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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________.

Commission file number 001-38801

AerSale Corporation

(Exact name of registrant as specified in its charter)

Delaware

    

84-3976002

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

255 Alhambra Circle, Suite 435

Coral Gables, FL

33134

(Address of Principal Executive Offices)

(Zip Code)

(305) 764-3200

Registrant’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common stock, $0.0001 par value per share

ASLE

The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares of Registrant’s common stock outstanding as of November 6, 2023 was 51,328,800.

TABLE OF CONTENTS

Page

Forward-Looking Statements

i

PART I – FINANCIAL INFORMATION

1

Item 1.

Condensed Consolidated Financial Statements

1

Condensed Consolidated Balance Sheets (Unaudited)

1

Condensed Consolidated Statements of Operations (Unaudited)

2

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

3

Condensed Consolidated Statements of Cash Flows (Unaudited)

4

Notes to the Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

27

PART II – OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

29

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

29

Signatures

32

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report may constitute forward-looking statements, and include, but are not limited to, changes in the market for our services; changes in applicable laws or regulations; the ability to launch new services and products or to profitably expand into new markets; and expectations of other economic, business and/or competitive factors. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 7, 2023.

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Unless otherwise stated or the context otherwise requires, references in this Quarterly Report to the “Company,” “AerSale,” “we,” “us,” “our” and similar terms refer to AerSale Corporation (f/k/a Monocle Holdings, Inc.) and its consolidated subsidiaries.

i

PART I – FINANCIAL INFORMATION

ITEM 1          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except share data and par value)

    

September 30, 

    

December 31, 

2023

2022

(Unaudited)

Current assets:

Cash and cash equivalents

$

3,154

$

147,188

Accounts receivable, net of allowance for credit losses of $979 and $1,074 as of September 30, 2023 and December 31, 2022

 

29,721

 

28,273

Income tax receivable

1,313

-

Inventory:

Aircraft, airframes, engines, and parts, net

 

200,807

 

117,488

Advance vendor payments

 

35,798

 

27,585

Deposits, prepaid expenses, and other current assets

 

15,335

 

13,022

Total current assets

 

286,128

 

333,556

Fixed assets:

 

Aircraft and engines held for lease, net

 

30,096

 

31,288

Property and equipment, net

 

25,092

 

12,638

Inventory:

 

Aircraft, airframes, engines, and parts, net

 

126,018

 

66,042

Operating lease right-of-use assets

28,445

 

31,624

Deferred income taxes

 

13,618

 

11,287

Deferred financing costs, net

 

1,589

 

544

Deferred customer incentives and other assets, net

 

535

 

628

Goodwill

 

19,860

 

19,860

Other intangible assets, net

 

22,521

 

24,112

Total assets

$

553,902

$

531,579

Current liabilities:

 

  

Accounts payable

$

38,954

$

21,131

Accrued expenses

 

3,919

 

8,843

Lessee and customer purchase deposits

 

6,444

 

17,085

Current operating lease liabilities

4,578

4,426

Current portion of long-term debt

632

-

Deferred revenue

 

2,393

 

1,355

Total current liabilities

 

56,920

 

52,840

Revolving credit facility

8,600

 

-

Long-term debt

7,927

 

-

Long-term lease deposits

 

152

 

152

Long-term operating lease liabilities

25,238

28,283

Maintenance deposit payments and other liabilities

 

151

 

668

Warrant liability

3,652

4,656

Total liabilities

102,640

86,599

Commitments and contingencies

 

  

Stockholders’ equity:

 

  

Common stock, $0.0001 par value. Authorized 200,000,000 shares; issued and outstanding 51,328,800 and 51,189,461 shares as of September 30, 2023 and December 31, 2022

 

5

 

5

Additional paid-in capital

 

315,254

 

306,141

Retained earnings

 

136,003

 

138,834

Total stockholders' equity

 

451,262

 

444,980

Total liabilities and stockholders’ equity

$

553,902

$

531,579

See accompanying notes to condensed consolidated financial statements.

