ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Financial Statements included in
Item 8 of this report.
Business Overview
Global Crossing Airlines Group Inc. (“GlobalX” or the “Company”) operates a US Part 121 flag and charter airline using the Airbus A320 family of aircraft. GlobalX’s business model is to (1) provide services on an ACMI using wet lease contracts to airlines and non-airlines, and (2) on a Charter basis whereby we provide passenger aircraft charter services to customers by charging an “all-in” fee that includes fuel, insurance, landing fees, navigation fees and most other operational fees and costs. GlobalX operates within the United States, Europe, Canada, Central and South America. GlobalX also plans to operate the Airbus A321 freighter (“A321F”) commencing in the fourth quarter of 2022 after completing all FAA certification requirements with the A321F.
Focused on becoming a Market leader with differentiated, value-creating solutions
GlobalX intends to become the best-in-class U.S. narrow-body, ACMI charter airline, operating both passenger and cargo charter aircraft while recruiting and maintaining a dynamic team of customer-centric flight crews, ground and maintenance teams and management staff.
GlobalX operates its A320 family aircraft for airlines, tour operators, college and professional sports teams, incentive groups, resorts and casino groups and government agencies. It is our goal to deliver best in class on time performance and dispatch reliability; Expand existing relationships and develop additional relationships with leading charter/our operators to provide aircraft during their peak seasons; and provide ad-hoc and track charter programs for non-airline customers, including hotels, casinos, cruise ship companies, tour operators.
Launch cargo charter flights with A321P2F (Passenger to Freighter)
GlobalX plans to add A321F (passenger to freighter) aircraft to its operating certificate and into the fleet commencing Q4 2022, and cargo will be an integral part of the GlobalX business. GlobalX intends to operate its A321Fs under ACMI charter operations with major package operators and major freight and logistics companies. Under these arrangements, customarily, these operators will take the commercial risk associated with the selling of the cargo and provide all ground handling and cargo-specific operations, with GlobalX assuming the operational risk of providing a functional aircraft, trained crew, in a safe and on time manner as the ACMI operator.
Location of Operations Bases
GlobalX will initially operate from two geographic bases:
•
Miami International Airport (“MIA”) – GlobalX’s main base of operations is MIA, and, pursuant to its Airline Use Agreement with MIA, GlobalX (1) operates charter flights out of Concourse E, and rents office space and operates its ticket counters, and (2) maintains a maintenance office for its maintenance staff and for storage of all aircraft records, as well as spare parts and consumables storage, with loading dock capabilities. While we do have an Airline Use Agreement in place with MIA, it does not guarantee availability of boarding gates or landing slots at that airport.
•
Atlantic City Airport (“ACY”) – GlobalX has a northeastern U.S. base at Atlantic City Airport, New Jersey, and intends to eventually base two A320 aircraft there. ACY has below-market aircraft landing fees and aircraft parking fees, and because of its location further east and on the water, does not experience the full effect of northeastern winter storms, remaining relatively free of snow and ice in the winter. ACY serves as an excellent location to base aircraft, will be used both for charters into Atlantic City on behalf of its major casinos, and to efficiently move aircraft for ad hoc and last-minute charters from other northeastern airports, including New York – JFK, New York – LaGuardia, Newark, Boston and Philadelphia.
Reducing Operational Costs
To control costs and maintain a competitive cost per Block Hour flown, GlobalX:
•
Flies only one aircraft family (A320).
•
Maintains focus on continuous financial discipline and strict departmental budgeting.
21
•
Has implemented and utilizes highly digital operating methods for both flight and maintenance operations, using best in class aviation software operating systems from leading suppliers including dispatch (Navblue), maintenance (Trax) and training software (Mint). By capitalizing on the latest software, GlobalX can effectively eliminate most manual processes and operate effectively with fewer people than a comparably-sized airline using older software systems.
•
Promotes organizational culture of efficiency and high productivity.
Marketing Plan
GlobalX plans to achieve its revenue goals by flying charter operations for a variety of client groups:
•
Scheduled airlines that have short-term or long-term capacity needs to supplement their existing routes or fleets.
•
Major tour operators, resorts, cruise lines and casinos that require airlift above and beyond scheduled service to meet their occupancy needs.
•
Professional and collegiate sports teams
•
Charter brokers representing a variety of interests, including the entertainment industry, dignitary travel, political campaigns, and government programs.
GlobalX Aircraft Fleet
Critical to GlobalX’s business model is a fleet of modern and cost-effective aircraft. To achieve this objective, GlobalX has selected what it believes is the best overall single-aisle aircraft family to operate. This approach differs from traditional airlines, which purchase a variety of aircraft, often from different manufacturers, to achieve their operational flight sectors, resulting in increased training, operating and spare part costs. GlobalX conducted research to determine the best aircraft to fly in competition with other narrow-body charter airlines in the single-aisle seat market and GlobalX selected the A320 aircraft family.
The following factors support GlobalX’s choice to operate the Airbus A320 and A321 aircraft versus the Boeing family of aircraft:
Cost and Operating factors: lower fuel burn, and better aircraft and cockpit crew pool availability.
Operational Capability: the A320 has a range advantage over the 737-800 and can fly non-stop from Miami to selected airports in North America, South America, the Caribbean, and between most major destinations in Europe. The A320 has excellent maintenance dispatch reliability and strong availability of spare parts and components, making the A320, in management’s estimation, the most popular aircraft among low-cost airlines.
Passenger comfort: better seat width, cargo bin volume for carry-on baggage and cargo hold volume.
Aircraft Maintenance
Heavy maintenance checks are expected to be sourced out to FAA-approved service providers. The "6Y" and "12Y" checks will be primarily paid for using funds from the accrued maintenance reserves paid to lessors under operating leases.
Strategy to Address Competitive Response
We expect the existing charter operators based in the U.S. to respond to GlobalX’s entry into the market by lowering their pricing to customers. The expected competitive response typically includes lowered ACMI rates for key contracts. We believe GlobalX’s existing relationships with potential customers and the underserved demand in the U.S., coupled with our newer planes allowing for a more cost-efficient operation, will allow us to address any competitive pressure and grow as anticipated.
GlobalX Charter Service
GlobalX is a charter provider that currently focuses exclusively on providing customized, non-scheduled passenger air transportservices with narrow-body Airbus A320 and A321 aircraft. We expect our primary line of business and focus to be commercial charter servicesfrom MIA to destinations throughout North and South America and the Caribbean, with established scheduled airlines that need additional air lift tosupplement their own, and established tour and travel operators that sell tour packages in and between these markets.
We provide our services through two contract structures: (1) ACMI and (2) Charter
We believe operating charter flights will largely insulate our expected profitability from fluctuations in jet fuel prices, which are typically the largest and most volatile expense for an air carrier. Under the vast majority of our commercial passenger charter arrangements, our
22
customers bear 100% of the cost of jet fuel. In addition, consistent with industry practice, we plan for those customers to pay us our contract price approximately two weeks in advance of their flights.
Because we expect that our ACMI customers would be responsible for fuel costs, our expected commercial ACMI revenues would not be affected directly by fuel price changes. However, a significant increase in fuel prices would likely have an adverse effect on demand for the use of our aircraft, which could have a material adverse effect on our profitability and financial position.
