REPUBLIC AIRWAYS HOLDINGS INC. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Index to Consolidated Financial Statements Consolidated Balance Sheets 65 Consolidated Statements of Operations and Comprehensive (Loss) Income 66 Consolidated Statements of Stockholders' Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 69 The information set forth below should be read together with " Management's Discussion and Analysis of Financial Condition and Results of Operations, " appearing elsewhere in this Annual Report on Form 10-K. 63 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Mesa Air Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Mesa Air Group, Inc. (the Company) as of September 30, 2022 and 2021, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Phoenix, Arizona December 29, 2022 64 MESA AIR GROUP, INC. Consolidated Balance Sheets (in thousands, except share amounts) September 30, September 30, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 57,683 $ 120,517 Restricted cash 3,342 3,350 Receivables, net 3,978 3,167 Expendable parts and supplies, net 26,715 24,467 Prepaid expenses and other current assets 6,616 6,885 Total current assets 98,334 158,386 Property and equipment, net 865,254 1,151,891 Intangible assets, net 3,842 6,792 Lease and equipment deposits 6,085 6,808 Operating lease right-of-use assets 43,090 93,100 Deferred heavy maintenance, net 9,707 3,499 Assets held for sale 73,000 — Other assets 16,290 36,121 Total assets $ 1,115,602 $ 1,456,597 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt and finance leases $ 97,218 $ 111,710 Current portion of deferred revenue 385 6,298 Current maturities of operating leases 17,233 32,652 Accounts payable 59,386 61,476 Accrued compensation 11,255 12,399 Other accrued expenses 29,000 33,657 Total current liabilities 214,477 258,192 Long-term debt and finance leases, excluding current portion 502,517 539,700 Noncurrent operating lease liabilities 16,732 33,991 Deferred credits 3,082 3,934 Deferred income taxes 17,719 69,940 Deferred revenue, net of current portion 23,682 28,202 Other noncurrent liabilities 29,219 34,591 Total noncurrent liabilities 592,951 710,358 Total liabilities 807,428 968,550 Commitments and contingencies (Note 17) Stockholders' equity: Common stock of no par value and additional paid-in capital, 125,000,000 shares authorized; 36,376,897 (2022) and 35,958,759 (2021) shares issued and outstanding, and 4,899,497 (2022) and 4,899,497 (2021) warrants issued and outstanding 259,177 256,372 Retained earnings 48,997 231,675 Total stockholders' equity 308,174 488,047 Total liabilities and stockholders' equity $ 1,115,602 $ 1,456,597 See accompanying notes to these consolidated financial statements. 65 MESA AIR GROUP, INC. Consolidated Statements of Operations and Comprehensive (Loss) Income (in thousands, except per share amounts) Year Ended September 30, 2022 2021 2020 Operating revenues: Contract revenue $ 478,482 $ 434,518 $ 506,590 Pass-through and other revenue 52,519 69,073 38,480 Total operating revenues 531,001 503,591 545,070 Operating expenses: Flight operations 177,038 162,137 169,242 Maintenance 201,930 217,646 192,123 Aircraft rent 36,989 39,345 48,802 General and administrative 43,966 49,855 52,246 Depreciation and amortization 81,508 82,847 82,296 Lease termination 233 4,508 — Asset impairment 171,824 — — Other operating expenses 7,238 3,536 4,028 Government grant recognition — ( 119,479 ) ( 83,834 ) Total operating expenses 720,726 440,395 464,903 Operating (loss) income ( 189,725 ) 63,196 80,167 Other income (expense), net: Interest expense ( 35,289 ) ( 34,730 ) ( 44,120 ) Interest income 139 365 105 Gain on sale aircraft 4,723 — — Loss on investments, net ( 13,715 ) ( 6,816 ) — Other (expense) income, net ( 801 ) 401 843 Total other expense, net ( 44,943 ) ( 40,780 ) ( 43,172 ) (Loss) income before taxes ( 234,668 ) 22,416 36,995 Income tax (benefit) provision ( 51,990 ) 5,828 9,531 Net (loss) income and comprehensive (loss) income $ ( 182,678 ) $ 16,588 $ 27,464 Net (loss) income per share Basic $ ( 5.06 ) $ 0.46 $ 0.78 Diluted $ ( 5.06 ) $ 0.43 $ 0.78 Weighted-average common shares outstanding Basic 36,133 35,713 35,237 Diluted 36,133 38,843 35,308 See accompanying notes to these consolidated financial statements. 66 MESA AIR GROUP, INC. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) Common Stock and Additional Number of Number of Paid-In Retained Shares Warrants Capital Earnings Total Balance at September 30, 2019 31,413,287 3,600,953 $ 238,504 $ 187,364 $ 425,868 Adoption of ASU 2018-09, Stock compensation- income taxes — — — 259 259 Stock compensation expense — — 4,414 — 4,414 Repurchased shares ( 142,439 ) — ( 586 ) — ( 586 ) Warrants converted to common stock 3,600,953 ( 3,600,953 ) — — — Restricted shares issued 555,473 — — — — Employee share purchases 99,644 — 440 — 440 Net income — — — 27,464 27,464 Balance at September 30, 2020 35,526,918 — $ 242,772 $ 215,087 $ 457,859 Stock compensation expense — — 3,126 — 3,126 Repurchased shares ( 155,174 ) — ( 1,486 ) — ( 1,486 ) Issuance of warrants, net of issuance costs — 4,899,497 11,489 — 11,489 Restricted shares issued 492,465 — — — — Employee share purchases 94,550 — 471 — 471 Net income — — — 16,588 16,588 Balance at September 30, 2021 35,958,759 4,899,497 $ 256,372 $ 231,675 $ 488,047 Stock compensation expense — — 2,761 — 2,761 Repurchased shares ( 147,108 ) — ( 455 ) — ( 455 ) Restricted shares issued 455,303 — 100 — 100 Employee share purchases 109,943 — 399 — 399 Net loss — — — ( 182,678 ) ( 182,678 ) Balance at September 30, 2022 36,376,897 4,899,497 $ 259,177 $ 48,997 $ 308,174 See accompanying notes to these consolidated financial statements. 67 MESA AIR GROUP, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended September 30, 2022 2021 2020 Cash flows from operating activities: Net (loss) income $ ( 182,678 ) 16,588 $ 27,464 Adjustments to reconcile net (loss) income to net cash flows provided by operating activities: Depreciation and amortization 81,508 82,847 82,296 Stock compensation expense 2,761 3,126 4,414 Loss on investments, net 13,715 6,816 — Deferred income taxes ( 52,221 ) 5,665 9,234 Asset impairment 171,824 — — Amortization of deferred credits ( 852 ) ( 2,357 ) ( 3,742 ) Amortization of debt discount and issuance costs and accretion of interest into long-term debt 9,681 11,379 4,202 Loss (gain) on extinguishment of debt 397 ( 950 ) — Loss (gain) on disposal of assets ( 4,723 ) 78 401 Provision for obsolete expendable parts and supplies 634 380 — Loss on lease termination 233 4,508 — Changes in assets and liabilities: Receivables ( 811 ) 10,545 9,368 Expendable parts and supplies ( 2,882 ) ( 1,865 ) ( 1,529 ) Prepaid expenses and other operating assets and liabilities ( 679 ) ( 56 ) ( 1,368 ) Accounts payable ( 2,772 ) 7,861 3,418 Deferred heavy maintenance, net ( 8,066 ) ( 3,857 ) — Deferred revenue ( 10,432 ) 10,742 23,758 Accrued expenses and other liabilities ( 3,175 ) ( 8,911 ) 20,801 Change in operating lease right-of-use assets and liabilities 1,900 ( 9,668 ) ( 4,055 ) Net cash provided by operating activities 13,362 132,871 174,662 Cash flows from investing activities: Capital expenditures ( 40,814 ) ( 17,149 ) ( 26,667 ) Proceeds from sale of flight equipment and expendable inventory 50,000 — — Investments in equity securities ( 200 ) ( 10,000 ) — Net payments on equipment & other deposits ( 7,621 ) ( 6,322 ) — Net cash provided by (used in) investing activities 1,365 ( 33,471 ) ( 26,667 ) Cash flows from financing activities: Proceeds from long-term debt 39,811 195,000 23,000 Principal payments on long-term debt and finance leases ( 114,910 ) ( 271,033 ) ( 138,289 ) Payments of debt and warrant issuance costs ( 2,414 ) ( 1,326 ) ( 1,780 ) Proceeds from issuance of common stock under ESPP 399 471 — Repurchase of stock ( 455 ) ( 1,486 ) ( 586 ) Net cash used in financing activities ( 77,569 ) ( 78,374 ) ( 117,655 ) Net change in cash, cash equivalents and restricted cash ( 62,842 ) 21,026 30,340 Cash, cash equivalents and restricted cash at beginning of period 123,867 102,841 72,501 Cash, cash equivalents and restricted cash at end of period $ 61,025 $ 123,867 $ 102,841 Supplemental cash flow information Cash paid for interest $ 24,895 $ 32,767 $ 41,501 Cash paid for income taxes, net $ 487 $ 404 $ 398 Operating lease payments in operating cash flows $ 36,262 $ 47,612 $ 44,173 Supplemental disclosure of non-cash operating activities Right-of-use assets obtained in exchange for lease liabilities $ 6,286 $ 4,309 $ 145,054 Supplemental disclosure of non-cash financing activities Accrued capital expenditures $ 1,121 $ 439 $ 61 Acquisition of finance leases $ 15,122 — — Investments in warrants to purchase common stock $ 3,260 $ 21,964 $ — Debt issuance cost related to loan agreement with U.S. Department of the Treasury — $ ( 1,887 ) $ — See accompanying notes to these consolidated financial statements. 68 MESA AIR GROUP, INC. Notes to Consolidated Financial Statements 1. Organization and Operations The Company Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is the holding company of Mesa Airlines, a regional air carrier providing scheduled passenger service to 107 cities in 39 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of September 30, 2022, Mesa operated a fleet of 158 aircraft with approximately 306 daily departures and 2,454 employees. Mesa’s fleet were operated conducted under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services Agreement (“FSA”), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either American Eagle, United Express, or DHL Express flights pursuant to the terms of CPAs entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc. (“DHL”) (each, our “major partner”). All of the Company’s consolidated contract revenues for the fiscal years ended September 30, 2022, 2021, and 2020 were derived from operations associated with these two (2) CPAs, FSA, and leases of aircraft to a third party. The CPAs between us and our major partners involve a revenue-guarantee arrangement whereby the major partners pay fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these CPAs, the major partners control route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses including fueling and airport fees are paid directly by DHL. Impact of Pilot Shortage and Attrition Impact of Pilot Shortage During our fiscal year ended September 30, 2022, the severity of the pilot shortage, elevated pilot attrition, and increasing costs associated with pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate. These airlines now seek to increase their capacity to meet the growing demand for air travel as the global pandemic has moderated. A primary source of pilots for the major US passenger and cargo carriers are the US regional airlines. As a result of pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. These challenges resulted in a negative impact on the Company’s financial results highlighted by operating cash flows of $ 13.4 million and net loss of $ 182.7 million including a non-cash impairment charge related to the Company’s American asset group of $ 171.8 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligation in the next twelve months. To address the events that gave rise to such concerns, management developed and implemented the following material changes to its business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next 12 months. In addition to successfully implementing these effective measures, the Company expects to develop and implement additional measures aimed at addressing periods beyond the next 12 months. ▪ In the fourth quarter, the Company reached an agreement with ALPA which increased overall pilot hourly pay by nearly 118 % for captains and 172 % for new-hire first officers. As a result of this agreement, we have experienced reduced attrition rates and attracted new pilots. ▪ The Company and American have agreed to terminate and complete a wind-down of the American CPA. This will ultimately eliminate financial penalties incurred under the American CPA. In December 2022, we entered into Amendment No.11 to our American CPA. See the disclosure under Note 18 - "Subsequent Events" in the notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for a discussion of Amendment No. 11 which includes among other things, disclosure regarding the wind-down of our operations with American and the termination of the American CPA. ▪ In December 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United which amended and restated the existing United CPA. This agreement increases block hour revenues to cover increased wages agreed to with ALPA and adds CRJ 900 aircraft currently operating under the American CPA. See the disclosure under Note 18 - "Subsequent Events" in the notes to the audited consolidated financial statement included in this Annual Report on Form 10-K for a discussion of the Amended and Restated United 69 CPA which includes among others, disclosure regarding the transition of the aircraft operated under the American CPA to be operated under the Third Amended and Restated United CPA . ▪ We entered into an agreement with United to sell 18 CRJ-700 aircraft during the reporting period, of which 10 were sold. The approximate net proceeds from the sale in the quarter was $ 36.8 million after retirement of debt. The remaining eight ( 8 ) are expected to close in early January 2022. The approximate net proceeds from the sale and after retirement of debt is $ 8 million. ▪ We entered into an agreement with a third party to sell eleven ( 11 ) of our CRJ-900 aircraft and one CRJ-200 aircraft to raise capital and retire debt. The approximate net proceeds from the sale are expected to be $ 8.2 million after retirement of debt. ▪ We entered into an agreement to sell 30 spare engines to United to raise capital and retire debt. The approximate gross proceeds from the sale are expected to be $ 80 million and will retire debt of $ 26.4 million. ▪ We established a new line of credit totaling $ 25.5 million to draw upon when needed. See the disclosure under Note 18 - "subsequent Events" in the notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the line of credit and amount drawn upon subsequently. ▪ We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on all seven aircraft for the period of January 2023 through December 2024, providing up to $ 14 million of liquidity. Additionally, the junior noteholder MHIRJ agreed to reduce its loan amount by approximately $ 5 million. ▪ We entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 aircraft at lease termination by a total of $ 25 million . ▪ We established the Mesa Pilot Development Program (the "MPD Program") to increase the pilot supply to Mesa.. We have entered into an agreement to purchase up to 29 state-of-the-art Pipistrel Alpha Trainer 2 aircraft. This new fleet will be the backbone of our MPD Program to help commercial pilots accelerate their accumulation of flight hours to reach the minimum flight hours required by FAA and then be hired by Mesa. As part of the program, pilots will be provided with the opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flights costs of $ 25 per hour, per pilot, will be fully financed by us with zero interest, providing no upfront out-of-pocket expense for flight time while the candidate is accruing the required hours to earn their ATP certificate. ▪ We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition. ▪ We have expanded the United Aviate program participation to include all pilots flying for Mesa. Previously, pilots had to fly under the United Express contract for a minimum of two (2) years to qualify for the flow through to United Airlines. Now, all pilots regardless of contract, are eligible to flow through to United Airlines enhancing Mesa's ability to attract and retain pilots. ▪ We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity. These plans and initiatives outlined above have effectively alleviated pressure on financial performance. While we continue implement and monitor our plans and initiatives, there is no guarantee that these will continue to be effective and achieve their desired objectives. As of September 30, 2022, the Company has $ 97.2 million of short-term debt due within the next twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity we have achieved as outlined above. 