AerSale(ASLE) - 2023 Q4 - Annual Report

PART I ITEM 1. BUSINESS AerSale supports mid-life commercial aircraft via Asset Management (64% of 2023 revenue) and TechOps (36% of 2023 revenue) - AerSale's mission is to provide full-service support to owners and operators of mid-life commercial aircraft, integrating multiple service and product offerings to save customers time and money[18] - The business operates in two segments: Asset Management Solutions and Technical Operations (TechOps), which together offer comprehensive support for used commercial aircraft[19] Revenue Contribution by Segment (FY2023 vs. FY2022) | Segment | FY2023 Revenue Contribution | FY2022 Revenue Contribution | | :------------------------- | :-------------------------- | :-------------------------- | | Asset Management Solutions | 64% | 68% | | TechOps | 36% | 32% | Corporate History and Background Details the formation of AerSale Corporation through a business combination in December 2020 - Monocle Acquisition Corporation was formed on August 20, 2018, and consummated a business combination with AerSale Aviation, Inc. on December 22, 2020, becoming AerSale Corporation[15][16][17] Overview of Business and Operations Outlines AerSale's core mission to provide full-service, cost-effective support for mid-life commercial aircraft - AerSale's core mission is to provide full-service support to owners and operators of mid-life commercial aircraft, offering a 'one-stop shop' approach to cost-effectively maintain aircraft through their operating life and retirement[18] Asset Management Solutions Focuses on acquiring, selling, leasing, and disassembling Flight Equipment to maximize financial returns in the secondary market - The Asset Management Solutions segment acquires Flight Equipment for sale, lease, or disassembly into used serviceable material (USM), maximizing financial returns by placing assets in the secondary market or extracting residual value from parts[20] - This segment primarily focuses on highly customized or short-term leases, leveraging USM and MRO capabilities to manage maintenance needs and monetize maintenance reserves[20] TechOps Provides nose-to-tail MRO services and develops proprietary Engineered Solutions for commercial aircraft, engines, and components - The TechOps segment provides nose-to-tail MRO services for commercial aircraft, engines, and components, serving passenger, cargo, and government sectors from its U.S.-based facilities[21] - TechOps leverages its engineering team to develop 'Engineered Solutions' (e.g., AerSafe®, AerAware™) that enhance aircraft performance, safety, and service life, often at lower costs than OEM products, approved by FAA STCs and PMAs[24][25] Competition Describes the highly competitive aviation aftermarket and AerSale's strategy to leverage synergistic capabilities for competitive advantage - The aviation aftermarket is highly competitive, with many participants specializing in subsets of AerSale's offerings, including OEMs, MRO providers, leasing companies, and USM sales organizations[26] - AerSale competes by targeting services and products where its synergic capabilities provide a competitive advantage, focusing on the comprehensive needs of mid-life Flight Equipment customers[30][31] Competitive Strengths Highlights AerSale's data-driven approach, comprehensive service suite, and FAA repair station ratings as key competitive advantages - AerSale's competitive strengths include a data-driven approach, proprietary analytical tools, and formalized decision-making processes to maximize Flight Equipment values[32] - The company offers a comprehensive suite of products and services, acting as a 'one-stop' source for aircraft, engine, and USM spare parts support, bundled with MRO solutions, facilitating cross-selling opportunities[33] - AerSale holds FAA 'unlimited' repair station ratings for airframe and component MRO, allowing efficient innovation and market introduction of new proprietary repairs and modifications[35] Growth Strategies Outlines AerSale's plans to expand MRO capabilities, government presence, Engineered Solutions, geographical footprint, and pursue acquisitions - AerSale plans to broaden MRO capabilities, expand its government presence, introduce new Engineered Solutions, expand its geographical footprint, and pursue strategic acquisitions[36][38][39][40][41] Customers Serves over 1,000 global customers, with non-U.S. customers contributing 58% of 2023 revenue and strong brand loyalty - AerSale serves over 1,000 customers globally, including domestic and foreign passenger airlines, cargo operators, and governmental agencies. Non-U.S. customers accounted for approximately 58% of total revenue in 2023[42] - The company fosters brand loyalty, with 67% of revenue from its top 100 customers in 2023 utilizing more than one service offering[42] Sales and Marketing Employs a matrixed marketing approach with direct sales, foreign representation, industry events, and digital initiatives - AerSale employs a matrixed marketing approach with 36 sales individuals, utilizing direct sales, foreign representation, industry events, and digital initiatives[45][46] Research and Development Focuses R&D on customer-centric value-add products and services to enhance Flight Equipment performance and lower maintenance costs - R&D focuses on customer-centric value-add products and services to enhance Flight Equipment performance, lower maintenance costs, and extend service life, leveraging insights from its full range of MRO services[47][48] Government Regulation Operates under extensive FAA and international regulations, with proprietary Engineered Solutions authorized by STCs and repair licenses - AerSale's operations are highly regulated