Air T Inc 10-K for FY2023
Air T Inc (AIRT)
10-K
2023-06-27
For: 2023-03-31
View Original
Added on
April 09, 2026
About this 10-K
Air T Inc filed this 10-K on June 27, 2023, covering the fiscal year ended March 31, 2023 (FY2023).
Headline figures
Fiscal year ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $247.32M
- up 39.7% from $177.08M a year earlier
- Net loss
- $12.3M
- compared with net income of $10.93M a year earlier
- Diluted EPS
- -$4.32
- compared with $3.78 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
| For the fiscal year ended | |||||
or
| For the transition period from | to | |||||||||||||
| Commission file number | |||||
(Exact name of registrant as specified in its charter)
| State or other jurisdiction of | (I.R.S. Employer | |||||||||||||
| incorporation or organization | Identification No.) | |||||||||||||
(Address of principal executive offices, including zip code)
(980 ) 595 – 2840
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| *Issued by Air T Funding | ||||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer | ☐ | Accelerated Filer | ☐ | ||||||||
| ☒ | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ .
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of September 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) based upon the closing price of the common stock on September 30, 2022 was approximately $17,244,993 .
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Common Stock | Common Shares, par value of $.25 per share | ||||
Outstanding Shares at May 31, 2023 | |||||
DOCUMENTS INCORPORATED BY REFERENCE
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| AIR T, INC. AND SUBSIDIARIES | ||
2023 ANNUAL REPORT ON FORM 10-K | ||
| TABLE OF CONTENTS | ||
| Page | ||||||||
| Item 1B. | ||||||||
| [Reserved] | ||||||||
| Item 7A. | ||||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |||||||
Interactive Data Files | ||||||||
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PART I
Item 1. Business
Air T, Inc. (the “Company,” “Air T,” “we” or “us” or “our”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth in its free cash flow per share over time.
We currently operate in four industry segments:
•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial jet engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;
•Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.
Acquisitions
On January 31, 2023, the Company acquired Worldwide Aircraft Services, Inc. ("WASI"), a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport. The acquisition was was funded with cash and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. WASI is included within the Overnight Air Cargo segment. See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Unconsolidated Investments
The Company has ownership interest in Contrail Asset Management, LLC (“CAM”). The operations of CAM are not consolidated into the operations of the Company. See Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
The Company also has ownership interests in Insignia Systems, Inc. ("Insignia") and Cadillac Casting, Inc. ("CCI"). The operations of these companies are not consolidated into the operations of the Company. See Note 10 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income (loss) and Adjusted EBITDA.
Certain financial data with respect to the Company’s geographic areas and segments is set forth in Notes 21 and 22 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Air T was incorporated under the laws of the State of Delaware in 1980. The principal place of business of Air T is 11020 David Taylor Drive, Suite 305, Charlotte NC, 28262 and Mountain Air Cargo, Inc. (“MAC”) is 5930 Balsom Ridge Road, Denver, North Carolina. The principal place of business of CSA Air, Inc. (“CSA”) is Iron Mountain, Michigan. The principal place of business for Global Ground Support, LLC (“GGS”) is Olathe, Kansas. The principal place of business of Delphax Technologies, Inc (“Delphax”) is Minneapolis, Minnesota. The principal place of business for Delphax Solutions, Inc. (“DSI”) is Mississauga, Canada. The principal place of business of Contrail Aviation Support, LLC (“Contrail”) is Verona, Wisconsin. The principal place of business of AirCo, LLC, AirCo 1, LLC, AirCo 2, LLC and AirCo Services, LLC (collectively, "AirCo”) and Worthington Aviation, LLC (“Worthington”) is Eagan, Minnesota. The principal place of business of Jet Yard, LLC (“Jet Yard”) and Jet Yard Solutions, LLC ("Jet Yard Solutions") is Marana, Arizona. The principal place of business of Air'Zona Aircraft Services, Inc. ("Air'Zona") is Kingman, Arizona. The principal place of business of Wolfe Lake is Minneapolis, Minnesota. The principal place of business of GdW Beheer B.V. ("GdW") is Amsterdam, the Netherlands. GdW was administratively dissolved on June 24, 2022 with Shanwick B.V. ("Shanwick") as the surviving entity and Shanwick's principal place of business is Amsterdam, the Netherlands. The principal place of business of Landing Gear Support Services, Inc. and Landing Gear Support Services PTE Limited (collectively, "LGSS") is Singapore, Singapore. The principal place of business of WASI is Springfield, Missouri.
We maintain an Internet website at http://www.airt.net and our SEC filings may be accessed through links on our website. The information on our website is available for information purposes only and is not incorporated by reference in this Annual Report on Form 10-K.
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Overnight Air Cargo.
The Company’s Overnight Air Cargo segment comprises the operations of MAC, CSA and WASI. MAC and CSA have a relationship with FedEx spanning over 40 years and represent two of nine companies in the U.S. that have North American feeder airlines under contract with FedEx. MAC and CSA operate and maintain Cessna Caravan, Sky Courier, ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States and upper Midwest, and in the Caribbean. MAC and CSA’s revenues are derived principally pursuant to “dry-lease” service contracts with FedEx. In these “dry- lease" contracts, FedEx provides the aircraft while MAC and CSA provide their own crew and exercise operational control of their flights.
On June 1, 2021, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the aircraft operated by MAC and CSA and replaced all prior dry-lease service contracts. These dry-lease agreements provide for the lease of specified aircraft by MAC and CSA in return for the payment of monthly rent with respect to each aircraft leased, which monthly rent reflected an estimate of a fair market rental rate. These dry-lease agreements provide that FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by MAC and CSA, respectively. The current dry-lease agreements provide for the reimbursement of MAC and CSA’s costs by FedEx, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs. The current dry-lease agreement was most recently renewed on June 1, 2021 and is set to expire on August 31, 2026. The dry-lease agreements may be terminated by FedEx or MAC and CSA, respectively, at any time upon 90 days’ written notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written notice. In addition, each of the dry-lease agreements provides that FedEx may terminate the agreement upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes MAC or CSA’s only customer, or MAC or CSA employs fewer than six employees. As of the date of this report, FedEx would be permitted to terminate each of the dry-lease agreements under this provision. The Company believes that the short-term nature of its agreements with FedEx is standard within the airfreight contract delivery service industry, where performance is measured on a daily basis.
As of March 31, 2023, MAC and CSA had an aggregate of 85 aircraft under its dry-lease agreements with FedEx. Included within the 85 aircraft, 2 Cessna Caravan aircraft are considered soft-parked. Soft-parked aircraft remain covered under our agreements with FedEx although at a reduced administrative fee compared to aircraft that are in operation. MAC and CSA continue to perform maintenance on soft-parked aircraft, but they are not crewed and do not operate on scheduled routes.
Revenues from MAC and CSA’s contracts with FedEx accounted for approximately 36% and 41% of the Company’s consolidated revenue for the fiscal years ended March 31, 2023 and 2022, respectively. The loss of FedEx as a customer would have a material adverse effect on the Company. FedEx has been a customer of the Company since 1980. MAC and CSA are not contractually precluded from providing services to other parties and MAC occasionally provides third-party maintenance services to other airline customers and the U.S. military.
MAC and CSA operate under separate aviation certifications. MAC is certified to operate under Part 121, Part 135 and Part 145 of the regulations of the FAA. These certifications permit MAC to operate and maintain aircraft that can carry a maximum cargo capacity of 7,500 pounds on the Cessna Caravan 208B under Part 135 and a maximum cargo capacity of 14,000 pounds for the ATR-42 and 17,800 pounds for the ATR-72 aircraft under Part 121. The maximum payload (cargo capacity) for the Cessna 408 operated under Part 135 is 6,000 pounds. The maximum structural payload (cargo capacity) for the ATR72-600F operated under Part 121 is 20,281 pounds. CSA is certified to operate and maintain aircraft under Part 135 of the FAA regulations. This certification permits CSA to operate aircraft with a maximum cargo capacity of 7,500 pounds.
MAC and CSA, together, operated the following FedEx-owned cargo aircraft as of March 31, 2023:
| Type of Aircraft | Model Year | Form of Ownership | Number of Aircraft | ||||||||||||||
| Cessna Caravan 208B (single turbo prop) | 1985-1996 | Dry lease | 61 | ||||||||||||||
| Cessna SkyCourier 408 (twin turbo prop) | 2022-2023 | Dry lease | 4 | ||||||||||||||
| ATR-42 (twin turbo prop) | 1992 | Dry lease | 9 | ||||||||||||||
| ATR-72 (twin turbo prop) | 1992 | Dry lease | 10 | ||||||||||||||
| ATR-72-600 (twin turbo prop) | 2022-2023 | Dry lease | 1 | ||||||||||||||
| 85 | |||||||||||||||||
The Cessna Caravan 208B aircraft are maintained under an FAA Approved Aircraft Inspection Program (“AAIP”). The inspection intervals range from 100 to 200 hours. The current engine overhaul period on the Cessna aircraft is 8,000 hours.
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The ATR-42 and ATR-72 aircraft are maintained under a FAA Part 121 continuous airworthiness maintenance program. The program consists of A and C service checks as well as calendar checks ranging from weekly to 12 years in duration. The engine overhaul period is 6,000 hours.
The Cessna Caravan 408 aircraft are maintained under an FAA Approved AAIP. The inspection program consists of 400 to 5,600 flight hour checks and 18 month to 120 month calendar checks.
MAC and CSA operate in a niche market within a highly competitive contract cargo carrier market. MAC and CSA are two of nine carriers that operate within the United States as FedEx feeder carriers. MAC and CSA are benchmarked against the other five FedEx feeders based on safety, reliability, compliance with federal, state and applicable foreign regulations, price and other service-related measurements. The Company believes accurate industry data is not available to indicate the Company’s position within its marketplace (in large measure because all of the Company’s direct competitors are privately held), but management believes that MAC and CSA, combined, constitute the largest contract carrier of the type described.
FedEx conducts periodic audits of MAC and CSA, and these audits are an integral part of the relationship between the carrier and FedEx. The audits test adherence to the dry-lease agreements and assess the carrier’s overall internal control environment, particularly as related to the processing of invoices of FedEx-reimbursable costs. The scope of these audits typically extends beyond simple validation of invoice data against the third-party supporting documentation. The audit teams generally investigate the operator’s processes and internal control procedures. The Company believes satisfactory audit results are critical to maintaining its relationship with FedEx. The audits conducted by FedEx are not designed to provide any assurance with respect to the Company’s consolidated financial statements, and investors, in evaluating the Company’s consolidated financial statements, should not rely in any way on any such examination of the Company or any of its subsidiaries.
On January 31, 2023, the Company acquired WASI, an aircraft repair station that began operating in 1986. WASI is a certified FAA/EASA part 145 repair station (no. OWRF547L) and specializes in medium passenger regional jets, regional/commuter turboprops, cargo and special mission operators. It maintains a fully equipped engine shop with tooling and engine run stands. Services of WASI include inspections, contract maintenance, refurbishment, structural repairs and modifications, avionics, engine service refurbishment and upgrades.
The Company’s overnight air cargo operations are not materially seasonal.
Ground Equipment Sales.
GGS is located in Olathe, Kansas and manufactures, sells and services aircraft deicers and other specialized equipment sold to domestic and international passenger and cargo airlines, ground handling companies, the United States Air Force (“USAF”), airports and industrial customers. GGS’s product line includes aircraft deicers, scissor-type lifts, military and civilian decontamination units, flight-line tow tractors, glycol recovery vehicles and other specialized equipment. In the fiscal year ended March 31, 2023, sales of deicing equipment accounted for approximately 85% of GGS’s revenues, compared to 88% in the prior fiscal year.
GGS designs and engineers its products. Components acquired from third-party suppliers are used in the assembly of its finished products. Components are sourced from a diverse supply chain. The primary components for mobile deicing equipment are the chassis (which is a commercial medium or heavy-duty truck), the fluid storage tank, a boom system, the fluid delivery system and heating equipment. The price of these components is influenced by raw material costs, principally high-strength carbon steels and stainless steel. GGS utilizes continuous improvements and other techniques to improve efficiencies and designs to minimize product price increases to its customers, to respond to regulatory changes, such as emission standards, and to incorporate technological improvements to enhance the efficiency of GGS’s products. Improvements have included the development of single operator mobile deicing units to replace units requiring two operators, a patented premium deicing blend system and a more efficient forced-air deicing system.
GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also offers fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab design, a patented forced-air deicing nozzle, on-board glycol blending system to substantially reduce glycol usage, and color and style of the exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol recovery vehicles and other special purpose mobile equipment.
GGS competes primarily on the basis of the quality and reliability of its products, prompt delivery, service and price. The market for aviation ground service equipment is highly competitive. Certain of GGS' competitors may have substantially greater financial resources than we do. These entities or investors may be able to accept more risk than the Company believes is in our best interest. In addition, the market for aviation ground services in the past has typically been directly related to the financial health of the aviation industry, weather patterns and changes in technology.
GGS’s mobile deicing equipment business has historically been seasonal, with revenues typically being lower in the fourth and first fiscal quarters as commercial deicers are typically delivered prior to the winter season. The Company has continued its
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efforts to reduce GGS’s seasonal fluctuation in revenues and earnings by broadening its international and domestic customer base and its product line.
In October 2021, GGS was awarded a new contract to supply deicing trucks to the USAF. This agreement renewed GGS' original agreement with the USAF entered in July 2009. Per the contract, GGS had to provide annual pricing for each one-year period during the duration of the contract. Further, based upon volume of commercial items purchased during that year, there may be discounts calculated into the pricing and are reflective of the submitted pricing. With all option years expected to be executed by the government, this contract would expire on October 21, 2027.
GGS sold a total of 14 and 7 deicers under the current contract with the USAF including both GL 1800 and ER 2875 models during fiscal years ended March 31, 2023 and March 31, 2022, respectively and all the units were accepted by the USAF. GGS has already received confirmed orders of 6 deicers for fiscal 2024’s delivery order and currently expects the delivery of both GL 1800 and ER 2875 models to begin in the second quarter of fiscal year 2024.
Commercial Jet Engines and Parts.
Contrail and Jet Yard (acquired during fiscal year 2017), AirCo (formed in May 2017), Worthington (acquired in May 2018), Jet Yard Solutions (formed in January 2021), Air'Zona (acquired in March 2021), LGSS (formed March 2022), and Crestone Air Partners ("Crestone", formed April 2022) comprises the commercial jet engines and parts segment of the Company’s operations. Contrail is a commercial aircraft trading, leasing and parts solutions provider. Its primary focus revolves around the CFM International CFM56-3/-5/-7 engines and the International Aero Engines V2500A5 engine, which power the two most prevalent narrow body, single aisle aircraft that are currently flown commercially—the Boeing 737 Classic / 737 NG and the Airbus A320 family. Contrail acquires commercial aircraft, jet engines and components for the purposes of sale, trading, leasing and disassembly/overhaul. Contrail holds an ASA-100 accreditation from the Aviation Suppliers Association.
Jet Yard and Jet Yard Solutions offer commercial aircraft storage, storage maintenance and aircraft disassembly/part-out services at facilities leased at the Pinal Air Park in Marana, Arizona. The prevailing climate in this area of Arizona provides conditions conducive to long-term storage of aircraft. Jet Yard Solutions is registered to operate a repair station under Part 145 of the regulations of the FAA. Jet Yard leases approximately 48.5 acres of land under a lease agreement with Pinal County, Arizona. Jet Yard was organized in 2014, entered into the lease in June 2016 and had maintained de minimus operations from formation through the date it was acquired by the Company. Effective January 1, 2021, Jet Yard subleased the aforementioned lease with Pinal County to Jet Yard Solutions.
AirCo operates an established business offering commercial aircraft parts sales, exchanges, procurement services, consignment programs and overhaul and repair services. AirCo Services, a wholly-owned subsidiary of AirCo ("AirCo Services"), holds FAA and European Aviation Safety Agency certifications covering aircraft instrumentation, avionics and a range of electrical accessories for civilian, military transport, regional/commuter and business/commercial jet and turboprop aircraft. Customers of AirCo include airlines and commercial aircraft leasing companies.
Worthington Aviation, like AirCo, operates an established business which supplies spare parts, repair programs and aircraft maintenance services to the global aviation community of regional and business aircraft fleets. Worthington offers a globally networked infrastructure and 24/7 support, ensuring fast delivery of spare parts and service, with four locations strategically located in the United States, United Kingdom & Australia. In addition, Worthington operates two FAA and EASA Certificated repair stations. The Tulsa maintenance, repair and overhaul ("MRO") facility provides composite aircraft structures, repair and support services. As a strategic resource for flight control, exhaust system and line replacement components, Worthington offers a wide array of services for complex operations. At the Eagan, Minnesota-based Repair Station, Worthington repair services offers a wide range of capabilities for repair and overhaul of airframe, accessories and power plant components in support of external as well as internal sales.
Air'Zona is a full service Fixed Base Operator, located on field at Kingman Airport (IGM) in Kingman, Arizona that provides aircraft service and maintenance. LGSS delivers landing gear focused asset management and technical and commercial services worldwide. Crestone invests in commercial jet aircraft and engines on behalf of capital partners and provides full-service aviation asset management. The revenues of Air'Zona, LGSS, and Crestone are not material to the Company's consolidated financial statements.
The Company’s commercial jet engines and parts operations are not materially seasonal.
Backlog.
GGS’s backlog consists of “firm” orders supported by customer purchase orders for the equipment sold by GGS. At March 31, 2023, GGS’s backlog of orders was $13.6 million, all of which GGS expects to be filled in the fiscal year ending March 31, 2024. At March 31, 2022, GGS’s backlog of orders was $14.0 million. Backlog is not meaningful for the Company’s other business segments.
Governmental Regulation.
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The Company and its subsidiaries are subject to regulation by various governmental agencies.
The Department of Transportation (“DOT”) has the authority to regulate air service. The DOT has authority to investigate and institute proceedings to enforce its economic regulations, and may, in certain circumstances, assess civil penalties, revoke operating authority and seek criminal sanctions.
Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA requires MAC and CSA to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.
The FAA has safety jurisdiction over flight operations generally, including flight equipment, flight and ground personnel training, examination and certification, certain ground facilities, flight equipment maintenance programs and procedures, examination and certification of mechanics, flight routes, air traffic control and communications and other matters. The FAA is concerned with safety and the regulation of flight operations generally, including equipment used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. The Company, through its subsidiaries, holds all operating airworthiness and other FAA certificates that are currently required for the conduct of its business, although these certificates may be suspended or revoked for cause. The FAA periodically conducts routine reviews of MAC and CSA’s operating procedures and flight and maintenance records.
The FAA has authority under the Noise Control Act of 1972, as amended, to monitor and regulate aircraft engine noise. The aircraft operated by the Company are in compliance with all such regulations promulgated by the FAA. Moreover, because the Company does not operate jet aircraft, noncompliance is not likely. Aircraft operated by us also comply with standards for aircraft exhaust emissions promulgated by the U.S. Environmental Protection Agency (“EPA”) pursuant to the Clean Air Act of 1970, as amended.
Jet Yard, Jet Yard Solutions, AirCo, and WASI, like Worthington, operate repair stations licensed under Part 145 of the regulations of the FAA. These certifications must be renewed annually, or in certain circumstances within 24 months. Certified repair stations are subject to periodic FAA inspection and audit. The repair station may not be relocated without written approval from the FAA.
Because of the extensive use of radio and other communication facilities in its aircraft operations, the Company is also subject to the Federal Communications Act of 1934, as amended.
Maintenance and Insurance.
The Company, through its subsidiaries, is required to maintain the aircraft it operates under the appropriate FAA and manufacturer standards and regulations.
The Company has secured public liability and property damage insurance in excess of minimum amounts required by the United States Department of Transportation.
The Company maintains cargo liability insurance, workers’ compensation insurance and fire and extended coverage insurance for owned and leased facilities and equipment. In addition, the Company maintains product liability insurance with respect to injuries and loss arising from use of products sold and services provided.
In March 2014, the Company formed SAIC, a captive insurance company licensed in Utah. SAIC insures risks of the Company and its subsidiaries that were not previously insured by the various Company insurance programs (including the risk of loss of key customers and contacts, administrative actions and regulatory changes); and may from time to time underwrite third-party risk through certain reinsurance arrangements. SAIC is included within the Company's Corporate and other segment.
Employees and Human Capital Resources.
As of March 31, 2023, the Company and its subsidiaries had 584 full-time and full-time-equivalent employees. None of the employees of the Company or any of its consolidated subsidiaries are represented by labor unions. The Company believes its relations with its employees are good.
We consider our relationship with our employees to be good. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. As it relates to our employees:
Oversight and Management
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Our executive officers are tasked with leading our organization in managing employment-related matters, including recruiting and hiring, onboarding and training, compensation planning, talent management and development. We are committed to providing team members with the training and resources necessary to continually strengthen their skills. Our executive team is responsible for periodically reviewing team member programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices. Management periodically reports to the Board regarding our human capital measures and results that guide how we attract, retain and develop a workforce to enable our business strategies.
Diversity, Equity and Inclusion
We believe that a diverse workforce is critical to our success, and we continue to monitor and improve the application of our hiring, retention, compensation and advancement processes for women and underrepresented populations across our workforce, including persons of color, veterans and LGBTQ to enhance our inclusive and diverse culture. We plan to invest in recruiting diverse talent.
Workplace Safety and Health
A vital part of our business is providing our workforce with a safe, healthy and sustainable working environment. We focus on implementing change through workforce observation and feedback channels to recognize risk and continuously improve our processes.
Importantly during fiscal years 2020 through 2022, our focus on providing a positive work environment on workplace safety have enabled us to preserve business continuity without sacrificing our commitment to keeping our colleagues and workplace visitors safe during the COVID-19 pandemic. We took immediate action at the onset of the COVID-19 pandemic to enact rigorous safety protocols in our facilities by improving sanitation measures, implementing mandatory social distancing, use of facing coverings, reducing on-site workforce through staggered shifts and schedules, remote working where possible, and restricting visitor access to our locations. We believe these actions helped minimize the impact of COVID-19 on our workforce.
Item 1B. Risk Factors
General Business Risks
Market fluctuations may affect our operations.
Market fluctuations may affect our ability to obtain funds necessary for the operation of our businesses from current lenders or new borrowings. In addition, we may be unable to obtain financing on satisfactory terms, or at all. Third-party reports relating to market studies or demographics we obtained previously also may no longer be accurate or complete. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our business, financial condition, results of operation and the overall value of our assets.
Rising inflation may result in increased costs of operations and negatively impact the credit and securities markets generally, which could have a material adverse effect on our results of operations and the market price of our common stock.
Inflation has accelerated in the U.S. and globally due in part to global supply chain issues, the increase in interest rates by the Federal Reserve, the Ukraine-Russia war, a rise in energy prices, and strong consumer demand. An inflationary environment can increase our cost of labor, as well as our other operating costs, which may have a material adverse impact on our financial results. In addition, economic conditions could impact and reduce the number of customers who purchase our products or services as credit becomes more expensive or unavailable. Although interest rates have increased and may increase further, inflation may continue. Further, increased interest rates could have a negative effect on the securities markets generally which may, in turn, have a material adverse effect on the market price of our common stock and our ability to sell additional trust preferred securities.
We could experience significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees in our operating businesses.
We compete with many other organizations for skilled management and staff employees, including organizations that operate in different market sectors than us. Costs to recruit and retain adequate personnel could adversely affect results of operations.
Legacy technology systems require a unique technical skillset which is becoming scarcer.
The Company deploys legacy technology systems in several significant business units. As technology continues to rapidly change, the available pool of individuals technically trained in and able to repair or perform maintenance on these legacy systems shrinks. As this scarcity increases, the Company’s ability to efficiently and quickly repair its legacy systems becomes increasingly difficult, which could have a significant impact on the Company’s day-to-day operations.
Security threats and other sophisticated computer intrusions could harm our information systems, which in turn could harm our business and financial results.
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We utilize information systems and computer technology throughout our business. We store sensitive data and proprietary information on these systems. Threats to these systems, and the laws and regulations governing security of data, including personal data, on information systems and otherwise held by companies is evolving and adding layers of complexity in the form of new requirements and increasing costs of attempting to protect information systems and data and complying with new cybersecurity regulations. Information systems are subject to numerous and evolving cybersecurity threats and sophisticated computer crimes, which pose a risk to the stability and security of our information systems, computer technology, and business.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information systems and computer technology to sophisticated and targeted measures known as advanced persistent threats and ransomware. The techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. A failure or breach in security could expose our company as well as our customers and suppliers to risks of misuse of information, compromising confidential information and technology, destruction of data, production disruptions, ransom payments, and other business risks which could damage our reputation, competitive position and financial results of our operations. Further, our technology resources may be strained due to an increase in the number of remote users. In addition, defending ourselves against these threats may increase costs or slow operational efficiencies of our business. If any of the foregoing were to occur, it could have a material adverse effect on our business and results of operations.
We sustained a cybersecurity attack in May 2022 involving ransomware that caused a network disruption and impacted certain of our systems. Upon detection, we undertook steps to address the incident, including engaging a team of third-party forensic experts and notifying law enforcement. We restored network systems and resumed normal operations. We have taken actions to improve our existing systems such as adding multi-factor authentication and to improve employee training and security competency. While we do not believe this event or resultant actions will have a material adverse effect on our business, this or similar incidents, or any other such breach of our data security infrastructure could have a material adverse effect on our business, results of operations and financial condition.
Although we maintain cybersecurity liability insurance, our insurance may not cover potential claims of these types or may not be adequate to indemnify us for any liability that may be imposed. Any imposition of liability or litigation costs that are not covered by insurance could harm our business.
We may not be able to insure certain risks adequately or economically.
We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a claim. If an uninsured loss or a loss in excess of insured limits should occur, or if we are required to pay a deductible for an insured loss, results of operations could be adversely affected.
Legal liability may harm our business.
Many aspects of our businesses involve substantial risks of liability, and, in the normal course of business, we have been named as a defendant or co-defendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. The expansion of our businesses, including expansions into new products or markets, impose greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our businesses and our prospects. Although our current assessment is that there is no pending litigation that could have a significant adverse impact, if our assessment proves to be in error, then the outcome of such litigation could have a significant impact on our consolidated financial statements.
Our business might suffer if we were to lose the services of certain key employees.
Our business operations depend upon our key employees, including our executive officers. Loss of any of these employees, particularly our Chief Executive Officer, could have a material adverse effect on our businesses as our key employees have knowledge of our businesses, the industries they operate in and customers that would be difficult to replace.
Our business, financial condition and results of operations could be adversely affected by global public health issues or similar events.
During the fiscal years ended March 31, 2021 and 2022, and to a lesser extent during the fiscal year ended March 31, 2023, the Company’s operations were impacted by the spread of the COVID-19 pandemic. Additionally, the Company has had to navigate the impact it had on employees, supply chains and the economy in general and the aviation industry in particular. The Company is unable at this time to predict the impact that a global health crisis or similar event would have on its businesses, financial position and operating results in future periods due to numerous uncertainties.
A pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our centers could adversely impact our business.
If a pandemic, epidemic or outbreak of an infectious disease, including new COVID-19 variants, or other public health crisis were to affect the areas in which we operate, our business, including our revenue, profitability and cash flows, could be
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adversely affected. Further, a pandemic, epidemic or outbreak of an infectious disease might adversely impact our business by causing temporary shutdowns of our businesses or by causing staffing shortages. We may be unable to locate replacement supplies, and ongoing delays could require us to reduce business operations. Although we have disaster plans in place, the extent to which new COVID-19 variants or other public health crisis will impact our business is difficult to predict and will depend on many factors beyond our control, including the speed of contagion, the development and implementation of effective preventative measures and possible treatments, the scope of governmental and other restrictions on travel and other activity, and public reactions to these factors.
Risks Related to Our Segment Operations
The operating results of our four segments may fluctuate, particularly our commercial jet engine and parts segment.
The operating results of our four segments have varied from period to period and comparisons to results for preceding periods may not be meaningful. Due to a number of factors, including the risks described in this section, our operating results may fluctuate. These fluctuations may also be caused by, among other things:
a.the economic health of the economy and the aviation industry in general;
b.FedEx’s demand for the use of the services of our Air Cargo segment;
c.the timing and number of purchases and sales of engines or aircraft;
d.the timing and amount of maintenance reserve revenues recorded resulting from the termination of long term leases, for which significant amounts of maintenance reserves may have accumulated;
e.the termination or announced termination of production of particular aircraft and engine types;
f.the retirement or announced retirement of particular aircraft models by aircraft operators;
g.the operating history of any particular engine, aircraft or engine or aircraft model;
h.the length of our operating leases; and
i.the timing of necessary overhauls of engines and aircraft.
These risks may reduce our operating segment’s results including particularly our commercial jet engines and parts segment. These risks may reduce the commercial jet engines and parts segment’s engine utilization rates, lease margins, maintenance reserve revenues and proceeds from engine sales, and result in higher legal, technical, maintenance, storage and insurance costs related to repossession and the cost of engines being off-lease. As a result of the foregoing and other factors, the availability of engines for lease or sale periodically experiences cycles of oversupply and undersupply of given engine models and generally. The incidence of an oversupply of engines may produce substantial decreases in engine lease rates and the appraised and resale value of engines and may increase the time and costs incurred to lease or sell engines. We anticipate that supply fluctuations from period to period will continue in the future. As a result, comparisons to results from preceding periods may not be meaningful and results of prior periods should not be relied upon as an indication of our future performance.
Our Air Cargo Segment is dependent on a significant customer.
Our Air Cargo business is significantly dependent on a contractual relationship with FedEx Corporation (“FedEx”), the loss of which would have a material adverse effect on our business, results of operations and financial position. In the fiscal year ended March 31, 2023, 36% of our consolidated operating revenues, and 98% of the operating revenues for our overnight air cargo segment, arose from services we provided to FedEx. While FedEx has been our customer since 1980 under similar terms, our current agreements may be terminated by FedEx upon 90 days’ written notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written notice. In addition, FedEx may terminate the dry-lease agreement with MAC or CSA upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes its only customer, or either MAC or CSA employs less than six employees. As of the date of issuance of this report, FedEx would be permitted to terminate each of the dry-lease agreements under this provision. The loss of these contracts with FedEx would have a material adverse effect on our business, results of operations and financial position.
Our dry-lease agreements with FedEx subject us to operating risks.
Our dry-lease agreements with FedEx provide for the lease of specified aircraft by us in return for the payment of monthly rent with respect to each aircraft leased. The dry-lease agreements provide for the reimbursement by FedEx of our costs, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs. Under the dry-lease agreements, certain operational costs incurred by us in operating the aircraft are not reimbursed by FedEx at cost, and such operational costs are borne solely by us. An increase in unreimbursed operational costs would negatively affect our results of operations.
Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’s operations.
Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’s operations. These risks are discussed in FedEx’s periodic reports filed with the SEC including its Annual Report on Form 10-K for the fiscal year ended May 31, 2022. These risks include but are not limited to the following:
•Economic conditions and anti-trade measures/trade policies and relations in the global markets in which it operates;
•Additional changes in international trade policies and relations could significantly reduce the volume of goods transported globally and adversely affect its business and results of operations.
•The price and availability of fuel.
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•Dependence on its strong reputation and value of its brand;
•Potential disruption to operations resulting from a significant data breach or other disruption to FedEx’s technology infrastructure;
•The continuing impact of the COVID-19 pandemic;
•The impact of being self-insured for certain costs;
•The transportation infrastructure continues to be a target for terrorist activities;
•Failure to successfully implement its business strategy and effectively respond to changes in market dynamics and customer preferences.
•Any inability to execute and effectively operate, integrate, leverage and grow acquired businesses and realize the anticipated benefits of acquisitions, joint ventures or strategic alliances;
•FedEx's ability to manage capital and its assets, including aircraft, to match shifting and future shipping volumes;
•Intense competition;
•Its autonomous delivery strategy is dependent upon the ability to successfully mitigate unique technological, operational and regulatory risks.
•The failure to successfully implement its business strategy and effectively respond to changes in market dynamics and customer preferences;
•Failure to attract and maintain employee talent or maintain company culture, as well as increases in labor and purchased transportation cost;
•Labor organizations attempt to organize groups of our employees from time to time, and potential changes in labor laws could make it easier for them to do so.
•FedEx Ground relies on service providers to conduct its linehaul and pickup-and-delivery operations, and the status of these service providers as direct employers of drivers providing these services is being challenged.