70 American Capacity Purchase Agreement As of September 30, 2022, the Company operated 42 CRJ-900 aircraft under an Amended and Restated Capacity Purchase Agreement with American dated November 19, 2020 (as amended, the “American CPA”). In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departure (“CD0”) and controllable flight completion (“CCF”) percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions as well as airport-related facilities and gates at American hubs and cities where we operate. The American CPA expires on December 31, 2025 . Our American CPA is subject to termination prior to its expiration, subject to our right to cure, in various circumstances including: ▪ If either American or we become insolvent, file for bankruptcy, or fail to pay the debts as they become due , the non-defaulting party may terminate the agreement; ▪ If either we or American fail to perform the covenants, conditions, or provisions of the American CPA, subject to certain notice and cure rights, the non-defaulting party may terminate the agreement; ▪ If, at any time during the term of the American CPA, the number of covered aircraft is less than twenty (20); ▪ If we are required by the United States Federal Aviation Administration (“FAA”) or the United States Department of Transportation (“DOT”) to suspend operations and we have not resumed operations within three (3) business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft ; ▪ If either our CCF or CD0 falls below certain levels for a specified period of time; ▪ Upon the occurrence of a force majeure event (as defined in the American CPA) that lasts for a specified period of consecutive days and affects our ability to operate scheduled flights, including a future epidemic or pandemic; ▪ If a labor dispute affects our ability to operate over a specified number of days or we operate in violation of any existing American collective bargaining agreement; or ▪ Upon a change in our ownership or control without the written approval of American. Under the American CPA, American had the option in its sole discretion to withdraw up to: (i) 10 aircraft during calendar year 2021, (ii) five ( 5 ) aircraft during each of calendar years 2022 and 2023, and (iii) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 - 2023, and thereafter American has the right to remove the remaining 20 aircraft. American also has the right and option to withdraw a specified number of aircraft upon each occurrence of the following: ▪ If our CCF falls below certain levels for a specified period of time, American may withdraw one (1) aircraft ; ▪ If our CD0 falls below certain levels for a specified period of time, American may withdraw one (1) aircraft ; ▪ If we fail to satisfactorily complete established cabin interior program requirements by certain deadlines, American may withdraw one (1) aircraft; or ▪ If our block hour utilization falls below certain levels for a specified period of time, American may withdraw a specified number of aircraft. During fiscal year 2021, we entered into amendments to the American CPA. The amendments reflect the following: ▪ The addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) three ( 3 ) aircraft, from January 5, 2021 to March 3, 2021, (ii) increasing to a total of five ( 5 ) aircraft, from March 4, 2021 to May 5, 2021, (iii) decreasing to a total of three ( 3 ) aircraft, from May 6, 2021 to June 2, 2021, and (iv) increasing to a total of five ( 5 ) aircraft, from June 3, 2021 to August 17, 2021. ▪ A temporary reduction in certain rates for the period December 2020 through September 2021. ▪ The waiver of the operational performance metrics for the month of August 2021, and extension of the deadline for completing certain cabin interior and refurbishment requirements as defined in the American CPA to December 31, 2021. ▪ Increases to incentive and penalty compensation under the American CPA, effective beginning in October 2021. 71 On June 10, 2022, we amended our American CPA, pursuant to Amendment No. 8 thereto, to modify certain commercial terms thereunder. On June 20, 2022, we amended our American CPA, pursuant to Amendment No. 9 thereto, which amended and restated Schedule 1 (Covered Aircraft) to the American CPA and set forth certain equipment modification requirements with respect to Covered Aircraft added to such Schedule. For the months of May and June 2022, we did not meet the CCF or CD0 minimum performance levels under the American CPA. The failure to meet these minimum performance levels for two (2) consecutive months under the terms of the American CPA gives American the right to remove two (2) additional aircraft from the CPA, one (1) aircraft for not meeting the CCF minimum performance level for two (2) consecutive months and one (1) aircraft for not meeting the CD0 minimum performance level for two (2) consecutive months. The Company's failure to meet the CCF or CD0 minimum performance levels for three (3) consecutive months gives American the right to terminate the CPA upon 90 days' notice and to provide a wind-down schedule. Subsequently on July 28, 2022, we amended our American CPA, pursuant to Amendment No. 10 thereto, to, among other things, (a) modify certain commercial terms, (b) provide that, commencing with calendar months after January 1, 2022, during any calendar month in which a Notification Shortfall (as defined in the CPA) occurs, bonuses and rebates will not be assessed, (c) reset the CCF and CD0 three (3)-month measurement periods for purposes of American’s termination rights under the CPA to commence August 2022, and (d) amend certain other amounts payable to us thereunder. In addition to the foregoing, our block hour utilization has fallen below required levels in prior months, which also gives American the right to withdraw certain aircraft, subject to complying with applicable notice requirements under the American CPA. For the months of August, September, and October 2022, we did not meet the CD0 minimum performance levels under the American CPA. As noted above, the failure to meet such performance levels for two (2) consecutive months under the terms of the American CPA gives American the right to remove one (1) additional aircraft from the CPA for not meeting the CD0 minimum performance levels for two (2) consecutive months. The Company’s failure to meet the CD0 minimum performance levels for three (3) consecutive months gives American the right to terminate the CPA upon 90 days’ notice and to provide a wind-down schedule. In December 2022, we entered into Amendment No.11 to our American CPA. See Note 18 – “ Subsequent Events ” for a discussion of Amendment No.11, which includes, among other things, disclosure regarding the wind down of our operations under the American CPA and the transition of such aircraft to the United CPA. United Capacity Purchase Agreement As of September 30, 2022, we operated 20 E-175LL and 60 E-175 aircraft under a Second Amended and Restated Capacity Purchase Agreement with United dated November 4, 2020 (as amended, the “United CPA”). Under our United CPA, United owns 42 of the 60 E-175 and all of the E-175LL aircraft and leases them to us at nominal amounts. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028 , and the 18 E-175 aircraft owned by us have terms expiring in 2028 . The E-175LL aircraft have terms expiring between 2032 and 2033 . In exchange for providing passenger flight services, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. United also reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"), and component maintenance for the E-175 aircraft owned by United. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United. Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement, and as of June 30, 2022, have entered into agreements to lease 20 of our 20 CRJ-700 aircraft. During August of 2022, we committed to a formal plan to sell 18 of our 20 CRJ-700 aircraft and subsequently terminated the leases on the 18 CRJ-700 aircraft. As of September 30, 2022, we sold 10 of the 18 CRJ-700 aircraft. See Note 7 – “ Assets Held for Sale ” for further discussion of the CRJ-700 aircraft classified as held for sale as of September 30, 2022. Our United CPA is subject to termination rights prior to its expiration, including : ▪ If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances; ▪ If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to 30 days' notice and cure rights ; ▪ If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement; 72 ▪ I f we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier; ▪ United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more ; ▪ If United elects to terminate our United CPA in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us; and ▪ Commencing five (5) years after the actual in-service date, United has the right to remove the E-175 aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the 10 year anniversary of the in-service date, certain accelerated margin payments. See Note 18 – “Subsequent Events” for a discussion of the Amended and Restated United CPA, which includes among others, disclosure regarding the transition of the aircraft operated under the American CPA to be operated under the Amended and Restated United CPA . DHL Flight Services Agreement On December 20, 2019, we entered into a Flight Services Agreement with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate three (3) Boeing 737-400F aircraft to provide cargo air transportation services as of September 30, 2022. In exchange for providing cargo flight services, we receive a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support expenses including fueling and airport fees are paid directly by DHL. Under our DHL FSA, DHL leases two (2) Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us. The third Boeing 737-400F aircraft is leased to us as an operating lease by a third party. The DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one (1) or more aircraft for a period of one (1) year with 90 days’ advance written notice . Our DHL FSA is subject to following termination rights prior to its expiration: ▪ If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights; ▪ If either party is declared bankrupt or insolvent; ▪ If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days; ▪ At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 day’s written notice . ▪ If we fail to comply with performance standards for three (3) consecutive measurement periods. ▪ If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days; ▪ Upon a change in control or ownership of the Company; and ▪ DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance. For the months of April, May, and June 2022, we did not meet the CCF and CA minimum performance levels under the DHL FSA. The failure to meet the minimum performance levels for three (3) consecutive months under the terms of the DHL FSA gives DHL the right to terminate the FSA. Management has received a waiver arising out of the failure to meet the aforementioned CCF and CA performance levels. For the months of July, August, and September 2022, we did not meet the CCF and CA minimum performance levels under the DHL FSA. The failure to meet the minimum performance levels for three (3) consecutive months under the terms 73 of the DHL FSA gives DHL the right to terminate the FSA. Management has received a waiver arising out of the failure to meet the aforementioned CCF and CA performance levels. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ( " GAAP " ) and include the accounts of the Company and its wholly owned operating subsidiaries. Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ( " ASC " ) and Accounting Standards Update (" ASU ") of the Financial Accounting Standards Board (" FASB "). All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications of certain immaterial prior period amounts have been made to conform to the current period presentation. The Company is an " emerging growth company, " as defined in the Jumpstart Our Business Startups Act of 2012 (the " JOBS Act ") and may remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the IPO, subject to specified conditions. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to " opt out " of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Use of Estimates The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates. 