The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related condensed notes included in this Quarterly Report, and with the audited consolidated financial statements, accompanying notes, and the other financial information included within the Annual Report on Form 10-K for the year endedDecember 31, 2020 (our "2020 Annual Report"). The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere within this Quarterly Report, particularly in the sections entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." OverviewHarbor Diversified, Inc. ("Harbor") is a non-operating holding company that is the parent of a consolidated group of subsidiaries, includingAWAC Aviation, Inc. ("AWAC"), which is the sole member ofAir 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 toAir Wisconsin , (2)Air Wisconsin Funding LLC , which provides flight equipment financing toAir Wisconsin , and (3)Harbor Therapeutics, Inc. , which is a non-operating entity with no material assets. Because Harbor consolidatesAir Wisconsin for financial statement purposes, disclosures relating to activities ofAir 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 "we," "us," or "our." Where reference is intended to refer only to Harbor, it is referred to as the "Company." For the three and nine months endedSeptember 30, 2021 ,Air Wisconsin operated a fleet of 64 CRJ-200 regional jets under a capacity purchase agreement (the "United capacity purchase agreement") with its sole major airline partner,United Airlines, Inc. ("United"), with a significant presence at both Chicago O'Hare andWashington -Dulles, two of United's key domestic hubs. All ofAir 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 three and nine months endedSeptember 30, 2021 andSeptember 30, 2020 , was derived from operations associated with the United capacity purchase agreement. Subject to certain limited exceptions, the United capacity purchase agreement providesAir Wisconsin fixed daily revenue for each aircraft covered under the agreement, a fixed payment for each departure and block hour flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying service for United. The agreement also provides for the payment or accrual of certain amounts by United toAir Wisconsin based on scheduling benchmarks. The United capacity purchase agreement has the effect of protectingAir Wisconsin , to an extent, from many of the elements that typically cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in the number of passengers. In providing regional flying under the United capacity purchase agreement,Air Wisconsin uses United's logos, service marks, and aircraft paint schemes. United controls route selection, pricing, seat inventories, marketing and scheduling. In addition, United providesAir Wisconsin with ground support services and gate access. InOctober 2020 ,Air Wisconsin entered into an amendment to the United capacity purchase agreement that, among other things, settled certain disputes that had existed between United andAir Wisconsin over amounts owed toAir Wisconsin under the United capacity purchase agreement. InApril 2021 ,Air Wisconsin entered into a second amendment to the United capacity purchase agreement which addressed the scheduling of block hours permitted in the event United did not elect to exercise its extension rights within the agreement. Impact of the COVID-19 Pandemic on Our Business and Industry As of the date of this filing, there continue to be widespread concerns regarding the ongoing impacts and disruptions caused by the COVID-19 pandemic in the regions in whichAir Wisconsin operates. The extent to which the COVID-19 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 COVID-19 pandemic, the development of new variants of the COVID-19 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. 19 -------------------------------------------------------------------------------- Table of Contents Focus on Safety for Employees and Passengers The safety and well-being of our employees and passengers are our priority. Throughout the COVID-19 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 theCenters for Disease Control and Prevention , including working with United to:
• enhance
• provide gloves, masks, and other personal protective equipment for crew members; • provide options toAir Wisconsin's employees who are diagnosed with COVID-19, including pay protection and extended leave options; • implement workforce social distancing, mask requirements and other protection measures, and enhanced cleaning of our facilities; and • provide regular, ongoing communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures. Reduction in Demand for Air Travel Public concerns about the COVID-19 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 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 suppressed in 2021. As an example, United's scheduled capacity for the three months endedSeptember 30, 2021 was approximately 26% lower than its scheduled capacity for the three months endedSeptember 30, 2019 .Air Wisconsin's monthly departures and scheduled block hours have generally increased sinceJune 2020 . However, there can be no assurance that this trend will continue. 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, has mitigated to some extent the adverse impacts of the COVID-19 pandemic. Impact on Competitive Environment Worldwide, several regional and larger carriers have ceased operations as a direct or indirect result of the COVID-19 pandemic. As of the date of this filing,ExpressJet Airlines, Inc. ,Miami Air International ,Trans States Airlines , andCompass 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. Operational Challenges During the early stages of the COVID-19 pandemic,Air Wisconsin's scheduled departures and block hours were significantly reduced. As flight demand has increased,Air Wisconsin's scheduled departures and block hours increased significantly in the three months endedSeptember 30, 2021 . However, the effects of the COVID-19 pandemic and the significant increase in scheduled departures and block hours increasedAir Wisconsin's costs and negatively affected its operations in the three months endedSeptember 30, 2021 in several respects: (i)Air Wisconsin