by the FAA and international equivalents, requiring certifications for manufacturing, repair, and operation of aircraft and components[50] - The company's Engineered Solutions are authorized by FAA STC approvals and proprietary repairs under 'unlimited' repair station licenses, creating a significant barrier to entry for competitors[52] Intellectual Property Protects its brand and product offerings with trademarks and proprietary intellectual property in market intelligence and Engineered Solutions - AerSale maintains trademarks for its brand and product offerings (e.g., AerSale®, AerSafe®, AerTrak®, AerAware™) and benefits from proprietary intellectual property in market intelligence, transactional data, and Engineered Solutions[55][56] Human Capital Resources Employs 707 individuals globally, focusing on attracting and retaining skilled personnel through competitive compensation and development programs - As of February 7, 2024, AerSale employed 707 employees worldwide, with 99% based in the U.S., supplemented by approximately 230 contract workers[60] - The company focuses on attracting and retaining skilled personnel through a safe work environment, competitive compensation, career development programs (e.g., A&P reimbursement, tuition reimbursement), and a culture of diversity and inclusion[61][63][64][65] - As of December 31, 2023, AerSale's employee base included 24% females and 64% minorities, with ongoing efforts in recruiting and scholarship programs to support diverse talent[66][68] Environmental Matters Subject to extensive environmental regulations for hazardous materials and emissions, with indemnification and insurance for potential liabilities - AerSale's operations are subject to extensive federal, state, and local environmental laws and regulations, requiring licenses and permits for managing hazardous materials and emissions[69] - The company has indemnification agreements and environmental impairment liability insurance for potential contamination liabilities at its facilities[70] Available Information Provides public access to SEC filings and corporate governance documents on its investor relations website - AerSale provides public access to its SEC filings and corporate governance documents, including its Code of Business Conduct and Ethics, on its investor relations website[71][72] ITEM 1A. RISK FACTORS AerSale faces risks from supply chain, industry cyclicality, market value, and lease repossession challenges - AerSale's business is subject to numerous risks and uncertainties, including those related to its business and industry, strategic and financial aspects, legal and regulatory compliance, and its common stock[10][75] Risks Related to AerSale's Business and Industry Highlights risks including supply chain disruptions, aviation industry cyclicality, fluctuating market values, and challenges in repossessing leased equipment - Key risks include supply chain disruptions, adverse impacts from the cyclical commercial aviation industry (e.g., geopolitical events, high fuel prices, economic downturns), fluctuating market values of aviation products, and difficulties in repossessing Flight Equipment from defaulting lessees[76][77][78][82][83] - Operational success is dependent on continued outsourcing by airlines for MRO services and the availability of skilled personnel; shortages or work stoppages could adversely affect operations[88][89] - International operations expose the company to risks like political instability, export regulations, anti-corruption laws, and global conflicts (e.g., Ukraine, Middle East) impacting supply chains and demand[94][96][97] Strategic and Financial Risks Covers risks related to financing availability, restrictive debt covenants, tax changes, asset impairment, and interest/currency rate fluctuations - AerSale's business strategy relies on continued availability of financing, and its existing debt includes restrictive and financial covenants that could limit operations or trigger defaults[120][121][122] - The company is exposed to risks from unanticipated changes in tax provisions, potential impairment of goodwill and other intangible assets, and fluctuations in interest rates (e.g., LIBOR to SOFR transition) and foreign currency exchange rates[124][125][126][127] Legal and Regulatory Risks Addresses risks from extensive aviation regulations, compliance with anti-corruption and trade laws, product liability, and environmental liabilities - The aviation industry is highly regulated by the FAA and international agencies; new or more stringent regulations, or revocation of licenses, could significantly impact operations and financial results[128][129][130] - Compliance with U.S. and international anti-corruption laws (e.g., FCPA), export/import controls, and trade sanctions is critical, with potential for criminal and civil penalties for non-compliance[137][138] - The company is susceptible to product and other liability claims, environmental liabilities, and the financial impact of global climate change regulations (e.g., CORSIA) and stakeholder ESG expectations[145][147][150][151][152] Risk Factors Related to our Common Stock Discusses potential stock price volatility, lack of sustained liquid trading, and the company's policy of not paying dividends - The company's share price may be volatile, and an active, liquid trading market for its common stock may not be sustained, potentially making it difficult for stockholders to liquidate investments[153] - Substantial future sales of common stock or the perception of such sales could depress the stock price, and the company does not intend to pay dividends in the foreseeable future[157][158] General Risk Factors Includes risks such as ineffective internal