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 ASC 280, " Segment Reporting, " we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flying services in accordance with our capacity purchase agreements and flight services agreement. While we operate under two (2) separate capacity purchase agreements and a flight services agreement, we do not manage our business based on any performance measure at the individual contract level. Additionally, our chief operating decision maker (“CODM”) uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. Our CODM 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 operated as one operating and reportable segment. All of our operating revenue in our 2022, 2021, and 2020 fiscal years was derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party. It is currently impractical to provide certain information on our revenue from our customers for each of our services and geographic information on our revenues and long-lived assets. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. 74 Restricted Cash Restricted cash primarily includes deposits in trust accounts to collateralize letters of credit and to fund workers' compensation claims, landing fees, and other business needs. Restricted cash is stated at cost, which approximates fair value. The Company has an agreement with a financial institution for a $ 6.0 million letter of credit facility to issue letters of credit for landing fees, workers' compensation insurance, and other business needs. Pursuant to such agreement, $ 3.3 million and $ 3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of September 30, 2022 and 2021, respectively, which are classified as restricted cash. Expendable Parts and Supplies Expendable parts and supplies are stated at cost, less an allowance for obsolescence. The Company provides an allowance for obsolescence for such parts and supplies over the useful life of its aircraft after considering the useful life of each 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 for expendable parts account was $ 3.8 million and $ 3.2 million as of September 30, 2022 and 2021, respectively. Property and Equipment Property and equipment are stated at cost, net of manufacturer incentives, and depreciated over their estimated useful lives to their estimated salvage values, which are 20 % for aircraft and rotable spare parts, using the straight-line method. Estimated useful lives of the various classifications of property and equipment are as follows: Property and Equipment Estimated Useful Life Buildings 30 years Aircraft 25 years from the manufacture date Flight equipment 7-20 years Equipment 5-9 years Furniture and fixtures 3-5 years Vehicles 5 years Rotable spare parts Life of the aircraft or term of the lease, whichever is less Leasehold improvements Life of the aircraft or term of the lease, whichever is less Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if (i) the undiscounted future cash flows are found to be less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value. To determine whether impairments exist for aircraft and other related assets used in operations, we group assets at the capacity purchase agreement, flight services agreement, or fleet type level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors. If an asset group is impaired, the impairment loss recognized is the amount by which the asset group's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available. Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups during the quarter ended September 30, 2022 and determined that only the asset group associated with the CRJ-900 fleet operating under the American CPA was impaired as discussed in Note 8 - " Balance Sheet Information ", because the future cash flows from the operation of other asset groups through the respective retirement dates exceeded the carrying value. The Company recognized impairment charges of $ 109.7 million, zero , and zero on property and equipment and other long-lived and ROU assets for the years ended September 30, 2022, 2021, and 2020 respectively. 75 Assets Held for Sale We classify assets as held for sale when our management approves and commits to a formal plan of sale that is probable of being completed within one (1) year. Assets designated as held for sale are recorded at the lower of their current carrying value or their fair market value, less costs to sell, beginning in the period in which the assets meet the criteria to be classified as held for sale. See Note 7 – “ Assets Held for Sale ” for further discussion of our assets classified as held for sale as of September 30, 2022 Fair Value Measurements The Company accounts for assets and liabilities in accordance with accounting standards that define fair value and establish a consistent framework for measuring fair value on either a recurring or a nonrecurring basis. Fair value is an exit price representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Accounting standards include disclosure requirements relating to the fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of three levels: • Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities; • Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and • Level 3 – Unobservable inputs in which there is little or no market data, requiring an entity to develop its own assumptions. Debt Financing Costs Debt financing costs consist of payments made to issue debt related to the purchase of aircraft, flight equipment, and certain flight equipment maintenance costs. The Company defers the costs and amortizes them to interest expense over the term of the debt agreement. Debt financing costs related to a recognized debt liability are presented as a direct deduction from the carrying amount of the related long-term debt on the consolidated balance sheet. Debt financing costs with no related recognized debt liability are presented as assets, with the current portion included in prepaid expenses and other current assets and the noncurrent portion included in other assets on the consolidated balance sheet. Unutilized Manufacturer Credits Manufacturer credits received in connection with aircraft purchases that can be used for the future purchase of certain goods and services are recorded as a prepaid asset based on the value of the credits expected to be utilized, and the Company reduces the asset as the credits are utilized to fund such purchases. The current portion is included in prepaid expenses and other current assets and the noncurrent portion is included in other assets on the consolidated balance sheet. Intangible Assets Customer relationships are amortized over their estimated useful lives. In accordance with ASC 360, Property, Plant, and Equipment, an intangible asset with a finite life that is being amortized is reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may be impaired. The Company records an impairment loss if the undiscounted future cash flows are found to be less than the carrying amount of the asset and if the carrying amount of the asset exceeds fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value. The Company recognized an impairment loss of $ 1.9 million, zero , and zero on intangible assets for the year ended September 30, 2022, 2021, and 2020 respectively. Other Assets Other noncurrent assets primarily consist of the non-current portion of lease incentives related to aircraft which Mesa leases to third parties and investments in equity securities. Lease incentives represent amounts paid or payable by Mesa to the lessee and are amortized as a reduction of lease revenue over the term of the lease. The current portion of the lease incentive assets is included in prepaid expenses and other current assets, and the non-current portion is included in other assets on the consolidated balance sheet. 76 Investments in equity securities with readily determinable fair values are adjusted to reflect the market value of the investments each reporting period, with corresponding gains and losses reflected in the statement of operations. Investments in equity securities without readily determinable values are measured at cost less impairment, if any, and are adjusted when there are observable prices of similar or identical investments from the same issuer . Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records deferred tax assets for the value of benefits expected to be realized from the utilization of state and federal net operating loss carryforwards. The Company periodically reviews these assets to determine the likelihood of realization. To the extent the Company believes some portion of the benefit may not be realizable based on the available sources of income, an estimate of the unrealized position is made, and a valuation allowance is recorded. The Company and its consolidated subsidiaries file a consolidated federal income tax return. Other Noncurrent Liabilities Other noncurrent liabilities primarily consist of the non-current portion of lease incentive obligations and deposits related to the aircraft which Mesa leases to third parties and vendor credit liabilities for future purchases of electric aircraft. Revenue Recognition The Company recognizes revenue when the service is provided under its capacity purchase agreements and flight services agreement. Under these agreements, the Company’s major partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of departures and block hours or flight hours flown. The agreements also include reimbursement of certain direct costs incurred by the Company in performing flight services. These costs, known as " pass-through costs, " may include passenger and hull insurance as well as aircraft property taxes. Additionally, for the E-175 aircraft owned by United, United reimburses the Company for heavy airframe and engine maintenance, landing gear maintenance, APU maintenance, and component maintenance. The Company also receives compensation under its agreements for heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all aircraft in scheduled service other than the E-175 aircraft owned by United. The contracts also include a profit margin on certain reimbursable costs, as well as incentives and penalties based on certain operational benchmarks. The Company is eligible to receive incentive compensation upon the achievement of certain performance criteria defined in the agreements. At the end of each period during the term of an agreement, the Company calculates the incentives or penalties achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable constraint guidance in accordance ASC 606. All revenue recognized under these contracts is presented as the gross amount billed to the major partners. See Note 3 - “ Contract Revenue and Pass-through and Other Revenue ” for further information. The Company has committed to perform various activities that can be generally classified into in-flight services and maintenance services. When evaluating these services, the Company determined that the nature of its promise is to provide a single integrated service, flight services, because its contracts require integration and assumption of risk associated with both services to effectively deliver and provide the flights as scheduled over the contract term. Therefore, the in-flight services and maintenance services are inputs to that combined integrated flight service. Both the services occur over the term of the agreement and the performance of maintenance services significantly effects the utility of the in-flight services. The Company's individual flights flown under the capacity purchase agreements and flight services agreement are deemed to be distinct and the flight service promised in the agreements represents a series of services that should be accounted for as a single performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore, revenue is recognized when each flight is completed. In allocating the transaction price, variable payments (i.e., billings based on departures and block hours or flight hours flown, pass-through costs, etc.) that relate specifically to the Company's efforts in performing flight services are recognized in the period in which the individual flight is completed. The Company has concluded that allocating the variability directly to the individual flights results in an overall allocation meeting the objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the Company to its customers. 77 A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest expense or aircraft lease expense costs while the aircraft is under contract. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the " right of use " of a specific type and number of aircraft over a stated period-of-time. The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations and comprehensive (loss) income . The Company recognized $ 158.4 million, $ 170.2 million and $ 208.9 million of lease revenue for the year ended September 30, 2022, 2021, and 2020, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive (loss) income because the use of the aircraft is not a separate activity of the total service provided under our capacity purchase agreements. The Company's capacity purchase agreements and flight services agreement are renewable periodically and contain provisions pursuant to which the parties could terminate their respective agreements, or withdraw aircraft under their respective agreements, subject to certain conditions as described in Note 1. The agreements also contain terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The agreements are amended from time to time to change, add, or delete terms of the agreements. The Company's revenues could be impacted by a number of factors, including amendment or termination of its agreements with its major partners, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and settlement of reimbursement disputes with the Company's major partners. In the event contracted rates are not finalized at a quarterly or annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has an enforceable right, it estimates the amount the Company expects to be entitled to that is subject to the variable constraint guidance within ASC 606. The Company's agreements contain an option that allows its major partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. All of the Company's major partners have exercised this option. Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its capacity purchase agreements or flight services agreement. In addition, the Company's major partners also provide, at no cost to the Company, certain ground handling and customer service functions, as well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by the Company's major partners at no cost are presented net in its consolidated financial statements; hence, no amounts are recorded as revenue or operating expense for these items. Contract Liabilities Contract liabilities consist of deferred credits representing upfront payments received from major partners related to aircraft modifications associated with capacity purchase agreements and pilot training. The deferred credits are recognized over time depicting the pattern of transfer of the related services over the term of the capacity purchase agreements. Current and non-current deferred credits are recorded to other accrued expenses and non-current deferred credits in the consolidated balance sheets, respectively. The Company's total current and non-current deferred credit balances at September 30, 2022 and September 30, 2021 were $ 3.9 million and $ 4.8 million, respectively. The Company recognized $ 0.9 million, $ 2.4 million and $ 3.7 million of the deferred credits within contract revenue in the consolidated statements of operations and comprehensive (loss) income during the year ended September 30, 2022, 2021, and 2020, respectively. Contract Assets The Company recognizes assets from the incremental costs incurred to obtain contracts with major partners including aircraft painting, aircraft reconfiguration, and flight service personnel training costs. These costs are amortized based on the pattern of transfer of the services in relation to flight hours over the term of the contract. Contract assets are recorded as other assets in the consolidated balance sheets. The Company's contract assets balance at September 30, 2022 and September 30, 2021 was zero and zero , respectively. Contract cost amortization was zero , $ 2.0 million and $ 1.9 million for the year ended September 30, 2022, 2021, and 2020, respectively. Maintenance Expense The Company operates under an FAA approved continuous inspection and maintenance program. The cost of non-major scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to maintenance expense as incurred. 78 The Company accounts for heavy maintenance and major overhaul costs on its owned E-175 fleet under the deferral method whereby the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. Amortization of heavy maintenance and major overhaul costs charged to depreciation and amortization expense was $ 1.9 million, $ 0.4 million, and zero for the fiscal year ended September 30, 2022, 2021, and 2020, respectively. At September 30, 2022 and September 30, 2021, the Company had a deferred heavy maintenance balance, net of accumulated amortization, of $ 9.7 million and $ 3.5 million, respectively. The Company accounts for heavy maintenance and major overhaul costs for all other fleets under the direct expense method whereby costs are expensed to maintenance expense as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms. Our maintenance policy is determined by fleet when major maintenance is incurred. Under the Company's aircraft operating lease agreements and FAA operating regulations, it is obligated to perform all required maintenance activities on its fleet, including component repairs, scheduled airframe checks and major engine restoration events. The Company estimates the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals, and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on estimates, which can be impacted by changes in utilization of its aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events consist of overhauls to major components. Engine overhaul expense totaled $ 23.6 million, $ 31.4 million and $ 40.5 million for the years ended September 30, 2022, 2021, and 2020, respectively, of which $ 21.7 million, $ 16.8 million, and $ 7.0 million, respectively, was pass-through expense. Airframe check expense totaled $ 22.1 million, $ 51.1 million and $ 23.5 million for the years ended September 30, 2022, 2021, and 2020, respectively, of which $ 3.2 million, $ 20.5 million, and $ 7.2 million, respectively, was pass-through expense. Pursuant to the United CPA, United reimburses the Company for heavy maintenance on certain E-175 aircraft. Those reimbursements are included in pass-through and other revenue. See Note 1 - " Organization and Operations " for further information. Leases We determine if an arrangement is a lease at inception. As a lessee, we have lease agreements with lease and non-lease components and have elected to account for such components as a single lease component. Our operating lease activities are recorded in operating lease right-of-use assets, current maturities of operating leases, and noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are reflected in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion in the consolidated balance sheets. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis over the lease term, while finance leases result in a front-loaded expense pattern. To determine whether impairments exist for aircraft and other related assets used in operations, we group assets, including ROU assets, at the capacity purchase agreement, flight services agreement, or fleet type level (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors. Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups during the quarter ended September 30, 2022 and determined that the asset group associated with the CRJ-900 fleet operating under the American CPA, discussed in Note 8 – “ Balance Sheet Information ”, required impairment. This resulted in an impairment loss of $ 15.2 million to the leased aircraft in the asset group for the CRJ-900 fleet operating for the quarter ended September 30, 2022, which was recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income. 79 As a lessee, we have elected a short-term lease practical expedient on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to leases with terms of 12 months or less . Our capacity purchase agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the compensation under our capacity purchase agreements are designed to reimburse the Company, as lessor, for certain aircraft ownership costs of these aircraft. We account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing our estimate of the stand-alone selling prices. As discussed in Note 1, we lease, at nominal rates, certain aircraft from United and DHL under our United CPA and DHL FSA, which are excluded from operating lease assets and liabilities as they do not represent embedded leases under ASC 842. Other than nominal leases with our major partners, approximately 11 % of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. Additionally, any remaining ROU assets and lease liabilities will be written off. The majority of the Company's leased aircraft are leased through trusts that have a sole purpose to purchase, finance, and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single-owner trusts in which the Company does not participate, the Company is not at risk for losses and is not considered the primary beneficiary. Management believes that the Company's maximum exposure under these leases is the remaining lease payments. 3. Contract Revenue and Pass-through and Other Revenue The Company recognizes contract revenue when the service is provided under its capacity purchase agreements and flight services agreement. Under the capacity purchase agreements and flight services agreement, our major partners generally pay for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion, on-time performance, and other operating metrics. The Company’s performance obligation is met when each flight is completed, and revenue is recognized and reflected in contract revenue. The Company’s contract revenue also includes temporary rate reductions during fiscal year 2021 under our capacity purchase agreements. The basis for the reductions is temporary improvements in our cost structure being passed on to our major partners, primarily from lower labor costs due to the grants received under the Payroll Support Program and its extensions through the year ended September 30, 2021. The Company’s contract revenue for fiscal year ended September 30, 2022 does not include any rate reductions. The Company recognizes pass-through revenue when the service is provided under its capacity purchase agreements and flight services agreement. Pass-through revenue represents reimbursements for certain direct expenses incurred including passenger liability and hull insurance, property taxes, other direct costs defined within the agreements, and major maintenance on aircraft leased at nominal rates. The Company’s performance obligation is met when each flight is completed or as the maintenance services are performed, and revenue is recognized and reflected in pass-through and other revenue. The Company records deferred revenue when cash payments are received or are due from our major partners in advance of the Company’s performance, including amounts that are refundable. The Company deferred $ 10.4 million and $ 10.7 million of revenue during the years ended September 30, 2022 and September 30, 2021, respectively, which was billed to and paid by our major partners. Deferred revenue is recognized as flights are completed over the remaining contract term. The deferred revenue balance as of September 30, 2022 represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied, and is expected to be recognized as revenue as follows (in thousands): Periods Ending September 30, Total Revenue 2023 $ 385 2024 2,553 2025 10,065 2026 4,792 2027 3,679 Thereafter 2,593 80 Total $ 24,067 A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. Such costs include aircraft principal and interest debt service costs, aircraft depreciation, and interest expense or aircraft lease expense costs while the aircraft is under contract. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. We account for the non-lease component under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost basis approach representing our estimate of the stand-alone selling prices. The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations and comprehensive (loss) income. The Company recognized $ 158.4 million, $ 170.2 million, and $ 208.9 million of lease revenue for the years ended September 30, 2022, 2021, and 2020, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive (loss) income because the use of the aircraft is not a separate activity from the total service provided under our capacity purchase agreements. Historically, the Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease CRJ-700 aircraft. The lease agreements were accounted for as operating leases and had a term of nine (9) years beginning on the delivery date of each aircraft. Under the lease agreements, GoJet paid fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments were subject to reimbursement following GoJet’s completion of qualifying maintenance events defined in the agreements. Lease revenue for fixed monthly rent payments were recognized on a straight-line basis within contract revenue. Lease revenue for supplemental rent was deferred and recognized within contract revenue when it was probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term. The Company mitigated the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases included specified lease return condition requirements and the Company maintains inspection rights under the leases. Lease incentive obligations for reimbursements of certain aircraft maintenance costs are recognized as lease incentive assets and were amortized on a straight-line basis and recognized as a reduction to lease revenue over the lease term. During August of 2022, the Company classified 18 CRJ-700 aircraft as assets held for sale (see Note 7) and terminated all lease agreements with GoJet. As a result of the lease termination, the Company recognized a loss from immediately derecognizing lease incentive assets of $ 3.2 million. This loss is recorded in operating expense. Prior to the lease termination, lease revenue recognized under the GoJet agreements, net of amortization of the lease incentive assets, was $ 30.0 million, $ 9.5 million, and zero for the years ended September 30, 2022, 2021, and 2020 respectively. 4 . Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). This ASU provides optional expedients and exceptions for a limited period of time for accounting for contracts, hedging relationships, and other transactions affected by the London Interbank Offered Rate (LIBOR) or other reference rates expected to be discontinued. Optional expedients can be applied from March 12, 2020 through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements. In March 2022, the FASB issued new guidance to expand the scope of financial assets that can be included in a closed portfolio hedged using the portfolio layer method to allow consistent accounting for similar hedges. The expanded scope permits the application of the same portfolio hedging method to both prepayable and non-prepayable financial assets. The standard will be effective for annual reporting periods beginning after December 15, 2022, including interim reporting periods within those fiscal years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements. In June 2022, the FASB issued new guidance to clarify the fair value measurement guidance for equity securities subject to contractual restrictions that prohibit the sale of an equity security. Further, the guidance introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. The standard will be effective for annual reporting periods beginning after December 15, 2023, including interim reporting periods within those fiscal years. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements. 81 5. Concentrations of Credit Risk Financial instruments that potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents that are primarily held by financial institutions in the United States and accounts receivable. Amounts on deposit with a financial institution may at times exceed federally insured limits. The Company maintains its cash accounts with high credit quality financial institutions and, accordingly, minimal credit risk exists with respect to the financial institutions. As of September 30, 2022, the Company had $ 3.3 million in restricted cash. We have an agreement with a financial institution for a letter of credit facility and to issue letters of credit for particular airport authorities, worker's compensation insurance, property and casualty insurance and other business needs as required in certain lease agreements. Pursuant to the terms of this agreement, $ 3.3 million and $ 3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of September 30, 2022 and 2021, respectively, which are classified as restricted cash. 