•Disruptions, modifications in service or changes in the business or financial soundness of the United States Postal Service, a significant customer and vendor of FedEx;
•The impact of proposed pilot flight and duty time regulations;
•Increasing costs, the volatility of costs and funding requirements and other legal mandates for employee benefits, especially pension and healthcare benefits;
•The impact of global climate change or by legal, regulatory or market responses to such change;
•Potentially being unable to achieve our goal of carbon neutrality for its global operations by calendar 2040;
•Any inability to quickly and effectively restore operations following adverse weather or a localized disaster or disturbance in a key geography;
•Evolving Government regulation and enforcement;
•Any adverse changes in regulations and interpretations or challenges to its tax positions;
•Complex and evolving U.S. and foreign laws and regulations regarding data protection;
•The regulatory environment for global aviation or other transportation rights;
•Other risks and uncertainties, including:
▪widespread outbreak of an illness or any other communicable disease, or any other public health crisis;
▪the increasing costs of compliance with federal, state and foreign governmental agency mandates (including the Foreign Corrupt Practices Act and the U.K. Bribery Act) and defending against inappropriate or unjustified enforcement or other actions by such agencies;
▪changes in foreign currency exchange rates, especially in the euro, Chinese yuan, British pound, Canadian dollar, Australian dollar, Hong Kong dollar, Mexican peso, Japanese yen and Brazilian real, which can affect our sales levels and foreign currency sales prices;
▪any liability resulting from and the costs of defending against class-action, derivative and other litigation, such as wage-and-hour, joint employment, securities and discrimination and retaliation claims, and any other legal or governmental proceedings;
▪the impact of technology developments on our operations and on demand for our services, and our ability to continue to identify and eliminate unnecessary information-technology redundancy and complexity throughout the organization;
▪governmental underinvestment in transportation infrastructure, which could increase our costs and adversely impact our service levels due to traffic congestion, prolonged closure of key thoroughfares or sub-optimal routing of our vehicles and aircraft;
▪disruptions in global supply chains, which can limit the access of FedEx and our service providers to vehicles and other key capital resources and increase our costs;
▪stockholder activism, which could divert the attention of management and our board of directors from our business, hinder execution of our business strategy, give rise to perceived uncertainties as to our future and cause the price of our common stock to fluctuate significantly; and,
▪constraints, volatility or disruption in the capital markets, our ability to maintain our current credit ratings, commercial paper ratings, and senior unsecured debt and pass-through certificate credit ratings, and our ability to meet credit agreement financial covenants.
A material reduction in the aircraft we fly for FedEx could materially adversely affect our business and results of operations.
Under our agreements with FedEx, we are not guaranteed a number of aircraft or routes we are to fly and FedEx may reduce the number of aircraft we lease and operate upon 10 days’ written notice. Our compensation under these agreements, including our administrative fees, depends on the number of aircraft leased to us by FedEx. Any material permanent reduction in the aircraft we operate could materially adversely affect our business and results of operations. A temporary reduction in any period could materially adversely affect our results of operations for that period.
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Sales of deicing equipment can be affected by weather conditions.
Our ground equipment sales segment’s deicing equipment is used to deice commercial and military aircraft. The extent of deicing activity depends on the severity of winter weather. Mild winter weather conditions permit airports to use fewer deicing units, since less time is required to deice aircraft in mild weather conditions. As a result, airports may be able to extend the useful lives of their existing units, reducing the demand for new units.
We are affected by the risks faced by commercial aircraft operators and MRO companies because they are our customers.
Commercial aircraft operators are engaged in economically sensitive, highly cyclical and competitive businesses. We are a supplier to commercial aircraft operators and MROs. As a result, we are indirectly affected by all of the risks facing commercial aircraft operators and MROs, with such risks being largely beyond our control. Our results of operations depend, in part, on the financial strength of our customers and our customers’ ability to compete effectively in the marketplace and manage their risks.
Our engine values and lease rates, which are dependent on the status of the types of aircraft on which engines are installed, and other factors, could decline.
The value of a particular model of engine depends heavily on the types of aircraft on which it may be installed and the available supply of such engines. Values of engines generally tend to be relatively stable so long as there is sufficient demand for the host aircraft. However, the value of an engine may begin to decline rapidly once the host aircraft begins to be retired from service and/or used for spare parts in significant numbers. Certain types of engines may be used in significant numbers by commercial aircraft operators that are currently experiencing financial difficulties. If such operators were to go into liquidation or similar proceedings, the resulting over-supply of engines from these operators could have an adverse effect on the demand for the affected engine types and the values of such engines.
Upon termination of a lease, we may be unable to enter into new leases or sell the airframe, engine or its parts on acceptable terms.
We directly or indirectly own the engines or aircraft that we lease to customers and bear the risk of not recovering our entire investment through leasing and selling the engines or aircraft. Upon termination of a lease, we seek to enter a new lease or to sell or part-out the engine or aircraft. We also selectively sell engines on an opportunistic basis. We cannot give assurance that we will be able to find, in a timely manner, a lessee or a buyer for our engines or aircraft coming off-lease or for their associated parts. If we do find a lessee, we may not be able to obtain satisfactory lease rates and terms (including maintenance and redelivery conditions), and we cannot guarantee that the creditworthiness of any future lessee will be equal to or better than that of the existing lessees of our engines. Because the terms of engine leases may be less than 12 months, we may frequently need to remarket engines. We face the risk that we may not be able to keep our engines on lease consistently.
Failures by lessees to meet their maintenance and recordkeeping obligations under our leases could adversely affect the value of our leased engines and aircraft which could affect our ability to re-lease the engines and aircraft in a timely manner following termination of the leases.
The value and income producing potential of an engine or aircraft depends heavily on it being maintained in accordance with an approved maintenance system and complying with all applicable governmental directives and manufacturer requirements. In addition, for an engine or aircraft to be available for service, all records, logs, licenses and documentation relating to maintenance and operations of the engine or aircraft must be maintained in accordance with governmental and manufacturer specifications. Under our leases, our lessees are primarily responsible for maintaining our aircraft and engines and complying with all governmental requirements applicable to the lessee and the aircraft and engines, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. However, over time, certain lessees have experienced, and may experience in the future, difficulties in meeting their maintenance and recordkeeping obligations as specified by the terms of our leases. Failure by our lessees to maintain our assets in accordance with requirements could negatively affect the value and desirability of our assets and expose us to increased maintenance costs that may not be sufficiently covered by supplemental maintenance rents paid by such lessees.
Our ability to determine the condition of the engines or aircraft and whether the lessees are properly maintaining our assets is generally limited to the lessees’ reporting of monthly usage and any maintenance performed, confirmed by periodic inspections performed by us and third-parties. A lessee’s failure to meet its maintenance or recordkeeping obligations under a lease could result in:
a.a grounding of the related engine or aircraft;
b.a repossession that would likely cause us to incur additional and potentially substantial expenditures in restoring the engine or aircraft to an acceptable maintenance condition;
c.a need to incur additional costs and devote resources to recreate the records prior to the sale or lease of the engine or aircraft;
d.a decline in the market value of the aircraft or engine resulting in lower revenues upon a subsequent lease or sale;
e.loss of lease revenue while we perform refurbishments or repairs and recreate records; and
f.a lower lease rate and/or shorter lease term under a new lease entered into by us following repossession of the engine or aircraft.
Any of these events may adversely affect the value of the engine, unless and until remedied, and reduce our revenues and increase our expenses. If an engine is damaged during a lease and we are unable to recover from the lessee or though insurance, we may incur a loss.
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We may experience losses and delays in connection with repossession of engines or aircraft when a lessee defaults.
We may not be able to repossess an engine or aircraft when the lessee defaults, and even if we are able to repossess the engine or aircraft, we may have to expend significant funds in the repossession, remarketing and leasing of the asset. When a lessee defaults and such default is not cured in a timely manner, we typically seek to terminate the lease and repossess the engine or aircraft. If a defaulting lessee contests the termination and repossession or is under court protection, enforcement of our rights under the lease may be difficult, expensive and time-consuming. We may not realize any practical benefits from our legal rights and we may need to obtain consents to export the engine or aircraft. As a result, the relevant asset may be off-lease or not producing revenue for a prolonged period of time. In addition, we will incur direct costs associated with repossessing our engine or aircraft, including, but not limited to, legal and similar costs, the direct costs of transporting, storing and insuring the engine or aircraft, and costs associated with necessary maintenance and recordkeeping to make the asset available for lease or sale. During this time, we will realize no revenue from the leased engine or aircraft, and we will continue to be obligated to pay any debt financing associated with the asset. If an engine is installed on an airframe, the airframe may be owned by an aircraft lessor or other third party. Our ability to recover engines installed on airframes may depend on the cooperation of the airframe owner.
Our commercial jet engine and parts segment and its customers operate in a highly regulated industry and changes in laws or regulations may adversely affect our ability to lease or sell our engines or aircraft.
Certain of the laws and regulations applicable to our business, include:
Licenses and consents. A number of our leases require specific governmental or regulatory licenses, consents or approvals. These include consents for certain payments under the leases and for the export, import or re-export of our engines or aircraft. Consents needed in connection with future leasing or sale of our engines or aircraft may not be received timely or have economically feasible terms. Any of these events could adversely affect our ability to lease or sell engines or aircraft.
Export/import regulations. The U.S. Department of Commerce (the “Commerce Department”) regulates exports. We are subject to the Commerce Department’s and the U.S. Department of State’s regulations with respect to the lease and sale of engines and aircraft to foreign entities and the export of related parts. These Departments may, in some cases, require us to obtain export licenses for engines exported to foreign countries. The U.S. Department of Homeland Security, through the U.S. Customs and Border Protection, enforces regulations related to the import of engines and aircraft into the United States for maintenance or lease and imports of parts for installation on our engines and aircraft.
Restriction Lists. We are prohibited from doing business with persons designated by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) on its “Specially Designated Nationals List,” and must monitor our operations and existing and potential lessees and other counterparties for compliance with OFAC’s rules. Similarly, sanctions issued by the United Nations, the U.S. government, the European Union or other foreign governments could prohibit or restrict us from doing business in certain countries or with certain persons. As a result, we must monitor our operations and existing and potential lessees and other counterparties for compliance with such sanctions.
Anti-corruption Laws. As a U.S. corporation with international operations, we are required to comply with a number of U.S. and international laws and regulations which combat corruption. For example, the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar world-wide anti-bribery laws generally prohibit improper payments to foreign officials for the purpose of influencing any official act or decision or securing any improper advantage. The scope and enforcement of such anti-corruption laws and regulations may vary. Although our policies expressly mandate compliance with the FCPA and similarly applicable laws, there can be no assurance that none of our employees or agents will take any action in violation of our policies. Violations of such laws or regulations could result in substantial civil or criminal fines or penalties. Actual or alleged violations could also damage our reputation, be expensive to defend, and impair our ability to do business.
Civil aviation regulation. Users of engines and aircraft are subject to general civil aviation authorities, including the FAA and the EASA, who regulate the maintenance of engines and issue airworthiness directives. Airworthiness directives typically set forth special maintenance actions or modifications to certain engine and aircraft types or a series of specific engines that must be implemented for the engine or aircraft to remain in service. Also, airworthiness directives may require the lessee to make more frequent inspections of an engine, aircraft or particular engine parts. Each lessee of an engine or aircraft generally is responsible for complying with all airworthiness directives. However, if the engine or aircraft is off lease, we may be forced to bear the cost of compliance with such airworthiness directives. Additionally, even if the engine or aircraft is leased, subject to the terms of the lease, if any, we may still be forced to share the cost of compliance.
Our aircraft, engines and parts could cause damage resulting in liability claims.
Our aircraft, engines or parts could cause bodily injury or property damage, exposing us to liability claims. Our leases require our lessees to indemnify us against these claims and to carry insurance customary in the air transportation industry, including general liability and property insurance at agreed upon levels. However, we cannot guarantee that one or more catastrophic events will not exceed insurance coverage limits or that lessees’ insurance will cover all claims that may be asserted against us. Any insurance coverage deficiency or default by lessees under their indemnification or insurance obligations may reduce our recovery of losses upon an event of loss.
We have risks in managing our portfolio of aircraft and engines to meet customer needs.
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The relatively long life cycles of aircraft and jet engines can be shortened by world events, government regulation or customer preferences. We seek to manage these risks by trying to anticipate demand for particular engine and aircraft types, maintaining a portfolio mix of engines that we believe is diversified, has long-term value and will be sought by lessees in the global market for jet engines, and by selling engines and aircraft that we expect will not experience obsolescence or declining usefulness in the foreseeable future. There is no assurance that the engine and aircraft types owned or acquired by us will meet customer demand.
Liens on our engines or aircraft could exceed the value of such assets, which could negatively affect our ability to repossess, lease or sell a particular engine or aircraft.
Liens that secure the payment of repairers’ charges or other liens may, depending on the jurisdiction, attach to engines and aircraft. Engines also may be installed on airframes to which liens unrelated to the engines have attached. These liens may secure substantial sums that may, in certain jurisdictions or for certain types of liens, exceed the value of the particular engine or aircraft to which the liens have attached. In some jurisdictions, a lien may give the holder the right to detain or, in limited cases, sell or cause the forfeiture of the engine or aircraft. Such liens may have priority over our interest as well as our creditors’ interest in the engines or aircraft. These liens and lien holders could impair our ability to repossess and lease or sell the engines or aircraft. We cannot give assurance that our lessees will comply with their obligations to discharge third-party liens on our assets. If they do not, we may, in the future, find it necessary to pay the claims secured by such liens to repossess such assets.
In certain countries, an engine affixed to an aircraft may become an addition to the aircraft and we may not be able to exercise our ownership rights over the engine.
In certain jurisdictions, an engine affixed to an aircraft may become an addition to the aircraft such that the ownership rights of the owner of the aircraft supersede the ownership rights of the owner of the engine. If an aircraft is security for the owner’s obligations to a third-party, the security interest in the aircraft may supersede our rights as owner of the engine. Such a security interest could limit our ability to repossess an engine located in such a jurisdiction in the event of a lessee bankruptcy or lease default. We may suffer a loss if we are not able to repossess engines leased to lessees in these jurisdictions.
Higher or volatile fuel prices could affect the profitability of the aviation industry and our lessees’ ability to meet their lease payment obligations to us.
Historically, fuel prices have fluctuated widely depending primarily on international market conditions, geopolitical and environmental factors and events and currency exchange rates. Natural and other disasters can also significantly affect fuel availability and prices. The cost of fuel represents a major expense to airlines that is not within their control, and significant increases in fuel costs or hedges that inaccurately assess the direction of fuel costs can materially and adversely affect their operating results. Due to the competitive nature of the aviation industry, operators may be unable to pass on increases in fuel prices to their customers by increasing fares in a manner that fully offsets the increased fuel costs they may incur. In addition, they may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. The profitability and liquidity of those airlines that do hedge their fuel costs can also be adversely affected by swift movements in fuel prices if such airlines are required to post cash collateral under hedge agreements. Therefore, if for any reason fuel prices return to historically high levels or show significant volatility, our lessees are likely to incur higher costs or generate lower revenues, which may affect their ability to meet their obligations to us.
Interruptions in the capital markets could impair our lessees’ ability to finance their operations, which could prevent the lessees from complying with payment obligations to us.
The global financial markets can be highly volatile and the availability of credit from financial markets and financial institutions can vary substantially depending on developments in the global financial markets. Our lessees depend on banks and the capital markets to provide working capital and to refinance existing indebtedness. To the extent such funding is unavailable, or available only on unfavorable terms, and to the extent financial markets do not provide equity financing as an alternative, our lessees’ operations and operating results may be materially and adversely affected and they may not comply with their respective payment obligations to us.
Our lessees may fail to adequately insure our aircraft or engines which could subject us to additional costs.
While an aircraft or engine is on lease, we do not directly control its operation. Nevertheless, because we hold title to the aircraft or engine, we could, in certain jurisdictions, be held liable for losses resulting from its operation. At a minimum, we may be required to expend resources in our defense. We require our lessees to obtain specified levels of insurance and indemnify us for, and insure against, such operational liabilities. However, some lessees may fail to maintain adequate insurance coverage during a lease term, which, although constituting a breach of the lease, would require us to take some corrective action, such as terminating the lease or securing insurance for the aircraft or engines. Therefore, our lessees’ insurance coverage may not be sufficient to cover all claims that could be asserted against us arising from the operation of our aircraft or engines. Inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations to us will reduce the insurance proceeds that we would otherwise be entitled to receive in the event we are sued and are required to make payments to claimants. Moreover, our lessees’ insurance coverage is dependent on the financial condition of insurance companies and their ability to pay claims. A reduction in insurance proceeds otherwise payable to us as a result of any of these factors could materially and adversely affect our financial results.
If our lessees fail to cooperate in returning our aircraft or engines following lease terminations, we may encounter obstacles and are likely to incur significant costs and expenses conducting repossessions.
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Our legal rights and the relative difficulty of repossession vary significantly depending on the jurisdiction in which an aircraft or engines are located. We may need to obtain a court order or consents for de-registration or re-export, a process that can differ substantially from county to country. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may also apply. For example, certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease, to assign it to a third party, or to entitle the lessee or another third party to retain possession of the aircraft or engines without paying lease rentals or performing all or some of the obligations under the relevant lease. Certain of our lessees are partially or wholly owned by government-related entities, which can further complicate our efforts to repossess our aircraft or engines in that government’s jurisdiction. If we encounter any of these difficulties, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft or engines.
When conducting a repossession, we are likely to incur significant costs and expenses that are unlikely to be recouped. These include legal and other expenses related to legal proceedings, including the cost of posting security bonds or letters of credit necessary to effect repossession of the aircraft or engines, particularly if the lessee is contesting the proceedings or is in bankruptcy. We must absorb the cost of lost revenue for the time the aircraft or engines are off-lease. We may incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to pay and are necessary to put the aircraft or engines in suitable condition for re-lease or sale. We may also incur significant costs in retrieving or recreating aircraft records required for registration of the aircraft and in obtaining the certificate of airworthiness for an aircraft. It may be necessary to pay to discharge liens or pay taxes and other governmental charges on the aircraft to obtain clear possession and to remarket the aircraft effectively, including, in some cases, liens that the lessee may have incurred in connection with the operation of its other aircraft. We may also incur other costs in connection with the physical possession of the aircraft or engines.
If our lessees fail to discharge aircraft liens for which they are responsible, we may be obligated to pay to discharge the liens.
In the normal course of their businesses, our lessees are likely to incur aircraft and engine liens that secure the payment of airport fees and taxes, custom duties, Eurocontrol and other air navigation charges, landing charges, crew wages, and other liens that may attach to our aircraft. Aircraft may also be subject to mechanic’s liens as a result of routine maintenance performed by third parties on behalf of our customers. Some of these liens can secure substantial sums, and if they attach to entire fleets of aircraft, as permitted for certain kinds of liens, they may exceed the value of the aircraft itself. Although the financial obligations relating to these liens are the contractual responsibility of our lessees, if they fail to fulfill their obligations, the liens may ultimately become our financial responsibility. Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our aircraft or engines. In some jurisdictions, aircraft and engine liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. If we are obliged to pay a large amount to discharge a lien, or if we are unable take possession of our aircraft subject to a lien in a timely and cost-effective manner, it could materially and adversely affect our financial results.
If our lessees encounter financial difficulties and we restructure or terminate our leases, we are likely to obtain less favorable lease terms.
If a lessee delays, reduces, or fails to make rental payments when due, or has advised us that it will do so in the future, we may elect or be required to restructure or terminate the lease. A restructured lease will likely contain terms that are less favorable to us. If we are unable to agree on a restructuring and we terminate the lease, we may not receive all or any payments still outstanding, and we may be unable to re-lease the aircraft or engines promptly and at favorable rates, if at all.
Withdrawal, suspension or revocation of governmental authorizations or approvals could negatively affect our business.
We are subject to governmental regulation and our failure to comply with these regulations could cause the government to withdraw or revoke our authorizations and approvals to do business and could subject us to penalties and sanctions that could harm our business. Governmental agencies throughout the world, including the FAA, highly regulate the manufacture, repair and operation of aircraft operated in the United States and equivalent regulatory agencies in other countries, such as the EASA in Europe, regulate aircraft operated in those countries. With the aircraft, engines and related parts that we purchase, lease and sell to our customers, we include documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. With respect to a particular engine or engine component, we utilize FAA and/or EASA certified repair stations to repair and certify engines and components to ensure marketability. The revocation or suspension of any of our material authorizations or approvals would have an adverse effect on our business, financial condition and results of operations. New and more stringent government regulations, if enacted, could have an adverse effect on our business, financial condition and results of operations. In addition, certain product sales to foreign countries require approval or licensing from the U.S. government. Denial of export licenses could reduce our sales to those countries and could have a material adverse effect on our business.
Risks Related to Our Structure and Financing/Liquidity Risks
Our holding company structure may increase risks related to our operations.
Our business, financial condition and results of operations are dependent upon those of our individual businesses, and our aggregate investment in particular industries. We are a holding company with investments in businesses and assets in a number of industries. Our business, financial condition and results of operations are dependent upon our various businesses and investments and their management teams. Each of our businesses generally operate independently and in a decentralized manner. Additionally, in the ordinary course of business we guarantee the obligations of entities that we manage and/or invest
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in. Any material adverse change in one of our businesses, investments or management teams, or in a particular industry in which we operate or invest, may cause material adverse changes to our business, financial condition and results of operations. The more capital we devote to a particular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of operations, possibly in a material adverse way.
A small number of stockholders has the ability to control the Company.
We have a very concentrated stockholder base. As of March 31, 2023, our three largest stockholders beneficially owned or had the ability to direct the voting of shares of our common stock representing approximately 65% of the outstanding shares. As a result, these stockholders have the power to determine the outcome of substantially all matters submitted to our stockholders for approval, including the election of our board of directors. In addition, future sales by these stockholders of substantial amounts of our common stock, or the potential for such sales, could adversely affect the prevailing market price of our securities.
Although we do not expect to rely on the “controlled company” exemption, we may soon become a “controlled company” within the meaning of the Nasdaq listing standards, and we would qualify for exemptions from certain corporate governance requirements.
A “controlled company,” as defined in the Nasdaq listing standards, is a company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company. Controlled companies are not required to comply with certain Nasdaq listing standards relating to corporate governance, including:
•the requirement that a majority of its board of directors consist of independent directors;
•the requirement that its nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
•the requirement that its compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
As of May 4, 2023, Nicolas Swenson, our President, Chief Executive Officer and Chairman of the Board, beneficially owned an aggregate of 1,340,799 shares of our common stock, which represents 47.84% of the voting power of our outstanding common stock. Our President, CEO/Chairman could soon own a majority of the voting power for the election of our directors, and thus we would meet the definition of a “controlled company.” As a result, these requirements would not apply to us as long as we remain a “controlled company.”
Although we may soon qualify as a “controlled company,” we currently do not, and we do not expect to, rely on this exemption and we currently comply with, and we expect to continue to comply with, all relevant corporate governance requirements under the Nasdaq listing standards. However, if we were to utilize some or all of these exemptions, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq listing standards that relate to corporate governance.
An increase in interest rates or in our borrowing margin would increase the cost of servicing our debt and could reduce our cash flow and negatively affect the results of our business operations.
A portion of our outstanding debt bears interest at floating rates. As a result, to the extent we have not hedged against rising interest rates, an increase in the applicable benchmark interest rates would increase the cost of servicing our debt and could materially and adversely affect our results of operations, financial condition, liquidity and cash flows. In addition, if we refinance our indebtedness or it matures and interest rates or our borrowing margins increase between the time an existing financing arrangement was consummated and the time such financing arrangement is refinanced or matures, the cost of servicing our debt would increase and our results of operations, financial condition, liquidity and cash flows could be materially and adversely affected.
Our inability to maintain sufficient liquidity could limit our operational flexibility and also impact our ability to make payments on our obligations as they come due.
In addition to being capital intensive and highly leveraged, our aircraft and engine business requires that we maintain sufficient liquidity to enable us to contribute the non-financed portion of engine and aircraft purchases as well as to service our payment obligations to our creditors as they become due, despite the fact that the timing and amounts of our revenues do not match the timing under our debt service obligations. Our restricted cash is unavailable for general corporate purposes. Accordingly, our ability to successfully execute our business strategy and maintain our operations depends on our ability to continue to maintain sufficient liquidity, cash and available credit under our credit facilities. Our liquidity could be adversely impacted if we are subjected to one or more of the following:
•a significant decline in revenues,
•a material increase in interest expense that is not matched by a corresponding increase in revenues,
•a significant increase in operating expenses,
•a reduction in our available credit under our credit facilities, or
•general economic or national events.
If we do not maintain sufficient liquidity, our ability to meet our payment obligations to creditors or to borrow additional funds could become impaired.
Future cash flows from operations or through financings may not be sufficient to enable the Company to meet its obligations.
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Future cash flow of the Company’s operations can fluctuate significantly. If future cash flows are not sufficient to permit the Company to meet its obligations, this would likely have a material adverse effect on the Company, its businesses, financial condition and results of operations. Additionally, credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt. There can be no assurance that the Company or its subsidiaries will continue to have access to their lines of credit if their financial performance does not satisfy the financial covenants set forth in the applicable financing agreements. If the Company or its subsidiaries do not meet certain of its financial covenants, and if they are unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management and to renew or replace financing arrangements that mature during the current fiscal year, their ability to access available lines of credit could be limited, their debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.
The Company and/or its subsidiaries may be required to seek additional or alternative financing sources if the Company’s or its subsidiaries’ cash needs are significantly greater than anticipated or they do not materially meet their business plans, or there are unanticipated downturns in the markets for the Company’s and its subsidiaries’ products and services. Future disruption and volatility in credit market conditions could have a material adverse impact on the Company’s ability, or that of its subsidiaries, to refinance debt when it comes due on terms similar to our current credit facilities, to draw upon existing lines of credit or to incur additional debt if needed. There can be no assurance therefore that such financing will be available or available on acceptable terms. The inability to generate sufficient cash flows from operations or through financings or disruptions in the credit markets could impair the Company’s or its subsidiaries’ liquidity and would likely have a material adverse effect on their businesses, financial condition and results of operations.
A large proportion of our capital is invested in physical assets and securities that can be hard to sell, especially if market conditions are poor.
Because our investment strategy can involve public company securities, we may be restricted in our ability to effect sales during certain time periods. A lack of liquidity could limit our ability to vary our portfolio or assets promptly in response to changing economic or investment conditions. Additionally, if financial or operating difficulties of other competitors result in distress sales, such sales could depress asset values in the markets in which we operate. The restrictions inherent in owning physical assets could reduce our ability to respond to changes in market conditions and could adversely affect the performance of our investments, our financial condition and results of operations. Because there is significant uncertainty in the valuation of, or in the stability of the value of illiquid or non-public investments, the fair values of such investments do not necessarily reflect the prices that would actually be obtained when such investments are realized.
To service our debt and meet our other cash needs, we will require a significant amount of cash, which may not be available.
Our ability to make payments on, or repay or refinance, our debt, will depend largely upon our future operating performance. Our future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our maintaining specified financial ratios and satisfying financial condition tests and other covenants in the agreements governing our debt. Our business may not generate sufficient cash flow from operations and future borrowings may not be available in amounts sufficient to pay our debt and to satisfy our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to seek alternatives.
If we cannot meet our debt service obligations, we may be forced to reduce or delay investments and aircraft or engine purchases, sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and might require us to comply with more onerous covenants, which could further restrict our business operations. The terms of our debt instruments may restrict us from adopting some of these alternatives. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations or to meet our aircraft or engine purchase commitments as they come due.
The transition away from LIBOR may adversely affect our cost to obtain financing and may potentially negatively impact our interest rate swap agreements.
It is expected that a transition away from the widespread use of London Interbank Offered Rate (“LIBOR") to alternative rates may have a material adverse impact on the availability and cost of our financing, including LIBOR-based loans, as well as our interest rate swap agreements. We currently anticipate phasing out of our LIBOR based loans and swaps in the foreseeable future but uncertainty remains with respect to the implementation of the phase out and what revisions will be required and implemented, which will depend heavily on the current market conditions. It therefore remains uncertain how such changes will be implemented and the effects such changes would have on us and the financial markets generally. These changes may have a material adverse impact on the availability of financing and on our financing costs. Also, increases in interest rates on variable rate debt would increase our interest expense and the cost of refinancing existing debt and incurring new debt, unless we make arrangements that hedge the risk of rising interest rates, which would adversely affect net income and cash available for payment of our debt obligations and distributions to equity holders.
Despite our substantial indebtedness, we may incur significantly more debt, and cash may not be available to meet our financial obligations when due or enable us to capitalize on investment opportunities when they arise.
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We employ debt and other forms of leverage in the ordinary course of business to enhance returns to our investors and finance our operations, and despite our current indebtedness levels, we expect to incur additional debt in the future to finance our operations, including purchasing aircraft and engines and meeting our contractual obligations as the agreements relating to our debt, including our junior subordinated debentures, indentures, term loan facilities, revolving credit facilities, and other financings do not entirely prohibit us from incurring additional debt. We also enter into financing commitments in the normal course of business, which we may be required to fund. If we are required to fund these commitments and are unable to do so, we could be liable for damages pursued against us or a loss of opportunity through default under contracts that are otherwise to our benefit could occur. We are therefore subject to the risks associated with debt financing and refinancing, including but not limited to the following: (i) our cash flow may be insufficient to meet required payments of principal and interest; (ii) payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses and dividends; (iii) if we are unable to obtain committed debt financing for potential acquisitions or can only obtain debt at high interest rates or on other unfavorable terms, we may have difficulty completing acquisitions or may generate profits that are lower than would otherwise be the case; (iv) we may not be able to refinance indebtedness at maturity due to company and market factors such as the estimated cash flow produced by our assets, the value of our assets, liquidity in the debt markets, and/or financial, competitive, business and other factors; and (v) if we are able to refinance our indebtedness, the terms of a refinancing may not be as favorable as the original terms for such indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to utilize available liquidity, which would reduce our ability to pursue new investment opportunities, dispose of one or more of our assets on disadvantageous terms, or raise equity, causing dilution to existing stockholders.
The terms of our various credit agreements and other financing documents also require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios, and adequate insurance coverage. These covenants may limit our flexibility in conducting our operations and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness, even if we have satisfied and continue to satisfy our payment obligations. Regulatory and market changes may also result in higher borrowing costs and reduced access to credit.
Our current financing arrangements require compliance with financial and other covenants and a failure to comply with such covenants could adversely affect our ability to operate.
The terms of our various credit agreements and other financing documents require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage and leverage ratios and adequate insurance coverage. These covenants may limit our flexibility in conducting our operations and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness, even if we have satisfied and continue to satisfy our payment obligations. Regulatory and market changes may also result in higher borrowing costs and reduced access to credit.
Future acquisitions and dispositions of businesses and investments are possible, changing the components of our assets and liabilities, and if unsuccessful or unfavorable, could reduce the value of the Company and its securities.
Any future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities, as well as our business mix and prospects. Consequently, our financial condition, results of operations and the trading price of our securities may be affected by factors different from those affecting our financial condition, results of operations and trading price at the present time.
We face numerous risks and uncertainties as we expand our business.
We expect the growth and development of our business to come primarily from internal expansion and through acquisitions, investments, and strategic partnering. As we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and/or introduce new products, we face numerous risks and uncertainties concerning the integration of their controls and systems, including financial controls, accounting and data processing systems, management controls, other operations and adequate security. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.
Our business strategy includes acquisitions, and acquisitions entail numerous risks, including the risk of management diversion and increased costs and expenses, all of which could negatively affect the Company’s ability to operate profitably.
Our business strategy includes, among other things, strategic and opportunistic acquisitions. This element of our strategy entails several risks, including, but not limited to the diversion of management’s attention from other business concerns and the need to finance such acquisitions with additional equity and/or debt. In addition, once completed, acquisitions entail further risks, including: unanticipated costs and liabilities of the acquired businesses, including environmental liabilities, that could materially adversely affect our results of operations; difficulties in assimilating acquired businesses, preventing the expected benefits from the transaction from being realized or achieved within the anticipated time frame; negative effects on existing business relationships with suppliers and customers; and losing key employees of the acquired businesses. If our acquisition strategy is not successful or if acquisitions are not well integrated into our existing operations, the Company’s operations and business results could be negatively affected.
Strategic ventures may increase risks applicable to our operations.
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We may enter into strategic ventures that pose risks, including a lack of complete control over the enterprise, and other potential unforeseen risks, any of which could adversely impact our financial results. We may occasionally enter into strategic ventures or investments with third parties in order to take advantage of favorable financing opportunities, to share capital or operating risk, or to earn aircraft management fees. These strategic ventures and investments may subject us to various risks, including those arising from our possessing limited decision-making rights in the enterprise or over the related aircraft. If we were unable to resolve a dispute with a strategic partner in such a venture that retains material managerial veto rights, we might reach an impasse which may lead to operational difficulties in the venture and increases costs or the liquidation of our investment at a time and in a manner that would result in our losing some or all of our original investment and/or the occurrence of other losses, which could adversely impact our financial results.
