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Table of Contents

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, 2021

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)

121 Alhambra Plaza Suite 1700

Coral Gables, FL

33134

(Address of Principal Executive Offices)

(Zip Code)

(305) 764-3200

Registrant’s telephone number, including area code

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 Global Market

Redeemable warrants, each warrant exercisable for one share of Common Stock at an exercise price of $11.50

ASLEW

The Nasdaq Global 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 8, 2021 was 44,984,718.

Table of Contents

TABLE OF CONTENTS

Page

Forward-Looking Statements

i

PART I – FINANCIAL INFORMATION

1

Item 1.

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II – OTHER INFORMATION

29

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

Signatures

33

Table of Contents

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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report, including statements relating to the benefits of the Business Combination (as defined herein), our financial performance following the Business Combination, the impact of the COVID-19 pandemic on our business, changes in the market for our services, changes in applicable laws or regulations; our ability to launch new services and products or to profitably expand into new markets, and the possibility that we may be adversely affected by 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 impact of the COVID-19 pandemic on our business; factors that adversely impact the commercial aviation industry; fluctuation of market values for our aviation products; our inability to repossess Flight Equipment (as defined herein) when a lessee defaults and the cost of remarketing and releasing such repossessed Flight Equipment; compliance with significant government regulations; the success at our MRO (as defined herein) facilities is dependent on continued outsourcing by airlines; a shortage of skilled personnel or work stoppages; inability to obtain certain components and raw materials from suppliers; competitive pressures; risks associated with operating internationally; the value of liens on our flight equipment; ownership rights over an engine affixed to an aircraft; risks associated with business acquisitions; continued availability of financing; restrictive and financial covenants in our existing debt; product and other liability claims; risks associated with suppling equipment and services to the U.S. government; cyber or other security threats or other disruptions; compliance with environmental requirements; payment of capital expenditures; our lack of ownership of certain intellectual property that is important to our business; dependence on our facilities; damage to our reputation by improper conduct of employees, agents, and others; limitations on employee compensation as a result of the CARES Act; the loss of certain key employees; insolvency of any of our customers; exposure to intellectual property litigation; and the factors described under the section titled “Risk Factors” in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 16, 2021 (together with our amended Annual Report on Form 10-K/A filed with the SEC on May 4, 2021, the “Annual Report”).

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

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

    

September 30, 

    

December 31, 

2021

2020

(Unaudited)

Current assets:

Cash and cash equivalents

$

61,852

$

29,317

Accounts receivable, net of allowance for doubtful accounts of $1,408 and $1,652 as of September 30, 2021 and December 31, 2020

 

43,758

 

50,215

Inventory:

Aircraft, airframes, engines, and parts, net

 

80,106

 

85,192

Advance vendor payments

 

9,407

 

6,205

Due from related party

 

-

 

474

Deposits, prepaid expenses, and other current assets

 

4,571

 

7,560

Total current assets

 

199,694

 

178,963

Fixed assets:

 

Aircraft and engines held for lease, net

 

94,776

 

86,844

Property and equipment, net

 

7,404

 

7,839

Inventory:

 

Aircraft, airframes, engines, and parts, net

 

77,974

 

55,463

Deferred income taxes

 

6,696

 

5,708

Deferred financing costs, net

 

1,114

 

367

Deferred customer incentives and other assets, net

 

277

 

271

Due from related party

 

5,421

 

5,450

Goodwill

 

19,860

 

19,860

Other intangible assets, net

 

26,773

 

28,364

Total assets

$

439,989

$

389,129

Current liabilities:

 

  

Accounts payable

$

16,307

$

16,364

Accrued expenses

 

7,465

 

8,576

Income tax payable

 

298

 

1,324

Lessee and customer purchase deposits

 

16,972

 

2,820

Deferred revenue

 

2,958

 

2,595

Total current liabilities

 

44,000

 

31,679

Long-term lease deposits

 

2,517

 

1,145

Maintenance deposit payments and other liabilities

 

3,991

 

3,664

Warrant liability

3,921

1,186

Total liabilities

54,429

37,674

Commitments and contingencies

 

  

Stockholders’ equity:

 

  

