UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ___________ to ____________.
Commission file number
(Exact name of registrant as specified in its charter)
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incorporation or organization) | ||
(Address of Principal Executive Offices) | (Zip Code) |
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Registrant’s telephone number, including area code
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(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 |
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The |
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.
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).
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 | ☐ | ☒ | |
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
The number of shares of Registrant’s common stock outstanding as of August 4, 2023 was
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 (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, statements about the anticipated or potential impact of COVID-19 and any other pandemics on our business; 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)
| June 30, |
| December 31, | |||
2023 | 2022 | |||||
(Unaudited) | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | $ | ||||
Accounts receivable, net of allowance for credit losses of $ |
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Inventory: | ||||||
Aircraft, airframes, engines, and parts, net |
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Advance vendor payments |
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Deposits, prepaid expenses, and other current assets |
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Total current assets |
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Fixed assets: |
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Aircraft and engines held for lease, net |
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Property and equipment, net |
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Inventory: |
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Aircraft, airframes, engines, and parts, net |
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Operating lease right-of-use assets |
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Deferred income taxes |
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Deferred financing costs, net |
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Deferred customer incentives and other assets, net |
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Goodwill |
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Other intangible assets, net |
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Total assets | $ | $ | ||||
Current liabilities: |
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Accounts payable | $ | $ | ||||
Accrued expenses |
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Lessee and customer purchase deposits |
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Current operating lease liabilities | ||||||
Deferred revenue |
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Total current liabilities |
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Long-term debt |
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Long-term lease deposits |
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Long-term operating lease liabilities | ||||||
Maintenance deposit payments and other liabilities |
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Warrant liability | ||||||
Total liabilities | ||||||
Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and stockholders’ equity | $ | $ | ||||
See accompanying notes to condensed consolidated financial statements.
1
AERSALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2023 |
| 2022 |
| 2023 |
| 2022 |
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Revenue: | |||||||||||||
Products | $ | $ | $ | $ | |||||||||
Leasing |
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Services |
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Total revenue |
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Cost of sales and operating expenses: | |||||||||||||
Cost of products |
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Cost of leasing |
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Cost of services |
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Total cost of sales |
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Gross profit |
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Selling, general, and administrative expenses |
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(Loss) income from operations |
| ( |
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| ( |
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Other income (expenses): |
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Interest income (expense), net |
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| ( |
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| ( | |||||||
Other income, net |
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Change in fair value of warrant liability | |||||||||||||
Total other income |
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(Loss) income before income tax provision |
| ( |
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| ( |
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Income tax benefit (expense) |
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| ( |
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| ( | |||||||
Net (loss) income | $ | ( | $ | $ | ( | $ | |||||||
(Loss) earnings per share: | |||||||||||||
Basic | $ | ( | $ | | $ | ( | $ | | |||||
Diluted | $ | ( | $ | | $ | ( | $ | | |||||
Weighted average shares outstanding: | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | | |||||||||
See accompanying notes to condensed consolidated financial statements.
2
AERSALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
For the three and six months ended June 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 | $ | | $ | $ | $ | |||||||||
Share-based compensation | - | - | - | |||||||||||
Shares issued under the 2020 Equity Incentive Plan | - | | - | - | - | |||||||||
Shares surrendered for tax withholdings on equity awards | - | - | ( | - | ( | |||||||||
Net income |
| - | - |
| - |
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Balance at March 31, 2023 | $ | | $ | $ | $ | |||||||||
Share-based compensation | - | - | - | |||||||||||
Shares issued under the 2020 Employee Stock Purchase Plan | - | | - | |||||||||||
Shares issued under the 2020 Equity Incentive Plan | - | | - | - | - | |||||||||
Net (loss) |
| - | - |
| - |
| ( |
| ( | |||||
Balance at June 30, 2023 | $ | | $ | $ | $ | |||||||||
Total | ||||||||||||||
Common stock | Additional | Retained | stockholders’ | |||||||||||
| Amount |
| Shares |
| paid-in capital |
| earnings |
| equity | |||||
Balance at December 31, 2021 | $ |
| | $ | $ | $ | ||||||||
Share-based compensation | - | - | - | |||||||||||
Shares issued under the 2020 Employee Stock Purchase Plan | - | | - | |||||||||||
Shares issued under the 2020 Equity Incentive Plan | - | | - | - | - | |||||||||
Net income | - | - | - | |||||||||||
Balance at March 31, 2022 | $ | | $ | $ | $ | |||||||||
Share-based compensation | - | - | - | |||||||||||