1

AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

    

2023

    

2022

    

2023

    

2022

    

Revenue:

Products

$

66,842

$

16,823

$

149,960

$

217,813

Leasing

 

2,488

 

7,786

 

11,396

 

23,342

Services

 

23,154

 

26,390

 

78,725

 

72,258

Total revenue

 

92,484

 

50,999

 

240,081

 

313,413

Cost of sales and operating expenses:

Cost of products

 

48,697

 

12,755

 

107,176

 

133,702

Cost of leasing

 

1,051

 

1,818

 

3,253

 

6,538

Cost of services

 

19,262

 

20,937

 

61,647

 

56,001

Total cost of sales

 

69,010

 

35,510

 

172,076

 

196,241

Gross profit

 

23,474

 

15,489

 

68,005

 

117,172

Selling, general, and administrative expenses

 

25,403

 

23,983

 

77,724

 

71,252

(Loss) income from operations

 

(1,929)

 

(8,494)

 

(9,719)

 

45,920

Other income (expenses):

 

 

 

 

Interest (expense) income, net

 

(250)

 

393

 

1,178

 

15

Other income, net

 

127

 

45

 

498

 

526

Change in fair value of warrant liability

(55)

(2,029)

1,004

(1,881)

Total other (expenses) income

 

(178)

 

(1,591)

 

2,680

 

(1,340)

(Loss) income before income tax provision

 

(2,107)

 

(10,085)

 

(7,039)

 

44,580

Income tax benefit (expense)

 

1,959

 

1,072

 

4,208

 

(9,912)

Net (loss) income

$

(148)

$

(9,013)

$

(2,831)

$

34,668

(Loss) earnings per share:

Basic

$

-

$

(0.17)

$

(0.06)

$

0.67

Diluted

$

-

$

(0.17)

$

(0.07)

$

0.64

Weighted average shares outstanding:

Basic

51,321,026

51,745,354

51,252,581

51,707,809

Diluted

51,321,026

51,745,354

51,430,205

54,036,402

See accompanying notes to condensed consolidated financial statements.

2

AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

For the three and nine months ended September 30, 2023 and 2022

(in thousands, except share data)

(Unaudited)

Total

Common stock

Additional

Retained

stockholders’

    

Amount

    

Shares

    

paid-in capital

    

earnings

    

 equity

Balance at December 31, 2022

$

5

51,189,461

$

306,141

$

138,834

$

444,980

Share-based compensation

-

-

2,731

-

2,731

Shares issued under the 2020 Equity Incentive Plan

-

31,925

-

-

-

Shares surrendered for tax withholdings on equity awards

-

-

(70)

-

(70)

Net income

 

-

-

 

-

 

5

 

5

Balance at March 31, 2023

$

5

51,221,386

$

308,802

$

138,839

$

447,646

Share-based compensation

-

-

3,028

-

3,028

Shares issued under the 2020 Employee Stock Purchase Plan

-

21,551

278

-

278

Shares issued under the 2020 Equity Incentive Plan

-

7,470

-

-

-

Net (loss)

 

-

-

 

-

 

(2,688)

 

(2,688)

Balance at June 30, 2023

$

5

51,250,407

$

312,108

$

136,151

$

448,264

Share-based compensation

-

-

3,180

-

3,180

Shares issued under the 2020 Equity Incentive Plan

-

78,393

-

-

-

Shares surrendered for tax withholdings on equity awards

-

-

(34)

-

(34)

Net (loss)

-

-

-

(148)

(148)

Balance at September 30, 2023

$

5

51,328,800

$

315,254

$

136,003

$

451,262

Total

Common stock

Additional

Retained

stockholders’

    

Amount

    

Shares

    

paid-in capital

    

earnings

    

 equity

Balance at December 31, 2021

$

5

 

