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Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-02-14 · 79 added, 137 removed, 101 unchanged (68% of the section changed)

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This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, March 31, 2021, to and including December 31, 2021 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, March 31, 2022, to and including June 30, 2022 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

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• 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.

Further, Corporate and other also comprises insignificant businesses and business interests that do not pertain to other reportable segments.

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

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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 continue to operate at a loss from time to time during the remainder of fiscal 2022 and beyond.

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 fiscal 2023.

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 businesses in particular, and, as a result, present material uncertainty and risk with respect to us and our results of operations.

Third Quarter Fiscal 2022 Compared to Third Quarter Fiscal 2021

Consolidated revenue for the three-month period ended December 31, 2021 decreased by $10.4 million (19%) 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, 2021 compared to the same quarter in the prior fiscal year (in thousands):

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.

First Quarter Fiscal 2023 Compared to First Quarter Fiscal 2022

Consolidated revenue for the three-month period ended June 30, 2022 increased by $13.9 million (38%) 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 June 30, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Overnight Air Cargo $ 20,564 $ 18,851 $ 1,713 9 %

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$ 50,862 $ 36,968 $ 13,894 38 %

Revenues from the air cargo segment for the three-month period ended December 31, 2021 increased by $1.9 million (12%) compared to the third quarter of the prior fiscal year.

Revenues from the air cargo segment for the three-month period ended June 30, 2022 increased by $1,713 (9%) compared to the first quarter of the prior fiscal year.

The increase was principally attributable to higher administrative fees and maintenance labor revenue from FedEx.

The ground equipment sales segment contributed approximately $15.2 million and $20.8 million to the Company’s revenues for the three-month periods ended December 31, 2021 and 2020 respectively, representing a $5.5 million (27%) decrease in the current quarter.

The decrease was primarily driven by lower sales volume of deicing trucks this quarter due to the ongoing effects of COVID-19 compared to prior year comparable quarter.

At December 31, 2021, the ground equipment sales segment’s order backlog was $3.7 million compared to $17.3 million at December 31, 2020.

Finished Goods inventory increased to $8.7 million as of December 31, 2021 from $1.8 million as of December 31, 2020, as we added additional trucks ready for sale to capitalize on opportunistic sales that may arise as customers continue to recover from the impacts of the pandemic.

The commercial jet engines and parts segment contributed $11.4 million of revenues in the quarter ended December 31, 2021 compared to $18.1 million in the comparable prior year quarter, which is a decrease of $6.7 million (37%).

The decrease was primarily driven by the fact that Contrail had 3 asset sales with no profit margin in the prior-year quarter that did not recur in the current-year quarter.

Following is a table detailing operating income (loss) by segment during the three months ended December 31, 2021 compared to the same quarter in the prior fiscal year (in thousands):

The ground equipment sales segment contributed approximately $5.8 million and $8.2 million to the Company’s revenues for the three-month periods ended June 30, 2022 and 2021 respectively, representing a $2.4 million (29%) decrease in the current quarter.

The decrease was primarily driven by lower sales volume of military deicing trucks this quarter compared to prior year comparable quarter.

At June 30, 2022, the ground equipment sales segment’s order backlog was $17.2 million compared to $7.1 million at June 30, 2021.

Finished Goods inventory increased to $9.1 million as of June 30, 2022 from $7.3 million as of June 30, 2021, as we added additional trucks ready for sale to capitalize on opportunistic sales that may arise as customers continue to recover from the impacts of the pandemic.

The commercial jet engines and parts segment contributed $22.9 million of revenues in the quarter ended June 30, 2022 compared to $9.6 million in the comparable prior year quarter, which is an increase of $13.3 million (138%).

The increase was primarily driven by higher component part sales across all companies within the segment and engine sales at AirCo1 that did not occur in the same quarter in the prior fiscal year.

Revenues from the corporate and other segment for the three-month period ended June 30, 2022 increased by $1.3 million (377%) compared to the first quarter of the prior fiscal year.

The increase was primarily attributable to the acquisitions mentioned in Note 2 of the Notes to Condensed Consolidated Financial Statements of this report.

Following is a table detailing operating income (loss) by segment during the three months ended June 30, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Overnight Air Cargo $ 1,077 $ 732 $ 345

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$ 834 $ (4) $ 838

Consolidated operating income for the quarter ended December 31, 2021 was $25.0 thousand, compared to operating income of $1.1 million in the comparable quarter of the prior year.