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. At September 30, 2022, the Company had capacity purchase agreements with American and United and a flight services agreement with DHL. Substantially all of the Company's consolidated revenue for the years ended September 30, 2022, 2021, and 2020 and accounts receivable at the end of September 30, 2022 and 2021 was derived from these agreements. In certain cases, the terms of these agreements are not aligned with the lease obligations on the aircraft performing services under such agreements. Amounts billed by the Company under these agreements are subject to the Company's interpretation of the applicable agreement and are subject to audit by the Company's major partners. Periodically, the Company's major partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon the Company prevailing under the applicable audit, but also upon the financial well-being of the major partner. As such, the Company reviews amounts due based on historical collection trends, the financial condition of major partners and current external market factors and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was no t material at September 30, 2022 and 2021, respectively. If the Company's ability to collect these receivables and the financial viability of our major partners is materially different than estimated, the Company's estimate of the allowance could be materially impacted. American accounted for approximately 45 %, 45 % and 52 % of the Company's total revenue for the years ended September 30, 2022, 2021, and 2020, respectively. United accounted for approximately 48 %, 52 % and 48 % of the Company's total revenue for the years ended September 30, 2022, 2021, and 2020, respectively. A termination of either the American or the United capacity purchase agreement would have a material adverse effect on the Company's business prospects, financial condition, results of operations, and cash flows. 6 . Intangible Assets The Company includes its intangible assets of customer relationship in the asset group associated with the CRJ-900 fleet operating under the American CPA and monitors for any indicators of impairment of the asset group. When certain conditions or changes in the economic situation exist, the asset group may be impaired if the carrying amount of the assets is not recoverable and that carrying amount exceeds the asset group’s fair value. Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups during the quarter ended September 30, 2022 and determined that the asset group for the CRJ-900 fleet operating under the American CPA was impaired. As a result, the Company recognized an impairment loss of $ 1.9 million on the customer relationship related to the CRJ-900 fleet operating under the American CPA during the quarter ended September 30, 2022, which was recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income. The Company did no t record any impairment losses related to its intangible assets during the years ended September 30, 2021 and 2020. Information about the intangible assets of the Company at September 30, 2022 and 2021, is as follows (in thousands): September 30, September 30, 2022 2021 Customer relationship $ 43,800 $ 43,800 Accumulated amortization ( 38,029 ) ( 37,008 ) Impairment ( 1,929 ) - Net carrying value $ 3,842 $ 6,792 Total amortization expense recognized was approximately $ 1.0 million, $ 1.2 million, and $ 1.5 million for the fiscal years ended September 30, 2022, 2021, and 2020. The Company’s intangible assets have a remaining amortization period 82 of three ( 3 ) years . The Company expects to record amortization expense of $ 1.3 million, $ 1.3 million, and $ 1.2 million for fiscal years 2023, 2024 , and 2025 , respectively. 7. Assets Held for Sale During 2022, our management committed to a formal plan to sell certain of our CRJ-900, CRJ-200, and CRJ-700 aircraft. The aircraft are expected to be disposed of via sale by December 31, 2022. Accordingly, we determined the aircraft met the criteria to be classified as assets held for sale and have separately presented them in our consolidated balance sheet at the lower of their current carrying value or their fair market value less costs to sell. The fair values are based upon observable and unobservable inputs, including recent purchase offers and market trends and conditions. The assumptions used to determine the fair value of our assets held for sale are subject to inherent uncertainty and could produce a wide range of outcomes which we will continue to monitor in future periods as new information becomes available. Prior to the ultimate sale of the assets, subsequent changes in our estimate of the fair value of our assets held for sale will be recorded as a gain or loss with a corresponding adjustment to the assets’ carrying value. In connection with the classification of these assets as held for sale, we recorded impairment losses of $ 62.0 million, which are reflected within impairment of assets held for sale in our consolidated statements of operations and comprehensive (loss) income (loss). In September 2022, the Company completed the sale of 10 CRJ-700 aircraft for $ 50.0 million in cash proceeds. The disposed aircraft had a held for sale value of $ 45.3 million and the Company recognized $ 4.7 million of gain on sale, which is reflected within gain on sale of aircraft on our consolidated statements of operations and comprehensive (loss) income. As of September 30, 2022, the Company has 11 CRJ-900 aircraft, eight ( 8 ) CRJ-700 aircraft, and one ( 1 ) CRJ-200 aircraft that are classified as assets held for sale with a net book value of $ 73.0 million, which is reflected within assets held for sale on our consolidated balance sheet. 83 8 . Balance Sheet Information Certain significant amounts included in the Company's consolidated balance sheets as of September 30, 2022 and 2021, consisted of the following (in thousands): September 30, September 30, 2022 2021 Expendable parts and supplies, net: Expendable parts and supplies $ 31,913 $ 29,297 Less: obsolescence and other ( 5,198 ) ( 4,830 ) $ 26,715 $ 24,467 Prepaid expenses and other current assets: Prepaid aviation insurance $ 2,618 $ 2,171 Prepaid vendors 1,310 893 Prepaid other insurance 1,268 1,323 Lease Incentives 352 1,445 Other 1,068 1,053 $ 6,616 $ 6,885 Property and equipment, net: Aircraft and other flight equipment substantially pledged $ 1,260,143 $ 1,611,544 Other equipment 5,577 4,934 Leasehold improvements 2,776 2,776 Vehicles 992 1,184 Building 777 699 Furniture and fixtures 298 300 Total property and equipment 1,270,563 1,621,437 Less: accumulated depreciation ( 405,309 ) ( 469,546 ) $ 865,254 $ 1,151,891 Other assets: Investments in equity securities $ 15,178 $ 25,149 Lease incentives 1,097 10,957 Other 15 15 $ 16,290 $ 36,121 Other accrued expenses: Accrued property taxes $ 5,866 $ 8,783 Accrued interest 2,882 2,565 Accrued vacation 4,746 5,936 Accrued lodging 3,795 3,380 Accrued maintenance 1,453 1,580 Accrued liability on government payroll program 2,967 2,775 Accrued simulator costs 1,045 457 Accrued employee benefits 1,679 981 Accrued fleet operating expense 1,606 786 Short term lease incentive liability 97 3,318 Other 2,864 3,096 $ 29,000 $ 33,657 Other noncurrent liabilities: Warrant liabilities $ 25,225 $ 21,964 Lease incentive obligations 1,050 6,358 Long term employee benefits 1,123 1,447 Long term liability on government payroll program — 2,775 Other 1,821 2,047 $ 29,219 $ 34,591 84 Impairment of long-lived assets The Company monitors for any indicators of impairment of the long-lived fixed assets. When certain conditions or changes in the economic situation exist, the assets may be impaired and the carrying amount of the assets exceed its fair value. The assets are then tested for recoverability of carrying amount. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted net cash flows estimated to be generated by those assets are less than the carrying amount of those assets, and the net book value of the assets exceeds their estimated fair value. We group assets at the capacity purchase agreement, flight services agreement, and fleet-type level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators exist with respect to any of the asset groups, we estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors. Due to the impacts of the pilot shortage and the pilot wage increase, the Company assessed whether any impairment of its long-lived assets existed for all asset groups during the quarter ended September 30, 2022. The Company has determined that impairment charges were deemed necessary only for the asset group associated with the CRJ-900 fleet operating under the American CPA because the future cash flows from the operation of other asset groups through the respective retirement dates exceeded the carrying value. The asset group associated with the CRJ-900 fleet includes owned aircraft, leased aircraft, intangible assets of customer relationship, and other relevant long-lived assets. The fair values of assets within the CRJ-900 fleet were calculated using Level 3 fair value inputs based primarily upon recent market transactions, appraisals, and third-party bids, which were corroborated with published pricing guides and our assessment of existing market conditions based on industry knowledge. For the year ended September 30, 2022, the Company recognized a total impairment loss of $ 109.7 million related to the asset group associate with the CRJ-900 fleet, of which $ 92.6 million was related to property and equipment, $ 15.2 million was related to operating lease right-of-use assets, and $ 1.9 million was related to intangible asset of customer relationship. These impairment charges were recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income. The Company did no t record any impairment losses related to its long-lived assets during the years ended September 30, 2021 and 2020. The Company’s assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly. Depreciation Expense on Property and Equipment Depreciation expense on property and equipment totaled $ 80.5 million, $ 81.2 million and $ 80.8 million for the years ended September 30, 2022, 2021, and 2020, respectively. Other Assets In connection with a negotiated forward purchase contract for electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”) executed in February 2021, we obtained equity warrant assets giving us the right to acquire a number shares of common stock in Archer Aviation, Inc. (“Archer”), which at the time of our initial investment was a private, venture-backed company. As the initial investment in Archer did not have a readily determinable fair value, we accounted for this investment using the measurement alternative under ASC 321 and measured the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We estimated the initial equity warrant asset value to be $ 16.4 million based on publicly available information as of the grant date. In September 2021, the merger between Archer and a special purpose acquisition company (“SPAC”) was completed, resulting in a readily determinable fair value of our investments in Archer. Accordingly, gains and losses associated with changes in the fair value of our investments in Archer are measured in earnings, in accordance with ASC 321. The initial grant date value of the warrants, $ 16.4 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related aircraft purchase agreement. In connection with closing of the merger between Archer and the SPAC described above, in September 2021, we purchased 500,000 Class A common shares in Archer for $ 5.0 million, and obtained an additional warrant to purchase shares of Archer with a total grant date value of $ 5.6 million. The initial value of the warrants was recognized as a vendor credit liability within other noncurrent liabilities, and will be settled in the future, as a reduction of the acquisition date value of the eVTOL aircraft contemplated in the related aircraft purchase agreement. Because these investments have readily 85 determinable fair values, gains and losses resulting from changes in fair value of the investments are reflected in earnings, in accordance with ASC 321. All of our vested warrants have been exercised into shares of Archer common stock. Losses on our investments in Archer totaled $ 13.7 million and $ 6.8 million during the fiscal years ended September 30, 2022 and 2021, and are reflected in loss on investments, net in our Consolidated Statements of Operations and Comprehensive (Loss) Income. The fair values of the Company’s investments in Archer are Level 1 within the fair value hierarchy as the values are determined using quoted prices for the equity securities. In connection with a negotiated forward purchase contract for fully electric aircraft executed in July 2021, we obtained $ 5.0 million of preferred stock in Heart Aerospace Incorporated (“Heart”), a privately held company. Our investment in Heart does not have a readily determinable fair value, so we account for the investment using the measurement alternative under ASC 321 and measure the investment at initial cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment, or other features that indicate a change to fair value is warranted. Any changes in fair value from the initial cost of the investment in preferred stock are recognized as increases or decreases on our balance sheet and as net gains or losses on investments in equity securities, in other income (expense), net. The initial investment in preferred stock was measured at cost of $ 5.0 million. There were no identical or similar transactions during the fiscal year ended September 30, 2022, and as such, no adjustments to the initial cost of the equity investment resulting from observable price changes have been recorded at September 30, 2022. In connection with a negotiated forward purchase contract for hybrid-electric vertical takeoff and landing (“VTOL”) aircraft executed in February 2022, we obtained a warrant giving us the right to acquire a number of shares of common stock in the privately-held manufacturer of the VTOL aircraft. These investments do not have a readily determinable fair value, so we account for them using the measurement alternative under ASC 321 and measure the investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment or other features that indicate a discount to fair value is warranted. Any changes in fair value from the grant date value of the warrant assets will be recognized as increases or decreases to the investment on our balance sheet and as net gains or losses on investments equity securities. We estimated the initial warrant asset value to be $ 3.2 million based on prices of similar investments in the same issuer. The grant date value of the warrants, $ 3.2 million, was recognized as a vendor credit liability within other noncurrent liabilities. The liability related to the warrant assets will be settled in the future, as a reduction of the acquisition date value of the VTOL aircraft contemplated in the related forward purchase agreement. Total net losses on our investments in equity securities totaled $ 13.7 million during the year ended September 30, 2022, respectively, and are reflected in loss on investments, net in our consolidated statements of operations and comprehensive (loss) income. As of September 30, 2022, the aggregate carrying amount of our investments in equity securities was $ 15.2 million, and the carrying amount of our investments without readily determinable fair values was $ 9.0 million. 