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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-12 · 136 added, 72 removed, 108 unchanged (66% 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, 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.

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 September 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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Results of Operations

Impacts from Geopolitical, Macroeconomic, and COVID-19 Challenges

We continue to be exposed to macroeconomic pressures as a result of the lingering impacts of the COVID-19 pandemic, supply chain challenges, foreign currency fluctuations, and spikes in commodity prices as a result of geopolitical challenges, including the war in

Eastern Europe.

We continue to navigate through these challenges with a sharp focus on and goal of safeguarding our employees, helping our customers and managing impacts on our supply chain.

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 fiscal 2023.

Each of our businesses implemented measures to attempt to limit the impact of COVID-19 but we still experienced a number of disruptions, and we experienced and continue to experience to a lesser degree 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 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 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):

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 Company believes the estimates and assumptions underlying the Company’s condensed consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2022;

however, uncertainty over the ultimate direct and indirect impact COVID-19 will have on the global economy generally, and the Company’s businesses in particular, makes any estimates and assumptions as of September 30, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19.

The war in Eastern Europe and related sanctions imposed on Russia and related actors have resulted in interest rate acceleration and inflation, including, but not limited to, a significant increase in the price of commodities.

We expect that these factors will continue to negatively impact our businesses at least in the short-term.

The ultimate impact on our overall financial condition and operating results will depend on the currently unknowable duration and severity of these activities.

We continue to evaluate the long-term impact that these may have on our business model, however there can be no assurance that the measures we have taken or will take will completely offset the negative impact.

Second Quarter Fiscal 2023 Compared to Second Quarter Fiscal 2022

Consolidated revenue for the three-month period ended September 30, 2022 increased by $17.5 million (40%) 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 September 30, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

June 30, Change

September 30, Change

Overnight Air Cargo $ 22,069 $ 18,847 $ 3,222 17 %

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$ 60,688 $ 43,238 $ 17,450 40 %

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 $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.

Revenues from the air cargo segment for the three-month period ended September 30, 2022 increased by $3.2 million (17%) compared to the second quarter of the prior fiscal year.

The increase was principally attributable to higher administrative fees, maintenance labor and pass-through revenues from FedEx.

The ground equipment sales segment contributed approximately $18.0 million and $9.2 million to the Company’s revenues for the three-month periods ended September 30, 2022 and 2021 respectively, representing a $8.8 million (96%) increase in the current quarter.

The increase was primarily driven by significantly higher commercial ultimate deicers sales this quarter compared to prior year comparable quarter.

At September 30, 2022, the ground equipment sales segment’s order backlog was $21.1 million compared to $10.9 million at September 30, 2021.

The commercial jet engines and parts segment contributed $19.0 million of revenues in the quarter ended September 30, 2022 compared to $14.9 million in the comparable prior year quarter, which is an increase of $4.1 million (27%).

The increase was primarily driven by higher component part sales across all companies within the segment in the current quarter compared to prior year comparable quarter.

Revenues from the corporate and other segment for the three-month period ended September 30, 2022 increased by $1.3 million (464%) compared to the second 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):

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

Three Months Ended

June 30, Change

September 30, Change

Overnight Air Cargo $ 845 $ 857 $ (12)

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$ 179 $ 704 $ (525)

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.

The commercial jet engines and parts segment generated operating income of $3.1 million in the current-year quarter compared to an operating loss of $0.2 million in the prior-year quarter.

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

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):

Consolidated operating income for the quarter ended September 30, 2022 was $0.2 million, compared to an operating income of $0.7 million in the comparable quarter of the prior year.

The air cargo segment's operating income for the three-month period ended September 30, 2022 was relatively flat compared to the same quarter in the prior fiscal year.

The increase in revenue discussed above was offset by the impairment of previously capitalized costs on a software project that was deemed no longer probable to be completed and placed in service.

The ground equipment sales segment's operating income for the quarter ended September 30, 2022 increased by $1.8 million from the prior year comparable quarter to $1.9 million.

This increase was primarily attributable to the increased sales noted in the segment revenue discussion above.

The commercial jet engines and parts segment generated an operating loss of $0.2 million in the current-year quarter compared to an operating income of $1.9 million in the prior-year quarter.

The change was primarily attributable to the sale of an airframe with higher profit margin in the prior-year quarter that did not recur in the current-year quarter.

In addition, this segment incurred an inventory write-down of $1.0 million in the current quarter compared to none in the prior-year comparable quarter.

The corporate and other segment's operating loss for the three-month period ended September 30, 2022 was relatively flat compared to the same quarter in the prior fiscal year.

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

Three Months Ended

June 30, Change

September 30, Change

Interest expense (1,996) (1,167) $ (829)

Income from equity method investments 266 14 252

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

Other (357) 159 (516)

$ (2,087) $ 7,337 $ (9,424)

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 had a net non-operating loss of $2.1 million during the quarter ended September 30, 2022, compared to net non-operating income of $7.3 million in the prior-year quarter.