Experienced management team
Our management team has extensive operating and leadership experience in the airfreight, airline, and aircraft
Leasing, maintenance, and management industries at companies such as Republic Airways, Eastern Airlines, JetBlue Airways, Virgin America, Hawaiian Airlines, American Airlines, US Airways, Atlas Air, Breeze Airways, Emirates, North American Airlines, Miami Air, AAR, Continental Airlines, Pan Am, Atlantic Coast Airlines, and Flair Airlines, as well as the United States Army, and Air Force. In addition, our management team has a diversity of experience from other industries at companies such as KBR, Teladoc, The Home Depot, Halliburton, Lehman Brothers, and the Burger King Corporation.
Business Strategy
GlobalX seeks to become the best-in-class U.S. narrow-body, ACMI and Full Contract charter airline, operating both passenger and cargo charter aircraft while recruiting and maintaining a dynamic team of customer-centric flight crews, ground teams and management staff.
In launching a US 121 Flag and Supplemental charter airline in the United States, GlobalX has done, or plans to do, the following:
Launch passenger charter flights with A320/A321 all passenger aircraft
GlobalX operates its A320 family aircraft under ACMI/Full Contract charter operations for major airlines, tour operators, college and professional sports teams, incentive groups, major resorts and casino groups.
•
Deliver best in class on time performance and dispatch reliability;
•
Expand existing relationships and develop additional relationships with leading European charter/ our operators to provide aircraft during their peak seasons; and
•
Provide ad-hoc and track charter programs for non-airline customers, including hotels, casinos, cruise ship companies, tour operators.
Launch cargo charter flights with A321P2F (Passenger to Freighter)
GlobalX plans to add A321F (passenger to freighter) aircraft to its operating certificate and into the fleet commencing Q3 2022. Cargo is an important revenue stream for airlines and will be an integral part of the GlobalX operation.
GlobalX intends to operate its A321Fs under ACMI/Wet Lease charter operations with major package operators and major freight and logistics companies. Under these arrangements, customarily, these operators will take the commercial risk associated with the selling of the cargo capacity and provide all ground handling and cargo-specific operations, with GlobalX assuming the operational risk of providing a functional aircraft, trained crew, in a safe and on time manner as the ACMI operator.
Business Developments
Our results for 2021 were impacted by the following:
•
On December 31st, 2020 we accepted delivery of our first A320 passenger aircraft
•
On April 13th, 2021 we accepted delivery of our first A321 passenger aircraft
•
On August 7th, 2021 we received our Airline Operating Certificate from the United States Federal Aviation Authority and we began our revenue operations immediately thereafter
•
On September 3rd , 2021 we accepted delivery of our second A320 passenger aircraft
•
In October 2021, we initiated scheduled flights between Miami and Santo Domingo, Dominican Republic on behalf of White Wings
•
In November 2021, we initiated scheduled flights between Miami and Havana, Cuba, on behalf of Havana Air
23
•
On December 3rd, 9th, and 17th, 2021 we accepted delivery of our third, fourth, and fifth A320 passenger aircraft, respectively
•
In December 2021, we began flying in support of the NCAA’s fall football season
Results of Operations
The following discussion should be read in conjunction with our Financial Statements and other financial information appearing and referred to elsewhere in this report.
Years ended December 31, 2021 and 2020
Operating Statistics
The following table compares our Operating Fleet (average aircraft equivalents during the period) and total Block Hours operated:
Fleet & Block Hours
Total Operating Average Aircraft Equivalents 1.2 0.0 1.2
Operating Revenue
The following table compares our Operating Revenue (in dollars):
Operating revenue increased $14.3 million due to the initiation of revenue operations. Block Hours increased 1,679, also as a direct result of the initiation of revenue service.
Operating Expenses
The following table compares our Operating Expenses (in dollars):
Operating Expenses 2021 2020 Inc/(Dec) % Change
Salaries, wages and benefits increased $9.4 million, or 2,198%, primarily driven by our initiation of revenue service.
Aircraft fuel increased $3.1 million, or N/A%, driven by our initiation of revenue service. The majority of this cost is included in our revenue.
Maintenance, materials and repairs increased by $833 thousand, or N/A%, driven by our initiation of revenue service.
Depreciation and amortization increased $34 thousand, or 27,331%, driven by assets acquired to support our FAA certification and our initiation of revenue service.
Contracted ground and aviation services increased $3.3 million, or N/A%, driven by our initiation of revenue service.
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Travel increased $936 thousand, or 3,779%, driven by our initiation of revenue service and by efforts required to gain our FAA certification.
Insurance increased $1.7 million, or N/A%, driven by the delivery of aircraft during 2021 and our initiation of revenue service.
Aircraft rent increased $4.1 million, or N/A%, driven by the delivery of aircraft during 2021 and our initiation of revenue service.
Other in 2021 increased $5.3 million, or 240%, driven by our initiation of revenue service, the delivery of aircraft during 2021, and FAA certification.
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) (in thousands):
Non-Operating Expenses (Income) 2021 2020 Inc/(Dec) % Change
Unrealized Loss (Gain) on Financial Instruments 154,120 154,120 N/A
Loss (Gain) on Warrant Valuation increased $3.3 million driven by the reclassification of warrants during 2021 from a liability to equity
Unrealized Loss (Gain) on Financial Instruments increased $154 thousand driven by foreign exchange impacts.
Interest expense, net increased $31 thousand driven by financing of insurance premiums.
Discontinued Operations 2021 2020 Inc/(Dec) % Change
Income from Discontinued Operations $ 177,706 $ — 177,706 N/A
Income From Discontinued Operations increased $178 thousand dollars as a result of the spin-off of Canada Jetlines
Income Tax Expense 2021 2020 Inc/(Dec) % Change
Income tax expense $ — $ —
Income taxes. Our effective income tax rates were a benefit rate of 0% for 2021.
Liquidity and Capital Resources
The most significant liquidity events during 2021 were as follows:
Operating Activities. For 2021, Net cash used by operating activities increased by $6.7 million to $8.1 million, which primarily reflected Net loss of $20.0 million, an increase in Accounts receivable of $746 thousand, an increase in Prepaid expenses and other assets of $487 thousand, and a decrease in Operating Lease Obligations of $387 thousand. These were partially offset by noncash adjustments of $2.7 million for Loss on warrant revaluation, $1.3 million for share based payments, and $1.2 million for a decrease in operating lease right of use asset, as well as an increase in Accrued liabilities of $6.0 million, a Foreign exchange gain of $228 thousand. For 2020, Net cash used for operating activities was $1.4 million, which primarily reflected the lack of an airline operating certificate and revenue.
Investing Activities. For 2021, Net cash used for investing activities increased by $2.7 million to $3.3 million, consisting primarily of $2.7 million related to Deferred costs and other assets, and $653 thousand related to Purchases of property and equipment. For 2020, Net cash used for investing activities was $680 thousand, consisting primarily of $705 thousand related to Deferred costs and other assets.
Financing Activities. For 2021 Net cash provided by financing activities increased by $16.3 million to $18.9 million, which primarily reflected $19.0 million related to Proceeds from issuance of units, partially offset by $104 thousand related to Other liabilities and $34 thousand for Payments to related parties. For 2020, Net cash provided by financing activities was $2.6 million, which primarily reflected $2.5 million in Proceeds from issuances of units and $187 thousand related to Other liabilities.
We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. Our access to capital markets can be adversely impacted by prevailing economic
25
conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets.
