AerSale Corp: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. You should read the following management’s discussion and analysis together with the financial statements and related notes including Part II, Item 7 of AerSale’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). This discussion contains forward-looking statements about AerSale’s business, operations and industry that involve risks and uncertainties, such as statements regarding AerSale’s plans, objectives, expectations and intentions. AerSale’s future results and financial condition may differ materially from those currently anticipated because of the factors described in the section titled “Risk Factors” in the 2022 Form 10-K.

The Company

We operate as a platform for serving the commercial aviation aftermarket sector. Our top executives have on average over 30 years of experience in aircraft and engine (“Flight Equipment”) management, sales and maintenance services, and are supported by an experienced management team. We have established a global purpose built and fully integrated aviation company focused on providing products and services that maximize the value of Flight Equipment in the middle to end of its operating life cycle.

We are a worldwide provider of aftermarket commercial aircraft, engines, and their parts to passenger and cargo airlines, leasing companies, original equipment manufacturers (“OEM”), government and defense contractors, and maintenance, repair and overhaul (“MRO”) service providers. We report our activities in two business segments: Asset Management Solutions, comprised of activities that extract value from strategic asset acquisitions either as whole assets or by disassembling for used serviceable material (“USM”), and TechOps, comprised of MRO activities for aircraft and their components, sales of internally developed engineered solutions and other serviceable products.

We focus on mid-life Flight Equipment and monetize them through our Asset Management Solutions segment. Asset Management Solutions’ activities include monetization of assets through the lease or sale of whole assets, or through disassembly activities in support of our USM-related activities. Our monetizing services have been developed to maximize returns on mid-life Flight Equipment throughout their operating life, in conjunction with realizing the highest residual value of Flight Equipment at its retirement. We accomplish this by utilizing deep market and technical knowledge related to the management of Flight Equipment sales, leasing and MRO services. To extract value from the remaining flight time on whole assets, we provide flexible short-term (generally less than five years) leasing solutions of Flight Equipment to passenger and cargo operators across the globe. Once the value from the Flight Equipment’s flight time has been extracted, Flight Equipment is considered to be at or near the end of its useful life and is analyzed for return maximization as either whole asset sales or disassembled for sale as USM parts. Revenue from this segment is segregated between Aircraft and Engine depending on the asset type that generated the revenue. Lease revenue and the related depreciation from aircraft and engines installed on those aircraft is recognized under the Aircraft category. Revenue from sales of whole aircraft and related cost of sales are allocated between the Aircraft and Engine categories based on the allocated cost basis of the asset sold.

Our TechOps segment provides internal and third-party aviation services, including internally developed engineered solutions, full heavy aircraft maintenance and modification, component MRO, as well as end-of-life disassembly services. Our MRO business also engages in longer-term projects such as aircraft modifications, cargo and tanker conversions of aircraft, and aircraft storage. The TechOps segment also includes MRO services for landing gear, thrust reversers, hydraulic systems, and other aircraft components.

We utilize these capabilities to support our customers’ Flight Equipment, as well as to maintain and improve our own Flight Equipment, which is subsequently sold or leased to our customers. These processes require a high degree of expertise on each individual aircraft or component that is being serviced. Our knowledge of these processes allows us to assist customers to comply with applicable regulatory and OEM requirements. A significant amount of skilled labor is required to support this process, which the Company has accumulated through its diversified offerings.

In addition to our aircraft and USM parts offerings, we develop Engineered Solutions consisting of Supplemental Type Certificates (“STCs”) that can be installed on existing Flight Equipment to improve performance, comply with regulatory requirements, or improve safety. An example of these solutions is the AerSafe® product line, which we designed and obtained Federal Aviation Administration (“FAA”) approval to sell as a solution for compliance with the FAA’s fuel tank flammability regulations. These products are proprietary in nature and function as non-OEM solutions to regulatory requirements and other technical challenges, often at reduced delivery time and cost for operators. In order to develop these products, we engage in research and development (“R&D”) activities that are expensed as incurred.

Recent Accounting Pronouncements

The most recently adopted and to be adopted accounting pronouncements are described in Note B of our condensed consolidated financial statements included in this Quarterly Report, as well as in Item 8, Note B of our consolidated financial statements included in the 2022 Form 10-K.

Results of Operations

Three months ended September 30, 2023 compared to the three months ended September 30, 2022

Sales and gross profit for AerSale’s two business segments for the three months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Total revenue for the three months ended September 30, 2023 increased $41.5 million or 81.3% compared to the three months ended September 30, 2022, driven by an increase of $44.5 million, or 215.9%, in revenues within Asset Management Solutions, partially offset by an decrease of $3.0 million, or 9.8%, in revenues within TechOps.

