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Item 2. Management’s Discussion and Analysis

2021-02-12 compared with 2017-10-13 · 205 added, 283 removed, 11 unchanged (98% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

(As Restated)

As discussed in the Explanatory Note in this Form 10-Q/A and in Note 1A of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Form 10-Q/A, we are restating our consolidated financial statements and related disclosures at and for the three and nine months ended December 31, 2016.

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.

The Company has five business segments.

The overnight air cargo segment, comprised of the Company ’s Mountain Air Cargo, Inc.

(“MAC”) and CSA Air, Inc.

(“CSA”) subsidiaries, operates in the air express delivery services industry.

The ground equipment sales segment, comprised of the Company’s Global Ground Support, LLC (“GGS”) subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the U.S.

military and industrial customers.

The ground support services segment, comprised of the Company’s Global Aviation Services, LLC (“GAS”) subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers.

The printing equipment and maintenance segment is comprised of Delphax, which was consolidated for financial accounting purposes beginning November 24, 2015.

Delphax designs, manufactures and sells advanced digital print production equipment, maintenance contracts, spare parts, supplies and consumable items for these systems.

The equipment is sold through Delphax and its subsidiaries located in Canada, the United Kingdom and France.

A significant portion of Delphax’s net sales is related to service and support provided after the sale.

Delphax has a significant presence in the check production marketplace in North America, Europe, Latin America, Asia and the Middle East.

The Company’s newly established leasing segment comprised of the Company’s Air T Global Leasing, LLC subsidiary, Air T Global Leasing, LLC provides funding for equipment leasing transactions, which may include transactions for the leasing of equipment manufactured by GGS and transactions initiated by third parties unrelated to equipment manufactured by the Company or any of its subsidiaries.

Air T Global Leasing, LLC commenced operations during the quarter ended December 31, 2015.

(the “Company,” “Air T,” “we” or “us”) 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 also comprises of insignificant businesses that do not pertain to other reportable segments.

On September 30, 2019, we completed the sale of 100% of the equity ownership in the Company's wholly-owned subsidiary, Global Aviation Services, LLC.

Each business segment has separate management teams and infrastructures that offer different products and services.

The Company evaluates the performance of its business segments based on operating income.

As described in more detail in Note 2 of the notes to the accompanying condensed consolidated financial statements, on November 24, 2015, the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax ’s Canadian operating subsidiary for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from that Delphax subsidiary on October 2, 2015 and (ii) for $1,050,000 in cash a total of 43,000 shares (the “Shares”) of Delphax’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events).

Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments.

Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax’s employee stock option plans, at December 31, 2015 the number of shares of common stock underlying the Shares represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of the Shares and approximately 31% of the outstanding shares assuming conversion of the Shares and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax’s employee stock option plans.

Under the agreement that provided for the Company’s purchase of these interests, on November 24, 2015 three designees of the Company (including Nick Swenson, the Company’s President, Chief Executive Officer and Chairman, and Michael Moore, the President of the Company’s GGS subsidiary) were elected to the board of directors of Delphax, which had a total of seven members following their election.

Moore has been elected as non-executive Chairman of Delphax’s board of directors.

Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Shares and interests in the Warrant holders of the Series B Preferred Stock, voting as a separate class, the Company would be entitled to elect, after June 1, 2016, four-sevenths of the members of the board of directors of Delphax and, without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions.

As a result of these transactions, the Company determined that it had obtained control over Delphax in conjunction with the acquisition of the interests described above, and it has consolidated the relevant financial information of Delphax in its consolidated financial statements beginning on November 24, 2015.

The operating loss attributable to Delphax included in the Company ’s condensed consolidated statements of operations for the three and nine-months ended December 31, 2015 was approximately $883,000.

This operating loss is included in the Company’s consolidated net income for such periods.

The Company’s consolidated net income attributable to Air T, Inc.

stockholders eliminates the net loss attributable to the non-controlling interest in Delphax.

Following is a table detailing revenues by segment and by major customer category:

(In thousands)

Three Months Ended December 31,

Nine Months Ended December 31,

Overnight Air Cargo Segment:

Ground Equipment Sales Segment:

Commercial - Domestic

Commercial - International

Ground Support Services Segment

Printing Equipment and Maintenance

International

MAC and CSA provide overnight small package airfreight delivery services on a contract basis throughout the eastern half of the United States and the Caribbean.

MAC and CSA ’s revenues are derived principally pursuant to “dry-lease”

service contracts with FedEx.

Under the dry-lease service contracts in place through May 31, 2015, FedEx leased its aircraft to MAC and CSA for a nominal amount and paid a monthly administrative fee to MAC and CSA to operate the aircraft.

Under these contracts, all direct costs related to the operation of the aircraft (including fuel, outside maintenance, landing fees and pilot costs) were passed through to FedEx without markup.

The pass through costs totaled $8,709,000 and $23,756,000 for the three and nine-month periods ended December 31, 2014.

Effective June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the revenue aircraft operated by MAC and CSA and replace all prior dry-lease service contracts.

The new 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 was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate.

The new 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 new dry-lease agreements provide for the reimbursement by FedEx of MAC and CSA ’s 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.

The pass through costs totaled $9,704,000 for the three months ended December 31, 2015 and $25,483,000 for the nine-month period ended December 31, 2015.

Unlike the prior dry-lease contracts, under the new dry-lease agreements, certain operational crew costs incurred by MAC and CSA in operating the aircraft under the new dry-lease agreements are not reimbursed by FedEx at cost, and such operational costs are to be borne solely by MAC and CSA.

Under the new dry-lease agreements, MAC and CSA are required to perform maintenance of the leased aircraft in return for a maintenance fee based upon an hourly maintenance labor rate, which has been increased from the rate in place under the prior dry-lease service contracts.