Shares issued under the 2020 Employee Stock Purchase Plan | - | | - | |||||||||||
Net income | - | - | - | |||||||||||
Balance at June 30, 2022 | $ | | $ | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
AERSALE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Six Months Ended June 30, | |||||
2023 |
| 2022 | ||||
Cash flows from operating activities: | ||||||
Net (loss) income | $ | ( | $ | |||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||
Depreciation and amortization |
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Amortization of debt issuance costs |
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Amortization of operating lease assets |
| - | ||||
Inventory reserve |
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Impairment of aircraft held for lease | - | |||||
Provision for credit losses |
| - |
| ( | ||
Deferred income taxes |
| ( |
| ( | ||
Change in fair value of warrant liability | ( | ( | ||||
Share-based compensation | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
| ( |
| ( | ||
Inventory |
| ( |
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Deposits, prepaid expenses, and other current assets |
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| ( | |||
Deferred customer incentives and other assets |
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Advance vendor payments |
| ( |
| ( | ||
Accounts payable |
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Income tax payable | - | |||||
Accrued expenses |
| ( |
| ( | ||
Deferred revenue |
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Lessee and customer purchase deposits |
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| ( | |||
Other liabilities |
| ( |
| ( | ||
Net cash (used in) provided by operating activities |
| ( |
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Cash flows from investing activities: |
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Proceeds from sale of assets |
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Acquisition of aircraft and engines held for lease, including capitalized cost |
| - |
| ( | ||
Purchase of property and equipment |
| ( |
| ( | ||
Net cash provided by investing activities |
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Cash flows from financing activities: |
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Proceeds from long-term debt |
| - | ||||
Taxes paid related to net share settlement of equity awards | ( | - | ||||
Proceeds from the issuance of Employee Stock Purchase Plan shares | ||||||
Net cash provided by financing activities |
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(Decrease) increase in cash and cash equivalents |
| ( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | $ | ||||
Supplemental disclosure of cash activities |
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Income tax payments, net | ||||||
Interest paid | ||||||
Supplemental disclosure of noncash investing activities | ||||||
Reclassification of aircraft and aircraft engines inventory to (from) aircraft and engine held for lease, net | ( | |||||
Reclassification of customer purchase deposits to sale of assets | - | |||||
See accompanying notes to condensed consolidated financial statements.
4
AERSALE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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.
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 six months ended June 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 June 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
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):
| June 30, 2023 |
| December 31, 2022 |
| Change | ||||
Contract assets | $ | $ | $ | ( | |||||
Contract assets are reported within deposits, prepaid expenses, and other current assets on our Condensed Consolidated Balance Sheets. Changes in contract assets primarily results 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 $
8
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 six months ended June 30, 2023 and 2022 (in thousands):
| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||||||||
| 2023 |
| 2023 | |||||||||||||||
Asset Management |
|
| Asset Management |
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| |||||||||||||
| Solutions |
| Tech Ops |
| Total Revenues |
| Solutions |
| TechOps |
| Total Revenues | |||||||
USM | $ | $ | $ | $ | $ | $ | ||||||||||||
Whole asset sales |
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Engineered solutions |
| - |
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| - |
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Total products |
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Leasing |
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| - |
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| - |
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Services |
| - |
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| - |
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Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||
|
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||||
|
| 2022 |
| 2022 | ||||||||||||||
Asset Management | Asset Management | |||||||||||||||||
| Solutions |
| Tech Ops |
| Total Revenues |
| Solutions |
| TechOps |
| Total Revenues | |||||||
USM | $ | $ | $ | $ | $ | $ | ||||||||||||
Whole asset sales | ( | |||||||||||||||||
Engineered solutions |
| - |
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| - |
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Total products |
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Leasing |
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| - |
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| - |
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Services |
| - |
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| - |
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Total revenues | $ | $ | $ | $ | $ | $ | ||||||||||||
NOTE E — INVENTORY
Following are the major classes of inventory as of the below dates (in thousands):
| June 30, 2023 |
| December 31, 2022 | |||
Used serviceable materials | $ | $ | ||||
Work-in-process | ||||||
Whole assets | ||||||
$ | ||||||
Less short term |
| ( |
| ( | ||
Long term | $ | $ | ||||
The Company recorded inventory scrap loss reserves of $
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.
9
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):
| June 30, 2023 |
| December 31, 2022 | |||
Qwest: | ||||||
FAA Certifications | $ | $ | | |||
Goodwill |
|
| | |||
ALGS: |
|
|
|
| ||
FAA Certifications |
|
| | |||
Goodwill |
|
| | |||
ACS: |
|
|
|
| ||
Trademarks |
|
| | |||
FAA Certifications |
|
| | |||
Goodwill |
|
| | |||
ACT: |
|
|
| |||
Trademarks |
|
| | |||
FAA Certificates |
|
| | |||
Goodwill |
|
| | |||
Total intangible assets with indefinite lives | $ | $ | | |||
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 | June 30, 2023 | December 31, 2022 | ||||||
Qwest: | ||||||||
Customer relationships | $ | $ | ||||||
ALGS: |
|
|
| |||||
Customer relationships |
|
| ||||||
ACS: |
|
|
|
|
| |||
Customer relationships |
|
| ||||||
ACT: |
|
|
| |||||
Customer relationships |
|
| ||||||
Total intangible assets with definite lives | $ | $ | ||||||
Total amortization expense amounted to $
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.