Rapid business expansions or new business initiatives may increase risk.
Certain business initiatives, including expansions of existing businesses such as the relatively recent expansion at our commercial jet engines and parts segment and the establishment of an aircraft asset management business and an aircraft capital joint venture, may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes, new business plans and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and operational risks, and reputational concerns regarding the manner in which these assets are being operated or held. There is no assurance that prior year activity and results will occur in future periods.
Our policies and procedures may not be effective in ensuring compliance with applicable law.
Our policies and procedures designed to ensure compliance with applicable laws may not be effective in all instances to prevent violations. We could become subject to various governmental investigations, audits and inquiries, both formal and informal. Such investigations, regardless of their outcome, could be costly, divert management attention, and damage our reputation. The unfavorable resolution of such investigations could result in criminal liability, fines, penalties or other monetary or non-monetary sanctions and could materially affect our business or results of operations.
Compliance with the regulatory requirements imposed on us as a public company results in significant costs that may have an adverse effect on our results.
As a public company, we are subject to various regulatory requirements including, but not limited to, compliance with the rules
and regulations of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Compliance with these rules and regulations results in significant additional costs to us both directly, through increased audit and consulting fees, and indirectly, through the time required by our limited resources to address such regulations.
Deficiencies in our public company financial reporting and disclosures could adversely impact our reputation.
As we expand the size and scope of our business, there is a greater susceptibility that our financial reporting and other public disclosure documents may contain material misstatements and that the controls we maintain to attempt to ensure the complete accuracy of our public disclosures may fail to operate as intended. The occurrence of such events could adversely impact our reputation and financial condition. Management is responsible for establishing and maintaining adequate internal controls over financial reporting to give our stakeholders assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). However, the process for establishing and maintaining adequate internal controls over financial reporting has inherent limitations, including the possibility of human error. Our internal controls over financial reporting may not prevent or detect misstatements in our financial disclosures on a timely basis, or at all. Some of these processes may be new for certain subsidiaries in our structure, and in the case of acquisitions, may take time to be fully implemented. Our disclosure controls and procedures are designed to provide assurance that information required to be disclosed by us in reports filed or submitted under U.S. securities laws is recorded, processed, summarized and reported within the required time periods. Our policies and procedures governing disclosures may not ensure that all material information regarding us is disclosed in a proper and timely fashion or that we will be successful in preventing the disclosure of material information to a single person or a limited group of people before such information is generally disseminated.
Risks Related to Environmental, Social, and Governance Issues
Climate change, related legislative and regulatory responses to climate change, and the transition to a lower carbon economy may adversely affect our business.
There is increasing concern that a gradual rise in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe, an increase in the frequency, severity, and duration of extreme weather conditions and natural disasters, and water scarcity and poor water quality. These events could also compound adverse economic conditions. To the extent that significant changes in the climate occur in areas where our businesses are located or operate, we may experience extreme weather and/or changes in precipitation and temperature, all of which may result in physical damage to, or a decrease in demand for, our properties located in these areas or affected by these conditions and could negatively impact our operations. In addition, changes in federal, state, and local legislation and regulation based on concerns about climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green” building codes, could result in increased capital expenditures without a corresponding increase in revenue. Any assessment of the potential impact of future climate change legislation, regulations, or
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industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change.
We are subject to risks from natural disasters such as earthquakes and severe weather (the frequency and severity of which may be impacted by climate change), which may include more frequent or severe storms, extreme temperatures and ambient temperature increases, hurricanes, flooding, rising sea levels, shortages of water, droughts and wildfires, any of which could have a material adverse effect on our business, results of operations, and financial condition.
Natural disasters, severe weather such as earthquakes, tornadoes, wind, or floods, and wildfires may result in significant damage to our properties or disruption of our operations. The extent of casualty losses and loss of income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. Additional consequences of severe weather could include increased insurance premiums and deductibles or a decrease in the availability of coverage.
Environmentally hazardous conditions could potentially adversely affect us.
Under various federal, state, and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resources, or property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. The cost of defending against environmental claims, of compliance with environmental regulatory requirements, or of remediating any contaminated property could materially and adversely affect us.
We are subject to increasing scrutiny from investors and others regarding our environmental, social, governance, or sustainability responsibilities, which could result in additional costs or risks and adversely impact our reputation, associate retention, and ability to raise capital from such investors.
Investor advocacy groups, certain institutional investors, investment funds, other market participants, and stakeholders have focused increasingly on the Environmental, Social and Governance (“ESG” or “sustainability”) practices of companies, including those associated with climate change. These parties have placed increased importance on the implications of the social cost of their investments. If our ESG practices do not meet investor or other industry stakeholder expectations and standards, which continue to evolve, our reputation and associate retention may be negatively impacted based on an assessment of our ESG practices. Any sustainability disclosures we make may include our policies and practices on a variety of social and ethical matters, including corporate governance, environmental compliance, associate health and safety practices, human capital management, product quality, supply chain management, and workforce inclusion and diversity. It is possible that stakeholders may not be satisfied with our ESG practices or the speed of their adoption. We could also incur additional costs and require additional resources to monitor, report, and comply with various ESG practices. In addition, investors may decide to refrain from investing in us as a result of their assessment of our approach to and consideration of the ESG factors.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
The Company owns approximately 4.626 acres in Denver, North Carolina, which houses the operations of Air T and MAC and a 55,000 square feet office building in St. Louis Park, Minnesota that is partially leased to tenants and is the location of the Company's Minnesota executive office. On April 13, 2023, the Company signed a lease agreement to move the operations of Air T to Charlotte, North Carolina. The lease is for 4,900 square feet of office space, will commence on July 1, 2023 and expire on November 30, 2028 with the option to extend the lease for one additional three year term.
The Company leases approximately 1,950 square feet of office space and approximately 4,800 square feet of hangar space at the Ford Airport in Iron Mountain, Michigan. CSA’s operations are headquartered at these facilities which are leased from a third party under an annually renewable agreement.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located in Kinston, North Carolina under an agreement that extends through January 2028, with the option to extend the lease for three additional five-year periods thereafter. The rental rate under the lease increases by increments for each of the five-year renewal periods.
GGS leases an 112,500 square feet production facility in Olathe, Kansas. The facility is leased from a third party under a lease agreement, which expires in August 2024.
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As of March 31, 2023, the Company leased hangar, maintenance and office space from third parties at a variety of other locations, at prevailing market terms.
Contrail leases a 21,000 square feet facility in Verona, Wisconsin. This is a lease from a related party. See Note 15 “Related Party Matters” of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. This lease expires on July 17, 2026. Contrail also leased a 1,453 square feet office space in Denver, Colorado. The lease is a 60 month lease that extends through June 2026. As part of the formation of Crestone and transition of certain Contrail's employees to Crestone, Contrail terminated this lease prior to its expiration in 2026. Crestone entered into a lease agreement of a 1,663 square feet office space in Glendale, Colorado on September 1, 2022. The lease is a 24 month lease that extends through August 2024 with no option to renew.
Jet Yard leases approximately 48.5 acres of land from Pinal County at the Pinal Air Park in Marana, Arizona. The lease expires in May 2046, though Jet Yard has an option to renew the lease for an additional 30-year period (though the lease to a 2.6-acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable. On May 27, 2020, Pinal County and Jet Yard entered into the first amendment to the lease agreement in which Pinal County agreed to the terms of Jet Yard's ground hardening civil improvement project ("ground hardening improvements") on areas under lease to improve its aircraft parking facilities. Starting in fiscal 2021, Jet Yard subleased the aforementioned lease along with the ground hardening improvements to Jet Yard Solutions.
DSI leases 12,206 square feet of space in a building located in Mississauga, Canada. The lease expires on July 31, 2028.
Worthington and AirCo lease a 41,280 square-feet facility in Eagan, Minnesota. The lease for this facility expires in April 2027. Worthington has a lease in Tulsa, Oklahoma, which is 22,582 square feet and expires in January 2027. Additionally, Worthington also has two facility leases in Australia: Unit E3 is 1,195 square feet and Unit B5 is 1,442 square feet, both of which expire in January 2025.
WASI subleases approximately 53,500 square feet of land and facilities located at Branson National Airport, Springfield, Missouri. The lease expires on January 30, 2028 with an option to renew for two additional and consecutive five year terms plus an additional and consecutive term ending on May 5, 2039. WASI also leases an additional 2,000 square feet hangar space that expires on January 30, 2025 with no option to renew.
Item 3. Legal Proceedings.
The Company and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. We believe that our current proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations. We record a liability when a loss is considered probable, and the amount can be reasonably estimated.
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Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is publicly traded on the NASDAQ Global Market under the symbol “AIRT.”
As of March 31, 2023, the approximate number of holders of record of the Company’s Common Stock was 154.
The Company has not paid any cash dividends since 2014.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 shares (adjusted to 1,125,000 shares after the stock split on June 10, 2019) of the Company’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period. The Company purchased 51,794 shares pursuant to this authorization during the fiscal year ended March 31, 2023.
The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this report under the heading “Equity Compensation Plan Information”.
Purchases of shares of common stock during the fourth quarter are described below:
| Dates of Shares Purchased | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| Jan 1 - Jan 31, 2023 | 2,336 | $ | 25.04 | 2,336 | 872,999 | |||||||||||||||||||||
| Feb 1 - Feb 28, 2023 | 214 | $ | 22.60 | 214 | 872,785 | |||||||||||||||||||||
| March 1 - March 31, 2023 | 1,072 | $ | 21.85 | 1,072 | 871,713 | |||||||||||||||||||||
As of March 31, 2023, the Company did not sell any securities within the past three years that were not registered under the Securities Act.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Air T, Inc. (the “Company,” “Air T,” “we” or “us” or “our”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth in its free cash flow per share over time.
We currently operate in four industry segments:
•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;
•Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.
Acquisitions
On January 31, 2023, the Company acquired WASI, a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport. The acquisition was funded with cash and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. WASI is included within the Overnight air cargo segment. See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Unconsolidated Investments
The Company has an ownership interest in Contrail Asset Management, LLC (“CAM”). The operations of CAM are not consolidated into the operations of the Company. See Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
The Company also has ownership interests in Insignia and CCI. The operations of these companies are not consolidated into the operations of the Company. See Note 10 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income (loss) and Adjusted EBITDA.
24
Forward Looking Statements
Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,” “anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
•Economic and industry conditions in the Company’s markets;
•The risk that contracts with FedEx could be terminated or adversely modified;
•The risk that the number of aircraft operated for FedEx will be reduced;
•The risk that GGS customers will defer or reduce significant orders for deicing equipment;
•The impact of any terrorist activities on United States soil or abroad;
•The Company’s ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels;
•The Company's ability to meet debt service covenants and to refinance existing debt obligations;
•The risk of injury or other damage arising from accidents involving the Company’s overnight air cargo operations, equipment or parts sold and/or services provided;
•Market acceptance of the Company’s commercial and military equipment and services;
•Competition from other providers of similar equipment and services;
•Changes in government regulation and technology;
•Changes in the value of marketable securities held as investments;
•Mild winter weather conditions reducing the demand for deicing equipment;
•Market acceptance and operational success of the Company’s relatively new aircraft asset management business and related aircraft capital joint venture; and
•Despite our current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
25
Results of Operations
Fiscal 2023 vs. 2022
Consolidated revenue increased by $70.2 million (40%) to $247.3 million for the fiscal year ended March 31, 2023 compared to the prior fiscal year. Following is a table detailing revenue (after elimination of intercompany transactions), in thousands:
| Year ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Overnight Air Cargo | $ | 90,543 | $ | 74,409 | $ | 16,134 | 22 | % | |||||||||||||||
| Ground Equipment Sales | 48,485 | 42,239 | 6,246 | 15 | % | ||||||||||||||||||
| Commercial Jet Engines and Parts | 101,737 | 57,689 | 44,048 | 76 | % | ||||||||||||||||||
| Corporate and Other | 6,558 | 2,740 | 3,818 | 139 | % | ||||||||||||||||||
| Total | $ | 247,323 | $ | 177,077 | $ | 70,246 | 40 | % | |||||||||||||||
Revenues from the air cargo segment increased by $16.1 million (22%) compared to the prior fiscal year, principally attributable to higher labor revenues, higher admin fees and higher FedEx pass through revenues due to increased fleet (72 aircraft in the prior year compared to 85 in the current year). Pass-through costs under the dry-lease agreements with FedEx totaled $29.2 million and $23.0 million for the years ended March 31, 2023 and 2022, respectively.
The ground equipment sales segment contributed approximately $48.5 million and $42.2 million to the Company’s revenues for the fiscal years ended March 31, 2023 and 2022, respectively, representing a $6.2 million (15%) increase in the current year. The increase was primarily driven by a higher volume of truck sales to the USAF and commercial customers in the current fiscal year. At March 31, 2023, the ground equipment sales segment’s order backlog was $13.6 million compared to $14.0 million at March 31, 2022.
The commercial jet engines and parts segment contributed $101.7 million of revenues in fiscal year ended March 31, 2023 compared to $57.7 million in the prior fiscal year which is an increase of $44.0 million (76%). The increase is primarily attributable to the fact that all the companies within this segment had higher component sales as the aviation industry started to see more activity in the current year as COVID-19 related restrictions continued to loosen.
Revenues from the corporate and other segment increased by $3.8 million (139%) compared to the prior fiscal year, principally attributable to having a full year of Shanwick's revenues in fiscal 2023 compared to having only 2 months of revenues in fiscal 2022.
Following is a table detailing operating (loss) income by segment, net of intercompany during Fiscal 2023 and Fiscal 2022 (in thousands):
| Year ended March 31, | Change | ||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Overnight Air Cargo | $ | 4,047 | $ | 2,794 | $ | 1,253 | |||||||||||
| Ground Equipment Sales | 3,141 | 3,220 | (79) | ||||||||||||||
| Commercial Jet Engines and Parts | (957) | 3,619 | (4,576) | ||||||||||||||
| Corporate and Other | $ | (10,638) | (878) | (9,760) | |||||||||||||
| Total | $ | (4,407) | $ | 8,755 | $ | (13,162) | |||||||||||
Consolidated operating loss for the fiscal year ended March 31, 2023 was $4.4 million compared to consolidated operating income of $8.8 million in the prior fiscal year.
Operating income for the air cargo segment increased by $1.3 million in the current fiscal year, due primarily to having higher segment revenues as described above, offset by higher pilot salaries and aircraft lease costs.
The current fiscal year's ground equipment sales segment operating income was relatively flat compared to the prior fiscal year.
Operating loss of the commercial jet engines and parts segment was $1.0 million compared to operating income of $3.6 million in the prior year. The change was primarily attributable to the increase in inventory write-down of $6.6 million in the current fiscal year compared to the prior fiscal year, offset by the increase in sales explained above.
Operating loss of the corporate and other segment increased by $9.8 million in the current fiscal year, primarily driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the Employee Retention Credit ("ERC") that did not recur in the current fiscal year.
The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):
| Twelve Months Ended | Change | ||||||||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||||||||
| Overnight Air Cargo | $ | 4,505 | $ | 2,854 | $ | 1,651 | |||||||||||
| Ground Equipment Sales | 3,314 | 3,455 | (141) | ||||||||||||||
| Commercial Jet Engines and Parts | 7,105 | 5,200 | 1,905 | ||||||||||||||
| Corporate and Other | (8,895) | (103) | (8,792) | ||||||||||||||
| Adjusted EBITDA | $ | 6,029 | $ | 11,406 | $ | (5,377) | |||||||||||
Consolidated Adjusted EBITDA for the fiscal year ended March 31, 2023 was $6.0 million, a decrease of $5.4 million compared to the prior fiscal year.
Adjusted EBITDA for the air cargo segment increased by $1.7 million in the current fiscal year, due primarily to having higher segment operating income as described above.
The current fiscal year's ground equipment sales segment Adjusted EBITDA was relatively flat compared to the prior fiscal year's.
Adjusted EBITDA of the commercial jet engines and parts segment was $7.1 million, an increase of $1.9 million from the prior fiscal year. The increase was primarily driven by higher component sales explained above.
The corporate and other segment Adjusted EBITDA loss increased by $8.8 million from fiscal 2022 to fiscal 2023. The increase was driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the ERC credit that did not recur in the current fiscal year.
Following is a table detailing consolidated non-operating income (expense), net of intercompany during fiscal 2023 and fiscal 2022 (in thousands):
| Year Ended March 31, | Change | ||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Interest expense, net | $ | (7,935) | $ | (4,948) | $ | (2,987) | |||||||||||
| Gain on forgiveness of Paycheck Protection Program ("PPP") | — | 8,331 | (8,331) | ||||||||||||||
| Income from equity method investments | 1,460 | 37 | 1,423 | ||||||||||||||
| Other | (471) | 1,221 | (1,692) | ||||||||||||||
| Total | $ | (6,946) | $ | 4,641 | $ | (11,587) | |||||||||||
The Company had net non-operating loss of $6.9 million for the fiscal year ended March 31, 2023 compared to a non-operating income of $4.6 million in the prior fiscal year. The change was primarily attributable to the $8.3 million gain on the SBA's forgiveness of the Company's PPP loan recognized in the prior fiscal year, in addition to the $3.0 million increase in contractual interest expense driven by an increase in Contrail's revolver usage in the current fiscal year.
During the year ended March 31, 2023, the Company recorded $0.4 million of income tax expense, which yielded an effective rate of -3.8%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2023 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, and changes in the valuation allowance. The net change in the valuation allowance was $3.1 million for the year ended March 31, 2023. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. The change in the Company’s valuation allowance is primarily due to the realizability of the domestic deferred tax assets, the unrealized losses on investments, the foreign tax credits generated by the operations in the Company’s Puerto Rico branch that is expected to expire before being fully utilized, and the change in full valuation allowances associated with the Delphax entities.
During the fiscal year ended March 31, 2022, the Company recorded $1.2 million of income tax expense at an effective tax rate of 8.7%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2022 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, the exclusion of PPP loan forgiveness proceeds from taxable income, and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments and the generation of foreign tax credits through the NOL carryback claim that the Company expects to expire before they are fully utilized, and attribute reduction incurred by Delphax related to dissolution of its French subsidiary.
26
Market Outlook
Future economic developments such as inflation and increased interest rates as well as further business issues such as supply chain issues present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses implemented measures to attempt to limit the impact of COVID-19 and economic and business issues but we still experienced disruptions, and we experienced a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Many of our businesses may continue to generate reduced operating cash flows and could operate at a loss from time to time beyond fiscal 2023. We expect that issues caused by the pandemic and other economic and business issue will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact these issues on economic and market conditions and our businesses in particular, and, as a result, present material uncertainty and risk with respect to us and our results of operations.
27
Liquidity and Capital Resources
As of March 31, 2023, the Company held approximately $7.1 million in total cash, cash equivalents and restricted cash, of which, $0.8 million related to cash collateral for three Opportunity Zone fund investments. The Company also held $2.2 million in restricted investments held as statutory reserve of SAIC.
As of March 31, 2023, the Company’s working capital amounted to $52.3 million, a decrease of $45.1 million compared to March 31, 2022, primarily driven by an increase of $32.3 million in the current portion of long-term debt and a decrease of $8.2 million in the ERC receivable as refunds were received during fiscal 2023.
The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured twice a year at September 30 and March 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.25.
The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation.
The Air T Acquisition 22.1's term loans with ING (the Air T Acquisition 22.1 debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) include several covenants that are measured once a year at December 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.10 and a senior net leverage ratio of 2.10 at December 31, 2022 and 1.50 at subsequent years.
The Contrail Credit Agreement (the Contrail debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth ("TNW") of $12 million. As of March 31, 2023, the Company, AirCo 1, Air T Acquisition 22.1 and Contrail were in compliance with all financial covenants.
As of December 31, 2022, Contrail management forecasted that Contrail would be in violation of the debt service coverage ratio covenant contained in the ONB financing agreements during the twelve-month period subsequent to the filing date of the Form 10-Q for the quarterly period ended December 31, 2022, primarily because the first principal payment of its Term Note G (“Term Note G – ONB”) was to become due in November 2023. Non-compliance with a debt covenant that is not subsequently cured allows Old National Bank (“ONB”) the right to accelerate the maturity of the Contrail Credit Agreement and declare the entire amount of Contrail’s outstanding debt at the time of non-compliance immediately due and payable and exercise its remedies with respect to the collateral that secures the debt. In the event of acceleration of maturity of the Contrail Credit Agreement, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt.
In response to this condition, Contrail entered into an amendment to the Credit Agreement with ONB whereby, among other things, in exchange for a $20 million principal prepayment of Term Note G, Contrail obtained a waiver of the debt service coverage ratio covenant. $6.7 million of the $20.0 million prepayment was paid on March 30, 2023 and the remaining $13.3 million payment is currently expected to be paid in September 2023. These payments will eliminate the need for Contrail to make any future scheduled principal payments on Term Note G until the final maturity of (on) November 24, 2025. At this time, Contrail management believes it is highly probable that it will have sufficient liquidity to make the $13.3 million prepayment in September 2023.
The obligations of Contrail under the Contrail Credit Agreement are guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with other lenders.
As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on June 9, 2022, the Company, Jet Yard and MBT entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (“Amendment”) and a related Overline Note (“Overline Note”) in the original principal amount of $5.0 million. The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from $17.0 million to $22.0 million. As of March 31, 2023, the Overline Note was paid in full and terminated and the unused commitment on the MBT revolver was $8.3 million. The borrowing base calculation methodology remains unchanged.
As mentioned in Note 10 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on September 30, 2022, the Company executed a promissory note payable to CCI for $2.0 million that bears interest at 10.00% per annum and matured on December 30, 2022. As of December 31, 2022, this note has been repaid.
As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on November 8, 2022, Contrail entered into the Second Amendment to Master Loan Agreement (the “Amendment”) with ONB. The Amendment amends the Master Loan Agreement dated as of June 24, 2019, as amended. The principal revisions made in the Amendment are: (i) the tangible net worth covenant was revised to require that Contrail maintain a tangible net worth of at least $12.0 million at all times prior to March 31, 2024 and $15.0 million at all times on or following March 31, 2024; and, (ii) that all proceeds from certain asset sales during the period beginning on October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G. Contrail executed a Collateral Assignment of two Aircraft engines in connection with the Amendment.
28
As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on March 22, 2023, Contrail entered into the First Amendment to Second Amendment to Master Loan Agreement and Third Amendment to Master Loan Agreement ("the Amendment") with ONB. The Amendment amends the Master Loan Agreement dated June 24, 2019 with principal revisions to: (i) Section 3 of the Second Amendment was revised so that exclusion of certain gains and losses from the definition of “net income” applies through September 30, 2023, not March 31, 2023; (ii) Section 5 of the Second Amendment relating to prepayment of Term Loan G was amended to eliminate the requirement that all asset sales during the period beginning with October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G; instead, the Amendment provision now reflects the agreement that voluntary payments totaling $20.0 million would be made by the borrower on Term Loan G no later than September 30, 2023; and, (iii) a revolving note resting period covenant was added to the Amendment whereby the outstanding principal balance on the revolving note would be paid to zero (0) for at least thirty (30) consecutive days during each annual period ending on the anniversary date of the revolving note, provided the borrower has not achieved a debt service coverage ratio of 1.10:1.
As mentioned in Note 2 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on January 31, 2022 the Company funded the WASI acquisition through (i) a promissory note to Worldwide Aviation, LLC, (ii) cash, and (iii) an additional secured loan from MBT. The promissory note to Worldwide Aviation, LLC ("Seller's Note") in the amount of $1.5 million bears a fixed interest rate of 6.00% and is payable via periodic payments up to the January 1, 2026 maturity date. In connection with the acquisition, the Company and Jet Yard, LLC entered Amendment No. 2 to the Third Amended and Restated Credit Agreement (“Amendment No. 2”) with MBT. Amendment No. 2 amends the Third Amended and Restated Credit Agreement dated as of August 31, 2021 as amended by that certain Amendment No. 1 to the Third Amended and Restated Credit Agreement dated June 9, 2022. Amendment No. 2 provides for a new term loan (“Term Loan F”) in the amount of $1.0 million to help finance a portion of the consideration paid by the Company. Pursuant to the amendment, the Company executed Term Note F in favor of MBT in the original principal amount of $1.0 million. The note bears interest at a rate equal to the greater of six percent (6.00%) or the prime rate plus one percent (1.00%). The note obligates the Company to make monthly payments of principal plus accrued interest commencing March 1, 2023. The note may be prepaid, in whole or part, at any time without penalty and final payment of all amounts due under the note is due January 31, 2028.
As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, Contrail entered into an Operating Agreement with the Seller providing for the put and call options with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail and its current Chief Executive Officer. The Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on July 18, 2021 ("Contrail RNCI"). As of the date of this filing, neither the Seller nor Air T has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations.
As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, the Company has ownership interest in Contrail Asset Management, LLC (“CAM”). The operations of CAM are not consolidated into the operations of the Company. For its Investment Function (as defined in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report), CAM’s initial commitment to CJVII was approximately $51.0 million. The Company and MRC have commitments to CAM in the respective amounts of $7.0 million and $44.0 million. As of March 31, 2023, the Company has fulfilled its capital commitments to CAM.
The revolving lines of credit at Air T with MBT and Contrail with ONB have a due date or expire within the next twelve months. As of the date of this report, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note to extend the maturity date of the credit facility to August 31, 2024 and include the following changes:
1. A $2.0 million seasonal increase in the maximum amount available under the facility. The maximum amount of the facility will now increase to $19.0 million between May 1 and November 30 of each year and will decrease to $17.0 million between December 1 and April 30 of each year;
2.The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread. The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA). Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25% and 3.25%;
3.The unused commitment fee on the revolving credit facility will increase from 0.11% to 0.15%; and,
4.The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $5.0 million of “Other Investments” per year.
We are currently seeking to refinance the Contrail revolver prior to its maturity date; however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance this obligation, that the terms of such refinancing would be as favorable as the terms of our existing credit facility.
As a result, management believes it is probable that the cash on hand and current financings, net cash provided by operations from its remaining operating segments, together with amounts available under our current revolving lines of credit, as amended, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
29
Cash Flows
Following is a table of changes in cash flow from continuing operations for the respective years ended March 31, 2023 and 2022 (in thousands):
| Year Ended March 31, | Change | ||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Net Cash Provided by (Used in) Operating Activities | $ | 16,909 | $ | (33,084) | $ | 49,993 | |||||||||||
| Net Cash Used in Investing Activities | (6,168) | (33,388) | 27,220 | ||||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (12,380) | 59,254 | (71,634) | ||||||||||||||
| Effect of foreign currency exchange rates | 361 | (341) | 702 | ||||||||||||||
| Net Decrease in Cash and Cash Equivalents and Restricted Cash | $ | (1,278) | $ | (7,559) | $ | 6,281 | |||||||||||
Cash provided by operating activities was $16.9 million in fiscal year 2023 compared to cash used in operating activities of $33.1 million in fiscal year 2022. The fluctuation was primarily driven by the $17.3 million change in the ERC receivable: in the prior fiscal year, the Company applied for the ERC in the amount of $9.1 million, of which, in the current fiscal year, the Company received $8.2 million. In addition, the fluctuation was further increased by the $27.8 million change in inventories, primarily due to Contrail and GGS generating more sales of their inventories compared to the prior fiscal year.
Cash used in investing activities for fiscal year 2023 was $6.2 million compared to cash used in investing activities for the prior fiscal year of $33.4 million. The current fiscal year's cash usage was primarily driven by cash used for the acquisition of WASI of $2.5 million and investment in unconsolidated entities of $3.1 million. The prior fiscal year's cash usage was primarily driven by cash used for the acquisitions of Wolfe Lake assets of $13.4 million, Shanwick's acquisition of $12.8 million, and investment in unconsolidated entities of $6.8 million.
Cash used in financing activities for fiscal year 2023 was $12.4 million compared to cash provided by financing activities for the prior fiscal year of $59.3 million. This was primarily due to decreased net proceeds from lines of credit of $8.4 million, less proceeds from term loans of $23.6 million in addition to increased payments on term loans of $24.0 million. Lastly, the change was also due to the fact that there was no proceeds received from issuance of TruPs in the current fiscal year compared to $11.3 million in the prior fiscal year.
30
Off-Balance Sheet Arrangements
The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.
Systems and Network Security
Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including hacking, viruses, malicious software, break-ins, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information or other interruption to our business operations. As techniques used to obtain unauthorized access to sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against these attacks. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us or other participants, or the communication infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.
Supply Chain and Inflation
The Company continues to monitor a wide range of health, safety, and regulatory matters related to the continuing COVID-19 pandemic including its impact on our business operations. In addition, ongoing supply chain disruptions have impacted product availability and costs across all markets including the aviation industry in which our Company operates. Additionally, the United States is experiencing an acute workforce shortage and increasing inflation and interests rates which has created a hyper-competitive wage environment and increased debt costs. Thus far, the direct impact of these items on our businesses has not been material. However, ongoing or future disruptions to consumer demand, our supply chain, product pricing inflation, continued increases in interest rates, our ability to attract and retain employees, or our ability to procure products and fulfill orders, could negatively impact the Company’s operations and financial results in a material manner. We continue to look for proactive ways to mitigate potential impacts of these issues at our businesses.
The Company believes that inflation has not had a material effect on its manufacturing and commercial jet engine and parts operations, because increased costs to date have been passed on to customers. Under the terms of its overnight air cargo business contracts the major cost components of that segment's operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.
31
Non-GAAP Financial Measures
The Company uses adjusted earnings before taxes, interest, and depreciation and amortization ("Adjusted EBITDA"), a non-GAAP financial measure as defined by the SEC, to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.
Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. When calculating Adjusted EBITDA, the Company does not add back depreciation expense for aircraft engines that are on lease, as the Company believes this expense matches with the corresponding revenue earned on engine leases. Depreciation expense for leased engines totaled $1.6 million and $0.3 million for the fiscal year ended March 31, 2023 and 2022.
Management believes that Adjusted EBITDA is a useful measure of the Company's performance because it provides investors additional information about the Company's operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EBITDA is not intended to replace or be an alternative to operating income (loss) from continuing operations, the most directly comparable amounts reported under GAAP.
The table below provides a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA for the fiscal year ended March 31, 2023 and 2022 (in thousands):
| Twelve Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Operating (loss) income from continuing operations | $ | (4,407) | $ | 8,755 | |||||||
| Depreciation and amortization (excluding leased engines depreciation) | 2,525 | 1,589 | |||||||||
| Asset impairment, restructuring or impairment charges1 | 7,840 | 805 | |||||||||
| Loss on sale of property and equipment | 8 | 5 | |||||||||
| Securities expenses | 63 | 252 | |||||||||
| Adjusted EBITDA | $ | 6,029 | $ | 11,406 | |||||||
The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):
| Twelve Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Overnight Air Cargo | $ | 4,505 | $ | 2,854 | |||||||
| Ground Equipment Sales | 3,314 | 3,455 | |||||||||
| Commercial Jet Engines and Parts | 7,105 | 5,200 | |||||||||
| Corporate and Other | (8,895) | (103) | |||||||||
| Adjusted EBITDA | $ | 6,029 | $ | 11,406 | |||||||
1 Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2023 was a write-down of $7.3 million on the commercial jet engines and parts segment's inventory, of which, $5.4 million was due to a management decision to monetize three engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds. The remainder of the write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2023, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.
32
Seasonality
The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being higher in the second and third fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments are typically not susceptible to material seasonal trends.
33
Critical Accounting Policies and Estimates.
The Company’s significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The Company believes that the following are its most critical accounting policies:
Business Combinations. The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. Consistent with ASC 805, the Company accounts for each business combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. Goodwill is recognized for the excess of the purchase consideration over the fair value of identifiable net assets acquired. Included in purchase consideration is the estimated acquisition date fair value of any earn-out obligation incurred. For business combinations where non-controlling interests remain after the acquisition, assets (including goodwill) and liabilities of the acquired business are recorded at the full fair value and the portion of the acquisition date fair value attributable to non-controlling interests is recorded as a separate line item within the equity section or, as applicable to redeemable non-controlling interests, between the liabilities and equity sections of the Company’s consolidated balance sheets. There are various estimates and judgments related to the valuation of identifiable assets acquired, liabilities assumed, goodwill and non-controlling interests. These estimates and judgments have the potential to materially impact the Company’s consolidated financial statements.
Inventories – Inventories are carried at the lower of cost or net realizable value. Within the Company’s commercial jet engines and parts segment, there are various estimates and judgments made in relief of inventory as parts are sold from established groups of parts from one engine or airframe purchase. The estimates and judgments made in relief of inventory are based on assumptions that are consistent with a market participant’s future expectations for the commercial aircraft, jet engines and parts industry and the economy in general and our expected intent for the inventory. These assumptions and estimates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic or its effects could impact the assumptions and result in future losses to our inventory.