We do not expect to pay any significant U.S. federal income tax in 2022.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Global Crossing Airlines Group Inc. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB No. 89) 27
Consolidated Balance Sheets as of December 31, 2021 and 2020 28
Notes to Consolidated Financial Statements 32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Global Crossing Airlines Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Global Crossing Airlines Group Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a working capital deficiency and retained deficit as of December 31, 2021. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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/ Rosenberg Rich Baker Berman P.A.
Somerset, New Jersey
March 31, 2022
We have served as the Company’s auditor since 2020.
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GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Accounts receivable, net of allowance 745,646 —
Current assets held for sale — 11,400
Property and equipment, net of accumulated depreciation of $36,122 618,883 422
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current liabilities held for sale — 274,951
Deferred taxes — —
Non-current liabilities held for sale — 31,416
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Common stock subscribed — 452,269
See accompanying notes to consolidated financial statements.
28
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
OPERATING EXPENSES
Maintenance, materials and repairs 832,609 —
Contracted ground and aviation services 3,336,782 —
Unrealized Loss (Gain) on Financial Instruments 154,120 —
Income tax expense (benefit) — —
Basic loss per share – continuing operations $ (0.43 ) $ (0.11 )
Diluted loss per share – continuing operations $ (0.43 ) $ (0.11 )
Basic earnings per share – discontinued operations $ 0.00 $ 0.00
Diluted earnings per share – discontinued operations $ 0.00 $ 0.00
See accompanying notes to consolidated financial statements.
29
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Items not affecting cash:
Decrease in operating lease right of use asset 1,154,477 —
Non-cash working capital item changes:
Accounts receivable (745,646 ) —
Prepaid expenses and other current assets (486,670 ) (357,546 )
Decrease in operating lease obligations (386,945 ) -
Net cash provided by operating activities - discontinued operations 177,706 —
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset disposal - 24,639
Purchases of property and equipment (652,750 ) —
CASH FLOWS FROM FINANCING ACTIVITIES
Cash, cash equivalents and restricted cash - beginning of the period 548,690 -
Cash paid for
Taxes - -
See accompanying notes to consolidated financial statements.
30
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Share based compensation on stock options or RSUs — — — 216,111 — 216,111
Share based compensation on stock options or RSUs — — — 1,254,413 — 1,254,413
Other comprehensive income — — — — — —
See accompanying notes to consolidated financial statements.
31
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
1.
NATURE OF OPERATIONS AND GOING CONCERN
Global Crossing Airlines Inc. (the “Company” or “Global”) was incorporated under the laws of British Columbia and continued as a Federal corporation pursuant to the Canada Business Corporations Act effective February 28, 2017. During the year ended December 31, 2020, the Company completed a business acquisition pursuant to which it acquired all of the issued and outstanding shares of Global Crossing Airlines, Inc. (“Global USA”), a Delaware corporation. For financial reporting purposes, the Company is considered a continuation of Global USA, the legal subsidiary, except with regard to authorized and issued common stock which is that of the Company, the legal parent. On December 22, 2020, the Company changed its jurisdiction of incorporation from the province of British Columbia, Canada to the State of Delaware. The U.S. Domestication was required for the Company to complete its charter licensing process and will also reflect the Company’s U.S.-business and operations. The Company’s principal business activity is providing passenger aircraft to customers through aircraft operating service agreements including, crew, maintenance, insurance (“ACMI”) and charter services “Charter” serving the US, Caribbean and Latin American markets. The Company’s shares trade on the TSX Venture Exchange (the “Exchange” or “TSXV”) under the symbol “JET” and the OTCQB under the symbol “JETMF.”
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As of December 31, 2021, the Company had a working capital deficit of $5,113,865 and a retained deficit of $22,262,307. The Company began flight operations in August 2021. Without ongoing income generation or additional financing, the Company will be unable to fund general and administrative expenses and working capital requirements for the next 12 months. These material uncertainties raise substantial doubt as to the Company’s ability to continue as a going concern. The Company is evaluating financing its future requirements through a combination of debt, equity and/or other facilities. There is no assurance that the Company will be able to obtain such financings or obtain them on favorable terms. The consolidated financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and statement of financial position classifications that would be necessary were the going concern assumption deemed to be inappropriate. These adjustments could be material.
During the year ended December 31, 2020, the World Health Organization declared a global pandemic related to the virus known as COVID-19. The airline industry has been impacted significantly as many local and regional governments have issued public health orders and travel restrictions in response to COVID-19. An extended disruption may affect the Company’s ability to generate revenue and obtain additional financing. The impact of these factors on the Company is not yet determinable; however, the Company’s financial position, results of operations and cash flows in future periods may be materially affected.
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in functional currency and foreign currency translation
The consolidated financial statements are presented in United States dollars, which is the functional currency of the Company and its subsidiaries.
During the year ended December 31, 2020, the Company changed its functional currency to US dollars given the increasing prevalence of U.S. dollar-denominated activities of the Company resulting from the business acquisition described in Note 3. The change in functional currency from Canadian dollars to US dollars was accounted for prospectively from June 23, 2020. The exchange rate used to translate the balance sheet to reflect the change in functional currency on adoption was US $1 equals to Canadian $1.355.
Foreign currency transactions are translated into the functional currency using exchange rates in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate in effect at the measurement date. Non-monetary assets and liabilities denominated in foreign currencies are translated using the historical exchange rate.
Basis of consolidation
The consolidated financial statements include the accounts of the Company, and its subsidiaries, Global Crossing Airlines, Inc. and Global Crossing Airlines, LLC (collectively “Global USA”), GlobalX A320 Aircraft Acquisitions Corp. (“Acquisition A320”), GlobalX A321 Aircraft Acquisition Corp. (“Acquisition A321”), GlobalX Travel Technologies, Inc. (“Technologies”), CubaX Air Tours, LLC (“CubaX”) and Capitol Airlines, LLC. All intercompany transactions and balances have been eliminated on consolidation.
32
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Certain reclassifications and format changes have been made to prior year amounts to conform to the 2021 presentation.
Details of the Company’s subsidiaries are as follows:
Name Place of incorporation Interest % Principal activity
On May 19, 2021, the Company entered into an arrangement agreement (“the Arrangement”) to complete a spin-out of the shares of its wholly owned subsidiary, Canada Jetlines Operations Ltd. (“Jetlines”). On June 28, 2021, the Company completed the spin-out pursuant to the Arrangement under which the Company transferred 75% of shares of Jetlines to Global shareholders. To complete the spin-off, Global distributed one share of Jetlines for every two shares of Global held as of the record date. As of the closing of the Arrangement there were a total of 33,403,145 Jetlines shares issued and outstanding (including the 8,350,786 shares that have been retained by Global representing 25% of the issued and outstanding Jetlines shares). Jetlines and Global will operate as separate companies with different boards and management teams.
In accordance with U.S. GAAP, the financial position, results of operations, and cash flows of Jetlines are presented as discontinued operations and, as such, have been excluded from continuing operations for all periods presented. The sum of the individual earnings per share amounts from continuing operations and discontinued operations may not equal the total company earnings per share amounts due to rounding. Prior years’ balance sheets have been adjusted to reflect the effect of the spin-off.
With the exception of Note 4, the notes to the consolidated financial statements reflect the continuing operations of Global. See Note 4 - Discontinued Operations below for additional information regarding discontinued operations.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances at several financial institutions; at times, such balances may be in excess of insurance limits. The Company has not experienced any losses on these balances.
33
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Restricted Cash
Restricted cash of $2,752,285 is being held by a financial institution as security for an Airport Security Bond which is required by U.S. Customs and Border Protection.