Asset Management Solutions

Sales in the Asset Management Solutions segment increased $44.5 million or 215.9%, to $65.1 million for the three months ended September 30, 2023, due to a $14.4 million, or 221.2%, increase in revenue from Aircraft; and a $30.1 million, or 213.5%, increase in revenue from Engines. The increase in Aircraft revenue is primarily attributable to increased activity in the B757 and A320 product lines, as a result of higher Flight Equipment sales in the amount of $13.1 million due to the timing and availability of assets, as well as higher USM sales due to increased feedstock acquisitions; partly offset by lower leasing activity in the amount of $2.6 million as a result of planned reduction of the Aircraft leasing portfolio. The increase in Engines revenue is primarily attributable to higher activity across most product lines due to higher Flight Equipment sales in the amount of $29.1 million, and higher CF6-80 and CFM56 USM sales, partly offset by lower leasing activity in the amount of $2.7 million.

Cost of sales in Asset Management Solutions increased $34.6 million or 290.9%, to $46.5 million for the three months ended September 30, 2023, compared to the prior year period. The increase in cost of sales was primarily driven by the sales increase discussed above. Gross profit in the Asset Management Solutions segment increased $9.8 million to $18.5 million, or 113.3%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The gross profit increase is mainly attributable to higher revenue generated for the three months ended September 30, 2023, as noted above.

Aircraft gross profit margins decreased to 31.9% for the three months ended September 30, 2023, from 38.1% for the three months ended September 30, 2022 due to lower margin contribution from Flight Equipment sales. Engines gross profit margin was 26.9% for the three months ended September 30, 2023, a decrease from 44.1% for the three months ended September 30, 2022, which was primarily the result of lower margins on Flight Equipment sales and leasing activity.

TechOps

Our revenue from TechOps decreased by $3.0 million or 9.8%, to $27.4 million for the three months ended September 30, 2023, compared to the prior year period. The decrease was driven in part by lower storage maintenance at AerSale’s Roswell facility, largely due to fewer customer aircraft in storage as compared to prior periods, as well as lower contributions by component and landing gear repair activities.

Cost of sales in TechOps decreased $1.1 million or 4.7%, to $22.5 million for the three months ended September 30, 2023 compared to the prior year period. This was driven by lower cost of sales from AerSale’s Roswell facility, component repairs and landing gear activities.. Gross profit in TechOps decreased $1.9 million, or 27.4% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, driven by lower gross profit of $1.6 million on MRO services. Gross profit margin decreased to 18.0% for the three months ended September 30, 2023 compared to 22.4% for the prior year period, and was largely attributable to lower margin on MRO services of 16.8% for the three months ended September 30, 2023 compared to 20.7% for the prior year period, driven by lower component MRO and landing gear activities.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.4 million, or 5.9% to $25.4 million for the three months ended September 30, 2023, compared to the prior year period. The increase was mostly related to higher facility, research and development, and repair and maintenance costs incurred.

Change in Fair Value of Warrant Liability

We account for our private warrants as a liability at their fair value, with changes in fair value recognized in our results from operations for the period. The fair value of our private warrants is determined using a Black Scholes option pricing model. For the three months ended September 30, 2023, we recorded a $0.1 million change in fair value of warrant liability loss, compared to a $2.0 million loss in the prior year period.

Interest Income (Expense), Net

Interest expense, net was $0.3 million for the three months ended September 30, 2023, compared to $0.4 million interest income, net for the three months ended September 30, 2022. This was primarily related to interest expense incurred on borrowings under our debt facilities during the current year period, compared to interest earned on our excess cash in the prior year period.

Income Taxes

The effective tax rate for the three months ended September 30, 2023 was 93.0% compared to 10.6% for the three months ended September 30, 2022. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended September 30, 2023 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction, release of the valuation allowance and R&D credits. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended September 30, 2022 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Sales and gross profit for AerSale’s two business segments for the nine months ended September 30, 2023 and 2022 were as follows:

(in thousands, except percentages)

(in thousands, except percentages)

Total revenue for the nine-months ended September 30, 2023 decreased $73.3 million or 23.4% compared to the nine months ended September 30, 2022, driven by a decrease of $59.1 million, or 28.2%, in revenues within Asset Management Solutions and a decrease of $14.2 million, or 13.7%, in revenues within TechOps.

