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Item 7. Management’s Discussion and Analysis

2021-06-25 compared with 2020-06-26 · 159 added, 122 removed, 85 unchanged (77% of the section changed)

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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 five industry segments:

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;

• 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 engines and parts sales;

procurement services and overhaul and repair services to airlines and commercial aircraft companies;

• Printing equipment and maintenance, which designs, manufactures and sells advanced digital print production equipment and provides maintenance services to commercial customers;

• Corporate and other, which acts as the capital allocator and resource for other segments.

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.

On September 30, 2019, we completed the sale of 100% of the equity ownership in GAS, which previously constituted the ground support services segment.

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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.

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

Forward Looking Statements

4 unchanged sentences

• Economic conditions in the Company’s markets;

• The risk that contracts with FedEx could be terminated or adversely modified in connection with any renewal;

• The risk that the number of aircraft operated for FedEx will be further reduced;

• The risk that the United States Air Force will defer significant orders for deicing equipment under its contracts with GGS;

• 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 new commercial and military equipment and services;

• Market acceptance of the Company’s commercial and military equipment and services;

• Competition from other providers of similar equipment and services;

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• Mild winter weather conditions reducing the demand for deicing equipment;

• The Company's ability to meet debt service covenants and to refinance existing debt obligations;

• Market acceptance and operational success of the Company’s new aircraft asset management business and related new aircraft capital joint venture;

• The length and severity of the COVID-19 pandemic.

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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 are likely to decrease, we expect that many of our businesses will generate substantially reduced operating cash flow and may operate at a loss starting in the first quarter of fiscal 2021.

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

development and 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.

Due to insignificance, the Company combined the previous printing and equipment segment into corporate and other.

We have presented prior periods based on the current presentation.

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 implemented measures to attempt to limit the impact of COVID-19 but we still experienced a substantial number of disruptions, and we experienced and continue to experience 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 flow and may operate at a loss during at least the first half of fiscal 2022.

We expect that the impact of COVID-19 will continue to some extent.

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

Fiscal 2021 vs.

Consolidated revenue increased by $21.3 million (10%) to $236.8 million for the fiscal year ended March 31, 2020 compared to the prior fiscal year.

Following is a table detailing revenues (after elimination of intercompany transactions):

Consolidated revenue decreased by $61.7 million (26%) to $175.1 million for the fiscal year ended March 31, 2021 compared to the prior fiscal year.

Following is a table detailing revenue (after elimination of intercompany transactions), in thousands:

Year ended March 31, Change

(In thousands) 2020 2019

Overnight Air Cargo $ 66,251 $ 75,275 $ (9,024) (12) %

Ground Equipment Sales 60,679 59,156 1,523 3 %

Printing Equipment and Maintenance 306 655 (349) (53) %

Commercial Jet Engines and Parts 46,793 101,284 (54,491) (54) %

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Total $ 175,121 $ 236,785 $ (61,664) (26) %

Revenues from the air cargo segment increased by $2.3 million (3%) compared to prior fiscal year, principally attributable to higher sales to maintenance customers outside of FedEx.

Revenues from the air cargo segment decreased by $9.0 million (12%) compared to the prior fiscal year, principally attributable to lower sales to maintenance customers outside of FedEx as a result of COVID-19 and lower admin fees from FedEx due to fewer operating aircraft (66 aircraft in fiscal 2021 compared to 69 aircraft in fiscal 2020).

Pass-through costs under the dry-lease agreements with FedEx totaled $19.9 million and $23.7 million for the years ended March 31, 2021 and 2020, respectively.

The ground equipment sales segment contributed approximately $60.7 million and $59.2 million to the Company’s revenues for the fiscal periods ended March 31, 2021 and 2020, respectively, representing a $1.5 million (3%) increase in the current year.

The increase was primarily driven by an increase in sales of commercial and military deicers as a result of increased market requirements and more business.

At March 31, 2020, the ground equipment sales segment’s order backlog was $51.5 million as compared to $26.1 million at March 31, 2019.

