AerSale Corp (ASLE) FY 2024 MD&A

ITEM 7          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following management’s discussion and analysis together with the Consolidated Financial Statements. 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 by AerSale because of the factors described in the sections entitled “Risk Factors” and “Special Note Regarding Forward-looking Statements.” A discussion of the year ended December 31, 2023 compared to the year ended December 31, 2022 is included in our Annual Report on Form 10-K for the year ending December 31, 2023, filed with the SEC on March 8, 2024, under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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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.

We are a worldwide provider of aftermarket commercial Flight Equipment, 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 Flight Equipment acquisitions either as whole assets or by disassembling for used serviceable material (“USM”), and TechOps, comprised of MRO activities for aircraft and their components, and sales of internally developed engineered solutions and other serviceable products.

Our Asset Management Solutions segment focuses on mid-life Flight Equipment. 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 are 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 to all Flight Equipment. 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 for which we obtained Federal Aviation Administration (“FAA”) approval to sell as a solution for compliance with the FAA’s fuel tank flammability regulations. Another example of these solutions is our AerAware™ product, an industry-leading, next generation Enhanced Flight Vision System (“EFVS”) that has recently received approval by the FAA for the Boeing B737NG product line. 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 activities that are expensed as incurred.

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Results of Operations

Sales and gross profit for AerSale’s two business segments for the years ended in December 31, 2024 and 2023 were as follows:

Year ended December 31, 2024 compared to the year ended December 31, 2023

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Total revenue for the year ended December 31, 2024 increased by $10.6 million or 3.2% compared to 2023, driven by an increase of $0.3 million, or 0.1%, within Asset Management Solutions and an increase of $10.3 million, or 8.6%, within TechOps.

Asset Management Solutions

Sales in the Asset Management Solutions segment increased by $0.3 million to $215.5 million, or 0.1%, for the year ended December 31, 2024 compared to 2023, due to a $39.1 million decrease in revenue from Aircraft, and a $39.4 million increase in revenue from Engines. The decrease in Aircraft revenue is due to lower Flight Equipment sales in the amount of $36.7 million primarily attributable to decreased activity in the B757 product line resulting from softer demand in the freighter market, and lower leasing revenue of $1.8 million, partly offset by higher USM sales. The increase in Engines revenue is due to higher USM sales of $19.7 million, Flight Equipment sales of $9.4 million, and higher leasing revenue, primarily attributable to greater activity in the PW4000 and CFM56 product lines as we continue to monetize our feedstock.

Cost of sales in Asset Management Solutions decreased by $14.5 million to $133.0 million, or 9.8%, for the year ended December 31, 2024 compared to 2023. The decrease in cost of sales for Aircraft was primarily driven by the sales

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decrease discussed above. The increase in cost of sales for Engine was primarily driven by the sales increase discussed above. Gross profit in Asset Management Solutions increased by $14.8 million to $82.4 million, or 21.9%, for the year ended December 31, 2024 compared to 2023. The gross profit increase is mainly attributable to the higher margin generated on Flight Equipment sales, as noted below.

Aircraft gross profit margins increased to 34.8% for the year ended December 31, 2024, from 28.1% for the year ended December 31, 2023, due to higher margin on USM sales resulting from changes in product mix. Engines gross profit margins increased to 39.1% for the year ended December 31, 2024, from 33.4% for the year ended December 31, 2023, mainly due to higher margin on Flight Equipment sales, offset by changes in the USM product mix.

TechOps

AerSale’s revenue from the TechOps segment increased by $10.3 million to $129.6 million, or 8.6%, for the year ended December 31, 2024, compared to 2023. The increase was primarily driven by higher MRO product sales and higher service revenue from component repair activities.

