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Item 2. Management’s Discussion and Analysis

2023-02-10 compared with 2022-11-10 · 111 added, 98 removed, 146 unchanged (59% 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 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.

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 December 31, 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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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 be exposed to macroeconomic pressures as a result of the lingering impacts of the COVID-19 pandemic, supply chain challenges, foreign currency fluctuations, spikes in commodity prices and geopolitical challenges, including the war in Eastern

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 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.

Each of our businesses implemented measures to attempt to limit the impact of COVID-19 but we still experienced 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.

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, 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.

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 December 31, 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 and other macroeconomic factors have resulted in interest rate acceleration and inflation, including, but not limited to, a significant increase in the price of commodities.

These factors may 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):

Third Quarter Fiscal 2023 Compared to Third Quarter Fiscal 2022

Consolidated revenue for the three-month period ended December 31, 2022 increased by $16.0 million (35.1%) 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, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

September 30, Change

December 31, Change

Overnight Air Cargo $ 21,831 $ 18,248 $ 3,583 19.6 %

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$ 61,396 $ 45,433 $ 15,963 35.1 %

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.

Revenues from the air cargo segment for the three-month period ended December 31, 2022 increased by $3.6 million (19.6%) compared to the third 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 ground equipment sales segment contributed approximately $16.1 million and $15.2 million to the Company’s revenues for the three-month periods ended December 31, 2022 and 2021 respectively, representing a $0.9 million (6.0%) increase in the current quarter.

The increase was primarily driven by the increase in part sales this quarter compared to prior year's comparable quarter as commercial and military customers require parts to perform maintenance on their trucks.

At December 31, 2022, the ground equipment sales segment’s order backlog was $12.5 million compared to $3.7 million at December 31, 2021.

The commercial jet engines and parts segment contributed $21.7 million of revenues in the quarter ended December 31, 2022 compared to $11.4 million in the comparable prior year quarter, which is an increase of $10.3 million (90.8%).

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.

Revenues from the corporate and other segment for the three-month period ended December 31, 2022 increased by $1.1 million (199.8%) compared to the third 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 September 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 December 31, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

September 30, Change

December 31, Change

Overnight Air Cargo $ 1,009 $ 475 $ 534

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$ 135 $ 25 $ 110

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):

Consolidated operating income for the quarter ended December 31, 2022 was $0.1 million, compared to an operating income of $25.0 thousand in the comparable quarter of the prior year.

The air cargo segment's operating income for the three-month period ended December 31, 2022 was $1.0 million compared to operating income of $0.5 million in the same quarter in the prior fiscal year primarily due to the revenue increase noted above.

The ground equipment sales segment's operating income for the quarter ended December 31, 2022 decreased by $0.4 million from the prior year comparable quarter to $1.1 million.

This decrease was primarily attributable to the increased costs for material, labor, and overhead required to get truck units scheduled and built.

The commercial jet engines and parts segment generated operating income of $0.7 million in the current-year quarter compared to operating income of $0.3 million in the prior-year quarter.

The increase was primarily attributable to the increase in revenue mentioned above offset by an increase of $0.4 million in inventory write-down in the current quarter compared to the prior-year comparable quarter.

The corporate and other segment's operating loss for the three-month period ended December 31, 2022 was $2.7 million compared to an operating loss of $2.2 million in the same quarter in the prior fiscal year.

The increase was primarily attributable to the timing of bonus payments made compared to last year.

Following is a table detailing non-operating income (expense) during the three months ended December 31, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

September 30, Change

December 31, Change

Interest expense $ (2,204) $ (1,236) $ (968)

Income from equity method investments 2,118 99 2,019

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

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

Other (97) (11) (86)

$ (183) $ (1,496) $ 1,313

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 had a net non-operating loss of $0.2 million during the quarter ended December 31, 2022, compared to net non-operating loss of $1.5 million in the prior-year quarter.

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 offset by an increase in income from equity method investments, primarily driven by the $1.8 million share of net income recognized from Insignia.

See Note 9 of the Notes to Condensed Consolidated Financial Statements of this report.

In addition, in the prior-year quarter, an impairment loss of $0.3 million was recorded for CCI that did not recur in the current-year quarter.

During the three-month period ended December 31, 2022, the Company recorded global income tax benefit of $0.2 million at an effective tax rate ("ETR") of 325.0%.