In the second quarter 2021, the Company recorded a $8.3 million gain recognized on the SBA's forgiveness of the Company's PPP loan.

In the current-year quarter, the Company had higher interest expense due to having more outstanding TruPs shares and more indebtedness at Contrail compared to the prior-year quarter.

In addition, the Company recorded a $0.2 million unrealized loss due to fair value adjustments on our marketable investments in the current year compared to the prior year's $0.3 million unrealized gain.

During the three-month period ended September 30, 2022, the Company recorded global income tax benefit of $0.6 million at an effective tax rate ("ETR") of 30.0%.

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 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"), 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 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 September 30, 2022 were the change in valuation allowance related to 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.

During the three-month period ended September 30, 2021, the Company recorded $38.0 thousand in income tax expense at an ETR of 0.5%.

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax

rate for the three-month period ended September 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), the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail, and 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.

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

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

Six Months Ended

September 30, Change

Overnight Air Cargo $ 42,633 $ 37,697 $ 4,936 13 %

Ground Equipment Sales 23,834 17,371 6,463 37 %

Commercial Jet Engines and Parts 41,841 24,510 17,331 71 %

Corporate and Other 3,242 628 2,614 416 %

$ 111,550 $ 80,206 $ 31,344 39 %

Revenues from the air cargo segment for the six months ended September 30, 2022 increased by $4.9 million (13%) compared to the six months ended September 30, 2021.

The increase was principally attributable to increased administrative fees as well as higher pass-through revenue from FedEx as a result of increased business activity.

The ground equipment sales segment contributed approximately $23.8 million and $17.4 million to the Company’s revenues for the six-month periods ended September 30, 2022 and 2021 respectively, representing a $6.5 million (37%) increase in the current six-month period.

The increase was primarily driven by significantly higher commercial ultimate deicers sales in the current year.

The commercial jet engines and parts segment contributed $41.8 million of revenues in the six months ended September 30, 2022 compared to $24.5 million in the comparable prior year six months.

The increase was primarily driven by higher component part sales across all companies within the segment and engine sales at AirCo 1 that did not occur in the prior fiscal year.

Revenues from the corporate and other segment in the six months ended September 30, 2022 increased by $2.6 million (416%) compared to the six months ended September 30, 2021.

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 six months ended September 30, 2022 compared to the same six months in the prior fiscal year (in thousands):

Six Months Ended

September 30, Change

Overnight Air Cargo $ 1,922 $ 1,589 $ 333

Ground Equipment Sales $ 2,029 $ 1,465 564

Commercial Jet Engines and Parts $ 2,870 $ 1,664 1,206

Corporate and Other (5,809) (4,019) (1,790)

$ 1,012 $ 699 $ 313

Consolidated operating income for the six months ended September 30, 2022 was $1.0 million compared to an operating income of $0.7 million for the comparable six months of the prior year.

Operating income for the air cargo segment for the six months ended September 30, 2022 increased by $0.3 million versus the prior year comparable period primarily due to the revenue increase noted above.

The ground equipment sales segment operating income increased by $0.6 million to $2.0 million in the six-month period ended September 30, 2022 versus the prior year comparable period.

This increase was primarily attributable to the revenue increase noted above.

The commercial jet engines and parts segment generated an operating income of $2.9 million in the current-year six month period compared to an operating income of $1.7 million in the prior-year six-month period.

The change was primarily attributable to the increased component sales as well as engine sales at AirCo 1 as explained in the segment revenue discussion above.

The corporate and other segment's operating loss increased by $1.8 million to $5.8 million from the prior-year loss of $4.0 million primarily driven by higher benefits cost for the six months ended September 30, 2022.

Following is a table detailing non-operating income (loss) during the six months ended September 30, 2022 compared to the same six months in the prior fiscal year (in thousands):

Six Months Ended

September 30, Change

Interest expense (3,818) (2,105) $ (1,713)

Income from equity method investments 798 97 701

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

Other (509) 1,340 (1,849)

(3,529) 7,663 $ (11,192)

The Company had a net non-operating loss of $3.5 million for the six months ended September 30, 2022 compared to a net non-operating income of $7.7 million in the prior-year six-month period.

The decrease was primarily attributable to the $8.3 million gain recognized on the SBA's forgiveness of the Company's PPP loan and a $0.5 million gain on the liquidation of Delphax France, a subsidiary of Delphax Technologies, Inc.

in the prior year.

In the current year, the Company incurred $1.7 million higher interest expense due to having more outstanding TruPs shares and more indebtedness at Contrail.

In addition, the Company recorded a $0.2 million unrealized loss due to fair value adjustments on our marketable investments in the current year compared to prior year's $0.6 million unrealized gain.

The decrease was partially offset by $0.7 million higher net income from equity method investments in the current year compared to the prior year.

During the six-month period ended September 30, 2022, the Company recorded global income tax benefit of $0.4 million at an effective tax rate of 15.1%.

