Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Harbor Diversified, Inc. (Harbor) and its subsidiaries (collectively, the Company).

Harbor

is a non-operating holding company

that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (AWAC), which is the sole member of Air Wisconsin Airlines LLC (Air Wisconsin), which is a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (Lotus), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (AWF), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (Therapeutics), which

is a non-operating entity with

no material assets.

Description of Operations

The Company has principal lines of business focused on (1) providing regional air services through Air Wisconsin (airline business), (2) acquiring flight equipment for the purpose of leasing the equipment to Air Wisconsin, and (3) providing flight equipment financing to Air Wisconsin. Additionally, Air Wisconsin is continuing to explore aircraft leasing opportunities and entered into its first short-term aircraft lease in September 2022.

The airline business is operated entirely through Air Wisconsin, which is an independent regional air carrier. For the year ended December 31, 2022, Air Wisconsin was engaged in the business of providing scheduled passenger service solely for United Airlines, Inc. (United) under a capacity purchase agreement (United capacity purchase agreement) that was entered into in February 2017 and amended in October 2020, April 2021, April 2022, June 2022, September 2022 and February 2023. Air Wisconsin will cease flying for United in early June 2023.

In August 2022 Air Wisconsin entered into a separate capacity purchase agreement (American capacity purchase agreement) with American Airlines, Inc. (American), which was subsequently amended in February 2023 and March 2023, pursuant to which Air Wisconsin has agreed to provide up to 60

CRJ-200

regional jet aircraft for regional airline services for American. Air Wisconsin commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations.

For additional information, refer to Note 3,

Capacity Purchase Agreements with United and American

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (ASC) 280, “

Segment Reporting

,” we are not organized around specific services or geographic regions. For the year ended December 31, 2022, we operated in one service line providing scheduled flying services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the board of directors. The chief operating decision maker bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operate as one operating and reportable segment.

As further discussed below, substantially all of our operating revenues in the years ended December 31, 2022 and December 31, 2021 were derived from operations associated with United.

Contract Revenues

More than 99.9

% of the Company’s operating revenues for the years ended December 31, 2022 and December 31, 2021 were derived from operations associated with the United capacity purchase agreement. In performing an analysis of the United capacity purchase agreement within the framework of ASC 842 and ASC 606, the Company determined a portion of its compensation designed to reimburse Air Wisconsin for use of a certain number of aircraft, or “right of use,” is considered lease revenue. All other revenue received by Air Wisconsin is considered non-lease revenue. After consideration of the lease and non-lease components based on stand-alone selling prices, the Company determined the non-lease component to be the predominant component of the United capacity purchase agreement and, as such, elected a practical expedient to not separate the lease and non-lease components. Therefore, all compensation received by Air Wisconsin pursuant to the United capacity purchase agreement is accounted for under ASC 606.

The Company recognizes revenue under the United capacity purchase agreement over time as services are provided. Under the agreement, Air Wisconsin is entitled to receive a fixed rate for each departure and block hour (measured from takeoff to landing, including taxi time), and a fixed amount per aircraft per day. Under the agreement, Air Wisconsin’s performance obligation is met and revenue is recognized over time, which is then reflected in contract revenues. The agreement also provides for the reimbursement to Air Wisconsin of certain direct operating expenses such as hull and liability insurance, property taxes and Canadian navigational fees.

United makes provisional cash payments to Air Wisconsin during each month of service based on projected flight schedules. These provisional cash payments are subsequently reconciled with United based on actual completed flight activity. As of the date of this filing, these payments are reconciled through October 2022. Subject to final reconciliation of the provisional cash payments for the periods after October 31, 2022, as of December 31, 2022, United owed Air Wisconsin approximately $

29,435, which is recorded in accounts receivable, net, on the consolidated balance sheets. United is disputing that it owes $28,071 of this amount. For additional information regarding the dispute with United, refer to Note 8,

Commitments and Contingencies

Under the United capacity purchase agreement, Air Wisconsin is eligible to receive incentive payments, or may be required to pay penalties, upon the achievement of, or failure to achieve, certain performance criteria primarily based on flight completion,

on-time

performance, and customer satisfaction ratings. The incentives are defined in the agreement, and performance is measured on a monthly basis. At the end of each month during the term of the agreement, Air Wisconsin calculates the incentives achieved, or penalties payable, during that period and recognizes revenue accordingly, subject to the variable constraint guidance under Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 606, Revenue from Contracts with Customers (Topic 606). Although the final reconciliations have not been completed for periods after October 2022, after considering operational performance related to expected incentive and penalty payments, Air Wisconsin has received, or is likely to receive, net payments of $6,420 for the year ended December 31, 2022 as compared to $3,028 for the year ended December 31, 2021. As of December 31, 2022, Air Wisconsin recorded $2,307

as part of accounts receivable, net, on the consolidated balance sheets related to net incentive amounts. As of December 31, 2021, Air Wisconsin recorded a liability of $

117

as part of contract liabilities on the consolidated balance sheets related to net penalties owed to United.