51,673,099

$

313,901

$

94,973

$

408,879

Share-based compensation

-

-

3,755

-

3,755

Shares issued under the 2020 Employee Stock Purchase Plan

-

11,988

125

-

125

Shares issued under the 2020 Equity Incentive Plan

-

2,970

-

-

-

Net income

-

-

-

17,226

17,226

Balance at March 31, 2022

$

5

51,688,057

$

317,781

$

112,199

$

429,985

Share-based compensation

-

-

3,917

-

3,917

Shares issued under the 2020 Employee Stock Purchase Plan

-

18,111

220

-

220

Net income

-

-

-

26,455

26,455

Balance at June 30, 2022

$

5

51,706,168

$

321,918

$

138,654

$

460,577

Share-based compensation

-

-

4,357

-

4,357

Restricted Stock Units ("RSUs") vested and settled

-

20,630

-

-

-

Shares issued upon exercise of warrants

-

47,867

-

-

-

Net (loss)

-

-

-

(9,013)

(9,013)

Balance at September 30, 2022

$

5

51,774,665

$

326,275

$

129,641

$

455,921

See accompanying notes to condensed consolidated financial statements.

3

AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

    

Nine Months Ended September 30, 

2023

    

2022

Cash flows from operating activities:

Net (loss) income

$

(2,831)

$

34,668

Adjustments to reconcile net (loss) income to net cash (used in) operating activities:

Depreciation and amortization

 

7,585

 

8,589

Amortization of debt issuance costs

 

316

 

340

Amortization of operating lease assets

286

 

-

Inventory reserve

 

1,255

 

2,010

Impairment of aircraft held for lease

-

857

Provision for credit losses

 

-

 

(379)

Deferred income taxes

 

(2,331)

 

(2,655)

Change in fair value of warrant liability

(1,004)

1,881

Share-based compensation

8,939

12,029

Changes in operating assets and liabilities:

 

 

  

Deferred financing costs

(1,361)

 

-

Accounts receivable

 

(1,447)

 

3,730

Income tax receivable

(1,313)

-

Inventory

 

(168,313)

 

(26,441)

Deposits, prepaid expenses, and other current assets

 

(2,313)

 

(747)

Deferred customer incentives and other assets

 

93

 

661

Advance vendor payments

 

(8,212)

 

(10,097)

Accounts payable

 

17,824

 

2,082

Income tax payable

-

(2,205)

Accrued expenses

 

(5,015)

 

(594)

Deferred revenue

 

1,038

 

664

Lessee and customer purchase deposits

 

(10,641)

 

(24,996)

Other liabilities

 

(606)

 

(1,779)

Net cash (used in) operating activities

 

(168,051)

 

(2,382)

Cash flows from investing activities:

 

  

 

  

Proceeds from sale of assets

 

14,450

 

37,107

Acquisition of aircraft and engines held for lease, including capitalized cost

 

-

 

(6,945)

Purchase of property and equipment

 

(7,766)

 

(6,935)

Net cash provided by investing activities

 

6,684

 

23,227

Cash flows from financing activities:

 

  

 

  

Proceeds from long-term debt

8,559

 

-

Proceeds from Revolving Credit Facility

 

26,100

 

-

Repayments of Revolving Credit Facility

 

(17,500)

 

-

Taxes paid related to net share settlement of equity awards

(104)

-

Proceeds from the issuance of Employee Stock Purchase Plan shares

278

345

Net cash provided by financing activities

 

17,333

 

345

(Decrease) increase in cash and cash equivalents

 

(144,034)

 

21,190

Cash and cash equivalents, beginning of period

 

147,188

 

130,188

Cash and cash equivalents, end of period

$

3,154

$

151,378

Supplemental disclosure of cash activities

 

 

Income tax payments, net

1,306

14,637

Interest paid

575

856

Supplemental disclosure of noncash investing activities

Reclassification of aircraft and aircraft engines inventory to (from) aircraft and engine held for lease, net

9,312

(25,025)

Reclassification of customer purchase deposits to sale of assets

-

12,500

See accompanying notes to condensed consolidated financial statements.