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 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.

The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the six-month period ended September 30, 2022 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.

During the six-month period ended September 30, 2021, the Company recorded $33.0 thousand in income tax benefit which resulted in an effective tax rate of 0.4%.

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the six-month period ended September 30, 2021 were the changes 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.

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.

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 June 30, 2022.

There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended September 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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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 has not been material.

In particular, 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 workforce shortages and increasing inflation which has created a competitive wage environment.

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 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.

As of September 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 $1.6 million in restricted investments held as statutory reserve of SAIC.

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 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.

The Company has approximately $0.8 million of marketable securities and an aggregate of approximately $19.0 million in available funds under its lines of credit as of September 30, 2022.

As of September 30, 2022, the Company’s working capital amounted to $73.4 million, a decrease of $24.0 million compared to March 31, 2022 primarily driven by the increase in current portion of long-term debt as the revolving lines of credit at Air T with MBT and Contrail with ONB become due within a year.

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.

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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.

As of September 30, 2022, the unused commitment of the Overline Note was $4.1 million and no unused commitment on the MBT Revolver.

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 9 and Note 12 of Notes to Condensed Consolidated Financial Statements of this report, on September 30, 2022, the Company executed a promissory note payable to CCI for $2.0 million that bears interest at 10% per annum and matures on December 30, 2022.

The note may be prepaid at any time without penalty.

The note is subordinate and junior to any and all indebtedness of the Company to MBT.

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.

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

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.

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

As of September 30, 2022, CAM's remaining capital commitments are approximately $0.8 million from the Company and $17.3 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.

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

The revolving lines of credit at Air T with MBT and Contrail with ONB have a due date or expire within the next twelve months.

We are currently seeking to refinance these obligations prior to their respective maturity dates;

however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance these obligations, that the terms of such refinancing would be as favorable as the terms of our existing credit facility.

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,

Following is a table of changes in cash flow for the six months ended September 30, 2022 and 2021 (in thousands):

Six Months Ended September 30,

Net Cash Used in Operating Activities (13,946) (22,753)

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Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash 1,097 (9,653)

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.

Net cash used in operating activities was $13.9 million for the six-month period ended September 30, 2022 compared to net cash used in operating activities of $22.8 million in the prior year six-month period, resulting in an overall decrease of $8.9 million period over period.

The change in net cash used in operating activities was primarily driven by a net increase in cash provided by receivables of $7.7 million due to increased sales in the current period and lower payables and accrued expenses of $5.0 million, mostly attributable to timing of payroll, bonus, and health insurance payments.

Those changes are partially offset by a $4.0 million net increase in cash used to purchase inventories at Contrail and AirCo.

Net cash used in investing activities for the six-month period ended September 30, 2022 was $1.8 million compared to net cash used in investing activities of $2.4 million in the prior-year period.

The decrease in cash usage in investing activities was primarily driven by higher distributions received from equity method investments and less cash spent on purchases of intangible assets in the current year compared to the prior year.

Net cash provided by financing activities for the six-month period ended September 30, 2022 was $16.8 million compared to net cash provided by financing activities of $15.4 million in the prior-year period.

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

Non-GAAP Financial Measures

4 unchanged sentences

When calculating Adjusted EBITDA, the Company does not add back depreciation expense for aircraft engines that are on lease, as the Company believes this expense matches with the corresponding revenue earned on engine leases.

Depreciation expense for leased engines totaled $0.3 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively.

Depreciation expense for leased engines totaled $0.4 million and $18.0 thousand for the three months ended September 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 months ended June 30, 2022 and 2021 (in thousands):

Three months ended

The tables below provide a reconciliation of operating income (loss) to Adjusted EBITDA for the three and six months ended September 30, 2022 and 2021 (in thousands):

Three months ended Six months ended

9/30/2022 9/30/2021 9/30/2022 9/30/2021

Operating income (loss) from continuing operations $ 834 $ (4)

Operating income $ 179 $ 704 $ 1,012 $ 699

Depreciation and amortization (excluding leased engines depreciation) 645 304 1,252 584

Asset impairment, restructuring or impairment charges 1,488 — 1,536 —

(Gain) Loss on disposition of assets (1) — (2) 3

Security issuance expenses 15 5

Security expenses 19 60 34 65

Adjusted EBITDA $ 2,330 $ 1,068 $ 3,832 $ 1,351

Three months ended

Included in the asset impairment, restructuring or impairment charges for the three months ended September 30, 2022 was a write-down of $1.0 million on the commercial jet engines and parts segment's inventory.

Also included in that number is an impairment charge of $0.3 million related to previously capitalized costs on a software project that was deemed no longer probable to be completed and placed in service.

The table below provides Adjusted EBITDA by segment for the three and six months ended September 30, 2022 and 2021 (in thousands):

Three months ended Six months ended

9/30/2022 9/30/2021 9/30/2022 9/30/2021

5 unchanged sentences

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