had to cancel certain flights due to pilot and mechanic staffing issues, which is consistent with trends experienced across the airline industry; (ii) the cost of certain maintenance activities increased as a result of supply chain issues; (iii) aircraft maintenance and repair costs, as well as payroll costs increased as a result of increased flying levels across our industry; (iv) one ofAir Wisconsin's maintenance bases was closed for six days as a result of an outbreak of COVID-19 among the employees at that base, which required moving aircraft to different maintenance bases or the use of third-party maintenance providers; 20 -------------------------------------------------------------------------------- Table of Contents (v) certain changes in the flight schedules that United assigned toAir Wisconsin resulted in insufficient utilization ofAir Wisconsin's maintenance bases, which led to increases inAir Wisconsin's expenses; and (vi) these operational and performance issues negatively impacted the incentive paymentsAir Wisconsin receives under the United capacity purchase agreement and in some cases may require the payment of penalties. United is permitted to terminate the United capacity purchase agreement prior to the expiration of the term in certain circumstances, includingAir Wisconsin's controllable completion factor falling below a pre-determined level for four consecutive months. The operational and performance challenges experienced byAir Wisconsin during the third quarter resulted in a significant reduction in its controllable completion factor relative to prior periods. AlthoughAir Wisconsin and United have not reconciled the data forAir Wisconsin's recent performance, preliminary data indicate that September and October performance may have been below the minimum monthly controllable completion factor threshold.Air Wisconsin has taken a number of steps to improve operational performance and currently expects to meet or exceed the threshold controllable completion factor level for November, although there can be no assurance that it will be able to do so. Paycheck Protection Program InApril 2020 ,Air Wisconsin received a$10.0 million loan ("SBA Loan") under the small business Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and administered by theSmall Business Administration ("SBA"). The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, leave payments, and utility payments. The entire principal amount and accrued interest was forgiven inAugust 2021 in the amount of$10.1 million , which was recorded as gain on extinguishment of debt in the consolidated statements of operations for the three months endedSeptember 30, 2021 . Payroll Support Program InApril 2020 ,Air Wisconsin entered into a Payroll Support Program Agreement ("PSP-1 Agreement") with respect to payroll support ("Treasury Payroll Support") from theU.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 endedDecember 31, 2020 . TheTreasury commenced a routine audit ofAir Wisconsin's compliance with the terms of the PSP-1 Agreement. InDecember 2020 , the federal Consolidated Appropriations Act of 2021 ("PSP Extension Law") was adopted, which provides for additional payroll support to eligible air carriers. InMarch 2021 , pursuant to the PSP Extension Law,Air Wisconsin entered into a Payroll Support Program Extension Agreement with theTreasury (the "PSP-2 Agreement"), which is substantially similar to the PSP-1 Agreement.Air Wisconsin received approximately$32.9 million pursuant to the PSP-2 Agreement, all of which was received in the six months endedJune 30, 2021 . InMarch 2021 , the federal American Rescue Plan Act of 2021 ("American Rescue Plan") was adopted, which provides further payroll support to eligible air carriers. InJune 2021 , pursuant to the American Rescue Plan, theTreasury entered into a Payroll Support Program 3 Agreement withAir Wisconsin (the "PSP-3 Agreement" and, together with the PSP-1 Agreement and the PSP-2 Agreement, the "PSP Agreements"), which is substantially similar to the PSP-1 Agreement and the PSP-2 Agreement.Air Wisconsin received approximately$33.3 million pursuant to the PSP-3 Agreement, of which approximately$16.7 million was received in the three months endedSeptember 30, 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) neitherAir Wisconsin nor any of its affiliates can purchase an equity security ofAir Wisconsin , or any direct or indirect parent company ofAir Wisconsin , that is listed on a national securities exchange prior to certain dates. IfAir Wisconsin fails to comply with its obligations under these agreements, it may be required to repay some or all of the funds provided to it under these agreements. Any such default, acceleration, insolvency or failure to comply would likely have a material adverse effect on our business. In addition, the PSP Agreements authorize the Secretary of theDepartment of Transportation to impose certain air service obligations on recipients of payroll support untilMarch 1, 2022 . To date, no such service obligation has been imposed onAir Wisconsin . For additional information, refer to Note 8, Commitments and Contingencies in our unaudited consolidated financial statements included in this Quarterly Report. 21 -------------------------------------------------------------------------------- Table of Contents Exploring Business Opportunities InJuly 2021 ,Air Wisconsin entered into a lease for a CRJ-200 aircraft in freighter configuration that is expected to be delivered by the end of 2021. This aircraft has not yet been added toAir Wisconsin's FAA Operations Specifications.Air Wisconsin has added the CRJ-700, and is in the process of adding the CRJ-900, to itsFAA Operations Specifications. AlthoughAir Wisconsin does not currently have a customer for the freighter or any CRJ-700 or CRJ-900 aircraft, it is adding these additional aircraft capabilities to its fleet in an attempt to position itself to explore and take advantage of other business opportunities that may arise. Other Economic Conditions, Challenges and Risks Impacting Financial Results See the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations " within our 2020 Annual Report for a discussion of the general and specific factors and trends affecting our business and results of operations. Results of Operations Comparison of the Three Months EndedSeptember 30, 2021 and the Three Months EndedSeptember 30, 2020 The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below. Three Months Ended September 30, 2021 2020 Change Operating Data: Available Seat Miles ("ASMs") (in thousands) 438,990 134,467 304,523 226.5 % Actual Block Hours 37,995 11,487 26,508 230.8 % Actual Departures 26,137 8,581 17,556 204.6 % Revenue Passenger Miles ("RPMs") (in thousands) 364,533 66,150 298,383 451.1 % Average Stage Length (in miles) 341 324 17 5.2 % Contract Revenue Per Available Seat Mile ("CRASM") (in cents) 16.37 ¢ 20.30 ¢ (3.93 )¢ (19.4 )% Passengers 1,047,201 199,232