The commercial jet engines and parts segment contributed $101.3 million of revenues in fiscal year ended March 31, 2020 compared to $94.0 million in the prior fiscal year which is an increase of $7.3 million (8%).

The primary driver of the increase in revenues was Contrail trading two more aircraft in the current year compared to the prior year.

Following is a table detailing operating income by segment, net of intercompany during Fiscal 2020 and Fiscal 2019 (in thousands):

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

At March 31, 2021, the ground equipment sales segment’s order backlog was $10.3 million compared to $51.5 million at March 31, 2020.

The commercial jet engines and parts segment contributed $46.8 million of revenues in fiscal year ended March 31, 2021 compared to $101.3 million in the prior fiscal year which is a decrease of $54.5 million (54%).

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 on the aviation industry as a whole.

Following is a table detailing operating (loss) income by segment, net of intercompany during Fiscal 2021 and Fiscal 2020 (in thousands):

Year ended March 31, Change

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Commercial Jet Engines and Parts (10,882) 8,322 (19,204)

Printing Equipment and Maintenance (1,596) (1,403) (193) (14) %

Corporate and Other (9,419) (9,082) (337)

Total $ (9,175) $ 7,291 $ (16,466)

Consolidated operating income for the fiscal year ended March 31, 2020 decreased by $2.0 million (22%) to $7.3 million compared to operating income of $9.3 million in the prior fiscal year.

Operating income for the air cargo segment decreased by $1.2 million (61%) in the current fiscal year, due primarily to having fewer aircraft compared to the prior fiscal year (69 aircraft in fiscal 2020 compared to 79 aircraft in fiscal 2019) from the loss of the Caribbean service area.

Consolidated operating loss for the fiscal year ended March 31, 2021 was $9.2 million compared to consolidated operating income of $7.3 million in the prior fiscal year.

Operating income for the air cargo segment increased by $1.4 million in the current fiscal year, due primarily to having lower pilot and staff salaries as well as contract labor.

The ground equipment sales segment operating income increased by $1.6 million from $7.3 million in the prior year to $8.9 million in the current year.

This increase was primarily attributable to additional sales and the fact that sales in the current

year contained higher margin orders when compared to the prior year sales that included broader product mix with lower margin orders.

Operating income of the commercial jet engines and parts segment declined by $4.0 million to $8.3 million from $12.3 million in the prior year due to the segment incurring higher operational costs, which consisted mainly of material costs and legal fees on arranging and documenting aircraft and jet engine deals.

The operating loss in the corporate and other segment increased to 7.5 million from $6.9 million in the prior year.

The increase is primarily attributable to significant professional fees and legal spend on complex transactions such as the disposition of GAS.

This increase was primarily attributable to the increased sales noted in the segment revenue discussion above as well as better operating margin as a result of having a more profitable mix of products sold.

Operating loss of the commercial jet engines and parts segment was $10.9 million compared to operating income of $8.3 million in the prior year.

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

This segment's current year operating loss was also further increased due to inventory write-down of $6.4 million.

Following is a table detailing consolidated non-operating expenses, net of intercompany during Fiscal 2021 and Fiscal 2020 (in thousands):

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

Bargain purchase acquisition gain 49 1,984 (1,935) (98) %

Income (loss) from equity method investments (910) 341 (1,251) n/m

Loss from equity method investments (723) (910) 187

Other 2,741 (1,287) 4,028

$ (2,606) $ (4,667) $ 2,061

The Company had net non-operating expenses of $4.7 million for the year ended March 31, 2020, an increase of $1.3 million from $3.4 million in the prior year, principally due to an increase in interest expense of $1.3 million and investment losses of $1.3 million.

Additionally, the Company had a bargain purchase gain of $2.0 million in connection with the acquisition of Worthington in prior fiscal year, which contributed $1.9 million to the overall year over year increase in net non-operating expenses.

All of these increases were partially offset by the by the $4.5 million gain on settlement of bankruptcy related to Dephax Canada and UK.