The air cargo segment's operating income for the three-month period ended December 31, 2021 was relatively flat compared to the third quarter of the prior fiscal year.

The ground equipment sales segment's operating income for the quarter ended December 31, 2021 decreased by $2.8 million from the prior year comparable quarter to $1.5 million.

Consolidated operating income for the quarter ended June 30, 2022 was $0.8 million, compared to an operating loss of $4.0 thousand in the comparable quarter of the prior year.

The air cargo segment's operating income for the three-month period ended June 30, 2022 was $1.1 million compared to operating income of $0.7 million the first quarter of the prior fiscal year due primarily to having higher segment revenues as described above, offset by higher pilot and staff salaries.

The ground equipment sales segment's operating income for the quarter ended June 30, 2022 decreased by $1.3 million from the prior year comparable quarter to $0.1 million.

This decrease was primarily attributable to the decreased sales noted in the segment revenue discussion above.

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The change was primarily attributable to the increased component sales at the companies within this segment.

The corporate and other segment's operating loss was relatively flat this quarter compared to prior year's comparable quarter.

Following is a table detailing non-operating income (expense) during the three months ended December 31, 2021 compared to the same quarter in the prior fiscal year (in thousands):

The corporate and other segment's operating loss increased by $1.5 million to $3.5 million from the prior-year quarter loss of $1.9 million primarily driven by higher benefits cost in the current-year quarter.

Following is a table detailing non-operating income (expense) during the three months ended June 30, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Interest expense $ (1,822) $ (939) $ (883)

Income (Loss) from equity method investments 99 510 (411)

Other-than-temporary impairment loss on investments (348) — (348)

Income from equity method investments 532 83 449

Other (154) 1,182 (1,336)

$ (1,444) $ 326 $ (1,770)

The Company had a net non-operating loss of $1.5 million during the quarter ended December 31, 2021, compared to net non-operating income of $0.4 million in the prior-year quarter.

In the third quarter 2020, the Company recorded $0.5 million of net income from our equity investments whereas in the current quarter, we recorded $0.1 million of net income pick-up.

In addition, during the current-year quarter, the Company also recorded an impairment loss of $0.3 million on the equity investment of CCI.

Also in the current-year quarter, the Company recorded $1.0 million of investment loss driven by decreases in the fair value of our investments, which was reflected in the change in the Other non-operating income (expense).

During the three-month period ended December 31, 2021, the Company recorded $0.3 million in income tax benefit at an effective tax rate ("ETR") of 19.2%.

The Company had a net non-operating loss of $1.4 million during the quarter ended June 30, 2022, compared to net non-operating income of $0.3 million in the prior-year quarter.

In current year quarter, the Company had increased interest expense due to the increased issuance of the Company's Trust Preferred securities as well as an increased debt level at Contrail.

In the first quarter 2021, the Company recorded a gain of $0.5 million on the liquidation of Delphax France, a subsidiary of Delphax Technologies, Inc.

Also in the current-year quarter, the Company recorded $0.1 million of investment loss driven by decreases in the fair value of our investments compared to prior-year quarter investment gain of $0.3 million.

During the three-month period ended June 30, 2022, the Company recorded $0.2 million in income tax expense at an effective tax rate ("ETR") of (31.5)%.

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 three-month period ended December 31, 2021 were the change in valuation allowance related to the Company's subsidiaries in the corporate and other segment, Delphax Solutions, Inc.

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 June 30, 2022 were the change in valuation allowance related to the Company's subsidiaries in the corporate and other segment, Delphax Solutions, Inc.

and Delphax Technologies, Inc.

(collectively known as "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 the Company's 79%-owned subsidiary ("Contrail").

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

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, 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.

First Nine Months of Fiscal 2022 Compared to First Nine Months of Fiscal 2021

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

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 55,946 $ 49,789 $ 6,157 12 %

Ground Equipment Sales 32,603 48,656 (16,053) (33) %

Commercial Jet Engines and Parts 35,902 28,886 7,016 24 %

Corporate and Other 1,189 1,063 126 12 %

$ 125,640 $ 128,394 $ (2,754) (2) %

Revenues from the air cargo segment for the nine months ended December 31, 2021 increased by $6.2 million (12%) compared to the nine months ended December 31, 2020.