10
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 | June 30, 2023 | December 31, 2022 | ||||||
Tooling and equipment |
| - | $ | $ | ||||
Furniture and other equipment |
|
|
| |||||
Computer software |
|
|
| |||||
Leasehold improvements |
|
|
| |||||
Equipment under capital lease |
|
|
| |||||
Flight equipment held for R&D | - | |||||||
|
| |||||||
Less accumulated depreciation |
| ( |
| ( | ||||
$ | $ | |||||||
Depreciation expense, which includes amortization of equipment under capital lease, amounted to $
NOTE H — LEASE RENTAL REVENUES AND AIRCRAFT AND ENGINES HELD FOR LEASE
Aircraft and engines held for lease, net, as of the below dates consisted of the following (in thousands):
| June 30, 2023 |
| December 31, 2022 | |||
Aircraft and engines held for lease | $ | $ | ||||
Less accumulated depreciation |
| ( |
| ( | ||
$ | $ | |||||
Total depreciation expense amounted to $
The Company did not record any impairment of Flight Equipment for the three and six months ended June 30, 2023. The Company recorded impairment of Flight Equipment in the amount of $
Supplemental rents recognized as revenue totaled $
The Company’s current operating lease agreements for leased Flight Equipment expire over the next
Year ending December 31: |
| ||
Remainder of 2023 | $ | ||
2024 | |||
2025 |
| ||
Total minimum lease payments | $ |
11
NOTE I — ACCRUED EXPENSES
The following is a summary of the components of accrued expenses as of the below dates (in thousands):
| June 30, 2023 |
| December 31, 2022 | |||
Accrued compensation and related benefits | $ | $ | ||||
Accrued legal fees |
|
| ||||
Commission fee accrual |
|
| ||||
Accrued federal, state and local taxes and fees |
|
| ||||
Other |
|
| ||||
$ | $ | |||||
NOTE J – WARRANT LIABILITY
Warrants to purchase a total of
The Private Warrants include provisions that affect the settlement amount. Such variables are outside of those used to determine the fair value of a fixed-for-fixed instrument, and as such, the Private Warrants do not meet the criteria for equity treatment under guidance contained in ASC Topic 815, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock.” The Company classifies the Private Warrants as a liability at their fair value subject to re-measurement at each balance sheet date and adjusted at each reporting period until exercised or expired, and any change in fair value is recognized in the Company's Condensed Consolidated Statements of Operations. The fair value of the Private Warrants is determined using the Black-Scholes option pricing model. The following table represents the assumptions used in determining the fair value of the Private Warrants as of June 30, 2023:
| June 30, 2023 | |
Risk-free interest rate | ||
Expected volatility of common stock | ||
Dividend yield | - | |
Expected option term in years | |
The significant assumptions utilized in the Black-Scholes calculation consist of interest rate for U.S. Treasury Bonds, as published by the U.S. Federal Reserve, and expected volatility estimated using historical daily volatility of guideline public companies.
The warrant liability income recognized in the Company's Condensed Consolidated Statements of Operations related to the change in fair value of warrant liability was $
12
NOTE K — EARNINGS PER SHARE
The computation of basic and diluted earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during each period.
The following table provides a reconciliation of the computation for basic and diluted earnings per share for the three and six months ended June 30, 2023 and 2022, respectively (in thousands, except share and per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Net (loss) income | $ | ( | $ | $ | ( | $ | ||||||
Change in fair value of warrant liability | ( |
| ( |
| ( |
| ( | |||||
Net (loss) income for EPS - Diluted | $ | ( | $ | $ | ( | $ | ||||||
Weighted-average number of shares outstanding - basic |
| |
| |
| |
| | ||||
Additional shares from assumed stock-settled restricted stock units | - | | - | | ||||||||
Additional shares from assumed exercise of warrants | | | | | ||||||||
Weighted-average number of shares outstanding - diluted |
| | |
| | | ||||||
(Loss) earnings per share – basic: | $ | ( | $ | | $ | ( | $ | | ||||
(Loss) earnings per share – diluted: | $ | ( | $ | | $ | ( | $ | | ||||
Anti-dilutive shares/units excluded from earnings per share - diluted: | ||||||||||||
Additional shares from assumed stock-settled restricted stock units | | - | | - | ||||||||
NOTE L — BUSINESS SEGMENTS
Consistent with how our chief operating decision maker (Chairman and Chief Executive Officer) evaluates performance and utilizes gross profit as a profitability measure, the Company reports its activities in
| ● | Asset Management Solutions — comprised of activities to extract value from strategic asset acquisitions through leasing, trading, or disassembling for product sales. |
| ● | TechOps — comprised of MRO activities and product sales of internally developed engineered solutions and other serviceable products. |
The Asset Management Solutions segment 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.
