Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, a smaller reporting company or an emerging growth company. See the definitions of “,” “,” “” and “” in Rule of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule of the Exchange Act).    Yes  ☐    No  ☒

As of June 30, 2021, the last business day of the registrant’s second fiscal quarter for the year ended December 31, 2021, the aggregate market value of the voting and stock held by of the registrant, based upon the closing price of the registrant’s common stock as reported on the OTC Market, was approximately $64.3 The determination of affiliate status for this purpose does not reflect a determination that any of such persons shall be deemed to be an affiliate of the registrant for any other purpose.

As of March , 2022, the registrant had 47,155,297 shares of common stock outstanding and 4,000,000 shares of Series C Convertible Redeemable Preferred Stock outstanding. The registrant does not have any class of securities registered pursuant to Section 12(b) or Section 12(g) of the Act.

This Annual Report on Form for the fiscal year ended December 31, 2021 (this “Annual Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements are subject to considerable risks and uncertainties. Forward-looking statements relate to matters such as our industry, business plans and strategies, material contracts, key relationships, consumer behavior, flight schedules and completed flight activity, revenues, expenses, margins, profitability, tax liability, capital expenditures, liquidity, capital resources and other operating information. Forward-looking statements include all statements that are not statements of historical facts, and can be identified by words such as “anticipate,” “approximately,” “assume,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases in this Annual Report. All of our forward-looking statements include assumptions underlying or relating to such statements that may cause actual results to differ materially from those that we are currently expecting, and are subject to considerable risks and uncertainties, including without limitation:

Harbor Diversified, Inc. (“Harbor”) is a holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC (“Lotus”), which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC (“AWF”), which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc. (“Therapeutics”), which is a entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, for purposes of this Annual Report on Form for the year ended December 31, 2021 (this “Annual Report”), disclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations, operations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as “we,” “us,” or “our.” Where reference is intended to refer only to Harbor, it is referred to as the “Company.”

For the year ended December 31, 2021, Air Wisconsin operated a fleet of 64 regional jets under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenues for the years ended December 31, 2021 and 2020 was derived from operations associated with the United capacity purchase agreement.

As of the date of this filing, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the pandemic in the regions in which Air Wisconsin operates. The extent to which the pandemic will impact our industry, business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic, the development of new variants of the virus that may be more contagious or virulent than prior versions, the issuance, scope and effect of any vaccine mandates and of other mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs.

Public concerns about the virus, as well as the various governmental guidelines and restrictions adopted to limit the spread of the virus, have had a material adverse impact on passenger demand for air travel since March 2020. While passenger demand for air travel has increased in recent months as a result of the easing of certain of these guidelines and restrictions, as well as expanded availability and adoption of vaccines, United has stated that it expects demand will remain below levels throughout 2022.

Notwithstanding the significant negative impact to our business and the airline industry, Air Wisconsin’s receipt of governmental assistance under the SBA Loan and the Payroll Support Program, described in the section entitled “” within this Annual Report, has mitigated to some extent the adverse impacts of the pandemic.

Several regional and larger carriers have ceased operations as a direct or indirect result of the pandemic. As of the date of this filing, ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines, and Compass Airlines, each of which are domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain.

Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the pandemic, these shortages were temporarily abated. However, as flight demand increased through the year ended December 31, 2021 and into 2022, these shortages have become acute, particularly for regional airlines such as Air Wisconsin, due to a number of factors, including retirements and employees seeking opportunities at mainline carriers and in other industries. Air Wisconsin’s monthly departures and scheduled block hours generally increased from June 2020 until October 2021. However, departures and scheduled block hours rarely reached levels and have declined slightly since October 2021, mostly as a result of pilot shortages.

Our primary business strategy currently consists of serving United and its customers through Air Wisconsin’s provision of regional airline services. We strive to serve as an efficient and reliable provider of flight services to United and to provide a high level of service to United and its customers in accordance with the United capacity purchase agreement. We believe that as a result of factors such as increased demand for air transportation and pilot shortages there will continue to be strong demand from major airlines for regional air services, and we seek to position Air Wisconsin to take advantage of this anticipated demand.

. We seek to maintain a profitable business while operating pursuant to the United capacity purchase agreement. To do so requires that we focus on a disciplined cost control approach through responsible outsourcing of certain operating functions and diligent control of corporate and administrative costs, implementing company-wide efforts to improve our cost position. We also seek to earn incentive payments pursuant to the United capacity purchase agreement and to avoid penalty payments, based upon our operational performance and the results of customer satisfaction surveys.

. We strive to provide our employees competitive pay and benefit packages and to offer a positive and supportive work environment to make Air Wisconsin an attractive place to work and build a career.

. The United capacity purchase agreement expires in February 2023. Air Wisconsin and United are in active negotiations regarding the extension of the agreement or the execution of a new agreement, although we can provide no assurance that any agreement will be reached. Accordingly, Air Wisconsin is exploring a commercial agreement with another major airline partner, as well as other business strategies to take advantage of anticipated demand for regional air services.

As of December 31, 2021, Air Wisconsin owned 64 regional jets, all of which were manufactured by Bombardier, Inc. (“Bombardier”). The regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a cabin, limited overhead and under seat storage, a lavatory and a galley that allows for snack and beverage service. The regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.

United and Air Wisconsin entered into the United capacity purchase agreement in February 2017, which was amended in October 2020 and April 2021. Pursuant to the United capacity purchase agreement, United has agreed to purchase the capacity of the Air Wisconsin regional jets covered under the agreement. Air Wisconsin commenced flying under the United capacity purchase agreement in September 2017. As of December 31, 2021, all of Air Wisconsin’s regional jets were available to support Air Wisconsin’s obligations under the United capacity purchase agreement.

Airlines are subject to extensive regulation. Air Wisconsin has a Federal Aviation Administration (“FAA”)-mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance and component service. Air Wisconsin also outsources certain aircraft, engine and other component maintenance functions. To procure these services, Air Wisconsin uses competitive bidding among qualified vendors.

Component service includes engine overhauls and engine performance restoration events, which are quite extensive and can take several months. We maintain an inventory of spare engines at both Air Wisconsin and Lotus to provide for continued operations during scheduled and unscheduled engine maintenance events. Air Wisconsin provides maintenance services for its regional jets and for its owned and leased engines and equipment.

Certain Air Wisconsin competitors are larger and have significantly greater financial and other resources than Air Wisconsin. In addition, certain of these competitors may have capacity purchase agreement terms that are more favorable than the United capacity purchase agreement. Moreover, economic downturns, including as a result of the pandemic, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional carriers which has resulted in changes to the competitive landscape. The effect of economic downturns on our results of operations is currently somewhat mitigated by the terms of the United capacity purchase agreement, but there is an ongoing dispute with United regarding certain terms of the agreement, and the extension of Air Wisconsin’s partnership with United beyond the current term is not certain.

FAA regulations require pilots to have an Airline Transport Pilot license with specific ratings for the aircraft to be flown and to be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance, and aircraft inspection must also meet experience standards prescribed by FAA regulations. All employees performing a safety-sensitive function are subject to random, and post-accident drug testing.