Under the United capacity purchase agreement, Air Wisconsin is entitled to receive a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the

COVID-19

pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so through the wind-down period under the United capacity purchase agreement (wind-down period). Accordingly, during the year ended December 31, 2022, Air Wisconsin recognized $28,277 of fixed revenues that were previously deferred, compared to a deferral of $1,618 of fixed revenues in the year ended December 31, 2021. Air Wisconsin’s deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term, including the wind-down period, based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed through the end of the wind-down period. As of December 31, 2022 and December 31, 2021, deferred fixed revenues in the amount of $16,561 and $44,838, respectively, were recorded as part of deferred revenues on the consolidated balance sheets. For additional information regarding the wind-down schedule with United, refer to Note 2,

Liquidity

Consistent with the discussion above, for the year ended December 31, 2022, as compared to the year ended December 31, 2021, Air Wisconsin also recognized increased

non-refundable

upfront fee revenues and increased fulfillment costs, both of which are amortized over the remaining term of the United capacity purchase agreement in proportion to the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods. During the year ended December 31, 2022, Air Wisconsin recorded $4,385 of revenue from upfront fees and $470 of fulfillment costs, compared to $3,593 in revenue from upfront fees and $385 of fulfillment costs for the year ended December 31, 2021. As of December 31, 2022, deferred upfront fee revenue in the amount of $1,335 is recorded as part of contract liabilities on the consolidated balance sheets.

As part of the October 2020 amendment to the United capacity purchase agreement (CPA Amendment), United made a cash settlement payment of $670 and issued a note receivable to Air Wisconsin in the amount of $11,048, of which $4,410 was deferred as of December 31, 2020, with the remaining portion to be recognized in proportion to the number of flights expected to be completed in subsequent periods through the end of the wind-down period. In October 2021, in accordance with the CPA Amendment, Air Wisconsin received $294 from United for the opening of a crew base, of which $73 was deferred as of December 31, 2021. For the year ended December 31, 2022, Air Wisconsin recorded $2,132 of revenue related to these items, compared to $1,923 of revenue related to these items for the year ended December 31, 2021. As of December 31, 2022, deferred CPA Amendment revenue in the amount of $650 is recorded as part of contract liabilities on the consolidated balance sheets.

The timing of the recognition of deferred fixed revenue,

non-refundable

upfront fee revenue, fulfillment costs, and deferred CPA Amendment revenue in future periods is subject to considerable uncertainty due to a number of factors, including the actual number of completed flights in any particular period relative to the estimated number of flights anticipated to be flown through the end of the wind-down period.

The amount of revenues recognized for the year ended December 31, 2022 that were previously recorded as contract liabilities were $6,517.

The CPA Amendment provided, among other things, for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. In conjunction with the significant reduction in departures and block hours resulting from the

COVID-19

pandemic in 2020, and consistent with the terms of the CPA Amendment, management determined that, from an accounting perspective, a new performance obligation was created by United, requiring Air Wisconsin to stand ready to deliver flight services. Air Wisconsin determined, using the expected cost plus a margin method, that the United “stand ready” rate represents the relative stand-alone selling price of the performance obligation. The stand ready performance obligation is being recognized over time on a straight-line basis based on the number of unscheduled block hours below a minimum threshold at the stand ready rate as determined in a manner consistent with the CPA Amendment. For the year ended December 31, 2022, Air Wisconsin recorded $18,023 in revenue related to this performance obligation compared to $15,128 for the year ended December 31, 2021. Under the CPA Amendment, United is required to accrue this amount and, upon request by Air Wisconsin, deliver a note evidencing this amount each quarter. Therefore, this amount is recorded in notes receivable on the consolidated balance sheets. The notes receivable contain a significant financing component and any interest income is separately reported in the consolidated statements of operations. United has disputed that it owes these amounts in respect of certain quarters and has refused to deliver notes for those quarters. On November 4, 2022, United prepaid to Air Wisconsin $50,126 to satisfy all of the outstanding, undisputed notes receivable, including all accrued interest, pursuant to the CPA Amendment in respect of the period of the second quarter 2020 through the third quarter 2021 and the $11,048 note receivable described above. As of December 31, 2022, the principal amount of the unpaid disputed notes totaled $19,452, bore interest at the rate of 4.5%, and had a maturity date of February 28, 2023. As of December 31, 2022, interest receivable on the disputed notes totaled $335 and is recorded in accounts receivable, net on the consolidated balance sheets. For additional information regarding the dispute with United, refer to Note 8,

Commitments and Contingencies

Other Revenues

Other revenues primarily consist of the sales of parts to other airlines and aircraft lease payments. These other revenues are immaterial in all periods presented. The transaction price for these other revenues generally is fair market value.