The TechOps segment consists of aftermarket support and services businesses that provide maintenance support for aircraft and aircraft components, and sale of engineered solutions. Our MRO business also engages in longer term projects such as aircraft modifications, cargo conversions of wide-body aircraft, and aircraft storage. The segment also includes MRO of landing gear, thrust reversers, and other components. Cost of sales consists principally of the cost of product, direct labor, and overhead. Our engineered solutions revenue consists of sales of products internally developed as permitted by Supplemental Type Certificates issued by the FAA. These products are proprietary in nature and function as non-original equipment manufacturer solutions to airworthiness directives and other technical challenges for operators.
13
In order to develop these products, the Company engages in research and development (“R&D”) activities, which are expensed as incurred. The TechOps segment also engages in the repair and sale of USM inventory for which it has the overhaul capabilities and relationships to sell.
Gross profit is calculated by subtracting cost of sales from revenue. The assets and certain expenses related to corporate activities are not allocated to the segments. Our reportable segments are aligned principally around the differences in products and services. The segment reporting excludes the allocation of selling, general and administrative expenses, interest income (expense) and income tax expense.
Selected financial information for each segment for the three months ended June 30, 2023 and 2022 is as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2023 |
| 2022 | 2023 |
| 2022 | |||||||
Revenue |
|
| ||||||||||
Asset Management Solutions |
|
| ||||||||||
Aircraft | $ | | $ | | $ | | $ | | ||||
Engine |
| |
| |
| |
| | ||||
| |
| |
| |
| | |||||
TechOps |
|
|
|
| ||||||||
MRO services |
| |
| |
| |
| | ||||
Product sales |
| |
| |
| |
| | ||||
Whole asset sales | |
| ( |
| |
| | |||||
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | ||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2023 | 2022 | 2023 |
| 2022 | ||||||||
Gross profit |
|
|
|
| ||||||||
Asset Management Solutions |
|
|
|
| ||||||||
Aircraft | $ | | $ | | $ | | $ | | ||||
Engine |
| |
| |
| |
| | ||||
| |
| |
| |
| | |||||
TechOps |
|
|
|
| ||||||||
MRO services |
| |
| |
| |
| | ||||
Product sales |
| |
| |
| |
| | ||||
Whole asset sales | |
| ( |
| |
| | |||||
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | ||||
June 30, 2023 | December 31, 2022 | |||||||||||
Total assets | ||||||||||||
Asset Management Solutions | $ | | $ | | ||||||||
Tech Ops | | | ||||||||||
Corporate | | | ||||||||||
$ | | $ | | |||||||||
14
The following table reconciles segment gross profit to (loss) income before income tax provision for the three months ended June 30, 2023 and 2022 (in thousands):
| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||
2023 |
| 2022 | 2023 |
| 2022 | |||||||
Segment gross profit | $ | $ | $ | $ | ||||||||
Selling, general and administrative expenses |
| ( |
| ( |
| ( |
| ( | ||||
Interest income (expense), net |
|
| ( |
|
| ( | ||||||
Other income, net |
|
|
|
| ||||||||
Change in fair value of warrant liability | ||||||||||||
(Loss) income before income tax provision | $ | ( | $ | $ | ( | $ | ||||||
Intersegment sales include amounts invoiced by a segment for work performed for another segment. Amounts are based on actual work performed or products sold and agreed-upon pricing which is intended to be reflective of the arm’s length value of the contribution made by the supplying business segment. All intersegment transactions have been eliminated upon consolidation.
| Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||
2023 |
| 2022 |
| 2023 |
| 2022 | ||||||
Asset Management Solutions | $ | $ | $ | $ | ||||||||
TechOps |
|
|
|
| ||||||||
Total intersegment revenues | $ | $ | $ | $ | ||||||||
NOTE M— FINANCING ARRANGEMENTS
$
On July 20, 2018, the Company and other subsidiary borrowers signatory thereto entered into a secured amended and restated revolving credit agreement (as amended, the “Revolving Credit Agreement”), which provides for a $
As of June 30, 2023, there was
$
On June 30, 2023, the Company entered into a Property and Equipment Revolving Term Loan (“Equipment Loan”) with a total advance commitment of $
The Equipment Loan bears interest at a rate per annum equal to one-month Secured Overnight Financing Rate (“SOFR”) +
The Equipment Loan is subject to ongoing compliance by the Company in the form of various customary affirmative and negative covenants, as well as certain financial covenants. The Company was in compliance with these covenants as of June 30, 2023.