Under prior dry-lease service contracts, the hourly maintenance labor rate had not been adjusted since 2008.

The new dry-lease agreements provide for the payment by FedEx to MAC and CSA of a monthly administrative fee based on the number and type of aircraft leased and routes operated.

The amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to reflect the greater monthly lease payment per aircraft and that certain operational costs are to be borne by MAC and CSA and not reimbursed.

The amount of the administrative fee is subject to adjustment based on the number of aircraft operated, routes flown and whether aircraft are considered to be soft-parked.

The new dry-lease agreements have a term that would initially expire, unless renewed, on May 31, 2016.

The new 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 new dry-lease agreement 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 new dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes its only customer, or it employs less than six employees.

As of the date of this report, FedEx would have been permitted to terminate each of the new dry-lease agreements under this provision.

The Company believes that the short term and other provisions of its agreements with FedEx are standard within the airfreight contract delivery service industry.

At December 31, 2015, MAC and CSA operated an aggregate of 18 ATR aircraft and an aggregate of 61 Cessna Caravan aircraft under agreements with FedEx.

None of these aircraft were soft-parked (soft-parked aircraft remain covered under the agreements with FedEx although at a reduced administrative fee compared to aircraft that are in operation).

In January 2016, FedEx advised MAC that effective at the end of February 2016 it was transferring an ATR aircraft operated by MAC to another feeder operator to meet scheduling needs.

The administrative revenue related to an ATR aircraft is significantly greater than the administrative revenue related to the operation of a Cessna Caravan.

MAC and CSA combined contributed approximately $48,949,000 and $36,626,000 to the Company ’s revenues for the nine-month periods ended December 31, 2015 and 2014, respectively, a current year increase of $12,323,000 (34%).

The increase in revenue was due principally to the changes in the dry-lease agreements described above.

GGS manufactures and supports aircraft deicers and other specialized equipment on a worldwide basis.

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.

This includes 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, 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 also 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, performance, and reliability of its products, as well as prompt delivery, customer service and price.

On May 15, 2014, GGS was awarded a contract to supply deicing trucks to the USAF.

The initial contract award is for two years through July 13, 2016 with four additional one-year extension options that may be exercised by the USAF.

Because this contract with USAF does not obligate the USAF to purchase a set or minimum number of units, the value of this contract, as well as the number of units to be delivered, depends upon the USAF ’s requirements and available funding.

In September 2014, GGS’s contract with the USAF to supply the flight line tow tractors expired.

GGS contributed approximately $45,667,000 and $35,902,000 to the Company ’s revenues for the nine-month periods ended December 31, 2015 and 2014, respectively, representing a $9,764,000 (27%) increase.

At December 31, 2015, GGS’s order backlog was $10.8 million compared to $7.2 million at December 31, 2014 and $24.4 million at September 30, 2015.

GAS provides aircraft ground support equipment, fleet, and facility maintenance services.

At December 31, 2015, GAS was providing ground support equipment, fleet, and facility maintenance services to more than 100 customers at 70 North American airports.

GAS contributed approximately $17,974,000 and $14,768,000 to the Company ’s revenues for the nine-month periods ended December 31, 2015 and 2014, respectively, representing a $3,207,000 (22%) increase.

Delphax designs, manufactures and sells advanced digital print production equipment, and the sells maintenance contracts, spare parts, supplies and consumable items for these systems.

A significant portion of Delphax ’s net sales is related to service and support provided after the equipment sale.

The Company’s investments in Delphax are intended to support the commercial rollout and manufacturing costs of the new Delphax elan™

500 digital color print system, which combines advances in inkjet and paper-handling technologies in a production class sheet-fed system offering full CMYK color and 1600 dpi print quality at speeds of up to 500 letter impressions per minute.

For the period from the acquisition of interests in Delphax on November 24, 2015 through December 31, 2015, Delphax generated revenues of approximately $1,035,000.

Air T Global Leasing, LLC, which commenced operations during the three months ended December 31, 2015, contributed revenues of approximately $6,000.

In March 2014, the Company formed Space Age Insurance Company (“SAIC”), a captive insurance company licensed in Utah, and initially capitalized with $250,000.

SAIC insures risks of the Company and its subsidiaries that were not previously insured by the Company ’s insurance programs and underwrites third-party risk through certain reinsurance arrangements.

The activities of SAIC are included within the corporate results in the accompanying condensed consolidated financial statements (see Note 11).

Third Quarter Highlights

The third quarter of fiscal 2016 saw the Company ’s revenues increase by $15,726,000 (51%) from the prior year comparable quarter.

Operating income increased by $ 1,749,000 (82%) compared to the prior year comparable quarter.

These results represent a robust third quarter that was positively impacted by higher volume of GGS deicer sales and increased profitability, along with the favorable impact of the new dry-lease agreements with FedEx.

In addition, operating income for the third quarter ended December 31, 2015 included the $883,000 operating loss at Delphax.

Operating income for the prior year quarter included a gain on sale of property and equipment of $781,000 arising from the sale of the Company-owned aircraft and de-icing units held for lease.

The gain on sale of property and equipment for the fiscal 2016 quarter was $56,000.

Revenues from the air cargo segment increased by $5,701,000 (44%) compared to the third quarter of the prior fiscal year.

Administrative fee revenues increased to reflect the greater administrative fee amounts paid under the new lease agreements which became effective on June 1, 2015.

The maintenance revenues increased to reflect the higher hourly maintenance labor rate during fiscal 2016.

Operating income for the air cargo segment increased by $811,000 (135%), as increased administrative fee revenue was offset in part by increases in rental expense for leased aircraft under the new lease agreements.