847,969 425.6 %
The increase in ASMs, block hours, departures, and RPMs during the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , was primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. Operating Revenues The following table sets forth our operating revenues and the associated dollar and percentage changes for the dates presented: Three Months Ended September 30, 2021 2020 Change Operating Revenues ($ in thousands): Contract Revenues$ 71,866 $ 27,298 $ 44,568 163.3 % Contract Services and Other 21 20 1 5.0 % Total Operating Revenues$ 71,887 $ 27,318 $ 44,569 163.1 % Total operating revenues increased by$44.6 million , or 163.1%, during the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. 22 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented: Three Months Ended September 30, 2021 2020 Change Operating Expenses ($ in thousands): Payroll and Related Costs$ 29,056 $ 21,852 $ 7,204 33.0 % Aircraft Fuel and Oil 51 8 43 537.5 % Aircraft Maintenance, Materials and Repairs 10,692 3,292 7,400 224.8 % Aircraft Rent - 897 (897 ) (100.0 )% Other Rents 1,572 806 766 95.0 % Depreciation, Amortization and Obsolescence 6,570 6,946 (376 ) (5.4 )% Payroll Support Program (16,146 ) (18,859 ) 2,713 (14.4 )% Purchased Services and Other 6,869 4,048 2,821 69.7 % Total Operating Expenses$ 38,664 $ 18,990 $ 19,674 103.6 % Payroll and Related Costs . Payroll and related costs increased$7.2 million , or 33.0%, to$29.1 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The increase was primarily driven by an increase in crew wages, bonuses and training expenses of$4.3 million , an increase in personnel expenses, including per diem and crew rooms of$2.3 million , an increase in maintenance wages of$0.4 million and an increase in other wages, taxes and benefits of$0.3 million . Aircraft Fuel and Oil . Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the three months endedSeptember 30, 2021 andSeptember 30, 2020 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the three months endedSeptember 30, 2021 andSeptember 30, 2020 . Aircraft Maintenance, Materials and Repairs . Aircraft maintenance, materials and repairs costs increased$7.4 million , or 224.8%, to$10.7 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The 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 . Aircraft rent expense decreased$0.9 million , or 100.0%, to no aircraft rent expense for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The decrease was due toAir Wisconsin's acquisition of all of its remaining leased aircraft during 2020. Other Rents . Other rents expense increased$0.8 million , or 95.0%, to$1.6 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The increase was primarily due to an increase of$0.8 million in flight training simulator rental expense. Depreciation, Amortization and Obsolescence . Depreciation, amortization and obsolescence expense decreased$0.4 million , or 5.4%, to$6.6 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The decrease was primarily due to the retirement of leasehold improvements on formerly leased aircraft and a decrease in the obsolescence reserve related to our inventory of aircraft parts. Payroll Support Program . 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. In the three months endedSeptember 30, 2021 , andSeptember 30, 2020 ,Air Wisconsin received approximately$16.7 million and$20.5 million , respectively, under the Payroll Support Program. The Company recognized approximately$16.1 million and$18.9 million under the Payroll Support Program as a contra-expense on its consolidated statements of operations for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. Purchased Services and Other . Purchased services and other expense increased$2.8 million , or 69.7%, to$6.9 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . This increase was primarily due to an increase in outside services, consisting primarily of aircraft line maintenance of$1.9 million , an increase in insurance expense of$0.4 million , and an increase in on call maintenance expense of$0.2 million . 23 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense) Interest Income . Interest income increased by$0.6 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The increase was primarily due to an increase in interest earned on the long-term notes receivable due from United. Interest Expense . Interest expense decreased by$0.3 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , primarily due to the prepayment of debt inJune 2021 and the repayment of debt inDecember 2020 . For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. Loss onMarketable Securities . Loss on marketable securities was$0.09 million for the three months endedSeptember 30, 2021 . The loss reflects the change in market value and sales of securities as of the three months endedSeptember 30, 2021 . There were no marketable securities held during the three months endedSeptember 30, 2020 . Gain on Extinguishment of Debt. Gain on extinguishment of debt was$10.1 million for the three months endedSeptember 30, 2021 . The gain resulted from the forgiveness of the SBA Loan. Other, Net . Other income increased by$0.6 million for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . The other income consists of dividend income from investments in marketable securities. Net Income Net income for the three months endedSeptember 30, 2021 was$36.3 million , or$0.67 per basic share and$0.51 per diluted share, compared to net