Accounts Receivable
The Company performs a monthly evaluation of accounts receivable and establishes an allowance for expected credit losses based on our best estimate, using a broad range of information including historical information, current conditions and forecasts. Account balances are written off against the allowance when we determine that the receivable will not be recovered.
Lessor Maintenance Deposits
GlobalX’s aircraft lease agreements provide that Global pay maintenance reserves monthly to aircraft lessors to be held as collateral in advance of major maintenance activities required to be performed by Global. Maintenance reserve payments are either fixed, or variable based on actual flight hours or cycles. These lease agreements provide that maintenance reserves are reimbursable to Global upon completion of the maintenance event in an amount equal to the lesser of (1) the amount of the maintenance reserve held by the lessor associated with the specific maintenance event or (2) the qualifying costs related to the specific maintenance event.
Maintenance reserve payments that are expected to be recoverable via reimbursable expenses will be reflected as Lessor Maintenance Deposits on the accompanying Consolidated Balance Sheets. As of December 31, 2021, Lessor Maintenance Deposits totaled $82,776 and are included in Deferred Costs and other assets in the consolidated balance sheet.. During the year ended December 31, 2020, the Company did not make or expense any maintenance reserve payments as none were due.
Heavy Maintenance
The Company accounts for heavy maintenance costs for airframes and engines using the deferral method. Under this method, expense recognition of scheduled heavy maintenance events is deferred and amortized over the estimated period until the next scheduled heavy maintenance event is required. During the years ended December 31, 2021 and 2020, the Company did not incur amortization expense with respect to heavy maintenance costs and had no deferred maintenance costs of the years then ended.
Property & Equipment
Property and equipment are recorded at cost or fair value at the Acquisition Date and depreciated on a straight-line basis to an estimated residual value over their estimated useful lives or lease term, whichever is shorter, as follows:
Office and Ground Equipment 5 years
Computer Hardware and Software 3-5 years
Modifications that enhance the operating performance or extend the useful lives of leased airframes are considered leasehold improvements and are capitalized and depreciated over the economic life of the asset or the term of the lease, whichever is shorter.
Equity Investments
Investments in partnerships and less-than-majority owned subsidiaries in which the Company does not have control but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method of accounting. The equity method investments are included in the accompanying Balance Sheets with Deferred Costs and Other Assets. The Company’s share of earnings or losses from these investments is shown in the accompanying Consolidated Statements of Operations in Other Expense. Equity method investments are initially recognized at cost. The carrying amount of the equity investment is adjusted at each reporting period by the percentage of any change in its equity corresponding to the Company’s percentage interest in these equity
34
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
affiliates. The carrying costs of these investments are also increased or decreased to reflect additional contributions or withdrawals of capital. Any difference in the book equity and the Company’s pro-rata share of the net assets of the investment will be reported as gain or loss at the time of the liquidation of the investment. It is the Company’s policy to record losses in excess of the investment if the Company is committed to provide financial support to the investee.
Evaluation of Long-Lived Assets
Long-lived assets are evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Such indicators include significant technological changes, adverse changes in market conditions and/or poor operating results. The carrying value of a long-lived asset group is considered impaired when the projected undiscounted future cash flows are less than its carrying value. The amount of impairment loss recognized is the difference between the estimated fair value and the carrying value of the asset or asset group. Fair value is determined using various valuation techniques including discounted cash flow models, quoted market values and third- party independent appraisals, as considered necessary. No impairment losses were recognized during the years ended December 31, 2021 and 2020.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date, which are based on the estimated number of awards that are ultimately expected to vest.
Estimating fair value for granted stock options and compensatory warrants requires determining the most appropriate valuation model which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the option or warrant, volatility, dividend yield, and rate of forfeitures and making assumptions about them.
Estimating fair value for granted restricted share units requires estimating the number of awards likely to vest on grant and at each reporting date up to the vesting date. The estimated forfeiture rate is adjusted for actual forfeitures in the period.
Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Stock-based compensation expenses are included in the consolidated statement of operations.
Income taxes
The estimation of income taxes includes evaluating the recoverability of deferred tax assets and liabilities based on an assessment of the Company’s ability to utilize the underlying future tax deductions against future taxable income prior to expiry of those deductions. Management assesses whether it is probable that some or all of the deferred income tax assets and liabilities will not be realized. The ultimate realization of deferred tax assets and liabilities is dependent upon the generation of future taxable income. To the extent that management’s assessment of the Company’s ability to utilize future tax deductions changes, the Company would be required to recognize more or fewer deferred tax assets or liabilities, and deferred income tax provisions or recoveries could be affected.
Leases
Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases ,” (“ASC 842”), which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company determines if a contract contains a lease at inception. The lease term represents the non-cancellable period for which the Company has the right to use an underlying asset, which may include periods covered by certain options to extend and/or terminate the lease. Lease liabilities and corresponding right-of-use (“ROU”) assets are recognized at the commencement date of a lease. Leases with an initial lease term of 12 months or less are not recorded on the balance sheet.
35
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
In addition, the Company leases office space under a month-to-month agreement. For leases with terms greater than 12 months, including renewal options when appropriate, we record the related right-of-use asset and lease liability as the present value of fixed lease payments over the lease term.
Warrant Liability
The Company evaluates its warrants to determine if those contracts qualify as liabilities in accordance with ASC 480-10, Distinguishing Liabilities from Equity and ASC 815-40, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the warrant liability is marked-to-market each balance sheet date and recorded as a liability, with the change in fair value recorded in the statements of operations as other income or expense. Upon conversion or exercise of a warrant liability, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
For warrants with a fixed conversion price and a fixed number of shares, the Company utilizes a Black Scholes model for valuation. For warrants with variability in the number of shares or conversion price (such as a down round feature), the Company utilizes the Monte Carlo Method to value the warrant liability. The reason the Company selected the lattice binomial model is that in many cases there may be multiple embedded features or the features may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models.
Revenue Recognition
The Company generates operating revenues by providing passenger aircraft outsourcing services to customers on a Charter and ACMI basis, in exchange for guaranteed minimum revenues at predetermined levels of operation for defined periods of time.
Our performance obligations under Charter contracts involve the provision of passenger aircraft charter services to customers, including various US Government agencies, brokers, freight forwarders, direct shippers, airlines, college sports teams and fans, and private charter customers. Our obligations are for one or more flights based on a specific origin and destination. The Company typically bears all direct operating costs for charters, which include fuel, insurance, landing and navigation fees, and most other operational fees and costs.
The time interval between when an aircraft departs the terminal until it arrives at the destination terminal is measured in hours and called “Block Hours.” Revenue from Charter contracts is typically recognized over time as the services are performed based on Block Hours operated on behalf of a customer. Payment terms and conditions vary by charter contract, although the vast majority of contracts require payment in advance of the services being provided. Since advance payments are typically made shortly before the services are performed, such payments are not considered significant financing components.
Our performance obligations under ACMI contracts involve outsourced passenger aircraft operating services, including the provision of an aircraft, crew, maintenance and insurance. ACMI contracts generally provide for the transfer of the benefits from these performance obligations on a combined basis through the operation of the aircraft over time. Customers assume fuel, demand and price risk. Generally, customers are also responsible for landing, navigation and most other operational fees and costs. When we act as an agent for costs reimbursed by customers, such reimbursed amounts are recorded as Operating Revenue, net of the related costs, when the costs are incurred. When we are responsible for any of these costs, such reimbursed amounts are recorded as Operating Revenue and the costs are recorded as Operating Expenses as incurred.