controls, customer insolvency, and adverse effects from market fluctuations or economic downturns - General risks include the potential for ineffective internal control over financial reporting, insolvency or financial difficulties of customers, and adverse effects from market fluctuations or economic downturns[163][165][166] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[167] ITEM 1C. CYBERSECURITY AerSale implements a comprehensive cybersecurity program, overseen by the Audit Committee, reporting no material incidents - AerSale has a comprehensive cybersecurity risk management program, utilizing NIST and CIS frameworks, to identify, assess, and manage risks to critical systems and information[168] - The program includes security awareness training, internal/external vulnerability assessments, third-party risk management, and an incident response plan, with oversight from the Board's Audit Committee[168][169][172] - As of the report date, AerSale is not aware of any cybersecurity threats or incidents that have materially affected its business strategy, results of operations, or financial condition[170] Cybersecurity Risk Management and Strategy Details AerSale's risk-based cybersecurity program, incorporating NIST and CIS frameworks for comprehensive protection - AerSale's cybersecurity program uses a risk-based approach, designed on NIST and CIS frameworks, covering security awareness training, internal/external assessments, and third-party risk mitigation[168][169] Cybersecurity Governance Describes the Board's Audit Committee oversight of cybersecurity risks, receiving updates from the Chief Information Officer - The Board of Directors delegates cybersecurity risk oversight to the Audit Committee, which receives updates from the Chief Information Officer, a seasoned technology executive with over 20 years of experience[172] ITEM 2. PROPERTIES AerSale's principal office is in Miami, with MRO and distribution facilities across the U.S. and international sales offices - AerSale's principal executive office is in Miami, Florida, with operating locations including MRO facilities in Goodyear, Arizona; Roswell, New Mexico; Millington, Tennessee; and Albuquerque, New Mexico[173][174] - The company's MRO facilities feature over 760,000 square feet of hangar space and long-term storage capacity for up to 650 aircraft, supporting the TechOps segment[177] - USM parts distribution is primarily handled from dedicated warehouses in Memphis, Tennessee, and Roswell, New Mexico, providing over 500,000 square feet of space for Flight Equipment inventory[178] ITEM 3. LEGAL PROCEEDINGS AerSale is involved in incidental litigation, with management believing ultimate liability will not materially affect financial results - AerSale is subject to litigation incidental to its business and maintains significant insurance coverage to protect against adverse judgments[179][412] - Management believes that the ultimate liability associated with known claims or litigation will not materially affect the company's consolidated financial condition or results of operations[412][414] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to AerSale Corporation - Mine Safety Disclosures are not applicable[180] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES AerSale's common stock trades on Nasdaq ('ASLE'), with 7,518 holders, no dividends, and no issuer purchases in 2023 - AerSale's common stock is listed on the Nasdaq Capital Market under the symbol 'ASLE'[180] - As of February 26, 2024, there were 7,518 holders of record of the company's common stock[180] - The company has not paid cash dividends and does not intend to in the foreseeable future, with future earnings retained for operations and debt service, and current restrictions from its Revolving Credit Agreement[181][158] - AerSale did not purchase any of its outstanding common stock during the year ended December 31, 2023[182] ITEM 6. [RESERVED] This item is reserved and contains no information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AerSale's 2023 revenue decreased 18.1% to $334.5 million, leading to a $5.6 million net loss, primarily from reduced Flight Equipment sales Consolidated Financial Performance (FY2023 vs. FY2022) | Metric | FY2023 ($ in thousands) | FY2022 ($ in thousands) | Percent Change | | :----------------- | :---------------------- | :---------------------- | :------------- | | Total Revenue | 334,503 | 408,544 | (18.1)% | | Gross Profit | 92,421 | 151,394 | (39.0)% | | Net (Loss) Income | (5,563) | 43,861 | (112.7)% | - The decrease in total revenue was driven by a $62.4 million (22.5%) decrease in Asset Management Solutions and an $11.6 million (8.9%) decrease in TechOps[195] - As of December 31, 2023, AerSale had $5.9 million in cash and cash equivalents and $131.0 million of availability under its Revolving Credit Agreement[206] The Company Describes AerSale as a global provider of aftermarket commercial aircraft, engines, and parts, specializing in mid-life Flight Equipment monetization - AerSale is a global provider of aftermarket commercial aircraft, engines, and parts, focusing on mid-life Flight Equipment monetization through its Asset Management Solutions and TechOps segments[188][189] - The company develops proprietary Engineered Solutions (e.g., AerSafe®, AerAware™) to improve aircraft performance, regulatory compliance, and safety, often at reduced costs[192] Results of Operations Analyzes revenue and gross profit declines in 2023, increased SG&A, and the shift to a net loss, with changes in warrant liability and tax rates Revenue and Gross Profit by Segment (FY2023 vs. FY2022) | Segment / Category | FY2023 Revenue ($ in thousands) | FY2022 Revenue ($ in thousands) | Revenue % Change | FY2023 Gross Profit ($ in thousands) | FY2022 Gross Profit ($ in thousands) | Gross Profit % Change | | :------------------------- | :------------------------------ | :------------------------------ | :--------------- | :----------------------------------- | :----------------------------------- | :-------------------- | | Asset Management Solutions | | | | | | | | Aircraft | 80,877 | 101,511 | (20.3)% | 22,739 | 36,156 | (37.1)% | | Engines | 134,290 | 176,096 | (23.7)% | 44,916 | 82,075 | (45.3)% | | Subtotal | 215,167 | 277,607 | (22.5)% | 67,655 | 118,231 | (42.8)% | | TechOps | | | | | | | | MRO | 102,535 | 95,258 | 7.6% | 20,428 | 21,111 | (3.2)% | | Product Sales | 16,583 | 11,942 | 38.9% | 3,761 | 4,397 | (14.5)% | | Whole Asset Sale | 218 | 23,737 | (99.1)% | 577 | 7,655 | (92.5)% | | Subtotal | 119,336 | 130,937 | (8.9)% | 24,766 | 33,163 | (25.3)% | | Total | 334,503 | 408,544 | (18.1)% | 92,421 | 151,394 | (39.0)% | - Selling, general and administrative expenses increased by $6.9 million (7.1%) to $103.2 million in 2023, driven by cost of living adjustments, additional headcount, higher facility costs, and increased legal costs[201] - The company recorded a $2.3 million gain on the change in fair value of warrant liability in 2023, compared to a $0.5 million loss in 2022[202] - The effective tax rate increased to 27.5% in 2023 from 24.2% in 2022, mainly due to a valuation allowance release offset and an increase in credits offset by higher nondeductible executive compensation[205] Financial Position, Liquidity and Capital Resources Assesses AerSale's liquidity, supported by cash, internally generated funds, and $131.0 million available under its Revolving Credit Agreement - As of December 31, 2023, AerSale had $5.9 million in cash and cash equivalents, with $29.0 million outstanding and $131.0 million available under its Revolving Credit Agreement[206] - The company believes its equity base, internally generated funds, and existing debt facilities are sufficient to maintain operations for the next 12 months[207] Cash Flows—Year ended December 31, 2023 compared to Year ended December 31, 2022 Compares cash flow activities, noting a significant increase in cash used in operating activities due to feedstock acquisitions Cash Flow Summary (FY2023 vs. FY2022) | Cash Flow Activity | FY2023 ($ in millions) | FY2022 ($ in millions) | | :------------------------- | :--------------------- | :--------------------- | | Operating Activities | (174.2) | (0.1) | | Investing Activities | 3.1 | 41.4 | | Financing Activities | 29.7 | (24.3) | - The significant increase in cash used in operating activities in 2023 was primarily due to $131.9 million in feedstock acquisitions and lower results from operations[209] - Cash provided by financing activities in 2023 was mainly from proceeds from the Equipment Loan and borrowings under the Revolving Credit Agreement[210] Debt Obligations and Covenant Compliance Details the amended Revolving Credit Agreement and new Equipment Loan, with $29.0 million outstanding and covenant compliance - The Revolving Credit Agreement was amended in July 2023, increasing maximum commitments to $180.0 million (expandable to $200.0 million) and extending maturity to July 24, 2028[211] - As of December 31, 2023, $29.0 million was outstanding under the Revolving Credit Agreement, with $131.0 million availability, and the company was in compliance with all debt covenants[212] - A new $10.0 million Equipment Loan was entered into in June 2023 to finance capital expenditures, with $8.6 million outstanding as of December 31, 2023[213] Off-Balance Sheet Arrangements and Contractual Obligations Reports no off-balance sheet arrangements as of December 31, 2023, but notes a $33.1 million purchase commitment - AerSale had no off-balance sheet arrangements as of December 31, 2023[214] - The company has a $33.1 million purchase commitment with Universal Avionics for technical equipment for its AerAware™ product, expected to be satisfied by Q4 2024[214] Critical Accounting Policies and Estimates Highlights critical accounting policies involving significant management estimates for revenue recognition, inventory valuation, and asset useful lives - Critical accounting policies involve significant management estimates and assumptions, particularly for revenue recognition (cost-to-cost method for services), inventory valuation (lower of cost or market), and useful lives/residual values of Flight Equipment[216][217][219][270] Recent Accounting Pronouncements Details the adoption of ASU 2021-04 and ASU 2016-13 with no material impact, and evaluation of ASU 2023-07 - AerSale adopted ASU 2021-04 (Earnings Per Share) and ASU 2016-13 (Credit Losses) in 2022 and 2023, respectively, with no material impact on financial statements[306][307] - The company is evaluating ASU 2023-07 (Segment Disclosures), effective for fiscal years beginning after December 15, 2023, for its potential impact[308] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AerSale faces market risks from variable interest rates and foreign currency, with a 10% rate increase impacting interest expense by $0.4 million - AerSale is exposed to market risks from fluctuating interest rates on its variable-rate debt (Revolving Credit Agreement and Equipment Loan) and foreign currency exchange rates[224][225] - A hypothetical 10% increase in the average interest rate on variable-rate debt would increase annual interest expense by $0.4 million[225] - The company primarily uses the U.S. dollar as its functional currency, and a hypothetical 10% devaluation of the U.S. dollar would not have a material impact on its financial position or operations[226] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presents