15
During the six months ended June 30, 2023 the Company borrowed $
There was
The schedule of payments on the Equipment Loan as of June 30, 2023 is as follows (in thousand):
Year ending December 31: | ||
2023 | $ | - |
2024 | ||
2025 |
| |
2026 | ||
2027 | ||
Total payments | $ |
NOTE N — STOCKHOLDERS’ EQUITY
Common Stock
The Company’s common stock, $
2020 Equity Incentive Plan
The Company maintains a 2020 Equity Incentive Plan (the “2020 Plan”) and has registered
Restricted stock unit activity under the 2020 Plan for the six months ended June 30, 2023 and 2022 was as follows:
Weighted Average | ||||||||
Weighted Average | Remaining Contractual | |||||||
| Amount |
| Grant Date Fair Value |
| Life (Years) | |||
Outstanding at December 31, 2022 | | $ | | $ | ||||
Granted | |
| | |||||
Forfeited | ( |
| | |||||
Vested | ( | | - | |||||
Outstanding June 30, 2023 | | $ | | $ | ||||
16
Weighted Average | ||||||||
Weighted Average | Remaining Contractual | |||||||
| Amount |
| Grant Date Fair Value |
| Life (Years) | |||
Outstanding at December 31, 2021 | | $ | | $ | ||||
Granted | |
| | |||||
Forfeited | ( | | ||||||
Vested | ( | | - | |||||
Outstanding June 30, 2022 | | $ | | $ | ||||
The Company’s restricted stock units include
For the restricted stock unit awards granted under the 2020 Plan containing both service and performance conditions, the Company recognizes compensation expense when the awards are considered probable of vesting. Restricted stock units are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employee have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
2020 Employee Stock Purchase Plan
The Company also maintains the Aersale Corporation 2020 Employee Stock Purchase Plan (the “ESPP”) and has registered
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
17
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 June 30, 2023 compared to the three months ended June 30, 2022
Sales and gross profit for AerSale’s two business segments for the three months ended June 30, 2023 and 2022 were as follows:
18
Three Months Ended June 30, |
| ||||||||
(in thousands, except percentages) |
| 2023 |
| 2022 |
| Percent Change |
| ||
Revenue |
|
|
|
| |||||
Asset Management Solutions |
|
|
|
|
|
| |||
Aircraft | $ | 12,053 | $ | 56,857 |
| (78.8) | % | ||
Engines |
| 25,018 |
| 57,684 |
| (56.6) | % | ||
37,071 | 114,541 |
| (67.6) | % | |||||
TechOps |
|
|
|
| |||||
MRO | 28,417 | 23,631 |
| 20.3 | % | ||||
Product Sales | 3,620 | 1,786 |
| 102.7 | % | ||||
Whole Asset Sale | 218 | (350) | (162.3) | % | |||||
32,255 | 25,067 |
| 28.7 | % | |||||
Total | $ | 69,326 | $ | 139,608 |
| (50.3) | % | ||
Three Months Ended June 30, |
| ||||||||
(in thousands, except percentages) |
| 2023 |
| 2022 |
| Percent Change |
| ||
Gross Profit |
|
|
|
| |||||
Asset Management Solutions |
|
|
|
| |||||
Aircraft | $ | 1,760 | $ | 21,934 | (92.0) | % | |||
Engines |
| 9,595 | 28,219 | (66.0) | % | ||||
11,355 | 50,153 | (77.4) | % | ||||||
TechOps |
|
|
| ||||||
MRO | 7,241 | 4,554 | 59.0 | % | |||||
Product Sales | 1,168 | 623 | 87.5 | % | |||||
Whole Asset Sale | 376 | (350) | (207.4) | % | |||||
8,785 | 4,827 | 82.0 | % | ||||||
Total | $ | 20,140 | $ | 54,980 | (63.4) | % | |||
Total revenue for the three months ended June 30, 2023 decreased $70.3 million or 50.3% compared to the three months ended June 30, 2022, driven by a decrease of $77.5 million, or 67.6%, in revenues within Asset Management Solutions, partially offset by an increase of $7.2 million, or 28.7%, in revenues within TechOps.
Asset Management Solutions
Sales in the Asset Management Solutions segment decreased $77.5 million or 67.6%, to $37.1 million for the three months ended June 30, 2023, due to a $44.8 million, or 78.8%, decrease in revenue from Aircraft; and a $32.7 million, or 56.6%, decrease in revenue from Engines. The decrease in Aircraft revenue is primarily attributable to decreased activity in the B747 and B757 product lines as a result of lower Flight Equipment sales in the amount of $43.9 million due to softer demand in the freighter market; as well as lower leasing activity totaling $2.0 million, partially offset by higher USM activity. The decrease in Engines revenue is primarily attributable to lower activity in the RB211 and CF6-80 product lines due to lower Flight Equipment sales in the amount of $31.6 million, and lower CF6-80 and PW4000 leasing activity in the amount of $2.1 million, partially offset by higher USM activity.