income of$7.9 million , or$0.14 per basic share and$0.11 per diluted share, for the three months endedSeptember 30, 2020 . For additional information, refer to Note 10, Earnings per Share and Equity , in our unaudited consolidated financial statements included in this Quarterly Report. The increase in net income for the three months endedSeptember 30, 2021 primarily resulted from increased revenues as a result of the increase in demand for air travel and the gain resulting from the forgiveness of the SBA Loan, which was partially offset by an overall increase in operating expenses. Within operating expenses, aircraft maintenance and repair costs, as well as payroll and related costs, increased due to increased flying levels. Income Taxes In the three months endedSeptember 30, 2021 , our effective tax rate was 18.1%, compared to (0.2)% for the three months endedSeptember 30, 2020 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our federal and state net operating losses. We recorded an income tax expense of$8.0 million and an income tax benefit of$0.01 million for the three months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. The income tax expense for the three months endedSeptember 30, 2021 resulted in an effective tax rate of 18.1%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the tax exempt status of the SBA Loan forgiveness, the impact of state income taxes and permanent differences between financial statement and taxable income. The income tax provision for the three months endedSeptember 30, 2020 resulted in an effective tax rate of (0.2)%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the impact of state income taxes, the reversal of valuation allowances on federal and state deferred tax assets, and permanent differences between financial statement and taxable income. For additional information, refer to Note 5, Income Taxes , in our audited consolidated financial statements included within our 2020 Annual Report. 24 -------------------------------------------------------------------------------- Table of Contents Comparison of the Nine Months EndedSeptember 30, 2021 and the Nine Months EndedSeptember 30, 2020 The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below. Nine Months Ended September 30, 2021 2020 Change Operating Data: Available Seat Miles (ASMs) (in thousands) 918,676 653,629 265,047 40.6 % Actual Block Hours 81,989 55,689 26,300 47.2 % Actual Departures 57,734 38,482 19,252 50.0 % Revenue Passenger Miles (RPMs) (in thousands) 715,066 379,852 335,214 88.2 % Average Stage Length (in miles) 322 342 (20 ) (5.8 )% Contract Revenue Per Available Seat Mile (CRASM) (in cents) 18.99 ¢ 17.00 ¢ 1.99 ¢ 11.7 % Passengers 2,147,805 1,064,478
1,083,327 101.8 %
The increase in departures and RPMs during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , was primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. Operating Revenues The following table sets forth our operating revenues and the associated dollar and percentage changes for the dates presented: Nine Months Ended September 30, 2021 2020 Change Operating Revenues ($ in thousands): Contract Revenues$ 174,467 $ 111,113 $ 63,354 57.0 % Contract Services and Other 54 59 (5 ) (8.5 )% Total Operating Revenues$ 174,521 $ 111,172 $ 63,349 57.0 % Total operating revenues increased by$63.3 million , or 57.0%, during the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , primarily due to an increase in flying under the United capacity purchase agreement as a result of increased demand for air travel related to the recovery from the COVID-19 pandemic. Operating Expenses The following table sets forth our operating expenses and the associated dollar and percentage changes for the periods presented: Nine Months Ended September 30, 2021 2020 Change Operating Expenses ($ in thousands): Payroll and Related Costs$ 76,819 $ 76,885 $ (66 ) (0.1 )% Aircraft Fuel and Oil 108 44 64 145.5 % Aircraft Maintenance, Materials, and Repairs 29,224 18,802 10,422 55.4 % Aircraft Rent 67 6,660 (6,593 ) (99.0 )% Other Rents 3,757 3,856 (99 ) (2.6 )% Depreciation, Amortization, and Obsolescence 19,569 20,553 (984 ) (4.8 )% Payroll Support Program (66,316 ) (34,034 ) (32,282 ) 94.9 % Purchased Services and Other 18,209 14,459 3,750 25.9 % Total Operating Expenses$ 81,437 $ 107,225 $ (25,788 ) (24.1 )% 25
-------------------------------------------------------------------------------- Table of Contents Payroll and Related Costs . Payroll and related costs decreased$0.07 million , or 0.1%, to$76.8 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The decrease was primarily driven by a decrease in other wages, taxes and benefits of$3.3 million , a decrease in management wages of$1.5 million and a decrease in maintenance wages of$0.7 million . This decrease was offset by an increase in crew wages, bonuses and training expenses of$3.5 million and an increase in personnel expenses, including per diem and crew rooms, of$1.8 million . Aircraft Fuel and Oil . Substantially all of the fuel costs incurred as a result of flying pursuant to the United capacity purchase agreement during the nine months endedSeptember 30, 2021 andSeptember 30, 2020 were directly paid to suppliers by United. Aircraft fuel and oil expense primarily reflects the costs associated with aircraft oil purchases. These expenses were immaterial for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 . Aircraft Maintenance, Materials and Repairs . Aircraft maintenance, materials and repairs costs increased$10.4 million , or 55.4%, to$29.2 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The 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 . Aircraft rent expense decreased$6.6 million , or 99.0%, to$0.07 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The decrease was due toAir Wisconsin's acquisition of its remaining leased aircraft operated during 2020. Other Rents . Other rents expense decreased$0.1 million , or 2.6%, to$3.8 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The decrease was primarily due to a decrease of$0.2 million in building rent offset by an increase of$0.05 million in flight training simulator rental expense. Depreciation, Amortization and Obsolescence . Depreciation, amortization and obsolescence expense decreased$1.0 million , or 4.8%, to$19.6 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The decrease was primarily due to the retirement of leasehold improvements on formerly leased aircraft and a decrease in the obsolescence reserve related to our inventory of aircraft parts. Payroll Support Program . 