4

AERSALE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2023

NOTE A — DESCRIPTION OF THE BUSINESS

Organization

Monocle Acquisition Corporation (“Monocle”) was initially formed on August 20, 2018 for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses.

On December 22, 2020 (the “Closing Date”), Monocle consummated the previously announced business combination pursuant to that certain Amended and Restated Agreement and Plan of Merger, dated September 8, 2020 (the “Merger Agreement”), by and among Monocle, AerSale Corporation (f/k/a Monocle Holdings Inc.), a Delaware corporation (the “Company”), AerSale Aviation, Inc. (f/k/a AerSale Corp.), a Delaware corporation (“AerSale Aviation”), Monocle Merger Sub 1 Inc., a Delaware corporation (“Merger Sub 1”), Monocle Merger Sub 2 LLC, a Delaware limited liability company (“Merger Sub 2”), and Leonard Green & Partners, L.P., a Delaware limited partnership, solely in its capacity as the initial Holder Representative (as defined in the Merger Agreement). The transactions contemplated by the Merger Agreement are referred to herein as the “Merger” or the “Business Combination” and in connection therewith, Monocle merged with and into us, whereby we survived the Merger and became the successor issuer to Monocle by operation of Rule 12g-3 under the Securities Exchange Act, as amended.

Upon the consummation of the Merger: (a) Merger Sub 1 was merged with and into Monocle, with Monocle surviving the Merger as a wholly-owned direct subsidiary of the Company (the “First Merger”), and (b) Merger Sub 2 was merged with and into AerSale Aviation, with AerSale Aviation surviving the Merger as a wholly-owned indirect subsidiary of the Company (the “Second Merger”). In connection with the closing of the Business Combination (the “Closing”), AerSale Aviation changed its name from “AerSale Corp.” to “AerSale Aviation, Inc.” and the Company changed its name from “Monocle Holdings Inc.” to “AerSale Corporation.” Immediately following the Merger, the Company contributed all of its ownership in Monocle to AerSale Aviation which continued as a wholly owned subsidiary of the Company.

The Company’s corporate headquarters is based in Miami, Florida, with additional offices, hangars, and warehouses located globally.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared from the books and records of the Company in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”), which permits reduced disclosures for interim periods. Although these interim consolidated financial statements do not include all of the information and footnotes required for complete annual consolidated financial statements, management believes all adjustments, consisting only of normal recurring adjustments, and disclosures necessary for a fair presentation of the accompanying condensed consolidated balance sheets, statements of operations, stockholders’ equity, and cash flows have been made. Unaudited interim results of operations and cash flows are not necessarily indicative of the results that may be expected for the full year. Unaudited interim condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and footnotes included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”), wherein a more complete discussion of significant accounting policies and certain other information can be found.

5

Revenue Recognition

Products — Used Serviceable Material (“USM”) Sales

Revenues from sales of USM are measured based on consideration specified in a contract with a customer, and excludes any sales commissions and taxes collected and remitted to government agencies. We recognize revenue when we satisfy a performance obligation by transferring control over a product to a customer. The parts are sold at a fixed price with no right of return. In determining the performance obligation, management has identified the promise in the contract to be the shipment of the spare parts to the customer. Title passes to the buyer when the goods are shipped, and the buyer is responsible for any loss in transit and the Company has a legal right to payment for the spare parts once shipped. We generally sell our USM products under standard 30-day payment terms, subject to certain exceptions. Customers neither have the right to return products nor do they have the right to extended financing. The Company has determined that physical acceptance of the spare parts to be a formality in accordance with Accounting Standards Codification (“ASC”) 606 – Revenue from Contracts with Customers (“ASC 606”).

Spare parts revenue is based on a set price for a set number of parts as defined in the purchase order. The performance obligation is completed once the parts have shipped and as a result, all of the transaction price is allocated to that performance obligation. The Company has determined that it is appropriate to recognize spare parts sales at a point in time (i.e., the date the parts are shipped) in accordance with ASC 606.