Cost of sales in Asset Management Solutions decreased $38.7 million or 60.1%, to $25.7 million for the three months ended June 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 $38.8 million to $11.4 million, or 77.4%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The
19
gross profit decrease is mainly attributable to lower revenue generated for the three months ended June 30, 2023, as noted above.
Aircraft gross profit margins decreased to 14.6% for the three months ended June 30, 2023, from 38.6% for the three months ended June 30, 2022 due to lower margin contribution from Flight Equipment sales. Engine gross profit margin was 38.4% for the three months ended June 30, 2023, a decrease from 48.9% for the three months ended June 30, 2022, which was primarily the result of slightly lower margins on Flight Equipment sales.
TechOps
Our revenue from TechOps increased by $7.2 million or 28.7%, to $32.3 million for the three months ended June 30, 2023, compared to the prior year period. The increase was largely driven by component repair activities, along with increased demand for heavy MRO services.
Cost of sales in TechOps increased $3.2 million or 16.0%, to $23.5 million for the three months ended June 30, 2023 compared to the prior year period. This was driven by higher cost of sales from component repair activities and heavy MRO services. Gross profit in TechOps increased $4.0 million, or 82.0% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, driven by higher gross profit of $2.6 million on MRO services. Gross profit margin increased to 27.2% for the three months ended June 30, 2023 compared to 19.3% for the three months ended June 30, 2022, and was largely attributable to higher margin on MRO services of 25.5% for the three months ended June 30, 2023 compared to 19.3% during the three months ended June 30, 2022, driven by higher margin maintenance work at our Goodyear, Arizona facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.6 million, or 15.3%, to $27.1 million for the three months ended June 30, 2023, compared to the prior year period. The increase was mostly related to higher payroll, facility and legal costs incurred in the normal course of business.
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 June 30, 2023, we recorded a $1.4 million change in fair value of warrant liability income, same as in the prior year period.
Interest Income (Expense), Net
Interest income, net was $0.4 million for the three months ended June 30, 2023, compared to $0.2 million interest expense, net for the three months ended June 30, 2022. This was primarily related to higher interest income, partially offset by unused balance fees on our second amended and restated revolving credit agreement (as amended, the “Revolving Credit Agreement”).
Income Taxes
The effective tax rate for the three months ended June 30, 2023 was 46.7% compared to 19.3% for the three months ended June 30, 2022. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended June 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 and R&D credits. The difference between the effective tax rate and the statutory tax rate of 21% for the three months ended June 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.
20
Six months ended June 30, 2023 compared to the six months ended June 30, 2022
Sales and gross profit for AerSale’s two business segments for the three months ended June 30, 2023 and 2022 were as follows:
Six Months Ended June 30, |
| ||||||||
(in thousands, except percentages) |
| 2023 |
| 2022 |
| Percent Change |
| ||
Revenue |
|
|
|
| |||||
Asset Management Solutions |
|
|
|
|
|
| |||
Aircraft | $ | 36,948 | $ | 71,840 |
| (48.6) | % | ||
Engines |
| 48,553 |
| 117,231 |
| (58.6) | % | ||
85,501 | 189,071 |
| (54.8) | % | |||||
TechOps |
|
|
|
| |||||
MRO | 55,571 | 45,868 |
| 21.2 | % | ||||
Product Sales | 6,307 | 3,870 |
| 63.0 | % | ||||
Whole Asset Sale | 218 | 23,605 |
| (99.1) | % | ||||
62,096 | 73,343 |
| (15.3) | % | |||||
Total | $ | 147,597 | $ | 262,414 |
| (43.8) | % | ||
Six Months Ended June 30, |
| ||||||||
(in thousands, except percentages) |
| 2023 |
| 2022 |
| Percent Change |
| ||
Gross Profit |
|
|
|
| |||||
Asset Management Solutions |
|
|
|
| |||||
Aircraft | $ | 10,215 | $ | 27,299 | (62.6) | % | |||
Engines |
| 19,199 |
| 54,229 | (64.6) | % | |||
29,414 | 81,528 | (63.9) | % | ||||||
TechOps |
|
|
| ||||||
MRO | 13,186 | 10,805 | 22.0 | % | |||||
Product Sales | 1,555 | 1,827 | (14.9) | % | |||||
Whole Asset Sale | 376 | 7,523 | (95.0) | % | |||||
15,117 | 20,155 | (25.0) | % | ||||||
Total | $ | 44,531 | $ | 101,683 | (56.2) | % | |||
Total revenue for the six-months ended June 30, 2023 decreased $114.8 million or 43.8% compared to the six months ended June 30, 2022, driven by a decrease of $103.6 million, or 54.8%, in revenues within Asset Management Solutions and a decrease of $11.2 million, or 15.3%, in revenues within TechOps.