Air Wisconsin maintains relationships with various flight and maintenance institutions across the country that are focused on developing the next generation of aviation professionals. It typically recruits pilots and mechanics who have completed required coursework from accredited flight or maintenance programs and have obtained applicable certifications. Air Wisconsin also provides internship opportunities to individuals in the process of completing their coursework and training for aviation maintenance. These roles provide experience for the students and prepares them for other opportunities within Air Wisconsin.

We are committed to the safety and security of Air Wisconsin’s passengers and employees and to complying with safety and security requirements. Air Wisconsin has taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of its operations. Some of these efforts include aircraft security and surveillance and securing of cockpit doors. Additionally, both on its own and in coordination with United, Air Wisconsin has required employees to wear masks and has increased its aircraft cleaning procedures both between flights and overnight. Enhanced cleaning measures are intended to ensure that frequently touched surfaces, such as armrests, tray tables and seatbelts, are routinely and comprehensively cleaned utilizing disinfectants to prevent transmission of and other contagions. An increased supply of sanitizing wipes and hand sanitizer onboard Air Wisconsin’s aircraft is available to aid its crewmembers in efforts to keep the aircraft clean and disinfected.

The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. Air Wisconsin currently holds an air carrier certificate with Federal Aviation Regulation operation specifications.

Under DOT regulations and federal law, Air Wisconsin must be owned and controlled directly and indirectly by citizens of the United States. The restrictions imposed by federal law and regulations currently require that at least 75% of Air Wisconsin’s voting equity securities must be owned and controlled, directly and indirectly, by persons or entities who are citizens of the United States, as defined in the Federal Aviation Act and interpreted by the DOT, that the Company’s Chief Executive Officer, Air Wisconsin’s President and Chief Executive Officer, and at least of the members of Air Wisconsin’s board of managers and the Company’s board of directors and other managing officers be citizens of the United States, and that Air Wisconsin and the Company be under the actual control of citizens of the United States. In addition, at least 51% of Air Wisconsin’s total outstanding equity securities must be owned and controlled, directly and indirectly, by citizens of the United States and no more than 49% of its equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into “open skies” air transport agreements with the U.S. which allow unrestricted access on air service routes between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country. No more than 25% of Air Wisconsin’s equity securities may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have not entered into an “open skies” air transport agreement with the U.S. We are currently in compliance with these ownership provisions. In addition, the Company’s amended and restated certificate of incorporation and the Company’s amended and restated bylaws currently prohibit the transfer of any shares of the Company’s capital stock that would result in (i) any person or entity becoming a “Five-Percent Stockholder” (as defined under Treasury Regulation of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity who is already a “Five-Percent Stockholder” of our then-outstanding capital stock. These restrictions on the transfer of the Company’s capital stock inhibit the acquisition of control of Air Wisconsin by any foreign citizen.

The DOT also has jurisdiction over certain consumer protection matters related to air transportation. This covers unfair or deceptive practices, unfair methods of competition, advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints and transportation of passengers with disabilities. The DOT has adopted consumer protection rules regulating lengthy tarmac delays, chronically delayed flights, codeshare disclosure and undisclosed display bias. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and agreements (where one airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions. In the future, the DOT may adopt additional regulations that increase the costs of Air Wisconsin’s operations or otherwise adversely impact our financial performance.

The Company is a holding company that is the parent of a consolidated group of five subsidiaries: AWAC, Air Wisconsin, Lotus, AWF, and Therapeutics. The subsidiaries, other than Air Wisconsin, are described below:

Therapeutics is a entity with no material assets.

Pursuant to the United capacity purchase agreement, United is permitted to terminate the agreement prior to the expiration of the term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s controllable completion factor falling below levels for a period of at least four consecutive months, a grounding of at least a specified number of Air Wisconsin’s aircraft, and certain changes of control of Air Wisconsin. No such termination event has occurred or exists as of the date of this filing. If United does not agree to enter into a new capacity purchase agreement, or if a termination event occurs and United exercises its right to terminate the agreement in accordance with its terms, our business would be significantly negatively impacted. A termination or expiration of this agreement would have a material adverse effect on our financial condition, results of operations and liquidity, unless we are able to enter into satisfactory substitute arrangements for the utilization of Air Wisconsin’s aircraft. We may not be able to enter into substitute arrangements, and any arrangements we are able to secure may not be as favorable to us as the current agreement.

Any events that negatively impact the financial or operating performance of United could have a material adverse effect on our business, financial condition and results of operations. For example, during the pandemic, United has experienced a significant decline in flight demand and revenues. While there has been a modest demand recovery, this reduction in demand as compared to 2019 levels is expected to continue at least through 2022, which we expect will continue to negatively impact Air Wisconsin’s scheduled block hours. In addition, United may be materially and adversely impacted, directly or indirectly, by worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations and increasing interest rates. If United were to experience significant financial difficulties as a result of these or other reasons, it could negatively impact United’s ability to meet its financial obligations under the United capacity purchase agreement and potentially alter its business strategy as it applies to regional airlines. Further, if United were to become bankrupt, the United capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations.

As a result of the significant decline in passenger demand and drastically reduced flight departures during the early stage of the pandemic, there was no shortage of qualified pilots in the airline industry. During the first two years of the pandemic, for many reasons, such as reduced flying opportunities, travel restrictions and vaccine mandates, many pilots decided to retire or seek employment in other industries. However, as passenger demand for air travel has increased, Air Wisconsin has experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from voluntary retirement decisions. Air Wisconsin has also experienced challenges with pilot attrition to other airlines. Air Wisconsin has historically expended significant resources to recruit and train pilots, including as a result of upward pressure on pilot compensation and limited availability of flight simulators and instructors, and Air Wisconsin may experience additional cost increases in the future, which could have an adverse impact on our financial condition and operating results.

Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during the pandemic, and the hiring needs of other airlines. There is also a risk that some mechanics may have decided to leave the airline industry or may decide to do so in the future. If Air Wisconsin is unable to hire and retain a sufficient number of qualified mechanics, it could have an adverse impact on its business and operations.

There is also a risk that Air Wisconsin would lose employees, including additional pilots and mechanics, if a vaccine mandate were imposed by any federal, state or local government authority. If future pilot or mechanic attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to increase its labor costs to attract and retain sufficient qualified pilots and mechanics or it may be unable to fly the number of flights required under the United capacity purchase agreement, which may result in penalties under the agreement that would negatively impact Air Wisconsin’s operations and our financial condition.

In June 2021, United announced that its long-term fleet strategy involves significantly reducing, but not eliminating, the use of single class aircraft, which includes the regional jet comprising the Air Wisconsin fleet. According to United, its new fleet strategy would reduce single class aircraft flight departures from 33% of United’s total departures down to approximately 10% by 2026. Although United has reduced its fleet of single class 50 seat aircraft through actions it has taken with other regional airlines, such as ExpressJet Airlines, Inc. and Trans States Airlines, it is possible that United might not agree to extend the United capacity purchase agreement, or enter into a new agreement, as part of its fleet planning process. If the agreement is not extended or a new agreement is not entered into, our business would be significantly impacted, and it is unlikely we would have an immediate source of revenues or earnings to offset the financial impact. Alternatively, United could agree to extend the agreement, but on terms materially different from the current agreement. American Airlines has also announced that it intends to significantly reduce the single class aircraft in its fleet, and Delta Airlines has announced that it intends to retire all of the single class aircraft in its fleet. Therefore, Air Wisconsin may not be able to enter into substitute arrangements with other airlines, and any arrangements it is able to secure may not be as favorable to us as the current United capacity purchase agreement. Since our primary business strategy currently involves flying single class aircraft, the publicly announced fleet strategy changes by several major carriers, including Air Wisconsin’s sole airline partner, represent a substantial risk to our business.