Cash and Cash Equivalents

Money market funds and investments and deposits with an original maturity of three months or less when acquired are considered cash and cash equivalents.

Restricted Cash

As of December 31, 2022 and December 31, 2021, the Company had a restricted cash balance of $849 and $1,449, respectively. A portion of the balance secures a credit facility for the issuance of letters of credit guaranteeing the performance of Air Wisconsin’s obligations under certain lease agreements, airport agreements and insurance policies. The remaining portion is cash held for the repurchase of shares under Harbor’s stock repurchase program. For additional information, refer to Note 8,

Commitments and Contingencies

and Note 16,

Stock Repurchase Program.

Marketable Securities

The Company’s equity security investments, consisting of exchange-traded funds and mutual funds, are recorded at fair value based on quoted market prices (Level 1) in marketable securities on the consolidated balance sheets, in accordance with the guidance in ASC Topic 321,

Investments-Equity Securities

, with the change in fair value during the period included in the consolidated statements of operations. As of December 31, 2022 and December 31, 2021, the fair value of the Company’s marketable securities was $153,827 and $138,370, respectively.

The calculation of net unrealized gains and losses that relate to marketable securities held as of December 31, 2022 and December 31, 2021 is as follows:


	Year Ended December 31, 2022			Year Ended December 31, 2021

Net losses recognized during the period on equity securities	$	(8,826	)	$	(1,158	)
Less: Net gains recognized during the period on equity securities sold during the period		—			2

Unrealized losses recognized during the period on equity securities held as of the end of the period	$	(8,826	)	$	(1,160	)

Spare Parts and Supplies

Expendable parts are stated at average cost less an obsolescence allowance. The Company provides for an allowance for obsolescence after considering the useful life of the aircraft fleet, the estimated cost of expendable parts expected to be on hand at the end of the useful life and the estimated salvage value of the parts. This allowance is based on management estimates and is subject to change. Expendable parts are charged to expense when used. Expendable parts that are repairable are returned to inventory at the average cost of comparable parts, less a reserve for scrap. Supplies are stated at average cost.

Property and Equipment

Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:


Assets	Depreciable Life	Current Residual Value
Aircraft	7 years	$	50
Rotable parts	7 years		10%
Spare engines	7 years	$	25
Ground equipment	up to 10 years		0%
Office equipment	up to 10 years		0%
Leasehold improvements	Shorter of asset or lease life		0%

The table below sets forth the original cost of the Company’s fixed assets and accumulated depreciation as of the dates presented. The table excludes construction in process of $

2,237

and $

3,573

for the years ended December 31, 2022 and December 31, 2021, respectively.


For the years ended:	December 31, 2022				December 31, 2021
Assets	Original Cost		Accumulated Depreciation/ Amortization		Original Cost		Accumulated Depreciation/ Amortization
Aircraft		70,089		40,544		70,178		31,319
Engines		163,708		103,834		157,510		86,339
Rotable parts		27,936		18,655		28,459		18,834
Ground equipment		2,718		2,063		2,555		1,868
Office equipment		4,519		4,218		4,509		4,130
Leasehold improvements		818		452		1,188		823

		269,788		169,766		264,399		143,313

Air Wisconsin’s capitalized engine maintenance costs are amortized over their estimated useful life measured in remaining engine cycles to the next scheduled shop visit. Lotus’ engine maintenance costs are expensed.

Depreciation expense in the years ended December 31, 2022 and December 31, 2021 was $24,911 and $24,997, respectively, and is included in depreciation, amortization, and obsolescence in the accompanying consolidated statements of operations.

Impairment of Long-Lived and Intangible Assets

Impairment of Long-Lived Assets and Indefinite-Lived Intangible Assets

The Company evaluates long-lived assets and indefinite-lived intangible assets for potential impairment and records impairment losses when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. Impairment losses are measured by comparing the fair value of the assets to their carrying amounts. In determining the need to record impairment charges, the Company is required to make certain estimates and assumptions regarding such things as the current fair market value of the assets and future net cash flows to be generated by the assets. If there are subsequent changes to these estimates or assumptions, or if actual results differ from these estimates or assumptions, such changes could impact the financial statements in the future. The Company conducted a qualitative impairment assessment of its long-lived assets and indefinite-lived intangible assets and determined that no quantitative impairment tests were required to be performed as of December 31, 2022 and December 31, 2021.