Revenue from ACMI contracts is typically recognized over time as the services are performed based on Block Hours operated on behalf of a customer during a given month.
The Company commenced flight operations during August 2021 upon receipt of the final DOT and FAA approvals.
Recently Adopted Accounting Standards
In June 2018, the FASB issued ASU 2018-07 Improvements to Non-employee Share-based Payment Accounting. ASU 2018-07 expands the scope of ASC 718, Compensation - Stock Compensation, to share-based payments granted to non- employees for goods and services. Additionally, in November 2019, the FASB issued ASU 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from
36
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Contracts with Customers (Topic 606), which requires entities to measure and classify share based payments to a customer, in accordance with the guidance in ASC 718. The new guidance did not impact how we account for Share based payments.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update eliminates, clarifies, and modifies certain guidance related to the accounting for income taxes. The amended guidance did not have a material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update requires the use of an “expected loss” model on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. ASU 2016-13 was initially effective for non- public companies for fiscal years and interim periods beginning after December 15, 2021, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which delayed the effective date for certain entities, such as the Company, to apply ASU 2016-13 until fiscal years and interim periods beginning after December 15, 2022. The Company evaluated the impact of ASU 2016-13 and determined the adoption of Topic 326 will not have a material impact on our consolidated financial statements.
3.
ACQUISITION
On February 5, 2020, the Company entered into a definitive agreement with Global USA with respect to a reverse merger transaction of the Company and Global USA (the “Transaction”). On June 23, 2020, the Transaction closed and Global USA had taken over the operations of the Company. On the closing of the Transaction, the consolidated entity changed its name to Global Crossing Airlines, Inc. (“Global”) and consolidated issued and outstanding common and variable voting shares (each a “Share”) on the basis of one post-consolidation Share for every ten pre-consolidation shares. Global USA is now a wholly-owned subsidiary of Global. The common shares of Global commenced trading on the TSX Venture Exchange as a Tier 2 industrial issuer under the symbol “JET” on June 25, 2020.
For accounting purposes, the reverse merger transaction is accounted for as a reverse recapitalization as the acquisition of a non-operating public shell company does not qualify as a business for business combination purposes, as described in ASC Topic 805, Business Combinations. Reverse recapitalization accounting applies when a non-operating public shell company acquires a private operating company and the owners and management of the private operating company have actual or effective voting and operating control of the combined company. Correspondingly, the Company recognized the issuance of the restricted and unregistered share capital based on the assumption of net monetary liabilities, along with a recapitalization.
On the date of the Transaction, net liabilities of $1,286,533 were assumed.
The accounting for the reverse merger results in the following:
a.
The consolidated financial statements of the combined entities are issued under the legal parent, Canada Jetlines, but are considered a continuation of the financial statements of the legal subsidiary, Global USA.
b.
Since Global USA is deemed to be the acquirer for accounting purposes, its assets and liabilities are included in the consolidated financial statements at their historical carrying values.
The transaction resulted in the issuance of 9,484,757 shares of the Company to the former shareholders of Global USA.
Shareholders of Global USA were also issued an aggregate of 2,357,594 consideration warrants, with each warrant exercisable for one share of the Company. On closing, Global USA shareholders exercised all of the warrants in exchange for the settlement of $589,400 in Global USA liabilities outstanding as of February 29, 2020.
Prior to the closing of the Transaction, the Company completed an offering of units for aggregate gross proceeds of
37
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
$1,543,600 (the “Offering”). The Company issued 6,174,400 units at a price of $0.25 per unit. Each unit consists of one share and one warrant exercisable for twenty-four (24) months at a price of $0.50 for each share.
In connection with the Transaction, the Company also issued 415,150 shares to settle outstanding debt of approximately
$74,233 due to certain creditors at a deemed price of $0.16 per share and a further 48,809 shares to settle CAD$129,355.
4.
DISCONTINUED OPERATIONS
As discussed in Note 2. Basis of Presentation above, on June 28, 2021, the Company completed the spin-off of Jetlines, its wholly owned subsidiary, and the requirements for the presentation of Jetlines as a discontinued operation were met on that date. Accordingly, Jetlines’ historical financial results are reflected in the Company’s consolidated financial statements as discontinued operations. The Company did not allocate any general corporate overhead or interest expense to discontinued operations.
As described in Note 2, Global retained 25% of the shares issued and outstanding of Jetlines. The Company’s investment in Jetlines was recorded in accordance with the guidance of ASC 845-10, Nonmonetary Transactions, and ASC 505-60, Spinoffs and Reverse Spinoffs. Accordingly, the net liabilities transferred were derecognized at the carrying value and the Company recorded the gain on discontinued operations.
The following is a summary of Jetlines’ assets and liabilities as of June 28, 2021 and December 31, 2020:
Cash and cash equivalents $ 4,897 $ 2,480
Other current assets 2,135 —
Accounts payable and accrued liabilities (303,581 ) (274,951 )
The results of discontinued operations and gain from discontinued operations are as follows:
General and administrative $ 4,788 $ —
Regulatory costs 3,147 —
Travel, meals, and entertainment 16,081 —
Net loss for period (125,124 ) —
Gain on disposal of liabilities 302,830 —
Income from discontinued operations $ 177,706 $ —
The investment in Jetlines shall be adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any, in accordance with the guidance of ASC 323, Investments—Equity Method and Joint Ventures.
5.
EQUITY INVESTMENTS
The Company’s investments in affiliates accounted for using the equity method include a 50% interest in GlobalX Ground Team, LLC (“GlobalX Ground”) and a 25% interest in Canada Jetlines Operations Ltd. (“Jetlines”).
Investment in GlobalX Ground Team, LLC:
38
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
On September 9, 2020, the Company entered into a joint venture agreement with KD Holdings, LLC (“KD Holdings”) for the purpose of providing ground handling services. Under the terms of the agreement, KD Holdings will run the day-to-day operations of the ground handling division and supply the ground equipment and Global will provide assistance and guidance to the operations. The Company accounts for the joint venture in accordance with the equity method.
As of December 31, 2021, the Company elected to write down GlobalX’s investment in the joint venture to zero. Going forward GlobalX has elected to self-perform all ground handling activities at Miami International Airport. As of December 31, 2021, there was $197,558 due to GlobalX Ground and a $20,478 loss recorded with respect to the equity investment in GlobalX Ground for the year then ended. There was no activity with GlobalX Ground during the year ended December 31, 2020.
Investment in Canada Jetlines Operations Ltd.:
As described in Note 2, On June 28, 2021, the Company completed the spin-out pursuant to the Arrangement under which the Company transferred 75% of shares of Jetlines to Global shareholders. Global retained 25% of the shares issued and outstanding of Jetlines and accounts for the investment in accordance with the equity method. During the year ended December 31, 2021, Jetlines did not generate revenue or incur any material expenses.
6.
DEFERRED FINANCING FEES
In connection with the GEM Global Yield LLC agreement (Note 10) the Company issued a note for $2,000,000 CAD ($1,418,880 USD) and issued 2,106,290 warrants exercisable at a price of CAD $0.50 per share until May 4, 2023. The initial fair value of the warrants was recorded as a prepaid financing fee in the amount of $1,390,151. These costs are initially capitalized on the consolidated balance sheet as deferred finance costs and will be subsequently reclassified to common stock and additional paid-in capital upon on a pro-rata basis as the Company draws down on the facility. As described in Note 10, on June 28, 2021, adjustments were made to the warrants issued resulting in a change in warrants issued and their exercise price.