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. In the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 ,Air Wisconsin received approximately$66.3 million and$41.0 million , respectively, under the Payroll Support Program. The Company recognized approximately$66.3 million and$34.0 million under the Payroll Support Program as a contra-expense on its consolidated statements of operations for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. Purchased Services and Other . Purchased services and other expense increased$3.8 million , or 25.9%, to$18.2 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . This increase was primarily due to an increase in outside services, consisting primarily of aircraft line and on call maintenance, of$4.2 million , and an increase in insurance expense of$0.8 million , partially offset by a decrease in legal expense of$0.4 million , a decrease in professional and technical fees, consisting primarily of consulting and auditing services of$0.4 million , a decrease in property tax expense of$0.1 million , and a decrease in miscellaneous expenses of$0.2 million . Other Income (Expense) Interest Income . Interest income increased by$1.2 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The increase was primarily due to an increase in interest earned on the long-term notes receivable due from United. Interest Expense . Interest expense decreased by$0.5 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , primarily due to the prepayment of debt inJune 2021 and the repayment of debt inDecember 2020 . For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. Loss onMarketable Securities . Loss on marketable securities was$0.1 million for the nine months endedSeptember 30, 2021 . The loss reflects the change in market value and sales of securities as of the nine months endedSeptember 30, 2021 . There were no marketable securities held during the nine months endedSeptember 30, 2020 . 26 -------------------------------------------------------------------------------- Table of Contents Gain on Extinguishment of Debt. Gain on extinguishment of debt was$10.4 million for the nine months endedSeptember 30, 2021 . A gain of$10.1 million resulted from the forgiveness of the SBA Loan with the remainder attributable to the prepayment of debt. Other, Net . Other income increased by$0.7 million for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The other income consists of dividend income from investments in marketable securities. Net Income Net income for the nine months endedSeptember 30, 2021 was$82.0 million , or$1.49 per basic share and$1.14 per diluted share, compared to net income of$4.0 million , or$0.06 per basic and diluted share for the nine months endedSeptember 30, 2020 . For additional information, refer to Note 10, Earnings per Share and Equity , in our consolidated financial statements included in this Quarterly Report. The increase in net income for the nine months endedSeptember 30, 2021 primarily resulted from increased revenues as a result of increased demand for air travel and overall lower operating expenses, as a result of the increase in the contra-expense related to funds received under the Payroll Support Program, and the gain resulting from the forgiveness of the SBA Loan. Although overall operating expenses were lower in the nine months endedSeptember 30, 2021 when compared to the nine months endedSeptember 30, 2020 , there were significant increases in aircraft maintenance and repair costs as well as payroll and related costs resulting from the increased flying levels. Income Taxes In the nine months endedSeptember 30, 2021 , our effective tax rate was 21.6%, compared to (38.3)%, for the nine months endedSeptember 30, 2020 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our federal and state net operating losses. We recorded an income tax expense of$22.6 million and an income tax benefit of$1.1 million for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. The income tax expense for the nine months endedSeptember 30, 2021 resulted in an effective tax rate of 21.6%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the tax exempt status of the SBA Loan forgiveness, the impact of state taxes and permanent differences between financial statement and taxable income. The income tax provision for the nine months endedSeptember 30, 2020 resulted in an effective tax rate of (38.3)%, which differed from theU.S. federal statutory rate of 21.0%, primarily due to the impact of state taxes, the reversal of valuation allowances on federal and state deferred tax assets, and permanent differences between financial statement and taxable income, offset by a discrete tax benefit of$0.9 million from a refund of alternative minimum tax credits available under a provision of the CARES Act that occurred during the period. For additional information, refer to Note 5, Income Taxes , in our consolidated financial statements included within our 2020 Annual Report. Liquidity and Capital ResourcesAlthough Air Wisconsin's departures and block hours have increased through the nine months endedSeptember 30, 2021 and the date of this filing, the COVID-19 pandemic continues to evolve. As such, the ongoing impact that the COVID-19 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. Sources and Uses of Cash Our principal sources of liquidity are our cash and cash equivalents balance, our marketable securities,Air Wisconsin's cash flows from operations, and its receipt of governmental assistance under the SBA Loan and the Payroll Support Program. As ofSeptember 30, 2021 , our cash and cash equivalents balance was$43.7 million and we held$126.5 million of marketable securities. For the nine months endedSeptember 30, 2021 , we generated cash flows from operations of$82.8 million , which included$66.3 million received pursuant to the Payroll Support Program. In the near term,Air Wisconsin expects to fund its liquidity requirements through cash generated from operations and existing cash, cash equivalents, and marketable securities balances. 