Revenues for GGS increased by $7,705,000 (61%) compared to the third quarter of the prior fiscal year.

GGS has generated operating income of approximately $3,875,000 for the quarter, compared to operating income of $1,704,000 in the prior year ’s comparable quarter, a $2,170,000 (127%) increase.

GGS’s commercial revenues have increased from the prior year comparable quarter principally attributable to significant increase in commercial domestic deicer sales this quarter as GGS completed a significant order by a major airline company received in June 2015.

Gross margins in the segment also improved compared to the prior year comparable quarter as a result of continuing efforts to improve production efficiencies, as well as a change in the product and customer mix.

GGS’s profitability increased, with a gross margin percentage of 26.2% for the third quarter of fiscal 2016 compared to 22.8% for the third quarter of the prior fiscal year.

Revenues from GAS increased by $1,279,000 (24%) compared to the third quarter of the prior fiscal year as a result of growth in new markets and services offered to new and existing customers.

Operating income for the same period decreased by $236,000 to an operating income of $26,000 as maintenance and parts expenses remain high in select markets.

Lower start-up margins on new business and increases in overall operating costs also adversely affected operating income.

Operating costs continued to be high in the current period due to investments made in infrastructure to help position GAS for additional growth in new markets and with new customers, including facility upgrades, leadership and support role changes, training and additional quality controls.

Although GAS is starting to see growth in the revenue base, it has been slower than expected and new shops experience lower margins than more established locations.

As noted above, Delphax ’s operating loss for the period starting November 24, 2015 and ending December 31, 2015 was approximately $883,000.

The Company’s investments in Delphax are intended to support the commercial rollout and manufacturing costs of the new Delphax elan™

500 digital color print system.

The Company anticipates that Delphax may continue to generate operating losses until the rollout of the elan™

500 is successful.

Critical Accounting Policies and Estimates

The preparation of the Company ’s condensed 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 its control change.

Accordingly, actual results could differ materially from estimates.

The Company believes that the following are its most significant accounting policies:

Allowance for Doubtful Accounts:

An allowance for doubtful accounts receivable is established based on management ’s estimates of the collectability of accounts receivable.

The required allowance is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of outstanding accounts receivable.

The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.

The Company ’s inventories are valued at the lower of cost or market.

Provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories.

Historical parts usage, current period sales, estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates.

Estimates are subject to volatility and can be affected by reduced equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment, changes in the financial strength of the aviation industry, as well as technological and market changes in the print industry.

Warranty Reserves:

GGS warranties its ground equipment products for up to a three-year period from date of sale.

Delphax provides a limited warranty for its digital presses and proprietary spare parts and supplies for 90 days after the date of sale, except in the European Union where the warranty period runs until one year after the date of sale.

Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted quarterly as actual warranty cost becomes known.

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.

Deferred tax assets are recognized only to the extent that they are more-likely-than-not to be realized.

This determination can involve the exercise of significant judgment regarding future profitability.

Revenue Recognition:

Cargo revenue is recognized upon completion of contract terms.

Maintenance and ground support services revenue is recognized when the service has been performed.

Revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer.

Attribution of net income or loss of partially-owned consolidated entities:

In the case of Delphax, we determined that the attribution of net income or loss should be based on consideration of all of Air T ’s investments in Delphax and Delphax Canada.

Our investment in the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock.

This provision would have entitled Air T, Inc.

to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests.

We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests.

We furthermore concluded that our investment in the debt of Delphax should be considered in attribution.

Specifically, Delphax ’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero.

Additional losses are then fully attributed to our debt investments until they too are reduced to zero.

This sequencing reflects the relative priority of debt to equity.

Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67% / 33% share.

Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.

The effect of interest expense arising under the Senior Subordinated Note and of other intercompany transactions are reflected in the attribution of Delphax net income or losses to non-controlling interests because Delphax is a variable interest entity.

The above-described attribution methodology applies only to our investments in Delphax.

We establish the appropriate attribution methodology on an entity-specific basis.

Foreign Currency Translation:

The financial information of Delphax ’s subsidiaries in the United Kingdom and France are measured in their functional currencies, Pound Sterling and Euro, respectively, before translating to U.S.

The functional currency of Delphax’s Canadian subsidiary is the U.S.

Balance sheet items are translated using exchange rates as of the balance sheet date.

Relevant consolidated statement of income items are translated using average exchange rates for the applicable period.

The gains and losses resulting from the translations of Delphax’s subsidiaries in the United Kingdom and France are recorded as a component of equity.

GGS ’s business has historically been seasonal, with the revenues and operating income typically being lower in the first and fourth fiscal quarters as commercial deicers are typically delivered in anticipation of the winter season.

The Company attempted to reduce GGS’s seasonal fluctuation in revenues and earnings by seeking military and international sales and broadening its product line to increase revenues and earnings throughout the year.

On May 15, 2014, GGS was awarded a contract to supply deicing trucks to the USAF, which replaced a prior contract initially awarded in 2009.

The initial contract award is for two years through July 13, 2016 with four additional one-year extension options that may be exercised by the USAF.

The value of the contract, as well as the number of units to be delivered, depends upon annual requirements and available funding to the USAF.

The overnight air cargo, ground support services, printing equipment and maintenance and leasing segments are not susceptible to seasonal trends.

We evaluate the performance of our business segments based on operating income and Adjusted EBITDA.

Results of Operations

The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations.

Each of our businesses remain open.

However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of disruptions, and have experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods.

Furthermore, while operating expenses at our businesses have decreased, we expect that many of our businesses will generate substantially reduced operating cash flows.

We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially lasts even longer.

The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations.

Third Quarter Fiscal 2021 Compared to Third Quarter Fiscal 2020

Consolidated revenues increased $15,726,000 (51%) to $46,619,000 for the three-month period ended December 31, 2015 compared to the equivalent prior period.