7.
ASSET ACQUISITION
On March 22, 2021, the Company executed an agreement to purchase certain assets from Kizoto, LLC. Under the agreement, Global’s newly formed subsidiary, GlobalX Travel Technologies, Inc. (“Travel”) would purchase all of the assets used in or relating to the business operation described as “Flugy” and Global committed to finance Travel to facilitate the transaction. The assets acquired include all of Kizoto's right, title and interest in Flugy including, but not limited to, all software source code for the Flugy platform, website and mobile applications and related intellectual and intangible property. In assessing the assets transferred under the agreement, the Company determined that the Flugy assets do not constitute a business as defined in Subtopic 805-10. Accordingly, the transaction was accounted for as an asset purchase.
Consideration for the Flugy asset purchase included $50,000 paid to Kizoto, LLC and 20% of the shares issued and outstanding of Travel. The Company recorded the Flugy platform and the related intangible assets acquired as other noncurrent assets at the total acquisition cost of $50,000. After the closing date, each party shall be entitled to receive a distribution of the net profits according to their respective percentage of ownership.
In connection with the agreement, Travel shall pay Kizoto an initial monthly fee of $5,000 to cover ongoing management and development services. This rate increased to $10,000 once the first flight was flown. The monthly management fees will be expensed as incurred as these payments are composed of mostly management and administrative fees. Services provided by Kizoto which further develop and improve the software will be capitalized and amortized over the estimated useful life. Once the Flugy platform is placed in service, Travel shall pay Kizoto a fee for each passenger seat sold by Travel or sold by a third party which uses the Flugy platform or technology. The per-seat fees are considered transaction costs incurred in the generation of revenue from passenger seat reservations. The costs will be recorded as a reduction of the related revenues generated.
8.
LEASES
The Company adopted ASC 842 using the modified retrospective transition approach with an effective date of January 1, 2019 and elected to combine lease and non-lease components. Leases with an initial term of 12 months or less will be recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term. These leases primarily relate to the Company’s lease agreements for the month-to-month agreement for office space and leases for office equipment.
39
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
For leases with terms greater than 12 months, including renewal options when appropriate, we record the related right-of-use asset and lease liability as the present value of fixed lease payments over the lease term. Details of the Company’s leasing arrangements are provided below:
In December 2020, the Company accepted delivery of an aircraft leased on a 29-month term commencing at the date of delivery. In addition to basic rent due, the Company will pay the lessors supplemental rent for maintenance of the aircraft and equipment.
In February 2021, the Company entered into a lease agreement for an aircraft and paid commitment fees to the lessor. The two-year lease term commenced in April 2021. Under the agreement, the Company will pay the lessor a fixed hourly rent for each flight hour operated plus supplemental rent for maintenance of the aircraft and equipment.
In June 2021 the Company entered into a lease agreement for an aircraft and paid commitment fees to the lessor. The lease term commenced in December 2021 and will run until February 2027. In addition to basic rent due, the Company will pay the lessors supplemental rent for maintenance of the aircraft and equipment.
In July 2021 the Company entered into a lease agreement for an aircraft and paid commitment fees to the lessor. The lease commenced in September 2021 and runs through December 2026. In addition to basic rent due, the Company will pay the lessor supplemental rent for maintenance of aircraft equipment.
On October 14, 2021 the Company signed a lease for one Airbus A321 converted freighter. The term of the lease is 10 years and will commence upon aircraft delivery, which is expected to take place in October 2022. In addition to basic rent due, the Company will pay the lessors supplemental rent for maintenance of the aircraft and equipment.
On November 5, 2021 the Company signed leases for two Airbus A320s. The terms of both leases are 74 months and commenced upon aircraft delivery in December 2021. In addition to basic rent due, the Company will pay the lessors supplemental rent for maintenance of the aircraft and equipment.
The following table summarizes the lease-related assets and liabilities recorded on the Company’s Consolidated Balance Sheets:
Assets
Liabilities
40
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
The following table presents lease costs related to the Company’s Leases:
Operating lease cost
Fixed operating lease cost Rent expense $ 1,661,032 $ —
Variable operating lease cost Rent expense 1,980,000 —
Future minimum payments due on right of use operating leases are as follows:
Less amount representing interest (13,571,418 )
Present value of minimum lease payments 23,435,840
Less short-term obligations (3,393,497 )
The Company uses the rate stated in the lease to discount lease payments to present value. In the event the leases do not provide a readily determinable implicit or stated rate, the Company estimates the incremental borrowing rate to discount lease payments based on information available initially at adoption and at lease commencement going forward, taking into consideration recent debt issuances as well as publicly available data for instruments with similar characteristics.
The weighted average discount rate related to the operating lease obligations is 10.08%. Weighted average remaining term of the leases is 5.37 years.
The Company reviewed the operating lease for extension options that may be reasonably certain to be exercised and then would become part of the right-of-use assets and lease liabilities. As of December 31, 2021, the Company did not have any material operating leases with extension or termination options which are reasonably certain to be exercised.
In addition, the aircraft lease requires the Company to make maintenance reserve payments to cover the cost of major scheduled maintenance for the aircraft. These payments are generally variable as they are based on utilization of the aircraft, including the number of flight hours flown and/or flight departures, and are not included as minimal rental obligations in the table above.
9.
COMMITMENTS AND CONTINGENCIES
The Company has contractual obligations and commitments primarily with regard to management and development services (Note 7), lease arrangements (Note 8), and financing arrangements (Note 10).
41
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
On January 23, 2021, the Company entered into a premium finance agreement with a financial institution to finance a 12-month hull insurance policy for its aircrafts. The Company financed $1,345,836 of the total premium amount of $1,738,386 at a rate of 3.71% interest. The down payment of $395,000 and the first monthly installment was paid at time of signing.
The Company is subject to various legal proceedings in the normal course of business and records legal costs as incurred. Management believes these proceedings will not have a materially adverse effect on the Company.
10.
CAPITAL COMMITMENTS
GEM Global Yield LLC SCS
The Company entered into an agreement with GEM Global Yield LLC SCS ("GEM"), the private alternative investment group to provide the Company with up to CND $100 million over a 36-month term following the closing of the Transaction (the “Facility”). The initial CAD $100 Million is in the form of a capital commitment that allows the Company to draw down funds during the 36-month term by issuing shares to GEM (or such persons as it may direct) and subject to share lending arrangement(s) being in place. The Company controls the timing and maximum amount of drawdown under this facility and has no minimum drawdown obligation. On July 8, 2020 the TSX Venture Exchange provided approval for the Facility.
The Company entered into a promissory note to pay GEM Yield Bahamas Limited a fee equal to two percent (2%) of the aggregate purchase price, being $2,000,000 CAD ($1,418,880 USD). The fee is payable, whether or not any draw down notices have been delivered, as follows: the first 25% of the fee shall be paid within 12 months from the date of the agreement; an additional 25% of the fee shall be paid within 18 months from the date of the agreement and the rest of 50% of the fee shall be paid within 24 months from the date of this agreement. The note bears interest at 5 percent above the base rate of Barclays Bank PLC as per the promissory note. The note was recorded as a deferred finance cost on the consolidated balance sheet.
