monthly support fee and anticipated heavy maintenance reimbursements in the amounts of $2,259 and $0, respectively, were recorded as part of short-term contract assets, and $247 and $0, respectively, were netted in long-term contract liabilities on the condensed consolidated balance sheets. Air Wisconsin’s contract liabilities related to the one-time assistance payment and estimated monthly support fee and heavy maintenance revenues under the American capacity purchase agreement will adjust over the remaining contract term, based on the actual reimbursement of the monthly support fee and heavy maintenance revenues and on the number of flights actually completed in each reporting period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. For additional information regarding Amendment No. 3, refer to Note 14, Subsequent Events, and Part II, Item 5, Other Information, in this Quarterly Report.
As part of an October 2020 amendment to the United capacity purchase agreement (“CPA Amendment”), United made a cash settlement payment of $670 and issued a note receivable to Air Wisconsin in the amount of $11,048, of which $4,410 was deferred as of December 31, 2020, with the remaining portion recognized in proportion to the number of flights completed in subsequent periods through the end of the wind-down period. In October 2021, in accordance with the CPA Amendment, Air Wisconsin received $294 from United for the opening of a crew base, of which $73 was deferred as of December 31, 2021, with the remaining portion recognized in proportion to the number of flights completed in subsequent periods through the end of the wind-down period. For the three and nine months ended September 30, 2023, Air Wisconsin recorded $0 and $649 of revenue related to these items, respectively, compared to $453 and $1,611 of revenue related to these items for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was no deferred CPA Amendment revenue recorded as part of contract liabilities on the condensed consolidated balance sheets.
The timing of the recognition under the American capacity purchase agreement of non-refundable upfront fee revenue, fulfillment costs, monthly support fee revenues, heavy check maintenance revenues and one-time support fee revenues in future periods is subject to considerable uncertainty due to a number of factors, including the estimated revenue amounts to be received and the number of flights actually completed in the period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. The amount of revenues recognized for the three and nine months ended September 30, 2023, that were related to the United capacity purchase agreement and previously recorded as contract liabilities was $0 and $1,985, respectively. During the three and nine months ended September 30, 2023, there were no revenues recognized that were previously recorded as contract liabilities related to the American capacity purchase agreement.
The CPA Amendment provided, among other things, for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours resulting from the COVID-19 pandemic in 2020, and consistent with the terms of the CPA Amendment, management determined that, from an accounting perspective, a new performance obligation was created by United, requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United “stand ready” rate represented the relative stand-alone selling price of the performance obligation. The stand ready performance obligation was recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment. For the three and nine months ended September 30, 2023, Air Wisconsin recorded $0 and $1,641, respectively, in revenue related to this performance obligation compared to $5,138 and $12,746 for the three and nine months ended September 30, 2022, respectively. Under the CPA Amendment, United was required to accrue this amount and, upon request by Air Wisconsin, deliver a note evidencing this amount each quarter. Therefore, this amount is recorded in notes receivable on the condensed consolidated balance sheets. The notes receivable contain a significant financing component and any interest income is separately reported on the condensed consolidated statements of operations. United has disputed that it owes these amounts in respect of certain quarters and has refused to deliver notes for those quarters. On November 4, 2022, United prepaid to Air Wisconsin $50,126 to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, pursuant to the CPA Amendment in respect of the period from the second quarter of 2020 through the third quarter of 2021 and the $11,048 note receivable described above. The unpaid disputed notes came due on
February 28, 2023. As of September 30, 2023, the principal amount of the unpaid disputed notes totaled $21,093. Prior to February 28, 2023, the unpaid disputed notes bore interest at the rate of 4.5% per annum. After February 28, 2023, the notes bear interest at the default interest rate of 12% per annum. As of September 30, 2023, interest receivable on the disputed notes, calculated at the pre-default contractual rate without any default interest, totaled $1,034 and is recorded in receivables, net, on the condensed consolidated balance sheets. For additional information, refer to Note 8, Commitments and Contingencies, in this Quarterly Report.
Other Revenues
Other revenues primarily consist of the sales of parts to other airlines and aircraft lease payments. These other revenues are immaterial in all periods presented. The transaction price for these other revenues generally is fair market value.
Cash and Cash Equivalents
Money market funds and investments and deposits with an original maturity of three months or less when acquired are considered cash and cash equivalents.