The increase was principally attributable to higher pass-through revenue and maintenance

labor revenue from FedEx as a result of increased business activity versus the prior year quarter as well as higher maintenance revenue from customers outside of FedEx.

The ground equipment sales segment contributed approximately $32.6 million and $48.7 million to the Company’s revenues for the nine-month periods ended December 31, 2021 and 2020 respectively, representing a $16.1 million (33)% decrease in the current nine-month period.

The decrease was primarily driven by a lower sales volume of deicing trucks due to the ongoing effects of COVID-19 in the current year compared to prior year as well as higher numbers of trucks sold to the U.S.

Air Force in the prior nine-month period.

The commercial jet engines and parts segment contributed $35.9 million of revenues in the nine months ended December 31, 2021 compared to $28.9 million in the comparable prior year nine months.

The increase is primarily attributable to the fact that all the companies within this segment had higher component sales as the aviation industry started to see more activity in the current year as COVID-19 related restrictions continued to loosen.

Following is a table detailing operating income (loss) by segment during the nine months ended December 31, 2021 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 2,063 $ 1,617 $ 446

Ground Equipment Sales 2,929 7,369 (4,440)

Commercial Jet Engines and Parts 2,000 (4,776) 6,776

Corporate and Other (6,268) (7,091) 823

$ 724 $ (2,881) $ 3,605

Consolidated operating income for the nine months ended December 31, 2021 was $0.7 million compared to an operating loss of $2.9 million for the comparable nine months of the prior year.

Operating income for the air cargo segment for the nine months ended December 31, 2021 increased by $0.4 million versus the prior year comparable period primarily due to the revenue increase noted above.

The ground equipment sales segment's operating income decreased by $4.4 million to $2.9 million in the nine-month period ended December 31, 2021 versus the prior year comparable period.

This decrease was primarily attributable to the revenue decrease noted above, in addition to higher costs of materials required to build trucks.

The commercial jet engines and parts segment generated an operating income of $2.0 million in the current-year nine month period compared to an operating loss of $4.8 million in the prior-year nine-month period.

The change was primarily attributable to the increased component sales as the aviation industry started to see more activity as explained in the segment revenue discussion above.

The corporate and other segment's operating loss was $6.3 million for the nine months ended December 31, 2021 versus the prior year comparable period's operating loss of $7.1 million.

This is primarily attributable to the segment having lower health insurance claims during the nine months ended December 31, 2021 compared to December 31, 2020.

Following is a table detailing non-operating income (expense) during the nine months ended December 31, 2021 compared to the same quarter in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Interest expense $ (3,341) $ (3,413) $ 72

Income (Loss) from equity method investments 197 (546) 743

Gain on forgiveness of Paycheck Protection Program (“PPP”) loan 8,331 — 8,331

Other-than-temporary impairment loss on investments (348) — (348)

Other 1,329 2,125 (796)

$ 6,168 $ (1,834) $ 8,002

The Company had a net non-operating income of $6.2 million for the nine months ended December 31, 2021 compared to a net non-operating loss of $1.8 million in the prior-year nine-month period.

The increase was primarily attributable to the $8.3 million gain

recognized on the SBA's forgiveness of the Company's PPP loan.

In addition, during the nine months ended December 31, 2021, the Company recorded an impairment loss of $0.3 million on the equity investment of CCI.

Further, in the prior year, the Company recorded $0.5 million of net loss from our equity investments whereas in the current year, we recorded $0.2 million of net income from these investments.

During the nine-month period ended December 31, 2021, the Company recorded $0.2 million in income tax benefit at an effective rate of (3.6)%.

(collectively known as "Delphax"), other capital losses, 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 Aviation Support, LLC.

During the three-month period ended June 30, 2021, the Company recorded $5.0 thousand in income tax benefit at an effective tax rate ("ETR") of (1.6)%.

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, 2021 were the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail, the exclusion from taxable income of the PPP loan forgiveness income, as directed by the CARES Act enacted in 2020, and any accrued interest forgiven as a part of that Act.

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

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, 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.

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 June 30, 2021 were the change in valuation allowance related to Delphax and other capital losses, 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.

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, 2022.

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.

revenues and expenses.

Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions.

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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, 2021.

There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended June 30, 2022.

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.