Cost of sales in TechOps increased by $13.5 million to $108.1 million, or 14.3%, for the year ended December 31, 2024 compared to 2023, driven by revenue fluctuations noted above. Gross profit in TechOps decreased $3.3 million to $21.5 million, or 13.2%, for the year ended December 31, 2024, compared to 2023, driven by lower profit generated on MRO services. Gross profit margin decreased to 16.6% for the year ended December 31, 2024 compared to 20.8% for the year ended December 31, 2023, driven by lower margin on MRO services as a result of our facility expansion projects, partly offset by higher margins on product sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $9.0 million to $94.2 million, or 8.7%, for the year ended December 31, 2024, as compared to 2023. The decrease was primarily related to lower share-based compensation, partially offset by higher labor cost at our heavy MRO facilities from our expansion projects.

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 was determined using the Black-Scholes option pricing model. We recorded a $2.3 million gain on the change in fair value of the warrant liability for each of the years ended December 31, 2024 and 2023, respectively.

Interest (expense) income, net

Interest expense, net for the year ended December 31, 2024 was $5.7 million, as compared to interest income, net of $0.2 million for the year ended December 31, 2023. The increase in interest expense, net was primarily related to interest expense incurred on higher borrowings under our debt facilities during the current year as a result of feedstock acquisitions and MRO expansion investments.

Other income (expense), net

Other income, net for the year ended December 31, 2024 increased by $0.8 million to $1.5 million, as compared to 2023, primarily due to $1.0 million gain on insurance proceeds partially offset by unfavorable foreign exchange rate fluctuations.

Income taxes

The effective tax rate for the year ended December 31, 2024 was 25.3% compared to 27.5% for the year ended December 31, 2023. The decrease in effective tax rate was mainly a result of the change in fair market value of the warrants, the impact of state income taxes, and stock-based compensation. The difference between the effective tax rate and the

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statutory tax rate of 21% for the year ended December 31, 2024, was primarily due to the change in fair market value of the warrants, and return to provisions adjustments, among others. The difference between the effective tax rate and the statutory tax rate of 21% for the year ended December 31, 2023, was primarily due to the impact of a valuation allowance release and an increase in credits offset by executive compensation.

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Financial Position, Liquidity and Capital Resources

As of December 31, 2024, we had $4.7 million of cash and cash equivalents. We finance our growth through cash flows generated from operations and borrowings secured by our assets. We had $39.2 million outstanding under the Revolving Credit Agreement (as defined below) as of December 31, 2024, with $138.1 million of availability thereunder. We generated cash from operations of $11.2 million, primarily as a result of our income from operations, utilized cash for investing activities of $16.1 million, and generated cash from financing activities in the amount of $3.8 million for the year ended December 31, 2024.

During the year ended December 31, 2023, we entered into a revolving term loan collateralized by our property and equipment (the “Synovus Equipment Loan”) and borrowed $8.6 million. During the year ended December 31, 2024, the Company financed additional equipment purchases of $0.6 million under this facility and paid off the entire loan balance in the amount of $9.2 million.

During the year ended December 31, 2024, we entered into a revolving term loan collateralized by our property and equipment purchases (the “CIBC Equipment Loan”) and borrowed $1.8 million under this facility, which remains outstanding as of December 31, 2024.

We believe our equity base, internally generated funds, and existing availability under our debt facilities are sufficient to maintain our level of operations over the next 12 months. Any projections of future cash needs and cash flows beyond the next twelve months are subject to substantial uncertainty, but we believe our sources of liquidity, as discussed above, will be sufficient to meet our long-term cash requirements. If an event occurs that affects 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, open-market purchases, privately negotiated transactions or otherwise including, but not limited to, privately negotiated transactions with certain of our stockholders who have rights to require us to file a registration statement covering shares of our common stock. 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—Year ended December 31, 2024 compared to Year ended December 31, 2023

Cash Flows from Operating Activities

Net cash provided by operating activities was $11.2 million for the year ended December 31, 2024 compared to cash used of $174.2 million for the same period in 2023. The increase in cash provided of $185.3 million was primarily due to lower feedstock acquisitions of $61.7 million during 2024 compared to $131.9 million during 2023, as well as $31.9 million related to proceeds from insurance claims.