The Company had net non-operating expenses of $2.6 million for the year ended March 31, 2021, a decrease of $2.1 million from $4.7 million in the prior year.

The decrease was primarily due to the prior-year's impairment loss on the investment of Insignia of $2.3 million that did not recur in the current-year as well as an increase of $4.0 million in other income, driven by $2.1 million of investment income and realized gain on sale of securities in the current-year.

The decrease was partially offset by 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.

During the year ended March 31, 2021, the Company recorded $3.4 million of income tax benefit related to continuing operations, which yielded an effective rate of 28.8%.

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, 2021 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 Aviation Support, LLC, state income tax expense, the rate differential for the NOL carryback claim 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.

During the fiscal year ended March 31, 2020, the Company recorded $0.5 million of income tax benefit related to continuing operations at an effective tax rate of -20.7%.

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, 2020 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 Aviation Support, LLC as well as state income tax expense, and changes in the valuation allowance.

The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and attribute reduction incurred by Delphax, Inc related to cancellation of debt income and dissolution of Canadian and UK subsidiaries.

During the fiscal year ended March 31, 2019, the Company recorded $1.8 million of income tax expense related to continuing operations at an effective tax rate of 29.5%.

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, 2019 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail Aviation Support, LLC as well as state income tax expense, and changes in the valuation allowance.

The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and losses incurred by Delphax.

The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and attribute reduction incurred by Delphax related to cancellation of debt income and dissolution of its Canadian and UK subsidiaries.

Market Outlook

During the last quarter of fiscal 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States.

The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19.

The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, there have been international mandates and

mandates in the United States from federal, state and local authorities instituting quarantines and stay-at-home orders, closing schools, and instituting restrictions on travel and/or limiting operations of non-essential offices and retail centers.

Such actions are increasing rates of unemployment and adversely impacting many industries, with the airline and transportation industries being particularly adversely affected.

The airline and transportation industry is closely related to the U.S.

general economic cycle because business and leisure travelers are directly affected by economic conditions that drive demand.

The airline and transportation industry is experiencing a sharp decline in travel demand, and thus directly impacting the Company's commercial aircraft, jet engines and parts industry, due to the impact of the COVID-19 pandemic and the related governmental restrictions instituted to slow the spread of the virus.

Though certain states are beginning to loosen certain aspects of these restrictions, all of the markets in which our business units are located are subject to some form of restrictions on business operations.

As a result of these mandatory restrictions as well as voluntary shutdowns, 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.

The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.

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

The rapid development and 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 the performance of our businesses and investments.

The full extent of the impact and effects of COVID-19 will depend on future developments which are highly uncertain and cannot be predicted with confidence, including, among other factors, the duration, severity and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.

In addition, if in the future there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and our investments may be subject to similar risks and uncertainties as posed by COVID-19.

COVID-19 and its impact on the 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 implemented measures to attempt to limit the impact of COVID-19 but we still experienced a substantial number of disruptions, and a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods.

We currently expect that many of our businesses may continue to generate reduced operating cash flow and may operate at a loss during at least the first half of fiscal 2022.

We expect that these impacts will continue to some extent.

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.

The outbreak of the COVID-19 virus in the United States and elsewhere created considerable instability and disruption in the U.S.

and world economies.

Uncertainty still surrounds COVID-19 and its potential effects, as well as the extent and effectiveness of any responses taken on a national and local level.

Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures and other restrictions on travel, congregation and business operations resulted in significant negative impacts in the United States and world economies and in relation to our business.

The long-term impact of COVID-19 on the U.S.

and world economies remains uncertain and the duration and scope of the world-wide economic downturn cannot currently be predicted.

The extent to which our financial condition, results of operations and overall value will continue to be affected by the COVID-19 pandemic will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic, containment and the effectiveness of vaccine measures, among others.

Liquidity and Capital Resources

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 once a year at March 31, including but not limited to a negative covenant requiring a debt service coverage ratio of 1.25.

Contrail’s Credit Agreement with Old National Bank (the Contrail 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 quarterly, including but not limited to a negative covenant requiring a debt service coverage ratio of 1.25.