Revenues from the air cargo segment increased by $5,701,000 (44%) compared to the prior year comparable quarter.

Administrative fee revenues increased to reflect the greater administrative fee amount paid under the new dry-lease agreements which became effective on June 1, 2015.

In addition, the maintenance revenues increased to reflect the higher hourly maintenance labor rate during fiscal 2016.

Revenues in the ground equipment sales segment increased $7,705,000 (61%) as a result of an increase in commercial domestic deicer sales due in large part to a significant order by a major airline company received in June 2015.

Revenues in the ground support services segment increased $1,279,000 (24%), as a result of the segments ’s growth in new markets and in services offered to new and existing customers.

Consolidated revenue increased by $1,035,000 due to the inclusion of the printing equipment and maintenance segment in consolidated results due to the acquisition of interests in Delphax on November 24, 2015.

Operating expenses increased $13,976,000 (49%) to $ 42,728,000 for the three-month period ended December 31, 2015 compared to the equivalent prior period.

The principal component of the air cargo segment increase, $3,507,000, is due to the payment of monthly rent with respect to each aircraft leased, which monthly rent was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate.

Ground equipment sales segment operating costs increased $5,534,000 (51%) driven principally by the current quarter ’s $7,705,000 (61%) increase in revenues and offset by production efficiencies.

Ground support services segment operating costs increased by $1,516,000 (30%) due to increases in maintenance and parts expense, along with investments made in the segment’s infrastructure to help position GAS for additional growth, including facility upgrades, leadership and support role changes, training and additional quality controls.

General and administrative expenses increased $931,000 (25%) to $4,585,000 for the three-month period ended December 31, 2015 compared to the equivalent prior period.

The principal components of this increase were employee benefits and professional fees in the current fiscal year.

Other consolidated operating expenses increased by $1,918,000 primarily due to Delphax.

Operating income for the quarter ended December 31, 2015 was $1,749,000 (82%) higher, compared to operating income of $2,141,000 for the comparable prior quarter.

Operating income for the air cargo segment increased $811,000 (135%) principally due to increased administrative fee revenues and a higher hourly maintenance labor rate under the new dry-lease agreements.

Operating income for the air cargo segment for the prior year quarter included a $374,000 gain from the sale of Company-owned aircraft used primarily to support the air cargo segment ’s operations.

Operating income for the ground equipment segment increased $2,170,000 (127%) principally attributable to increased commercial domestic deicer sales this quarter and increased profitability.

Operating income for the ground equipment segment for the prior year quarter included a $412,000 gain from the sale of eight leased de-icing units to the leasing customers.

Gross margin percentage for this segment was 26.2% for this quarter compared to 22.8% for the prior year quarter as the segment benefited from production efficiencies due in part to the large number of identical units manufactured to fill the significant order discussed above.

Operating results for GAS decreased by $236,000 (90%) for an operating income of $26,000 for the current year period, as a result of the significant increase in operating costs to position the segment for anticipated growth as discussed above, as well as increased maintenance and parts expense in select markets.

Operating income was adversely affected by the $883,000 operating loss of the printing equipment and maintenance segment for the period in which Delphax’s financial results were included in the Company’s consolidated financial statements.

Pretax earnings increased $ 1,806,000 (84%) to $3,945,000 for the three-month period ended December 31, 2015 compared to the prior year comparable period, primarily due to higher GGS deicer sales and profitability and the impact of the new dry-lease agreements with FedEx.

Net income attributable to Air T, Inc.

stockholders (that is, net income after adjustment to eliminate the net loss attributable to the non-controlling interests in Delphax) increased $1,277,000 (88%) to $2,726,000 for the three-month period ended December 31, 2015 compared to the prior year comparable period.

During the three-month period ended December 31, 2015, the Company recorded $1,499,000 in income tax expense, which resulted in an estimated annual tax rate of 38.0%, compared to the rate of 32.3% for the comparable prior quarter.

The estimated annual effective tax rates for both periods d iffer from the U.S.

federal statutory rate of 34% partially due to the effect of state income taxes and the federal domestic production activities deduction.

The rates for the periods ended December 31, 2015 and 2014 also include the estimated benefit for the exclusion of income for SAIC afforded under Section 831(b).

The increased estimated annual tax rate for the current year period reflects the establishment of a valuation allowance against the net loss of Delphax in the consolidation period.

Because Air T, Inc.

holds an equity interest of only 38% in Delphax, Delphax is required to continue to file a separate United States corporate tax return apart from Air T, Inc.

As such, Delphax losses cannot be used to off-set Air T, Inc.

Consolidated revenue decreased by $17.5 million or 24% to $55.8 million for the three-month period ended December 31, 2020 compared to the same quarter in the prior fiscal year.

Following is a table detailing revenue by segment, net of intercompany during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

Overnight Air Cargo $ 16,322 $ 18,706 $ (2,384) (13) %

Ground Equipment Sales 20,769 15,949 4,820 30 %

Commercial Jet Engines and Parts 18,078 38,536 (20,458) (53) %

Corporate and Other 650 109 541 496 %

$ 55,819 $ 73,300 $ (17,481) (24) %

Revenues from the air cargo segment for the three-month period ended December 31, 2020 decreased by $2.4 million (13%) compared to the third quarter of the prior fiscal year.

The decrease was principally attributable to lower maintenance revenue as a result of fewer operating aircraft due to COVID-19.

The ground equipment sales segment contributed approximately $20.8 million and $15.9 million to the Company’s revenues for the three-month periods ended December 31, 2020 and 2019 respectively, representing a $4.8 million (30%) increase in the current quarter.