AerSale's audited consolidated financial statements and notes, detailing accounting policies, risks, and financial performance - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows[229] - Detailed notes to the consolidated financial statements provide information on the company's business, significant accounting policies, risks and uncertainties, revenue recognition, inventory, intangible assets, property and equipment, leases, financing arrangements, income taxes, earnings per share, stockholders' equity, business segments, commitments, related-party transactions, and benefit plans[250] Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued an unqualified opinion on AerSale's consolidated financial statements for 2021-2023, affirming GAAP conformity - Grant Thornton LLP, serving as AerSale's auditor since 2017, issued an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2023, 2022, and 2021, stating they present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[231][234] Consolidated Balance Sheets Highlights a significant decrease in cash and cash equivalents and an increase in inventory from 2022 to 2023 Consolidated Balance Sheet Highlights (as of December 31, 2023 vs. 2022) | Metric | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :--------------------------- | :---------------------------- | :---------------------------- | | Total Current Assets | 264,774 | 333,556 | | Total Assets | 553,938 | 531,579 | | Total Current Liabilities | 45,713 | 52,840 | | Total Liabilities | 108,923 | 86,599 | | Total Stockholders' Equity | 445,015 | 444,980 | - Cash and cash equivalents significantly decreased from $147.2 million in 2022 to $5.9 million in 2023[236] - Inventory (current and non-current) increased from $183.5 million in 2022 to $329.2 million in 2023, reflecting increased feedstock acquisitions[236][327] Consolidated Statements of Operations Reports a net loss of $5.6 million in 2023, a significant decline from 2022 net income, driven by lower gross profit and higher expenses Consolidated Statements of Operations (FY2023 vs. FY2022 vs. FY2021) | Metric | FY2023 ($ in thousands) | FY2022 ($ in thousands) | FY2021 ($ in thousands) | | :------------------------------------ | :---------------------- | :---------------------- | :---------------------- | | Total Revenue | 334,503 | 408,544 | 340,437 | | Gross Profit | 92,421 | 151,394 | 119,392 | | Selling, General, and Admin. Expenses | 103,191 | 96,348 | 77,498 | | (Loss) Income from Operations | (10,770) | 55,046 | 56,662 | | Net (Loss) Income | (5,563) | 43,861 | 36,115 | | Basic (Loss) Earnings Per Share | (0.11) | 0.85 | 0.84 | | Diluted (Loss) Earnings Per Share | (0.15) | 0.83 | 0.76 | - The company reported a net loss of $5.6 million in 2023, a significant decline from net income of $43.9 million in 2022, primarily due to lower gross profit and increased operating expenses[240] Consolidated Statements of Stockholders' Equity Shows stable total stockholders' equity in 2023 despite a net loss, supported by increases in additional paid-in capital Consolidated Statements of Stockholders' Equity (FY2023 vs. FY2022) | Metric | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :------------------------- | :---------------------------- | :---------------------------- | | Common Stock | 5 | 5 | | Additional Paid-in Capital | 311,739 | 306,141 | | Retained Earnings | 133,271 | 138,834 | | Total Stockholders' Equity | 445,015 | 444,980 | - Total stockholders' equity remained relatively stable at $445.0 million in 2023, despite a net loss, due to increases in additional paid-in capital from share-based compensation[245] Consolidated Statements of Cash Flows Details a significant increase in cash used in operating activities in 2023, primarily due to $131.9 million in inventory acquisitions Consolidated Statements of Cash Flows (FY2023 vs. FY2022 vs. FY2021) | Cash Flow Activity | FY2023 ($ in thousands) | FY2022 ($ in thousands) | FY2021 ($ in thousands) | | :------------------------- | :---------------------- | :---------------------- | :---------------------- | | Operating Activities | (174,150) | (113) | 79,079 | | Investing Activities | 3,091 | 41,371 | 13,204 | | Financing Activities | 29,744 | (24,258) | 8,588 | | Net Change in Cash | (141,315) | 17,000 | 100,871 | | Cash, End of Period | 5,873 | 147,188 | 130,188 | - Net cash used in operating activities significantly increased to $174.2 million in 2023, primarily driven by $131.9 million in inventory acquisitions[209][248] - Net cash provided by financing activities in 2023 was $29.7 million, mainly from new debt proceeds, contrasting with cash used in 2022 due to common stock repurchases[210][248] Notes to Consolidated Financial Statements Provides detailed explanations of accounting policies, risks, and financial statement components, supporting the consolidated financial data NOTE A-DESCRIPTION OF THE BUSINESS Describes AerSale's formation and its core business as a global provider of aftermarket commercial aircraft, engines, and parts - AerSale Corporation, formed from the merger of Monocle Acquisition Corporation and AerSale Aviation, Inc. in December 2020, is a worldwide provider of aftermarket commercial aircraft, engines, and parts[252][253][254] - The company's business segments, Asset Management Solutions and TechOps, focus on maximizing value from mid-life Flight Equipment through leasing, sales, disassembly for USM, and MRO services, including proprietary Engineered Solutions[254][256] NOTE B -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines key accounting policies including consolidation, inventory valuation, asset depreciation, goodwill impairment, and revenue recognition methods - AerSale