The Company periodically evaluates the carrying value of inventory. In these evaluations, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Any slow moving, obsolete or damaged inventory and inventory with costs exceeding net realizable value are evaluated for write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
Valuation of Assets on Lease or Held for Lease - Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. On a quarterly basis, we monitor the portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company’s ability to lease an asset in the future. On an annual basis, even absent any such ‘triggering event’, we evaluate the assets in our portfolio to determine if their carrying amount may not be recoverable. If an asset is determined to be unrecoverable, the asset is written down to fair value. When evaluating for impairment, we test at the individual asset level (e.g., engine, airframe or aircraft), as each asset generates its own stream of cash flows, including lease rents and maintenance reserves.
The Company must make significant and subjective estimates in determining whether any impairment exists. Those estimates are as follows:
•Fair value – we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data.
•Future cash flows – when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model.
If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges.
Accounting for Redeemable Non-Controlling Interest. Policies related to redeemable non-controlling interests involve judgment and complexity, specifically on the classification of the non-controlling interests in the Company’s consolidated balance sheet, and the accounting treatment for changes in the fair value or estimated redemption value for non-controlling interests that are redeemed at other than fair value. Further, there is significant judgment in determining whether an equity instrument is currently redeemable or not currently redeemable but probable that the equity instrument will become redeemable. Additionally, there are also significant estimates made in the valuation of Contrail's RNCI. The fair value of Contrail's non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. Contrail’s market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail. There are also significant estimates made to determine the estimated redemption value of Shanwick's redeemable non-controlling interest ("Shanwick RNCI"). The analysis uses significant inputs such as forecasted earnings before interest and taxes ("EBIT"), discount rate and expected volatility, which require significant management judgment and assumptions.
34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of its variable rate borrowing. The Company has entered into variable to fixed rate interest-rate swap agreements to effectively reduce its exposure to interest rate fluctuations.
We are also exposed to certain losses in the event of nonperformance by the counterparties under the swaps. We regularly evaluate the financial condition of our counterparties. Based on this review, we currently expect the counterparties to perform fully under the swaps. However, if a counterparty defaults on its obligations under a swap, we could be required to pay the full rates on the applicable debt, even if such rates were in excess of the rate in the contract.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and the Notes to Consolidated Financial Statements for a description of our accounting policies and other information related to these financial instruments.
35
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
| Page | |||||
Consolidated Statements of Income (Loss) for the Years Ended March 31, 2023 and 2022 | |||||
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2023 and 2022 | |||||
Consolidated Balance Sheets as of March 31, 2023 and 2022 | |||||
Consolidated Statements of Cash Flows for the Years Ended March 31, 2023 and 2022 | |||||
Consolidated Statements of Equity for the Years Ended March 31, 2023 and 2022 | |||||
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Air T, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the "Company") as of March 31, 2023 and 2022, the related consolidated statements of income (loss), comprehensive income (loss), equity, and cash flows, for each of the two years in the period ended March 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Redeemable non-controlling interest – valuation of Contrail Aviation Support, LLC — Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
The Company has a 79% controlling interest in Contrail Aviation Support, LLC and is party to an operating agreement with the owner of the remaining 21% ownership interest in Contrail Aviation Support, LLC, that contains certain future redemption features that are outside the control of the Company.
37
This arrangement is recorded and disclosed as a redeemable non-controlling interest at fair value of $7.2 million as of March 31, 2022. The Company adjusts the redeemable non-controlling interest each reporting period to the higher of the redemption value or carrying value, using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. The determination of fair value includes estimation uncertainty under both approaches.
The income approach requires significant management judgment with respect to forecasts of future revenue, operating margins, and capital expenditures, and the selection and use of an appropriate discount rate. The market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail Aviation Support, LLC. We identified the valuation of redeemable non-controlling interest in Contrail Aviation Support, LLC as a critical audit matter given the significant judgments and assumptions required by management to estimate the fair value of the redeemable non-controlling interest, as well as the fact that performing audit procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant judgments and assumptions utilized in the valuation of the redeemable non-controlling interest in Contrail Aviation Support, LLC, included the following, among others:
•We evaluated the reasonableness of management’s forecasts of future revenue and operating margins by comparing the forecasts to:
◦Historical results of Contrail Aviation Support, LLC, and
◦Forecasted information included in industry reports.
•We considered the impact of industry and market conditions on management’s forecasts for Contrail Aviation Support, LLC.
•We involved our fair value specialists to assist in the evaluation of:
◦The valuation methodologies used by the Company to determine whether they were consistent with generally accepted valuation practices, and reasonably weighted.
◦The discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.
◦Earnings multiples, including testing the underlying source information and mathematical accuracy of the calculations, and evaluating the appropriateness of the Company’s selection of companies in its industry comparable groups.
•We performed sensitivity analyses with regard to forecasted revenue and the discount rate to evaluate the changes in the fair value of the redeemable non-controlling interest in Contrail Aviation Support, LLC, that would result from changes in those significant assumptions.
•We evaluated whether the business and valuation assumptions used were consistent with evidence obtained in other areas of the audit.
/s/ Deloitte & Touche LLP
June 27, 2023
We have served as the Company's auditor since 2018.
38
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
| Year Ended March 31, | |||||||||||
| (In thousands, except per share data) | 2023 | 2022 | |||||||||
| Operating Revenues: | |||||||||||
| Overnight air cargo | $ | $ | |||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| Corporate and other | |||||||||||
| Operating Expenses: | |||||||||||
| Overnight air cargo | |||||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| General and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Inventory write-down | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Loss on sale of property and equipment | |||||||||||
| Operating (Loss) Income | ( | ||||||||||
| Non-operating (Expense) Income: | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Gain on forgiveness of PPP | |||||||||||
| Income from equity method investments | |||||||||||
| Other | ( | ||||||||||
| ( | |||||||||||
| (Loss) Income before income taxes | ( | ||||||||||
| Income Tax Expense | |||||||||||
| Net (Loss) Income | ( | ||||||||||
| Net Income Attributable to Non-controlling Interests | ( | ( | |||||||||
| Net (Loss) Income Attributable to Air T, Inc. Stockholders | $ | ( | $ | ||||||||
| (Loss) Income per share (Note 23) | |||||||||||
| Basic | $ | ( | $ | ||||||||
| Diluted | $ | ( | $ | ||||||||
| Weighted Average Shares Outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See notes to consolidated financial statements.
39
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Net (Loss) Income | $ | ( | $ | ||||||||
| Other Comprehensive Income: | |||||||||||
| Foreign currency translation income (loss) | ( | ||||||||||
Unrealized gain on interest rate swaps, net of tax of $ | |||||||||||
| Reclassification of interest rate swaps into earnings | |||||||||||
| Total Other Comprehensive Income | |||||||||||
| Total Comprehensive (Loss) Income | ( | ||||||||||
| Comprehensive Income Attributable to Non-controlling Interests | ( | ( | |||||||||
| Comprehensive (Loss) Income Attributable to Air T, Inc. Stockholders | $ | ( | $ | ||||||||
See notes to consolidated financial statements.
40
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (In thousands, except per share data) | March 31, 2023 | March 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Restricted cash | |||||||||||
| Restricted investments | |||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | |||||||||||
| Income tax receivable | |||||||||||
| Inventories, net | |||||||||||
| Employee retention credit receivable | |||||||||||
| Other current assets | |||||||||||
| Total Current Assets | |||||||||||
Assets on lease or held for lease, net of accumulated depreciation of $ | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
Intangible assets, net of accumulated amortization of $ | |||||||||||
| Right-of-use assets | |||||||||||
| Equity method investments | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total Assets | |||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | |||||||||||
| Income tax payable | |||||||||||
| Accrued expenses and other (Note 12) | |||||||||||
| Current portion of long-term debt | |||||||||||
| Short-term lease liability | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income tax liabilities, net | |||||||||||
| Long-term lease liability | |||||||||||
| Other non-current liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Redeemable non-controlling interest | |||||||||||
| Commitments and contingencies (Note 24) | |||||||||||
| Equity: | |||||||||||
| Air T, Inc. Stockholders' Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Treasury stock, | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total Air T, Inc. Stockholders' Equity | |||||||||||
| Non-controlling Interests | |||||||||||
| Total Equity | |||||||||||
| Total Liabilities and Equity | $ | $ | |||||||||
See notes to consolidated financial statements.
41
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Gain on forgiveness of PPP loan | ( | ||||||||||
| Income from equity method of investments | ( | ( | |||||||||
| Inventory write-down | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Other | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued expenses | ( | ( | |||||||||
| Employee retention credit receivable | ( | ||||||||||
| Other | ( | ||||||||||
| Total adjustments | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Sale of marketable securities | |||||||||||
| Acquisition of businesses, net of cash acquired | ( | ( | |||||||||
| Investment in unconsolidated entities | ( | ( | |||||||||
| Acquisition of assets | ( | ||||||||||
| Capital expenditures related to property & equipment | ( | ( | |||||||||
| Capital expenditures related to assets on lease or held for lease | ( | ||||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from lines of credit | |||||||||||
| Payments on lines of credit | ( | ( | |||||||||
| Proceeds from term loan | |||||||||||
| Payments on term loan | ( | ( | |||||||||
| Proceeds received from issuance of TruPs | |||||||||||
| Other | ( | ||||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | ( | ||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | |||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | |||||||||||
| Equipment leased or held for lease transferred to inventory | |||||||||||
| Equipment in inventory transferred to assets on lease | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||||
| Operating cash payments for operating leases | |||||||||||
| Cash paid during the year for interest | |||||||||||
| Cash paid during the year for income taxes | $ | $ | |||||||||
See notes to consolidated financial statements.
42
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| (In thousands) | Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Share | Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests* | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net income* | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to fair value of redeemable non-controlling interest | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain of interest rate swaps, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Put option issued to co-investor in CAM (Note 24) | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of interest rate swaps into earnings | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share | Amount | Share | Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Non-controlling Interests* | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | ( | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss* | — | — | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock compensation expense | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to fair value of redeemable non-controlling interest | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on interest rate swaps, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reversal of Put option issued to co-investor in CAM (Note 24) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of interest rate swaps into earnings | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | ( | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
*Excludes amount attributable to redeemable non-controlling interest in Contrail and Shanwick.
See notes to consolidated financial statements.
43
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2023 AND 2022
Air T, Inc. (the “Company,” “Air T,” “we” or “us” or “our”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth of free cash flow per share over time.
We currently operate in four industry segments:
•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;
•Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.
Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income (loss) and Adjusted EBITDA.
44
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Future economic developments such as inflation and increased interest rates as well as further business issues such as supply chain issues present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses implemented measures to attempt to limit the impact of COVID-19 and economic and business issues but we still experienced disruptions, and we experienced a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Many of our businesses may continue to generate reduced operating cash flows and could operate at a loss from time to time beyond fiscal 2023. We expect that issues caused by the pandemic and other economic and business issue will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact these issues on economic and market conditions and our businesses in particular, and, as a result, presents material uncertainty and risk with respect to us and our results of operations. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2023, however; uncertainty over the ultimate direct and indirect impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2023 inherently less certain than they would be absent the current and potential impacts of COVID-19.
Segments - The Company has four reportable operating segments: overnight air cargo, ground equipment sales, commercial jet engine and parts and corporate and other. The Company assesses the performance of these segments on an individual basis (see Note 22).
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information by business segment for purposes of allocating resources and evaluating financial performance. Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income (loss) and Adjusted EBITDA.
Business Combinations – The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. Consistent with ASC 805, the Company accounts for each business combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. Goodwill is recognized for the excess of the purchase consideration over the fair value of identifiable net assets acquired. Included in purchase consideration is the estimated acquisition date fair value of any earn-out obligation incurred. For business combinations where non-controlling interests remain after the acquisition, assets (including goodwill) and liabilities of the acquired business are recorded at the full fair value and the portion of the acquisition date fair value attributable to non-controlling interests is recorded as a separate line item within the equity section or, as applicable to redeemable non-controlling interests, between the liabilities and equity sections of the Company’s consolidated balance sheets.
The acquisition method permits the Company a period of time after the acquisition date during which the Company may adjust the provisional amounts recognized in a business combination. This period of time is referred to as the “measurement period”. The measurement period provides an acquirer with a reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. Accordingly, the Company is required to recognize adjustments to the provisional amounts, with a corresponding adjustment to goodwill, in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the Company would adjust its consolidated financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date.
Income statement activity of an acquired business is reflected within the Company’s consolidated statements of income (loss) commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.
Acquisition-related costs are costs the Company incurs to affect a business combination. Those costs may include such items as finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.
Changes in estimates of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as part of the acquisition, rather, they are recognized directly in earnings.
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Financial Instruments Designated for Trading – Except for short sales of equity securities, the Company accounts for all other financial instruments (including derivative instruments) designated for trading in accordance with ASC 815. All changes in the fair value of the financial instruments designated for trading are recognized in earnings as they occur. Further, all gains and losses on derivative instruments designated for trading are presented net on the consolidated Statements of Income (Loss). The fair value of derivative instruments designated for trading in a gain position are recorded in Other Current Assets and the fair value of derivative instruments designated for trading in a loss position are recorded in Accrued Expenses and Other on the consolidated Balance Sheets.
The Company accounts for short sales of equity securities in accordance with ASC 942 and ASC 860. The obligations incurred in short sales are reported in Accrued Expenses and Other on the consolidated Balance Sheets. They are subsequently measured at fair value through the income statement at each reporting date with gains and losses on securities. Interest on the short positions are accrued periodically and reported as interest expense. The market value of the Company’s equity securities and cash held by the broker are used as collateral against any outstanding margin account borrowings for purposes of short selling equities. This collateral is recorded in Other Current Assets on the consolidated Balance Sheets.
The Company reports all cash receipts and payments resulting from the purchases and sales of securities, loans, and other assets that are acquired specifically for resale as operating cash flows.
Inventories – Inventories are carried at the lower of cost or net realizable value. When finished goods units are leased to customers under operating leases, the units are transferred to Assets on Lease or Held For Lease. The classification of cash flows associated with the purchase and sale of finished goods is based on the activity that is likely to be the predominant source or use of cash flows for the items. Consistent with aviation industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.
The Company periodically evaluates the carrying value of inventory. In these evaluations, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Any slow moving, obsolete or damaged inventory and inventory with costs exceeding net realizable value are evaluated for write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
In accordance with industry practice, all inventories are classified as a current asset including portions with long production cycles, some of which may not be realized within one year.
Investments under the Equity Method – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. For investments that have a different fiscal year-end, if the difference is not more than three months, the Company elects a 3-month lag to record the change in the investment.
The Company assesses the carrying value of its investments whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the investment to the estimated future undiscounted cash flows of the investment, which take into account current, and expectations for future, market conditions and the Company’s intent with respect to holding or disposing of the investment. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and the Company’s ultimate use of the investment could impact the assumptions and result in future impairment losses to the investments. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through quoted prices in active markets or various valuation techniques, including internally developed discounted cash flow models or comparable market transactions.
Goodwill - The Company evaluates goodwill on an annual basis or anytime events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The Company is permitted to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value, including goodwill. In qualitatively evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances such as macroeconomic conditions, industry and market developments, cost factors, and the overall financial performance of the reporting unit. If, after assessing these events and circumstances, it is determined that there may be an impairment, then a quantitative analysis is performed. In the first step of the quantitative method, recoverability of goodwill is evaluated by estimating the fair value of the reporting unit’s goodwill using multiple techniques, including a discounted cash flow model income approach and a market approach. The estimated fair value is then compared to the carrying value of the reporting unit. The Company will recognize an impairment charge for the amount by which the carrying value of the reporting unit exceeds its fair value, if any.
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Goodwill consisted of the following (in thousands):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Goodwill, at original cost | $ | $ | |||||||||
| Accumulated impairment | ( | ( | |||||||||
| Goodwill, net of impairment | $ | $ | |||||||||
As of March 31, 2023, $4.2 million of the goodwill balance is attributable to the acquisition of Contrail and included within the Commercial Jet Engines and Parts segment. $6.3 million of the goodwill balance is attributable to the acquisition of Shanwick in February 2022, and included within the Corporate and Other segment. $0.1 million of the goodwill balance is attributable to the acquisition of WASI in January 2023, and included within the Overnight Air Cargo segment.
We performed our annual impairment assessment for goodwill of our reporting units at March 31, 2023. In the fiscal year 2023, COVID-19 continued to have some impact on the macroeconomic conditions and the outlook of the airline industry. Due to this, the Company performed a quantitative analysis using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Our discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The forecasts and assumptions are based on our annual and long-term business plans. The market approach requires management to make significant assumptions related to market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating characteristics as our reporting units.
Based on the results of our annual quantitative assessment conducted as of March 31, 2023, the fair value of our reporting units exceeded their carrying values, and management concluded that no impairment charge was warranted.
Intangible Assets – Amortizable intangible assets consist of acquired patents, tradenames, customer relationships, and other finite-lived identifiable intangibles. Such intangibles are initially recorded at fair value and subsequently subject to amortization. Amortization is recorded using the straight-line method over the estimated useful lives of the assets. In accordance with the applicable accounting guidance, the Company evaluates the recoverability of amortizable intangible assets whenever events occur that indicate potential impairment. In doing so, the Company assesses whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the estimated fair value of the asset.
The estimated amortizable lives of the intangible assets are as follows:
| Years | |||||
| Purchased software | |||||
| Internally developed software | |||||
| In-place lease and other intangibles | Over lease term | ||||
| Trade names | |||||
| Certification | |||||
| Non-compete | |||||
| License | |||||
| Patents | |||||
| Customer relationships | |||||
Property and Equipment and Assets on Lease or Held for Lease – Property and equipment is stated initially at cost, or fair value if purchased as part of a business combination. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Equipment leased to customers is depreciated using the straight line method. Useful lives range from three years for computer equipment, seven years for flight equipment, ten years for deicers and other equipment leased to customers and thirty years for buildings.
Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. Certain costs incurred in connection with the acquisition of engine assets are capitalized as part of the cost of such assets. If assets are not actively being leased (i.e. held for lease), then they are not being depreciated. Major overhauls which improve functionality or extend original useful life are capitalized and depreciated over the engine assets' useful life to a residual value. The Company depreciates the engines on a straight-line basis over the assets' useful life from the acquisition date to a residual value. The Company adjusts its estimates annually for these older generation assets, including updating estimates of an engine’s or aircraft’s remaining operating life. The Company believes this methodology accurately reflects the typical holding period for the assets and that the residual value assumption, which is dependent on the Company's eventual plan for the engine assets (i.e. whole asset sale, part-out, etc.), reasonably approximates the selling price of the assets.
When engine assets are committed for sales, the assets are transferred to Inventory. The classification of cash flows associated with the purchase and sale of engine assets is based on the activity that is likely to be the predominant source or use of cash flows for the items.
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Accounting for Debt - Trust Preferred Securities and Warrant Liability – On June 10, 2019, the Company issued an aggregate of 1.6 million TruPs in the amount of $4.0 million in a non-cash transaction. In connection with the issuance of these TruPs, the Company also issued an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in stated value of TruPs). A warrant for mandatorily redeemable shares conditionally obligates the issuer to ultimately transfer assets—the obligation is conditioned only on the warrant's being exercised because the shares will be redeemed. Thus, warrants for mandatorily redeemable shares are liabilities under ASC 480. In total, 5.3 million Warrants were exercised and the remaining 3.1 million Warrants expired on August 30, 2021.
On May 14, 2021, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (the “sales agent” or “Ascendiant”), pursuant to which it may sell and issue its TruPs having an aggregate offering price of up to $8.0 million from time to time. The Company has no obligation to sell any TruPs, and may at any time suspend offers under the ATM Agreement or terminate the ATM Agreement.
Income Taxes – Income taxes have been provided using 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. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
A valuation allowance against net deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. All deferred income taxes are classified as non-current in the consolidated balance sheets. The Company recognizes the benefit of a tax position taken on a tax return, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. An uncertain income tax position is not recognized if it has a less than a 50% likelihood of being sustained.
Accounting for Redeemable Non-Controlling Interest – In 2016, in connection with the Company's acquisition of Contrail, Contrail entered into an Operating Agreement (the “Operating Agreement”) with the Seller providing for the governance of and the terms of membership interests in Contrail. The Operating Agreement includes put and call options (“Contrail Put/Call Option”) with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail and its current Chief Executive Officer. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was on July 18, 2021. Per the agreement, the price is to be agreed upon by the parties or, failing such agreement, to be determined pursuant to third-party appraisals in a process specified in the agreement.
In February 2022, in connection with the Company's acquisition of GdW, a consolidated subsidiary of Shanwick, the Company entered into a shareholder agreement with the 30 % non-controlling interest owners of Shanwick, providing for the governance of and the terms of membership interests in Shanwick. The shareholder agreement includes put and call options (“Shanwick Put/Call Option”) with regard to the 30 % non-controlling interest. The non-controlling interest holders are the executive management of the underlying business. The Shanwick Put/Call Option grants the Company an option to purchase the 30 % interest at the call option price ("Call Option") that equals to the average EBIT over the 3 Financial Years prior to the exercise of the Call Option multiplied by 8. In addition, the Shanwick Put/Call Option also grants the non-controlling interest owners an option ("Put Option") to require Air T to purchase from them their respective ownership interests at the Put Option price, that is equal to the average EBIT over the 3 Financial Years prior to the exercise of the Put Option multiplied by 7.5. The Call Option and the Put Option may be exercised at any time from the fifth anniversary of the shareholder agreement and then only at the end of each fiscal year of Air T.
Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result of this feature, the Company recorded the non-controlling interests as redeemable and classified them in temporary equity within its Consolidated Balance Sheets initially at their acquisition-date estimated redemption value or fair value.
Per the Operating Agreement, the Contrail's non-controlling interest is redeemable at fair value, which is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The
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The Shanwick's non-controlling interest is redeemable at established multiples of EBIT and, as such, is considered redeemable at other than fair value. It is recorded on our consolidated balance sheets at estimated redemption value within redeemable non-controlling interests, and changes in its estimated redemption value are recorded on our consolidated statements of operations within non-controlling interests. As of March 31, 2023, the estimated redemption value of Shanwick's redeemable non-controlling interest is $4.7 million. See Note 24, Commitments and Contingencies.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04- Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. In December 2022, the FASB issued ASU 2022-06- Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this Update defer the implementation deadline of Topic 848 from December 31, 2022, to December 31, 2024. The Company is currently in the process of converting our LIBOR-based contracts, hedging relationships, and other transactions to other reference rates. We anticipate to be completed by September 30, 2023.
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2. ACQUISITIONS
Worldwide Aviation Services, Inc.
On January 31, 2023, the Company acquired Worldwide Aircraft Services, Inc. ("WASI"), a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport. The acquisition was was funded with cash and the loans described in Note 14 of this report. WASI is included within the Overnight air cargo segment.
The acquisition date's fair value of the consideration is summarized in the table below (in thousands):
| January 31, 2023 | |||||
| Cash consideration | $ | ||||
| Seller's Note | $ | ||||
| Total consideration | $ | ||||
The transaction was accounted for as a business combination in accordance with ASC Topic 805 "Business Combinations." Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their fair values as of January 31, 2023, with the excess of total consideration above fair value of net assets acquired recorded as goodwill. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of January 31, 2023 (in thousands):
| January 31, 2023 | |||||
| ASSETS | |||||
| Accounts receivable | $ | ||||
| Inventory | |||||
| Other current assets | |||||
| Property, plant and equipment, net | |||||
| Intangible -Trade Name | |||||
| Intangible - Non-competition Agreement | |||||
| Intangible - Customer Relationships | |||||
| Other assets | |||||
| Total assets | $ | ||||
| LIABILITIES | |||||
| Accounts payable | |||||
| Accrued expenses and deferred revenue | |||||
| Total liabilities | $ | ||||
| Net assets acquired | $ | ||||
| Consideration paid | |||||
| Less: Cash acquired | ( | ||||
| Less: Net assets acquired | ( | ||||
| Goodwill | $ | ||||
As of March 31, 2023, the purchase price allocation is final.
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| Income Statement Post-Acquisition | |||||
| Revenue | $ | ||||
| Cost of Sales | |||||
| Operating Expenses | |||||
| Operating Loss | ( | ||||
| Non-operating expense | ( | ||||
| Net loss | $ | ( | |||
Pro forma financial information is not presented as the results are not material to the Company’s consolidated financial statements.
Wolfe Lake HQ, LLC
On December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake HQ, LLC, completed the purchase of the real estate located at 5000 36th Street West, St. Louis Park, Minnesota pursuant to a real estate purchase agreement with WLPC East, LLC, a Minnesota limited liability company (an unaffiliated third-party) dated October 11, 2021. The real estate purchased consists of a 2-story office building, asphalt-paved driveways and parking areas, and landscaping. The building was constructed in 2004 with an estimated 54,742 total square feet of space. The real estate purchased is where Air T's Minnesota executive office is currently located. With this purchase, the Company assumed 11 leases from existing tenants occupying the building.
The total amount recorded for the real estate was $13.4 million, which included the purchase price of $13.2 million and total direct capitalized acquisition costs of $0.2 million. The consideration paid for the real estate consisted of approximately $3.3 million in cash and a new secured loan from Bridgewater Bank ("Bridgewater") with an aggregate principal amount of $9.9 million and a fixed interest rate of 3.65 % which matures on December 2, 2031. See Note 14.
In accordance with ASC 805, the purchase price consideration was allocated as follows (in thousands):
| Land | $ | ||||
| Building | |||||
| Site Improvements | |||||
| Tenant Improvements | |||||
| In-place lease and other intangibles | |||||
| $ | |||||
GdW Beheer B.V.
On February 10, 2022, the Company acquired GdW, a Dutch holding company in the business of providing global aviation data and information. The acquisition was completed through a wholly-owned subsidiary of the Company, Air T Acquisition 22.1, LLC ("Air T Acquisition 22.1"), a Minnesota limited liability company, through its Dutch subsidiary, Shanwick, and was funded with cash, investment by executive management of the underlying business, and the loans described in Note 14. As part of the transaction, the executive management of the underlying business purchased 30.0 % of Shanwick. Air T Acquisition 22.1 and its consolidated subsidiaries are included within the Corporate and other segment.
Subsequent to the acquisition date, the Company made certain measurement period adjustments to the preliminary purchase price allocation, which resulted in an increase to goodwill of $0.3 million. The increase is attributable to a measurement period adjustment of $0.3 million related to certain intangible assets acquired and related deferred tax liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. As of June 30, 2022, the measurement period was completed and all adjustments are reflected in the tables below.
Total consideration is summarized in the table below (in thousands):
| February 10, 2022 | |||||
| Consideration paid | $ | ||||
| Less: Cash acquired | ( | ||||
| Less: Net assets acquired | ( | ||||
| Goodwill | $ | ||||
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The transaction was accounted for as a business combination in accordance with ASC Topic 805 "Business Combinations." Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their fair values as of February 10, 2022, with the excess of total consideration over fair value of net assets acquired recorded as goodwill. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of February 10, 2022 (in thousands):
| February 10, 2022 | |||||
| ASSETS | |||||
| Accounts Receivable | $ | ||||
| Other current assets | |||||
| Property, plant and equipment, net | |||||
| Intangible - Proprietary Database | |||||
| Intangible - Customer Relationships | |||||
| Total assets | |||||
| LIABILITIES | |||||
| Accounts payable | |||||
| Accrued expenses and deferred revenue | |||||
| Deferred income tax liabilities, net | |||||
| Total liabilities | |||||
| Net assets acquired | $ | ||||
The following table sets forth the revenue and expenses of GdW, prior to intercompany eliminations, that are included in the Company’s condensed consolidated statement of income for the fiscal year ended March 31, 2022 (in thousands):
| Income Statement Post-Acquisition | |||||
| Revenue | $ | ||||
| Cost of Sales | |||||
| Operating Expenses | |||||
| Operating Income | |||||
| Non-operating income | |||||
| Net income | $ | ||||
Pro forma financial information is not presented as the results are not material to the Company’s consolidated financial statements.
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3. MAJOR CUSTOMER
53
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and reports financial assets and liabilities at fair value. Fair value measurement is classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Assets Measured and Recorded at Fair Value on a Recurring Basis
The following consolidated balance sheet items are measured at fair value on a recurring basis (in thousands):
| Fair Value Measurements at March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Marketable securities (including restricted investments) (Level 1) | $ | $ | ||||||||||||
| Contrail's redeemable non-controlling interest (Level 3) | $ | $ | ||||||||||||
The fair values of our interest rate swaps are based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instruments are held, the derivatives are classified as Level 2 in the hierarchy. See Note 9.
The fair value of Contrail's redeemable non-controlling interest is based on a combination of market approach and income approach and is classified as Level 3 in the hierarchy. See Note 24.
The fair value measurements which use significant observable inputs (Level 3), changed due to the following (in thousands):
| Contrail's Redeemable Non-Controlling Interest | ||||||||
| Beginning Balance as of April 1, 2022 | $ | |||||||
| Contribution from non-controlling member | ||||||||
| Distribution to non-controlling member | ||||||||
| Net loss attributable to non-controlling interests | ( | |||||||
| Fair value adjustment - Contrail (Note 24) | ||||||||
| Ending Balance as of March 31, 2023 | $ | |||||||
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable approximate their fair values at March 31, 2023 and 2022.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of engine assets on lease or held for lease by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors such as current data from manufacturers as well as specific market sales. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. The Company used Level 2 inputs to measure write-downs of engine assets on lease or held for lease. As of March 31, 2023, as a result of our year-end valuation, we did not identify any impairment on our engine assets on lease or held for lease.
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5. INVENTORIES
Inventories consisted of the following (in thousands):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Overnight air cargo: | |||||||||||
| Finished goods | |||||||||||
| Ground equipment manufacturing: | |||||||||||
| Raw materials | |||||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Corporate and other: | |||||||||||
| Raw materials | |||||||||||
| Finished goods | |||||||||||
| Commercial jet engines and parts: | |||||||||||
| Whole engines available for sale or tear-down | |||||||||||
| Parts | |||||||||||
| Total inventories | |||||||||||
| Reserves | ( | ( | |||||||||
| Total inventories, net of reserves | $ | $ | |||||||||
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6. LESSOR ARRANGEMENTS
Assets on lease
The Company leases equipment to third parties, primarily through Contrail which leases engines to aviation customers with lease terms between 1 and 3 years under operating lease agreements. For the assets currently on lease, there are no options for the lessees to purchase the assets at the end of the leases. The Company depreciates the engines on a straight-line basis over the assets' useful life from the acquisition date to a residual value. Depreciation expense relating to engines on lease was $1.6 million and $0.3 million for the fiscal years ended March 31, 2023 and 2022, respectively.
Future minimum rental payments to be received do not include contingent rentals that may be received under certain leases because amounts are based on usage. Contingent rent earned totaled approximately $0 and $0.1 million for the fiscal years ended March 31, 2023 and 2022, respectively. As of March 31, 2023, future minimum rental payments to be received under non-cancelable leases are as follows (in thousands):
| Year ended March 31, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
As of March 31, 2023, Contrail has received its return-to-condition compensation ("engine compensation") in the amount of $4.6 million on a previously leased engine that terminated in December 2022.
Office leases
The Company, through its wholly owned subsidiary, Wolfe Lake, leases offices to third parties with lease terms between 5 and 29 years under operating lease agreements. For the offices currently on lease, there are no options for the lessees to purchase the spaces at the end of the leases. The Company depreciates the assets on a straight-line basis over the assets' useful life. Depreciation expense relating to office leases was $0.3 million and $0.1 million for the fiscal years ended March 31, 2023 and 2022, respectively.
We recognized rental and other revenues related to operating lease payments of $1.4 million and $0.4 million, respectively, of which variable lease payments were $0.6 million and $0.2 million during the fiscal years ended March 31, 2023 and 2022, respectively. Future minimum rental payments to be received do not include variable lease payments that may be received under certain leases because amounts are based on usage. The following table sets forth the undiscounted cash flows for future minimum base rents to be received from customers for office leases in effect as of March 31, 2023:
| Year ended March 31, | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total | $ | ||||
56
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Furniture, fixtures and equipment | $ | $ | |||||||||
| Leasehold improvements | |||||||||||
| Building | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
57
8. INTANGIBLES
Intangibles consisted of the following (in thousands):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Purchased software | $ | $ | |||||||||
| Internally developed software | |||||||||||
| In-place lease and other intangibles | |||||||||||
| Customer relationships | |||||||||||
| Patents | |||||||||||
| Other | |||||||||||
| Accumulated amortization | ( | ( | |||||||||
| In-process software | |||||||||||
| Intangible assets, total | $ | $ | |||||||||
In the fiscal year ended March 31, 2023, the Company impaired $0.3 million of previously capitalized costs related to a software project that was deemed no longer probable to be completed and placed in service.