Certain factors have led, and may in the future lead, United to modify the anticipated utilization of Air Wisconsin’s aircraft under the United capacity purchase agreement, some of which are beyond Air Wisconsin’s control. Any factors that continue to cause United to schedule the utilization of Air Wisconsin’s aircraft on routes or at frequencies materially different than we have forecasted could further reduce our ability to realize operating efficiencies, which would continue to negatively impact our financial condition and operating results. United has stated that it does not expect the recovery from the pandemic to follow a linear path and, as such, the actual number of flights United schedules under the United capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated or which United initially communicated for the period.

In addition to the fleet strategy changes discussed above, growth opportunities within United’s current flight network may be limited by various factors, including “scope” clauses in United’s current collective bargaining agreements with its pilots that restrict the number and size of regional aircraft that may be operated in its flight systems that are not flown by its pilots. Although United has significant room under its scope clauses with respect to aircraft, which comprise Air Wisconsin’s fleet, these clauses could limit Air Wisconsin’s ability to operate larger aircraft for United, which would limit Air Wisconsin’s expansion opportunities. United is under no obligation to provide Air Wisconsin with an opportunity to fly additional aircraft within its system or to otherwise expand its relationship with Air Wisconsin.

Air Wisconsin’s ability to expand its operations in the future may be limited by a number of factors impacting the airline industry, including pilot and mechanic shortages, access to airport terminals and facilities, capital expenditures required to maintain or expand fleet operations, significant changes in fuel prices or other variable costs, regulatory changes, changes in the availability of necessary parts and equipment, and intense competition and pricing pressure. Given the competitive nature of the airline industry, we believe limited growth opportunities exist and as a result Air Wisconsin may be required to accept less favorable contract terms in order to secure new or additional flying opportunities. Due to United’s stated intention in June 2021 to significantly reduce its use of single class aircraft by 2026, there may not be any new or additional flying opportunities available to Air Wisconsin with United. In addition, due to American Airlines’ and Delta Airlines’ stated intentions to significantly reduce or retire their use of single class aircraft, there may not be substitute flying opportunities with other major airlines. Further, even if Air Wisconsin is offered the ability to pursue growth opportunities in the future, they may involve economic terms or financing commitments that are unfavorable to Air Wisconsin or do not result in profitable operations.

Air Wisconsin currently relies on a single aircraft type, the regional jet, and a single engine type, the General Electric (“GE”) engine. The issuance of FAA or manufacturer directives restricting or prohibiting the use of this aircraft type or engine type, or Air Wisconsin’s inability to obtain necessary parts and services related to this aircraft type or engine type, would negatively impact our business and financial results. In addition, any concerns raised regarding the safety or reliability of the regional jet or the GE engine, whether or not directly associated with Air Wisconsin’s fleet, could result in concerns about Air Wisconsin’s fleet that could negatively impact our business.

Air Wisconsin has been highly dependent upon Bombardier, Inc. (“Bombardier”), as the sole manufacturer of Air Wisconsin’s aircraft, and GE, as the sole manufacturer of Air Wisconsin’s aircraft engines, to provide sufficient parts and related maintenance and support services to it in a timely manner. In June 2020, Bombardier consummated an agreement with Mitsubishi Heavy Industries, Ltd (“Mitsubishi”), pursuant to which Mitsubishi purchased Bombardier’s regional jet program, including all aspects of the regional jet, such as type certificates, maintenance, support, refurbishment, marketing and sales activities. Air Wisconsin’s operations could be materially and adversely affected by the failure or inability of Mitsubishi or GE to provide required maintenance or support services, or as a result of unscheduled or unanticipated maintenance requirements for Air Wisconsin’s aircraft or engines.

A significant majority of Air Wisconsin’s employees are represented by labor unions, including the Air Line Pilots Association, International (“ALPA”), the Association of Flight Attendants (“AFA”), the International Association of Machinists and Aerospace Workers (“IAMAW”), and the Transport Workers Union of America (“TWU”). The terms and conditions of future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency, or other factors, to bear higher costs than Air Wisconsin, which may result in higher industry wages and increased pressure on Air Wisconsin to increase the wages and benefits of its employees. Future agreements may be on terms that are less favorable to Air Wisconsin than its current agreements or not comparable to agreements entered into by its competitors. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Any agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results. If Air Wisconsin is unable to reach agreement with any of its unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, it may be subject to work interruptions, stoppages or shortages.

The average age of Air Wisconsin’s regional jets as of December 31, 2021 was approximately 19.3 years. As Air Wisconsin’s fleet continues to age, its maintenance costs may increase, both on an absolute basis and as a percentage of its operating expenses, and may result in periods during which aircraft are dedicated to maintenance activities and unavailable for flying under the United capacity purchase agreement. In addition, as noted above, there is an industry wide shortage of aircraft mechanics. Air Wisconsin has increased its labor costs to attract and retain qualified mechanics. However, as passenger demand for air travel has increased and additional aircraft are brought back into service to address the increased demand, the turnaround time for routine and heavy maintenance has lengthened. As a result, Air Wisconsin has experienced, and may continue to experience, delays and increased costs in obtaining both and third party maintenance services. Any continued increase in Air Wisconsin’s maintenance costs or decreased revenues resulting from periods could have a further adverse effect on our financial condition and operating results.

United, Air Wisconsin’s sole airline partner, began experiencing a significant decline in domestic and international demand related to the pandemic during the first quarter of 2020. United has stated that it expects demand will remain below levels throughout 2022. As a result of lowered demand, United significantly reduced the number of Air Wisconsin’s scheduled departures and block hours relative to 2019 levels. In the year ended December 31, 2021, Air Wisconsin’s scheduled departures and block hours were approximately 81,755 and 121,409, respectively, as compared to scheduled departures and block hours of approximately 106,840 and 170,708, respectively, for the year ended December 31, 2019. Air Wisconsin’s monthly departures and scheduled block hours generally increased from June 2020 until October 2021, but rarely reached levels and have declined slightly since October 2021, mostly as a result of pilot shortages. There can be no assurance as to whether departures and scheduled block hours will return to levels. United has stated publicly that it does not expect recovery from to follow a linear path and, as such, the actual number of flights United schedules under the United capacity purchase agreement in any particular period may be significantly different from the number of flights we initially anticipated, or which United initially communicated for the period.

The magnitude and scope of the impact of the pandemic on our business and future results of operations are highly uncertain and subject to change. The full extent of the impact of the pandemic on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, including the effectiveness of the mitigation strategies employed by United, the duration and spread of the impact of on long-term demand for air travel, the impact of the pandemic on our financial health and operations and those of United, United’s compliance with the United capacity purchase agreement, and future governmental actions, all of which are highly uncertain and cannot be predicted. In addition, a further outbreak of including spread of new variants that may be more contagious or virulent than prior versions or that may be resistant to currently approved vaccines, an outbreak of another disease or similar public health threat, or any other event that would affect consumer demand for air travel or impose travel restrictions, could have a material adverse impact on our business, operating results, financial condition and liquidity, and those of United.

