Basis of Presentation and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2020

Summary of Significant Accounting Policies

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Harbor Diversified, Inc. and its consolidated subsidiaries (collectively, the Company). The Company’s consolidated subsidiaries consist of its wholly owned subsidiaries, Lotus Aviation Leasing, LLC, Air Wisconsin Funding LLC, AWAC Aviation, Inc. (AWAC, together with its wholly owned subsidiary, Air Wisconsin Airlines LLC (Air Wisconsin)) and Harbor Therapeutics, Inc. (which is

a non-operating entity

with no material assets).

The 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 notes to 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. These consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly 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 consolidated financial statements are presented in thousands except per share amounts.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2019, which was filed with the SEC on July 10, 2020 (2019 Annual Report). Due in part to the severe impacts from the global coronavirus

(COVID-19)

pandemic, in addition to other factors, the results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other reporting period.

Description of Operations

The Company has principal lines of business focused on (1) providing air transportation (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.

The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier that is engaged in the business of providing scheduled passenger service under a capacity purchase agreement with United Airlines, Inc. (United) that was entered into in February 2017 and amended in October 2020. See Note 3 for additional information.

Air Wisconsin operates as a United Express carrier with a significant presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs.

Contract and Other Revenues

The Company recognizes revenue under its capacity purchase agreement with United (United capacity purchase agreement) over time as services are provided. United pays the Company a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day, with additional incentives primarily based on flight completion,

on-time

performance, and customer satisfaction ratings. Under this agreement, the Company’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues.

The United capacity purchase agreement includes weekly provisional cash payments based on a projected level of flying each month. The Company and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis.

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

Revenue from Contracts with Customers

(Topic 606).

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

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for potential impairment and records impairment losses on long-lived assets 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 have a material impact on the Company’s financial statements in the future.

Certain factors occurring in the three month period ended March 31, 2020, which primarily related to the impacts and disruptions caused by the

COVID-19

pandemic, resulted in an impairment triggering event that required the Company to evaluate the carrying value of its long-lived property and equipment assets. Such factors included, but were not limited to, notification prior to March 31 of a reduced flying schedule from United for the months of April, May and June of 2020, and the reduced demand for air travel due to the

COVID-19

pandemic. After reviewing for impairment, the Company concluded an impairment charge was not needed as of March 31, 2020. The Company continues to monitor events and the need for an updated impairment analysis.

Impairment of Intangible Assets

Indefinite-lived intangible assets, including trade names and Air Wisconsin’s air carrier certificate, are not subject to amortization, but are subject to at least an annual assessment for impairment by applying a fair value-base. The Company’s assessment as of December 31, 2019 determined there was no impairment to the indefinite–lived intangible assets. Certain factors occurring in the three month period ended March 31, 2020, which primarily related to the impacts and disruptions caused by the

COVID-19

pandemic, resulted in an impairment triggering event that required the Company to evaluate the carrying value of its indefinite–lived intangible assets. Such factors included, but were not limited to, a reduced flying schedule from United for the months of April, May and June of 2020, and the travel restrictions and reduced demand for air travel due to the

COVID-19

Comprehensive Income

The Company does not have any components of comprehensive income; therefore, as of March 31, 2020 and 2019, respectively, comprehensive income was equal to net income reported in the statements of operations.

Concentration of Credit Risk

The Company at times has had cash in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. As of March 31, 2020, there were no bank deposits that exceeded the FDIC insurance limits.

Substantially all the Company’s revenues for the three month periods ended March 31, 2020 and 2019 were derived from the United capacity purchase agreement. See Note 3 for additional information.

Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates or assumptions for a number of reasons, including the risks and uncertainties described in this Quarterly Report. See the section entitled “

Risk Factors

”.

Fair Value of Financial Instruments

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

held-to-maturity

debt securities and are reported at amortized cost.

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (that is, an exit price).

Fair Value Measurement

, Topic 820, establishes a three-tier fair value hierarchy, which prioritizes inputs used in fair value. The tiers are as follows:

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

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

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

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures annually and it is possible that an asset or liability may be classified differently from year to year. However, the Company expects that changes in classifications between levels will be rare. The Company classifies money market funds and deposits as Level 1 and long-term investments as Level 2. There have been no transfers between Level 1 and Level 2 investments during the three month period ended March 31, 2020.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU

2016-13,

Financial Instruments—Credit Losses

(Topic 326):

Measurement of Credit Losses on Financial Instruments

(ASU

2016-13).

ASU

2016-13

introduces a new accounting model known as Credit Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables. There are other provisions within the standard affecting how impairments of other financial assets may be recorded and presented, as well as expanded disclosures. ASU

2016-13

is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU

2016-13

on its consolidated financial statements.