The components of purchased intangible assets for WASI were as follows (in thousands):
| March 31, 2023 | |||||||||||||||||||||||
| Average Remaining Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||
| Customer relationships | $ | $ | |||||||||||||||||||||
| Other | |||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||
Based on the intangible assets recorded at March 31, 2023 and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
| (In thousands) | Amortization | ||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| $ | |||||
58
9. INVESTMENTS IN SECURITIES AND DERIVATIVE INSTRUMENTS
As part of the Company’s interest rate risk management strategy, the Company, from time to time, uses derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings (Air T - Term Note A and Air T - Term Note D). To meet these objectives, the Company entered into interest rate swaps with notional amounts consistent with the outstanding debt to provide a fixed rate of 4.56 % and 5.09 %, respectively, on Term Notes A and D. The swaps mature in January 2028.
On August 31, 2021, Air T and MBT refinanced Term Note A and fixed its interest rate at 3.42 %. As a result of this refinancing, the Company determined that the interest rate swap on Term Note A was no longer an effective hedge. The Company will amortize the fair value of the interest-rate swap contract included in accumulated other comprehensive income (loss) associated with Term Note A at the time of de-designation into earnings over the remainder of its term. In addition, any changes in the fair value of Term Note A's swap after August 31, 2021 are recognized directly into earnings. The remaining swap contract associated with Term Note D is designated as an effective cash flow hedging instrument in accordance with ASC 815.
On January 7, 2022, Contrail completed an interest rate swap transaction with Old National Bank ("ONB") with respect to the $43.6 million loan made to Contrail in November 2020 pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve ("Contrail - Term Note G"). The purpose of the floating-to-fixed interest rate swap transaction was to effectively fix the loan interest rate at 4.68 %. As of February 24, 2022, this swap contract has been designated as a cash flow hedging instrument and qualified as an effective hedge in accordance with ASC 815. During the period between January 7, 2022 and February 24, 2022, the Company recorded a loss of approximately $0.1 million in the consolidated due to the changes in the fair value of the instrument prior to the designation and qualification of this instrument as an effective hedge. After it was deemed an effective hedge, the Company recorded changes in the fair value of the instrument in the consolidated statement of comprehensive income (loss). On March 30, 2023, Contrail made a prepayment of $6.7 million on Contrail - Term Note G. As a result of this prepayment, the Company determined that the interest rate swap on Contrail - Term Note G was no longer an effective hedge. The Company will amortize the fair value of the interest-rate swap contract included in accumulated other comprehensive income (loss) associated with Contrail - Term Note G at the time of de-designation into earnings over the remainder of its term. In addition, any changes in the fair value of Contrail - Term Note G's swap after March 30, 2023 are recognized directly into earnings.
For the swaps related to Air T Term Note D and Contrail - Term Note G (prior to March 30, 2023), the effective portion of changes in the fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the consolidated statement of income (loss) as interest expense in the same period in which the underlying hedged transactions affect earnings. The interest rate swaps are considered Level 2 fair value measurements. As of March 31, 2023 and March 31, 2022, the fair value of the interest-rate swap contracts was an asset of $2.4 million and $0.9 million, respectively, which is included within other assets in the consolidated balance sheets. During the years ended March 31, 2023 and 2022, the Company recorded a gain of approximately $1.0 million and $0.9 million, net of tax, respectively, in the consolidated statement of comprehensive income (loss) for changes in the fair value of the instruments.
The Company may, from time to time, employ trading strategies designed to profit from market anomalies and opportunities it identifies. Management uses derivative financial instruments to execute those strategies, which may include options, and futures contracts. These derivative instruments are priced using publicly quoted market prices and are considered Level 1 fair value measurements. During the fiscal year ended March 31, 2023, the Company recorded no gain and $0.3 million loss related to these derivative instruments. During the fiscal year ended March 31, 2022, the Company did no
The following table presents these derivative instruments at fair value in the condensed consolidated balance sheets as of March 31, 2023 and March 31, 2022 (in thousands):
| (In thousands) | March 31, 2023 | March 31, 2022 | ||||||
| Assets: | ||||||||
| Exchange-traded options & futures | ||||||||
| Other current assets | $ | $ | ||||||
| Total assets | ||||||||
| Liabilities: | ||||||||
| Exchange-traded options & futures | ||||||||
| Accrued Expenses and other | ||||||||
| Total liabilities | $ | $ | ||||||
The Company also invests in exchange-traded marketable securities and accounts for that activity in accordance with ASC 321, Investments- Equity Securities. Marketable equity securities are carried at fair value, with changes in fair market value included in the determination of net income (loss). The fair market value of marketable equity securities is determined based on quoted market prices in active markets. During the fiscal year ended March 31, 2023, the Company had a gross unrealized gain aggregating to $0.5 million and a gross unrealized loss aggregating to $0.9 million. During the fiscal year ended March 31, 2022, the Company had a gross unrealized gain aggregating to $2.8 million and a gross unrealized loss aggregating to $2.4 million. These unrealized gains and losses are included in Other income (loss) on the consolidated statement of income (loss).
The market value of the Company’s equity securities and cash held by the broker are periodically used as collateral against any outstanding margin account borrowings. As of March 31, 2023 and 2022, the Company had $0.1 million and $0 of outstanding borrowings under its margin account, respectively. As of March 31, 2023 and 2022, the Company had cash margin balances related to exchange-traded equity securities and securities sold short of $0.2 million and $0 , respectively, which is reflected in other current assets on the consolidated balance sheets. The interest rate on margin account borrowings was 6.33 % as of March 31, 2023.
59
10. EQUITY METHOD INVESTMENTS
The Company’s investment in Insignia is accounted for under the equity method of accounting. The Company has elected a three-month lag upon adoption of the equity method. As of March 31, 2023, the number of Insignia's shares owned by the Company was 0.5 million, representing approximately 27 % of the outstanding shares. During the fiscal year ended March 31, 2021, due to loss attributions and impairments taken in prior fiscal years, the Company's net investment basis in Insignia was reduced to $0 . On August 23, 2021, Insignia restated its 10-K for the fiscal year ended December 31, 2020 and its 10-Q for the quarter ended March 31, 2021. The Company evaluated these restatements and determined that they would not result in any additional impact on the Company's condensed consolidated financial statements. During the three months ended September 30, 2022, Insignia recorded net income of $11.8 million, which was primarily driven by a gain on litigation settlement of $12.0 million. During the fiscal year ended March 31, 2023, the Company's share of Insignia's net income for twelve months ended December 31, 2022 was $3.1 million. The Company applied $1.4 million to offset the cumulative value of unrecorded share of losses, resulting in net income recognition of $1.7 million. As of March 31, 2023, the Company's net investment basis in Insignia is $1.7 million.
The Company's 20.1 % investment in CCI is accounted for under the equity method of accounting. Due to the differing fiscal year-ends, the Company has elected a three-month lag to record the CCI investment at cost, with a basis difference of $0.3 million. For the fiscal year ended March 31, 2023, the Company recorded income of $0.8 million as its share of CCI's net income for the twelve months ended December 31, 2022, along with a basis difference adjustment of $50.0 thousand. The Company's net investment basis in CCI is $3.1 million as of March 31, 2023. During the quarter ended December 31, 2022, the Company also paid off the $2.0 million promissory note payable to CCI. See Note 14.
Summarized audited financial information for the Company's equity method investees for the twelve months ended December 31, 2022 and December 31, 2021 are as follows (in thousands):
| Twelve Months Ended December 31, 2022 | Twelve Months Ended December 31, 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Gross Profit | |||||||||||
| Operating income (loss) | ( | ||||||||||
| Net income (loss) | ( | ||||||||||
| Net income (loss) attributable to Air T, Inc. stockholders | $ | $ | ( | ||||||||
60
11. EMPLOYEE RETENTION CREDIT
The ERC, as originally enacted on March 27, 2020 by the CARES Act, is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act (the “Relief Act”), enacted on December 27, 2020, amended, and extended the ERC. The Relief Act extended and enhanced the ERC for qualified wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an eligible employer pays to employees after December 31, 2020 through June 30, 2021. Under the American Rescue Plan Act of 2021 ("ARPA"), which was signed into law on March 11, 2021, the ERC was further extended through December 31, 2021. The purpose of the ERC is to encourage employers to keep employees on the payroll, even if they are not working during the covered period because of the COVID-19 outbreak.
The Company qualified for federal government assistance through the ERC provisions for the period between January 1, 2021 and September 30, 2021. As of March 31, 2022, we recognized the one-time refunds totaling $9.1 million which was included on the Consolidated Balance Sheets as an Employee Retention Credit receivable, as well as on the Consolidated Statements of Income (Loss) as an offset to the related employee expenses within general and administrative expenses in the fiscal year ended March 31, 2022. During the fiscal year ended March 31, 2023, the Company received $8.2 million of the total refunds, leaving $0.9 million in the Employee Retention Credit receivable.
61
12. ACCRUED EXPENSES
| Year ended March 31, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Salaries, wages and related items | $ | $ | |||||||||
| Profit sharing and bonus | |||||||||||
| Other deposits | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
62
13. LESSEE ARRANGEMENTS
The Company has operating leases for the use of real estate, machinery, and office equipment. The majority of our leases have a lease term of 2 to 5 years; however, we have certain leases with longer terms of up to 30 years. Many of our leases include options to extend the lease for an additional period.
The lease term for all of the Company’s leases includes the non-cancellable period of the lease, plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor that is considered likely to be exercised.
Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments. Variable payments are typically operating costs associated with the underlying asset and are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Our leases do not contain residual value guarantees.
The Company has elected to combine lease and non-lease components as a single component and not to recognize leases on the balance sheet with an initial term of one year or less.
The interest rate implicit in lease contracts is typically not readily determinable, and as such the Company utilizes the incremental borrowing rate to calculate lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease cost for the fiscal years ended March 31, 2023 and 2022 are as follows (in thousands):
| Twelve Months Ended March 31, 2023 | Twelve Months Ended March 31, 2022 | |||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Variable lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
Amounts reported in the consolidated balance sheets for leases where we are the lessee as of the fiscal years ended March 31, 2023 and 2022 were as follows (in thousands):
| March 31, 2023 | March 31, 2022 | |||||||
| Operating leases | ||||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term | ||||||||
| Operating leases | ||||||||
| Weighted-average discount rate | ||||||||
| Operating leases | % | % | ||||||
Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the fiscal year ended March 31, 2023 are as follows (in thousands):
| Operating Leases | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total undiscounted lease payments | |||||
| Interest | ( | ||||
| Discount | ( | ||||
| Total lease liabilities | $ | ||||
63
14. FINANCING ARRANGEMENTS
Borrowings of the Company and its subsidiaries are summarized below at March 31, 2023 and March 31, 2022, respectively.
On June 9, 2022, the Company, Jet Yard and MBT entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (“Amendment”) and a related Overline Note (“Overline Note”) in the original principal amount of $5.0 million. The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from $17.0 million to $22.0 million. The borrowing base calculation methodology remains unchanged.
The interest rate on borrowings under the facility that are less than $17.0 million remains at the greater of 2.50 % or Prime minus 1.00 %. The interest rate applicable to borrowings under the facility that exceed $17.0 million is the greater of 2.50 % or Prime plus 0.50 %. The commitment fee on unused borrowings below $17.0 million remains at 0.11 %. The commitment fee on unused borrowings above $17.0 million is 0.20 %. The Amendment also includes an additional covenant to the credit agreement, namely the requirement that the Company provide inventory appraisals for AirCo, AirCo Services and Worthington to MBT twice a year.
Each of the Company subsidiaries that has guaranteed the MBT revolving facility executed a guaranty acknowledgment in which they agreed to guaranty the Overline Note and acknowledged, among other things, that the Overline Note would not impair the lenders rights under the previously executed guaranty or security agreement.
The Overline Note and commitment matures on the earlier of March 31, 2023 or the date on which the Company receives all funds from the Company’s Employee Retention Credit ("ERC") application (estimated at approximately $9.1 million) plus the full receipt of the Company’s carryback tax refund for the year (estimated at approximately $2.6 million). As of March 31, 2023, the Overline Note was paid in full and terminated.
On September 30, 2022, the Company executed a promissory note payable to CCI ("Promissory Note - CCI") for $2.0 million that bears interest at 10.00 % per annum and matured on December 30, 2022. As of December 31, 2022, this note has been repaid without penalty.
On November 8, 2022, Contrail entered into the Second Amendment to Master Loan Agreement (the “Amendment”) with ONB. The Amendment amends the Master Loan Agreement dated as of June 24, 2019, as amended. The principal revisions made in the Amendment are: (i) the tangible net worth covenant was revised to require that Contrail maintain a tangible net worth of at least $12.0 million at all times prior to March 31, 2024 and $15.0 million at all times on or following March 31, 2024; and, (ii) that all proceeds from certain asset sales during the period beginning on October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G. Contrail executed a Collateral Assignment of two Aircraft engines in connection with the Amendment.
On January 31, 2022 the Company funded the WASI acquisition through (i) a promissory note to Worldwide Aviation, LLC, (ii) cash, and (iii) an additional secured loan from MBT. The promissory note to Worldwide Aviation, LLC in the amount of $1.5 million bears a fixed interest rate of 6.00 % and is payable via periodic payments up to the January 1, 2026 maturity date. In connection with the acquisition, the Company and Jet Yard entered Amendment No. 2 to the Third Amended and Restated Credit Agreement (“Amendment No. 2”) with MBT. Amendment No. 2 amends the Third Amended and Restated Credit Agreement dated as of August 31, 2021 as amended by that certain Amendment No. 1 to the Third Amended and Restated Credit Agreement dated June 9, 2022. Amendment No. 2 provides for a new term loan (“Term Loan F”) in the amount of $1.0 million to help finance a portion of the consideration paid by the Company for WASI. Pursuant to the amendment, the Company executed Term Note F in favor of MBT in the original principal amount of $1.0 million. The note bears interest at a rate equal to the greater of six percent (6.00 %) or the prime rate plus one percent (1.00 %). The note obligates the Company to make monthly payments of principal plus accrued interest commencing March 1, 2023. The note may be prepaid, in whole or part, at any time without penalty and final payment of all amounts due under the note is due January 31, 2028.
On March 22, 2023, Contrail entered into the First Amendment to Second Amendment to Master Loan Agreement and Third Amendment to Master Loan Agreement ("the Amendment") with ONB. The Amendment amends the Master Loan Agreement dated June 24, 2019 with principal revisions to: (i) Section 3 of the Second Amendment was revised so that exclusion of certain gains and losses from the definition of “net income” applies through September 30, 2023, not March 31, 2023; (ii) Section 5 of the Second Amendment relating to prepayment of Term Loan G was amended to eliminate the requirement that all asset sales during the period beginning with October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G; instead, the Amendment provision now reflects the agreement that voluntary payments totaling $20.0 million would be made by the borrower on Term Loan G no later than September 30, 2023; and, (iii) a revolving note resting period covenant was added to the Amendment whereby the outstanding principal balance on the revolving note would be paid to zero (0) for at least thirty (30) consecutive days during each annual period ending on the anniversary date of the revolving note, provided the borrower has not achieved a debt service coverage ratio of 1.10 :1. As mentioned in Note 9, during the quarter ended March 31, 2023, Contrail made a prepayment of $6.7 million on Term Loan G without penalty.
The following table provides certain information about the current financing arrangements of the Company's and its subsidiaries as of March 31, 2023 and 2022:
| (In Thousands) | March 31, 2023 | March 31, 2022 | Maturity Date | Interest Rate | Unused commitments | ||||||||||||||||||||||||
| Air T Debt | |||||||||||||||||||||||||||||
| Revolver - MBT | $ | $ | 8/31/20232 | Greater of | $ | ||||||||||||||||||||||||
| Overline Note - MBT | 3/31/20233 | Greater of | |||||||||||||||||||||||||||
| Term Note A - MBT | 8/31/2031 | ||||||||||||||||||||||||||||
| Term Note B - MBT | 8/31/2031 | ||||||||||||||||||||||||||||
| Term Note D - MBT | 1/1/2028 | 1-month LIBOR + | |||||||||||||||||||||||||||
| Term Note E - MBT | 6/25/2025 | Greater of LIBOR + | |||||||||||||||||||||||||||
| Term Note F - MBT | 1/31/2028 | Greater of | |||||||||||||||||||||||||||
| Promissory Note - CCI | 12/30/2022 | ||||||||||||||||||||||||||||
| Debt - Trust Preferred Securities | 6/7/2049 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| AirCo 1 Debt | |||||||||||||||||||||||||||||
| Term Loan - Park State Bank ("PSB") | 12/11/2025 | 3-month LIBOR + 3.00%4 | |||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Jet Yard Debt | |||||||||||||||||||||||||||||
| Term Loan - MBT | 8/31/2031 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Contrail Debt | |||||||||||||||||||||||||||||
| Revolver - ONB | 9/5/2023 | 1-month LIBOR + 3.45%5 | |||||||||||||||||||||||||||
| Term Loan G - ONB | 11/24/2025 | 1-month LIBOR + 3.00%6 | |||||||||||||||||||||||||||
| Term Loan H - ONB | 8/18/2023 | Wall Street Journal (WSJ) Prime Rate + | |||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Delphax Solutions Debt | |||||||||||||||||||||||||||||
| Canadian Emergency Business Account Loan | 12/31/2025 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Wolfe Lake Debt | |||||||||||||||||||||||||||||
| Term Loan - Bridgewater | 12/2/2031 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Air T Acquisition 22.1 | |||||||||||||||||||||||||||||
| Term Loan - Bridgewater | 2/8/2027 | ||||||||||||||||||||||||||||
| Term Loan A - ING | 2/1/2027 | ||||||||||||||||||||||||||||
| Term Loan B - ING | 5/1/2027 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| WASI Debt | |||||||||||||||||||||||||||||
| Promissory Note - Seller's Note | 1/1/2026 | ||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||
| Total Debt | |||||||||||||||||||||||||||||
| Unamortized Debt Issuance Costs | ( | ( | |||||||||||||||||||||||||||
| Total Debt, net | $ | $ | |||||||||||||||||||||||||||
Fiscal 2023's weighted average interest rate on short term borrowings outstanding was 7.77 % . The weighted average interest rate on short term borrowings outstanding as of March 31, 2022 was 3.90 %.
The Air T revolving credit facility and the Contrail revolving credit facility contain affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates.
The obligations of Contrail under the Contrail Credit Agreement with ONB are secured by a first-priority security interest in substantially all of the assets of Contrail. The obligations of Contrail under the Contrail Credit Agreement are also guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with MBT.
At March 31, 2023, our contractual financing obligations, including payments due by period, are as follows (in thousands):
| Fiscal year ended | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Unamortized Debt Issuance Costs | ( | |||||||
| $ | ||||||||
The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements.
Fair Value of Debts - As of March 31, 2023 and 2022, the carrying amounts reported in the consolidated balance sheets for the Company’s debt instruments approximate the fair values. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debts.
Interest Expense, net - The components of net interest expense during the years ended March 31, 2023 and March 31, 2022 are as follows (in thousands):
| March 31, 2023 | March 31, 2022 | ||||||||||
| Contractual interest | $ | $ | |||||||||
| Amortization of deferred financing costs | |||||||||||
| Interest income | ( | ( | |||||||||
| Total | $ | $ | |||||||||
2 On June 23, 2023, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note. The amendments extended the maturity date of the credit facility to August 31, 2024, among other changes. See Note 26.
3 Earlier of 3/31/23 or the date on which Air T has received the payment from the federal income tax refunds in the amount of approximately $2.6 million and Employee Retention Tax Credits in an amount not less than $9.1 million. As of March 31, 2023, the Overline Note was paid in full and terminated.
4 On May 26, 2023, AirCo 1 executed an Amendment to Main Street Priority Loan Agreement with PSB. The Amendment replaces the three-month LIBOR benchmark applicable to the loan with a three-month SOFR based rate, which is defined as the three-month SOFR rate plus 3.26 %. See Note 26.
5 Effective May 26, 2023, Contrail amended the Promissory Note Revolving Note with ONB to replace the LIBOR based interest rate with a one-month SOFR based rate. The applicable interest rate is now the one-month SOFR-based rate, as defined in the loan agreement, plus 3.56 %. See Note 26.
6 Effective May 26, 2023, Contrail amended the Promissory Note Term Note G with ONB to replace the one-month LIBOR based interest rate with a one-month SOFR-based rate. The principal amount of the loan was $38.2 million on the effective date of the amended documents and the applicable interest rate is now the one-month SOFR based rate, as defined in the loan agreement, plus 3.11 %. See Note 26.
64
15. RELATED PARTY MATTERS
Contrail leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn Properties, LLC, a limited liability company whose membership interests are owned by Mr. Joseph Kuhn, Contrail's Chief Executive Officer and Mrs. Miriam Cohen-Kuhn, Contrail's Chief Financial Officer, equally. The facility consists of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental payments of approximately $0.2 million to Cohen Kuhn Properties, LLC pursuant to such lease during the period from April 1, 2022 through March 31, 2023. This lease expires on July 17, 2026. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance. The Company believes that the terms of such leases are no less favorable to the Company than would be available from an independent third party.
Gary S. Kohler, a director of the Company, entered into an employment agreement with Blue Clay Capital Management, a wholly-owned subsidiary of the Company, in the Corporate and other segment, to serve as its Chief Investment Officer in return for an annual salary of $51.5 thousand plus variable compensation based on the management and incentive fees to be paid to the subsidiary by certain of these investment funds and eligibility to participate in discretionary annual bonuses.
Nick Swenson, CEO of the Company, is also the majority shareholder of CCI. As of March 31, 2023, Mr. Swenson owned 69.9 % of ownership interests in CCI. Under the VIE model, Mr. Swenson is the primary beneficiary of CCI due to the high extent of his ownership relative to other shareholders of CCI, and the lack of shared power between Mr. Swenson and the Company ("the related party group") to direct the activities of CCI that most significantly impact CCI’s economic performance.
Air T Acquisition 22.1's term loan with Bridgewater is secured by a first lien on all of the assets of the Subsidiary, a pledge of $5.0 million, 8.0 % TruPs, and a personal guaranty of the Company’s Chairman, President and Chief Executive Officer Nicholas Swenson.
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16. EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
Air T, Inc. maintains two stock option plans for the benefit of certain eligible employees and directors. The first Air T stock option plan is the 2012 Stock Option Plan. The second Air T stock option plan is the 2020 Omnibus Stock and Incentive Plan. In addition, Delphax maintains a number of stock option plans. Compensation expense is recognized over the requisite service period for stock options which are expected to vest based on their grant-date fair values. The Company uses the Black-Scholes option pricing model to value stock options granted under the Air T, Inc. plans and the Delphax plans. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.
Air T's 2012 Stock Option Plan
In Fiscal 2023, 3,750 options were exercised under the Air T's 2012 Stock Option Plan at $5.75 per share, which was disclosed within our condensed consolidated statement of equity. 7,500 unexpired options remain outstanding under this plan as of March 31, 2023.
Option activity during the fiscal years ended March 31, 2022 and 2023 is summarized below (in thousands, except for shares):
| Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding at March 31, 2021 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | |||||||||||||||||||||||
| Forfeited | |||||||||||||||||||||||
| Repurchased | |||||||||||||||||||||||
| Outstanding at March 31, 2022 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited | |||||||||||||||||||||||
| Repurchased | |||||||||||||||||||||||
| Outstanding at March 31, 2023 | |||||||||||||||||||||||
| Exercisable at March 31, 2023 | $ | $ | |||||||||||||||||||||
Air T's 2020 Omnibus Stock and Incentive Plan
On December 29, 2020, the Company’s Board of Directors unanimously approved the 2020 Omnibus Stock and Incentive Plan (the "Plan"), which was subsequently approved by the Company's stockholders at the August 18, 2021 Annual Meeting of Stockholders. The total number of shares authorized under the Plan is 420,000 . Among other instruments, the Plan permits the Company to grant stock option awards. Through March 31, 2023, options to purchase up to 326,000 shares have been granted under the Plan. Vesting of options is based on the grantee meeting specified service conditions. Furthermore, the number of vested options that a grantee is able to exercise, if any, is based on the Company’s stock price as of the vesting dates specified in the respective option grant agreements. As of the first vesting date on June 30, 2022, 32,600 shares did not meet the stock price condition and therefore, could not be exercised. As of March 31, 2023, the remaining number of options that grantees are able to exercise is 293,400 . The Company uses the Black-Scholes option pricing model to value stock options granted under the Air T's 2020 Omnibus Stock and Incentive Plan. We determined that the fair value of the Plan at inception was $1.3 million.
The key assumptions used in the Plan's Black-Scholes option pricing model are as follows:
| Risk-free interest rate | % | ||||
| Expected dividend yield | |||||
| Expected term | |||||
| Expected volatility | % | ||||
We do not anticipate significant forfeitures and elected to account for forfeitures as they occur. During fiscal years ended March 31, 2023 and 2022, total compensation cost recognized under the Plan was $0.3 million and $0.4 million, respectively. The unrecognized compensation cost related to nonvested awards is $0.6 million, which is expected to be recognized over a weighted average period of 8.25 years.
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17. REVENUE RECOGNITION
Performance Obligations
Substantially all of the Company’s non-lease revenue is derived from contracts with an initial expected duration of one year or less. As a result, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price, to expense costs incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations.
The following is a description of the Company’s performance obligations as of March 31, 2023:
| Type of Revenue | Nature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms | ||||
| Product Sales | The Company generates revenue from sales of various distinct products such as parts, aircraft equipment, printing equipment, jet engines, airframes, and scrap metal to its customers. A performance obligation is created when the Company accepts an order from a customer to provide a specified product. Each product ordered by a customer represents a performance obligation. The Company recognizes revenue when obligations under the terms of the contract are satisfied; generally, this occurs at a point-in-time upon shipment or when control is transferred to the customer. Transaction prices are based on contracted terms, which are at fixed amounts based on standalone selling prices. While the majority of the Company's contracts do not have variable consideration, for the limited number of contracts that do, the Company records revenue based on the standalone selling price less an estimate of variable consideration (such as rebates, discounts or prompt payment discounts). The Company estimates these amounts based on the expected incentive amount to be provided to customers and reduces revenue accordingly. Performance obligations are short-term in nature and customers are typically billed upon transfer of control. The Company records all shipping and handling fees billed to customers as revenue. The terms and conditions of the customer purchase orders or contracts are dictated by either the Company’s standard terms and conditions or by a master service agreement or by the contract. | ||||
| Support Services | The Company provides a variety of support services such as aircraft maintenance, printer maintenance, and short-term repair services to its customers. Additionally, the Company operates certain aircraft routes on behalf of FedEx. A performance obligation is created when the Company agrees to provide a particular service to a customer. For each service, the Company recognizes revenues over time as the customer simultaneously receives the benefits provided by the Company's performance. This revenue recognition can vary from when the Company has a right to invoice to the output or input method depending on the structure of the contract and management’s analysis. For repair-type services, the Company records revenue over-time based on an input method of costs incurred to total estimated costs. The Company believes this is appropriate as the Company is performing labor hours and installing parts to enhance an asset that the customer controls. The vast majority of repair-services are short term in nature and are typically billed upon completion of the service. Some of the Company’s contracts contain a promise to stand ready as the Company is obligated to perform certain maintenance or administrative services. For most of these contracts, the Company applies the 'as invoiced' practical expedient as the Company has a right to consideration from the customer in an amount that corresponds directly with the value of the entity's performance completed to date. A small number of contracts are accounted for as a series and recognized equal to the amount of consideration the Company is entitled to less an estimate of variable consideration (typically rebates). These services are typically ongoing and are generally billed on a monthly basis. | ||||
In addition to the above type of revenues, the Company also has Leasing Revenue, which is in scope under Topic 842 (Leases) and out of scope under Topic 606 and Other Revenues (Freight, Management Fees, etc.) which are immaterial for disclosure under Topic 606.
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The following table summarizes disaggregated revenues by type (in thousands):
| Year Ended March 31, 2023 | Year Ended March 31, 2022 | ||||||||||
| Product Sales | |||||||||||
| Air Cargo | $ | $ | |||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| Corporate and other | |||||||||||
| Support Services | |||||||||||
| Air Cargo | |||||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| Corporate and other | |||||||||||
| Leasing Revenue | |||||||||||
| Air Cargo | |||||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| Corporate and other | |||||||||||
| Other | |||||||||||
| Air Cargo | |||||||||||
| Ground equipment sales | |||||||||||
| Commercial jet engines and parts | |||||||||||
| Corporate and other | |||||||||||
| Total | $ | $ | |||||||||
See Note 21 for the Company's disaggregated revenues by geographic region and Note 22 for the Company’s disaggregated revenues by segment. These notes disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Contract Balances and Costs
Contract liabilities relate to deferred revenue, our unconditional right to receive consideration in advance of performance with respect to subscription revenue and advanced customer deposits with respect to product sales. The following table presents outstanding contract liabilities as of April 1, 2022 and March 31, 2023 and the amount of contract liabilities that were recognized as revenue during the year ended March 31, 2023 (in thousands):
| Outstanding Contract Liabilities | Outstanding Contract Liabilities Recognized as Revenue | ||||||||||
| As of March 31, 2023 | $ | ||||||||||
| As of April 1, 2022 | |||||||||||
| For the Year ended March 31, 2023 | $ | ( | |||||||||
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18. EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(e) defined contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are immediately eligible to participate in the Plans. The Company’s contribution to the Plans for the years ended March 31, 2023 and 2022 was approximately $0.7 million and $0.6 million, respectively, and was recorded in the consolidated statements of income (loss).
The Company, in each of the past three years, has paid a discretionary profit sharing bonus in which all employees have participated. Profit sharing expense in fiscal 2023 and 2022 was approximately $2.4 million and $2.0 million, respectively, and was recorded in general and administrative expenses in the consolidated statements of income (loss).
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19. INCOME TAXES
Income tax expense (benefit) attributable to (loss) income from continuing operations consists of (in thousands):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Current: | |||||||||||
| Federal | $ | $ | |||||||||
| State | |||||||||||
| Foreign | |||||||||||
| Total current | |||||||||||
| Deferred: | |||||||||||
| Federal | ( | ||||||||||
| State | ( | ||||||||||
| Foreign | ( | ||||||||||
| Total deferred | ( | ( | |||||||||
| Total | $ | $ | |||||||||
Income tax expense attributable to income (loss) from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 21.0 % to pretax income (loss) from continuing operations as follows (in thousands):
| Year Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Expected Federal income tax expense (benefit) U.S. statutory rate | $ | ( | % | $ | % | ||||||||||||||||||
| State income taxes, net of federal benefit | ( | % | % | ||||||||||||||||||||
| Permanent Items | - | % | ( | - | % | ||||||||||||||||||
| Micro-captive insurance benefit | ( | % | ( | - | % | ||||||||||||||||||
| Change in valuation allowance | - | % | ( | - | % | ||||||||||||||||||
| Income attributable to minority interest - Contrail | - | % | ( | - | % | ||||||||||||||||||
| Write-off Delphax Tech SAS | % | % | |||||||||||||||||||||
| PPP Loan Forgiveness | % | ( | - | % | |||||||||||||||||||
| Other differences, net | - | % | % | ||||||||||||||||||||
| Income tax expense (benefit) | $ | - | % | $ | % | ||||||||||||||||||
The Company did not record any liabilities for uncertain tax positions for the fiscal years ended March 31, 2023 and March 31, 2022.
The Company (exclusive of Delphax which has a full valuation allowance) has federal gross operating losses of $1.7 million and state gross operating losses of $9.4 million at March 31, 2023. These net operating losses will begin to expire in tax year 2031. The Company has foreign tax credits of $0.4 million that will begin to expire in tax year 2029.
DSI and Delphax (collectively known as the “Delphax entities”) are not included in Air T’s consolidated tax return. During the year ended March 31, 2023, DSI and Delphax accounted for $0.3 million and $0.0 million , respectively, of fiscal year 2023's valuation allowance effect. During the year ended March 31, 2022, each entity, respectively, accounted for $0.2 million and $(2.2 ) million of the fiscal year 2022's valuation allowance effect.