As of March 31, 2020, both the Company and Contrail were in compliance with all financial covenants.

As of March 31, 2020, the Company held approximately $15.6 million in cash and cash equivalents and restricted cash, $9.6 million of which related to restricted cash collateralized for the three Opportunity Zone fund investments.

The Company also held $1.1 million in restricted investments held as statutory reserve of SAIC and $68,981 of restricted investments pledged to secure SAIC’s participation in certain reinsurance pools.

As of March 31, 2021, the Company held approximately $15.9 million in cash and cash equivalents and restricted cash, $4.7 million of which related to restricted cash collateralized for three Opportunity Zone fund investments.

The Company also held $1.5 million in restricted investments held as statutory reserve of SAIC.

The Company also has approximately $1.4 million of marketable securities.

As of March 31, 2020, the Company’s working capital amounted to $30.7 million, an increase of $12.2 million compared to March 31, 2019, primarily driven by an increase in inventory of $33.2 million offset by an increase in short-term borrowings of $17.9 million.

As of March 31, 2021, the Company’s working capital amounted to $77.6 million, an increase of $46.9 million compared to March 31, 2020, primarily driven by a decrease in short-term borrowings of $37.0 million.

See Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report for a summary of “Financing Arrangements” as of March 31, 2021.

In addition, the exercise of warrants ("Warrants") to purchase trust preferred capital securities ("TruPs") issued on June 10, 2019 has generated cash proceeds of $8.5 million during the year ended March 31, 2020, which is disclosed in the financing section on our consolidated statements of cash flows.

On February 25, 2020, Air T, Inc.

and MBT entered into Amendment No.

3 to the Amended and Restated Credit Agreement (the “Third Amendment”).

The Third Amendment extends the termination date for the revolving credit commitment and the supplemental revolving credit commitment to the earlier of August 31, 2021, the date the Company reduces the respective commitment to zero or termination due to an event of default.

Thirteen of the Company’s subsidiaries continue to, jointly and severally, guaranty the full and prompt payment and performance of all debts and obligations of the Company to MBT and continue to grant a first priority security interest in each subsidiary’s assets to MBT as collateral for such obligations.

On February 25, 2020, AirCo 1, LLC, entered into Amendment No.

1 to the Loan Agreement with MBT (the “First Amendment”).

The First Amendment extends the stated termination date of the revolving facility to August 31, 2021.

We are closely monitoring the impact of the COVID-19 pandemic on our business and continue to assess the situation at our businesses and operations on a daily basis.

Each of our businesses remains open for business.

However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we continue to experience a reduction in demand for commercial aircraft, jet engines and parts which have negatively could materially and adversely affect the financial performance and value of our inventory.

All of the markets in which our businesses are located are subject to some level of restrictions on business operations.

For the months of April and May, revenues for the Overnight Air Cargo, Ground Equipment Sales and Commercial jet Engines and Parts segments were down 14%, 26% and 67%, respectively.

We expect that the unprecedented reduction in demand for air travel and the resulting extreme financial pressure put on commercial aviation businesses will negatively impact our consolidated cash flow from operations in the first quarter of 2021.

However, the continuing impact of COVID-19 on future quarters cannot be determined with certainty at this time.

Even after travel advisories and restrictions are modified or lifted, demand for commercial aircraft, jet engines and parts may remain weak for a significant length of time as demand for travel may still remain low, which may be a function of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses.

We cannot predict if and when the demand for our commercial aircraft, jet engines and parts will return to pre-outbreak levels of volume and pricing.

Due to the impact of COVID-19 on its business, as of March 31, 2020, Contrail forecasted a probable non-compliance with its financial covenants for the quarter ended September 30, 2020.

Non-compliance with a debt covenant that is not subsequently cured gives Old National Bank (“ONB”) the right to declare the 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.

As of the issuance date of this report, Contrail is in discussion with ONB to seek a waiver to its financial covenants, and/or secure alternative financing to avoid an event of non-compliance.