The increase was primarily driven by a higher volume of truck sales to the U.S.

At December 31, 2020, the ground equipment sales segment’s order backlog was $17.3 million compared to $29.1 million at December 31, 2019.

The commercial jet engines and parts segment contributed $18.1 million of revenues in the quarter ended December 31, 2020 compared to $38.5 million in the comparable prior year quarter which is a decrease of $20.5 million (53%).

The decrease is primarily attributable to the fact that all the companies within this segment had lower engine and component sales and lease income due to the impact of COVID-19.

Following is a table detailing operating income (loss) by segment during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended December 31, 2020 Change

Overnight Air Cargo $ 490 $ 638 $ (148)

Ground Equipment Sales 4,229 1,644 2,585

Commercial Jet Engines and Parts (1,598) 3,440 (5,038)

Corporate and Other (2,053) (2,002) (51)

$ 1,068 $ 3,720 $ (2,652)

Consolidated operating income for the quarter ended December 31, 2020 was $1.1 million, a decrease of $2.7 million from operating income of $3.7 million in the comparable quarter of the prior year.

The ground equipment sales segment operating income for the quarter ended December 31, 2020 increased by $2.6 million from the prior year comparable quarter to $4.2 million.

This increase was primarily attributable to the increased sales noted in the segment revenue discussion above as well as better operating margin.

The commercial jet engines and parts segment generated an operating loss of $1.6 million in the current-year quarter compared to an operating income of $3.4 million in the prior-year quarter.

The change was primarily attributable to the decreased aircraft engines and component sales as well as lease income due to COVID-19 at the companies within this segment as explained in the segment revenue discussion above.

Following is a table detailing non-operating income (loss) during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

Other-than-temporary impairment loss on investments $ — $ (1,095) $ 1,095

Interest expense (1,172) (1,227) 55

Gain (Loss) from equity method investments 510 (282) 792

Other 1,039 81 958

$ 377 $ (2,523) $ 2,900

The Company had a net non-operating income of $0.4 million for the quarter ended December 31, 2020, compared to a non-operating loss of $2.5 million in the prior-year quarter.

The non-operating loss from Q3 2020 was principally driven by an impairment loss in the investment of Insignia of $1.1 million that did not recur in Q3 2021.

In addition, the current year-quarter also included approximately $0.7 million of investment income compared to only $17.0 thousand in the prior year-quarter.

During the three-month period ended December 31, 2020, the Company recorded $0.3 million in income tax benefit at an effective tax rate ("ETR") of (22.0)%.

The Company records income taxes using an estimated annual effective tax rate for interim reporting.

primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for the Company's captive insurance company subsidiary ("SAIC") under Section 831(b) and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the three-month period ended December 31, 2019, the Company recorded $0.6 million in income tax benefit at an ETR of 51.5%.

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2019 were the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

First nine Months of Fiscal 2021 Compared to First nine Months of Fiscal 2020

Consolidated revenue increased $26,335,000 (30%) to $113,631,000 for the nine-month period ended December 31, 2015 compared to its equivalent prior period.

Revenues in the air cargo segment were $12,323,000 (34%) higher primarily due to the impact of the new dry-lease agreement with FedEx discussed above.

Revenues in the ground equipment sales segment increased $9,764,000 (27%) due to the increase in commercial domestic deicer sales in the second and third fiscal quarters driven principally by a significant order by a major airline company received in June 2015.

The ground support services segment ’s revenues were up $3,207,000 (22%), resulting from the addition of new customers and locations over the past year.

Other consolidated revenues increased by $1,035,000 principally attributable to the inclusion of the printing equipment and maintenance segment in consolidated results due to the acquisition of interest in Delphax on November 24, 2015.

Operating expenses increased $22,825,000 for the nine-month period ended December 31, 2015 compared to its equivalent prior period.

Air cargo segment operating expenses increased $10,354,000 (29%) primarily due to the increased monthly aircraft rent under the dry-lease agreements with FedEx which became effective on June 1, 2015.

Of the segment ’s $45,555,000 of operating costs for the nine months ended December 31, 2015, $25,483,000 in costs were passed through to its air cargo customer without markup.

Ground equipment sales segment operating costs increased $6,199,000 (20%) driven primarily by the current period’s increase in the volume of deicing units sold.

Ground support services segment operating expenses increased $4,173,000 (29%) due to the same factors affecting the quarterly comparison discussed above.

General and administrative expenses increased $1,414,000 (13%) for the nine-month period ended December 31, 2015 compared to its equivalent prior period.

The increase was incurred over a variety of categories with the principal components being employee benefits and professional fees.

Other consolidated operating expenses increased by $1,918,000 primarily due to the inclusion of the printing equipment and maintenance segment in consolidation results for the nine-month period ended December 31, 2015.

Operating income for the nine-month period ended December 31, 2015 was $8,346,000, a $3,509,000 (73%) increase from the prior year comparable period.

Operating income for the nine-month period of the prior fiscal year included $1,054,781 gain on the sale of property and equipment, principally the sale of the company-owned aircraft and leased de-icing units described above.

Sale of property and equipment contributed only $51,000 to operating income in the current-year period.

The overnight air cargo segment saw a $1,969,000 (138%) increase in the operating income as a result of the same factors affecting the third quarter discussed above.

The ground equipment sales segment experienced a $3,566,000 (80%) increase in its operating income in the nine-month period ended December 31, 2015.

In addition to the increase of the number of deicers sold in the current year period, gross margin percentage for the first nine months of the current fiscal year was 26.2% compared to 22.8% for the prior year period, driven primarily by the factors affecting the third quarter profitability discussed above.

The ground support services segment saw a $966,000 (-168%) decrease in the operating income for the period, as a result of the same factors affecting the third quarter discussed above.