9 . Fair Value Measurements Other than our assets held for sale, asset group associated with the CRJ-900 fleet, and investments in equity securities described in Notes 7 and 8, respectively, we did not measure any of our assets or liabilities at fair value on a recurring or nonrecurring basis as of September 30, 2022 and 2021. The carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable included on the consolidated balance sheets approximated fair value at September 30, 2022 and 2021 because of the immediate or short-term maturity of these financial instruments. The Company's debt agreements are not traded on an active market. The Company has determined the estimated fair value of its debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable and, therefore, could be sensitive to changes in inputs. The Company utilizes the discounted cash flow method to estimate the fair value of Level 3 debt. 86 The carrying value and estimated fair value of the Company's long-term debt, including current maturities, were as follows (in millions): September 30, 2022 September 30, 2021 Carrying Fair Carrying Fair Value Value Value Value Long-term debt, including current maturities ( 1) $ 615.3 $ 541.7 $ 670.3 $ 676.8 (1) Current and prior period long-term debts' carrying and fair values exclude net debt issuance costs. 10 . Long-Term Debt, Finance Leases, and Other Borrowings Long-term debt as of September 30, 2022 and 2021, consisted of the following (in thousands): September 30, September 30, 2022 2021 Senior and subordinated notes payable to secured parties, due in monthly installments, interest based on LIBOR plus interest spread at 2.71 % through 2027 , collateralized by the underlying aircraft $ 73,850 $ 86,551 Notes payable to secured parties, due in semi-annual installments, interest based on LIBOR plus interest spread at 4.75 % to 6.25 % through 2028 , collateralized by the underlying aircraft 131,010 152,100 Notes payable to secured parties, due in quarterly installments, interest based on LIBOR plus interest at spread 2.20 % to 2.32 % for senior note & 4.50 % for subordinated note through 2028 , collateralized by the underlying aircraft 106,865 122,762 Other obligations due to financial institution, monthly and/or quarterly interest due from 2022 through 2031 , collateralized by the underlying equipment 18,038 4,581 Notes payable to financial institution, due in monthly installments, interest based on LIBOR plus interest spread at 3.10 % through 2024 , collateralized by the underlying equipment 26,758 45,559 Notes payable to financial institution, due in monthly installments, plus interest spread at 5.00 % through 2022 , collateralized by the underlying aircraft - 30,625 Notes payable to financial institution, due in monthly installments, plus interest spread at 5.00 % through 2023 , secured by flight equipment 2,000 4,000 Revolving credit facility, monthly interest based on LIBOR plus interest spread at 3.75 % through 2022 15,630 22,930 Notes payable to financial institution, quarterly interest based on LIBOR plus interest spread at 3.50 % through 2027 204,947 201,227 Notes payable to financial institution, due in monthly installments, interest based on LIBOR plus interest spread at 4.24 % , through 2027 , collateralized by the underlying equipment 36,212 - Gross long-term debt, including current maturities $ 615,310 $ 670,335 Less unamortized debt issuance costs ( 8,303 ) ( 9,295 ) Less notes payable warrants ( 7,272 ) ( 9,630 ) Net long-term debt, including current maturities $ 599,735 $ 651,410 Less current portion, net of unamortized debt issuance costs ( 97,218 ) ( 111,710 ) Net long-term debt $ 502,517 $ 539,700 87 Principal maturities of long-term debt as of September 30, 2022, and for each of the next five (5) years are as follows (in thousands): Total Principal Periods Ending September 30, Amount 2023 $ 99,102 2024 73,374 2025 64,512 2026 271,824 2027 63,958 Thereafter 42,540 $ 615,310 The net book value of collateralized aircraft and equipment as of September 30, 2022 was $ 856.9 . million. Enhanced Equipment Trust Certificate ("EETC") In December 2015, an Enhanced Equipment Trust Certificate (" EETC ") pass-through trust was created to issue pass-through certificates to obtain financing for new E-175 aircraft. At September 30, 2022, Mesa has $ 131.0 million of equipment notes outstanding issued under the EETC financing included in long-term debt on the consolidated balance sheets. The structure of the EETC financing consists of a pass-through trust created by Mesa to issue pass-through certificates, which represent fractional undivided interests in the pass-through trust and are not obligations of Mesa. The proceeds of the issuance of the pass-through certificates were used to purchase equipment notes which were issued by Mesa and secured by its aircraft. The payment obligations under the equipment notes are those of Mesa. Proceeds received from the sale of pass-through certificates were initially held by a depositary in escrow for the benefit of the certificate holders until Mesa issued equipment notes to the trust, which purchased such notes with a portion of the escrowed funds. Mesa evaluated whether the pass-through trust formed for its EETC financing is a variable interest entity (" VIE ") and required to be consolidated. The pass-through trust was determined to be a VIE; however, the Company has determined that it is not the primary beneficiary of the pass-through trust, and therefore, has not consolidated the pass-through trust with its financial statements. CIT Revolving Credit Facility On June 30, 2022, we entered into the Second Amended and Restated Credit and Guaranty Agreement by and among Mesa Airlines and Mesa Air Group Airline Inventory Management, L.L.C., as borrowers, Mesa Air Group, as a Guarantor, the other guarantors party thereto from time to time, CIT Bank, as Administrative Agent, and the other lenders party thereto, which was effective as of June 30, 2022 and extended the maturity date of the facility by three (3) months to December 31, 2022. As of September 30, 2022, $ 15.6 million of the draw loan remained outstanding. Future borrowings, if any, under this facility are subject to, among other things, the Company having sufficient unencumbered assets to meet the borrowing base requirements under the facility. Our CIT revolving credit facility includes a minimum interest and rental coverage ratio covenant. In March and April 2022, we entered into amendments to the CIT revolving credit facility which lowered the minimum interest and rental coverage ratio covenant for the year September 30, 2022. As a result, we are in compliance with this covenant. Loan Agreement with the United States Department of the Treasury On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with U.S. Department of the Treasury (the “U.S. Treasury”) for a secured loan facility of up to $ 200.0 million that matures in October 2025 (“the Treasury Loan”). On October 30, 2020, the Company borrowed $ 43.0 million and on November 13, 2020, the Company borrowed an additional $ 152.0 million. No further borrowings are available under the Treasury Loan. The Company also issued warrants to purchase shares of common stock to the U.S. Treasury. The Treasury Loan bears interest at a variable rate equal to (a)(i) the LIBOR rate divided by (ii) one minus the Eurodollar Reserve Percentage plus (b) 3.50 %. Accrued interest on the loans is payable in arrears on the first business day following the 14th day of each March, June, September, and December, beginning with December 15, 2020. All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025 (the “Maturity Date”). Interest is paid in kind by increasing the principal amount of the loan by the amount of such 88 interest due on an interest payment date for the first 12 months of the loan . Mesa's obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment , and tooling (collectively, the “Collateral”). The obligations under the Treasury Loan are guaranteed by the Company and Mesa Air Group Inventory Management. The proceeds were used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Treasury Loan may be made, in whole or in part, by Mesa Airlines, without premium or penalty, at any time and from time to time. Amounts prepaid may not be reborrowed. Mandatory prepayments of loans under the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and certain insurance payments related to the Collateral. In addition, if a “change of control ” (as defined in the Treasury Loan) occurs with respect to Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan. The Treasury Loan requires the Company, under certain circumstances, including within 10 business days prior to the last business day of March and September of each year beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0, Mesa Airlines will be required either to provide additional Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan or repay the term loans under the Treasury Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.6 to 1.0. The Treasury Loan contains two (2) financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury Loan also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service. In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, the Company issued to the U.S. Treasury warrants to purchase an aggregate of 4,899,497 shares of the Company’s common stock at an exercise price of $ 3.98 per share, which was the closing price of the Common Stock on The Nasdaq Stock Market on April 9, 2020. The exercise price and number of shares of common stock issuable under the Warrants are subject to adjustment as a result of anti-dilution provisions contained in the Warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. For accounting purposes, the fair value for the Warrant was estimated using a Black-Scholes option pricing model and recorded in stockholders' equity with an offsetting debt discount to the Treasury Loan in the consolidated balance sheet. The Company incurred $ 3.1 million in debt issuance costs relating to the Treasury Loan. In accordance with the applicable guidance, Mesa allocated the debt issuance costs between the Treasury Loan and related warrants. At funding on October 30, 2020, the initial $ 43.0 million was recorded net of $ 0.7 million in capitalized debt issuance costs. At funding on November 13, 2020, the remaining $ 152.0 million was recorded net of $ 2.3 million in capitalized debt issuance costs. The remaining $ 0.1 million in debt issuance costs was allocated to the warrants as a reduction to the warrant value within additional paid-in capital. Debt issuance costs allocated to the debt are amortized into interest expense using the effective interest method over the term of the related loan. Prior to the November 13, 2020 funding of the $152.0 million portion of the Treasury Loan, the Company repaid $ 167.7 million in existing aircraft debt covering 44 aircraft, including indebtedness under its (a) Senior Loan Agreements, dated June 27, 2018, (b) Junior Loan Agreements, also dated June 27, 2018, (c) Credit Agreements, dated January 31, 2007, April 16, 2014, and May 23, 2014, (d) Senior Loan Agreements, dated December 27, 2017, and (e) Junior Loan Agreements, also dated December 27, 2017 (collectively, “the EDC Loans”). The Company made payments totaling $ 164.2 million to repay the EDC Loans, consisting of principal of $167.7 million, and a $ 3.5 million discount on the balance owed. Additionally, in connection with the repayment, $ 2.5 million of unamortized original issue discount and deferred financing costs were recorded as a loss on debt extinguishment, resulting in a net gain on extinguishment of $ 1.0 million recorded within other income. In April 2022, we entered into an agreement with the U.S. Treasury to lower the minimum collateral coverage ratio covenant to 1.5 to 1.0 through September 30, 2022. As of September 30, 2022, the Company is in compliance with all debt covenants. 89 Spare Engine Financing In December 2021, we entered into a loan agreement with a financing institution to finance certain purchases of spare engines via a newly formed limited liability company (“LLC”). The loan agreement provides for aggregate borrowings of up to $ 54.0 million through November 2022. In December 2021, we borrowed an aggregate of $ 35.3 million under the loan agreement, which matures in December 2027 . The borrowed amounts are collateralized by the underlying engines and require monthly principal and interest payments until maturity. Borrowings under the loan agreement bear interest at the monthly LIBOR plus 4.25 % . The borrowings are the obligation of the newly formed LLC and are guaranteed by Mesa Airlines, Inc. The newly formed LLC, which is wholly owned by Mesa, was determined to be a VIE for which we are the primary beneficiary because we have the power to direct the activities of the LLC that most significantly impact the LLC’s economic performance and the obligation to absorb losses and right to receive benefits from the LLC in our capacity as sole member of the LLC and guarantor of the borrowings. Therefore, the LLC is consolidated in our financial statements and the borrowings are reflected as long-term debt in our consolidated balance sheets. The loan agreement contains a loan-to-value (“LTV”) financial covenant pursuant to which we are required to prepay certain amounts of the loan if the aggregate outstanding principal balance of the loan exceeds a specified percentage of the appraised value of the engines beginning in the 12 th full month after closing and each June 1 and December 1 thereafter. As of September 30, 2022, we were in compliance with all debt covenants. 