27 -------------------------------------------------------------------------------- Table of ContentsAir Wisconsin requires cash to fund its operating expenses and working capital requirements, which include outlays for capital expenditures, labor, maintenance, and payment of debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect current market conditions and our projected demand. Our capital expenditures are typically used to acquire or maintain aircraft and flight equipment forAir Wisconsin . During the nine months endedSeptember 30, 2021 , we paid$1.3 million in capital expenditures primarily related to purchases of rotable parts and capitalized engine overhauls. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.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. IfAir 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 ofSeptember 30, 2021 ,Air Wisconsin had$2.4 million of short-term debt, and$65.8 million of long-term debt, all of which is secured indebtedness incurred in connection with the Aircraft Notes described within our 2020 Annual Report. For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. The United capacity purchase agreement andAir Wisconsin's credit agreements with its lender contain restrictions that limitAir Wisconsin's ability to pay, or prohibit it from paying, dividends or distributions to the Company. In addition, the PSP Agreements preventAir Wisconsin from paying dividends prior to certain dates. We believe our available working capital and anticipated cash flows from operations will be sufficient to meet our liquidity requirements for at least the next 12 months from the date of this filing. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted. Restricted Cash As ofSeptember 30, 2021 , in addition to cash and cash equivalents of$43.7 million , the Company had$1.1 million in restricted cash which relates to a credit facility used for the issuance of cash collateralized letters of credit supporting our worker's compensation insurance program, landing fees at certain airports and facility leases, as well as cash held for the repurchase of shares under the Company's stock repurchase program. Restricted cash includes amounts escrowed in an interest-bearing account that secure the credit facility. Cash Flows The following table presents information regarding our cash flows for each of the dates presented ($ in thousands): Nine Months EndedSeptember 30, 2021 2020
Change
Net cash provided by operating activities$ 82,829 $ 59,294 $ 23,535 39.7 %
Net cash used in investing activities (127,983 ) (9,081 )
(118,902 ) 1,309.3 % Net cash (used in) provided by financing activities (41,248 ) 894
(42,142 ) (4,713.9 )%
Net Cash Flows Provided by Operating Activities During the nine months endedSeptember 30, 2021 , our net cash flows provided by operating activities was$82.8 million . We had net income of$82.0 million , which was primarily due to increased revenues as a result of the increase in demand for air travel, and lower overall expenses when compared to the nine months endedSeptember 30, 2020 . Net cash flows are further adjusted for increases in cash primarily related to depreciation, obsolescence and amortization of$18.5 million , contract liabilities of$20.8 million , and accounts payable of$5.1 million , partially offset by decreases in cash primarily related to the gain on extinguishment of debt of$10.4 million , long-term deferred revenues of$11.9 million , notes receivable of$13.7 million , accounts receivable of$2.4 million , accrued payroll and benefits of$1.0 million and prepaid and other expenses of$4.9 million . 28 -------------------------------------------------------------------------------- Table of Contents During the nine months endedSeptember 30, 2020 , our cash flows provided by operating activities was$59.3 million . We had net income of$4.0 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$29.2 million under the United capacity purchase agreement, depreciation and engine overhaul amortization of$21.5 million , deferred credits related to the Payroll Support Program of$7.0 million ,$2.5 million related to operating lease right-of-use assets and contract liabilities of$4.6 million , partially offset by decreases in cash primarily related to accounts payable of$5.5 million , amortization of contract costs of$1.7 million , prepaid expenses of$2.6 million and accounts receivable of$3.2 million .Net Cash Used in Investing Activities During the nine months endedSeptember 30, 2021 , our net cash used in investing activities was$128.0 million resulting primarily from investments in marketable securities. During the nine months endedSeptember 30, 2020 , our net cash used in investing activities was$9.1 million resulting primarily from the purchase of aircraft and an investment in rotable parts and engine overhauls to supportAir Wisconsin's fleet under the United capacity purchase agreement.Net Cash (Used in) Provided by Financing Activities During the nine months endedSeptember 30, 2021 , our net cash used in financing activities was$41.2 million , reflecting$39.5 million in repayments of long-term debt,$0.6 million of dividends paid on the Series C Preferred, and$1.2 million to repurchase shares of our common stock. During the nine months endedSeptember 30, 2020 , our net cash provided by financing activities was$0.9 million , reflectingAir Wisconsin's receipt of a$10.0 million loan under the PPP established pursuant to the CARES Act, partially offset by a dividend payment of$0.6 million on the Series C Preferred and payments of long-term debt of$8.5 million . Commitments and Contractual Obligations For additional information regarding our commitments and contractual obligations, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Commitments and Contractual Obligations " within our 2020 Annual Report. InJune 2021 ,Air Wisconsin prepaid approximately$11.4 million of debt, outstanding under the Aircraft Notes dueDecember 31, 2025 , and approximately$17.0 million of the principal amount outstanding under a credit agreement due 2022 along with all interest due as ofJune 30, 2021 . The prepayment under the Aircraft Notes resulted in a$0.2 million gain on extinguishment of debt due to the decrease in previously expected future undiscounted cash flows used in determining the carrying value of the debt. InAugust 2021 , the SBA granted forgiveness of the$10.0 million SBA Loan. The accrued interest in the amount of$0.1 million was also forgiven. The forgiveness resulted in a$10.1 million gain on extinguishment of debt. InSeptember 2021 ,Air Wisconsin prepaid the remaining amount due under the credit agreement due 2022 in the amount of$10.0 million along with interest of$0.1 million . The following table sets forth our cash obligations as ofSeptember 30, 2021 ($ in thousands) October through December Total 2021 2022