In addition, on July 10, 2020, pursuant to the terms of the Facility, the Company issued 2,106,290 warrants to GEM exercisable at a price of CAD $0.50 per share until May 4, 2023. The initial fair value of the warrants was recorded as prepaid financing fee in the amount of $1,390,151. The warrants’ fair value was calculated using the Monte Carlo pricing model, assuming an expected life of 2.82 years, a risk-free interest rate of 0.18%, an expected dividend rate of 0.00%, stock price of $0.94 and an expected annual volatility coefficient of 70%.
On June 28, 2021, GEM and the Company agreed to adjust the terms of the warrants. Under the adjustment agreement, the exercise price of the warrants was changed from CAD $0.50 per share to USD $0.39 per share. In addition, the number warrants granted was adjusted due to the Arrangement Agreement (Note 1) under which the Company transferred 75% of the shares of Jetlines to shareholders of the Company. Accordingly, the number of warrants was adjusted from 2,106,290 to 2,182,553. The warrants were remeasured at the adjustment date using the Monte Carlo pricing model, assuming an expected life of 1.85 years, a risk-free interest rate of 0.22%, an expected dividend rate of 0.00%, stock price of $2.03 and an expected annual volatility coefficient of 74.7%. The revaluation of the warrants resulted in a fair value at June 28, 2021 of $3,475,379, producing a gain of $2,650,772. The warrants were initially classified as derivative liabilities due to denomination of the exercise price in a foreign currency (CAD). As described in Note 13, the change in currency denomination to USD resulted in reclassification of the warrants to equity. The warrants fair value of the warrant liability was eliminated on the adjustment date and included in additional paid in capital on the consolidated statement of changes in shareholders’ equity.
On October 1, 2021, GEM has filed initial pleadings in the Supreme Court of the State of New York, County Of New York, claiming the Company breached the share subscription agreement between the parties by failing to pay a $500,000 fee due on May 4, 2021 GEM is requesting repayment in full of the CAD $2,000,000 promissory note issued by the Company to GEM plus accrued interest and costs and expenses related to collection. The note payable to GEM is recorded in current liabilities on the consolidated balance sheet.
11.
INCOME TAXES
The Company’s effective tax rate for the years ended December 31, 2021 and 2020 was 0%. The effective tax rate represents a blend of federal and state taxes and includes the impact of certain nondeductible items.
42
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
The following table summarizes the significant components of the provision for income taxes from continuing operations:
For the YearEndedDecember 31,2021 For the YearEndedDecember 31,2020
Federal:
Current $ — $ —
State:
Current — —
Total income tax provision $ — $ —
The income tax provision differs from that computed at the federal statutory corporate tax rate as follows:
For the YearEndedDecember 31,2021 For the YearEndedDecember 31,2020
Expected provision at Federal statutory tax rate 21.00 % 21.00 %
State tax expense, net of Federal benefit — 4.57 %
Change in valuation allowance (18.12 )% (31.00 )%
Permanent difference (2.88 )% 6.00 %
Other — (0.57 )%
The following table summarizes the significant components of the Company’s deferred taxes:
For the YearEndedDecember 31,2021 For the YearEndedDecember 31,2020
Deferred tax assets (liabilities):
Net deferred tax assets (liabilities) $ — $ —
43
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
As of December 31, 2021, the Company has net operating losses available for deduction against future taxable income of $17.7 million and $2.7 million respectively. The net operating losses do not expire and may be carried forward indefinitely.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which the temporary differences become deductible. Management considers the scheduled reversal of the liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. It was concluded on a more-likely-than-not basis that the Company’s deferred tax assets were not realizable as of December 31, 2021. Accordingly, a valuation allowance of $4.8 million has been recorded to offset these deferred tax assets. The change in in valuation allowance for the year ended December 31, 2021 from 2020 was an increase of $4.0 million.
The Company recognizes the consolidated financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. If applicable, the Company reports both accrued interest and penalties related to unrecognized tax benefits as a component of Income Tax Expense in the Consolidated Statements of Operations.
The Company files income tax returns in the United States and the State of Florida. In the normal course of business, the Company is subject to potential income tax examination by the federal and state tax authorities in these jurisdictions for tax years that are open under local statute. For U.S. federal and state income tax purposes, the Company’s 2019 and 2020 tax returns remain open to examination.
12.
FAIR VALUE MEASUREMENTS
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Under GAAP, there are three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices for identical assets or liabilities in active markets.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of December 31, 2021, the Company did not have financial liabilities measured at fair value on a recurring basis. Financial liabilities measured at fair value on a recurring basis as of December 31, 2020 are summarized below and disclosed on the consolidated balance sheet:
Fair Value MeasurementUsing Level 3Inputs Total
December 31, 2020 Amount atFair Value Level 1 Level 2 Level 3
Liabilities
44
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2021 and 2020:
Amount
Balance at January 1, 2020 $ —
Purchases, issuances, and settlements 1,390,151
Change in fair value of warrant liabilities (565,544 )
Change in fair value of warrant liabilities 2,650,772
Warrant adjustment agreement (Note 10) (3,475,379 )
Balance at December 31, 2021 $ —
Changes in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.
Certain assets are measured at fair value on a nonrecurring basis. The Company’s non-financial assets, which primarily consist of property and equipment are not required to be measured at fair value on a recurring basis and are reported at carrying value.
12.
WARRANT LIABILITY
On July 10, 2020, the Company issued 2,106,290 warrants in connection with the financing arrangement entered into with GEM Global Yield LLC. The warrants allow the holder to purchase common stock at an exercise price equal to CAD $0.50 ($0.39 USD) per share at any time on or after their issuance date and on or prior to the close of business 3 years after the issuance date (the “Termination Date”). At time of issuance, the Company determined that the warrants required classification as a liability pursuant to ASC 815 due to the exercise price of the warrants which was denominated in a foreign currency. As such, the warrants were re-measured at each reporting period with changes being recorded as a component of other income in the statement of operations. As described in Note 10, on June 28, 2021, adjustments were made to the warrants, changing the strike price from CAD to USD. The Company applied the guidance under ASC 480 and determined that the outstanding warrants represent freestanding financial interests classifiable as equity. Accordingly, the fair value of the warrants as of June 28, 2021 was reclassified to additional paid in capital.
As described above and in Note 10, the Company’s warrant liability was re-measured to fair value on June 28, 2021 and reclassified to additional paid-in capital. As such, the Company had no warrant liabilities as of December 31, 2021.
The fair value of the warrant liabilities was measured using the Monte Carlo pricing model. Significant inputs into the model as of June 28, 2021 and December 31, 2020 are as follows:
Interest rate (annual) (1) 0.22 % 0.14 %
Volatility (annual) (2) 74.7 % 70 %
Remaining term (years) 1.85 2.34
Annualized dividend yield (3) 0 % 0 %
The warrant liabilities are considered Level 3 liabilities on the fair value hierarchy as the determination of fair value includes various assumptions about of future activities and the Company’s stock prices and historical volatility of Guideline Public Companies as inputs.
45
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
13.
LONG-TERM LOAN PAYABLE
On May 28, 2020, Jetlines received an interest-free Canada Emergency Business Account (“CEBA”) loan in the amount of CND$40,000 to help cover the Company's operating expenses, payroll and other non‐deferrable expenses which are
critical to sustain business continuity. The program has been implemented by Bank of Montreal in collaboration with the Government of Canada as part of the COVID-19 relief initiatives. If the Company repays 75% of the principal amount on or before December 31, 2022, the repayment of the remaining 25% of the principal amount will be forgiven. In the event that the Company does not repay the principal amount by December 31, 2022, the principal amount and all accrued and unpaid interest at the rate of 5% per annum from January 1, 2023 will be due and payable on December 31, 2025.