Common stock, $0.0001 par value. Authorized 200,000,000 shares; issued and outstanding 42,949,261 and 41,046,216 shares

 

4

 

4

Additional paid-in capital

 

301,768

 

292,593

Retained earnings

 

83,788

 

58,858

Total equity

 

385,560

 

351,455

Total liabilities and stockholders’ equity

$

439,989

$

389,129

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AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

    

    

2021

    

2020

    

2021

    

2020

    

Revenue:

Products

$

43,613

$

9,922

$

124,914

$

37,726

Leasing

 

8,002

 

20,627

 

20,624

 

47,637

Services

 

21,683

 

26,516

 

78,116

 

74,193

Total revenue

 

73,298

 

57,065

 

223,654

 

159,556

Cost of sales and operating expenses:

Cost of products

 

30,954

 

6,657

 

85,147

 

41,207

Cost of leasing

 

2,436

 

5,073

 

7,667

 

21,316

Cost of services

 

15,276

 

18,830

 

55,635

 

57,370

Total cost of sales

 

48,666

 

30,560

 

148,449

 

119,893

Gross profit

 

24,632

 

26,505

 

75,205

 

39,663

Selling, general, and administrative expenses

 

22,803

 

13,377

 

53,079

 

40,614

Payroll support program proceeds

 

-

 

(6,347)

 

(14,768)

 

(12,693)

Transaction costs incurred

 

-

 

219

 

-

 

434

Income from operations

 

1,829

 

19,256

 

36,894

 

11,308

Other income (expenses):

 

 

 

 

Interest expense, net

 

(241)

 

(267)

 

(750)

 

(1,307)

Other income, net

 

9

 

206

 

258

 

358

Change in fair value of warrant liability

(2,104)

-

(2,735)

-

Total other expenses

 

(2,336)

 

(61)

 

(3,227)

 

(949)

(Loss) income before income tax provision

 

(507)

 

19,195

 

33,667

 

10,359

Income tax expense

 

(1,129)

 

(4,476)

 

(8,737)

 

(2,519)

Net (loss) income

$

(1,636)

$

14,719

$

24,930

$

7,840

(Loss) earnings per share - basic

$

(0.04)

$

397.70

$

0.59

$

211.83

(Loss) earnings per share - diluted

$

(0.04)

$

397.70

$

0.59

$

211.83

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AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

For the three and nine months ended September 30, 2021 and 2020

(in thousands, except per share data)

(Unaudited)

Total

Common stock

Additional

Retained

stockholders’

    

Amount

    

Shares

    

paid-in capital

    

earnings

    

 equity

Balance at December 31, 2020

$

4

41,046,216

$

292,593

$

58,858

$

351,455

Issuance of Earn-Out shares

1,855,634

(269)

(269)

Shares issued upon exercise of warrants

47,411

545

545

Net income

 

 

 

10,018

 

10,018

Balance at March 31, 2021

$

4

42,949,261

$

292,869

$

68,876

$

361,749

Stock-based compensation

150

150

Net income

 

 

 

16,548

 

16,548

Balance at June 30, 2021

4

42,949,261

293,019

85,424

378,447

Stock-based compensation

8,749

8,749

Net loss

(1,636)

(1,636)

Balance at September 30, 2021

$

4

42,949,261

$

301,768

$

83,788

$

385,560

Total

Common stock

Additional

Retained

stockholders’

    

Amount

    

Shares

    

paid-in capital

    

earnings

    

 equity

Balance at December 31, 2019

$

1

 

5,285,054

$

243,221

$

50,764

$

293,986

Net income

1,059

1,059

Balance at March 31, 2020

$

1

5,285,054

$

243,221

$

51,823

$

295,045

Net loss

(7,938)

(7,938)

Balance at June 30, 2020

$

1

5,285,054

$

243,221

$

43,885

$

287,107

Net income

14,719

14,719

Balance at September 30, 2020

$

1

5,285,054

$

243,221

$

58,604

$

301,826

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AERSALE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands, except per share data)

(Unaudited)

    

Nine Months Ended September 30, 

    

2021

    

2020

Cash flows from operating activities:

Net income

$

24,930

$

7,840

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

9,868

 