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 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

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, 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), the foreign rate differentials between the federal and foreign tax rates for Air T’s ownership of foreign operations in Puerto Rico, the Netherlands, and Singapore, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

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

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 2023 Compared to First Nine Months of Fiscal 2022

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

Six Months Ended

September 30, Change

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 64,464 $ 55,946 $ 8,518 15.2 %

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$ 172,946 $ 125,640 $ 47,306 37.7 %

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.

Revenues from the air cargo segment for the nine months ended December 31, 2022 increased by $8.5 million (15.2%) compared to the nine months ended December 31, 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 ground equipment sales segment contributed approximately $40.0 million and $32.6 million to the Company’s revenues for the nine-month periods ended December 31, 2022 and 2021 respectively, representing a $7.4 million (22.6%) increase in the current nine-month period.

The increase was primarily driven by increased pricing of truck units sold and higher parts and service revenue.

The commercial jet engines and parts segment contributed $63.6 million of revenues in the nine months ended December 31, 2022 compared to $35.9 million in the comparable prior year nine 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.

Revenues from the corporate and other segment in the nine months ended December 31, 2022 increased by $3.7 million (314.1%) compared to the nine months ended December 31, 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

Following is a table detailing operating income (loss) by segment during the nine months ended December 31, 2022 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Overnight Air Cargo $ 2,931 $ 2,063 $ 868

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$ 1,147 $ 724 $ 423

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.

Consolidated operating income for the nine months ended December 31, 2022 was $1.1 million compared to an operating income of $0.7 million for the comparable nine months of the prior year.

Operating income for the air cargo segment for the nine months ended December 31, 2022 increased by $0.9 million versus the prior year comparable period primarily due to the revenue increase noted above.

The ground equipment sales segment operating income increased by $0.2 million to $3.1 million in the nine-month period ended December 31, 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 commercial jet engines and parts segment generated an operating income of $3.6 million in the current-year nine month period compared to an operating income of $2.0 million in the prior-year nine-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

The corporate and other segment's operating loss increased by $2.2 million to $8.5 million from the prior-year loss of $6.3 million primarily driven by higher benefits cost and the timing of bonus payments compared to last year for the nine months ended December 31, 2022.

Following is a table detailing non-operating income (loss) during the nine months ended December 31, 2022 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended

December 31, Change

Interest expense $ (6,021) $ (3,341) $ (2,680)

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

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

Other (608) 1,329 $ (1,937)

$ (3,712) $ 6,168 $ (9,880)

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.

The Company had a net non-operating loss of $3.7 million for the nine months ended December 31, 2022 compared to a net non-operating income of $6.2 million in the prior-year nine-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 in the prior year period which did not occur in the current period.

In the current year, the Company incurred $2.7 million higher interest expense due to having more outstanding TruPs shares and more indebtedness at Contrail.

In addition, the Company recorded a $0.4 million unrealized loss due to fair value adjustments on our marketable investments in the current year compared to prior year's $0.3 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 decrease was partially offset by $2.7 million higher net income from equity method investments in the current year compared to the prior year, primarily driven by $1.8 million share of net income from Insignia.

See Note 9 of the Notes to Condensed Consolidated Financial Statements of this report.

During the nine-month period ended December 31, 2022, the Company recorded global income tax benefit of $0.5 million at an effective tax rate of 20.9%.

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

The primary factors contributing to the difference between the federal statutory rate of 21% 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.

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, 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), the foreign rate differentials between the federal and foreign tax rates for Air T’s ownership of foreign operations in Puerto Rico, the Netherlands, and Singapore, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

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

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine-month period ended December 31, 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

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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 September 30, 2022.

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

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 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.

As of December 31, 2022, the Company held approximately $6.5 million in cash and cash equivalents and restricted cash, $1.3 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 $1.5 million in restricted investments held as statutory reserve of SAIC.

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.

The Company has approximately $0.6 million of marketable securities and an aggregate of approximately $22.0 million in available funds under its lines of credit as of December 31, 2022.

As of December 31, 2022, the Company’s working capital amounted to $63.2 million, a decrease of $34.2 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 September 30, 2022, the unused commitment of the Overline Note was $4.1 million and no unused commitment on the MBT Revolver.

As of December 31, 2022, the unused commitment on the Overline Note and the MBT revolver was $5.0 million and $8.2 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 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 of December 31, 2022, this note has been repaid.

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 21.0% non-controlling interest retained by the Seller.

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

As of December 31, 2022, CAM's remaining capital commitments are approximately $0.7 million from the Company and $16.0 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, $104.4 million of capital has been deployed to CJVII.