Asset Management Solutions
Sales in the Asset Management Solutions segment decreased $103.6 million or 54.8%, to $85.5 million for the six months ended June 30, 2023, due to a $68.7 million, or 58.6%, decrease in revenue from Engines; and a $34.9 million, or 48.6%, decrease in revenue from Aircraft. The decrease in Engines revenue is primarily attributable to decreased activity in the RB211 and CF6-80 product line as a result of lower Flight Equipment sales in the amount of $66.2 million, and lower leasing revenue in the CF6-80 product line totaling $3.7 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 $33.6 million due to softer demand in the freighter market, and lower leasing revenue of $3.0 million, partially offset by higher USM sales activity.
Cost of sales in Asset Management Solutions decreased $51.5 million, or 47.8%, to $56.1 million for the six months ended June 30, 2023, compared to the prior year period. The decrease in cost of sales was primarily driven by the
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sales decrease discussed above. Gross profit in the Asset Management Solutions segment decreased $52.1 million to $29.4 million, or 63.9%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The gross profit decrease is mainly attributable to lower revenue generated for the six months ended June 30, 2023, as noted above.
Aircraft gross profit margins decreased to 27.6% for the six months ended June 30, 2023, from 38.0% for the six months ended June 30, 2022, due to lower margin on Flight Equipment sales and USM sales. Engine gross profit margin was 39.5% for the six months ended June 30, 2023, a decrease from 46.3% for the six months ended June 30, 2022, which was primarily the result of lower margins on Flight Equipment sales, partly offset by higher margins on USM sales and leasing activity.
TechOps
Our revenue from TechOps decreased by $11.2 million, or 15.3%, to $62.1 million for the six months ended June 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, along with improved component repair activities and heavy MRO services.
Cost of sales in TechOps decreased $6.2 million, or 11.7%, to $47.0 million for the six months ended June 30, 2023, compared to the prior year period, driven by costs generated from the sale of Flight Equipment of $16.0 million during the six months ended June 30, 2022, partially offset by cost associated with revenue fluctuations noted above. Gross profit in TechOps decreased $5.0 million, or 25.0%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, driven by the profit generated from the sale of Flight Equipment of $7.5 million, partially offset by higher gross profit of $2.4 million on MRO services. Gross profit margin decreased to 24.3% for the six months ended June 30, 2023 compared to 27.5% for the six months ended June 30, 2022, and was largely attributable to the margin generated from the sale of Flight Equipment of 31.9% for the six months ended June 30, 2022, partially offset by improved margins on MRO services of 23.7% for the six months ended June 30, 2023, compared to 23.6% during the six months ended June 30, 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.0 million, or 10.7%, to $52.3 million for the six months ended June 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 in the normal course of business.
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 six months ended June 30, 2023, we recorded a $1.1 million change in fair value of the warrant liability income, compared to a $0.1 million income in the prior year period.
Interest Income (Expense), Net
Interest income, net for the six months ended June 30, 2023 was $1.4 million and was primarily related to interest earned on cash deposits. Interest expense, net for the six months ended June 30, 2022 was $0.4 million, and was primarily related to unused balance fees on the Revolving Credit Agreement.
Income Taxes
The effective tax rate for the six months ended June 30, 2023 was 45.6% compared to 20.1% for the six months ended June 30, 2022. The difference between the effective tax rate and the statutory tax rate of 21% for the six months ended June 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 and R&D credits. The difference between the effective tax rate
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and the statutory tax rate of 21% for the six months ended June 30, 2022 is primarily due to the impact of state income taxes and non-deductible changes in the fair value of the warrant liability.
Financial Position, Liquidity and Capital Resources
As of June 30, 2023, we had $34.6 million of cash and cash equivalents. We finance our growth through cash flows generated from operations and borrowings secured by our assets. We had no outstanding balance under the Revolving Credit Agreement as of June 30, 2023, and we had $99.6 million of availability thereunder. We used cash in operations of $129.2 million for the six months ended June 30, 2023, mostly for feedstock acquisitions, and generated cash from investing activities of $7.9 million for the six months ended June 30, 2023.
During the six months ended June 30, 2023, we entered into a new revolving term loan collateralized by our property and equipment (“Equipment Loan”), and borrowed $8.6 million, which remained outstanding as of June 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 June 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— Six months ended June 30, 2023 compared to six months ended June 30, 2022
Cash Flows from Operating Activities
Net cash used in operating activities was $129.2 million for the six months ended June 30, 2023, compared to cash provided of $41.2 million for the same period in 2022. The decrease of $170.4 million was primarily due to feedstock acquisitions, lower results from operations, partially offset by the timing of purchase deposits.