Several regional and larger carriers have ceased operations as a direct or indirect result of the pandemic. ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines and Compass Airlines, each of which are domestic regional or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy or ceased or severely limited operations due, at least in part, to the pandemic’s impact on their business.

Any additional consolidation or significant alliance activity within the airline industry, such as the American Airlines and Jet Blue Airways alliance, could further limit the number of potential airline partners with whom Air Wisconsin could enter into commercial agreements. In addition, any further consolidation activity involving United, reduction in the size of its network or decision to accelerate the reduction of single class aircraft such as the regional jet could alter its business strategy or its perception of the value of its relationship with Air Wisconsin, which could limit opportunities for Air Wisconsin to provide additional service to United. Similarly, any further consolidation or restructuring of any major air carrier’s regional jet programs, including as a result of long-term fleet strategy changes announced by several major carriers, could negatively impact Air Wisconsin’s future growth opportunities.

Given that Air Wisconsin currently operates a single aircraft type, any accident or incident involving the regional jet aircraft type, whether or not operated by Air Wisconsin, may result in Air Wisconsin temporarily or permanently suspending service on all or a large portion of its fleet. Any grounding of Air Wisconsin’s aircraft could have an adverse impact on Air Wisconsin’s operations, its relationship with United, and our financial results. In addition, certain groundings of at least a specified number of Air Wisconsin’s aircraft would provide United the right to terminate the United capacity purchase agreement.

Further, any accident or incident involving a regional jet, regardless of the operator or geographic location of the incident, could cause a public perception that the aircraft type is less safe and reliable than other aircraft types, which could negatively impact our business, financial condition and operating results. Any such accident or incident could result in an acceleration of the implementation of fleet strategy changes by major air carriers that would reduce or eliminate the use of aircraft, including the regional jet.

In February 2012, the Company’s predecessor, Harbor Biosciences, Inc., filed a Form 15 with the SEC to deregister its common stock pursuant to Section 12(g) of the Exchange Act. The filing of the Form 15 had the effect of suspending the Company’s obligation, pursuant to Section 15(d) of the Exchange Act, to file reports and other information with the SEC. As a result, prior to the filing of our Annual Report on Form for the year ended December 31, 2019, the last periodic report filed by the Company was the Annual Report on Form for the year ended December 31, 2011. As of January 1, 2020, the Company no longer met the eligibility criteria under Rule of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act, requiring the Company to resume filing reports and other information with the SEC pursuant to the Exchange Act.

The Company has incurred significant direct and indirect costs, and diversion of management time and resources, as a result of the requirement to comply with certain reporting obligations under the Exchange Act, including those incurred in connection with the preparation and filing of Annual Reports on Form Quarterly Reports on Form and Current Reports on Form the audit of the consolidated financial statements contained within this Annual Report in accordance with SEC rules and Public Company Accounting Oversight Board (United States) standards, and compliance with certain provisions of the Sarbanes-Oxley Act of 2002. The Company expects to incur significant additional costs relating to its public reporting obligations, which could have a negative impact on the Company’s results of operations.

To reduce the risk of a potential adverse effect on the Company’s ability to use its current or future net operating loss carryforwards for federal income tax purposes, the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, prohibit certain transfers of shares of the Company’s capital stock that could result in adverse tax consequences by impairing the Company’s ability to utilize its net operating loss carryforwards. These transfer restrictions are subject to a number of rules and exceptions, and generally may only be repealed or amended by the affirmative vote of the holders of at least of the outstanding shares of the Company’s capital stock. These transfer restrictions apply to the beneficial owners of the shares of the Company’s capital stock. The transfer restrictions contained in the Company’s amended and restated certificate of incorporation, as amended, and amended and restated bylaws, as amended, may limit demand for the Company’s common stock, which may adversely affect the trading price. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur, or otherwise discouraging takeover attempts that some stockholders may consider beneficial.

The Company is a “smaller reporting company” under applicable SEC rules and regulations, and it will continue to be a “smaller reporting company” for so long as either (i) the market value of the Company’s common stock held by as of the end of its most recently completed second quarter is less than $250 million or (ii) the market value of the Company’s common stock held by is less than $700 million and the annual revenues of the Company are less than $100 million during the most recently completed fiscal year. As a “smaller reporting company,” the Company has relied on exemptions from certain disclosure requirements that are applicable to other public reporting companies. These exemptions include reduced financial disclosure and disclosure regarding executive compensation. Investors may find the Company’s common stock less attractive because it relies on these exemptions, which could lead to a less active trading market for the Company’s common stock and negatively impact the trading price.

As of December 31, 2021, Air Wisconsin owned 64 regional jets. The regional jet offers many of the capabilities and amenities of larger commercial jet aircraft, including flight attendant service, a cabin, limited overhead and under seat storage, a lavatory and a galley that allows for snack and beverage service. The regional jet has a speed comparable to larger aircraft operated by major airlines and has a range of approximately 1,585 miles.

In July 2003, Air Wisconsin financed the Milwaukee maintenance hangar through the issuance of approximately $4.3 million principal amount of City of Milwaukee, Wisconsin variable rate industrial development bonds. The bonds mature November 1, 2033. Prior to May 1, 2006, the bonds were secured by a guaranteed investment contract, which was collateralized with cash and interest was payable semiannually. In May 2006, Air Wisconsin acquired the bonds using the cash collateral. The bonds are reported as long-term investments on the balance sheets. The hangar is accounted for as a asset.

On March 30, 2021, the Company’s board of directors adopted a stock repurchase program pursuant to which the Company could repurchase up to $1.0 million of shares of its common stock from time to time during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, will depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. The Company may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule under the Exchange Act, or subject to Rule under the Exchange Act. The Company is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time.

Harbor Diversified, Inc. (“Harbor”) is a holding company that is the parent of a consolidated group of subsidiaries, including AWAC Aviation, Inc. (“AWAC”), which is the sole member of Air Wisconsin Airlines LLC (“Air Wisconsin”), a regional air carrier. Harbor is also the direct parent of three other subsidiaries: (1) Lotus Aviation Leasing, LLC, which leases flight equipment to Air Wisconsin, (2) Air Wisconsin Funding LLC, which provides flight equipment financing to Air Wisconsin, and (3) Harbor Therapeutics, Inc., which is a entity with no material assets. Because Harbor consolidates Air Wisconsin for financial statement purposes, disclosures relating to activities of Air Wisconsin also apply to Harbor, unless otherwise noted. When appropriate, Air Wisconsin is named specifically for its individual contractual obligations and related disclosures. Where reference is intended to include Harbor and its consolidated subsidiaries, they may be jointly referred to as the “Company,” “we,” “us,” or “our.” Where reference is intended to refer only to Harbor Diversified, Inc., it is referred to as “Harbor.”

For the year ended December 31, 2021, Air Wisconsin operated a fleet of 64 regional jets under a capacity purchase agreement (the “United capacity purchase agreement”) with its sole major airline partner, United Airlines, Inc. (“United”), with a presence at both Chicago O’Hare and Washington-Dulles, two of United’s key domestic hubs. All of Air Wisconsin’s flights are operated as United Express pursuant to the terms of the United capacity purchase agreement. More than 99% of our operating revenues for the years ended December 31, 2021 and December 31, 2020 was derived from operations associated with the United capacity purchase agreement.