Products — Whole Asset Sales

Revenues from whole asset sales are measured based on consideration specified in the contract with the customer. The Company and customer enter into an agreement which outlines the place and date of sale, purchase price, condition of the whole asset, bill of sale and the assignment of rights and warranties from the Company to the customer. The Company has identified the transfer of the whole asset as the performance obligation. The transaction price is set at a fixed dollar amount per fixed quantity (number of whole assets) and is explicitly stated in each contract. Whole asset sales revenue is based on a set price for a set number of assets, which is allocated to the performance obligation discussed above, in its entirety. The Company has determined the date of transfer to the customer is the date the customer obtains control over the asset and would cause the revenue recognition. Payment is required in full upon customers’ acceptance of the whole asset on the date of the transfer, unless the Company extends credit terms to customers it deems creditworthy.

Leasing Revenues

The Company leases aircraft and engines (“Flight Equipment”) under operating leases that contain monthly base rent and reports rental income straight line over the life of the lease as it is earned. Additionally, the Company’s leases provide for supplemental rent, which is calculated based on actual hours or cycles of utilization and, for certain components, based on the amount of time until maintenance of that component is required. In certain leases, the Company records supplemental rent paid by the lessees as maintenance deposit payments and other liabilities in recognition of the Company’s contractual commitment to reimburse qualifying maintenance. Reimbursements to the lessees upon receipt of evidence of qualifying maintenance work are charged against the existing maintenance deposit payment liabilities. In leases where the Company is responsible for performing certain repairs or replacement of aircraft components or engines, supplemental rent is recorded as revenue in the period earned. In the event of premature lease termination or lessee default on the lease terms, revenue recognition will be discontinued when outstanding balances are beyond the customers’ deposits held. Flight Equipment leases are billed in accordance with the lease agreement and invoices are due upon receipt.

6

Service Revenues

Service revenues are recognized as performance obligations are fulfilled and the benefits are transferred to the customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, our service contract with the customer is considered one performance obligation as it includes factors such as the good or service being provided is significantly integrated with other promises in the contract, the service provided significantly modifies or customizes the other good or service or the goods or services are highly interdependent or interrelated with each other. If the contract has more than one performance obligation, the Company determines the standalone price of each distinct good or service underlying each performance obligation and allocates the transaction price based on their relative standalone selling prices. The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

For most service contracts, our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. We receive payments from our customers based on billing schedules or other terms as written in our contracts.

For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services are transferred to the customer. Revenue is recognized based on the relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation. We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved include future labor costs and efficiencies, overhead costs and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results. Under most of our maintenance, repair and overhaul (“MRO”) contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered, fair compensation for work performed, the costs of settling and paying other claims and a reasonable profit on the costs incurred or committed.

Changes in estimates and assumptions related to our arrangements accounted for using the input method based on labor hours are recorded using the cumulative catchup method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide MRO services.

We have elected to use certain practical expedients permitted under ASC 606. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our Condensed Consolidated Statements of Operations, and are not considered a performance obligation to our customers. Our reported revenue on our Condensed Consolidated Statements of Operations is net of any sales or related non-income taxes.

New Accounting Pronouncements Adopted

There have been no recent accounting pronouncements, changes in accounting pronouncements, or recently adopted accounting guidance during the nine months ended September 30, 2023 that are of significance or potential significance to us.

Payroll Support Programs

In connection with the financial assistance the Company received under the Payroll Support Program, the Company was required to comply with certain provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), including the requirement that funds provided pursuant to the Payroll Support Program be used exclusively for the continuation of payment of employee wages, salaries and benefits and the requirement against

7

involuntary terminations and furloughs and reductions in employee pay rates and benefits from the signing date of the Payroll Support Program agreement through September 30, 2021. The agreement also required the Company to issue a recall to any employee who was terminated or furloughed between October 1, 2020 and March 4, 2021 and enable such employee to return to employment. In addition, the Company was subject to provisions prohibiting the repurchase of common stock and the payment of common stock dividends through September 30, 2022, and limited the payment of certain employees’ compensation, which lapsed on April 1, 2023. If the Company does not comply with these provisions, it may be required to reimburse up to 100% of any previously received relief funds. As of September 30, 2023, we were in compliance with all applicable provisions of the CARES Act, Payroll Support Program and American Rescue Plan Act of 2021.