Restricted Cash
As of September 30, 2023 and December 31, 2022, the Company had a restricted cash balance of $707 and $849, respectively. A portion of the balance secures a credit facility for the issuance of letters of credit guaranteeing the performance of Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies. The remaining portion is cash held for the repurchase of shares under Harbor’s stock repurchase program. For additional information, refer to Note 8, Commitments and Contingencies and Note 13, Stock Repurchase Program, in this Quarterly Report.
Receivables, net
Subsequent to June 30, 2023, the Company changed the description of Accounts receivable, net to Receivables, net on its condensed consolidated balance sheets. The change did not result in the reclassification of items presented in prior periods. As of September 30, 2023 and December 31, 2022, the Company had a receivables, net balance of $40,391 and $40,341, respectively. The table below sets forth the major categories that make up the balances:
    
September 30, 2023December 31, 2022
Trade receivables
31,151 30,019 
Insurance and warranty claim receivables
3,385 2,710 
Federal and state tax receivables
3,022 3,901 
Other industry related receivables
2,843 3,729 
Allowance for expected credit losses
(10)(18)
Receivables, net40,391 40,341 
Marketable Securities
The Company’s equity security investments, consisting of exchange-traded funds and mutual funds, are recorded at fair value based on quoted market prices (Level 1) in marketable securities on the condensed consolidated balance sheets, in accordance with the guidance in ASC Topic 321, Investments-Equity Securities, with the change in fair value during the period included on the condensed consolidated statements of operations. As of September 30, 2023 and December 31, 2022, the fair value of the Company’s marketable securities was $136,562 and $153,827, respectively. For additional information, refer to Fair Value of Financial Instruments in this Note 1, in this Quarterly Report.
The calculation of net unrealized gains and losses that relate to marketable securities held as of September 30, 2023 is as follows:
Three Months Ended
September 30, 2023		Nine Months Ended
September 30, 2023
Unrealized (losses) gains recognized during the period on equity securities held as of the end of the period$(925)$102 
Plus: Net losses recognized during the period on equity securities sold during the period
(30)(112)
Net losses recognized during the period on equity securities
$(955)$(10)
The calculation of net unrealized gains and losses that relate to marketable securities held as of September 30, 2022 is as follows:
Three Months Ended
September 30, 2022		Nine Months Ended
September 30, 2022
Unrealized losses recognized during the period on equity securities held as of the end of the period$(3,749)$(9,774)
Plus: Net gains (losses) recognized during the period on equity securities sold during the period
— — 
Net losses recognized during the period on equity securities
$(3,749)$(9,774)
Property and Equipment
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
AssetsDepreciable Life
Current Residual Value
Aircraft7 years$50 
Spare engines7 years$25 
Rotable parts7 years10 %
Ground equipment
up to 10 years
0 %
Office equipment
up to 10 years
0 %
Leasehold improvementsShorter of asset or lease life0 %
The table below sets forth the original cost of the Company’s fixed assets and accumulated depreciation or amortization as of the dates presented:
September 30, 2023December 31, 2022
AssetsOriginal
Cost		Accumulated
Depreciation/
Amortization
Original
Cost
Accumulated
Depreciation/
Amortization
Aircraft$70,779 $47,655 $70,089 $40,544 
Spare engines164,706 117,372 163,708 103,834 
Rotable parts27,412 18,406 27,936 18,655 
Ground equipment2,850 2,217 2,718 2,063 
Office equipment4,692 4,331 4,519 4,218 
Leasehold improvements1,052 625 818 452 
Total$271,491 $190,606 $269,788 $169,766 
The amounts in the table exclude construction in process of $2,741 and $2,237 at September 30, 2023 and December 31, 2022, respectively. Construction in process primarily relates to the cost of parts that are not capitalized until the parts are placed into service.
Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop visit. Lotus’ engine maintenance costs are expensed.
Depreciation expense in the three and nine months ended September 30, 2023 was $6,365 and $18,928, respectively, compared to $6,224 and $18,656 for the three and nine months ended September 30, 2022, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying condensed consolidated statements of operations.
Impairment of Long-Lived Assets and Indefinite-Lived Intangible Assets
The Company evaluates long-lived assets and indefinite-lived intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets.
If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and indefinite-lived intangible assets and determined that no quantitative impairment tests were required to be performed as of September 30, 2023 and December 31, 2022. Air Wisconsin in the future may include aircraft other than the CRJ-200 as part of its flying operations. Such an event would likely lead Air Wisconsin to conduct quantitative tests for impairment of the CRJ-200 fleet and related assets.
Income Taxes
The Company utilizes the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.
As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.
The Company is subject to federal, state and local income taxes in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require the application of significant
judgment. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2019. With a few exceptions, the Company is no longer subject to state or local income tax examinations for years prior to 2018. As of September 30, 2023, the Company had no outstanding tax examinations.