20,513

Amortization of debt issuance costs

 

366

 

573

Inventory reserve

 

5,033

 

13,427

Impairment of aircraft held for lease

-

3,036

Provision for doubtful accounts

 

(122)

 

262

Deferred income taxes

 

(988)

 

1,340

Change in fair value of warrant liability

2,735

-

Stock-based compensation

8,899

-

Changes in operating assets and liabilities, net of acquisition:

 

 

  

Accounts receivable

 

5,279

 

8,977

Inventory

 

(44,104)

 

(28,617)

Deposits, prepaid expenses, and other current assets

 

3,628

 

3,309

Deferred customer incentives and other assets

 

-

 

56

Advance vendor payments

 

(3,201)

 

(7,283)

Accounts payable

 

(57)

 

(1,413)

Income tax payable

(987)

-

Accrued expenses

 

(2,234)

 

(869)

Deferred revenue

 

363

 

(2,935)

Lessee and customer purchase deposits

 

16,649

 

1,356

Other liabilities

 

327

 

414

Net cash provided by operating activities

 

26,384

 

19,986

Cash flows from investing activities:

 

  

 

  

Business acquisition

 

-

 

(16,976)

Proceeds from sale of assets

 

6,995

 

3,100

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

 

(60)

 

(1,227)

Purchase of property and equipment

 

(1,060)

 

(1,594)

Net cash provided by (used in) investing activities

 

5,875

 

(16,697)

Cash flows from financing activities:

 

  

 

  

Repayments of 8% Senior Secured Notes

 

-

 

(3,424)

Proceeds from Revolving Credit Facility

 

-

 

104,634

Repayments of Revolving Credit Facility

 

-

 

(104,634)

Cash paid for employee taxes on withholding shares

(269)

-

Proceeds from exercise of warrants

545

-

Net cash provided by (used in) financing activities

 

276

 

(3,424)

Increase (decrease) in cash and cash equivalents

 

32,535

 

(135)

Cash and cash equivalents, beginning of period

 

29,317

 

17,505

Cash and cash equivalents, end of period

$

61,852

$

17,370

Supplemental disclosure of cash activities

 

 

Income taxes

8,095

2,284

Interest

452

749

Supplemental disclosure of noncash investing activities

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

14,650

(6,779)

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AERSALE CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2021

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 the Company survived the merger and became the successor issuer to Monocle by operation of Rule 12g-3 under the Exchange Act.

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 will continue as a wholly owned subsidiary of the Company.

The Company’s corporate headquarters are based in Miami, Florida, with additional offices, hangars, and warehouses 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 accounting principles Generally Accepted 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 (“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 Annual Report, wherein a more complete discussion of significant accounting policies and certain other information can be found.

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Revenue Recognition

Products — Used Serviceable Material Sales (“USM”)

Revenues from sales of USM are measured based on consideration specified within customer contracts, and excludes any sales commissions and taxes collected and remitted to government agencies. The Company recognizes revenue when performance obligations are satisfied by transferring control of a product or service 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, the buyer is responsible for any loss in transit and the Company has a legal right to payment for the spare parts once shipped. The Company generally sells its 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”) Topic 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 believes the whole asset holds standalone value to the customer as it is not dependent on any other services for functionality purposes and therefore is distinct within the context of the contract and as described in ASC 606-10. Accordingly, 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 a customer’s acceptance of the whole asset on the date of the transfer.

Leasing Revenues

The Company leases 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 payment 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 payments 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. Payment terms for leased flight equipment are due upon receipt.

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Service Revenues

Service revenues are recognized as performance obligations when they are fulfilled and the benefits are transferred to the customer. At contract inception, the Company evaluates if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, the Company’s 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. Variable consideration that cannot be reasonably estimated is recorded when known.

For most service contracts, performance obligations are satisfied over time as work progresses based on transfer of control of products and services to our customers. The Company receives payments from our customers based on billing schedules or contract terms.

For performance obligations that are satisfied over time, the Company measures progress in a manner that depicts the performance of transferring control to the customer. As such, the Company utilizes 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. The Company is 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 the Company’s Maintenance, Repair and Overhaul (“MRO”) contracts, if the contract is terminated for convenience, the Company is 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 the Company provides MRO services.