Asset Management Solutions

Sales in the Asset Management Solutions segment decreased $59.1 million or 28.2%, to $150.6 million for the nine months ended September 30, 2023, due to a $38.6 million, or 29.4%, decrease in revenue from Engines; and a $20.5 million, or 26.2%, decrease in revenue from Aircraft. The decrease in Engines revenue is primarily attributable to decreased activity in the RB211 and CF6-80 product lines as a result of lower Flight Equipment sales in the amount of $37.1 million, and lower leasing revenue in the CF6-80 product line totaling $6.3 million, partially offset by higher USM sales. The decrease in Aircraft revenue is primarily attributable to decreased activity in the B747 and B757 product line due to lower Flight Equipment sales in the amount of $20.5 million due to softer demand in the freighter market, and lower leasing revenue of $5.6 million, partially offset by higher USM sales activity.

Cost of sales in Asset Management Solutions decreased $16.8 million, or 14.1%, to $102.6 million for the nine months ended September 30, 2023, compared to the prior year period. The decrease in cost of sales was primarily driven by the sales decrease discussed above. Gross profit in the Asset Management Solutions segment decreased $42.3 million to $48.0 million, or 46.8%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The gross profit decrease is mainly attributable to lower revenue generated for the nine months ended September 30, 2023, as noted above.

Aircraft gross profit margin decreased to 29.2% for the nine months ended September 30, 2023, from 38.0% for the nine months ended September 30, 2022, due to lower margin on Flight Equipment sales. Engine gross profit margin was 33.5% for the nine months ended September 30, 2023, a decrease from 46.0% for the nine months ended September 30, 2022, which was primarily the result of lower margins on Flight Equipment sales, partly offset by higher margins on USM sales.

TechOps

Our revenue from TechOps decreased by $14.2 million, or 13.7%, to $89.5 million for the nine months ended September 30, 2023, compared to the prior year period. The decrease was primarily driven by the sale of Flight Equipment during 2022, which was purchased and controlled by the TechOps segment prior to its ultimate sale, partly offset by higher revenues from component repair activities and heavy MRO services.

Cost of sales in TechOps decreased $7.3 million, or 9.5%, to $69.5 million for the nine months ended September 30, 2023, compared to the prior year period, driven by lower costs related to the sale of Flight Equipment of $16.1 million during the nine months ended September 30, 2022, partially offset by cost associated with revenue fluctuations noted above. Gross profit in TechOps decreased $6.9 million, or 25.6% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, driven by lower profit generated from the sale of Flight Equipment of $7.1 million and USM sales, partially offset by higher gross profit of $0.8 million on MRO services. Gross profit margin decreased to 22.4% for the nine months ended September 30, 2023 compared to 26.0% for the nine months ended September 30, 2022, and was largely attributable to the margin generated from the sale of Flight Equipment of 31.9% for the nine months ended September 30, 2022, as well as lower margins on MRO services of 21.7% for the nine months ended September 30, 2023, compared to 22.5% during the nine months ended September 30, 2022.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $6.5 million, or 9.1% to $77.7 million for the nine months ended September 30, 2023, compared to the prior year period. The increase was mostly related to Company-wide cost of living adjustments, additional headcount, along with higher facility and legal costs incurred.

Change in Fair Value of Warrant Liability

We account for our private warrants as a liability at their fair value, with changes in fair value recognized in our results from operations for the period. The fair value of our private warrants is determined using a Black Scholes option pricing model. For the nine months ended September 30, 2023, we recorded a change in fair value of the warrant liability gain of $1.0 million, compared to a $1.9 million loss in the prior year period.

Interest Income (Expense), Net

Interest income, net for the nine months ended September 30, 2023 was $1.2 million and was primarily related to interest generated on excess cash. There was nominal interest expense during the nine months ended September 30, 2022.

Income Taxes

The effective tax rate for the nine months ended September 30, 2023 was 59.8% compared to 22.2% for the nine months ended September 30, 2022. The difference between the effective tax rate and the statutory tax rate of 21% for the nine months ended September 30, 2023 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction, release of the valuation allowance and R&D credits. The difference between the effective tax rate and the statutory tax rate of 21% for the nine months ended September 30, 2022 is primarily due to the impact of state income taxes and non-deductible executive compensation, offset by the foreign derived intangible income deduction.

Financial Position, Liquidity and Capital Resources

As of September 30, 2023, we had $3.2 million of cash and cash equivalents. We finance our growth through cash flows generated from operations and borrowings secured by our assets. We had $8.6 million outstanding under the Revolving Credit Agreement as of September 30, 2023, and we had $149.0 million of availability thereunder. We used cash in operations of $168.1 million for the nine months ended September 30, 2023, mostly for feedstock acquisitions, and generated cash from investing activities of $6.7 million for the nine months ended September 30, 2023.