As of the date of this filing, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the pandemic in the regions in which Air Wisconsin operates. The extent to which the pandemic will impact our industry, business, financial condition, and results of operations in the future is highly uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic, the development of new variants of the virus that may be more contagious or virulent than prior versions, the scope and effect of vaccine mandates and of other mandated or recommended containment and mitigation measures, the effect of government stabilization and recovery efforts, and the success of vaccine distribution programs.

The safety and well-being of our employees and passengers are our priority. Throughout the pandemic, Air Wisconsin has taken numerous steps to provide its employees and passengers with the ability to take appropriate safety measures in accordance with guidelines provided by the Centers for Disease Control and Prevention, including working with United to:

Public concerns about the virus, as well as the various governmental guidelines and restrictions adopted to limit the spread of the virus, have had a material adverse impact on passenger demand for air travel since the beginning of the pandemic. While passenger demand for air travel has generally increased in recent months as a result of the easing of certain of these guidelines and restrictions, as well as expanded availability and adoption of vaccines, United has stated that it expects demand will remain below levels throughout 2022.

Notwithstanding the significant negative impact to our business and the airline industry, Air Wisconsin’s receipt of governmental assistance under the SBA Loan and the Payroll Support Program (each as described below), has mitigated to some extent the adverse impacts of the pandemic.

Historically, the airline industry has experienced periodic shortages of qualified personnel, particularly pilots and mechanics. As a result of the reduced flying caused by the pandemic, the shortage was temporarily abated. However, as flight demand increased, the shortage has become acute, particularly for regional airlines such as Air Wisconsin due to a number of factors, including retirements and employees seeking opportunities at mainline carriers and in other industries. Air Wisconsin’s monthly departures and scheduled block hours generally increased from June 2020 until October 2021. However, departures and scheduled block hours rarely reached levels and have declined slightly since October 2021, mostly as a result of pilot shortages.

Several regional and larger carriers have ceased operations as a direct or indirect result of the pandemic. As of the date of this filing, ExpressJet Airlines, Inc., Miami Air International, Trans States Airlines, and Compass Airlines, each of which are domestic, regional, or charter airlines, have either filed for Chapter 11 or Chapter 7 bankruptcy, or ceased or severely limited operations. The impact of these and other changes to the competitive environment on our business and industry is highly uncertain.

During the early stages of the pandemic, Air Wisconsin’s scheduled departures and block hours were significantly reduced. As flight demand increased, Air Wisconsin’s scheduled departures and block hours increased significantly through October 2021. However, the effects of the pandemic, the industry wide pilot and mechanic shortages, and the significant increase in scheduled departures and block hours increased Air Wisconsin’s costs and negatively affected its operations in the second half of 2021 in several respects:

In April 2020, Air Wisconsin entered into a Payroll Support Program Agreement Agreement”) with respect to payroll support (“Treasury Payroll Support”) from the U.S. Department of the Treasury (“Treasury”) under a program (“Payroll Support Program”) provided by the CARES Act. Pursuant to the Payroll Support Program, Air Wisconsin received approximately $42.2 million, all of which was received in the year ended December 31, 2020. The Treasury commenced a routine audit of Air Wisconsin’s compliance with the terms of the Agreement. As of the date of this filing, Air Wisconsin has not received written confirmation from the OIG regarding the status or results of the audit.

In December 2020, the federal Consolidated Appropriations Act of 2021 (“PSP Extension Law”) was adopted, which provided for additional payroll support to eligible air carriers. In March 2021, pursuant to the PSP Extension Law, Air Wisconsin entered into a Payroll Support Program Extension Agreement with the Treasury (the Agreement”), which is substantially similar to the Agreement. Air Wisconsin received approximately $33.0 million pursuant to the Agreement, all of which was received in the six months ended June 30, 2021.

In March 2021, the federal American Rescue Plan Act of 2021 (“American Rescue Plan”) was adopted, which provided further payroll support to eligible air carriers. In June 2021, pursuant to the American Rescue Plan, the Treasury entered into a Payroll Support Program 3 Agreement with Air Wisconsin (the Agreement” and, together with the Agreement and the Agreement, the “PSP Agreements”), which is substantially similar to the Agreement and the Agreement. Air Wisconsin received approximately $33.3 million pursuant to the Agreement, all of which was received in the six months ended September 30, 2021.

For additional information, refer to Note 8, in our audited consolidated financial statements within this Annual Report.

For the year ended December 31, 2021, we had total operating revenues of $247.6 million, a 33.1% increase, compared to $185.9 million for the year ended December 31, 2020. Net income for the year ended December 31, 2021 was $92.6 million, or net income of $1.69 per basic share and $1.29 per diluted share, compared to net income of $39.8 million, or $0.71 per basic share and $0.56 per diluted share, for the year ended December 31, 2020. For additional information, refer to Note 12, , and Note 13, , in our audited consolidated financial statements included in this Annual Report.

The number of aircraft we have in scheduled service and the block hours and departures we generate from our flights are primary drivers of our revenues under the United capacity purchase agreement. As a result of greater passenger demand since the beginning stages of the pandemic, block hours increased from 74,438 during the year ended December 31, 2020 to 116,081 during the year ended December 31, 2021, or by 55.9%, and our number of departures increased from 52,405 in 2020 to 80,927 in 2021, or by 54.4%.

Primarily as a result of the increased flight schedules during the year ended December 31, 2021 compared to the year ended December 31, 2020, revenues from the United capacity purchase agreement increased by 33.2% to $247.5 million. Furthermore, we deferred recognizing revenue of $1.6 million related to fixed payments received under the United capacity purchase agreement during the year ended December 31, 2021, compared to $43.2 million during the year ended December 31, 2020, consistent with recognizing this revenue based on current and estimated future departures. For additional information, refer to the section entitled “Critical Accounting Policies – .” However, as a result of the October 2020 amendment to the United capacity purchase agreement, we recognized $17.1 million of revenue during the year ended December 31, 2021 as compared to $28.7 million of revenue during the year ended December 31, 2020, resulting from the payment or accrual by United to Air Wisconsin based on certain scheduling benchmarks and the settlement of certain other outstanding items. For additional information, refer to Note 1, Summary of Significant Accounting Policies – , in our audited consolidated financial statements included in this Annual Report.

Our total operating expenses decreased $0.2 million, or 0.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020. Although our year over year operating expenses were relatively unchanged, the increased number of flights we operated as a result of the increase in passenger demand since the beginning stages of the pandemic resulted in a $16.4 million increase in aircraft maintenance and repair costs and a $7.8 million increase in payroll expense, partially offset by a $6.6 million decrease in aircraft rent due to the acquisition of formerly leased aircraft in 2020. Furthermore, we recorded an additional $24.1 million in payroll support grants received from the Treasury as an offset to our operating expenses during the year ended December 31, 2021 compared to the year ended December 31, 2020. For additional information, refer to the section entitled “–.”