Cash Flows from Investing Activities

Net cash used in investing activities was $16.1 million for the year ended December 31, 2024, compared to cash provided of $3.1 million in the same period for 2023. Cash used in investing activities during the year ended December 31, 2024 was driven by purchases of property and equipment and Flight Equipment in support of our TechOps expansion projects. Cash generated by investing activities during year ended December 31, 2023 was driven by Flight Equipment sales offset in part by purchase of property and equipment.

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Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2024 was $3.8 million, compared to $29.7 million in the same period for 2023. Cash provided by financing activities during the year ended December 31, 2024 was primarily related to the proceeds from net borrowings under our Revolving Credit Agreement, along with borrowings under the CIBC Equipment Loan, offset in part by net repayments under the Synovus Equipment Loan. Cash provided by financing activities during the year ended December 31, 2023 is the result of proceeds from net borrowings under the Synovus Equipment Loan, as well as net borrowings under the Revolving Credit Agreement.

Debt Obligations and Covenant Compliance

Wells Fargo Senior Secured Revolving Credit Facility

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, expandable to $200.0 million, subject to conditions and the availability of lender commitments and borrowing base limitations, and to extend the maturity date to July 24, 2028, subject to certain conditions.

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 December 31, 2024, there was $39.2 million outstanding under the Revolving Credit Agreement and we had $138.1 million of availability thereunder. We were in compliance with our debt covenants for the Revolving Credit Agreement as of December 31, 2024.

Synovus Equipment Loan

On June 30, 2023, the Company entered into the Synovus Equipment Loan with a total advance commitment of $10.0 million for the purpose of financing capital expenditures on property and equipment. This facility became a term loan during the quarter ended June 30, 2024, with a maturity date of June 26, 2027. The Equipment Loan was collateralized by the property and equipment it financed and required interest only payment until converted to a term loan, at which point, principal and interest payments were required.

During the year ended December 31, 2024, the Company borrowed an additional $0.6 million to finance equipment purchases and paid off the entire loan balance in the amount of $9.2 million.

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CIBC Equipment Loan

On November 22, 2024, the Company entered into the CIBC Equipment Loan with a total advance commitment of $10.0 million for the purpose of financing capital expenditures on property and equipment. Advances made by the lender are convertible into term loans at the option of the lender at a rate of SOFR plus 3.0% and have a maturity date of thirty-six (36) months from the term loan conversion date. Advances under this loan are collateralized by the property and equipment it finances and require interest only payment until converted to a term loan, at which point, principal and interest payments are required.

During the year ended December 31, 2024, the Company borrowed $1.8 million under this facility, which remained outstanding as of December 31, 2024. As of December 31, 2024, borrowings under this facility were converted to a term loan maturing on December 23, 2027.

We were in compliance with our debt covenants for the CIBC Equipment Loan as of December 31, 2024.

Off-Balance Sheet Arrangements and Contractual Obligations

We did not have any off-balance sheet arrangements as of December 31, 2024. Refer to Note Q – Leases within our Consolidated Financial Statements in this Annual Report for a summary of our non-cancelable contractual obligations under operating leases.

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The Company has entered into a purchase commitment with Universal Avionics, a subsidiary of Elbit Systems, valued at $21.0 million for the acquisition of technical equipment for manufacturing our AerAware™ product. The commitment is expected to be partially satisfied during 2025, with the remaining commitment delivery date to be determined.

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Critical Accounting Policies and Estimates

The preparation of 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 Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Refer to Note B to the Consolidated Financial Statements in Item 8 of this Annual Report for a discussion of our significant accounting policies and estimates. The following is a summary of critical accounting estimates and additional information on the level of uncertainty regarding relevant changes to the estimates and assumptions.