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Supply Chain and Inflation

The Company continues to monitor a wide range of health, safety, and regulatory matters related to the continuing COVID-19 pandemic including its impact on our business operations.

The Company continues to monitor a wide range of health, safety, and regulatory matters related to the COVID-19 pandemic including its impact on our business operations.

In particular, ongoing supply chain disruptions have impacted product availability and costs across all markets including the aviation industry in which our company operates.

Additionally, the United States is experiencing an acute workforce shortage and increasing inflation which has created a hyper-competitive wage environment.

Thus far, the direct impact of these items on our businesses have been immaterial.

Thus far, the direct impact of these items on our businesses has not been material.

However, ongoing or future disruptions to consumer demand, our supply chain, product pricing inflation, our ability to attract and retain employees, or our ability to procure products and fulfill orders, could negatively impact the Company’s operations and financial results in a material manner.

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Liquidity and Capital Resources

As of December 31, 2021, the Company held approximately $5.8 million in cash and cash equivalents and restricted cash, $2.9 million of which related to restricted cash collateralized for Air T OZ 1, LLC, Air T OZ 2, LLC, and Air T OZ 3, LLC (the "Opportunity Zone Funds"), each a Minnesota limited liability company and a subsidiary of the Company.

As of June 30, 2022, the Company held approximately $9.5 million in cash and cash equivalents and restricted cash, $2.0 million of which related to restricted cash collateralized held for three opportunity zone investments made by the Company - Air T OZ 1, LLC, Air T OZ 2, LLC, and Air T OZ 3, LLC (the "Opportunity Zone Funds"), each a Minnesota limited liability company and a subsidiary of the Company.

The Company also held $1.7 million in restricted investments held as statutory reserve of SAIC.

The Company has approximately $2.6 million of marketable securities and an aggregate of $36.8 million in available funds under its lines of credit as of December 31, 2021.

As of December 31, 2021, the Company’s working capital amounted to $85.6 million, an increase of $8.0 million compared to March 31, 2021.

As mentioned in Note 2 and Note 11 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake HQ, LLC, completed the purchase of the real estate located at 5000 36th Street West, St.

Louis Park, Minnesota pursuant to the real estate purchase agreement with WLPC

East, LLC, a Minnesota limited liability company dated October 11, 2021.

The Company has approximately $0.9 million of marketable securities and an aggregate of $32.9 million in available funds under its lines of credit as of June 30, 2022.

As of June 30, 2022, the Company’s working capital amounted to $107.7 million, an increase of $10.4 million compared to March 31, 2022.

As mentioned in Note 2 and Note 12 of Notes to Condensed Consolidated Financial Statements of this report, on December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake HQ, LLC, completed the purchase of the real estate located at 5000 36th Street West, St.

Louis Park, Minnesota pursuant to a real estate purchase agreement with WLPC East, LLC, a Minnesota limited liability company (an unrelated third-party) dated October 11, 2021.

The real estate purchased consists of a 2-story office building, asphalt-paved driveways and parking areas, and landscaping.

The building was constructed in circa 2004 with an estimated 54,742 total square feet of space.

The real estate purchased is where the Air T's executive office is currently located.

The building was constructed in 2004 and contains an estimated 54,742 total square feet of space.

The real estate purchased is where the Air T's Minnesota executive office is currently located.

With this purchase, the Company assumed 11 leases from existing tenants occupying the building.

The purchase price was $13.2 million, which was paid for with approximately $3.3 million in cash and a new secured loan from Bridgewater with an aggregate principal amount of $9.9 million and a fixed interest rate of 3.65% which matures on December 2, 2031.

On April 13, 2020, the Company entered into a loan with MBT with a principal amount of $8.2 million pursuant to the Payroll Protection Program, backed by the SBA, under the CARES Act.

As of December 31, 2021, the Company's PPP Loan was fully forgiven by the SBA.

As such, the Company accounted for its then outstanding principal and accrued interest as a gain on extinguishment in accordance with ASC 470.

As mentioned in Note 11 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, during the first three quarters of fiscal 2022, the Company received $7.9 million in gross proceeds from the sale of TruPs through a S-3 Registration Statement filed by the Company.