As of December 31, 2020, the balance due on the note was $31,416. In connection with the spinoff described in Note 3, the loan payable was included in the net liabilities transferred on June 28, 2021. Accordingly, the long-term payable balance at December 31, 2021 is $0.
14.
SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL AUTHORIZED
The Company has authorized share capital of 200,000,000 shares of common stock, par value $0.001 per share.
On July 12, 2021 the Company completed a share capital reorganization creating a new class of shares, Class B non-voting shares. As of December 31, 2021, the Company had 26,044,933 common shares, 5,537,313 Class A common shares, and 19,655,630 Class B non-voting shares outstanding.
Prior to the U.S. Domestication that closed on December 22, 2020, the Company had both common voting shares and variable voting shares. In connection with the closing of the U.S. Domestication, all common voting shares and variable voting shares were converted into common shares of the Company.
Share issuances
During the year ended December 31, 2021:
•
The Company issued 8,064,517 common shares units for net proceeds of $4,569,689 pursuant to a private placement.
•
The Company issued 2,000,000 common shares units and 5,537,313 Class A common shares unit for net proceeds of $9,999,999 pursuant to a private placement.
•
The Company issued 5,524,878 shares for net proceeds of $4,090,155 pursuant to the exercise of 5,524,878 share purchase warrants issued to Global USA shareholders.
•
The Company issues 541,776 shares for net proceeds of $274,496 pursuant to the exercise of 541,776 share purchase warrants.
•
The Company issued 240,000 shares pursuant to 240,000 RSUs.
•
Company issued 391,332 common shares for net proceeds of $97,833 pursuant to the exercise of stock options.
46
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
During the year ended December 31, 2020:
•
On June 23, 2020, the Company consolidated its common shares, which was approved by the directors of the Company and was subsequently approved by the TSX Venture Exchange (“TSX-V”). The consolidation resulted in each shareholder of the Company receiving one post-consolidation share for every ten pre-consolidation common shares held. The number of shares, warrants and options and earnings per share data presented in these condensed consolidated interim financial statements have all been adjusted retroactively to reflect the impact of this share consolidation.
•
The Company issued 6,174,400 units for gross proceeds of $1,543,600 pursuant to a private placement.
•
The Company issued 2,357,594 shares pursuant to the exercise of 2,357,594 share purchase warrants issued to Global USA shareholders upon the completion of the Transaction (Note 3).
•
The Company issued 9,485,257 shares in exchange for pre-Transaction shares held by Global USA shareholders. The exchange ratio was 1 Global USA share for 18,971 shares of the Company.
•
The Company issued 342,000 shares pursuant to the exercise of 344,000 RSUs. The fair value of the RSUs in the amount of $54,720 was credited to common stock.
•
The Company issued 463,959 shares pursuant to the settlement of debt of $213,059 owing to various creditors. The fair value of the settlement of debt in the amount of $213,059 was credited to common stock.
•
The Company incurred share issue costs in the amount of $15,908 in connection with the issuance of shares.
•
On August 26, 2020, the Company issued 769,785 common voting and variable shares for gross proceeds of USD $520,809 in accordance with the GEM Agreement.
Share purchase warrants
The following is a summary of share purchase warrants activities during the years ended December 31, 2021 and 2020:
Number of SharePurchase Warrants WeightedAverage Exercise Price
Outstanding, January 1, 2020 —
Expired — —
Expired — —
As of December 31, 2021, the following share purchase warrants were outstanding and exercisable:
Outstanding Exercise Price Remaining life(years) Expiry Date
47
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
As of December 31, 2020, the following share purchase warrants were outstanding and exercisable:
Outstanding Exercise Price Remaining life(years) Expiry Date
Share-based payments
The maximum number of Voting Shares issuable pursuant to share-based payment arrangements, including stock options, restricted share units and performance share units, is 5,460,000.
Stock options
The Company grants stock options to directors, officers, employees and consultants as compensation for services, pursuant to its Amended Stock Option Plan (the “Stock Option Plan”). The maximum price shall not be less than the closing price of the Company’s shares on the last trading day preceding the date on which the grant of options is approved by the Board of Directors. Options have a maximum expiry period of ten years from the grant date. Vesting conditions are determined by the Board of Directors in its discretion with certain restrictions in accordance with the Stock Option Plan.
The following is a summary of stock option activities for the years ended December 31, 2021 and 2020:
Outstanding, January 1, 2020 — $ — $ —
Granted — — —
As of December 31, 2021, the following stock options were outstanding and exercisable:
Outstanding Exercisable Exercise Price Remaining life (years) Expiry Date
48
GLOBAL CROSSING AIRLINES GROUP INC.
(FORMERLY “CANADA JETLINES LTD.”)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
As of December 31, 2020, the following stock options were outstanding and exercisable:
Outstanding Exercisable Exercise Price Remaining life (years) Expiry Date
The Company recognizes share-based payments expense for all stock options granted using the fair value based method of accounting. The fair value of stock options is determined by the Black-Scholes Option Pricing Model with assumptions for risk-free interest rates, dividend yields, volatility factors of the expected market price of the Company’s shares, forfeiture rate, and expected life of the options.
There were no stock options granted during the year ended December 31, 2021. The following weighted average assumptions were used to estimate the weighted average grant date fair value of stock options granted during the year ended December 31, 2020.
For the year ended December 31, 2020
Risk-free interest rate 0.38%
Expected life (years) 4.78
Annualized volatility 143%
Dividend yield 0%
Restricted share units
The Company grants restricted share units (“RSUs”) to directors, officers, employees and consultants as compensation for services, pursuant to its Amended RSU Plan (the “RSU Plan”). One restricted share unit has the same value as a Voting Share. The number of RSUs awarded and underlying vesting conditions are determined by the Board of Directors in its discretion.
At the election of the Board of Directors, upon each vesting date, participants receive (a) the issuance of Voting Shares from treasury equal to the number of RSUs vesting, or (b) a cash payment equal to the number of vested RSUs multiplied by the fair market value of a Voting Share, calculated as the closing price of the Voting Shares on the TSXV for the trading day immediately preceding such payment date; or (c) a combination of (a) and (b).
On the grant date of RSUs, the Company determines whether it has a present obligation to settle in cash. If the Company has a present obligation to settle in cash, the RSUs are accounted for as liabilities, with the fair value remeasured at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the period. The Company has a present obligation to settle in cash if the choice of settlement in shares has no commercial substance, or the Company has a past practice or a stated policy of settling in cash, or generally settles in cash whenever the counterparty asks for cash settlement.
If no such obligation exists, RSUs are accounted for as equity settled share-based payments and are valued using the share price on grant date. Upon settlement:
a.
If the Company elects to settle in cash, the cash payment is accounted for as the repurchase of an equity interest (i.e. as a deduction from equity), except as noted in (c) below.
b.
If the Company elects to settle by issuing shares, the value of RSUs initially recognized in reserves is reclassified to capital, except as noted in (c) below.
c.
If the Company elects the settlement alternative with the higher fair value, As of the date of settlement, the Company recognizes an additional expense for the excess value given (i.e. the difference between the cash paid and the fair value of shares that would otherwise have been issued, or the difference between the fair value of the shares and the amount of cash that would otherwise have been paid, whichever is applicable).