1 1 . Earnings Per Share Calculations of net (loss) income per common share were as follows (in thousands, except per share data): Year Ended September 30, 2022 2021 2020 Net (loss) income $ ( 182,678 ) $ 16,588 $ 27,464 Basic weighted average common shares outstanding 36,133 35,713 35,237 Add: Incremental shares for: Dilutive effect of warrants — 2,543 — Dilutive effect of restricted stock — 587 71 Diluted weighted average common shares outstanding 36,133 38,843 35,308 Net (loss) income per common share Basic $ ( 5.06 ) $ 0.46 $ 0.78 Diluted $ ( 5.06 ) $ 0.43 $ 0.78 Basic (loss) income per common share is computed by dividing net (loss) income attributable to Mesa Air Group by the weighted average number of common shares outstanding during the period. The number of incremental shares from the assumed issuance of shares relating to restricted stock and exercise of warrants (excluding warrants with a nominal conversion price) is calculated by applying the treasury stock method. Share-based awards and warrants whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net (loss) income per share calculation. In loss periods, these incremental shares are excluded from the calculation of diluted loss per share, as the inclusion of unvested restricted stock and warrants would have an anti-dilutive effect. The following number of weighted-average potentially dilutive shares (in thousands) were excluded from the calculation of diluted net (loss) income per share because the effect of including such potentially dilutive shares would have been anti-dilutive: Year Ended September 30, 2022 2021 2020 Warrants 758 — — Restricted stock 106 — — 864 — — 90 12. Common Stock In connection with the Treasury Loan and as partial compensation to the U.S. Treasury for the provision of financial assistance under the Treasury Loan, the Company issued warrants to the U.S. Treasury to purchase shares of the Company’s common stock, no par value, at an exercise price of $ 3.98 per share (the “Exercise Price”), which was the closing price of the common stock on The Nasdaq Stock Market on April 9, 2020. The warrants were issued pursuant to the terms of a Treasury Warrant Agreement entered into by the Company and the U.S. Treasury. The exercise price and number of warrant shares issuable under the warrants are subject to adjustment as a result of anti-dilution provisions contained in the warrants for certain stock issuances, dividends, and other corporate actions. The warrants expire on the fifth anniversary of the date of issuance and are exercisable either through net share settlement or net cash settlement, at the Company’s option. The warrants are accounted for within equity at a grant date fair value determined under the Black Scholes Option Pricing Model. As of September 30, 2022, 4,899,497 warrants were issued and outstanding. The Company has not historically paid dividends on shares of its common stock. Additionally, the Treasury Loan and the Company's aircraft lease facility (the " RASPRO " Lease Facility) with RASPRO Trust 2005, a pass-through trust contains restrictions that limit the Company's ability to or prohibit it from paying dividends to holders of its common stock. 1 3 . Income Taxes The provision for income taxes consists of the following: Years Ended September 30, 2022 2021 2020 (in thousands) Current Federal $ — $ ( 39 ) $ — State 231 202 297 $ 231 $ 163 $ 297 Deferred Federal ( 47,879 ) 4,494 8,404 State ( 4,342 ) 1,171 830 $ ( 52,221 ) $ 5,665 $ 9,234 (Benefit) provision for income taxes $ ( 51,990 ) $ 5,828 $ 9,531 The reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows: Years Ended September 30, 2022 2021 2020 (in thousands) Income tax (benefit) provision at federal statutory rate $ ( 49,280 ) $ 4,707 $ 7,769 (Reduction) increase in income taxes resulting from: State taxes, net of federal tax benefit ( 3,953 ) 669 968 Nondeductible stock compensation expenses 251 ( 241 ) 524 Permanent items 206 292 314 Change in valuation allowances ( 22 ) ( 140 ) 1,173 162(m) limitation 11 12 14 Impact of changing rates on deferred tax assets ( 247 ) 509 ( 2,313 ) Expired tax attributes 964 152 633 Other 80 ( 132 ) 449 Income tax (benefit) provision $ ( 51,990 ) $ 5,828 $ 9,531 91 The components of the Company's deferred taxes as of September 30, 2022 and 2021 are as follows: Years Ended September 30, 2022 2021 (in thousands) Net operating loss carryforwards $ 131,897 $ 121,604 Deferred credits 703 899 Other accrued expenses 1,769 2,682 Prepaids and other 1,175 1,969 Warrant liabilities 5,725 5,018 State alternative minimum tax 1 1 Other reserves and estimated losses 873 729 Operating lease liabilities 8,012 15,226 Deferred revenue 5,506 1,439 Gross deferred tax assets $ 155,661 $ 149,567 Less: valuation allowance ( 2,901 ) ( 2,922 ) Total net deferred tax assets $ 152,760 $ 146,645 Intangible assets ( 877 ) ( 1,552 ) Operating lease right-of-use assets ( 2,055 ) ( 11,467 ) Property and equipment ( 166,586 ) ( 200,105 ) Unrealized gain on equity investments ( 961 ) ( 3,461 ) Total deferred tax liabilities $ ( 170,479 ) $ ( 216,585 ) Net deferred tax liability $ ( 17,719 ) $ ( 69,940 ) The Company has federal and state income tax net operating losses (“NOL”) carryforwards of $ 591.4 million and $ 247.0 million, which expire in fiscal years 2027 - 2038 and 2022 - 2042 , respectively. Approximately $ 180.9 million of our federal NOL carryforwards are not subject to expiration. These NOL carryovers are only available to offset 80 % of taxable income in years in which they are utilized due to tax law changes as a result of the Tax Cuts and Jobs Act. The Company believes that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $ 2.9 million as of September 30, 2022 and $ 2.9 million as of September 30, 2021 on the deferred tax assets related to these state NOL carryforwards. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of income tax expense. The federal and state NOL carryforwards in the income tax returns filed included unrecognized tax benefits. The deferred tax assets recognized for those NOLs are presented net of these unrecognized tax benefits. Because of the change of ownership provisions of the Tax Reform Act of 1986, the use of a portion of our NOL and tax credit carryforwards may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities. The Company determined it had an ownership change in February of 2009. Based on the study conducted at that time, a portion of the federal NOLs were determined to be limited by IRC Section 382, resulting in the Company writing off a portion of its NOLs at that time. Additionally, the Company’s initial public offering in August of 2018 resulted in a change in ownership under Section 382 of the Internal Revenue Code. The Company completed an update to the analysis of any potential limitation on the use of its net operating losses under Section 382 for the fiscal year ended September 30, 2022. Based on such analysis, the Company does not believe any ownership changes during the review period will further limit its ability to use its current net operating losses to offset future taxable income, if any. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: Years Ended September 30, 2022 2021 2020 (in thousands) Unrecognized tax benefits — October 1 $ 4,866 $ 4,866 $ 4,688 Gross decreases — tax positions in prior period — — — Gross increases — tax positions in prior period — — 178 Unrecognized tax benefits — September 30 $ 4,866 $ 4,866 $ 4,866 92 The Company’s unrecognized tax benefits of $ 4.9 million, $ 4.9 million and $ 4.9 million as of September 30, 2022, 2021, and 2020, respectively, is included as an offset to the net deferred tax asset balance. If recognized, the balance of the uncertain tax benefits would impact the effective tax rate. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded accrued penalties or interest related to the unrecognized tax benefits noted above as the amounts would result in an adjustment to NOL carryforwards. We are subject to taxation in the United States and various states. As of September 30, 2022, the Company is no longer subject to U.S. federal or state examinations by taxing authorities for fiscal years prior to 2002. 1 4 . Share-Based Compensation Restricted Stock The Company grants restricted stock units (" RSUs ") as part of its long-term incentive compensation to employees and non-employee members of the Board of Directors. RSUs generally vest over a period of three (3) to five (5) years for employees and one (1) year for members of the Board of Directors. The restricted common stock underlying RSUs are not deemed issued or outstanding upon grant, and do not carry any voting rights. RSUs are measured based on the fair market value of the underlying common stock on the grant date. The restricted stock activity for our years ended September 30, 2022, 2021, and 2020 is summarized as follows: Weighted- Average Number Grant Date 2018 Plan of Shares Fair Value Restricted shares unvested at September 30, 2019 847,974 $ 9.56 Granted 910,297 3.97 Vested ( 555,473 ) 9.21 Cancelled ( 7,250 ) 7.89 Restricted shares unvested at September 30, 2020 1,195,548 $ 5.47 Granted 346,123 9.53 Vested ( 492,465 ) 6.89 Cancelled ( 43,000 ) 4.57 Restricted shares unvested at September 30, 2021 1,006,206 6.22 Granted 718,959 3.20 Vested ( 455,303 ) 6.13 Cancelled ( 97,369 ) 2.97 Restricted shares unvested at September 30, 2022 1,172,493 $ 4.43 As of September 30, 2022, there was $ 4.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.7 years. Compensation cost for share-based awards are recognized on a straight-line basis over the vesting period. The Company recognizes forfeitures of share-based awards as they occur. Share-based compensation expense for the years ended September 30, 2022, 2021, and 2020 was $ 2.8 million, $ 3.1 million, and $ 4.4 million, respectively. Share-based compensation expense is recorded in general and administrative expenses in the consolidated statements of operations and comprehensive (loss) income. The Company repurchased 147,108 shares of its common stock for $ 0.5 million to cover the income tax obligation on vested employee equity awards during the fiscal year ended September 30, 2022. The Company repurchased 155,174 shares of its common stock for $ 1.5 million to cover the income tax obligation on vested employee equity awards and warrant conversions during the fiscal year ended September 30, 2021. During the fiscal year ended September 30, 2020, the Company repurchased 142,439 shares of its common stock for $ 0.6 million to cover the income tax obligation on vested employee equity awards. 93 1 5 . Employee Stock Purchase Plan 2019 ESPP The Mesa Air Group, Inc. 2019 Employee Stock Purchase Plan (the " 2019 ESPP ") is a nonqualified plan that provides eligible employees of Mesa Air Group, Inc. with an opportunity to purchase Mesa Air Group, Inc. ordinary shares through payroll deductions. Under the 2019 ESPP, eligible employees may elect to contribute 1 % to 15 % of their eligible compensation during each semi-annual offering period to purchase Mesa Air Group, Inc. ordinary shares at a 10 % discount. A maximum of 500,000 Mesa Air Group, Inc. ordinary shares may be issued under the 2019 ESPP. As of September 30, 2022, eligible employees purchased and the Company issued an aggregate of 304,137 Mesa Air Group, Inc. ordinary shares under the 2019 ESPP, 109,943 of which were purchased and issued during the current fiscal year. 1 6 . Leases At September 30, 2022, the Company leased 16 aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases. The operating leases require the Company to pay taxes, maintenance, insurance, and other operating expenses. Rental expense is recognized on a straight-line basis over the lease term, net of lessor rebates and other incentives. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased. Aggregate rental expense under all operating aircraft, equipment and facility leases totaled approximately $ 43.4 million, $ 44.6 million, and $ 51.4 million for the year ended September 30, 2022, 2021, and 2020, respectively. At September 30, 2022, the Company leased 2 aircraft and 3 spare engines under non-cancelable finance leases. Basic rent on finance leases is paid monthly and at the end of the lease term. At the end of the lease term, the Company has the option to purchase the aircraft and engines for most of the finance leases. These finance leases are reflected as finance lease obligations of $ 18.0 million on our consolidated balance sheet as of September 30, 2022. The components of our operating and finance lease costs were as follows (in thousands): Year Ended September 30, 2022 2021 Operating lease costs $ 37,637 $ 37,929 Variable and short-term lease costs 5,783 6,708 Interest expense on finance lease liabilities 547 576 Amortization expense of finance lease assets 2,705 2,130 Total lease costs $ 46,672 $ 47,343 As of September 30, 2022, the Company’s operating lease right-of-use assets were $ 43.1 million, the Company’s current maturities of operating lease liabilities were $ 17.2 million, and the Company’s noncurrent operating lease liabilities were $ 16.7 million. As of September 30, 2022, the Company’s current portion of finance lease liabilities were $ 2.7 million, and the Company’s noncurrent finance lease liabilities were $ 15.3 million. The Company’s operating lease payments included in operating cash flows for the year ended September 30, 2022 and 2021 were $ 36.3 million and $ 47.6 million, respectively. The Company’s finance lease interest payments included in operating cash flows for the year ended September 30, 2022 and 2021 were $ 0.3 million and $ 0.6 million, respectively. The Company’s finance lease principal payments included in financing cash flows for the year ended September 30, 2022 and 2021 were $ 2.5 million and $ 2.3 million, respectively. Due to the impacts of the pilot shortage and the pilot wage increase, we evaluated all asset groups during the quarter ended September 30, 2022 and determined that only the asset group associated with the CRJ-900 fleet operating under the American CPA, discussed in Note 8, required impairment. This resulted in an impairment loss of $ 15.2 million to the leased aircraft within the asset group for the CRJ-900 fleet operating for the year ended September 30, 2022, which was recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income. Additionally, we recorded a $ 0.2 million of impairment on certain operating lease ROU assets associated with the abandonment of a leased facility during the year ended September 30, 2022. The Company did no t record any impairment losses related to its operating lease right-of-use assets during the years ended September 30, 2021 and 2020. 