Maintenance

The Company operates its aircraft under a continuous inspection and maintenance program. Generally, the normal cost of recurring maintenance is expensed when incurred. However, we use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit.

Income Taxes

The Company utilizes the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the current applicable tax rates. Deferred tax expense represents the result of changes in deferred tax assets and liabilities.

As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would

more-likely-than-not

sustain the position following an audit. For tax positions meeting the

more-likely-than-not

threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.

The Company is subject to federal, state and local income taxes in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company is no longer subject to U.S. federal income tax examinations for the years prior to 2019. With a few exceptions, the Company is no longer subject to state or local income tax examinations for years prior to 2018. As of December 31, 2022, the Company had no outstanding tax examinations.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. The Company accrued $62 and $57 for the payment of interest and penalties at December 31, 2022 and December 31, 2021, respectively.

Comprehensive Income

The Company does not have any components of comprehensive income and, as of December 31, 2022 and December 31, 2021, comprehensive income is equal to net income reported in the consolidated statements of operations.

Concentration of Customer Risk

Concentration of Credit Risk and Customer Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are held by financial institutions in the United States and accounts receivable. The Company at times has had bank deposits in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, the Company believes that minimal credit risk exists with respect to these financial institutions. As of December 31, 2022, in addition to cash and cash equivalents of $33.3 million, the Company had $0.8 million in restricted cash, which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker’s compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under Harbor’s stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secures the credit facility.

Significant customers are those which represent more than 10% of the Company’s total revenue or net accounts receivable balance at each respective balance sheet date. Substantially all of the Company’s consolidated revenue for the years ended December 31, 2022, and December 31, 2021, and accounts receivable and notes receivable at the end of both years were derived from the United capacity purchase agreement.

Air Wisconsin entered into the American capacity purchase agreement in August 2022 and commenced flying operations for American in March 2023. American will become Air Wisconsin’s sole airline partner once all aircraft are removed from United’s flying operations; and at that point, substantially all of the Company’s revenues will be derived from the American capacity purchase agreement.

Neither United’s nor American’s obligations to pay Air Wisconsin the amounts required to be paid under the applicable capacity purchase agreement are collateralized.

For additional information, refer to Note 3,

Capacity Purchase Agreements with United and American

Estimates and Assumptions

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

Fair Value of Financial Instruments

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

held-to-maturity

debt securities and are reported at amortized cost.

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

Fair Value Measurement

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

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

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

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

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates these determinations each reporting period, and it is possible that an asset or liability may be classified differently from year to year.

The tables below set forth the Company’s classification of marketable securities and long-term investments as of the dates presented:


	December 31, 2022
	Total		Level 1		Level 2		Level 3
Marketable securities – exchange-traded funds	$	109,178	$	109,178	$	—	$	—
Marketable securities – mutual funds		44,649		44,649		—		—
Long-term investments – bonds (see Note 6)		4,275		—		4,275		—

Total	$	158,102	$	153,827	$	4,275	$	—


	December 31, 2021
	Total		Level 1		Level 2		Level 3
Marketable securities – exchange-traded funds	$	113,936	$	113,936	$	—	$	—
Marketable securities – mutual funds		24,434		24,434		—		—
Long-term investments – bonds (see Note 6)		4,275		—		4,275		—

Total	$	142,645	$	138,370	$	4,275	$	—

Reclassifications

Certain operating expenses previously recorded in purchased services and other in the consolidated statements of operations in the amount of $12,403 for the year ended December 31, 2021, have been reclassified to aircraft maintenance, materials and repairs to conform to the presentation for the year ended December 31, 2022, with no effect on net income. The reclassification relates to certain third party maintenance activities.

Certain

non-operating

income previously recorded in other, net in the consolidated statements of operations in the amount of $2,496 for the year ended December 31, 2021, has been reclassified to interest income to conform to the presentation for the year ended December 31, 2022, with no effect on net income. The reclassification relates to income on marketable securities.

Certain current liabilities previously recorded in contract liabilities in the consolidated balance sheets as of December 31, 2021 have been reclassified to deferred revenue in the amount of $35,792 to conform to the presentation as of December 31, 2022. As a result of this change, the consolidated statements of cash flows also required a reclassification from contract liabilities in the amount of $35,792 to deferred revenues in the

Cash Flows from Operating Activities

section of the consolidated statements of cash flows.

Upcoming Accounting Pronouncement

In June 2016, FASB issued ASU

2016-13,

Financial Instruments—Credit Losses

(Topic 326):

Measurement of Credit Losses on Financial Instruments

(ASU

2016-13).

ASU

2016-13

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

2016-13

is effective for calendar years beginning after December 15, 2022, including interim periods within those calendar years, with early adoption permitted. The Company believes the adoption of this standard will not have a material impact on its consolidated financial statements.