Operating income was adversely affected by the $883,000 operating loss of the printing equipment and maintenance segment for the period in which Delphax ’s financial results are consolidated in the Company’s financial statements.

Non-ope rating income increased $27,000 to $25,000 for the nine-month period ended December 31, 2015 principally due to interest income on investments.

Pretax earnings increased $ 3,537,000 to $8,371,000 for the nine-month period ended December 31, 2015 compared to the prior comparable period.

Net income attributable to Air T, Inc.

stockholders increased $2,444,000 (73%) to $5,784,000 for the nine-month period ended December 31, 2015 compared to the prior-year period.

During the nine-month period ended December 31, 2015, the Company recorded $2,867,000 in income tax expense, which resulted in an estimated annual tax rate of 34.2%, compared to the rate of 30.9% for the comparable prior period.

The estimated annual effective tax rates for both periods differ from the U.

federal statutory rate of 34% partially due to the effect of state income taxes and the federal domestic production activities deduction.

The rates for the periods ended December 31, 2015 and 2014 also include the estimated benefit for the exclusion of income for SAIC afforded under Section 831(b).

The increased estimated annual tax rate for the current year period reflects the establishment of a valuation allowance against the net loss of Delphax in the consolidation period.

Because Air T, Inc.

holds an equity interest of only 38% in Delphax, Delphax is required to continue to file a separate United States corporate tax return apart from Air T, Inc.

As such, Delphax losses cannot be used to off-set Air T, Inc.

Following is a table detailing revenue by segment (in thousands):

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 49,789 $ 56,771 $ (6,982) (12) %

Ground Equipment Sales 48,656 40,939 7,717 19 %

Commercial Jet Engines and Parts 28,886 72,665 (43,779) (60) %

Corporate and Other 1,063 806 257 32 %

$ 128,394 $ 171,181 $ (42,787) (25) %

Revenues from the air cargo segment for the nine months ended December 31, 2020 decreased by $7.0 million (12%) compared to the nine months ended December 31, 2019.

The decrease was principally attributable to lower maintenance revenue as a result of fewer operating aircraft due to COVID-19.

The ground equipment sales segment contributed approximately $48.7 million and $40.9 million to the Company’s revenues for the nine-month periods ended December 31, 2020 and 2019 respectively, representing a $7.7 million (19%) increase in the current nine-month period.

The increase was driven by strong sales of catering trucks during Q1 2021 and the higher volume of truck sales to the U.S.

Air Force in Q3 2021.

The commercial jet engines and parts segment contributed $28.9 million of revenues in the nine months ended December 31, 2020 compared to $72.7 million in the comparable prior year nine months.

The decrease is primarily attributable to the fact that all the companies within this segment had lower aircraft engines and component sales and lease income due to the impact of COVID-19 during the first three fiscal quarters in the current fiscal year.

Following is a table detailing operating income (loss) by segment during the nine months ended December 31, 2020 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 1,617 $ 909 $ 708

Ground Equipment Sales 7,369 4,212 3,157

Commercial Jet Engines and Parts (4,776) 6,411 (11,187)

Corporate and Other (7,091) (6,347) (744)

$ (2,881) $ 5,185 $ (8,066)

Consolidated operating loss for the nine months ended December 31, 2020 was $2.9 million compared to an operating income of $5.2 million for the comparable nine months of the prior year.

Operating income for the air cargo segment for the nine months ended December 31, 2020 increased by $0.7 million versus the prior year comparable period due primarily to more efficient labor utilization and broad-based operational improvements led by a new management team.

The ground equipment sales segment operating income increased by $3.2 million to $7.4 million in the nine-month period ended December 31, 2020 versus the prior year comparable period.

This increase was primarily attributable to the improved operating leverage achieved during the year as a result of favorable pricing and larger production runs.

The commercial jet engines and parts segment generated an operating loss of $4.8 million in the current-year nine month period compared to an operating income of $6.4 million in the prior-year nine-month period.

Following is a table detailing non-operating income (loss) during the nine months ended December 31, 2020 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Other-than-temporary impairment loss on investments $ — $ (2,305) $ 2,305

Interest expense (3,413) (4,298) 885

Gain on settlement of bankruptcy — 4,527 (4,527)

Gain (Loss) from equity method investments (546) (636) 90

Other 2,125 (75) 2,200

$ (1,834) $ (2,787) $ 953

The Company had a net non-operating loss of $1.8 million for the nine months ended December 31, 2020 compared to a net non-operating loss of $2.8 million in the prior-year nine-month period.

The difference was principally due to the prior-year's gain on settlement of bankruptcy proceedings related to Dephax Canada and UK of $4.5 million that did not recur in the current-year.

The difference was offset by the prior-year's impairment loss on the investment of Insignia of $2.3 million as well as an increase of $2.2 million in other income, driven by $1.8 million of investment income and realized gain on sale of securities in the current-year.

During the nine-month period ended December 31, 2020, the Company recorded $2.2 million in income tax benefit at an ETR of 45.9%.

The Company records income taxes using an estimated annual effective tax rate for interim reporting.

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the nine-month period ended December 31, 2019, the Company recorded $0.1 million in income tax benefit which resulted in an effective tax rate of (2.2)%.

The primary factors contributing to the difference between the federal statutory rate and the Company's effective tax rate for the nine-month period ended December 31, 2019 were related to the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are fully described in Note 1 to the condensed consolidated financial statements and in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020.

The preparation of the Company’s condensed 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.

There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended December 31, 2020.

The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being lower in the first and fourth fiscal quarters as commercial deicers are typically delivered prior to the winter season.

Other segments have typically not experienced material seasonal trends.

Liquidity and Capital Resources

As of December 31, 2015 the Company's working capital amounted to $26,111,000, a decrease of $4,314,000 compared to March 31, 2015.