NOTE C — SIGNIFICANT RISKS AND UNCERTAINTIES

Impact of Ukraine Conflict and Russia Sanctions

In February of 2022, Russia invaded Ukraine and is still engaged in an active conflict against the country. As a result, governments in the European Union, the United States, the United Kingdom, Switzerland, and other countries have enacted sanctions against Russia and Russian interests. These sanctions include controls on the export and re-export of certain goods, supplies, and technologies, supply of aircraft and aircraft components to Russian persons or for use in Russia, subject to certain wind-down periods, and the imposition of restrictions on doing business with certain state-owned Russian customers and other investments and business activities in Russia. In order to comply with these sanctions, we ceased pursuing future business in Russia and terminated three leases in 2022 with operators doing business in Russia, successfully recovering two aircraft with one engine still unrecovered. Due to continued uncertainty in the ability to recover this engine from Russia or to collect insurance coverage, we impaired this asset during the second quarter of 2022. Although the current sanctions prohibit the continuation of certain business activities, the three leases referenced were contractually scheduled to expire in 2022 and therefore did not have a material impact on our business. While it is difficult to predict the short or long term implications of this conflict and sanctions on the global economy and the aviation industry, we intend to fully comply with all applicable sanctions and embargoes, and do not expect the current situation will have a material adverse effect on our results of operations.

Emerging Military Conflict in Israel

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. Although we do not expect the current situation will have a material adverse effect on our results of operations, our supplier of most of the components in our Enhanced Flight Vision System “AerAware” and our ERP supplier are both based in Israel.

NOTE D — REVENUE

The timing of revenue recognition, customer billings and cash collections results in a contract asset or contract liability at the end of each reporting period. Contract assets consist of unbilled receivables or costs incurred where revenue recognized over time exceeds the amounts billed to customers. Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied. Contract assets and contract liabilities are determined on a contract-by-contract basis.

8

Contract assets are as follows (in thousands):

    

September 30, 2023

    

December 31, 2022

    

Change

Contract assets

$

7,007

$

7,277

$

(270)

Contract assets are reported within deposits, prepaid expenses, and other current assets on our Condensed Consolidated Balance Sheets. Changes in contract assets primarily result from the timing difference between the performance of services. Contract liabilities are reported as deferred revenue on our Condensed Consolidated Balance Sheets and amounted to $1.4 million as of December 31, 2022, of which $1.1 million was related to contract liabilities for services to be performed. For the nine months ended September 30, 2023, the Company recognized as revenue the full amount of contract liabilities included in the beginning balance for services performed as the timing between customer payments and our performance of the services is generally no longer than six months. No such revenue was recognized for the three months ended September 30, 2023.

Disaggregation of Revenue

The Company reports revenue by segment. The following tables present revenue by segment, as well as a reconciliation to total revenue for the three and nine months ended September 30, 2023 and 2022 (in thousands):

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2023

    

2023

Asset Management

    

    

Asset Management

    

    

    

 Solutions

    

Tech Ops

    

Total Revenues

    

 Solutions

    

TechOps

    

Total Revenues

USM

$

17,754

$

3,884

$

21,638

$

49,348

$

9,709

$

59,057

Whole asset sales

 

44,812

 

-

 

44,812

 

89,811

 

218

 

90,029

Engineered solutions

 

-

 

392

 

392

 

-

 

874

 

874

Total products

 

62,566

 

4,276

 

66,842

 

139,159

 

10,801

 

149,960

Leasing

 

2,488

 