The Company has 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, are included in cost of sales in our condensed consolidated statements of operations and are not considered a performance obligation to our customers. The Company’s reported sales on our condensed consolidated statements of operations are net of any sales or related non income taxes. The Company also utilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value the Company is providing to the customer.

Revision of Prior Period Financial Statements

During the nine months ended September 30, 2021, the Company identified and corrected immaterial errors that affected certain of its previously issued consolidated financial statements. These errors related to the misapplication of generally accepted accounting principles in the United States in connection with the classification of the Company’s private warrants as equity. The SEC released a Public Statement on April 12, 2021 noting that when one or more features common to warrants in SPAC transactions is included in a warrant, the warrant “should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.” Following review of the SEC’s statement, the Company concluded that its private warrants do not meet the conditions to be classified as equity and instead, the private

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warrants meet the definition of a derivative under ASC 815 “Derivatives and Hedging.” This requires the Company to record the private warrants as a liability measured at fair value on the Company’s Condensed Consolidated Balance Sheets with the changes in fair value each period reported in earnings. As a result, in the three and nine months ended September 30, 2021, the Company recorded $2.1 million and $2.7 million, respectively, reflected as change in fair value of warrant liability. Accordingly, the Company revised its December 31, 2020 financial statements by recognizing the private warrants as a liability upon the consummation of the Business Combination on December 22, 2020 in the amount of $1.2 million with a corresponding reduction to additional paid-in capital and retained earnings of $0.8 million and $0.4 million, respectively.

The Company determined the impact of the error related to the accounting treatment of private warrants had an immaterial impact with respect to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020. However, in order to correctly present the immaterial errors noted above, previously issued comparative financial statements have been revised as of the quarter ended March 31, 2021.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. In July 2018, FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” Although early adoption is permitted, the Company plans to adopt Topic 842 during the first quarter of 2022, on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”), “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments — Credit Losses,” which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will become effective for the Company beginning January 1, 2023, with early adoption permitted, on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.

Payroll Support Programs

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and is intended to assist the economy by issuing a relief package to preserve jobs in industries adversely impacted by the COVID-19 outbreak. On June 8, 2020, the Company entered into an agreement with the U.S. Department of the Treasury to receive $16.4 million in emergency relief through the CARES Act Payroll Support Program to be paid in installments. The proceeds of these grants are recorded within accrued expenses when received and are recognized as payroll support program proceeds in the condensed consolidated statement of operations over the periods that the funds are intended to compensate. During the three months ended September 30, 2020, we recognized $6.3 million under the CARES Act Payroll Support Program. During the nine months ended September 30, 2021 and 2020, we recognized $3.7 million and $12.7 million under the CARES Act Payroll Support Program, respectively.

As part of the Payroll Support Program Extension Law, we entered into a new agreement with the U.S. Department of the Treasury on March 4, 2021 for the receipt of relief funds of $5.5 million. No amounts were received or recognized under the Payroll Support Program Extension Law during the three months ended September 30, 2021. During the nine months ended September 30, 2021, we received and recognized $5.5 million in grant proceeds under the Payroll Support Program Extension Law.

Pursuant to the American Rescue Plan Act of 2021 (“ARP”), we entered into a new agreement with the U.S. Department of the Treasury on April 16, 2021 for the receipt of relief funds of an additional $5.5 million. No amounts

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were received or recognized under the American Rescue Plan Act during the three months ended September 30, 2021.  During the nine months ended September 30, 2021, we received and recognized $5.5 million in grant proceeds under the American Rescue Plan Act.

In connection with the financial assistance we have received under the Payroll Support Program, we are required to comply with certain provisions of the 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 involuntary terminations, furloughs and reductions in employee pay rates and benefits from the signing date of the Payroll Support Program agreement through September 30, 2021. In addition, we are subject to provisions prohibiting the repurchase of common stock and the payment of common stock dividends through September 30, 2022, as well as limitations on the payment of certain employee compensation through April 1, 2023. These restrictions may affect our operations and if we do not comply with these provisions, we may be required to reimburse up to 100% of any previously received relief funds. As of September 30, 2021, we have been in compliance with these provisions.