Deferred tax assets and liabilities were comprised of the following (in thousands):
| 2023 | 2022 | ||||||||||
| Net operating loss & attribute carryforwards | $ | $ | |||||||||
| Unrealized losses on investments | |||||||||||
| Inventory reserve | |||||||||||
| Accrued vacation | |||||||||||
| Foreign tax credit | |||||||||||
| Accounts and notes receivable | |||||||||||
| Interest rate swaps | |||||||||||
| Investment in partnerships | |||||||||||
| Lease liabilities | |||||||||||
| Other deferred tax assets | |||||||||||
| Total deferred tax assets | |||||||||||
| Bargain purchase gain | ( | ( | |||||||||
| Property and equipment | ( | ( | |||||||||
| Right-of-use assets | ( | ( | |||||||||
| Capital gain deferment | ( | ( | |||||||||
| Foreign intangible assets | ( | ( | |||||||||
| Other deferred tax liabilities | ( | ( | |||||||||
| Total deferred tax liabilities | ( | ( | |||||||||
| Net deferred tax assets | $ | $ | |||||||||
| Less valuation allowance | ( | ( | |||||||||
| Net deferred tax liabilities | $ | ( | $ | ( | |||||||
Delphax entities
Effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately 67 %, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax historically had foreign subsidiaries located in France, Canada and the United Kingdom; all of which file(d) tax returns in those jurisdictions. With few exceptions, Delphax, is no longer subject to examinations by income tax authorities for tax years before 2016.
Delphax maintains a September 30 fiscal year end and DSI maintains a March 31 fiscal year end. The returns for the fiscal years ended September 30, 2022 and March 31, 2023 have not yet been filed. The gross deferred tax balances related to the Delphax entities includes estimated foreign, U.S. federal and U.S. state loss carryforwards of $5.4 million, $8.4 million and $2.2 million, respectively. The net operating losses expire in varying amounts beginning in the tax year 2027.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets will be recovered. In accounting for the Delphax entities' tax attributes, the Company has established a full valuation allowance of $3.4 million at March 31, 2023, and $3.1 million at March 31, 2022. The cumulative tax losses incurred by the Delphax entities in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established against the Delphax entities’ net deferred tax assets.
The Company continues to assert that it will permanently reinvest any foreign earnings of DSI in a foreign country and will not repatriate those earnings back to the U.S. As a result of its permanent reinvestment assertion, the Company has not recorded deferred taxes related to DSI under the indefinite exception.
Valuation Allowance
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
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20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||
| 2023 | |||||||||||||||||||||||
| Operating Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating (Loss) Income, net of tax | ( | ( | ( | ||||||||||||||||||||
| Less: (Income) Loss attributable to non-controlling interests | ( | ( | |||||||||||||||||||||
| Loss attributable to Air T, Inc. Stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Basic Loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted Loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Antidilutive shares excluded from computation of income (loss) per share | |||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Operating Income (Loss), net of tax | ( | ||||||||||||||||||||||
| Less: Income attributable to non-controlling interests | ( | ( | ( | ( | |||||||||||||||||||
| Income (Loss) attributable to Air T, Inc. Stockholders | ( | ||||||||||||||||||||||
| Basic Income (Loss) per share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted Income (Loss) per share | $ | $ | $ | ( | $ | ||||||||||||||||||
| Antidilutive shares excluded from computation of income (loss) per share | |||||||||||||||||||||||
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21. GEOGRAPHICAL INFORMATION
Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and similar tangible long-lived assets, net of accumulated depreciation, held outside the United States are summarized in the following table as of March 31, 2023 and March 31, 2022 (in thousands):
| March 31, 2023 | March 31, 2022 | ||||||||||
| United States | $ | $ | |||||||||
| Foreign | |||||||||||
| Total tangible long-lived assets, net | $ | $ | |||||||||
The Company’s tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent primarily engines on lease or held for lease at March 31, 2023. The net book value located within each individual country at March 31, 2023 is listed below (in thousands):
| Country | March 31, 2023 | March 31, 2022 | |||||||||
| Macau | $ | $ | |||||||||
| Other | |||||||||||
| Total tangible long-lived assets, net | $ | $ | |||||||||
Total revenue, located in the United States, and outside the United States is summarized in the following table as of March 31, 2023 and March 31, 2022 (in thousands):
| March 31, 2023 | March 31, 2022 | ||||||||||
| United States | $ | $ | |||||||||
| Foreign | |||||||||||
| Total revenue | $ | $ | |||||||||
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22. SEGMENT INFORMATION
The Company has four reportable segments: overnight air cargo, ground equipment sales, commercial jet engine and parts and corporate and other. Segment data is summarized as follows (in thousands):
| (In Thousands) | Year Ended March 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| Operating Revenues: | |||||||||||
| Overnight Air Cargo: | |||||||||||
| Domestic | $ | $ | |||||||||
| International | |||||||||||
| Total Overnight Air Cargo | |||||||||||
| Ground Equipment Sales: | |||||||||||
| Domestic | |||||||||||
| International | |||||||||||
| Total Ground Equipment Sales | |||||||||||
| Commercial Jet Engines and Parts: | |||||||||||
| Domestic | |||||||||||
| International | |||||||||||
| Total Commercial Jet Engines and Parts | |||||||||||
| Corporate and Other: | |||||||||||
| Domestic | |||||||||||
| International | |||||||||||
| Total Corporate and Other | |||||||||||
| Total | |||||||||||
| Operating (Loss) Income: | |||||||||||
| Overnight Air Cargo | |||||||||||
| Ground Equipment Sales | |||||||||||
| Commercial Jet Engines and Parts | ( | ||||||||||
| Corporate and Other | ( | ( | |||||||||
| Total | ( | ||||||||||
| Capital Expenditures: | |||||||||||
| Overnight Air Cargo | |||||||||||
| Ground Equipment Sales | |||||||||||
| Commercial Jet Engines and Parts | |||||||||||
| Corporate and Other | |||||||||||
| Total | |||||||||||
| Depreciation and Amortization: | |||||||||||
| Overnight Air Cargo | |||||||||||
| Ground Equipment Sales | |||||||||||
| Commercial Jet Engines and Parts | |||||||||||
| Corporate and Other | |||||||||||
| Total | $ | $ | |||||||||
The table below provides a reconciliation of operating income (loss) to Adjusted EBITDA by reportable segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):
| Fiscal year 2023 | |||||||||||||||||||||||||||||
| Overnight Air Cargo | Ground Equipment Sales | Commercial Jet Engines and Parts | Corporate and Other | Total | |||||||||||||||||||||||||
| Operating income (loss) from continuing operations | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
| Depreciation and amortization (excluding leased engines depreciation) | |||||||||||||||||||||||||||||
| Asset impairment, restructuring or impairment charges | 7 | ||||||||||||||||||||||||||||
| Loss (Gain) on sale of property and equipment | ( | ||||||||||||||||||||||||||||
| Securities expenses | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Fiscal year 2022 | |||||||||||||||||||||||||||||
| Overnight Air Cargo | Ground Equipment Sales | Commercial Jet Engines and Parts | Corporate and Other | Total | |||||||||||||||||||||||||
| Operating income (loss) from continuing operations | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Depreciation and amortization (excluding leased engines depreciation) | |||||||||||||||||||||||||||||
| Asset impairment, restructuring or impairment charges | ( | ||||||||||||||||||||||||||||
| Loss on sale of property and equipment | |||||||||||||||||||||||||||||
| Securities expenses | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
7 Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2023 was a write-down of $7.3 million on the commercial jet engines and parts segment's inventory, of which, $5.4 million was due to a management decision to monetize three engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds. The remainder of the write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2023, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.
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23. EARNINGS PER COMMON SHARE
Basic earnings per share has been calculated by dividing net income (loss) attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive.
The computation of earnings per common share is as follows (in thousands, except per share data):
| Year Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net (loss) income from operations | $ | ( | $ | ||||||||
| Net income from operations attributable to non-controlling interests | ( | ( | |||||||||
| Net (loss) income from operations attributable to Air T, Inc. Stockholders | ( | ||||||||||
| (Loss) income from operations per share: | |||||||||||
| Basic | $ | ( | $ | ||||||||
| Diluted | $ | ( | $ | ||||||||
| Antidilutive shares excluded from computation of (loss) income per share | |||||||||||
| Weighted Average Shares Outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
24. COMMITMENTS AND CONTINGENCIES
Contrail Put/Call Option
Contrail entered into an Operating Agreement in connection with the acquisition of Contrail providing for the governance of and the terms of membership interests in Contrail and including put and call options with the Seller of Contrail. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was on July 18, 2021. The Company has presented this redeemable non-controlling interest in Contrail between the liabilities and equity sections of the accompanying consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Contrail RNCI is a Level 3 fair value measurement that is valued at $8.0 million as of March 31, 2023. The change in the redemption value compared to March 31, 2022 is an increase of $0.8 million. The increase was driven by $1.8 million of the net change in fair value, offset by $1.0 million of net loss attributable to the non-controlling interest. As of the date of this filing, neither the Seller nor Air T has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations.
Contrail Asset Management, LLC and CJVII, LLC
On May 5, 2021, the Company formed an aircraft asset management business called Contrail Asset Management, LLC (“CAM”), and an aircraft capital joint venture called CJVII, LLC (“CJVII”). The new ventures focus on acquiring commercial aircraft and jet engines for leasing, trading and disassembly. The joint venture, CJVII, was formed as a series LLC ("CJVII Series"). It consists of several individual series that target investments in current generation narrow-body aircraft and engines, building on Contrail’s origination and asset management expertise. CAM was formed to serve two separate and distinct functions: 1) to direct the sourcing, acquisition and management of aircraft assets owned by CJVII Series as governed by the Management Agreement between CJVII and CAM (“Asset Management Function”), and 2) to directly invest into CJVII Series alongside other institutional investment partners (“Investment Function”).
CAM has two classes of equity interests: 1) common interests and 2) investor interests. Neither interest votes as the entity is operated by a Board of Directors. The common interests of CAM relate to its Asset Management Function. The investor interests of CAM relate to the Company’s and Mill Road Capital’s (“MRC”) investments through CAM into CJVII (the Investment Function) and ultimately into the individual CJVII Series. With regard to CAM’s common interests, the Company
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currently owns 90 % of the economic common interests in CAM, and MRC owns the remaining 10 %. MRC invested $1.0 million directly into CAM in exchange for 10 % of the common interests. For the Asset Management Function, CAM receives origination fees, management fees, consignment fees (where applicable) and a carried interest from the direct investors into each CJVII Series. Such fee income and carried interest will be distributed to the Company and MRC in proportion to their respective common interests.
For its Investment Function, CAM’s initial commitment to CJVII was approximately $51.0 million. The Company and MRC have commitments to CAM in the respective amounts of $7.0 million and $44.0 million. These represent the investor interests of CAM, separate and distinct from the common interests. Any investment returns on CAM’s investor interests are shared pro-rata between the Company and MRC for each individual investment at the CJVII Series. As of March 31, 2023, Air T has fulfilled its Investment Function initial commitment to CAM.
Per its Operating Agreement, CAM is comprised of only two Series: the Onshore and the Offshore Series. Participation in each is determined solely based on whether a potential investment at the CJVII Series is a domestic (Onshore) or international (Offshore) investment. As of March 31, 2023, for its Investment Function, the Company has contributed $6.9 million to CAM’s Offshore Series and $0.6 million to CAM’s Onshore Series.
The Company determined that CAM is a variable interest entity and that the Company is not the primary beneficiary. This is primarily the result of the Company's conclusion that it does not control CAM’s Board of Directors, which has the power to direct the activities that most significantly impact the economic performance of CAM. Accordingly, the Company does not consolidate CAM and has determined to account for this investment using equity method accounting. As of March 31, 2023, the Company's net investment basis in CAM is $5.7 million.
In connection with the formation of CAM, MRC has a fixed price put option of $1.0 million to sell its common equity in CAM to Air T at each of the first three (3 ) anniversary dates. At the later of (a) five (5 ) years after execution of the agreement and (b) distributions to MRC per the waterfall equal to their capital contributions, Air T has a call option and MRC has a put option on the MRC common interests in CAM. If either party exercises the option, the exercise price will be fair market value if Air T pays in cash at closing or 112.5 % of fair market value if Air T opts to pay in three (3 ) equal annual installments after exercise. The Company previously recognized $1.0 million within “” with an offset to equity as of March 31, 2022. We subsequently reviewed this accounting treatment and determined that there was no loss contingency that existed under ASC 450 as we did not expect the $1.0 million put option to be exercised in the money to MRC. As such, as of March 31, 2023, the Company reversed the $1.0 million previously recorded. This matter was not material to our consolidated financial statements for any quarterly or annual periods. With respect to the secondary put and call option, as it is priced at fair value, the Company also determined that there is no potential loss or gain upon exercise that would need to be recognized.
Shanwick Put/Call Option
In February 2022, in connection with the Company's acquisition of GdW, a consolidated subsidiary of Shanwick, the Company entered into a shareholder agreement with the 30 % non-controlling interest owners of Shanwick, providing for the governance of and the terms of membership interests in Shanwick. The shareholder agreement includes the Shanwick Put/Call Option with regard to the 30 % non-controlling interest. The non-controlling interest holders are the executive management of the underlying business. The Shanwick Put/Call Option grants the Company an option to purchase the 30 % interest at the call option price that equals to the average EBIT over the 3 Financial Years prior to the exercise of the Call Option multiplied by 8. In addition, the Shanwick Put/Call Option also grants the non-controlling interest owners an option to require Air T to purchase from them their respective ownership interests at the Put Option price, that is equal to the average EBIT over the 3 Financial Years prior to the exercise of the Put Option multiplied by 7.5. The Call Option and the Put Option may be exercised at any time from the fifth anniversary of the shareholder agreement and then only at the end of each fiscal year of Air T.
The Company has presented this redeemable non-controlling interest in Shanwick between the liabilities and equity sections of the accompanying condensed consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the estimated redemption value at the end of each reporting period. As the Shanwick RNCI will be redeemed at established multiples of EBIT, it is considered redeemable at other than fair value. Changes in its estimated redemption value are recorded on our consolidated statements of operations within non-controlling interests. The Shanwick RNCI's estimated redemption value is $4.7 million as of March 31, 2023, which was comprised of the following (in thousands):
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| Shanwick's Redeemable Non-Controlling Interest | ||||||||
| Beginning Balance as of April 1, 2022 | $ | |||||||
| Contribution from non-controlling members | ||||||||
| Distribution to non-controlling members | ( | |||||||
| Net income attributable to non-controlling interests | ||||||||
| Redemption value adjustments | ||||||||
| Ending Balance as of March 31, 2023 | $ | |||||||
25. SHARES REPURCHASE
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 (retrospectively adjusted to 1,125,000 after the stock split on June 10, 2019) shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period. During the year ended March 31, 2023, the Company repurchased 51,794 shares at an aggregate cost of $1.1 million, in which all were recorded as treasury shares. The Company has a total of 208,121 treasury shares as of March 31, 2023.
On August 16, 2022, President Biden signed the Inflation Reduction Act ("IRA") into law. The IRA enacted a 15% corporate minimum tax rate (subject to certain thresholds being met) that will be applicable to the Company beginning in its Fiscal 2024, a 1% excise tax on share repurchases made after December 31, 2022, and created and extended certain tax-related energy incentives. The Company does not currently expect that the tax-related provisions of the IRA will have a material impact on its consolidated financial statements.
As a result of the IRA's enactment into law, the Company is now subject to a 1% excise tax on share repurchases, effective for share repurchases made after December 31, 2022. This excise tax may be reduced for the value of certain share issuances. The excise tax incurred in connection with the Company's stock repurchases during the fourth quarter of Fiscal 2023 was not material.
26. SUBSEQUENT EVENTS
Amendment of ONB loans
Effective May 26, 2023, Contrail entered into the Fourth Amendment to Master Loan Agreement and the Amended and Restated Promissory Note Term Note G with ONB. The purpose of the amended documents was to replace the one-month LIBOR based interest rate with a one-month SOFR-based rate. All other material terms of the obligations remain the same. The principal amount of the loan was $38.2 million on the effective date of the amended documents and the applicable interest rate is now the one-month SOFR based rate, as defined in the loan agreement, plus 3.11 %.
Effective May 26, 2023, Contrail entered into the First Amendment to Supplement #8 to Master Loan Agreement, the Fifth Amendment to Supplement #2 to the Master Loan Agreement and the Fourth Amended and Restated Promissory Note Revolving Note with ONB. The purpose of the amended documents was to replace the LIBOR based interest rate with a one-month SOFR based rate. All other material terms of the obligation remain the same. The maximum principal amount of the revolving note remains at $25.0 million and the applicable interest rate is now the one-month SOFR-based rate, as defined in the loan agreement, plus 3.56 %.
Amendment of PSB Loan Agreement
On May 26, 2023, AirCo 1 executed an Amendment to Main Street Priority Loan Facility Term Loan Agreement with PSB. The Amendment replaces the three-month LIBOR benchmark applicable to the loan with a three-month SOFR based rate, which is defined as the three-month SOFR rate plus 3.26 %. The principal amount of the loan was $6.4 million on the effective date of the amended agreement. The interest rate is to be determined on the 11th day of each month on the amounts that remain outstanding, commencing June 11, 2023.
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Amendment of MBT Revolving Credit Agreement
On June 23, 2023, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note. The amendments extended the maturity date of the credit facility to August 31, 2024 and include the following changes:
1. A $2.0 million seasonal increase in the maximum amount available under the facility. The maximum amount of the facility will now increase to $19.0 million between May 1 and November 30 of each year and will decrease to $17.0 million between December 1 and April 30 of each year;
2.The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread. The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA). Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25 % and 3.25 %;
3.The unused commitment fee on the revolving credit facility will increase from 0.11 % to 0.15 %; and,
4.The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $5.0 million of “Other Investments” per year.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
Disclosure Controls
Our Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, are responsible for establishing and maintaining our disclosure controls and procedures that are designed to ensure that information relating to the Company required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Certifying Officers have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of March 31, 2023. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, the Company’s disclosure controls and procedures were effective. In addition, we believe that the consolidated financial statements in this annual report fairly present, in all material respects, the Company’s consolidated financial condition as of March 31, 2023, and consolidated results of its operations and cash flows for the year then ended, in conformity with U.S. GAAP.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, is a process designed by, or under the supervision of, the Company's Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining policies and procedures designed to maintain the adequacy of the Company's internal control over financial reporting, including those policies and procedures that:
(1)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
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The Company's management has evaluated the effectiveness of the Company's internal control over financial reporting as of March 31, 2023 based on the criteria established in a report entitled Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, the Company's management has concluded that the Company's internal control over financial reporting was effective at the reasonable assurance level as of March 31, 2023.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during fiscal quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Item 1.01 Entry into a Material Definitive Agreement.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On June 23, 2023, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note. The amendments extended the maturity date of the credit facility to August 31, 2024 and include the following changes:
1. A $2.0 million seasonal increase in the maximum amount available under the facility. The maximum amount of the facility will now increase to $19.0 million between May 1 and November 30 of each year and will decrease to $17.0 million between December 1 and April 30 of each year;
2.The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread. The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA). Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25% and 3.25%;
3.The unused commitment fee on the revolving credit facility will increase from 0.11% to 0.15%; and,
4.The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $5.0 million of “Other Investments” per year.
The foregoing summary of the terms of Amended and Restated Revolving Credit Note and Amendment No. 3 to Third Amended and Restated Credit Agreement are qualified in their entirety by reference to the amendment and promissory note filed as Exhibits 10.15, and 10.26 herewith. The changes to the revolving credit facility and related promissory note were acknowledged and agreed to by the non-borrower guarantor entities.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information contained under the headings “Proposal 1 - Election of Directors,” “Executive Officers,” “ Committees of the Board of Directors,” and “Delinquent Section 16(a) Reports” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
Audit Committee Report
The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process.
In this context, the Audit Committee has reviewed and discussed with management and the independent registered public accounting firm the audited financial statements as of and for the year ended March 31, 2023. The Audit Committee has
78
discussed with the independent registered public accounting firm the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committee, as adopted by the Public Company Accounting Oversight Board and currently in effect. In addition, the Audit Committee discussed with the independent registered public accounting firm the written disclosures and letter required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, regarding the independent registered public accounting firm’s communication with the Audit Committee concerning independence and discussed with them their independence from the Company and its management. The Audit Committee also has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with their independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023 for filing with the Securities and Exchange Commission.
June 27, 2023
AUDIT COMMITTEE
Travis Swenson, Chair
Peter McClung
Ray Cabillot
Code of Ethics
The Company has adopted a code of ethics applicable to its executive officers and other employees. A copy of the code of ethics is available on the Company’s internet website at http://www.airt.net. The Company intends to post waivers of and amendments to its code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions on its Internet website.
Item 11. Executive Compensation.
The information contained under the heading “Executive Compensation,” “Base Salary,” “Incentive and Bonus Compensation,” “Retirement and Other Benefits,” “Executive Compensation Tables,” “Employment Agreement and Retirement Savings Plan” and “Director Compensation” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference..
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the heading “Certain Beneficial Owners of Common Stock,” “Director and Executive Officer Stock Ownership,” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
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Equity Compensation Plan Information
The following table provides information as of March 31, 2023, regarding shares outstanding and available for issuance under Air T, Inc.’s existing equity compensation plans.
| 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 (excluding securities listed in first column) | |||||||||||||||||
| Equity compensation plans approved by security holders: | ||||||||||||||||||||
| Air T 2012 Stock Option Plan | 7,500 | $ | 7.04 | — | ||||||||||||||||
| Air T 2020 Omnibus Stock Option Plan | 293,400 | N/A | 94,000 | |||||||||||||||||
| Equity compensation plans not approved by security holders: | — | — | — | |||||||||||||||||
| Total | 300,900 | $ | 7.04 | 94,000 | ||||||||||||||||
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information contained under the heading “Director Independence” and “Certain Transactions” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Information about aggregate fees billed to us by our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34 ) will be presented under the caption “Audit Committee Pre-approval of Auditor Engagements” and “Audit Fees” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
PART IV
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Item 15. Exhibits and Financial Statement Schedules.
1.Financial Statements
a.The following are incorporated herein by reference in Item 8 of Part II of this report:
(i)Report of Independent Registered Public Accounting Firm – Deloitte & Touche LLP
(ii)Consolidated Balance Sheets as of March 31, 2023 and 2022.
(iii)Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended March 31, 2023 and 2022.
(iv)Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2023 and 2022.
(v)Consolidated Statements of Cash Flows for the years ended March 31, 2023 and 2022.
(vi)Notes to Consolidated Financial Statements.
2. Exhibits
No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 3.3 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 4.4 | |||||
| 4.5 | |||||
| 4.6 | |||||
| 4.7 | |||||
| 4.8 | |||||
| 4.9 | |||||
| 10.1 | |||||
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| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | |||||
| 10.6 | |||||
| 10.7 | |||||
| 10.8 | |||||
| 10.9 | |||||
| 10.10 | |||||
| 10.11 | |||||
| 10.12 | |||||
| 10.13 | |||||
| 10.14 | |||||
| 10.15 | |||||
| 10.16 | |||||
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| 10.17 | |||||
| 10.18 | |||||
| 10.19 | |||||
| 10.20 | |||||
| 10.21 | |||||
| 10.22 | |||||
| 10.23 | |||||
| 10.24 | |||||
| 10.25 | |||||
| 10.26 | |||||
| 10.27 | |||||
| 10.28 | |||||
| 10.29 | |||||
| 10.30 | |||||
| 10.31 | |||||
| 10.32 | |||||
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| 10.33 | |||||
| 10.34 | |||||
| 10.35 | |||||
| 10.36 | |||||
| 10.37 | |||||
| 10.38 | |||||
| 10.39 | |||||
| 10.40 | |||||
| 10.41 | |||||
| 10.42 | |||||
| 10.43 | |||||
| 10.44 | |||||
| 10.45 | |||||
| 10.46 | |||||
| 10.47 | |||||
| 10.48 | |||||
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| 10.49 | |||||
| 10.50 | |||||
| 10.51 | |||||
| 10.52 | |||||
| 10.53 | |||||
| 10.54 | |||||
| 10.55 | |||||
| 10.57 | |||||
| 10.58 | |||||
| 10.59 | |||||
| 10.60 | |||||
| 10.61 | Fourth Amendment to Master Loan Agreement by and between Contrail Aviation Support, LLC, Contrail Aviation Leasing, LLC and Old National Bank dated May 26, 2023. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 2, 2023) (Commission File No. 001-35476) | ||||
| 10.62 | |||||
| 10.63 | |||||
| 10.64 | |||||
| 10.65 | |||||
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| 10.66 | |||||
| 10.67 | |||||
| 10.68 | |||||
| 10.69 | |||||
| 10.70 | |||||
| 10.71 | |||||
| 10.72 | |||||
| 10.73 | |||||
| 10.74 | |||||
| 10.75 | |||||
| 10.76 | |||||
| 10.77 | |||||
| 10.78 | |||||
| 10.79 | |||||
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| 10.80 | |||||
| 10.81 | |||||
| 10.82 | |||||
| 10.83 | |||||
| 10.84 | |||||
| 10.85 | |||||
| 10.86 | |||||
| 10.87 | |||||
| 10.88 | |||||
| 10.89 | |||||
| 10.90 | |||||
| 10.91 | |||||
| 10.92 | |||||
| 10.93 | |||||
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| 10.94 | |||||
| 10.95 | |||||
| 10.96 | |||||
| 10.97 | |||||
| 10.98 | |||||
| 10.99 | |||||
| 10.100 | |||||
| 10.101 | |||||
| 10.102 | |||||
| 10.103 | |||||
| 10.104 | |||||
| 10.105 | |||||
| 10.106 | Amended and Restated Promissory Note Term Note G executed by Contrail Aviation Support, LLC and Contrail Aviation Leasing, LLC in favor of Old National Bank dated May 26, 2023. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 2, 2023) (Commission File No. 001-35476) | ||||
| 10.107 | |||||
| 10.108 | |||||
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| 10.109 | |||||
| 10.110 | |||||
| 10.111 | |||||
| 10.112 | |||||
| 10.113 | |||||
| 10.114 | |||||
| 10.115 | |||||
| 10.116 | |||||
| 10.117 | |||||
| 10.118 | |||||
| 10.119 | |||||
| 10.120 | |||||
| 10.121 | |||||
| 10.122 | |||||
| 10.123 | |||||
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| 10.124 | |||||
| 10.125 | |||||
| 10.126 | |||||
| 10.127 | |||||
| 10.128 | |||||
| 10.129 | |||||
| 10.130 | |||||
| 10.131 | |||||
| 10.132 | |||||
| 10.133 | |||||
| 10.134 | |||||
| 10.135 | |||||
| 10.136 | |||||
| 10.137 | |||||
| 10.138 | |||||
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| 10.139 | |||||
| 10.140 | |||||
| 10.141 | |||||
| 10.142 | |||||
| 10.143 | |||||
| 10.144 | |||||
| 10.145 | |||||
| 10.146 | |||||
| 10.147 | |||||
| 10.148 | |||||
| 21.1 | |||||
| 23.1 | |||||
| 24.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following financial information from the Annual Report on Form 10-K for the year ended March 31, 2023, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholders Equity, and (v) the Notes to the Consolidated Financial Statements (filed herewith). | ||||
* Management compensatory plan or arrangement required to be filed as an exhibit to this report.
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** Certain information has been omitted from this exhibit pursuant to the request for confidential treatment submitted to the Securities and Exchange Commission. The omitted information has been separately filed with the Securities and Exchange Commission.
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Item 16. Form 10-K Summary
We have chosen not to include an optional summary of the information required by this Form 10-K. For a reference to the information in this Form 10-K, investors should refer to the Table of Contents to this Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AIR T, INC. | |||||||||||
| By: | /s/ Nick Swenson | ||||||||||
| Nick Swenson, Chairman, President and Chief Executive Officer and Director (Principal Executive Officer) | Date: June 27, 2023 | ||||||||||
| By: | /s/ Brian Ochocki | ||||||||||
| Brian Ochocki, Chief Financial Officer (Principal Financial Officer) | Date: June 27, 2023 | ||||||||||
| By: | /s/ Raymond Cabillot | ||||||||||
| Raymond Cabillot, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ William R. Foudray | ||||||||||
| William R. Foudray, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ Gary S. Kohler | ||||||||||
| Gary S. Kohler, Director | Date: June 27, 2023 | ||||||||||
| By: | / s/ Peter McClung | ||||||||||
| Peter McClung, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ Travis Swenson | ||||||||||
| Travis Swenson, Director | Date: June 27, 2023 | ||||||||||
State of Delaware Secretary of State Division of Corporations Delivered 02 :34 PM 03/10/2022 FILED 02:34 PM03/10/2022 SR 20220955287 - FIle Number 903055 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF AIR T,INC. The undersigned authorized officer of Air T, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), hereby certifies as follows effective as ofAugust 18, 2021: FIRST: The name of the Corporation is: Air T, Inc. SECOND: The stockholders and board of directors of the Corporation properly adopted and approved the following amendment to the Certificate of Incorporation of the Company (the "Certificate") in accordance with the provisions of Section 242 of the DGCL. THIRD: Paragraph (b) ofArticle 4 of the Certificate shall be amended and restated in its entirety and shall read as follows: "(b) The total number of shares of undesignated preferred stock that the corporation shall have authority to issue is two million (2,000,000) and the par value of each of such shares is One Dollar ($1.00) amounting in the aggregate to Two Million Dollars ($2,000,000) in one or more series, with such voting powers, designations, preferences and relative, participating, optional or other special resolution or resolutions providing for the creation and issuance of any such series adopted by the board of directors prior to the issuance of any shares of such series, pursuant to authority expressly vested in the board." FOURTH: All other provisions ofthe Certificate shall remain unchanged and shall continue in full force and effect. [Signature Page to Follow.]
INWITNESS WHEREOF, the Corporation has caused this Certificate ofAmendment to the Certificate of Incorporation to be executed by the undersigned authorized officer effective as of the date first set forth above. AIR T,INC. Mark Jundt General Counsel and Corporate Secretary 22131615v2 SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF AIRT, INC.
EXHIBIT 4.2
Description of the Registrant’s Securities
Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934, as Amended
Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934, as Amended
Description of Capital Stock
The following is a brief summary of the terms of the capital stock of Air T, Inc. (the “Company,” “we,” “our,” or “us”) which is based upon the Company’s Restated Certificate of Incorporation dated October 30, 2001 (as amended from time to time, the “Certificate of Incorporation”) and Amended and Restated By-laws dated November 21, 2012 (the “Bylaws”). Our Common Stock (as defined below) is registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The summary is not complete and is qualified by reference to our Certificate of Incorporation and our Bylaws, which are filed as exhibits to this Form 10-K and are incorporated by reference herein. We encourage you to read our Certificate of Incorporation, our Bylaws and the applicable provisions of the Delaware General Corporation Law (the “DGCL”) for additional information.
As of May 1, 2021, our capital stock consists of the following:
•4,000,000 authorized shares of common stock, par value $0.25 (the “Common Stock”).
•50,000 authorized shares of preferred stock, par value $1.00 (the “Preferred Stock”). The Preferred Stock is not registered under Section 12 of the Exchange Act.
•4,000,000 authorized shares of Alpha Income Trust Preferred Securities, par value $25.00 (the “AIPs”).1
•8,400,000 warrants (the “Warrants”) to purchase the AIPs.2
Currently, the Common Stock is publicly listed and traded on the NASDAQ Stock Market (the “NASDAQ”) under the symbol “AIRT.” And the AIPs and Warrants are publicly listed and traded on the NASDAQ under the symbols “AIRTP” and “AIRTW,” respectively.
Common Stock
The number of authorized shares of Common Stock may be increased or decreased by the vote of a majority of the holders of the voting power of that class of capital stock who are
1 The AIPs are issued by Air T Funding (“Air T Funding”), a statutory business trust formed under the laws of the State of Delaware.
2 The Warrants are issued by Air T Funding, and the AIPs are purchasable upon the exercise of the Warrants issued in connection therewith. Contemporaneously with the filing of Form 424B1 filed by the Company effective as of June 10, 2019, the Company issued 1,600,000 AIPs to the holders of its Common Stock as a dividend. As a result of the Reverse Split, these holders now collectively hold an aggregate of 160,000 AIPs.
1
entitled to vote generally in the election of directors, in accordance with Section 242(b)(2) of the DGCL or any equivalent provision enacted.
Voting Rights. The holders of Common Stock are entitled to one vote per share, and each stockholder shall at every meeting of the stockholder be entitled to vote such number of share then held by such stockholder in person or by proxy, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Holders of all classes of capital stock of the Company are entitled to vote together as a single class on all matters presented to the stockholders for their vote or approval, except for the election and the removal of directors as discussed below, or otherwise as required by applicable law.
Dividends. Dividends upon the capital stock of the Company, if any, may be declared by the Board at any regular or special meeting, pursuant to the DGCL. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the discretion of the Board. As of the date hereof, the Company has not paid a dividend since 2014.
Holders of Common Stock are entitled to receive dividends at the same rate whenever dividends are declared by the Board out of assets legally available for their payment, after payment of any dividends required to be paid on shares of Preferred Stock outstanding, as set forth in the Certificate of Incorporation.
Before payment of any dividend, there may be set aside out of any funds of the Company available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Company, or for such other purpose as the directors shall think conducive to the interest of the Company, and the directors may modify or abolish any such reserve in the manner in which it was created.