With respect to alternative financing, Contrail and ONB intend to access debt financing under the Main Street (“Main Street”) Lending Program, established by the Federal Reserve in response to economic uncertainty caused by the COVID-19 pandemic.

Main Street loans are intended to provide additional credit to companies that were in sound condition prior to the onset of the COVID-19 pandemic.

While Contrail and ONB believe that Contrail qualifies under the criteria set forth under the Main Street Lending Program, there is no assurance that Contrail will obtain credit under the Main Street program sufficient to refinance the amount of debt outstanding with ONB.

The obligations of Contrail under the Contrail Credit Agreement with ONB ("Contrail Credit Agreement") are also guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection.

The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured once a year at 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 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation.

As of March 31, 2021, the Company and AirCo 1 were in compliance with all financial covenants.

The Contrail Credit Agreement (the Contrail debt in Note 13 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 $15 million.

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

The material changes within the Third Amendment were:

(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.

Due primarily to the impact of COVID-19 on its business, as of March 31, 2021, Contrail was not in compliance with maintaining the minimum TNW of $15 million.

As of the issuance date of this report, pursuant to the existing terms of the Contrail Credit Agreement, the Company and the non-controlling interest owner of Contrail made total capital contributions to Contrail in the amount of $1.4 million, which had the effect of curing this financial covenant non-compliance.

Contrail and ONB are also in discussions to reduce the minimum TNW to $8 million, in exchange for certain amendments to its credit agreement, including renewing its revolving line of credit at a lower amount than the current agreement.

However, there is no assurance that Contrail will be successful in reducing the minimum TNW financial covenant.

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.

In the possible absence of Contrail’s operation as a going concern, the Company believes it, along with the rest of its businesses, will continue to operate as a going concern, given the maximum guarantee of Contrail’s obligations of $1.6 million.

We have taken several measures intended to help maintain financial flexibility.

Subsequent to March 31, 2020, we obtained loans totaling approximately $8.2 million under the Paycheck Protection Program (the “PPP”) to help pay for payroll costs, mortgage interest, rent or utility costs related to our businesses.

Based on information currently available and our current projected operating cash flow needs and interest and debt repayments, we believe we have adequate cash for at least the next twelve months to fund our business operations, meet all of our financial commitments, and other obligations.

However, we cannot predict whether future developments related to the COVID-19 pandemic will adversely affect our liquidity position.

Following is a table of changes in cash flow for the respective years ended March 31, 2020 and 2019 (in thousands):

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 Fed").

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

The proceeds were used to pay down the Contrail Revolver.

The loan proceeds are also 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 indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement.

The principal terms of the Contrail Main Street Loan are detailed in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

On December 11, 2020, AirCo 1 and Park State Bank ("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 Term Loan - PSB are detailed in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

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 Payroll Protection Program ("PPP loan"), as authorized by the CARES Act, of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs.

The Company has applied to MBT for forgiveness of the PPP Loan;

however, forgiveness is not fully assured.

As mentioned in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, in 2016, Contrail Aviation 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 Aviation and its current Chief Executive Officer.

The Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail Aviation commencing on the fifth anniversary of the acquisition, which is on July 18, 2021.

As of the date of issuance, neither the Seller nor Air T has indicated the intent to exercise its put and call options on July 18, 2021.

If either side were to exercise its option, the Company anticipates that the price would approximate the fair value of the Redeemable Non-Controlling Interest, as determined on the transaction date, based on the methodology in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

The Company currently expects that it would fund any required payment from cash provided by operations.

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 from continuing operations for the respective years ended March 31, 2021 and 2020 (in thousands):

Year Ended March 31,

2021 2020 Change

Net Cash Provided by (Used in) Operating Activities $ (26,231) $ 22,356 $ (48,587)

Net Cash Used in Investing Activities (11,568) (22,853) 11,285

Net Cash Used in Operating Activities $ (1,823) $ (26,231) $ 24,408

Net Cash Provided by (Used in) Investing Activities 2,516 (11,568) 14,084

Net Cash Provided by Financing Activities 71 19,240 (19,169)

Effect of foreign currency exchange rates (412) 260 (672)

Net Increase in Cash and Cash Equivalents and Restricted Cash $ (18,299) $ 9,145 $ (27,444)

Cash used in operating activities was $26.2 million in fiscal year 2020 compared to cash provided by operating activities of $22.4 million in fiscal year 2019.