consolidates all wholly-owned subsidiaries and operates as an 'emerging growth company,' electing the extended transition period for new accounting standards[257][258][259] - Key policies include valuing inventory at the lower of cost or market, depreciating Flight Equipment held for lease over its useful life, and testing goodwill and indefinite-lived intangible assets for impairment annually[266][270][273][275] - Revenue from products (USM, whole asset sales) is recognized at a point in time upon transfer of control, while service revenue is recognized over time using the cost-to-cost input method[280][281][284][288] NOTE C - SIGNIFICANT RISKS AND UNCERTAINTIES Details financial statement reliance on estimates, capital intensity, debt reliance, regulatory changes, international operational risks, and customer credit concentrations - The company's financial statements rely on estimates and assumptions, particularly for asset useful lives, impairment, and tax provisions, which are sensitive to commercial aviation industry conditions[314][315] - Significant risks include capital intensity, reliance on debt facilities, regulatory changes, and international operational risks (e.g., political instability, foreign laws, FCPA exposure)[316][317] - Credit risk concentrations exist with certain customers, with two customers accounting for 25% of total revenue in 2023, and one customer making up 20% of trade receivables[320] NOTE D - REVENUE Explains revenue recognition timing differences and disaggregates revenue by segment and type for FY2023 - Revenue recognition timing differences create contract assets (unbilled receivables) and contract liabilities (advance payments/billings in excess of revenue)[322] Revenue Disaggregation by Segment and Type (FY2023) | Revenue Type | Asset Management Solutions ($ in thousands) | TechOps ($ in thousands) | Total Revenues ($ in thousands) | | :--------------------- | :------------------------------------------ | :----------------------- | :------------------------------ | | USM | 63,418 | 15,278 | 78,696 | | Whole asset sales | 137,236 | 218 | 137,454 | | Engineered solutions | - | 1,305 | 1,305 | | Leasing | 14,513 | - | 14,513 | | Services | - | 102,535 | 102,535 | | Total Revenues | 215,167 | 119,336 | 334,503 | NOTE E-INVENTORY Details the composition of inventory, noting a significant increase in whole assets and USM in 2023 due to feedstock acquisitions Inventory Composition (as of December 31, 2023 vs. 2022) | Inventory Type | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :----------------------- | :---------------------------- | :---------------------------- | | Used serviceable materials | 120,053 | 73,827 | | Work-in-process | 22,270 | 16,659 | | Whole assets | 186,845 | 93,044 | | Total Inventory | 329,168 | 183,530 | | Less short term | (177,770) | (117,488) | | Long term | 151,398 | 66,042 | - Inventory increased significantly in 2023, particularly in whole assets and used serviceable materials, reflecting feedstock acquisitions[327] - The company recorded $1.5 million in scrap loss reserves in 2023, compared to $0.3 million in 2022, as a component of cost of products[270] NOTE F -INTANGIBLE ASSETS Reports on goodwill and indefinite-lived intangible assets, which are tested for impairment annually, with no impairment recorded in 2023 or 2022 - Goodwill and indefinite-lived intangible assets (trademarks, FAA certifications) are not amortized but are tested for impairment annually. No impairment was recorded in 2023 or 2022[328][329] Intangible Assets with Indefinite Lives (as of December 31, 2023 vs. 2022) | Asset Type | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :------------------- | :---------------------------- | :---------------------------- | | FAA Certifications | 9,530 | 9,530 | | Goodwill | 19,860 | 19,860 | | Trademarks | 800 | 800 | | Total | 30,190 | 30,190 | - Definite-lived intangible assets, primarily customer relationships, are amortized over ten years, with amortization expense of $2.1 million in 2023 and 2022[332][333] NOTE G - PROPERTY AND EQUIPMENT, NET Details a significant increase in net property and equipment in 2023, driven by investments in leasehold improvements and R&D Flight Equipment Property and Equipment, Net (as of December 31, 2023 vs. 2022) | Asset Type | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :------------------------------ | :---------------------------- | :---------------------------- | | Tooling and equipment | 16,024 | 14,649 | | Furniture and other equipment | 12,076 | 10,090 | | Computer software | 2,374 | 2,152 | | Leasehold improvements | 16,269 | 7,390 | | Equipment under capital lease | 192 | 192 | | Flight equipment held for R&D | 7,784 | - | | Less accumulated depreciation | (27,027) | (21,835) | | Total Property and Equipment| 27,692 | 12,638 | - Property and equipment, net, increased significantly to $27.7 million in 2023 from $12.6 million in 2022, driven by investments in leasehold improvements and Flight Equipment for R&D[335] - Depreciation expense for property and equipment increased to $3.7 million in 2023 from $2.2 million in 2022[335] NOTE H - AIRCRAFT AND ENGINES HELD FOR LEASE AND LEASE RENTAL Reports a decrease in net aircraft and engines held for lease in 2023, alongside reduced depreciation expense and contingent rental fees Aircraft and Engines Held for Lease, Net (as of December 31, 2023 vs. 2022) | Metric | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Aircraft and engines held for lease | 58,136 | 83,902 | | Less accumulated depreciation | (31,661) | (52,614) | | Total Aircraft and Engines for Lease| 26,475 | 31,288 | - Aircraft and engines held for lease, net, decreased to $26.5 million in 2023 from $31.3 million