Revenue Recognition

We measure revenue based on the consideration specified in a contract with a customer, and exclude any sales commissions and taxes collected and remitted to government agencies. We recognize revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. 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. For service revenue, we utilize the input method of cost-to-cost to measure progress and 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 make certain judgments and estimates, including estimated revenue 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.

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Changes in estimates and assumptions related to our arrangements are recorded using the cumulative catch-up method of accounting. The catch-up adjustment for the current year due to changes in revenue estimates did not have a material impact on our financial statements.

Inventory Cost

We record inventory at the lower of cost or net realizable value. For purchases of whole Flight Equipment for sale or lease, cost is determined using the specific identification method whereby total cost is the cost paid, including certain asset acquisition costs that can be capitalized, to acquire such assets as a whole.

Additionally, we purchase certain whole Flight Equipment to disassemble and supply material for our engine and airframe USM inventory. For Flight Equipment parts that originate from such dismantled aircraft and engines, cost is determined using a ratio calculated based on the relationship of the cost of the dismantled aircraft or engine at the time of purchase to the total estimated sales value of the dismantled aircraft or engine at the time of purchase. At the time of sale, this ratio is applied to the sale price of each individual airframe and/or engine part to determine its allocated cost. At the time of sale, the sum of an individual part’s allocated cost and actual repair or overhaul costs incurred represent the total cost for such part.

We evaluate this ratio periodically, and if necessary, update our sales estimates and make prospective adjustments to this ratio. Any amounts identified with an estimated sales value lower than the carrying value is reduced to the estimated net realizable value at the time of the review. Expenditures required for the repair of engine and airframe parts are capitalized as inventory and are expensed as cost of sales when associated parts are sold. Our allocation of inventory between short term and long term reflects the inventory’s operating cycle, which is longer than one year due to teardown and repair lead times. Inventory expected to be monetized within 18 months as well as work-in-process and inventory used in MROs are reported under current assets on the Consolidated Balance Sheets. During the year ended December 31, 2024, we adjusted the estimated return in certain product lines as a result of new material received into inventory as well as changes in demand for certain product lines. During the year ended December 31, 2024, the Company recorded additional inventory reserves of $0.9 million.

Goodwill

In the first quarter of 2024, the Company identified a triggering event that may indicate the fair value of one or more of the Company’s reporting units more likely than not did not exceed their carrying values. The triggering event was due to the significant decline in the market price of the Company’s common stock. As a result and due to the lack of recovery of the Company’s stock price during the year ended December 31, 2024, the Company performed a quantitative goodwill impairment test for the Asset Management Solutions and ACT reporting units for each of the quarters ended March 31, 2024, June 30, 2024, September 30, 2024, and December 31, 2024, and determined that the fair values exceeded the carrying values for each reporting unit of as the end of each quarter tested. As such, the quantitative tests did not result in a goodwill impairment for the Company’s reporting units.

As part of our quantitative assessment as of December 31, 2024, we noted that our fair value estimates of the Asset Management Solutions reporting unit exceeded their carrying value by a small margin, which indicates a higher potential risk of goodwill impairment in the future; especially if this reporting unit is unable to achieve projected performance metrics. As of December 31, 2024, the amount of goodwill in the Asset Management Solutions reporting unit amounted to $13.4 million.

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The fair value determination of the Company’s reporting units and goodwill is judgmental in nature and requires the use of estimates and assumptions that are sensitive to changes. Such estimates include revenue growth rates, profit margins, and discount rates which consider the risk-free rate as well as company and market specific risk premiums. Revenue estimates for the Asset Management Solutions reporting unit are dependent on our ability to monetize existing Flight Equipment and meet our feedstock acquisition targets. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible a material change could occur. As a result, there can be no assurance that the estimates and assumptions made for purposes of the quantitative goodwill and indefinite-lived intangible impairment tests will prove to be an accurate prediction of future results.

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Recent Accounting Pronouncements

The most recent adopted and to be adopted accounting pronouncements are described in Note B to AerSale’s Consolidated Financial Statements included in this Annual Report.