Conversion. Common Stock has no conversion rights.
Liquidation. If we liquidate, any assets remaining after (i) payment of our debts and other liabilities (ii) setting aside sufficient amounts for any payment due to any holders of Preferred Stock, will be distributable ratably among the holders of the Common Stock treated as a single class.
The holders of Common Stock are not entitled to preemptive rights.
AIPs and Warrants
As a result of one-for-ten reverse split (the “Reverse Split”) of the AIPs effective January 14, 2020, each Warrant entitles the holder to purchase one-tenth of one (1/10) AIP for $2.40 per share, at any time, which price represents a 4% discount to the $2.50 face value for 1/10 of an AIP. Pursuant to the filing of that certain Current Report on Form 8-K filed by the Company on January 11, 2021, the Warrants will expire on August 30, 2021, unless redeemed at an earlier date thereto.
2
Air T Funding exists for the sole purpose of issuing the AIPs and investing the proceeds thereof in 8% Junior Subordinated Debentures (the “Debentures”) to be issued by the Company. The AIPs represent undivided beneficial interests in Air T Funding’s assets, which will consist solely of the Debentures and payments thereunder.
Distributions. The distributions payable on each AIP will be fixed at a rate per annum of 8% of the liquidation amount of $25.00 per AIP (the “Liquidation Amount”), will be cumulative, will accrue from the date of issuance of the AIPs, and will be payable quarterly in arrears on the 15th day of February, May, August and November of each year, commencing on August 15, 2019 (subject to possible deferral as described in Form 424B5 filed by the Company effective as of May 14, 2021). The amount of each distribution due with respect to the AIPs will include amounts accrued through the date the distribution payment is due. Additionally, from time to time the Board may, in its sole discretion, declare distributions in addition to the distributions equal to the 8.0% per annum Liquidation Amount.
Redemption.
The AIPs are subject to mandatory redemption at any time on or after June 7, 2024. Upon the repayment or redemption at any time, in whole or in part, of any Debenture, the proceeds from such repayment or redemption shall be applied to redeem a like amount of the AIP as set forth in Form 424B5 filed by the Company effective as of May 14, 2021. If less than all of the Debentures are to be repaid or redeemed, then the proceeds from such repayment or redemption shall be allocated to the redemption of the AIPs pro rata. Additionally, the AIPs may be subject to a mandatory redemption upon certain tax, investment company or capital treatment events, as further described in Form 424B5 filed by the Company effective as of May 14, 2021.
Voting Rights. The holders of the AIPs will generally have no voting rights except for in limited circumstances relating only to the modification of the AIPs, the dissolution, winding-up or termination of Air T Funding. Any required approval of holders of the AIPs may be given at a meeting of holders of AIPs convened for such purpose or pursuant to written consent. The property trustee of Air T Funding will cause a notice of any meeting at which holders of the AIPs are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be given to each holder of record of the AIPs in the manner set forth in the Trust Agreement of Air T Funding.3 No vote or consent of the holders of the AIPs will be required for Air T Funding to redeem and cancel the AIPs in accordance with the Trust Agreement.
Notwithstanding that holders of the AIPs are entitled to vote or consent under any of the circumstances described above, any of the AIPs that are owned by the Company, the trustees of Air T Funding or any affiliate of the Company or any such trustees, shall, for purposes of such vote or consent, be treated as if they were not outstanding.
3 The term “Trust Agreement” as used herein means the Interim Trust Agreement dated as of September 28, 2018, among the Company, as Depositor, Delaware Trust Company, as Delaware Trustee and the individual Operating Trustees, as superseded and replaced by the Trust Agreement dated as of June 10, 2019, as further amended and supplemented from time to time, among the Company, as Depositor, Delaware Trust Company, as Property Trustee, Delaware Trust Company, as Delaware Trustee and the individual Administrative Trustees.
3
Exercise of the Warrants. Each Warrant entitles the holder to purchase one-tenth of one (1/10) AIP for $2.40 per share, at any time following the registration of the Warrants pursuant to Form 424B1 filed by the Company effective as of June 10, 2019, and with such price representing a discount to the $2.50 face value for 1/10 of an AIP. The Warrants expired on August 30, 2021, unless redeemed at an earlier date thereto.
Liquidation. The Company will have the right, at any time, to terminate Air T Funding and cause the Debentures to be distributed to the holders of the AIPs thereupon. Such right is subject to the Company having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. In addition, Air T Funding shall automatically terminate upon expiration of its term or shall earlier terminate on the first to occur of certain events as set forth in the Trust Agreement.
If an early termination of Air T Funding occurs, Air T Funding shall be liquidated by its trustees as expeditiously as such trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of Air T Funding as provided by applicable law, to the holders of AIPs and Air T Funding common securities (the “Common Securities”) a like amount of the Debentures, unless such distribution is determined by the Property Trustee of Air T Funding not to be practical. In such an event, such AIP and Common Security holders will be entitled to receive out of the assets of Air T Funding available for distribution to holders, after satisfaction of liabilities to creditors of Air T Funding as provided by applicable law, an amount equal to, in the case of holders of AIPs, the aggregate of the Liquidation Amount of $25.00 per AIP plus accrued and unpaid distributions thereon to the date of payment (such amount being the “Liquidation Distribution”).
If such Liquidation Distribution can be paid only in part because Air T Funding has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by Air T Funding on the AIPs shall be paid on a pro rata basis. The holder(s) of the Common Securities will be entitled to receive distributions upon any such liquidation pro rata with the holders of the AIPs, except that if a Debenture “Event of Default” (as that term is defined in Form 424B5 filed by the Company effective as of May 14, 2021) has occurred and is continuing, the AIPs shall have a priority over the Common Securities.
21842572v2
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084126\050\6335984.v3 AMENDED AND RESTATED REVOLVING CREDIT NOTE U.S. $19,000,000.00 Dated as of June 23, 2023 Minnetonka, Minnesota FOR VALUE RECEIVED, on the Revolving Credit Termination Date (as defined in the Credit Agreement hereinafter defined) the undersigned, AIR T, INC., a Delaware corporation (the “Borrower”), promises to pay to the order of MINNESOTA BANK & TRUST, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust (the “Lender”), the principal sum of NINETEEN MILLION AND NO/100THS DOLLARS (U.S. $19,000,000.00) or, if less, the aggregate unpaid principal amount of all Revolving Credit Loans (as hereinafter defined) made by the Lender to the Borrower pursuant to the Credit Agreement. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time and interest shall accrue on the outstanding amounts under this Note at the greater of: (a) five percent (5.0%) or (b) the following floating rate of interest per annum (the “Index”): an adjusted rate (the “Adjusted Term SOFR Rate”) that is equal to: (1) the greater of (A) zero percent (0.0%) (the “Floor”) and (B) the forward-looking term rate based on SOFR for a one month period (to the extent that such tenor is available to Lender and Lender has determined it can be administered), as quoted by Lender based on the website of the CME Group Benchmark Administration Limited (CBA) (or a successor administrator of the Term SOFR Rate selected by Lender (the “Term SOFR Administrator”))(“Term SOFR”), based on the applicable Term SOFR rate as determined by Lender and as in effect on each applicable date of determination, in each case, as such Term SOFR rate changes and is recalculated from time to time in accordance with the terms below, and as adjusted for all applicable reserve requirements and any costs arising from time to time in connection with a change in government regulation as reasonably determined by Lender (such higher amount, the “Term SOFR Rate”), plus (2) the Applicable Margin (as such term is defined in the Credit Agreement, hereinafter defined); provided, that in the event Borrower enters into an interest swap with Lender with respect to interest accruing under this Note, the Floor will automatically be deemed not to apply to the principal portion of this Note that is so hedged for the duration of such interest rate swap transaction and the foregoing is limited solely to an interest rate swap transaction with the Lender and shall not apply to any other derivative product, such as in interest rate cap or collar. Interest accrued during each calendar month shall be due and payable on the first day of the following calendar month, with the first such interest payment due on July 1, 2023. Subject to the terms of this Note, so long as the amounts outstanding under this Note are accruing interest at the Adjusted Term SOFR Rate, then the Term SOFR Rate will be reset on each Business Day (the “Reset Date”) using the Term SOFR Rate as determined two U.S. Government Securities DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 2 U.S. $19,000,000.00 June 23, 2023 Business Days preceding the applicable Reset Date (the “Daily Reference Date”); provided, that in the event Borrower enters into an interest rate hedge, swap, collar or other similar derivative transaction with Lender with respect to interest accruing under this Note, the Term SOFR Rate will be reset on the first (1st) day or the fifteenth (15th) day of each month, as applicable, using the Term SOFR Rate as determined two U.S. Government Securities Business Days preceding such applicable day of the month (the “Monthly Reference Date”); provided, further, that if Term SOFR for a one month interest period is not published for any applicable Daily Reference Date or Monthly Reference Date, and Lender determines in its sole discretion that such failure is temporary, the applicable Term SOFR Rate shall be the Term SOFR Rate for a one month period as published on the most recent applicable Business Day that Lender determines such Term SOFR Rate was available prior to the applicable Daily Reference Date or Monthly Reference Date. The term "Business Day" means any day that is not a Saturday, Sunday or other day that is a legal holiday under the laws of the State of New York or is a day on which banking institutions in such state are authorized or required by law to close. The term “U.S. Government Securities Business Day” means any day except for a Saturday, a Sunday or a day on which the Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in U.S. Government Securities. The term “Federal Reserve Board” means the Board of Governors of the Federal Reserve System of the United States. The term “SOFR” means a rate equal to the secured overnight financing rate as administered by the SOFR Administrator. FOR REFERENCE ONLY, on the date hereof, the Term SOFR Rate is 5.08923% per annum and the Adjusted Term SOFR Rate is 5.08923%. The Term SOFR Rate is an index used by Lender for the determination of interest and Term SOFR Rate and the Adjusted Term SOFR Rate are not necessarily the lowest interest rates charged by Lender on other loans to other customers. Borrower understands and agrees that Lender may make loans to other customers based on other rates of interest as well. Lender will inform Borrower of the current Adjusted Term SOFR Rate from time to time upon request by Borrower. INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the applicable interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method. This calculation method results in a higher effective interest rate than the numeric interest rate stated in this Note. The Term SOFR Rate shall be determined by Lender in accordance with the terms hereof, and such determination shall be conclusive absent manifest error. CONFORMING CHANGES ADJUSTMENT. In connection with the use or administration of DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 3 U.S. $19,000,000.00 June 23, 2023 Term SOFR, the Term SOFR Rate and Adjusted Term SOFR Rate, Lender will have the right to make Conforming Changes from time to time and, notwithstanding anything to the contrary in this Note or in any other promissory notes, loan documents or security documents, or other agreements between Borrower and Lender (each a “Loan Document”), and any amendments implementing such Conforming Changes will become effective without any further action or consent of any other party to this Note or any other Loan Document. Lender will notify Borrower from time to time of the effectiveness of any Conforming Changes in connection with the use or administration of Term SOFR, the Term SOFR Rate or Adjusted Term SOFR Rate. The term “Conforming Changes” means, with respect to either the use or administration of Term SOFR, the Term SOFR Rate or the Adjusted Term SOFR Rate or the use, administration, adoption or implementation of any Benchmark (as defined below) replacement, any technical, administrative or operational changes (including changes to the definition of “Business Day”), timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, conversion or continuation notices, the applicability and length of lookback periods, and other technical, administrative or operational matters) that Lender decides may be appropriate to reflect the adoption and implementation of any such rate or to permit the use and administration thereof by Lender in a manner substantially consistent with market practice (or, if Lender decides that adoption of any portion of such market practice is not administratively feasible or if Lender determines that no market practice for the administration of any such rate exists, in such other manner of administration as Lender decides is reasonably necessary in connection with the administration of this Note and the other Loan Documents). UNAVAILABILITY OF SOFR/BENCHMARK REPLACEMENT. Subject to the Benchmark Replacement provisions below, if, in connection with the implementation and use of the Term SOFR Rate: (a) Lender determines (which determination shall be conclusive and binding absent manifest error) that the “Term SOFR Rate” cannot be determined pursuant to the definition thereof, (b) Lender reasonably determines that the Adjusted Term SOFR Rate does not adequately and fairly reflect the cost to Lender, or (c) Lender determines that any applicable law has made it unlawful, or that any governmental authority has asserted that it is unlawful, for Lender or its applicable lending office to make, maintain or fund loans or advances whose interest is determined by reference to SOFR, Term SOFR, or the Term SOFR Rate, or to determine or charge interest rates based upon SOFR, Term SOFR, or the Term SOFR Rate; then upon notice of any such occurrence or determination by Lender to Borrower, any obligation of Lender to make available the Adjusted Term SOFR Rate, and any right of Borrower to use the Adjusted Term SOFR Rate, shall be suspended until Lender revokes such notice. Upon receipt of such notice, all amounts outstanding under this Note will be deemed to accrue at the Benchmark Replacement rate, if applicable, or if such Benchmark Replacement rate is not available or does not adequately and fairly reflect the cost to Lender, at the Adjusted Prime Rate. The term “Adjusted Prime Rate” DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 4 U.S. $19,000,000.00 June 23, 2023 means a variable rate of interest that is equal to: (1) the greater of (A) five percent (5.0%), and (B) the rate last quoted by The Wall Street Journal as the “Prime Rate” in the United States or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519) (Selected Interest Rates) as the “bank prime loan” rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by Lender) or any similar release by the Federal Reserve Board (as determined by Lender) (such higher amount, the “Prime Rate”), plus (2) an applicable percentage selected by Lender, taking into consideration any selection or recommendation of a replacement rate by any relevant agency or authority, and evolving or prevailing market practice, to reasonably approximate the Adjusted Term SOFR Rate or otherwise adequately and fairly reflect the cost to Lender, as determined in its discretion (the “Prime Margin”). BENCHMARK REPLACEMENT. (a) Benchmark Replacement. Notwithstanding anything to the contrary, if Lender has determined in its sole discretion that (i) the administrator of Term SOFR, or any relevant agency or authority for such administrator, of Term SOFR (or any substitute index which replaces the Term SOFR (Term SOFR or such replacement, the “Benchmark”)) has announced that such Benchmark will no longer be provided, (ii) any relevant agency or authority has announced that such Benchmark is no longer representative, or (iii) any similar circumstance exists such that such Benchmark has become permanently unavailable or ceased to exist (each a “Benchmark Transition Event”), then Lender shall (x) replace such Benchmark with a replacement rate or (y) if one or more such circumstances apply to fewer than all tenors of such Benchmark used for determining an Interest Period hereunder, discontinue the availability of the affected interest periods. With respect to Term SOFR, such replacement rate will be Daily Simple SOFR unless Lender reasonably determines that Daily Simple SOFR is not readily available or shall otherwise reasonably determine that a different rate has been recommended as a replacement benchmark rate for determining such a rate by the by the Federal Reserve Board or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Federal Reserve Board or the Federal Reserve Bank of New York, or any successor thereto (the “Relevant Governmental Body”). In the case of a replacement rate other than Term SOFR, Lender may add a spread adjustment selected by Lender, taking into consideration any selection or recommendation of a replacement rate by any relevant agency or authority, and evolving or prevailing market practice. Such replacement rates for the Benchmark as applicable, each a “Benchmark Replacement”. The term “Daily Simple SOFR” means a daily rate based on SOFR and determined by Lender in accordance with the conventions for such rate selected by Lender. (b) Notices; Standards for Decisions and Determinations. Lender will notify Borrower of (i) DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 5 U.S. $19,000,000.00 June 23, 2023 the implementation of any Benchmark Replacement and (ii) the effectiveness of any Conforming Changes in connection with the use, administration, adoption or implementation of a Benchmark Replacement. Lender will notify Borrower of the removal or reinstatement of any tenor of a Benchmark pursuant to clause (a) above. Any determination, decision or election that may be made by Lender pursuant to this provision, including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action or any selection, will be conclusive and binding absent manifest error and may be made in its sole discretion and without consent from any other party to this Note or any other Loan Documents, except, in each case, as expressly required pursuant to this provision. Payments. Both principal and interest are payable in lawful money of the United States of America to the Lender at 9800 Bren Road East, Suite 200, Minnetonka, MN 55343 (or other location specified by the Lender) in immediately available funds. By its execution of this Note, the Borrower authorizes the Lender to charge from time to time against any of Borrower’s depository accounts maintained with the Lender any such payments when due and the Lender will use its reasonable efforts to notify the Borrower of such charges. Prepayment; Minimum Interest Charge. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $15.00. Other than Borrower’s obligations to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments of accrued unpaid interest. Rather, early payment will reduce the principal balance due. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Minnesota Bank & Trust, 9800 Bren Road East, Suite 200, Minnetonka, MN 55343. Late Charge. If a payment due hereunder is not made within seven days after the date when due, Borrower shall pay to Lender a late payment charge of 5% of the amount of the overdue payment to compensate Lender for a portion of the cost related to handling the overdue payment. Interest After Default. Upon the occurrence and during the continuance of an Event of Default, DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 6 U.S. $19,000,000.00 June 23, 2023 including failure to pay upon final maturity, the interest rate on this Note shall be increased by adding an additional 3.000 percentage point margin over the interest rate that would otherwise be in effect hereunder (such increased rate of interest being, the “Default Rate”). However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law. Credit Agreement. This Note is the Revolving Credit Note referred to in, and is entitled to the benefits of, the Third Amended and Restated Credit Agreement dated as of August 31, 2021 (as amended, modified, supplemented or restated from time to time being the “Credit Agreement”; capitalized terms not otherwise defined herein being used herein as therein defined) by and among the Borrower, Jet Yard, LLC, an Arizona limited liability company, and the Lender. The Credit Agreement, among other things, (i) provides for the making of Revolving Credit Loans (the “Revolving Credit Loans”) by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Revolving Credit Loan being evidenced by this Note; (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events prior to the maturity hereof upon the terms and conditions therein specified; and (iii) contains provisions for the mandatory prepayment hereof upon certain conditions. Security Agreement. This Note is secured by, among other things, that certain Security Agreement dated August 31, 2021, executed by the Borrower and certain of its Subsidiaries in favor of the Lender. Waiver of Presentment and Demand for Payment; Etc. Borrower and any endorsers or guarantors hereof severally waive presentment and demand for payment, notice of intent to accelerate maturity, protest or notice of protest and non-payment, bringing of suit and diligence in taking any action to collect any sums owing hereunder or in proceeding against any of the rights and properties securing payment hereunder, and expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further security or the release of any security for this Note, all without in any way affecting the liability of Borrower and any endorsers or guarantors hereof. No extension of time for the payment of this Note, or any installment thereof, made by agreement by Lender with any Person now or hereafter liable for the payment of this Note, shall affect the original liability under this Note of the undersigned, even if the undersigned is not a party to such agreement. Event of Default. Any “Event of Default” (as defined in the Credit Agreement) shall constitute an Event of Default under this Note. Upon the occurrence of an Event of Default, in addition to any other rights or remedies Lender may have at law or in equity or under the Credit Agreement or under any other Loan Document, Lender may, at its option, without notice to Borrower, declare DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 7 U.S. $19,000,000.00 June 23, 2023 immediately due and payable the entire unpaid principal sum hereof, together with all accrued and unpaid interest thereon plus any other sums owing at the time of such Event of Default pursuant to this Note, the Security Agreement or any other Loan Document. The failure to exercise the foregoing or any other options shall not constitute a waiver of the right to exercise the same or any other option at any subsequent time in respect of the same event or any other event. The acceptance by the holder of any payment hereunder which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time. Expense Reimbursement. Borrower agrees to pay all expenses for the preparation of this Note, as set forth in the Credit Agreement, including exhibits, and any amendments to this Note as may from time to time hereafter be required, and the reasonable attorneys’ fees and legal expenses of counsel for Lender from time to time incurred in connection with the preparation and execution of this Note and any document relevant to this Note, any amendments hereto or thereto, and the consideration of legal questions relevant hereto and thereto. Borrower agrees to reimburse Lender upon demand for all reasonable out-of-pocket expenses (including attorneys’ fees and legal expenses) in connection with Lender’s enforcement of the obligations of the Borrower hereunder or under the Security Agreement or any other collateral document, whether or not suit is commenced including, without limitation, attorneys’ fees and legal expenses in connection with any appeal of a lower court’s order or judgment. The obligations of the Borrower under this paragraph shall survive any termination of the Credit Agreement, this Note, the Security Agreement, and any other Loan Document. Successors and Assigns. This Note shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns except that Borrower may not assign or transfer its rights hereunder without the prior written consent of Lender, which consent may be withheld in Lender’s sole discretion. In connection with the actual or prospective sale by the Lender of any interest or participation in the loan obligation evidenced by this Note, Borrower hereby authorizes the Lender to furnish any information concerning the Borrower or any of its affiliates, however acquired, to any Person or entity. Usury. Borrower and Lender agree that no payment of interest or other consideration made or agreed to be made by Borrower to Lender pursuant to this Note shall, at any time, be in excess of the maximum rate of interest permissible by law. In the event such payments of interest or other consideration provided for in this Note shall result in an effective rate of interest which, for any period of time, is in excess of the limit of the usury or any other law applicable to the loan evidenced hereby, all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice between or by any party hereto, be applied to DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 8 U.S. $19,000,000.00 June 23, 2023 the unpaid principal balance and not to the payment of interest; if a surplus remains after full payment of principal and lawful interest, the surplus shall be remitted by Lender to Borrower, and Borrower hereby agrees to accept such remittance. This provision shall control every other obligation of the Borrower and Lender relating to this Note. Business Purpose Loan. The Loan is a business loan. Borrower hereby represents that this loan is for commercial use and not for personal, family or household purposes. The Borrower agrees that the Loan evidenced by this Note is an exempted transaction under the Truth In Lending Act, 15 U.S.C., §1601, et seq. Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. WAIVER OF DEFENSES. OTHER THAN CLAIMS BASED UPON THE FAILURE OF THE LENDER TO ACT IN A COMMERCIALLY REASONABLE MANNER, THE BORROWER WAIVES EVERY PRESENT AND FUTURE DEFENSE (OTHER THAN THE DEFENSE OF PAYMENT IN FULL OR THAT NO EVENT OF DEFAULT EXISTED), CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE LENDER IN ENFORCING THIS NOTE OR ANY OF THE LOAN DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER. Waiver of Right to Jury Trial; Venue. BORROWER WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION RELATING TO OR ARISING FROM THIS NOTE. AT THE OPTION OF LENDER, THIS NOTE MAY BE ENFORCED IN ANY UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MINNESOTA OR THE STATE COURT SITTING IN HENNEPIN OR RAMSEY COUNTY, MINNESOTA. BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT PROPER OR CONVENIENT. IN THE EVENT AN ACTION IS COMMENCED IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS NOTE, LENDER, AT ITS OPTION, SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 9 U.S. $19,000,000.00 June 23, 2023 WITHOUT PREJUDICE. Amendment and Restatement. This Note is being executed and delivered in amendment and restatement of, but not in payment of, that certain Amended and Restated Revolving Credit Note dated August 31, 2021, made by the Borrower payable to the order of the Lender in the original principal amount of $17,000,000.00 (the “Existing Note”); provided, however, that interest accrued on the Existing Note through the date hereof shall be due and payable on July 1, 2023. This Note is given in substitution for, but not in payment of, the Existing Note. The execution and delivery of this Note does not constitute payment, cancellation, satisfaction, discharge, release or novation of the Existing Note. Delivery and acceptance of this Note shall not evidence repayment of or a novation with respect to the Existing Note or any remaining indebtedness under the Existing Note, which indebtedness remains outstanding and shall be evidenced by this Note. Counterparts. This Note may be executed in any number of counterparts, each of which shall be deemed an original and all of which together constitute a fully executed Note even though all signatures do not appear on the same document. DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
AMENDED AND RESTATED REVOLVING CREDIT NOTE Page 10 U.S. $19,000,000.00 IN WITNESS WHEREOF, this Amended and Restated Revolving Credit Note has been executed to be effective as of the date set forth above. BORROWER: AIR T, INC., a Delaware corporation By: Name: Brian Ochocki Its: Chief Financial Officer LENDER: MINNESOTA BANK & TRUST, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust By:_________________________________ Name: Dianne Wegscheid Title: Senior Vice President DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 AMENDMENT NO. 3 TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT This AMENDMENT NO. 3 TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 23, 2023 (the “Amendment”), between Air T, Inc., a Delaware corporation (together with its successors and assigns, “Air T”), Jet Yard, LLC, an Arizona limited liability company (together with its successors and assigns, “Jet Yard”; and together with Air T being sometimes collectively referred to herein as the “Borrowers” and individually as a “Borrower”), and Minnesota Bank & Trust, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust (the “Lender”). RECITALS: A. The Borrowers and the Lender are parties to that certain Third Amended and Restated Credit Agreement dated as of August 31, 2021, as amended by that certain Amendment No. 1 to Third Amended and Restated Credit Agreement dated June 9, 2022, and by that certain Amendment No. 2 to Third Amended and Restated Credit Agreement dated January 31, 2023 (the “Original Agreement”), pursuant to which Lender has agreed to extend credit to the Borrowers under the terms and conditions set forth therein. B. The Borrowers have requested that the Lender agree to (1) extend the Revolving Credit Termination Date to August 31, 2024, and (2) provide for a seasonal increase in the Revolving Credit Commitment. C. Subject to the terms and conditions of this Amendment, the Lender will agree to the foregoing request of the Borrowers. NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. All capitalized terms used in this Amendment shall, except where the context otherwise requires, have the meanings set forth in the Original Agreement as amended hereby. 2. Amendments. (a) The definition of the terms “Revolving Credit Commitment”, “Revolving Credit Note” and “Revolving Credit Termination Date”, appearing in Section Article I of the Original Agreement are hereby amended in their respective entireties to read as follows: “‘Revolving Credit Commitment’ means the obligation of the Lender to make Revolving Credit Loans to Air T and issue Letters of Credit for the account of Air T in an aggregate principal amount not to exceed (a) $19,000,000 during the period commencing on May 1 and ending on November 30 of each year, or (b) $17,000,000 at all other times, as the same may be changed from time to time pursuant to the terms hereof. DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
2 084126.039 | 6467377v4 ‘Revolving Credit Note’ means the Amended and Restated Revolving Credit Note in the original principal amount of $19,000,000.00, dated June 23, 2023, in the form provided by Lender, made by Air T payable to the order of the Lender, as such promissory note may be amended, modified or supplemented from time to time, and such term shall include any substitutions for, or renewals of, such promissory note. ‘Revolving Credit Termination Date’ means the earliest to occur of (a) August 31, 2024, (b) the date the Revolving Credit Commitment is permanently reduced to zero pursuant to Error! Reference source not found., and (c) the termination of the Revolving Credit Commitment pursuant to Section 8.02.” (b) Article I of the Original Agreement is further amended by inserting definitions of the following terms in the appropriate alphabetical order: “‘Applicable Margin’ means, at any date of determination, the percentage indicated below in accordance with the Total Funded Debt Leverage Ratio at such date: Total Funded Debt Leverage Ratio Applicable Margin Less than to 2.00:1.00 2.25% Greater than or equal to 2.00:1.00 but less than 2.75:1.00 2.50% Greater than or equal to 2.75:1.00 but less than 3.25:1.00 2.75% Greater than or equal to 3.25:1.00 3.25% The Applicable Margin on the Third Amendment Effective Date is 3.25% and the Applicable Margin shall continue at such percentage until changed in accordance with the terms of this definition. The Total Funded Debt Leverage Ratio and the Applicable Margin will be determined at each Applicable Margin Determination Date, commencing with the September 30, 2023 Applicable Margin Determination Date, as calculated from the financial statements delivered by the Borrowers for Air T’s fiscal quarter ending on such Applicable Margin Determination Date pursuant to Section 6.01(b) of this Agreement. Any increase or decrease in: (a) the Applicable Margin shall apply to all then existing or thereafter arising Revolving Credit Loans; and (b) the Applicable Margin shall become effective as of the first day of the first month following the date on which the Borrowers deliver Air T’s financial statements to the Lender in accordance with Section 6.01(b) showing that the Total Funded Debt Leverage Ratio as calculated for an Applicable Margin Determination Date required a change in the Applicable Margin, and shall continue to be effective until subsequently changed in accordance with this definition; provided, that, if the financial statements required by Section 6.01(b) are not delivered in the time periods provided therein, then the Total Funded Debt Leverage Ratio will be deemed to be greater than 3.25 to 1.0. DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
3 084126.039 | 6467377v4 ‘Applicable Margin Determination Date’ means the last day of each of Air T’s fiscal quarters that end on March 31 or September 30 of each year. ‘Third Amendment’ means that certain Amendment No. 3 to Third Amended and Restated Credit Agreement dated as of June 23, 2023, amending this Agreement. ‘Third Amendment Effective Date’ means the ‘Effective Date’ of the Third Amendment, as such term is therein defined. ‘Total Funded Debt’ means, at any Applicable Margin Determination Date, all Debt for borrowed money (including the Loans), all Indebtedness evidenced by notes, bonds, debentures, or similar instruments, and all Capital Lease Obligations, and also including Indebtedness consisting of guaranties of Total Funded Debt of other Persons. ‘Total Funded Debt Leverage Ratio’ means, at any Applicable Margin Determination Date, the period of twelve (12) consecutive months ending on such date, the ratio of (a) Total Funded Debt, to (b) EBITDA.” (c) Section 2.11 of the Original Agreement is hereby amended in its entirety to read as follows: “ Section 2.11. Revolving Credit Commitment Fee. Air T shall pay to the Lender a fee (the “Revolving Credit Commitment Fee”) in an amount determined by applying a rate of (a) 0.11 % per annum at all dates prior to June 23, 2023 and (b) 0.15% per annum on June 23, 2023 and all subsequent dates, to the average daily excess of the Revolving Credit Commitment over the outstanding principal balance of the Revolving Credit Loans. Such Revolving Credit Commitment Fee shall be payable to the Lender in arrears on the last day of each calendar month.” (d) Section 7.04(f) of the Original Agreement is hereby amended in its entirety to read as follows: “ (f) Only so long as no Default or Event of Default has occurred and is continuing either before or following the making of any such Investment, Air T may make other Investments (“Other Investments”) not otherwise permitted under this Section; provided, that, the aggregate amount of such Other Investments shall not exceed $5,000,000 in any of Air T’s fiscal years.” (e) Section 8.01(k) of the Original Agreement is hereby amending by replacing the reference in such Section to the term “Collateral Account” is replaced with “Collateral Account Agreement”. (f) The Original Agreement is further amended by inserting a new Section 9.16 immediately following existing Section 9.15 to read as follows: DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
4 084126.039 | 6467377v4 “ Section 9.16 Arbitration. (a) Disputes. Lender and each party to this agreement hereby agree that all disputes, claims and controversies between them whether individual or joint in nature, whether arising from the agreement, or any related note or agreement, whether in tort, contract or equitable, and now existing or hereafter arising (collectively, “Disputes”) shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. The Arbitration provision is a material inducement for the parties entering into the transactions relating to this agreement. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration. DISPUTES SUBMITTED TO ARBITRATION ARE NOT RESOLVED IN COURT BY A JUDGE OR JURY. TO THE EXTENT ALLOWED BY APPLICABLE LAW, THE PARTIES IRREVOCABLY AND VOLUNTARILY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARBITRATED PURSUANT TO ARBITRATION. No party hereto shall be entitled to join or consolidate Disputes by or against others in any arbitration, or to include in any arbitration any Dispute as a representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity. (b) Governing Rules. If a Dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the Dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration, litigation, or some other Dispute resolution procedure. Any arbitration proceeding in which the amount in controversy is: (i) at least $1,000,000.00 shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial Disputes; (ii) $5,000,000.00 or less will be decided by a single arbitrator who shall not render an award of greater than $5,000,000.00; and (iii) $5,000,000.00 or more shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. Every arbitrator shall be a neutral practicing attorney or a retired member of the state or federal judiciary, in either case with a minimum of ten years’ experience in the substantive law applicable to the subject matter of the Dispute. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. The Arbitration provision shall survive the repayment of the Notes and the termination, amendment, or expiration of any of the documents or any relationship between the parties. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