2023 2024 2025 Thereafter
Aircraft Notes Principal
Aircraft Notes Interest 8,645 595 2,380 2,170 1,890 1,610 -
Operating Lease Obligations 19,987 1,479 6,017
5,832 3,356 2,644 659 Total$ 88,132 $ 2,074 $ 11,897 $ 15,002 $ 12,246 $ 46,254 $ 659 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 inJune 2021 , no semi-annual installments are due prior toDecember 31, 2022 . As ofSeptember 30, 2021 , all ofAir Wisconsin's long-term debt was subject to fixed interest rates. For additional information regarding the Aircraft Notes and Other Loans, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations" within our 2020 Annual Report and Note 6, Debt , in our unaudited consolidated financial statements included in this Quarterly Report. 29 -------------------------------------------------------------------------------- Table of Contents Acquisition from Southshore InJanuary 2020 , the Company completed an acquisition fromSouthshore Aircraft Holdings, LLC and its affiliated entities ("Southshore") of three CRJ-200 regional jets, each having two General Electric ("GE") engines, plus five additionalGE engines, in exchange for the issuance of 4,000,000 shares of the Company'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 CRJ-200 regional jets andGE engines from Southshore under lease arrangements. For additional information, refer to the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Economic Conditions, Challenges and Risks Impacting Results - Aircraft Leases " within our 2020 Annual Report. InJanuary 2020 , the Company filed a Certificate of Designations, Preferences, and Rights of Series C Convertible Redeemable Preferred Stock ("Certificate of Designations") with the Secretary of State of theState of Delaware , which establishes the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series C Preferred. Series C Convertible Redeemable Preferred Stock The Series C Preferred accrues cumulative quarterly dividends at the rate per share of 6.0% of the Series C Issue Price per annum, which are cumulative and compound quarterly to the extent dividends have not been declared by the Board of Directors (the "Preferential Dividends"). From and afterDecember 31, 2023 , upon the election of holders of a majority of the outstanding Series C Preferred, the rate of the Preferential Dividends shall be increased by an additional 1.0% per annum per share for each and every six-month period following such election (the "Dividend Ratchet"). At the option of the Board of Directors, in lieu of paying the Preferential Dividends and the Conversion Cap Excess Dividends (as defined below) in cash, all or some of such dividends may be paid in additional shares of Series C Preferred (the "PIK Dividends"). OnSeptember 28, 2021 , the Board of Directors declared a dividend of approximately$0.2 million on the Series C Preferred, which was paid onSeptember 30, 2021 . Each share of Series C Preferred was initially convertible, at any time after issuance, into that number of shares of common stock determined by dividing the then applicable Series C Liquidation Amount (defined below) by$0.80 , subject to certain adjustments set forth in the Certificate of Designations (the "Conversion Price"). The Certificate of Designations requires that the Conversion Price be adjusted to equal the Weighted Average Price (as defined in the Certificate of Designations) of the common stock during the Reporting Adjustment Period. The "Reporting Adjustment Period" was the first 90-trading day period commencing on or afterAugust 28, 2020 (which was the first trading day following the day that was 45 days following the date on which the Company provided notice to its stockholders of the filing of its Annual Report on Form 10-K for the year endedDecember 31, 2019 ) during which an aggregate of at least 5.0% of the outstanding shares of common stock were traded. The Conversion Price was adjusted as ofJanuary 7, 2021 to be$0.15091 . 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 afterDecember 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 afterDecember 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 the date of this filing, 754,550 shares of the Series C Preferred are immediately convertible into 16,500,000 shares of common stock (representing 23.4% of the fully diluted shares of capital stock of the Company), and the remaining 3,245,450 shares of the Series C Preferred would be deemed Conversion Cap Excess Shares. In the event of any liquidation, dissolution or winding up of the Company or a sale of the Company, the Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Company to the common stock or other junior capital stock, an amount equal to the Series C Issue Price, plus an amount equal to all accrued but unpaid Preferential Dividends, Conversion Cap Excess Dividends and any other accrued but unpaid dividends (the "Series C Liquidation Amount"). 