Concentration of Credit Risk and Customer Risk
Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are held by financial institutions in the United States and accounts receivable. The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation insurance limit. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, the Company believes it has minimal credit risk with respect to these financial institutions. As of September 30, 2023, in addition to cash and cash equivalents of $15,839, the Company had $707 in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility. Since a significant portion of Air Wisconsin’s revenues has been derived from United and American, a significant portion of the receivables, net balance has been derived from United and American as well. For the three and nine months ended September 30, 2023, United and American made up $30,543 and $608 of the receivables, net balance of $40,391, respectively. As of December 31, 2022, United made up $29,770 of the receivables, net balance of $40,341.
Significant customers are those which represent more than 10% of the Company’s total revenue or receivables, net balance at each respective balance sheet date. Approximately 0.1% and 50.1% of the Company’s consolidated revenues for the three and nine months ended September 30, 2023, respectively, and 99.9% for both the three and nine months ended September 30, 2022, and a substantial portion of receivables, net and notes receivable at the end of the three and nine months ended September 30, 2022 were derived from the United capacity purchase agreement.
Air Wisconsin entered into the American capacity purchase agreement in August 2022 and commenced flying operations for American in March 2023. Approximately 99.7% and 49.7% of the Company’s consolidated revenues for the three and nine months ended September 30, 2023, respectively were from the American capacity purchase agreement. American became Air Wisconsin’s sole airline partner when all of Air Wisconsin’s aircraft were removed from United’s flying operations in early June 2023. After this time, substantially all of the Company’s revenues and receivables, net will be derived from the American capacity purchase agreement.
Neither United’s nor American’s obligations to pay Air Wisconsin the amounts required to be paid under the applicable capacity purchase agreement are collateralized.
For additional information, refer to Note 3, Capacity Purchase Agreements with United and American, in this Quarterly Report.
Estimates and Assumptions
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, marketable securities, receivables, net, long-term investments, accounts payable, and long-term debt. The Company believes the carrying amounts of these financial instruments, with the exception of marketable securities, are a reasonable estimate of their fair value because of the short-term nature of such instruments, or, in the case of long-term debt, because of fixed interest rates on such debt. Marketable securities are reported at fair value based on quoted market prices. Long-term investments are held-to-maturity debt securities and are reported at amortized cost.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price). Fair Value Measurement (“Topic 820”) establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 inputs that are either directly or indirectly observable.
Level 3 - Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations each reporting period, and it is possible that an asset or liability may be classified differently from year to year.
The tables below set forth the Company’s classification of marketable securities and long-term investments as of the dates presented:
September 30, 2023
TotalLevel 1Level 2Level 3
Marketable securities – exchange-traded funds$110,992 $110,992 $— $— 
Marketable securities – mutual funds25,570 25,570 — — 
Long-term investments – bonds (see Note 6)4,275 — 4,275 — 
Total$140,837 $136,562 $4,275 $— 
December 31, 2022
TotalLevel 1Level 2Level 3
Marketable securities – exchange-traded funds$109,178 $109,178 $— $— 
Marketable securities – mutual funds44,649 44,649 — — 
Long-term investments – bonds (see Note 6)4,275 — 4,275 — 
Total$158,102 $153,827 $4,275 $— 
Reclassification
Certain non-operating income amounts were previously recorded in other, net, on the condensed consolidated statements of operations in the amounts of $892 and $1,796 for the three and nine months ended September 30, 2022, respectively, have been reclassified to interest income to conform to the presentation for the three and nine months ended September 30, 2023, with no effect on net income. The reclassification relates to certain income received on the investments in marketable securities.
Recently Adopted Accounting Pronouncement
On January 1, 2023 the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 introduces a new accounting model known as Current Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses, while also providing transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivable. There are other provisions in the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. The Company determined that amounts in dispute with United do not fall within the standard. The Company further determined that its receivables are primarily the result of its relationship with United and American, or insurance related receivables. These receivables are payable by credit-worthy companies and any resulting adjustment related to the adoption of CECL was determined to be immaterial. Therefore, the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements. Further, no adjustment was made to opening retained earnings as a result of the adoption of the accounting standard using the modified retrospective method. The Company does continue to maintain an allowance for expected credit losses primarily related to employee receivables. The allowance for expected credit losses was $10 and $18, as of September 30, 2023 and December 31, 2022, respectively. The Company will continue to monitor its financial instruments for expected credit losses under the newly adopted standard.