As described in Note 5 of the accompanying notes to condensed consolidated financial statements, the fair value of marketable securities in Insignia were reclassified during this first quarter of the current fiscal year from current assets to non-current assets of $4,744,000.

On April 1, 2015, the Company replaced the existing $7.0 million credit line with a senior secured revolving credit facility of $20.0 million (the “Revolving Credit Facility”).

The Revolving Credit Facility includes a sublimit for issuances of letters of credit of up to $500,000.

Under the Revolving Credit Facility, each of the Company, MAC, CSA, GGS, GAS and Air T Global Leasing LLC may make borrowings.

Initially, borrowings under the Revolving Credit Facility bear interest (payable monthly) at an annual rate of one-month LIBOR plus 1.50%, although the interest rates under the Revolving Credit Facility are subject to incremental increases based on a consolidated leverage ratio.

In addition, a commitment fee accrues with respect to the unused amount of the Revolving Credit Facility at an annual rate of 0.15%.

Amounts applied to repay borrowings under the Revolving Credit Facility may be reborrowed, subject to the terms of the facility.

The Revolving Credit Facility matures on April 1, 2017.

Borrowings under the Revolving Credit Facility, together with hedging obligations, if any owing to the lender under the Revolving Credit Facility or any affiliate of such lender, are secured by a first-priority security interest in substantially all assets of the Company and the other borrowers (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing), but excluding interests in real property.

The agreement governing the Revolving Credit Facility contains affirmative and negative covenants, including covenants that restrict the ability of the Company and the other borrowers 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 their business, enter into certain operating leases, and make certain capital expenditures.

The Credit Agreement also contains financial covenants, including a minimum consolidated tangible net worth of $22.0 million, a minimum consolidated fixed charge coverage ratio of 1.35 to 1.0, a minimum consolidated asset coverage ratio of 1.75 to 1.0, and a maximum consolidated leverage ratio of 3.5 to 1.0.

The agreement governing the Revolving Credit Facility contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, certain changes of control of the Company, termination of or modification to materially reduce the scope of the services required to be provided under certain agreements with FedEx, and the occurrence of a material adverse effect upon the Company and the other borrowers as a whole.

At December 31 , 2015, aggregate outstanding borrowings under the Revolving Credit Facility was $0.

As of December 31, 2015, Delphax maintained debt facilities consisting of a $7.0 million revolving senior credit facility, subject to a borrowing base of North American accounts receivable and inventory.

The Delphax revolving senior credit facility is secured by substantially all of its North American assets, expires in November 2018, prohibits payment of cash dividends by Delphax and is subject to certain financial covenants.

The Delphax revolving senior credit facility provides for interest based upon the prime rate plus a margin (4.25% as of December 31, 2015).

As of December 31, 2015, Delphax had aggregate borrowings of $181,000 outstanding under its revolving senior credit facility.

Also, as of December 31, 2015, an additional $2,828,000 was available for borrowing by Delphax under its senior credit facility and Delphax reported that it was in compliance with the covenants for its the senior credit facility agreement.

Because the Delphax revolving credit facility prohibits the payment of cash dividends it is not a source of liquidity to Air T, Inc.

or any of its subsidiaries.

Following is a table of changes in cash flow for the respective periods ended December 31, 2015 and 2014:

As of December 31, 2020, the Company held approximately $48.8 million in cash and cash equivalents and restricted cash, $5.3 million of which related to restricted cash collateralized for the three Opportunity Zone fund investments.

The Company also held $0.7 million in restricted investments held as statutory reserve of SAIC.

The Company has approximately $5.4 million of marketable securities and an aggregate of $24.7 million in available funds under its lines of credit as of December 31, 2020.

As of December 31, 2020, the Company’s working capital amounted to $84.0 million, an increase of $53.3 million compared to March 31, 2020.

The Contrail Credit Agreement 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 of $15 million.

On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with ONB.

The material changes within the Third Amendment are:

(a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021;

and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S.

Federal Reserve.

The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020.

The loan proceeds are to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines.

The proceeds will also be used to pay down the Contrail Revolver.

The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement.

The principal terms of the Contrail Main Street Loan are:

(a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing November 24, 2021;

(b) 15% principal payments plus 15% of the amount of capitalized interest are due on November 24, 2023 and 2024, with the remainder due on the loan maturity date – November 24, 2025;

and, (d) a 2% origination fee was paid on funding of the loan.

The loan contains affirmative covenants as to cash flow coverage and tangible net worth.

The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events.

The loan is secured by a security interest in the assets of Contrail.

On December 11, 2020, AirCo 1 and PSB entered into a loan in the aggregate amount of $6.2 million for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the Fed.

The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020.

The loan proceeds were used to pay off the AirCo 1 revolving line of credit with MBT.

The principal terms of the AirCo 1 Main Street Loan are:

(a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing December 11, 2021;

(b) 15% principal payments (including any capitalized interest accrued thereon) are due on December 11, 2023, and 2024, with the remainder due on the loan maturity date – December 11, 2025;

and, (d) a 2% origination fee was paid on funding of the loan.

The loan contains an affirmative covenant relating to collateral valuation.

The loan is secured by a security interest in the assets of AirCo 1 and a pledge of AirCo’s membership interest in AirCo 1.

The revolving line of credit at Air T with MBT has a due date or expires within the next twelve months.

We are currently seeking to refinance this obligation prior to August 31, 2021;

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.

In April 2020, the Company obtained loans under the PPP, as authorized by the CARES Act, of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs.

The Company will apply to MBT for forgiveness of the PPP Loan, however, forgiveness is not fully assured.

The Company believes it is probable that the cash on hand (including that obtained from the PPP and other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, 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.