The TruPs were sold and issued under the S-3 “shelf” Registration Statement base prospectus filed with the Securities and Exchange Commission on March 10, 2021 and declared effective by the SEC on March 19, 2021, and under an At the Market Offering Agreement and a First Amendment to the At the Market Offering Agreement filed with the SEC on May 14, 2021 and November 19, 2021, respectively, and prospectus supplements filed with the SEC on May 14, 2021 and November 19, 2021, respectively.

The Shelf Registration Statement registers a number of securities that may be issued by the Company in a maximum aggregate amount of up to $15 million.

The Registration Statement is subject to the offering limits set forth in General Instruction I.B.6 of Form S-3 because the Company’s public float is less than $75 million.

For so long as the Company's public float is less than $75 million, the aggregate market value of securities sold by the Company under the Shelf Registration Statement pursuant to Instruction I.B.6 to Form S-3 during any 12 consecutive months may not exceed one-third of the Company’s public float.

For purposes of this limitation, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $26.8 million, based on 1.1 million shares of our outstanding common stock held by non-affiliates and a price of $25.15 per share, which was the price as of December 31, 2021, a date within 60 days of the date that our common stock was last sold on The Nasdaq Global Market on February 11, 2022, calculated in accordance with General Instruction I.B.6 of Form S-3.

After giving effect to the $8.9 million offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell from time to time up to the full amount of the $1.0 million remaining under the current Prospectus Supplement.

As mentioned in Note 1 4 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, in 2016, Contrail entered into an Operating Agreement with the Seller providing for the put and call options with regard to the 21% non-controlling interest retained by the Seller.

As mentioned in Note 12 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on June 9, 2022, the Company, Jet Yard and MBT entered into Amendment No.

1 to Third Amended and Restated Credit Agreement (“Amendment”) and a related Overline Note (“Overline Note”) in the original principal amount of $5.0 million.

The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from $17.0 million to $22.0 million.

As of June 30, 2022, the unused commitment of the MBT revolver and the Overline Note was $2.9 million and $5.0 million, respectively.

The total amount of borrowings under the facility as revised is now the Company’s calculated borrowing base or $22.0 million.

The borrowing base calculation methodology remains unchanged.

As mentioned in Note 15 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, in 2016, Contrail entered into an Operating Agreement with the Seller providing for the put and call options with regard to the 21% non-controlling interest retained by the Seller.

The Seller is the founder of Contrail and its current Chief Executive Officer.

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

As of the date of this filing, neither the Seller nor Air T has indicated an intent to exercise the put and call options.

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

As of the date of this filing, neither the Seller nor the Company has indicated an intent to exercise the put and call options.

If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date.

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

As mentioned in Note 1 4 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on May 5, 2021, the Company formed a new aircraft asset management business called CAM and a new aircraft capital joint venture called CJVII.

The new venture will focus on acquiring commercial aircraft and jet engines for leasing, trading and disassembly.

CJVII will target investments in current generation narrow-body aircraft and engines, building on Contrail Aviation’s origination and asset management expertise.

CAM will serve two separate and distinct functions:

As mentioned in Note 15 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on May 5, 2021, the Company formed an aircraft asset management business called CAM and an aircraft capital joint venture called

The venture focuses on acquiring commercial aircraft and jet engines for leasing, trading and disassembly.

CJVII targets investments in current generation narrow-body aircraft and engines, building on Contrail Aviation’s origination and asset management expertise.

CAM serves two separate and distinct functions:

1) to direct the sourcing, acquisition and management of aircraft assets owned by CJVII, and 2) to directly invest into CJVII alongside other institutional investment partners.

CAM has an initial commitment to CJVII of approximately $53.0 million, which is comprised of an $8.0 million initial commitment from the Company and an approximately $45.0 million initial commitment from MRC.

As of December 31, 2021, CAM's remaining capital commitments are approximately $4.2 million from the Company and $28.9 million from MRC.

CJVII will initially be capitalized with up to $408.0 million of equity from the Company and three institutional investor partners, consisting of $108.0 million in initial commitments and $300.0 million in upsize capacity, contingent on underwriting and transaction appeal.

As of June 30, 2022, CAM's remaining capital commitments are approximately $1.1 million from the Company and $19.7 million from MRC.

CJVII was initially capitalized with up to $408.0 million of equity from the Company and three institutional investor partners, consisting of $108.0 million in initial commitments and $300.0 million in upsize capacity, contingent on underwriting and transaction appeal.