-

 

2,488

 

11,396

 

-

 

11,396

Services

 

-

 

23,154

 

23,154

 

-

 

78,725

 

78,725

Total revenues

$

65,054

$

27,430

$

92,484

$

150,555

$

89,526

$

240,081

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

2022

    

2022

Asset Management

Asset Management

    

 Solutions

    

Tech Ops

    

Total Revenues

    

 Solutions

    

TechOps

    

Total Revenues

USM

$

10,128

$

3,455

$

13,583

$

38,869

$

5,209

$

44,078

Whole asset sales

2,677

-

2,677

147,451

23,605

171,056

Engineered solutions

 

-

 

563

 

563

 

-

 

2,679

 

2,679

Total products

 

12,805

 

4,018

 

16,823

 

186,320

 

31,493

 

217,813

Leasing

 

7,786

 

-

 

7,786

 

23,342

 

-

 

23,342

Services

 

-

 

26,390

 

26,390

 

-

 

72,258

 

72,258

Total revenues

$

20,591

$

30,408

$

50,999

$

209,662

$

103,751

$

313,413

NOTE E — INVENTORY

Following are the major classes of inventory as of the below dates (in thousands):

    

September 30, 2023

    

December 31, 2022

Used serviceable materials

$

91,680

$

73,827

Work-in-process

20,113

16,659

Whole assets

215,032

93,044

$

326,825

183,530

Less short term

 

(200,807)

 

(117,488)

Long term

$

126,018

$

66,042

9

The Company recorded inventory scrap loss reserves of $0.5 million and $1.3 million for the three and nine months ended September 30, 2023, respectively.

The Company did not record an inventory reserve for the three and nine months ended September 30, 2023, and recorded an inventory reserve $1.8 million for the nine months ended September 30, 2022, due to the Company’s evaluation of the inventory’s net realizable value. Additions to inventory reserves are included in cost of products in the accompanying Condensed Consolidated Statements of Operations.

NOTE F — INTANGIBLE ASSETS

In accordance with ASC 350, Intangibles — Goodwill and Other (“ASC 350”), goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company reviews and evaluates our goodwill and indefinite life intangible assets for potential impairment at a minimum annually or more frequently if circumstances indicate that impairment is possible.

The Company determined the fair value of assets acquired and liabilities assumed using a variety of methods. An income approach based on discounted cash flows was used to determine the values of our trademarks, certifications, customer relationships and Federal Aviation Administration (“FAA”) certificates. The assumptions the Company used to estimate the fair value of our reporting units are based on historical performance, as well as forecasts used in our current business plan and require considerable management judgment.

The Company’s goodwill and intangible assets as defined by ASC 350 is related to our subsidiaries, AerSale Component Solutions (d/b/a AerSale Landing Gear Solutions) (“ALGS”), Avborne Component Solutions (d/b/a AerSale Component Solutions) (“ACS”), and Aircraft Composite Technologies (“ACT”), which are included in the TechOps segment, as well as Qwest, which is included under the Asset Management Solutions segment.

Goodwill and other intangibles as of the below dates are (in thousands):

    

September 30, 2023

    

December 31, 2022

Qwest:

FAA Certifications

$

724

$

724

Goodwill

 

13,416

 

13,416

ALGS:

 

  

 

  

FAA Certifications

 

710

 

710

Goodwill

 

379

 

379

ACS:

 

  

 

  

Trademarks

 

600

 

600

FAA Certifications

 

7,300

 

7,300

Goodwill

 

63

 

63

ACT:

 

Trademarks

 

200

 

200

FAA Certificates

 

796

 

796

Goodwill

 

6,002

 

6,002

Total intangible assets with indefinite lives

$

30,190

$

30,190

10

The Company performed its annual quantitative impairment analysis on the indefinite lived intangible assets as of July 1, 2023 and 2022 and concluded there was no impairment.

Intangible assets with definite useful lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets with definite lives as of the below dates are as follows (in thousands):