NOTE C — SIGNIFICANT RISKS AND UNCERTAINTIES

Impact of Coronavirus (“COVID-19”)

COVID-19 was declared a global health pandemic by the World Health Organization. In early March 2020, as AerSale began to see the impacts to its customers, the Company took decisive actions to position itself for the short-term impacts of COVID-19, while allowing the Company the flexibility to quickly pursue the opportunities that would follow. The Company cancelled approximately $20 million of feedstock opportunities under negotiation, as it evaluated the impacts of COVID-19 on asset valuations. The Company also reexamined its structure and executed measures in 2020 to adjust the business through strategic headcount reductions and suspension of various other initiatives, resulting in reduced costs of over $20 million on an annualized basis.

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, and future restrictions due to different strains, or variants of COVID-19, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown.

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.

Contract assets are as follows (in thousands):

    

September 30, 2021

    

December 31, 2020

    

Change

Contract assets

$

14,912

$

20,431

$

(5,519)

Contract assets are reported within accounts receivable on our condensed consolidated balance sheets. Changes in contract assets primarily results from the timing difference between our performance of services. Contract liabilities are reported as deferred revenue on our condensed consolidated balance sheets and amounted to $2.6 million as of December 31, 2020, of which $2.2 million was related to contract liabilities for services performed. For the three and nine months ended September 30, 2021, the Company recognized as revenue $0.6 million and $2.0 million of contract liabilities for services performed as the timing between customer payments and our performance of the services is generally no longer than six months.

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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, 2021 and 2020 (in thousands):

    

Three months ended September 30, 

    

Nine months ended September 30, 

    

    

2021

    

2021

    

Asset Management

    

    

Asset Management

    

    

    

 Solutions

    

Tech Ops

    

Total Revenues

    

 Solutions

    

Tech Ops

    

Total Revenues

    

USM

$

13,466

$

1,315

$

14,781

$

33,935

$

3,574

$

37,509

Whole asset sales

 

27,408

 

-

 

27,408

 

83,868

 

-

 

83,868

Engineered solutions

 

-

 

1,424

 

1,424

 

-

 

3,537

 

3,537

Total products

 

40,874

 

2,739

 

43,613

 

117,803

 

7,111

 

124,914

Leasing

 

8,002

 

-

 

8,002

 

20,624

 

-

 

20,624

Services

 

-

 

21,683

 

21,683

 

-

 

78,116

 

78,116

Total revenues

$

48,876

$

24,422

$

73,298

$

138,427

$

85,227

$

223,654

    

Three months ended September 30, 

    

Nine months ended September 30, 

    

    

2020

    

2020

    

Asset Management

Asset Management

    

 Solutions

    

Tech Ops

    

Total Revenues

    

 Solutions

    

Tech Ops

    

Total Revenues

    

USM

$

9,025

$

515

$

9,540

$

30,594

$

1,989

$

32,583

Whole asset sales

-

-

-

3,103

-

3,103

Engineered solutions

 

-

 

382

 

382

 

-

 

2,040

 

2,040

Total products

 

9,025

 

897

 

9,922

 

33,697

 

4,029

 

37,726

Leasing

 

20,627

 

-

 

20,627

 

47,637

 

-

 

47,637

Services

 

-

 

26,516

 

26,516

 

-

 

74,193

 

74,193

Total revenues

$

29,652

$

27,413

$

57,065

$

81,334

$

78,222

$

159,556

NOTE E — INVENTORY

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

    

September 30, 2021

    

December 31, 2020

Used serviceable materials

$

68,222

$

63,277

Work-in-process

13,622

20,611

Whole assets

76,236

56,767

$

158,080

140,655

Less short term

 

(80,106)

 

(85,192)

Long term

$

77,974

$

55,463

The Company did not record inventory reserve for the three months ended September 30, 2021 and 2020, respectively, and recorded an inventory reserve of $4.8 million and $12.9 million for the nine months ended September 30, 2021 and 2020, respectively. These amounts are included in cost of products in the accompanying condensed consolidated statements of operations, due to the Company’s evaluation of the inventory’s net realizable value.