5 084126.039 | 6467377v4 otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. (c) Self Help, Provisional Remedies and Foreclosure. No action by any party to take or dispose of any collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; foreclosing against real property, invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. (d) Small Claims Court. Any party may require that a Dispute be resolved in Small Claims Court if the Dispute and related claims are fully within that court’s jurisdiction. (e) Real Property Collateral. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property located in a state which recognizes a one action rule unless any conditions for arbitration that are set forth in the mortgage or deed of trust are satisfied; if any such Disputes are not referred to arbitration, then any provision in the mortgage or deed of trust providing for the referral of Disputes to a referee or master shall be applicable to such Disputes. (f) Self Help, Provisional Remedies and Foreclosure. No action by any party to take or dispose of any collateral securing any Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; foreclosing against real property; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing any Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing any Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party.” (g) The form of Borrowing Base Certificate attached as Exhibit B to the Original Agreement is amended in its entirety to conform with the form of Borrowing Base DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
6 084126.039 | 6467377v4 Certificate (Amended 6/2023) attached as Exhibit B to this Amendment. (h) The form of Compliance Certificate attached as Exhibit C to the Original Agreement is amended in its entirety to conform with the form of Compliance Certificate (Amended 6/2023) attached as Exhibit C to this Amendment. 3. Conditions to Effectiveness. This Amendment shall become effective on the date (the “Effective Date”) when, and only when, the Lender shall have received: (a) this Amendment, duly executed by a Responsible Officer of each Borrower; (b) an Amended and Restated Revolving Credit Note (the “A&R Revolving Credit Note”), in the form provided by Lender, duly executed by Air T; (c) a certificate of the secretary of each Borrower in the form provided by the Lender, appropriately completed and duly executed by such Borrower’s secretary; (d) an Acknowledgment and Agreement, in the form provided by the Lender, duly executed by each Guarantor that is not a Borrower; (e) an Acknowledgment and Agreement, in the form provided by the Lender, duly executed by Jet Yard; (f) a non-refundable amendment fee in the amount of $10,000, payable in immediately available funds; and (g) such other documents as the Lender may reasonably request. 4. Representations and Warranties. To induce the Lender to enter into this Amendment, the Borrowers jointly and severally represent and warrant to the Lender as follows: (a) The execution, delivery and performance by the Borrowers of this Amendment, the A&R Revolving Credit Note and any other Loan Document to which either or both Borrowers is a party have been duly authorized by all necessary corporate, or as the case may be, limited liability company, action, do not require any approval or consent of, or any registration, qualification or filing with, any government agency or authority or any approval or consent of any other person (including, without limitation, any shareholder), do not and will not conflict with, result in any violation of or constitute any default under, any provision of either Borrower’s formation or governance documents, any agreement binding on or applicable to either Borrower or either Borrower’s property, or any law or governmental regulation or court decree or order, binding upon or applicable to either Borrower or of any of either Borrower’s property and will not result in the creation or imposition of any security interest or other lien or encumbrance in or on any of its property pursuant to the provisions of any agreement applicable to either Borrower or either Borrower’s property; (b) The representations and warranties contained in the Original Agreement are DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
7 084126.039 | 6467377v4 true and correct as of the date hereof as though made on that date except: (i) to the extent that such representations and warranties relate solely to an earlier date; and (ii) that the representations and warranties set forth in Section 5.04 of the Original Agreement to the audited annual financial statements and internally-prepared interim financial statements of Air T shall be deemed to be a reference to the audited financial statements and interim financial statements, as the case may be, of Air T most recently delivered to the Lender pursuant to Section 6.01(a) or 6.01(b) of the Original Agreement; (c) No events have taken place and no circumstances exist at the date hereof which would give either or both Borrowers the right to assert a defense, offset or counterclaim to any claim by the Lender for payment of the Obligations; (d) The Original Agreement, as amended by this Amendment, the A&R Revolving Credit Note and each other Loan Document to which any Borrower is a party are the legal, valid and binding obligations of such Loan Party and are enforceable in accordance with their respective terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to general equitable principles which may limit the right to obtain equitable remedies; and (e) Both before and after giving effect to this Amendment, there does not exist any Default or Event of Default. 5. Release. The Borrowers hereby jointly and severally release and forever discharge the Lender and its successors, assigns, directors, officers, agents, employees and participants from any and all actions, causes of action, suits, proceedings, debts, sums of money, covenants, contracts, controversies, claims and demands, at law or in equity, which either or both Borrowers ever had or now has against the Lender or its successors, assigns, directors, officers, agents, employees or participants by virtue of the Lender’s relationship to the Borrowers in connection with the Loan Documents and the transactions related thereto 6. Reference to and Effect on the Loan Documents. (a) From and after the date of this Amendment, each reference in: (i) the Original Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import referring to the Original Agreement, and each reference to the “Credit Agreement”, the “Credit Agreement”, “thereunder”, “thereof”, “therein” or words of like import referring to the Original Agreement in any other Loan Document shall mean and be a reference to the Original Agreement as amended hereby; and except as specifically set forth above, the Original Agreement remains in full force and effect and is hereby ratified and confirmed; and (ii) any Loan Document to the “Revolving Credit Note”, “thereunder”, “thereof”, “therein” or words of like import referring to the Revolving Credit Note shall mean and be a reference to the A&R Revolving Credit Note executed and delivered pursuant to this letter amendment. DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
8 084126.039 | 6467377v4 (b) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lender under the Agreement or any other Loan Document, nor constitute a waiver of any provision of the Agreement or any such other Loan Document. 7. Costs, Expenses and Taxes. The Borrowers jointly and severally agree to pay on demand all costs and expenses of the Lender in connection with the preparation, reproduction, execution and delivery of this Amendment and the other documents to be delivered hereunder or thereunder, including their reasonable attorneys’ fees and legal expenses. In addition, the Borrowers shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered hereunder and agrees to save the Lender harmless from and against any and all liabilities with respect to, or resulting from, any delay in the Borrowers’ paying or omission to pay, such taxes or fees. 8. Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. 9. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 10. Counterparts. This Amendment may be executed in counterparts and by separate parties in separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same document. Receipt by telecopy, pdf file or other electronic means of any executed signature page to this Amendment shall constitute effective delivery of such signature page. 11. Recitals. The Recitals hereto are incorporated herein by reference and constitute a part of this Amendment. [SIGNATURE PAGE FOLLOWS] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above. Air T, Inc., a Delaware corporation By: Name: Brian Ochocki Title: Chief Financial Officer Jet Yard, LLC, an Arizona limited liability company By: Stratus Aero Partners, LLC Its: Sole Member By: Air T, Inc., a Delaware corporation Its: Manager By: Name: Brian Ochocki Its: Chief Financial Officer Minnesota Bank & Trust, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust By_____________________ Name: Dianne Wegscheid Title: Senior Vice President/Commercial Team Lead [Signature page Amendment No. 3 to Third Amended and Restated Credit Agreement] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 EXHIBIT B Form of Borrowing Base Certificate (Amended 6/2023) Minnesota Bank & Trust 9800 Bren Road East, Suite 200 Minnetonka, MN 55343 Attention: Ms. Dianne Wegscheid, SVP Computed as of: _______________________ Report Number: _______ The undersigned is the Borrower under that certain Third Amended and Restated Credit Agreement, dated as of August 31, 2021 (such Third Amended and Restated Credit Agreement, as amended to date and as it may be further amended, modified, supplemented or restated from time to time being the “Credit Agreement”; capitalized terms not otherwise defined herein being used as therein defined) between AIR T, INC. (the “Borrower”) and MINNESOTA BANK & TRUST (the “Lender”). The Borrower hereby reaffirms all representations and warranties to the Credit Agreement and certifies and warrants that the Borrower and the other Loan Parties hold, subject to the security interest of the Lender under the Agreement, and the other Loan Documents, the following Collateral computed on a consolidated basis as of _____________ __, 202_. A. ACCOUNTS RECEIVABLE 1. Accounts Receivable Balance as of period ending above $__________ 2. Less: Ineligible Accounts a. Receivables over 120 days past invoice date $___________ b. 10% redline rule $ c. Insolvent $ d. Foreign $ e. Affiliated $ f. Contras $ g. U.S. Government $ h. Bonded $ i. State, county, municipality $ j. Customer deposits $_____________ k. Excess of concentration limit for account debtor $_____________ l. Other miscellaneous $____________ 3. TOTAL Ineligibles ($__________) 4. Total Eligible Accounts (Line A.1 – Line A.3) $___________ 5. Eligible Accounts Loan Value at 75% of Line A.4. $___________ DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 B. INVENTORY Report dated (see attached) 1. Raw Materials and Finished Goods Inventory $ 2. Less: a. Discontinued $_______________ b. Stored at a location w/out appropriate landlord/bailee/warehouseman’s waiver $_______________ c. Consigned to a Loan Party d. Inventory consigned by a Loan Party that does not comply with all Consigned Inventory Requirements $_______________ 3. Total Ineligibles $_____________ 4. Total Eligible Raw Materials and Finished Goods Inventory (Line B.1-Line B.3) $______________ 5. Eligible Raw Materials and Finished Goods Inventory Loan Value @ 50% of Line B.4 $______________ 6. GGS Titled Vehicles Inventory $____________ 7. Less: a. Discontinued $_______________ b. Stored at a location w/out appropriate landlord/bailee/warehouseman’s waiver $_______________ c. Consigned to a Loan Party d. Inventory consigned by a Loan Party that does not comply with all Consigned Inventory Requirements $_______________ 8. Total Ineligible GGS Titled Vehicles Inventory $_____________ 9. Total Eligible GGS Titled Vehicles Inventory (Line B.6-Line B.8) $______________ 10. Eligible GGS Titled Vehicles Inventory Loan Value @ 40% of Line B.4 $______________ 11. Eligible Inventory Loan Value (Line B5 + B.10) 1 1 Not to exceed 75% of Total Borrowing Base DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 C. Borrowing Base: 1. (Line A.4 + Line B.11) $______________ D. Availability/Amount to be Repaid: 1. Total Usage (Outstanding principal balance of Revolving Loans + Letter of Credit Obligations) $_______________ 2. Revolving Credit Commitment $17,000,0002 3. Borrowing Base (Line C.1.) 4A. Availability (Amount by which the lesser of [Line D.2 and Line D.3] exceeds Line D.1) $_______________ 4B. Amount to be repaid and Letters of Credit to be cash collateralized (Amount by which Line D.1 exceeds the lesser of [Line D.2 and Line D.3]) $_______________ The undersigned further certifies and warrants that (a) the Borrower has received federal income tax refunds in the amount of $___________ during the current Fiscal Year, (b) the Borrower has been awarded Employee Retention Tax Credits in the aggregate amount of $_____________ during the current Fiscal Year, and (c) no Event of Default is existing as of the date hereof and, to the best knowledge and belief of the officer of Air T executing this Borrowing Base Certificate, there has not been (except as may otherwise indicated below) any change to the information set forth above since the computation date specified above which would materially reduce the amounts shown if such amounts were computed as of the date of this Borrowing Base Certificate and all of the information provided on: (a) the Inventory report attached as Schedule A to this Borrowing Base Certificate and (b) the Other Investments report attached as Schedule B to this Borrowing Base Certificate, is true and correct as of the date hereof. AIR T, INC. By Title: Date: _________ 2 $19,000,000 during the period commencing on May 1 and ending on November 30 of each year DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 Schedule A to Borrowing Base Certificate Inventory Report as of _________________ [see attached] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 Schedule B to Borrowing Base Certificate Other Investments Report as of _________________ [see attached] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 EXHIBIT C FORM OF COMPLIANCE CERTIFICATE (Amended 6/2023) Minnesota Bank & Trust 9800 Bren Road East, Suite 200 Minnetonka, MN 55343 Attention: Ms. Dianne Wegscheid, SVP The undersigned is a Borrower under that certain Third Amended and Restated Credit Agreement, dated as of August 31, 2021 (as the same may be amended, modified or supplemented from time to time, herein called the “Agreement;” capitalized terms not otherwise defined herein being used as therein defined) between AIR T, INC., a Delaware corporation, Jet Yard, LLC, an Arizona limited liability company (the “Borrowers”), and MINNESOTA BANK & TRUST (the “Lender”). Pursuant to Section 6.02(b) of the Agreement, the undersigned certifies to the Lender as follows: The consolidated financial statements of Air T and its Subsidiaries attached hereto for the period ending ______________, 202__ (the “Financial Statements”) have been prepared in accordance with GAAP (except, in the case of the interim unaudited financial statements, for the absence of footnotes and subject to customary year end adjustments). 1. The representations and warranties contained in Article V of the Credit Agreement are true and correct as of the date hereof as though made on that date except to the extent that such representations and warranties expressly relate to an earlier date and except that the representations and warranties set forth in Section 5.04 of the Credit Agreement to the financial statements of Air T shall be deemed a reference to the audited and unaudited consolidated financial statements of Air T and its Subsidiaries, then most recently delivered to the Lender pursuant to Section 6.01(a) or (b) of the Credit Agreement, as the case may be. 2. As of _________, 202__, (the “Measurement Date”) no Default or Event of Default has occurred and is continuing [except (describe here any Default or Event of Default and the action which the undersigned proposes to take with respect thereto.)]. DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 3. Section 7.13(a). As of the Measurement Date, the minimum required Debt Service Coverage Ratio for the Measurement Period ending on the Measurement Date was 1.25 to 1.00 and the actual Debt Service Coverage Ratio was ___ to 1.00, as calculated in accordance with the Credit Agreement as set forth on the spreadsheet attached hereto as Schedule I and incorporated herein by reference. 4. Section 7.13(b). As of the Measurement Date, the minimum permitted Asset Coverage Ratio was 1.50 to 1.00 and the Borrower’s actual Leverage Ratio was ___ to 1.00, as calculated in accordance with the Credit Agreement as set forth on the spreadsheet attached hereto as Schedule I and incorporated herein by reference. 5. Total Funded Debt Leverage Ratio for purpose of determining Applicable Margin [Only if the Measurement Date is March 31 or September 30]. As of the Measurement Date the Borrower’s Total Funded Debt Leverage Ratio was ____ to 1.00, as calculated in accordance with the Credit Agreement as set forth on the spreadsheet attached hereto as Schedule I and incorporated herein by reference. AIR T, INC. By Title: Date: DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126.039 | 6467377v4 Schedule I to Compliance Certificate Covenant Calculations [see attached] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
ACKNOWLEDGMENT AND AGREEMENT Dated: June 23, 2023. Each of the undersigned has (a) guaranteed the payment and performance of all obligations of Air T, Inc., a Delaware corporation (together with its successors and assigns, “Air T”), and Jet Yard, LLC, an Arizona limited liability company (together with its successors and assigns, “Jet Yard”; and together with Air T being sometimes collectively referred to herein as the “Borrowers” and individually as a “Borrower”), to Minnesota Bank & Trust, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust (the “Lender”), pursuant to the terms of an Amended and Restated Guaranty dated as of August 31, 2021 (the “Guaranty”), jointly and severally made by the undersigned in favor of the Lender, which obligations include, without limitation, all “Obligations” (as defined in the Original Agreement described below) of the Borrowers to the Lender pursuant to that certain Third Amended and Restated Credit Agreement dated as of August 31, 2021, as amended by that certain Amendment No. 1 to Third Amended and Restated Credit Agreement dated June 9, 2022, and by that certain Amendment No. 2 to Third Amended and Restated Credit Agreement dated January 31, 2023 (as so amended, the “Original Agreement”), between the Borrowers and the Lender, and (b) granted a first priority security interest in its assets to the Lender as collateral for such Obligations pursuant to the terms of that certain Amended and Restated Security Agreement dated as of August 31, 2021 (the “Security Agreement”). Each of the undersigned acknowledges that it has received a copy of the proposed Amendment No. 3 to Third Amended and Restated Credit Agreement dated to be effective as of June 23, 2023 (the “Amendment”) providing for a seasonal increase in the Revolving Credit Commitment on the “Effective Date” of the Amendment, and amending certain other terms of the Original Agreement. Each of the undersigned (a) confirms that both the Guaranty and the Security Agreement remain in full force and effect, (b) agrees and acknowledges that the Amendment shall not in any way impair or limit the rights of the Lender under the Guaranty or under the Security Agreement, and (c) hereby acknowledges and agrees that (i) pursuant to the Guaranty, the Guarantors jointly and severally guaranty the payment and performance of all Obligations under the Original Agreement as amended by the Amendment, and (ii) pursuant to the Security Agreement each of the undersigned continues to grant a security interest to the Lender in the “Collateral” covered thereby to secure all Obligations of the Borrowers to the Lender, including, without limitation, all Loans now or hereafter made by the Lender under the Original Agreement as amended by the Credit Agreement. Each of the undersigned agrees that each reference to the “Credit Agreement”, the “Loan Agreement”, “therein”, “thereof”, “thereby” or words of similar effect referring to the Credit Agreement in any Loan Document to which such undersigned is a party shall mean and be a reference to the Original Agreement, as amended by the Amendment. Each of the undersigned: (a) represents and warrants to the Lender that no events have taken place and no circumstances exist at the date hereof which would give such undersigned the right to assert a defense, offset or counterclaim to any claim by the Lender for payment of the Obligations guaranteed by such undersigned or for the enforcement of the Guaranty; and (b) hereby releases and forever discharges the Lender and its successors, assigns, directors, officers, agents, DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
employees and participants from any and all actions, causes of action, suits, proceedings, debts, sums of money, covenants, contracts, controversies, claims and demands, at law or in equity, which such undersigned ever had or now has against the Lender or its successors, assigns, directors, officers, agents, employees or participants by virtue of their relationship to the Borrowers or any of the undersigned in connection with the Loan Documents and the transactions related thereto. Nothing in this Acknowledgment and Agreement requires the Lender to obtain the consent of any of the undersigned to any future amendment, modification or waiver to the Original Agreement, as amended by the Amendment, or any other Loan Document to which such undersigned is a party except as expressly required by the terms of the Loan Documents to which such undersigned is a party. This Acknowledgment and Agreement may be executed in counterparts and by separate parties in separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same document. The delivery of a facsimile, pdf or other digital copy of an executed counterpart of this Acknowledgment and Agreement shall be deemed to be valid execution and delivery of this Acknowledgment and Agreement. [SIGNATURE PAGES FOLLOW] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
[Guarantor Acknowledgment and Agreement Signature Page] Each of the undersigned has executed this Acknowledgment and Agreement to be effective as of the first date set forth above. AIRCO, LLC By: Name: Mark Jundt Title: Secretary AIR T GLOBAL LEASING, LLC By: Name: Mark Jundt Title: Secretary AIRCO SERVICES, LLC By: Name: Mark Jundt Title: Secretary AIRCO 2, LLC By: AIRCO, LLC Its: Sole Member By: Name: Mark Jundt Title: Secretary DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
[Guarantor Acknowledgment and Agreement Signature Page] Air’Zona Aircraft Services, LLC By: Name: Mark Jundt Title: Secretary CSA AIR, INC. By: Name: Mark Jundt Title: Secretary GLOBAL GROUND SUPPORT, INC. By: Name: Mark Jundt Title: Secretary JET YARD SOLUTIONS, LLC By: Stratus Aero Partners, LLC Its: Sole Member By: Air T, Inc., a Delaware corporation Its: Manager By: Name: Mark Jundt Its: Secretary MOUNTAIN AIR CARGO, INC. By: Name: Mark Jundt Title: Secretary DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
[Guarantor Acknowledgment and Agreement Signature Page] SPACE AGE INSURANCE COMPANY By: Name: Mark Jundt Title: Secretary STRATUS AERO PARTNERS, LLC By: Air T, Inc., a Delaware corporation Its: Manager By: Name: Mark Jundt Its: Secretary WORLDWIDE AIRCRAFT SERVICES, INC. By: Name: Mark Jundt Its: Secretary WORTHINGTON AVIATION, LLC By: Name: Mark Jundt Its: Secretary DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126\039\6308466.v2 ACKNOWLEDGMENT AND AGREEMENT Dated: June 23, 2023. The undersigned, Jet Yard, LLC, an Arizona limited liability company (the “Guarantor”) has (a) guaranteed the payment and performance of all obligations of its affiliate, Air T, Inc., a Delaware corporation (together with its successors and assigns, “Air T”), to Minnesota Bank & Trust, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust (the “Lender”), pursuant to the terms of a Guaranty dated as of August 31, 2021 (the “Guaranty”) executed by the Guarantor in favor of the Lender, which obligations include, without limitation, all “Obligations” (as defined in the Original Agreement described below) of Air T to the Lender pursuant to that certain Third Amended and Restated Credit Agreement dated as of August 31, 2021, as amended by that certain Amendment No. 1 to Third Amended and Restated Credit Agreement dated June 9, 2022, and by that certain Amendment No. 2 to Third Amended and Restated Credit Agreement dated January 31, 2023 (as so amended, the “Original Agreement”), between the Guarantor and Air T as the “Borrower” parties and the Lender, and (b) granted a first priority security interest in its assets to the Lender as collateral for such Obligations pursuant to the terms of that certain Amended and Restated Security Agreement dated as of August 31, 2021 (the “Security Agreement”). The Guarantor acknowledges that it has received a copy of the proposed Amendment No. 3 to Third Amended and Restated Credit Agreement dated to be effective as of June 23, 2023 (the “Amendment”) providing for a seasonal increase in the Revolving Credit Commitment on the “Effective Date” of the Amendment, and amending certain other terms of the Original Agreement. The Guarantor (a) confirms that both the Guaranty and the Security Agreement remain in full force and effect, (b) agrees and acknowledges that the Amendment shall not in any way impair or limit the rights of the Lender under the Guaranty or under the Security Agreement, and (c) hereby acknowledges and agrees that (i) pursuant to the Guaranty, the Guarantor guarantees the payment and performance of all Obligations under the Original Agreement, as amended by the Amendment, and (ii) pursuant to the Security Agreement the Guarantor continues to grant a security interest to the Lender in the “Collateral” covered thereby to secure all Obligations under the Original Agreement, as amended by the Credit Agreement, including, without limitation, the repayment of Term Loan F and all other Loans hereafter made by the Lender under the Original Agreement as amended by the Credit Agreement. The Guarantor agrees that each reference to the “Credit Agreement”, the “Loan Agreement”, “therein”, “thereof”, “thereby” or words of similar effect referring to the Credit Agreement in any Loan Document to which the Guarantor is a party shall mean and be a reference to the Original Agreement, as amended by the Amendment. The Guarantor: (a) represents and warrants to the Lender that no events have taken place and no circumstances exist at the date hereof which would give the Guarantor any right to assert a defense, offset or counterclaim to any claim by the Lender for payment of the Obligations guaranteed by the Guarantor or for the enforcement of the Guaranty; and (b) hereby releases and forever discharges the Lender and its successors, assigns, directors, officers, agents, employees and participants from any and all actions, causes of action, suits, proceedings, debts, sums of money, covenants, contracts, controversies, claims and demands, at law or in equity, which the DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
Guarantor ever had or now has against the Lender or its successors, assigns, directors, officers, agents, employees or participants by virtue of their relationship to Air T or the Guarantor in connection with the Loan Documents and the transactions related thereto. Nothing in this Acknowledgment and Agreement requires the Lender to obtain the consent of the Guarantor to any future amendment, modification or waiver to the Original Agreement, as amended by the Amendment, or any other Loan Document to which the Guarantor is a party except as expressly required by the terms of the Loan Documents to which the Guarantor is a party. The delivery of a facsimile, pdf or other digital copy of an executed counterpart of this Acknowledgment and Agreement shall be deemed to be valid execution and delivery of this Acknowledgment and Agreement. [SIGNATURE PAGE FOLLOWS] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
[Guarantor Acknowledgment and Agreement Signature Page] The Guarantor has executed this Acknowledgment and Agreement to be effective as of the first date set forth above. JET YARD, LLC, an Arizona limited liability company By: Stratus Aero Partners, LLC Its: Sole Member By: Air T, Inc., a Delaware corporation Its: Manager By: Name: Brian Ochocki Its: Chief Financial Officer DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126\039\6308420.v2 SECRETARY’S CERTIFICATE Date: June 23, 2023. The undersigned hereby certifies to Minnesota Bank & Trust, a division of HTLF Bank, successor by merger to Minnesota Bank and Trust (the “Lender”) that: (a) I am the Secretary of AIR T, INC., a Delaware corporation, the manager of STRATUS AERO PARTNERS, LLC, a Delaware limited liability company (the “Manager”), the sole member (the “Member”) of JET YARD, LLC, a limited liability company organized and existing in good standing under the laws of the State of Arizona (the “Company”); (b) the Resolutions attached as Exhibit A to that certain Secretary’s Certificate regarding the Company and signed and delivered to the Lender on or about August 31, 2021 (the “Original Certificate”), remain in full force and effect as of the date hereof and have not in any way been amended, modified or rescinded; (c) the Company’s Articles of Organization previously delivered to the Lender as an Exhibit to the Original Certificate remain in full force and effect as of the date hereof and have not in any way been amended, modified or rescinded; (d) the Company has no operating or limited liability company agreement; (d) the individuals whose signature specimens were included in the Secretary’s Certificate delivered to the Lender on or about June 26, 2020, continue to serve the Corporation in such capacities on the date of this Secretary’s Certificate. [signature page follows] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
IN WITNESS WHEREOF, I have executed this Secretary’s Certificate as of date first set forth above. STRATUS AERO PARTNERS, LLC, the sole member of Jet Yard, LLC By: Air T, Inc., a Delaware corporation Its: Manager By: Name: Mark Jundt Title: Secretary DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
084126\039\6308439.v2 SECRETARY’S CERTIFICATE Date: June 23, 2023. The undersigned hereby certifies to Minnesota Bank & Trust, a Minnesota state banking corporation (the “Lender”) that: (a) I am the Secretary of Air T, Inc., a corporation organized, existing and in good standing in the State of Delaware (the “Corporation”), and that I am authorized to execute this Certificate on behalf of the Corporation; (b) The Certificate of Incorporation of the Company attached as Exhibit A to the Secretary’s Certificate regarding the Corporation and signed and delivered to the Lender on or about June 9, 2022, remain in full force and effect as of the date hereof and have not in any way been amended, modified or rescinded. As of the date of this Certificate, no action by the Company is pending which would amend, alter, rescind or repeal said Certificate of Incorporation. (c) the Resolutions attached as Exhibit A to that certain Secretary’s Certificate regarding the Corporation and signed and delivered to the Lender on or about August 31, 2021 (the “Original Certificate”), remain in full force and effect as of the date hereof and have not in any way been amended, modified or rescinded; (c) the Corporation’s Bylaws previously delivered to the Lender as Exhibit C to the Original Certificate remain in full force and effect as of the date hereof and have not in any way been amended, modified or rescinded; and (e) the individuals whose signature specimens were included in the Secretary’s Certificate delivered to the Lender on or about June 26, 2020, continue to serve the Corporation in such capacities on the date of this Secretary’s Certificate. [signature page follows] DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
IN WITNESS WHEREOF, I have hereunder subscribed my name to be effective as of the date first set forth above. . By: Name: Mark Jundt Its: Corporate Secretary DocuSign Envelope ID: 69945E55-E085-477C-94DE-5F8DF61BA41E
EXHIBIT 21.1
AIR T, INC.
LIST OF SUBSIDIARIES AND CONSOLIDATED VARIABLE INTEREST ENTITIES
Percent Ownership | ||||||||
| Air T Global Leasing, LLC, a North Carolina limited liability company | 100% | |||||||
| CSA Air, Inc., a North Carolina corporation | 100% | |||||||
| Global Ground Support, LLC, a North Carolina limited liability company | 100% | |||||||
| Mountain Air Cargo, Inc., a North Carolina corporation | 100% | |||||||
| Space Age Insurance Company, a Utah corporation | 100% | |||||||
| Stratus Aero Partners LLC, a Delaware limited liability company | 100% | |||||||
| Jet Yard, LLC, an Arizona limited liability company | 100% | |||||||
| Jet Yard Solutions, LLC, an Arizona limited liability company | 100% | |||||||
| AirCo, LLC, a North Carolina limited liability company | 100% | |||||||
| AirCo 1, LLC, a Delaware limited liability company | 100% | |||||||
| AirCo Services, LLC, a North Carolina limited liability company | 100% | |||||||
| Contrail Aviation Support, LLC, a North Carolina limited liability company | 79% | |||||||
| Contrail Aviation Leasing, LLC, a Wisconsin limited liability company | 100% | |||||||
| BCCM Inc, a Delaware Corporation | 100% | |||||||
| BCCM Advisors, LLC, a Delaware limited liability company | 100% | |||||||
| BCCM Services, LLC, a Delaware limited liability company | 100% | |||||||
| Graphoptix, LLC, a Minnesota limited liability company | 100% | |||||||
| Delphax Solutions, Inc., an Ontario Corporation | 100% | |||||||
| Delphax Technologies Inc., a Minnesota Corporation | 67%* | |||||||
| Worthington Aviation, LLC, a North Carolina limited liability company | 100% | |||||||
| Ambry Hills Technologies, LLC, a Minnesota limited liability company | 100% | |||||||
| Air'Zona Acquisition, LLC, an Arizona limited liability company | 100% | |||||||
| Air'Zona Aircraft Services, Inc., an Arizona Corporation | 100% | |||||||
| Air T Ag Lending, LLC, a Minnesota limited liability company | 100% | |||||||
| Farmland Credit FR, LLC, a Minnesota limited liability company | 100% | |||||||
| Farmland Credit AV, LLC, a Minnesota limited liability company | 100% | |||||||
| Giant Jump, LLC, a Minnesota limited liability company | 100% | |||||||
| Wolfe Lake HQ, LLC, a Minnesota limited liability company | 100% | |||||||
| Air T Acquisition 22.1, LLC | 100% | |||||||
| Shanwick B.V., a Dutch holding company | 70% | |||||||
| Worldwide Aircraft Services, Inc., a Kansas corporation | 100% | |||||||
| * | Percent ownership assumes conversion by Air T of all shares of Series B Preferred Stock of Delphax Technologies Inc. into shares of common stock of Delphax Technologies Inc. | |||||||
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-135338 on Form S-8 and Registration Statement No. 333-254110 on Form S-3 of our report dated June 27, 2023, relating to the financial statements of Air T, Inc. appearing in this Annual Report on Form 10-K for the year ended March 31, 2023.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
June 27, 2023
Exhibit 24
POWER OF ATTORNEY
(FORM 10-K)
(FORM 10-K)
AIR T, INC., a Delaware corporation (the “Company”), and each of the undersigned directors of the Company, hereby constitutes and appoints Nick Swenson and Brian Ochocki and each of them (with full power to each of them to act alone) its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on its/his/her behalf and in its/his/her name, place and stead, in any and all capacities to sign, execute, affix its/his/her seal thereto and file the Annual Report on Form 10-K for the year ended March 31, 2023 under the Securities Exchange Act of 1934, as amended, with any amendment or amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority.
There is hereby granted to said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in respect of the foregoing as fully as it/he/she or itself/himself/herself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument and any of the undersigned directors may execute this Power of Attorney by signing any such counterpart.
Air T, Inc. has caused this Power of Attorney to be executed in its name by its Chairman, President and Chief Executive Officer on the 22nd day of June, 2023.
| AIR T, INC. | |||||||||||||||||
| By | /s/ Nick Swenson | ||||||||||||||||
Nick Swenson Chairman, President and Chief Executive Officer | |||||||||||||||||
The undersigned, directors of Air T, Inc., have hereunto set their hands as of the 27th day of June, 2023.
| By: | /s/ Nick Swenson | ||||||||||
Nick Swenson, Chairman, President and Chief Executive Officer and Director (Principal Executive Officer) | Date: June 27, 2023 | ||||||||||
| By: | /s/ Raymond Cabillot | ||||||||||
| Raymond Cabillot, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ William R. Foudray | ||||||||||
| William R. Foudray, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ Gary S. Kohler | ||||||||||
| Gary S. Kohler, Director | Date: June 27, 2023 | ||||||||||
| By: | / s/ Peter McClung | ||||||||||
| Peter McClung, Director | Date: June 27, 2023 | ||||||||||
| By: | /s/ Travis Swenson | ||||||||||
Travis Swenson, Director | Date: June 27, 2023 | ||||||||||
26549708v1
Exhibit 31.1
SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I.Nick Swenson, certify that:
1.I have reviewed this annual report on Form 10-K of Air T, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 27, 2023 | |||||
| /s/ Nick Swenson | |||||
Nick Swenson Chief Executive Officer | |||||
Exhibit 31.2
SECTION 302 CERTIFICATION OF INTERIM CHIEF FINANCIAL OFFICER
I.Brian Ochocki, certify that:
1.I have reviewed this annual report on Form 10-K of Air T, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 27, 2023 | |||||
| /s/ Brian Ochocki | |||||
| Brian Ochocki Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Air T, Inc. (the “Company”) Annual Report on Form 10-K for the year ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Nick Swenson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: June 27, 2023 | /s/ Nick Swenson | ||||
| Nick Swenson, Chief Executive Officer | |||||
Exhibit 32.2
CERTIFICATION OF INTERIM CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Air T, Inc. (the “Company”) Annual Report on Form 10-K for the year ended March 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Seth Barkett, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: June 27, 2023 | /s/ Brian Ochocki | ||||
| Brian Ochocki, Chief Financial Officer | |||||