Harbor’s board of directors has adopted a stock repurchase program pursuant to which Harbor could initially repurchase up to $1.0 million of shares of its common stock during the first calendar month of the program, subject to an automatic increase of $1.0 million per calendar month thereafter. The number of shares to be repurchased, and the timing of any such repurchases, depend on a number of factors, including the trading price of the common stock, the Company’s financial performance and liquidity position, general market conditions, applicable legal requirements and other factors. Repurchases may be affected through open market transactions, privately negotiated transactions, or any other lawful means. Harbor may, but is not required to, effect repurchases under a trading plan adopted pursuant to Rule under the Exchange Act, or subject to Rule under the Exchange Act. Harbor is not obligated under the program to acquire any particular number or value of shares and can suspend or terminate the program at any time. Harbor acquired 1,547,006 shares of its common stock pursuant to the stock repurchase program during the year ended December 31, 2021.

Although the United capacity purchase agreement reduces Air Wisconsin’s exposure to certain risks, its operating and business performance is driven by various factors that typically affect regional airlines and their markets, including factors that affect the broader airline and travel industries. The following key factors, in addition to the impact of the pandemic, may materially affect our future performance.

. The United capacity purchase agreement expires in February 2023. Air Wisconsin and United are in active negotiations regarding the extension of the agreement or the execution of a new agreement, although we can provide no assurance that any agreement will be reached. Accordingly, Air Wisconsin is exploring a commercial agreement with another major airline partner, as well as other business strategies to take advantage of anticipated demand for regional air services.

. More than 99% of our operating revenues for the year ended December 31, 2021 were derived from operations associated with the United capacity purchase agreement. Agreements such as the United capacity purchase agreement are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. Currently, a dispute exists under the United capacity purchase agreement with respect to certain amounts owed to Air Wisconsin by United. We cannot predict the outcome of this dispute.

. The airline industry is volatile and affected by numerous factors, such as tourist activity, consumer confidence, discretionary spending, fare initiatives, fuel prices, labor actions, global pandemics, outbreak of war or hostilities, changes in governmental regulations, government sanctions, changes in taxes and fees, and weather. These factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. Historically, capacity purchase agreements shelter regional airlines from some of these factors.

.The airline industry is highly competitive. Air Wisconsin competes principally with other regional airlines. We believe that major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: aircraft fleet type; ability to fly proposed schedules; availability of labor resources, including pilots; proposed economic terms; aircraft and engine resources; financial resources; operational reliability; reputation; customer service levels; and other factors. The extension of the United capacity purchase agreement, the execution of a new agreement with United, or the pursuit of a commercial agreement with another major airline partner will depend, in significant part, on Air Wisconsin’s ability to maintain a cost structure competitive with other regional air carriers, attract and retain qualified pilots, and maintain operational reliability. However, we continue to believe there will be strong demand from major airlines for regional air services, and we seek to continue to position Air Wisconsin to take advantage of this anticipated demand.

Air Wisconsin’s employees perform routine airframe and engine maintenance along with periodic inspections of equipment at its maintenance facilities. It also uses third-party vendors for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for Air Wisconsin’s aircraft. As of December 31, 2021, the average age of Air Wisconsin’s regional jets was approximately 19.3 years. We expect that maintenance costs will increase as its fleet continues to age. We use the direct expense method of accounting for Air Wisconsin’s maintenance of airframes, rotable parts, and normal recurring maintenance and for Lotus’ maintenance of engines, pursuant to which we recognize the expense when the maintenance work is completed. We use the deferral method of accounting for Air Wisconsin’s planned major maintenance activities for engines pursuant to which the capitalized engine overhaul costs are amortized over the estimated useful life measured in engine cycles remaining until the next scheduled shop visit. While Air Wisconsin keeps a record of expected maintenance events, the actual timing and costs of maintenance expense are subject to variables, such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs.

. During the year ended December 31, 2020, in three different transactions, Air Wisconsin acquired all thirteen of the remaining operational aircraft that were under various lease agreements.

The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of December 31, 2021, Air Wisconsin had 1,212 full-time employees and 36 part-time employees, for a total of 1,248 employees, of which 995 were represented by unions. Air Wisconsin’s collective bargaining agreement with its pilots, represented by the Airline Pilots Association, is amendable in November 2022 and its collective bargaining agreement with its flight attendants, represented by the Association of Flight Attendants-CWA, is amendable in October 2022. Air Wisconsin’s collective bargaining agreement with its dispatchers represented by the Transport Workers Union of America, is amendable and is in mediated negotiations. Conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with Air Wisconsin’s unionized employees may adversely affect Air Wisconsin’s ability to conduct business.

. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. These changes dramatically reduced the supply of qualified pilot candidates eligible for hiring by the airline industry and, in response, regional airlines implemented significant pilot wage and bonus increases. In recent years, Air Wisconsin experienced a significant increase in pilot attrition, and our results of operations may be negatively impacted if Air Wisconsin is unable to hire and train pilots in a timely manner.

Refer to the section entitled “” within this Annual Report for a discussion of the general and specific factors and trends affecting our business and results of operations.

. Contract revenues consist of the fixed monthly amounts per aircraft received pursuant to the United capacity purchase agreement, along with the additional amounts received based on the number of departures and block hours flown. The United capacity purchase agreement includes provisional cash payments four times per month based on a projected level of flying each month. Air Wisconsin and United subsequently reconcile these payments to the actual completed flight activity on a monthly basis. In addition, contract revenues in 2021 and 2020 include the impact of the amendment to the United capacity purchase agreement that Air Wisconsin entered into in October 2020 which, among other things, provides for the payment or accrual of certain amounts by United to Air Wisconsin based on certain scheduling benchmarks. The accruals are evidenced by notes receivable from United to Air Wisconsin.

Contract services and other revenue are not material and primarily consist of the sale of parts.

Payroll and related costs primarily relate to wages, benefits and payroll taxes for all Air Wisconsin’s employees, as well as costs related to lodging of our flight crews and crew training expenses.

. Substantially all aircraft fuel and related fueling costs for flying under the United capacity purchase agreement are directly paid and supplied by United; we do not record any revenue or expense for such fuel. We include the cost of aircraft oil, which we are responsible for under the United capacity purchase agreement, although that expense is not material.

Aircraft maintenance, materials and repairs include costs related to airframe and rotable overhauls, normal recurring maintenance and the cost of aircraft materials and parts related to Air Wisconsin’s regional jets and the cost of engine maintenance by Lotus. With the exception of engine overhauls by Air Wisconsin, we record these costs using the direct expense method of accounting, pursuant to which the expense is recognized when the maintenance work is completed. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary from period to period. We capitalize Air Wisconsin’s engine overhaul costs, and the amortization expense is included in aircraft maintenance, materials and repairs using the deferral method of accounting; Air Wisconsin’s engine overhaul costs are amortized over the estimated useful life of the overhaul measured in engine cycles remaining until the next scheduled shop visit.

Aircraft rent includes costs related to leased aircraft, including any lease termination expenses related to aircraft acquired prior to the end of their lease term.

Other rents include expenses related to leased engines, costs related to leased flight simulators used to train Air Wisconsin’s pilots, and building rents such as crew and maintenance bases and corporate office space.

Depreciation expense is a periodic charge primarily related to aircraft, engine and rotable parts depreciation. Obsolescence expense is a periodic charge primarily related to the provision for obsolescence on our expendable aircraft parts.