The Company recorded inventory scrap loss reserves of $0.1 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively. The Company recorded inventory scrap loss reserves of $0.2 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively, each of which was 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, 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

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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 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 Tech Ops 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, 2021

    

December 31, 2020

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

As a result of the COVID-19 pandemic and its impact on the aviation industry, the Company performed a qualitative impairment analysis as of June 30, 2020 and updated the analysis through September 30, 2020 on the indefinite lived intangible assets, as well as the Asset Management Solutions and Tech Ops segment goodwill and concluded there was no impairment for the nine month period ended September 30, 2020. The Company performed its annual quantitative impairment analysis as of July 1, 2021 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):

    

Useful Life

    

    

 In Years

September 30, 2021

December 31, 2020

Qwest:

Customer relationships

10

$

7,355

$

8,083

ALGS:

  

 

 

Customer relationships

10

 

75

 

90

ACS:

  

 

  

 

Customer relationships

10

 

1,505

 

1,663

ACT:

  

 

 

Customer relationships

10

 

7,508

 

8,198

Total intangible assets with definite lives

$

16,443

$

18,034

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Total amortization expense amounted to $0.5 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively. Total amortization expense amounted to $1.6 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively. Accumulated amortization amounted to $4.6 million and $3.0 million as of September 30, 2021 and December 31, 2020, respectively.

Other intangible assets are reviewed at least annually or more frequently if any event or change in circumstance indicates that an impairment may have occurred. As a result of the COVID-19 pandemic and its impact on the aviation industry, the Company performed an impairment analysis as of June 30, 2020 on the definite-lived intangible assets and concluded there was no impairment.

There was no goodwill activity during the nine months ended September 30, 2021. For the nine months ended September 30, 2020, goodwill increased by $6.0 million due to the acquisition of ACT.

NOTE G — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, as of the below dates consisted of the following (in thousands):

    

Useful Life

    

    

 In Years

September 30, 2021

December 31, 2020

Tooling and equipment

 

7 - 15

$

13,400

$

13,465

Furniture and other equipment

 

5

 

7,785

 

7,379

Computer software

 

5

 

1,987

 

2,378

Leasehold improvements

 

3 - 6

 

3,467

 

3,314

Equipment under capital lease

 

5

 

192

 

197

 

26,831

 

26,733

Less accumulated depreciation

 

(19,427)

 

(18,894)

$

7,404

$

7,839

Depreciation expense, which includes amortization of equipment under capital lease, amounted to $0.5 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense, which includes amortization of equipment under capital lease, amounted to $1.5 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively.

NOTE H — LEASE RENTAL REVENUES AND AIRCRAFT AND ENGINES HELD FOR LEASE

Aircraft and engines held for operating leases, net, as of the below dates consisted of the following (in thousands):

    

September 30, 2021

    

December 31, 2020

Aircraft and engines held for operating leases

$

228,048

$

228,942

Less accumulated depreciation

 

(133,272)

 

(142,098)

$

94,776

$

86,844

Total depreciation expense amounted to $2.1 million and $4.9 million for the three months ended September 30, 2021 and 2020, respectively. Total depreciation expense amounted to $6.8 million and $17.3 million for the nine months ended September 30, 2021 and 2020, respectively, and is included in cost of leasing in the condensed consolidated statements of operations.

Supplemental rents recognized as revenue totaled $2.3 million and $3.0 million for the three months ended September 30, 2021 and 2020, respectively. Supplemental rents recognized as revenue totaled $5.2 million and $10.6 million for the nine months ended September 30, 2021 and 2020, respectively.

The Company’s current operating lease agreements for flight equipment on lease expire over the next month to two years. The amounts in the following table are based upon the assumption that flight equipment under operating leases

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will remain on lease for the length of time specified by the respective lease agreements. Minimum future annual lease rentals contracted to be received under existing operating leases of flight equipment at were as follows (in thousands):

Year ending December 31:

    

Remainder of 2021

$

6,900

2022

 

15,616

2023

 

2,875

Total minimum lease payments

$

25,391

NOTE I — ACCRUED EXPENSES

The following is a summary of the components of accrued expenses as of the below dates (in thousands):