During the nine months ended September 30, 2023, we entered into a revolving term loan collateralized by our property and equipment (the “Equipment Loan”), and borrowed $8.6 million, which remained outstanding as of September 30, 2023.

We believe our equity base, internally generated funds, and existing availability under our debt facilities are sufficient to maintain our level of operations through September 30, 2024. If an event occurs that would affect our ability to meet our capital requirements, our ability to continue to grow our asset base consistent with historical trends could be impaired and our future growth limited to that which can be funded from internally generated capital.

We may, from time to time, purchase our outstanding shares of common stock through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such purchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, legal and regulatory considerations, contractual restrictions and other factors. Purchases, if any, will be funded through our available cash from operations. The amounts involved may be material.

Cash Flows— Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Cash Flows from Operating Activities

Net cash used in operating activities was $168.1 million for the nine months ended September 30, 2023, compared to cash used of $2.4 million for the same period in 2022. The increase in cash deployed of $165.7 million was primarily due to feedstock acquisitions and impact of lower results from operations, partially offset by the timing of purchase deposits.

Cash Flows from Investing Activities

Net cash provided by investing activities was $6.7 million for the nine months ended September 30, 2023, compared to cash provided of $23.2 million in the same period for 2022. Cash provided by investing activities during the nine months ended September 30, 2023 and 2022 was driven by Flight Equipment sales.

Cash Flows from Financing Activities

Net cash provided by financing activities was $17.3 million for the nine months ended September 30, 2023, compared to cash provided of $0.3 million in the same period for 2022. Cash provided by financing activities during the nine months ended September 30, 2023 was primarily related to the proceeds from the Equipment Loan, as more fully described below; as well as borrowing under our Revolving Credit Agreement (as defined below). Cash provided by financing activities during the nine months ended September 30, 2022 is the result of proceeds from the issuance and the sale of shares of common stock under the AerSale Corporation 2020 Employee Stock Purchase Plan.

Debt Obligations and Covenant Compliance

Wells Fargo Senior Secured Revolving Credit Facility

Effective July 25, 2023, we amended our revolving credit agreement (as amended, the “Revolving Credit Agreement”) to increase our maximum commitments under the Revolving Credit Agreement to $180.0 million aggregate amount, subject to borrowing base limitations, and to extend the maturity date to July 24, 2028, subject to certain conditions.

Prior to the amendment, our Revolving Credit Agreement was scheduled to mature on March 12, 2024, and provided commitments for a $150.0 million revolving credit facility, including a $10.0 million sub facility for letters of credit and for borrowings on same-day notice referred to as “swingline loans”, which has been retained.

The maximum amount of such commitments available at any time for borrowings and letters of credit is determined according to a borrowing base calculation equal to the sum of eligible inventory and eligible accounts receivable reduced by the aggregate amount, if any, of trade payables of the loan parties, as defined in the Revolving Credit Agreement. Extensions of credit under the Revolving Credit Agreement are available for working capital and general corporate purposes.

As of September 30, 2023, there was $8.6 million outstanding under the Revolving Credit Agreement and we had $149.0 million of availability thereunder. We were in compliance with our debt covenants for the Revolving Credit Agreement as of September 30, 2023.

Synovus Equipment Loan

On June 30, 2023, the Company entered into a property and equipment revolving term loan (the “Equipment Loan”) with a total advance commitment of $10.0 million for the purpose of financing capital expenditures on property and equipment. Once the total advance commitment is reached or commencing on June 30, 2024, whichever comes first, this facility will become a term loan with a maturity date of June 30, 2027. This loan is collateralized by the property and equipment it finances and requires interest only payment until converted to a term loan, at which point, principal and interest payments will be required.

During the nine months ended September 30, 2023, the Company borrowed $8.6 million under this facility, which remained outstanding as of September 30, 2023.

We were in compliance with our debt covenants for the Equipment Loan as of September 30, 2023.

Off-Balance Sheet Arrangements and Contractual Obligations

We did not have any off-balance sheet arrangements as of September 30, 2023. Refer to Note Q – Leases within our Consolidated Financial Statements in our 2022 Form 10-K for a listing of our non-cancelable contractual obligations under operating leases.

The Company has entered into a purchase commitment with Universal Avionics, a subsidiary of Elbit Systems, valued at $33.1 million for the acquisition of technical equipment for manufacturing our AerAware product. The commitment is expected to be satisfied by the fourth quarter of 2024. The Company has a commitment for the purchase of cargo conversion kits to support its B757 freighter conversion program in the amount of $11.9 million. The commitment is expected to be satisfied by 2024.