Purchased services and other expense primarily includes third-party aircraft line maintenance support in Chicago (O’Hare) and Washington (Dulles), information technology systems, legal fees, professional and technical fees, insurance and property taxes and other administrative expenses. The majority of insurance and property taxes are pass-through costs to United.

Interest expense is interest primarily relating to Air Wisconsin’s debt under the Aircraft Credit Agreements and certain other credit agreements.

Interest income includes interest income earned on our cash and cash equivalent balance and notes receivable due from United.

Other income (expense) includes income (expense) derived from activities not classified in any other area of the consolidated statements of operations.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (ASC) 280, “” we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flight services in accordance with the United capacity purchase agreement. Additionally, our chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis upon which the results and performance of the Company are communicated to the board of directors. The chief operating decision maker bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operate as one operating and reportable segment.

The increase in departures and RPMs during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to an increase in flying under the United capacity purchase agreement. As a result of the increased demand for air travel since the beginning stages of the pandemic, total operating revenues increased by $61.6 million, or 33.1%, during the year ended December 31, 2021, compared to the year ended December 31, 2020. Air Wisconsin’s block hours flown during the year ended December 31, 2021 increased 55.9%, compared to the year ended December 31, 2020.

. Payroll and related costs increased $7.8 million, or 7.9%, to $106.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily driven by an increase in crew wages, bonuses and training expenses of $8.8 million and personnel expenses of $3.0 million. These increases were offset by other wages, taxes and benefits which decreased by $2.6 million, inclusive of a refund claim for the employee retention credit in the amount of $1.1 million, and a decrease in management wages of $1.1 million.

. Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the years ended December 31, 2021 and 2020 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. This increase was primarily due to an increase in the number of flights we operated.

. Aircraft maintenance, materials and repairs costs increased $16.4 million, or 59.9%, to $43.7 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase was primarily driven by an increase in required maintenance and repair activities due to an increase in flying attributable to increased passenger demand for air transportation.

. Aircraft rent expense decreased $6.6 million, or 99.0%, to $0.07 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease was due to Air Wisconsin’s acquisition of its remaining operating leased aircraft during 2020. Air Wisconsin incurred $0.07 million in aircraft rent expense in 2021 for a that was leased for the purpose of adding that aircraft type to its FAA Operations Specifications. For additional information, refer to Note 4, , in our audited consolidated financial statements included in this Annual Report.

. Other rents expense increased $0.8 million, or 17.4%, to $5.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily due to an increase of $0.8 million in flight training simulator rental expense.

. Depreciation, amortization and obsolescence expense decreased $0.7 million, or 2.5%, to $26.6 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease was primarily due to the retirement of leasehold improvements in 2020 on formerly leased aircraft and the retirement of a spare engine. For additional information, refer to Note 4, , in our audited consolidated financial statements included in this Annual Report. 

. The proceeds of the Treasury Payroll Support received pursuant to the PSP Agreements are recorded in cash and cash equivalents when received and were recognized as a reduction in expense over the periods that the funds are intended to offset payroll expenses. For the years ended December 31, 2021, and December 31, 2020, Air Wisconsin received and recognized approximately $66.3 million and $42.2 million, respectively, under the Payroll Support Program.

. Purchased services and other expense increased $6.2 million, or 31.2%, to $25.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase was primarily due to an increase in outside services, consisting primarily of aircraft line and on call maintenance, of $6.0 million, an increase in insurance expense of $1.1 million, an increase in supplies of $0.5 million, and an increase of $0.4 million of other credits, partially offset by a decrease in legal expense of $0.5 million, a decrease in professional and technical fees, consisting primarily of consulting and auditing services of $0.3 million, and a decrease in property tax expense of $0.3 million. The year ended December 31, 2021 included a net gain on disposal of assets of $0.3 million compared to a net loss of $0.4 million on disposal of assets in the year ended December 31, 2020.

. Interest income increased $1.4 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increase was primarily due to an increase in interest earned on the long-term notes receivable due from United.

. Interest expense decreased by $0.9 million for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to the significant prepayment of debt in 2021. For additional information, refer to the section entitled “” and Note 6, , in our audited consolidated financial statements included in this Annual Report.

Loss on marketable securities was $1.2 million for the year ended December 31, 2021. The loss reflects the change in market value and sales of securities for the year ended December 31, 2021. There were no marketable securities held during the year ended December 31, 2020.

Gain on extinguishment of debt was $10.4 million for the year ended December 31, 2021. A gain of $10.1 million resulted from the forgiveness of the SBA Loan with the remainder attributable to the prepayment of debt. For additional information refer to Note 6, , in our audited consolidated financial statements included in this Annual Report.

. Other income increased by $2.5 million for the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase primarily consists of dividend income of $2.5 million from investments in marketable securities.

Net income for the year ended December 31, 2021 was $92.6 million, or $1.69 per basic share and $1.29 per diluted share, compared to net income of $39.8 million, or $0.71 per basic share and $0.56 per diluted share for the year ended December 31, 2020. For additional information, refer to Note 12, , in our consolidated financial statements included in this Annual Report.

For additional information, refer to Note 5, , in our audited consolidated financial statements included in this Annual Report.

Although Air Wisconsin’s departures and block hours generally increased through the year ended December 31, 2021 and the date of this filing, the pandemic continues to evolve. As such, the ongoing impact that the pandemic will have on our financial condition, results of operations, and liquidity remains highly uncertain. Management is actively monitoring the impact on our operations, airline partner, suppliers, industry, and workforce. We are taking actions based on currently available information to address the changing business environment; however, we cannot predict what changes in circumstances and future developments may occur or what effect those changes or developments may have on our business.

Air Wisconsin’s ability to service its long-term debt obligations and business development efforts depends on its ability to generate cash from operating activities, which is subject to, among other things, its future operating performance, as well as other factors, some of which may be beyond our control. If Air Wisconsin fails to generate sufficient cash from operations, it may need to obtain additional debt financing, or restructure its current debt financing, to achieve its longer-term objectives. As of December 31, 2021, Harbor had no indebtedness, and Air Wisconsin had $67.6 million in secured indebtedness, including $5.9 million of short-term indebtedness and $61.7 million of long-term indebtedness, all of which is secured indebtedness incurred in connection with the Aircraft Notes. For additional information, refer to the section entitled “” and Note 6, , in our audited consolidated financial statements included in this Annual Report.

During the year ended December 31, 2020, our net cash flows provided by operating activities was $73.2 million. We had net income of $39.8 million, which was primarily due to lower expenses as a result of payroll support received under the PSP Agreements, and lower expenses related to reduced flying activity, further adjusted for increases in cash primarily related to long-term deferred revenue of $30.7 million under the United capacity purchase agreement, depreciation and engine overhaul amortization of $28.5 million, $2.5 million related to operating lease assets, contract liabilities of $12.3 million and deferred income taxes of $3.6 million, partially offset by decreases in cash primarily related to notes receivable of $32.4 million, accounts payable of $7.8 million, amortization of contract costs of $2.5 million, prepaid expenses of $1.9 million and accounts receivable of $2.4 million.