30 -------------------------------------------------------------------------------- Table of Contents At any time following the earliest of (a) the date that is four years after the earlier of the Reporting Date or (i) any merger or consolidation to which the Company is a constituent party and to which one or more third-party entities, unaffiliated with the Company, are constituent parties or (ii) any transaction or series of related transactions pursuant to which the Company shall issue or sell a number of shares of common stock greater than 5.0% of the number of shares of common stock then outstanding, (b) the date the Dividend Ratchet has been initiated, (c) any time that fewer than 800,000 shares of Series C Preferred are outstanding, and (d)December 31, 2024 , the Company shall have the right to redeem all, but not less than all, of the shares of Series C Preferred then outstanding at a per share price equal to the then current Series C Liquidation Amount (the "Redemption Price"). At any time after the outstanding shares of Series C Preferred are deemed Conversion Cap Excess Shares, the Company shall have the right to redeem all, but not less than all, of the Conversion Cap Excess Shares then outstanding at the Redemption Price. Based on the applicable accounting guidance, the Company is required to apply the "if-converted" method to the Series C Preferred to determine the weighted average number of shares outstanding for purposes of calculating the net income 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. The Company accounts for its Series C Preferred in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity . Based on this 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. Aircraft Operating Leases As ofSeptember 30, 2021 ,Air Wisconsin had no operating aircraft remaining on lease. Debt and Credit Facilities For additional information regarding our debt and credit facilities, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt and Credit Facilities " within our 2020 Annual Report. Paycheck Protection Program InApril 2020 ,Air Wisconsin received the$10.0 million SBA Loan under the PPP established under the CARES Act and administered by the SBA. The loan was forgivable subject to certain limitations, including that the loan proceeds be used to retain workers and for payroll, mortgage payments, leave payments, and utility payments. The entire principal amount and accrued interest was forgiven inAugust 2021 , in the amount of$10.1 million , which was recorded as gain on extinguishment of debt in the consolidated statements of operations for the three months endedSeptember 30, 2021 . Payroll Support Program InApril 2020 ,Air Wisconsin entered into the PSP-1 Agreement with theTreasury for payroll support under the CARES Act and received approximately$42.2 million , all of which was received in the year endedDecember 31, 2020 . InMarch 2021 ,Air Wisconsin entered into the PSP-2 Agreement with theTreasury for payroll support under the PSP Extension Law and received approximately$32.9 million , all of which was received in the six months endedJune 30, 2021 . InJune 2021 theTreasury entered into the PSP-3 Agreement withAir Wisconsin for payroll support under the American Rescue Plan, andAir Wisconsin received approximately$33.3 million , approximately$16.7 million of which was received in the three months endedSeptember 30, 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) neitherAir Wisconsin nor any of its affiliates can purchase an equity security ofAir Wisconsin or any direct or indirect parent company ofAir Wisconsin that is listed on a national securities exchange prior to certain dates. IfAir 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. In addition, the PSP Agreements authorize the Secretary of theDepartment of Transportation to impose certain air service obligations on recipients of payroll support untilMarch 1, 2022 . To date, no such service obligation has been imposed onAir Wisconsin . For additional information, refer to Note 8, Commitments and Contingencies , in our consolidated financial statements included in this Quarterly Report. 31 -------------------------------------------------------------------------------- Table of Contents Maintenance Commitments For additional information regarding our maintenance commitments, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Maintenance Commitments " within our 2020 Annual Report. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that would have a material current or future effect on the Company's financial condition, results of operations or liquidity. Critical Accounting Policies Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, leases, and income tax. The application of these accounting policies involve the exercise of judgment and the use of assumptions as to the future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. For additional information regarding our critical accounting policies, see the section entitled " Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies " within our 2020 Annual Report. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to the information regarding market risk provided in the section entitled " Quantitative and Qualitative Disclosures about Market Risk " within our 2020 Annual Report. Item 4. Controls and Procedures Disclosure Controls and Procedures As required by Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as ofSeptember 30, 2021 , the last day of the period covered by this Quarterly Report. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as ofSeptember 30, 2021 , our disclosure controls and procedures were effective at the reasonable assurance level. Limitations on Effectiveness of Controls Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures, or our system of internal control over financial reporting, will prevent or detect all errors and all fraud. A control system, no matter how well designed or operated, can provide only reasonable, but not absolute, assurance that the objectives of the system are met. The design of our control system reflects the fact that there are resource constraints, and that the benefits of such control system must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control failures and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the intentional acts of individuals, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that the design of any particular control will always succeed in achieving its objective under all potential future conditions. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the three months endedSeptember 30, 2021 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. 32
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