Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statement with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Cash and Cash Equivalents

The Company  considers all highly liquid investments with a maturity  of three months or less when purchased  to be cash equivalents. The Company’s cash equivalents are held primarily in interest-bearing accounts.

Accounts Receivable

Accounts receivable include amounts  receivable from customers for aircraft and engine parts sales, aircraft and engine basic and supplemental  rents, and aircraft services. Contingent rents, also referred to as supplemental  rent, and consumption of consignment  inventory related to aircraft and engine parts that were earned or consumed, but unbilled, are also included in accounts receivable and totaled $615,000 and $1,860,000 at December 31, 2020 and 2019, respectively.

The Company  sells to a variety of customers worldwide. For certain transactions and customers not requiring payment in full prior to shipment of goods, the Company  extends credit based on an evaluation of the customers’ financial condition. The Company  monitors  exposure to credit losses and maintains  an allowance for doubtful  accounts for estimated  losses in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current market conditions, customers’ financial condition, amount of receivables in dispute, current receivables aging, and current payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. A rollforward of the allowance for doubtful accounts is as follows:

 

 

On June 9, 2014, an aircraft leased to Air Indus suffered significant damage as the result of a terrorist attack. At that time, the Company recorded an impairment to the asset of $2,500,000 to adjust the carrying amount  to the estimated residual value of $1,085,000. An insurance claim was filed and the insurance company is negotiating the final settlement owed to the Company. The Company has recorded an insurance receivable of $2,500,000, offsetting the impairment loss, which has been recorded in accounts receivable. In accordance with U.S. GAAP, the probable amount of the insurance recovery, limited to the amount of the loss recognized, was recorded as the insurance receivable. The Company believes that recovery of this insurance receivable is probable  and is working with the insurer on settling the claim by negotiating  the final settlement to the Company.

Flight Equipment Held for Lease

Flight equipment  held for lease is stated at cost, less accumulated depreciation. Certain internal and external professional fees, major improvements, modifications, and maintenance incurred in connection with the acquisition  of flight equipment  that are required to get the flight equipment  ready for initial service are capitalized and depreciated  over the remaining life of the flight equipment,  and are reported  in the investing section of the consolidated statements  of cash flows. Subsequent  to placing flight equipment  into service, the cost of maintenance and improvements  to flight equipment  is normally expensed unless the improvements  materially increase the long-term value of the flight equipment  or extend the useful life of the flight equipment. The capitalized cost is depreciated  over the lesser of the remaining useful life of the flight equipment  or the estimated useful life of the capitalized improvements. Aircraft airframe components are depreciated  over the assets’ useful life using the straight-line  method to the estimated residual value based on the total remaining life before disassembly or outright  scrap metal value. Aircraft airframe useful lives range from 2 to 10 years. Engines are depreciated using the straight-line method to the estimated residual value based on the total life remaining before disassembly. To arrive at the total engine life remaining before disassembly, the remaining  life of the engine’s life-limited parts,  the estimated  utilization,  and condition,  as well as the aircraft fleet supported by the engine model are considered. Upon completion  of its estimated service life as a leased asset, flight equipment is reclassified to inventory at its carrying value. The Company  discontinues the depreciation of flight equipment  when it is held as inventory for ultimate parts sales. Differences between estimates of useful lives and residual values and actual experience may result in future  impairments of aircraft  or engines and/or  additional gains or losses upon  disposal. The Company reviews residual values of aircraft and engines periodically based on knowledge of current residual values and residual value trends to determine if they are appropriate and records adjustments as necessary. Cash flows related  to the purchase  and sale of flight equipment  are presented  as operating  activities when the predominant source of cash flows related to the asset is from the ultimate parts sales of the assets. If the predominant source of cash flows related to the asset is expected to be from leasing of the asset, the cash flows are presented as investing activities.

Goodwill

In accordance  with ASC 350, “Intangibles — Goodwill and Other,” goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount  of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value. A quantitative assessment involves determining  the fair value of each reporting  unit using market participant assumptions. An entity should recognize an impairment charge for the amount  by which the carrying amount  of a reporting  unit exceeds its fair value up to the amount  of goodwill allocated to that reporting  unit. Our annual assessment date for goodwill is October 1, 2020.

For purposes of reviewing impairment and the recoverability of goodwill, we must make various assumptions  regarding estimated future cash flows and other factors in determining  the fair values of the reporting  unit, including market multiples, discount rates, etc.

As a result of the COVID-19 pandemic and its impact on the aviation industry, AerSale performed a qualitative impairment analysis as of June 30, 2020. The Company also performed its annual quantitative impairment analysis as of October 1, 2020 on the goodwill for the Asset Management Solutions and TechOps segments, and concluded the fair value of each reporting unit exceeded their carrying values, and thus no impairment charges were recorded.

Impairment of  Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount  of an asset may not be recoverable. Such events and circumstances include, but are not limited to, prolonged  industry downturns, a significant decline in the Company’s market value, and significant reductions  in the Company's projected cash flows. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. As a result of Covid-19 pandemic,  the Company performed an impairment analysis on the property, plant and equipment and concluded there was no impairment as of June 30, 2020.

Revenue Recognition

Products — Used Serviceable Material Sales (“USM”)

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  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, 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 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. Additionally, there is no impact to the timing and amounts  of revenue recognized for spare parts sales related to the implementation of 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 customers’ acceptance of the whole asset on the date of the transfer. As such, there is no impact to the timing and amounts of revenue recognized for whole asset sales related to the implementation of ASC 606.

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. Flight equipment  leases are billed in accordance  with the lease agreement and invoices are due upon receipt.

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. Variable consideration that cannot be reasonably estimated is recorded when known.

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 MRO contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and 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 consolidated statements of operations, and are not considered a performance obligation to our customers. Our reported sales on our consolidated statements of operations are net of any sales or related non income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

Sales Taxes

The Company’s policy is to present taxes collected from customers and remitted to governmental authorities on a net basis. The Company  records the amounts  collected as a current liability and relieves such liability upon remittance to the taxing authority without impacting revenue or expenses.

Income Taxes

Income taxes are accounted  for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts  of existing assets and liabilities and their respective tax bases and operating  loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company  recognizes the effect of income tax positions only if those positions are more likely than not of being sustained on examination by the taxing authorities. Recognized income tax positions are measured at the largest amount  that is greater than 50% likely of being realized. Changes in recognition or measurement  are reflected in the period in which the change in judgment occurs.

The Company  records interest and penalties related to unrecognized tax benefits in the income tax provision. The VIE was not included in the consolidated tax return of the Company. See Note L for more information about income taxes.

New Accounting  Pronouncements Not Yet Adopted

In February 2016, FASB issued “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.” Topic 842 will be effective for the Company in the fourth quarter of 2022 on a modified retrospective basis and early adoption is permitted. We plan to adopt Topic 842 in the fourth quarter of 2022. We are 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. ASU 2016-13 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. ASU 2016-13 will become effective for the Company beginning January 1, 2023, with early adoption permitted, on a modified retrospective approach. We are currently evaluating the impact this guidance will have on our consolidated financial statements and related disclosures.