The principal amount of the Aircraft Notes is payable in semi-annual installments of $3.5 million and certain additional amounts may be due based on excess cash flow. The amounts set forth in the table do not reflect any such additional excess cash flow payments. As a result of certain prepayments made under the Aircraft Notes in June 2021, no semi-annual installments are due prior to December 31, 2022. As of December 31, 2021, all of Air Wisconsin’s long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to Note 6, , included in our audited consolidated financial statements included in this Annual Report.

In January 2020, Harbor completed an acquisition from Southshore Aircraft Holdings, LLC and its affiliated entities (“Southshore”) of three regional jets, each having two General Electric (“GE”) engines, plus five additional GE engines, in exchange for the issuance of 4,000,000 shares of Harbor’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred”) with an aggregate value of $13.2 million, or $3.30 per share (the “Series C Issue Price”). Air Wisconsin had leased each of these regional jets and GE engines from Southshore. In January 2020, Harbor filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock (“Certificate of Designations”) with the Secretary of State of the State of Delaware, which establishes the rights, preferences, privileges, qualifications, restrictions and limitations relating to the Series C Preferred.

The conversion of Series C Preferred is subject to a limitation on the number of shares of the common stock that may be issued upon conversion of Series C Preferred equal to the sum of (a) 16,500,000, plus (b) the quotient of (i) the aggregate amount of all accrued and unpaid Preferential Dividends divided by (ii) $0.80, (the “Conversion Cap”) plus (c) the quotient of (i) the number of shares of Series C Preferred issued as PIK Dividends multiplied by the Series C Issue Price, divided by (ii) $0.80. Any outstanding shares of Series C Preferred that may not be converted pursuant to the limitation described herein (the “Conversion Cap Excess Shares”), from and after December 31, 2022, in addition to the Preferential Dividends, shall accrue cumulative quarterly dividends equal to an amount per share equal to 0.5% of the Series C Liquidation Amount (as defined below) of each outstanding Conversion Cap Excess Share in the first quarter after December 31, 2022, and increasing an additional 0.5% of the Series C Liquidation Amount in each subsequent quarter (the “Conversion Cap Excess Dividends”). As of March 18, 2022, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 25.9% of the fully diluted shares of capital stock of Harbor), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. For additional information related to the Series C Preferred, refer to the Annual Report on Form of the Company for the year ended December 31, 2020.

Based on the applicable accounting guidance, Harbor is required to apply to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income (loss) per share of common stock. However, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive.

Harbor accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480,. Based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or “mezzanine” equity. Accordingly, the Series C Preferred, which is subject to conditional redemption, is presented at redemption value as mezzanine equity outside of the stockholders’ equity section of the consolidated balance sheets.

In seven separate transactions occurring in 2003 and 2004, Air Wisconsin financed the acquisition of 35 regional jets through the issuance of senior aircraft notes to a loan trustee on behalf of a senior lender (the “Lender”) and subordinated aircraft notes to the loan trustee on behalf of a subordinated lender. The senior aircraft notes and the subordinated aircraft notes were governed by seven credit agreements. Prior to December 2018, the Lender acquired all of the subordinated aircraft notes from the subordinated lender.

In April 2020, Air Wisconsin entered into the Agreement with the Treasury for payroll support under the CARES Act and received approximately $42.2 million, all of which was received in the year ended December 31, 2020. In March 2021, Air Wisconsin entered into the Agreement with the Treasury for payroll support under the PSP Extension Law and received approximately $33.0 million, all of which was received in the six months ended June 30, 2021. In June 2021 the Treasury entered into the Agreement with Air Wisconsin for payroll support under the American Rescue Plan, and Air Wisconsin received approximately $33.3 million, all of which was received in the year ended December 31, 2021.

The PSP Agreements contain various covenants, including that (i) the payroll support proceeds must be used exclusively for the payment of wages, salaries and benefits, (ii) Air Wisconsin cannot involuntarily terminate or furlough any employee or reduce any employee’s pay rates or benefits without that employee’s consent, in any case prior to certain dates, (iii) Air Wisconsin cannot pay total compensation to certain employees in excess of certain total compensation caps, (iv) Air Wisconsin cannot pay dividends or make other capital distributions prior to certain dates, and (v) neither Air Wisconsin nor any of its affiliates can purchase an equity security of Air Wisconsin or any direct or indirect parent company of Air Wisconsin that is listed on a national securities exchange prior to certain dates. If Air Wisconsin fails to comply with its obligations under the PSP Agreements, it may be required to repay some or all of the funds provided to it under those agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. For additional information, refer to Note 8, , in our consolidated financial statements included in this Annual Report.

Air Wisconsin has entered into two heavy maintenance services agreements for certain maintenance, repair and modification services with respect to airframes owned or operated by Air Wisconsin, and one exclusive engine maintenance agreement to perform certain maintenance, repair, restoration, overhaul, modification and other services on aircraft engines owned or operated by Air Wisconsin. Two of the heavy maintenance services agreements are subject to certain escalation of labor rates and have an initial term through September 2022 and May 2024, respectively, but Air Wisconsin has the right to extend the term for up to two renewal terms of one year each, on the same terms and conditions as during the initial terms. The exclusive engine maintenance agreement is subject to an annual escalation and had an initial term through May 2021. Air Wisconsin exercised its right to extend the term through May 2023. No additional renewal options are available under the current agreement.

An sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.

We have no sheet arrangements that would have a material current or future effect on the Company’s financial condition, results of operations or liquidity.

We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 1, , in our audited consolidated financial statements included in this Annual Report.

As discussed above, under the United capacity purchase agreement, Air Wisconsin is paid a fixed amount per aircraft per day for each month during the term of the agreement. In accordance with GAAP, the Company recognizes revenue related to the fixed payments on a proportional basis taking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. Air Wisconsin deferred fixed revenues between April 2020 and June 2021 due to the significant decrease in its completed flights as a result of the pandemic. Beginning in July 2021, due to an increase in completed flights and based on projected future completed flight activity, Air Wisconsin began reversing this deferral of fixed revenues, and it anticipates continuing to do so through February 2023, the end of the contract period. Accordingly, during the first six months of 2021, Air Wisconsin deferred $15.4 million of fixed revenues, and in the last six months of 2021 Air Wisconsin recognized $13.4 million of fixed revenues that were previously deferred, compared to a deferral of $43.2 million of fixed revenues in the year ended December 31, 2020. In addition, Air Wisconsin’s fixed revenue rate was adjusted in the fourth quarter of 2021 to account for the opening of a crew base. This resulted in Air Wisconsin recognizing $0.5 million as a cumulative catchup adjustment based on prior and future expected departures and total revenues of $0.5 million, with a net adjustment to deferred revenues of ($0.4) million for the year ended December 31, 2021. Air Wisconsin’s deferred revenues related to the fixed portion of revenue under the United capacity purchase agreement will adjust over the remaining contract term based on the number of flights completed in each reporting period relative to the number of flights anticipated to be completed over the remaining contract term. With respect to the stand ready performance obligation, for the years ended December 31, 2021 and December 31, 2020, Air Wisconsin recorded $15.1 million and $21.4 million in revenue, respectively.

As required by the uncertain tax position guidance, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would sustain the position following an audit. For tax positions meeting the threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied the uncertain tax position guidance to all tax positions for which the statute of limitations remains open.