Following is a table of changes in cash flow for the nine months ended December 31, 2020 and 2019 (in thousands):

Nine Months Ended December 31,

Net Cash Provided by Operating Activities

Net Cash Used in Operating Activities (6,657) (9,691)

Net Cash Used in Investing Activities (308) (7,398)

Net Cash (Used in) Financing Activities

Net Cash Provided by Financing Activities 40,383 26,164

Effect of foreign currency exchange rates on cash and cash equivalents (164) (10)

Net (Decrease) Increase in Cash and Cash Equivalents

Cash provided by operating activities was $4,086,000 less for the nine-month period ended December 31, 2015 compared to the similar prior year period, resulting from a variety of offsetting factors.

Cash used in investing activities for the nine-month period ended December 31, 2015 was $2,000,000 more than the comparable prior year period due primarily to the purchase of marketable securities available for sale.

Cash used by financing activities was $7,837,000 more in the nine-month period ended December 31, 2015, than in the comparable prior year period due to $4,808,000 in payment on the line of credit and payment of Delphax senior credit facility for $3,042,000 in the current year quarter.

As of December 31, 2015, the Company ’s Revolving Credit Facility line of credit was paid in full and the cash borrowing under the line of credit was $0.

Net Increase in Cash and Cash Equivalents and Restricted Cash 33,254 9,065

Net cash used in operating activities was $6.7 million for the nine-month period ended December 31, 2020 compared to the net cash used in operating activities of $9.7 million in the prior year nine-month period.

During the nine months ended December 31, 2019, the Company purchased $7.0 million more engines and received them into inventory compared to the current-year period.

The cash usage was offset by $5.1 million due to a decrease in net income in the current year because of reduced operations as a result of COVID-19.

Net cash used in investing activities for the nine-month period ended December 31, 2020 was $0.3 million compared to net cash used in investing activities of $7.4 million in the the prior-year period.

Cash was used in the prior-year period primarily to purchase engines on lease and to invest in unconsolidated entities.

The cash usage was partially offset by proceeds from sale of engines on lease and the sale of GAS.

Net cash provided by financing activities for the nine-month period ended December 31, 2020 was $40.4 million compared to net cash provided by financing activities of $26.2 million in the prior-year period.

The increase was primarily driven by higher net cash proceeds from term loans.

Impact of Inflation

The Company believes that inflation has not had a material effect on its operations, because increased costs to date have generally been passed on to its customers.

Under the terms of the new dry-lease agreements, certain cost components of the air cargo segment ’s operations consisting principally of fuel, landing fees, third-party maintenance, parts and certain other direct operating costs, and certain maintenance costs are reimbursed, without markup, by the customer, but certain operational crew costs are borne by the Company and are not reimbursed.

Significant increases in inflation rates could have a material impact on future revenue and operating income.

Foreign Currency Exchange

The Company ’s consolidated financial statements include Delphax.

Delphax has subsidiaries in Canada, the United Kingdom, and France and, accordingly, some of the Company’s consolidated assets and liabilities are maintained in foreign currency environments.

Likewise, a portion of the Company’s consolidated revenues and operating costs are generated in foreign currencies.

The Company’s consolidated financial results are therefore subject to exchange rate fluctuations, which vary based on business volumes and currency market conditions.

These exchange rate fluctuations will cause foreign exchange gains and losses, which could be significant to consolidated results of operations depending on currency market conditions and the timing and levels of business activities in relevant foreign markets.

The Company believes that inflation has not had a material effect on its operations, because increased costs to date have generally been passed on to customers.

Under the terms of its overnight air cargo business contracts the major cost components of this business’ operations, consist principally of fuel, and certain other direct operating costs, and certain maintenance costs that are reimbursed by its customer.

Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

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 $0.6 million for the three months ended

December 31, 2020 and 2019.

Depreciation expense for leased engines totaled $1.7 million and $3.6 million for the nine months ended December 31, 2020 and 2019, respectively.

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 from continuing operations, the most directly comparable amounts reported under GAAP.

The tables below provide a reconciliation of operating income from continuing operations to Adjusted EBITDA and Adjusted EBITDA by segment for the three and nine months ended December 31, 2020 and 2019 (in thousands):

Three months ended Nine months ended

12/31/2020 12/31/2019 12/31/2020 12/31/2019

Operating income from continuing operations $ 1,068 $ 3,720 $ (2,881) $ 5,185

Depreciation and amortization (excluding leased engines depreciation) 259 325 917 971

Asset impairment, restructuring or impairment charges — 4 664 18

(Gains)/Losses on disposition of assets 5 (23) 1 (26)

Security issuance expenses — 50 — 319

Adjusted EBITDA $ 1,332 $ 4,076 $ (1,299) $ 6,467

Included in the asset impairment, restructuring or impairment charges for the nine months ended December 31, 2020 was a write-down of $0.5 million on the commercial jet engines and parts segment's inventories due to a management decision to monetize two engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds.

Three months ended Nine months ended

12/31/2020 12/31/2019 12/31/2020 12/31/2019

Overnight Air Cargo $ 506 $ 656 $ 1,672 $ 965

Ground Equipment Sales 4,267 1,723 7,521 4,408

Commercial Jet Engines and Parts (1,466) 3,541 (3,857) 6,712

Corporate and Other (1,975) (1,844) (6,635) (5,618)

Adjusted EBITDA $ 1,332 $ 4,076 $ (1,299) $ 6,467

Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

The Company is exposed to various risks, including interest rate risk.

As interest rates are projected to increase and can be volatile, the Company has designated a risk management policy which provides for the use of derivative instruments to provide protection against rising interest rates on variable rate debt.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q/A

Item 2. Management’s Discussion and Analysis