As of the date of this filing, certain institutional investors have gone into upsize capacity and $113.3 million of capital has been deployed to CJVII.

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

The Contrail Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with

The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth of $12.0 million.

The Company is in compliance with such financial covenants as of December 31, 2022.

However, management is forecasting that the Company will be in violation of the debt service coverage ratio during the twelve month period subsequent to the date of this filing, primarily because the first principal payment of its Term Note G becomes due in November 2023.

Non-compliance with a debt covenant that is not subsequently cured gives ONB the right to accelerate the maturity of the Contrail Credit Agreement and declare the entire amount of Contrail’s outstanding debt at the time of non-compliance immediately due and payable and exercise its remedies with respect to the collateral that secures the debt.

Should ONB accelerate the maturity of the Contrail Credit Agreement, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt in the event of default.

In response to these conditions, Contrail management is currently in discussion with ONB to obtain a waiver to its financial covenants, to seek to revise the financing documents and/or to secure alternative financing to avoid an event of non-compliance.

However, these plans have not been finalized and there is no assurance that management will be able to execute these plans.

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

The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with other lenders.

If Contrail were to cease operations, management believes the Company, along with the rest of its businesses, will continue to operate, given the maximum guarantee of Contrail’s obligations of $1.6 million, plus costs of collection.

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.

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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 for the six months ended September 30, 2022 and 2021 (in thousands):

Six Months Ended September 30,

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

Management has concluded that the plans are probable of being achieved to alleviate substantial doubt about the Company’s ability to continue as a going concern.

Following is a table of changes in cash flow for the nine months ended December 31, 2022 and 2021 (in thousands):

Nine Months Ended December 31,

Net Cash Used in Operating Activities $ (3,815) $ (19,690)

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Effect of foreign currency exchange rates on cash and cash equivalents 181 69

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

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.

Net Decrease in Cash and Cash Equivalents and Restricted Cash $ (1,858) $ (10,088)

Net cash used in operating activities was $3.8 million for the nine-month period ended December 31, 2022 compared to net cash used in operating activities of $19.7 million in the prior year nine-month period, resulting in an overall decrease of $15.9 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 $9.3 million due to increased sales in the current period, receipt of ERC payments of $2.4 million, and higher payables and accrued expenses of $5.0 million, mostly attributable to timing of payroll and an increase in customer deposits received.

In the current period, there was an additional purchase accounting adjustment related to the acquisition of GdW that increased our deferred tax liabilities by $2.4 million.

See Note 2 of the Notes to Condensed Consolidated Financial Statements of this report.

Those changes are offset by a $3.8 million net increase in cash used to purchase inventories at Contrail and AirCo in the current year.

Net cash used in investing activities for the nine-month period ended December 31, 2022 was $3.1 million compared to net cash used in investing activities of $19.5 million in the prior-year period.

The decrease in cash usage in investing activities was primarily driven by fewer investments in unconsolidated entities and no acquisition of assets in the current year, as compared to $13.4 million in the prior year.

Net cash provided by financing activities for the nine-month period ended December 31, 2022 was $4.9 million compared to net cash provided by financing activities of $29.1 million in the prior-year period.

The decrease was primarily driven by reduced proceeds from and increased payments to outstanding term notes in the current year, as well as issuance of TruPs in the prior year that did not recur in the current year.

This decrease was partially offset by an increase in proceeds from lines of credit in the current year.

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 $0.4 million and $18.0 thousand for the three months ended September 30, 2022 and 2021, respectively.

Depreciation expense for leased engines totaled $0.5 million and $70.4 thousand for the three months ended December 31, 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) to Adjusted EBITDA for the three and six months ended September 30, 2022 and 2021 (in thousands):

Three months ended Six months ended

The tables below provide a reconciliation of operating income (loss) to Adjusted EBITDA for the three and nine months ended December 31, 2022 and 2021 (in thousands):

Three months ended Nine months ended

12/31/2022 12/31/2021 12/31/2022 12/31/2021

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

Security expenses 19 60 34 65

Securities expenses 4 150 38 215

Adjusted EBITDA $ 1,337 $ 547 $ 5,167 $ 1,898

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

The asset impairment, restructuring or impairment charges for the three months ended December 31, 2022 was a write-down of $0.6 million on the commercial jet engines and parts segment's inventory.

The table below provides Adjusted EBITDA by segment for the three and nine months ended December 31, 2022 and 2021 (in thousands):

Three months ended Nine months ended

12/31/2022 12/31/2021 12/31/2022 12/31/2021

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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