As of the date of this filing, $91.6 million of capital has been deployed to CJVII.

The timing of the remaining capital commitment is not yet known at this time.

The Company believes it is probable that the cash on hand (including amounts forgiven under the PPP loan and other current financings), net cash provided by operations from its remaining operating segments, together with amounts available under our current revolving lines of credit, as amended, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.

Following is a table of changes in cash flow from continuing operations for the nine months ended December 31, 2021 and 2020 (in thousands):

Nine Months Ended December 31,

The Company believes it is probable that the cash on hand and current financings, net cash provided by operations from its remaining operating segments, together with amounts available under our current revolving lines of credit, as amended, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.

Following is a table of changes in cash flow from continuing operations for the three months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended June 30,

Net Cash Used in Operating Activities (2,531) (8,821)

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Effect of foreign currency exchange rates on cash and cash equivalents 173 (49)

Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash (10,088) 33,250

Net cash used in operating activities was $19.7 million for the nine-month period ended December 31, 2021 compared to net cash used in operating activities of $6.7 million in the prior year nine-month period.

The change in net cash used in operating activities was primarily driven by a net increase in cash used to purchase inventories at Contrail.

The Company had a net increase in inventories of $8.6 million in the current period and a net decrease of $6.1 million in the prior period.

In addition to regular inventory movements resulting from component sales and purchases, Contrail purchased 1 engine in the current period and sold 2 engines in the prior period, which is driving the aforementioned change in inventories.

Net cash used in investing activities for the nine-month period ended December 31, 2021 was $19.5 million compared to net cash used in investing activities of $0.3 million in the prior-year period.

Cash was used in the current-year period primarily to acquire the real estate located at 5000 36th Street West, St.

Louis Park, Minnesota, as referenced in Note 2 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report and to invest in CAM, the Company's new aircraft asset management business.

Net cash provided by financing activities for the nine-month period ended December 31, 2021 was $29.1 million compared to net cash provided by financing activities of $40.4 million in the prior-year period.

The decrease was primarily driven by lower net cash proceeds from the Company's term loans, partially offset by higher issuance of TruPs in the current-year.

Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash 1,155 (4,500)

Net cash used in operating activities was $2.5 million for the three-month period ended June 30, 2022 compared to net cash used in operating activities of $8.8 million in the prior year three-month period, equating to an overall decrease of $6.3 million period over period.

The overall decrease in net cash used in operating activities was primarily driven by a net increase in cash provided by receivables of $8.5 million due to timely payments in the current period as well as lower accrued expenses payments of $3.9 million, mostly attributable to timing of payroll, bonus, and health insurance payments.

Those impacts are partially offset by a $4.6 million net increase in cash used for inventories to support increased sales levels as well as a $1.1 million increase in net loss.

Net cash used in investing activities for the three-month period ended June 30, 2022 was $1.1 million compared to net cash used in investing activities of $1.4 million in the prior-year period.

Net cash provided by financing activities for the three-month period ended June 30, 2022 was $4.6 million compared to net cash provided by financing activities of $5.8 million in the prior-year period.

The decrease was primarily driven by higher net cash proceeds from the Company's term loans, offset by issuance of TruPs in the prior quarter that did not recur in the current quarter.

Non-GAAP Financial Measures

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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 $70.4 thousand and $1.7 million for the three months ended December 31, 2021 and 2020, respectively.

Depreciation expense for leased engines totaled $0.3 million and $0.1 million for the three months ended June 30, 2022 and 2021, 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 (loss), the most directly comparable amounts reported under GAAP.

The tables below provide a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA and Adjusted EBITDA by segment for the three and nine months ended December 31, 2021 and 2020 (in thousands):

Three months ended Nine months ended

The tables below provide a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA and Adjusted EBITDA by segment for the three months ended June 30, 2022 and 2021 (in thousands):

Three months ended

6/30/2022 6/30/2021

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Depreciation and amortization (excluding leased engines depreciation) 605 279

Asset impairment, restructuring or impairment charges — — — 664

Loss on disposition of assets — 5 3 1

(Gain) Loss on disposition of assets (2) 3

Security issuance expenses 15 5

Adjusted EBITDA $ 1,452 $ 283

Three months ended Nine months ended

Three months ended

6/30/2022 6/30/2021

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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-Q

Item 2. Management’s Discussion and Analysis