Cash used in operating activities in fiscal year 2020 increased due to additional purchases of inventory.

Cash used in investing activities for fiscal year 2020 was $11.6 million compared to cash used in investing activities for the prior fiscal year of $22.9 million.

There was 11.3 million less cash used in investing activities in fiscal year 2020 primarily because the Company received $26.5 million more of proceeds from sale of assets on lease or held for lease.

Cash provided by financing activities for fiscal year 2020 was $9.7 million more compared to the prior fiscal year.

This was primarily due to increased net proceeds from term loans and lines of credit in addition to proceeds received from the exercise of warrants.

Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash $ 352 $ (18,299) $ 18,651

Cash used in operating activities was $1.8 million in fiscal year 2021 compared to cash used in operating activities of $26.2 million in fiscal year 2020.

During fiscal year 2020, the Company's purchase of engines and components received into inventory exceeded amounts spent in fiscal year 2021 by $23.7 million.

Further, more cash was collected this year compared to the prior year as accounts receivable decreased by $6.6 million.

The decrease in cash usage was offset by a decrease in net income of $11.6 million due to reduced operations as a result of COVID-19.

Cash provided by investing activities for fiscal year 2021 was $2.5 million compared to cash used in investing activities for the prior fiscal year of $11.6 million.

This difference was primarily driven by a net decrease of $32.7 million in capital expenditures, partially offset by $22.5 million less proceeds from sale of assets on lease in fiscal year 2021 compared to fiscal year 2020.

Cash provided by financing activities for fiscal year 2021 was $19.2 million less compared to the prior fiscal year.

This was primarily due to decreased net proceeds from lines of credit of $65.9 million, offset by increased net proceeds from term loans of $51.7 million.

Off-Balance Sheet Arrangements

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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 its operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed by its customer.

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.

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 are not susceptible to material seasonal trends.

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 $1.9 million and $4.4 million for the fiscal year ended March 31, 2021 and 2020.

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 table below provides a reconciliation of operating income from continuing operations to Adjusted EBITDA for the fiscal year ended March 31, 2021 and 2020 (in thousands):

Twelve Months Ended

March 31, 2021 March 31, 2020

Operating (loss) income from continuing operations $ (9,175) $ 7,291

Depreciation and amortization (excluding leased engines depreciation) 1,231 1,329

Asset impairment, restructuring or impairment charges 6,592 18

Gain on sale of property and equipment (10) (37)

Security issuance expenses 32 363

Adjusted EBITDA $ (1,330) $ 8,964

Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2021 was a write-down of $6.4 million on the commercial jet engines and parts segment's inventory.

Of the total write-down, $0.5 million was driven by a management decision to monetize two engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds during the quarter ended September 30, 2020.

The remaining write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2021, 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.

The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2021 and 2020 (in thousands):

Twelve Months Ended

March 31, 2021 March 31, 2020

Overnight Air Cargo $ 2,248 $ 821

Ground Equipment Sales 9,132 7,588

Commercial Jet Engines and Parts (3,933) 8,718

Corporate and Other (8,777) (8,163)

Adjusted EBITDA $ (1,330) $ 8,964

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.

Critical Accounting Policies and Estimates.

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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.

Variable Interest Entities .

In accordance with applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which we have a variable interest is a variable interest entity.

There are various estimates and judgments in our analysis to determine if we must consolidate a variable interest entity as its primary beneficiary.

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 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.

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Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic 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 .

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Additionally, there are also significant estimates made in the valuation of the redeemable non-controlling interest.

The fair value of the 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.

Quantitative and Qualitative Disclosures about Market Risk.

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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-K

Item 7. Management’s Discussion and Analysis