in 2022[337] - Depreciation expense for leased assets decreased to $4.6 million in 2023 from $6.6 million in 2022[339] - Contingent rental fees (supplemental rent) decreased to $7.7 million in 2023 from $12.8 million in 2022[340] NOTE I - FAIR VALUE MEASUREMENTS Explains fair value measurements prioritize observable inputs and notes that certain financial instruments approximate carrying values - Fair value measurements prioritize observable inputs (Level 1, 2) over unobservable inputs (Level 3), using market, income, and cost approaches[341][342] - The fair value of accounts receivable, accounts payable, and borrowings under the Revolving Credit Agreement and Equipment Loan approximate their carrying values due to their short-term nature or variable interest rates[344] NOTE J - ACCRUED EXPENSES Reports a decrease in accrued expenses in 2023, primarily driven by a reduction in accrued compensation and related benefits Accrued Expenses (as of December 31, 2023 vs. 2022) | Accrued Expense Type | Dec 31, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | Accrued compensation and related benefits | 2,241 | 6,040 | | Accrued legal fees | 854 | 716 | | Commission fee accrual | 260 | 251 | | Accrued federal, state and local taxes and fees | 105 | 142 | | Other | 2,018 | 1,694 | | Total Accrued Expenses | 5,478 | 8,843 | - Accrued expenses decreased to $5.5 million in 2023 from $8.8 million in 2022, primarily due to a reduction in accrued compensation and related benefits[346] NOTE K - WARRANT LIABILITY Details outstanding private warrants classified as a liability, re-measured at fair value using the Black-Scholes model - As of December 31, 2023, 623,834 private warrants were outstanding, classified as a liability and re-measured at fair value each period, with changes recognized in the Consolidated Statements of Operations[347][350] - The fair value of private warrants is determined using the Black-Scholes option pricing model, with key assumptions including a risk-free interest rate of 3.84% and expected volatility of 41.66% for 2023[350][351] NOTE L- FINANCING ARRANGEMENTS Outlines the amended Revolving Credit Agreement and a new Equipment Loan, detailing outstanding amounts and interest rates Outstanding Debt Obligations (as of December 31, 2023) | Debt Type | Dec 31, 2023 ($ in thousands) | | :-------------------------------------------- | :---------------------------- | | $180.0 million Wells Fargo Senior Secured Revolving Credit Facility | 29,000 | | $10.0 million Synovus Property and Equipment Revolving Term Loan | 8,559 | | Total | 37,559 | | Less current portion | (1,278) | | Total long-term portion | 36,281 | - The Revolving Credit Agreement was amended in July 2023 to increase commitments to $180.0 million and extend maturity to July 24, 2028, bearing interest at SOFR plus 2.75% (7.69% as of Dec 31, 2023)[355][356] - A new $10.0 million Equipment Loan was secured in June 2023 for capital expenditures, with $8.6 million outstanding, bearing interest at one-month SOFR plus 3.50% (8.84% as of Dec 31, 2023)[357][358] NOTE M - INCOME TAXES Reports an income tax benefit of $2.1 million in 2023, a shift from an expense in 2022, due to a valuation allowance release and R&D credits Income Tax (Benefit) Expense (FY2023 vs. FY2022 vs. FY2021) | Income Tax Type | FY2023 ($ in thousands) | FY2022 ($ in thousands) | FY2021 ($ in thousands) | | :-------------- | :---------------------- | :---------------------- | :---------------------- | | U.S. federal | (2,376) | 9,675 | 9,104 | | U.S. state | 18 | 2,610 | 1,378 | | Foreign | 242 | 1,736 | 1,177 | | Total | (2,116) | 14,021 | 11,659 | - AerSale recorded an income tax benefit of $2.1 million in 2023, a significant change from an expense of $14.0 million in 2022, primarily due to a valuation allowance release and R&D credits[362][364] - Deferred tax assets, net of liabilities, increased to $12.2 million in 2023 from $11.3 million in 2022, with a valuation allowance of $1.3 million recorded against an outside basis difference[366] NOTE N - EARNINGS PER SHARE Reports negative basic and diluted EPS in 2023, reflecting the net loss for the period, compared to positive EPS in prior years Earnings Per Share (FY2023 vs. FY2022 vs. FY2021) | Metric | FY2023 | FY2022 | FY2021 | | :------------------------------------ | :---------- | :---------- | :---------- | | Net (loss) income attributable to common shareholders for EPS | $(7,833) | $43,861 | $36,115 | | Weighted-average shares outstanding - basic | 51,291,424 | 51,568,436 | 43,193,995 | | Basic (Loss) Earnings Per Share | $(0.11) | $0.85 | $0.84 | | Weighted-average shares outstanding - diluted | 51,457,821 | 53,145,639 | 47,310,100 | | Diluted (Loss) Earnings Per Share | $(0.15) | $0.83 | $0.76 | - Basic and diluted EPS turned negative in 2023, reporting a loss of $0.11 and $0.15 respectively, compared to positive EPS in prior years, reflecting the net loss for the period[374] NOTE O - STOCKHOLDERS' EQUITY Details common stock outstanding, share repurchases, vested earn-out shares, and restricted stock units under the 2020 Equity Incentive Plan - As of December 31, 2023, there were 52,954,430 shares of common stock issued and outstanding[372] - The company repurchased 1,500,000 shares of common stock for $22.2 million in November 2022[372] - Earn-out shares and unvested founder shares, contingent on stock price targets, fully vested by October 2021[375][378] - The 2020 Equity Incentive Plan had 532,399 restricted stock units outstanding as of December 31, 2023, with $7.9 million in share-based compensation expense recognized in 2023[384][388] NOTE P- BUSINESS SEGMENTS Reports revenue and gross profit for Asset Management Solutions and TechOps segments, noting