Critical Accounting Policies and Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of our critical accounting estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2022 Form 10-K. We continually review these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in the estimates and assumptions we use could have a material impact on our financial results. During the nine months ended September 30, 2023, there were no material changes in our critical accounting estimates and policies.

In the normal course of business, we are subject to market risks. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and sales. Our exposure to market risk includes fluctuating interest rates and changes in foreign exchange rates.

Interest Rate Risk

We are exposed to the risk that our earnings and cash flows could be adversely impacted by fluctuations in interest rates associated with borrowings under the Revolving Credit Agreement and the Equipment Loan, which have variable interest rates tied to SOFR. A ten percent increase in the average interest rate affecting our variable rate debt outstanding as of September 30, 2023 would not have had a material impact on our interest expense, financial position or continuing operations as of and for the three and nine months ended September 30, 2023.

Foreign Currency Exchange Risk

We primarily use the U.S. dollar as our functional currency in all markets in which we operate in order to reduce our foreign currency market risk. Only general office expense and payroll transactions for our international locations are denominated in local currency. A hypothetical ten percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing operations as of and for the three and nine months ended September 30, 2023.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of September 30, 2023.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following should be read in conjunction with, and supplements and amends, the factors that may affect our business or operations described under Part I – Item 1A “Risk Factors” contained in the 2022 Form 10-K. Other than as described in this Item 1A, there have been no material changes to our risk factors from the risk factors previously disclosed in the 2022 Form 10-K.

We are exposed to risks associated with operating internationally.

We conduct business in a number of foreign countries, certain of which are politically unstable or subject to military or civil conflicts. Consequently, we are subject to a variety of risks that are specific to international operations, including the following:

• military conflicts, civil strife, and political risks;
• export regulations that could erode profit margins or restrict exports;
• compliance with the U.S. Foreign Corrupt Practices Act, the United Kingdom Bribery Act of 2010, and other anti-bribery and anticorruption laws;
• the burden and cost of compliance with foreign laws, treaties, and technical standards and changes in those regulations;
• contract award and funding delays;
• potential restrictions on transfers of funds;
• import and export duties and value added taxes;
• foreign exchange risk;
• transportation delays and interruptions;
• uncertainties arising from foreign local business practices and cultural considerations; and
• changes in United States policies on trade relations and trade policy, including implementation of or changes in trade sanctions (such as those imposed on Russia), tariffs, and embargoes.

Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union. The agreement, which is being applied provisionally from January 1, 2021 and entered into force on May 1, 2021, addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal. These developments, or the perception that any related developments could occur, have had and may continue to have a material adverse effect on global economic conditions and financial markets, and could significantly reduce global market liquidity, restrict the ability of key market participants to operate in certain financial markets, increase restrictions on imports and exports between the United Kingdom and other countries and increase regulatory complexities. Asset valuations, currency exchange rates and credit ratings have been and may continue to be subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations as the United Kingdom determines which European Union laws to replace or replicate, including with respect to trade relations could depress economic activity and restrict our access to capital.

Measures that we have or will adopt to reduce the potential impact of losses resulting from the risks of doing business internationally may not be adequate, and the regions in which we operate might not continue to be stable enough to allow us to operate profitably or at all.

The war in the Ukraine is creating an adverse climate for our business. The U.S. government has imposed enhanced export restrictions and controls on certain products and technology, as well as sanctions on certain industry sectors and parties in Russia, Belarus and parts of the Ukraine. The governments of other jurisdictions in which we may conduct business, such as the European Union, have also implemented sanctions or other restrictive measures. These sanctions and enhanced export controls, as well as any responses from Russia, could adversely affect the Company and/or our supply chain, business partners or customers, flight activity, demand for MRO and leasing services and the related macro environment. The economic and security conditions could also limit the Company’s ability to provide its services or products to certain customers, as well as limit its ability to receive payments. The totality of these events, sanctions and restrictions may have a material adverse effect on our business, financial condition, liquidity and results of operations. These sanctions and restrictions may also jeopardize and adversely impact the availability and cost of insurance which covers any assets or operations that may be subject to these restrictions and enhanced sanctions.

On October 7, 2023, Hamas militants launched an extensive military operation into Israel’s southern border from the Gaza Strip and conducted a series of attacks, followed by an invasion of Israeli territory by land, air and sea directed at civilian and military targets. On October 8, 2023 Israel formally declared war on Hamas after their deadly attack. The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are such war’s global economic impact and impact on the Company’s business and operations and on the businesses and operations of the Company’s suppliers, customers and other third parties with which the Company conducts business. Of note, the Company’s ERP vendor and the supplier of most of the components of our Enhanced Flight Vision System “AerAware” are both based in Israel.