94 The table below presents the weighted average remaining terms and discount rates for our operating and finance leases as of September 30, 2022: As of September 30, 2022 Finance leases: Weighted average remaining lease term 7.4 years Weighted average discount rate 6.1 % Operating leases: Weighted average remaining lease term 3.8 years Weighted average discount rate 4.5 % The following table summarizes future minimum rental payments, primarily related to leased aircraft, required under operating and finance leases that had initial or remaining non-cancelable lease terms as of September 30, 2022 (in thousands): Periods Ending September 30, Operating Leases Finance Leases 2023 $ 18,356 $ 2,730 2024 10,172 7,054 2025 1,564 1,800 2026 1,046 1,800 2027 1,029 1,800 Thereafter 5,054 6,600 Total lease payments 37,221 21,784 Less: imputed interest ( 3,256 ) ( 3,746 ) Amounts recorded in the consolidated balance sheet $ 33,965 $ 18,038 RASPRO Lease Facility . On September 23, 2005, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO as lessor, for 15 of our CRJ-900 aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid quarterly on each aircraft. On each of March 10, 2014, June 5, 2014, and December 8, 2017, the RASPRO Lease Facility was amended to defer certain payments of basic rent (the " Deferred Amounts "). Until the principal of and accrued interest on the Deferred Amounts are paid in full: (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain a minimum of $ 35.0 million of cash, cash equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio. In June 2020, the Company amended its RASPRO aircraft lease agreement to defer a $ 4.0 million lease payment otherwise due in June 2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September 2021 through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor and accordingly, this was not a lease modification and required no changes to current accounting treatment. As of September 30, 2022, we were in compliance with the covenants in the RASPRO Lease Facility. 95 1 7 . Commitments and Contingencies Litigatio n We are involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings which we consider routine to our business activities on an ongoing basis. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our consolidated financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) is not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we have disclosed that fact. In assessing the materiality of a proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in Item 3: “Legal Proceedings”, we believed that the ultimate outcomes of the two ( 2 ) putative class action lawsuits and such other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity, or results of operations. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material. Engine Purchase Commitments On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of 10 new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 1, 2022. During the quarter ended March 31, 2021, a $ 7.0 million non-refundable purchase deposit was made for the first five (5) engines to be delivered in calendar year 2021. The Company has options to purchase an additional 10 similar engines beyond 2022. The total purchase commitment related to these 10 engines is approximately $ 52.2 million. As of September 30, 2022, we have purchased nine (9) of the engines pursuant to the Amended and Restated Letter Agreement No. 13-3 with delivery of the remaining three (3) engines expected to take place during calendar year 2023. If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company. Electric Aircraft Forward Purchase Commitments As described in Note 8, in February 2021, the Company entered into a forward purchase contract with Archer for a number of electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL aircraft is $ 200.0 million, with an option to purchase additional aircraft. The Company’s obligation to purchase the eVTOL aircraft is subject to the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met. As described in Note 8, in July 2021, the Company entered into a forward purchase contract with Heart for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is $ 1,200.0 million, with an option to purchase additional aircraft. The Company’s obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and conditions, which may or may not be met. Other Commitments We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs. 96 18. Subsequent Events Amendment No. 11 to American CPA In December 2022, we entered into Amendment No. 11 (the “AA Amendment”) to the American CPA. The AA Amendment provides for the termination and wind-down of the American CPA by April 3, 2023 (the “Wind-down Period”), at which time all Covered Aircraft (as defined in the American CPA) will be removed from the American CPA. We will begin to place aircraft operated under the American CPA with in March 2023. As of the date if this Annual Report on Form 10-K, we operate 42 CRJ-900 aircraft under the American CPA, including two (2) operational spares. The American CPA was previously set to expire by its terms on December 31, 2025. Under the terms of the AA Amendment, during the Wind-down Period (i) we will continue to receive a fixed minimum monthly amount per aircraft covered by the American CPA, plus additional amounts based on the number flights and block hours actually flown during each month, subject to adjustment based on the Company’s controllable completion rate and certain other factors, and (ii) American has agreed not to exercise certain any termination or withdrawal rights under the American CPA if we fail to meet certain operational performance targets for the three (3) consecutive month period ending January 31, 2023. Provided we comply with the terms of the American CPA during the Wind-down Period and no Material Breach (as defined in the American CPA) has occurred, American has also agreed to waive Mesa’s failure to meet certain past operational performance targets and other requirements, which triggered termination and withdrawal rights for American pursuant to the terms of American CPA. The AA Amendment provides for liquidated damages (the “Liquidated Damages Claim”) payable to American in the event of a Material Breach (as defined in the American CPA) of the American CPA or a repudiation by us of our obligations under the American CPA. So long as we have not caused any Material Breaches during the Wind-Down Period, then immediately upon the expiration thereof, the parties have agreed to execute a written mutual release of claims and acknowledgment that no Material Breaches have occurred under the American CPA (including, without limitation, any Liquidated Damages Claim). Amendment and Restatement of the United CPA On December 27, 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United (as amended and restated, the “Amended and Restated United CPA”), which amends and restates the Second Amended and Restated Capacity Purchase Agreement, dated as of November 4, 2020, with United (as theretofore amended). The Amended and Restated United CPA provides, among other things, for the following amended terms: ▪ The addition of up to 38 CRJ-900 aircraft to be operated by the Company on behalf of United under the Amended and Restated United CPA, dependent on the number of E-175 aircraft the Company is operating; ▪ An increase in rates to cover the Company’s pilot pay increases instituted in September 2022, effective through September 2025; ▪ United to be responsible for all costs associated with converting the CRJ-900 aircraft for operation in United’s network; ▪ Terms providing that United may remove from the scope of the United CPA the CRJ-900, subject to certain notice and other requirements; ▪ United’s existing utilization waiver for the Company’s operation of E175LL Covered Aircraft (as defined in the United CPA) to be extended to December 31, 2023; ▪ The extension of existing monthly operational performance incentives; and ▪ An agreement by the Company to not enter into new regional air carrier service agreements, excluding the Company’s existing agreement with DHL. In consideration for entering into the Amended and Restated United CPA and providing the revolving line of credit (discussed below), the Company has agreed to (i) grant United the right to designate one individual (the “United Designee”) to be appointed to the Company’s board of directors, and (ii) issue to United shares of our common stock equal to ten percent (10.0%) of the Company’s issued and outstanding shares on a fully diluted basis as of the date of such issuance (the “United Shares”). United’s board designee rights will terminate at such time as United’s equity ownership in the Company falls below five percent (5.0%). 97 The United Shares will be issued pursuant to an equity purchase agreement, which will contain customary representations, warranties, covenants and indemnities for such a transaction, including pre-emptive rights relating to the issuance of any equity securities by the Company. The Company will also enter into a definitive registration rights agreement with United, granting United customary demand registration rights in respect of publicly registered offerings of the Company, subject to usual and customary exceptions and limitations. Revolving Line of Credit In connection with the above-referenced Amendment to the United CPA, United has agreed to purchase and assume, pursuant to an Assignment and Assumption Agreement (the “Assignment”), all of CIT Bank’s rights and obligations under Mesa’s and Mesa Air Group Airline Inventory Management, L.L.C.’s existing revolving credit facility with CIT, which is guaranteed by the Company (the “Existing Agreement”). In connection with the effectiveness of the Assignment, the Existing Agreement will be amended (as so amended, the “Amended Credit Facility”) to, among other things, (i) extend the Revolving Loan Maturity Date (as defined in the Amended Credit Facility) from the earlier to occur of November 30, 2028 or the date of the termination of the United CPA; (ii) provide for a revolving loan of $ 10.0 million plus certain other fees (the “Effective Date Bridge Loan”), which will be due and payable on January 31, 2024, subject to certain mandatory prepayment requirements; (iii) provide for Revolving Commitments (as defined in the Amended Credit Facility) equal to $ 30.7 million (inclusive of the amount outstanding under such facility as of the effective date of the Assignment) plus the original principal amount of the Effective Date Bridge Loan; (iv) amortization of the obligations outstanding under the Existing Agreement commencing the last business day of each fiscal quarter commencing the fiscal quarter ending March 31, 2025; (v) a covenant capping Restricted Payments (as defined in the Amended Credit Facility) at $ 5.0 million per fiscal year, a consolidated interest and rental coverage ratio of 1.00 to 1.00 covenant, measured at the end of each fiscal quarter, and a Liquidity (as defined in the Amended Credit Facility) requirement of not less than $ 15.0 million at close of any business day. Amounts borrowed under this facility bear interest at 3.50 % for Base Rate Loans and 4.50 % per annum for Term SOFR Loans (as each term is defined in the Amended Credit Facility. Amounts borrowed under the Amended Credit Facility will be secured by a collateral pool consisting of a combination of expendable parts, rotable parts and engines and a pledge of the Company’s stock in certain aviation companies. Amendment to the Loan and Guarantee Agreement with the United States Department of the Treasury On December 22, 2022, Mesa Air Group, Inc. (the “Company”) and its wholly owned subsidiaries, Mesa Airlines, Inc. (“Mesa”) and Mesa Air Group Airline Inventory Management, L.L.C., entered into a Modification and Waiver Agreement (the “Modification Agreement”) with the United States Department of the Treasury (the “Treasury”) and The Bank of New York Mellon, as Administrative Agent and Collateral Agent (the “Bank of New York”). The Modification Agreement provides for the amendment of the Loan and Guarantee Agreement, dated as of October 30, 2020 (as theretofore amended, the “Loan Agreement”), among Mesa, as Borrower, the Company, as a Guarantor, the Guarantors party thereto from time to time, the Treasury, and the Bank of New York. The amended terms include, among others, the following: (i) a modification of the Collateral Coverage Ratio covenant with respect to amounts on deposit in the Eligible Receivables Account and the Collateral Coverage Ratio covenant, effective through the maturity date of the Loan Agreement; and (ii) a waiver of the Collateral Coverage Ratio covenant requirement with respect to the release of liens on Collateral. The Modification Agreement also imposes certain obligations on the Company in connection with its sale of Collateral subject to the Loan Agreement and certain lien release obligations on the Treasury with respect to such sales. Capitalized terms used herein but not otherwise defined have the meanings assigned to such terms in the Loan Agreement. Amendment to Credit Agreement with Economic Development Corporation of Canada On December 15 , 2022, the Company entered into an agreement to renegotiate an existing credit agreement with the Economic Development Corporation of Canada (“EDC”) and Mitsubishi Heavy Industries RJ Aviation, Inc. (“MHIRJ”) that would, among other things, (i) reduce principal amortization on seven (7) CRJ-900 certain airframes financed with EDC for 24 months, with such deferred sum repaid at maturity in June 2027, subject to certain engine overhaul investment requirements in year two (2) to be agreed upon, and (ii) forgive $ 700,000 of subordinated debt payable to MHIRJ on each of the seven (7) CRJ-900 aircraft if repaid prior to December 31, 2023. 98 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.