customer concentration - AerSale reports in two segments: Asset Management Solutions (leasing, trading, disassembly for product sales) and TechOps (MRO, engineered solutions product sales)[391][392] Segment Revenue and Gross Profit (FY2023 vs. FY2022) | Segment | FY2023 Revenue ($ in thousands) | FY2022 Revenue ($ in thousands) | FY2023 Gross Profit ($ in thousands) | FY2022 Gross Profit ($ in thousands) | | :----------------------------- | :------------------------------ | :------------------------------ | :----------------------------------- | :----------------------------------- | | Asset Management Solutions | 215,167 | 277,607 | 67,655 | 118,231 | | TechOps | 119,336 | 130,937 | 24,766 | 33,163 | | Total | 334,503 | 408,544 | 92,421 | 151,394 | - Two customers accounted for 25% of total revenue in 2023, with sales split between TechOps ($35.7 million) and Asset Management Solutions ($46.5 million)[397] NOTE Q - LEASES Details operating lease ROU assets and liabilities, total lease expense, and future undiscounted operating lease payments - AerSale recognizes operating lease ROU assets and liabilities based on the present value of lease payments, using its incremental borrowing rate[399] Operating Lease Expense (FY2023 vs. FY2022) | Lease Expense Type | FY2023 ($ in thousands) | FY2022 ($ in thousands) | | :----------------- | :---------------------- | :---------------------- | | Operating lease cost | 7,001 | 5,005 | | Short-term lease cost | 392 | 170 | | Variable lease cost | 397 | 1,071 | | Total | 7,790 | 6,246 | - Total undiscounted operating lease payments as of December 31, 2023, were $36.4 million, with a weighted-average remaining lease term of 7.13 years and a discount rate of 6.34%[408][410] NOTE R - COMMITMENTS AND CONTINGENCIES Covers executive employment agreements, including bonuses and severance, and ongoing litigation not expected to materially impact financials - Executive management employment agreements include discretionary bonuses and severance payments under certain termination conditions, with noncompete clauses[411] - The company is involved in litigation incidental to its business but does not believe the ultimate liability will materially affect its financial condition or results of operations[412][414] NOTE S - RELATED-PARTY TRANSACTIONS Reports an unrealized loss of $5.4 million in 2021 on an equity investment from a former consolidated VIE, AerLine - In 2021, AerSale recognized an unrealized loss of $5.4 million on an equity investment from a former consolidated VIE, AerLine, due to its financial deterioration[415] NOTE T - BENEFIT PLANS Details AerSale's 401(k) retirement savings plan, including nondiscretionary 3% safe harbor contributions to eligible participants - AerSale sponsors a 401(k) retirement savings plan, making nondiscretionary 3% safe harbor contributions to eligible participants[416] Nondiscretionary Contributions to Benefit Plan (FY2023 vs. FY2022 vs. FY2021) | Year | Nondiscretionary Contributions ($ in thousands) | | :--- | :-------------------------------------------- | | 2023 | 1,495 | | 2022 | 1,250 | | 2021 | 929 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE AerSale reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[418] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - As of December 31, 2023, AerSale's management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at the reasonable assurance level[420][421] - Management also assessed and concluded that the company maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO framework[423][425] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2023[426] ITEM 9B. OTHER INFORMATION This item is not applicable and contains no additional information - This item is not applicable[429] ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS This item is not applicable and contains no additional information - This item is not applicable[429] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement[426][428] ITEM 11. EXECUTIVE COMPENSATION Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement[426][428] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Details equity compensation plans, with 532,399 securities for issuance at $14.82 average exercise price, and 3,404,137 available for future issuance Equity Compensation Plan Information (as of December 31, 2023) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------------------------------------ | :----------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 532,399 | 14.82 | 3,404,137 | | Equity compensation plans not approved by security holders | - | - | - | | Total | 532,399 | 14.82 | 3,404,137 | - The 2020 Plan had 2,996,618 shares available for future grants, and the ESPP had 407,519 shares available as of December 31, 2023[431] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement[432] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement - Information for this item will be incorporated by reference from the 2024 Annual Meeting of Stockholders proxy statement[432][435] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Lists all exhibits filed with the Form 10-K, omitting financial statement schedules as not applicable or already presented - The section provides a list of exhibits filed as part of the Annual Report, including merger agreements, certificates of incorporation, bylaws, warrant agreements, and executive offer letters[434][433][438][442][446][449][454] - Financial statement schedules have been omitted because they are not applicable, not required, or the information is already shown in the financial statements or their notes[432] ITEM 16. FORM 10-K SUMMARY This item indicates that no Form 10-K summary is provided - No Form 10-K summary is provided[469]