Cash Flows from Investing Activities
Net cash provided by investing activities was $7.9 million for the six months ended June 30, 2023, compared to cash provided of $25.5 million in the same period for 2022. Cash provided by investing activities during the six months ended June 30, 2023 and 2022 was driven by sales of Flight Equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $8.8 million for the six months ended June 30, 2023, compared to cash provided of $0.3 million in the same period for 2022. Cash provided by financing activities during the six months ended June 30, 2023 was primarily related to the proceeds from our new property and equipment revolving term loan, as more fully described below. Cash provided by financing activities during the six months ended June 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
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Effective July 25, 2023, we amended our 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 June 30, 2023, there was no outstanding balance under the Revolving Credit Agreement and we had $99.6 million of availability thereunder. We were in compliance with our debt covenants for the Revolving Credit Agreement as of June 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 six months ended June 30, 2023, the Company borrowed $8.6 million under this facility, which remained outstanding as of June 30, 2023.
We were in compliance with our debt covenants for the Equipment Loan as of June 30, 2023.
Off-Balance Sheet Arrangements and Contractual Obligations
We did not have any off-balance sheet arrangements as of June 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 $17.9 million. The commitment is expected to be satisfied during 2023 and 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.
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During the six months ended June 30, 2023, there were no material changes in our critical accounting estimates and policies.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 June 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 six months ended June 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 six months ended June 30, 2023.
ITEM 4 CONTROLS AND PROCEDURES
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 June 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 June 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 June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company could be involved in litigation incidental to the operation of the business. The Company intends to vigorously defend all matters in which the Company is named defendants, and, for insurable losses, maintain significant levels of insurance to protect against adverse judgments, claims or assessments that may affect the Company. Although the adequacy of exiting insurance coverage of the outcome of any legal proceedings cannot be predicted with certainty, based on the current information available, the Company does not believe the ultimate liability associated with known claims or litigations, if any, in which the Company is involved will materially affect the Company’s consolidated financial condition or results of operations.
ITEM 1A RISK FACTORS
There are no material changes in the information reported under Part I – Item 1A “Risk Factors” contained in the 2022 Form 10-K.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
Rule 10b5-1 Plan Adoptions and Modifications
During the three months ended June 30, 2023, no director or officer
ITEM 6 EXHIBITS
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.
Incorporated by Reference | Filed/ | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Furnished Herewith |
2.1 | 8-K | 001-38801 | 2.1 | 12/9/2019 | ||||||||
2.2 | 10-Q | 001-38801 | 2.1 | 8/14/2020 | ||||||||
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Incorporated by Reference | Filed/ | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Furnished Herewith |
2.3 | 8-K | 001-38801 | 2.1 | 09/08/2020 | ||||||||
2.4 | 8-K | 001-38801 | 10.5 | 12/17/2020 | ||||||||
3.1 | Amended and Restated Certificate of Incorporation of Monocle Holdings Inc., dated October 13, 2020. | S-4/A | 333-235766 | 3.1 | 10/14/2020 | |||||||
3.2 | 8-K | 001-38801 | 3.2 | 12/23/2020 | ||||||||
3.3 | 10-Q | 001-38801 | 3.3 | 08/09/2021 | ||||||||
3.4 | Amended and Restated By laws of Monocle Holdings Inc., dated October 13, 2020. | S-4/A | 333-235766 | 3.2 | 10/14/2020 | |||||||
3.5 | 8-K | 001-38801 | 3.4 | 12/23/2020 | ||||||||
4.1 | S-4/A | 333-235766 | 4.2 | 02/14/2020 | ||||||||
4.2 | S-4/A | 333-235766 | 4.3 | 02/14/2020 | ||||||||
4.3 | 8-K | 001-38801 | 4.1 | 02/12/2019 | ||||||||
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Incorporated by Reference | Filed/ | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Furnished Herewith |
10.22 | AerSale Corporation Second Amended and Restated Non-Employee Director Policy | * | ||||||||||
10.23 | * | |||||||||||
10.24 | 8-K | 001-38801 | 1.1 | 08/01/2023 | ||||||||
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | * | ||||||||||
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | * | ||||||||||
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. | ** | ||||||||||
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | ** | ||||||||||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | * | ||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | * | ||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibit 101*) | * | ||||||||||
* | Filed herewith | |||||||||||
** | Furnished herewith | |||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AerSale Corporation | |||
Date: | August 8, 2023 | By: | /s/ Nicolas Finazzo |
Nicolas Finazzo | |||
Chairman, Chief Executive Officer, Division President, TechOps and Director | |||
(Principal Executive Officer) | |||
Date: | August 8, 2023 | By: | /s/ Martin Garmendia |
Martin Garmendia | |||
Chief Financial Officer and Treasurer | |||
(Principal Financial and Accounting Officer) | |||
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