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Item 7. Management’s Discussion and Analysis

2023-06-27 compared with 2022-06-28 · 132 added, 111 removed, 175 unchanged (58% of the section changed)

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Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.

Wolfe Lake HQ, LLC.

On December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake, completed the purchase of the real estate located at 5000 36th Street West, St.

Louis Park, Minnesota for $13.2 million pursuant to the real estate purchase agreement with WLPC East, LLC, a Minnesota limited liability company 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.

Air T's Minnesota executive office is currently located in the building.

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

Wolfe Lake HQ, LLC is included within the Corporate and other segment.

See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

GdW Beheer B.V.

On February 10, 2022, the Company, acquired GdW, a Dutch holding company in the business of providing global aviation data and information for EUR 12.5 million.

The acquisition was completed through a wholly-owned subsidiary of the Company, Air T Acquisition 22.1, a Minnesota limited liability company, through its Dutch subsidiary, Shanwick, and

was funded with cash, investment by executive management of the underlying business, and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

As part of the transaction, the executive management of the underlying business purchased 30% of Shanwick.

Air T Acquisition 22.1 and its consolidated subsidiaries are included within the Corporate and other segment.

On January 31, 2023, the Company acquired WASI, a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport.

The acquisition was funded with cash and the loans described in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

WASI is included within the Overnight air cargo segment.

See Note 2 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

Unconsolidated Investments

On May 5, 2021, the Company helped form an aircraft asset management business called CAM, and a new aircraft capital joint venture called CJVII.

The Company and MRC agreed to become common members in CAM.

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.

For the Asset Management Function, CAM receives origination fees, management fees, consignment fees (where applicable) and a carried interest.

For its Investment Function, 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.

Any investment returns are shared pro-rata between the Company and MRC.

The Company has an ownership interest in Contrail Asset Management, LLC (“CAM”).

The operations of CAM are not consolidated into the operations of the Company.

See Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

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

Discontinued Operations

On September 30, 2019, the Company completed the sale of GAS.

The results of operations of GAS are reported as discontinued operations in the condensed consolidated statements of operations for the year ended March 31, 2021.

Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.

Forward Looking Statements

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

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

• Despite our current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.

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Results of Operations

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 beyond fiscal 2022.

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

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

Fiscal 2023 vs.

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Total $ 247,323 $ 177,077 $ 70,246 40 %

Revenues from the air cargo segment increased by $8.2 million (12%) compared to the prior fiscal year, principally attributable to higher FedEx pass through revenues, higher admin fee as a result of increased contract rates starting in June 2021 and higher maintenance labor revenue.

In addition, maintenance revenue with customers outside of FedEx also increased compared to the prior year.

Revenues from the air cargo segment increased by $16.1 million (22%) compared to the prior fiscal year, principally attributable to higher labor revenues, higher admin fees and higher FedEx pass through revenues due to increased fleet (72 aircraft in the prior year compared to 85 in the current year).

Pass-through costs under the dry-lease agreements with FedEx totaled $29.2 million and $23.0 million for the years ended March 31, 2023 and 2022, respectively.

The ground equipment sales segment contributed approximately $42.2 million and $60.7 million to the Company’s revenues for the fiscal periods ended March 31, 2022 and 2021, respectively, representing a $18.4 million (30%) decrease in the current year.

The decrease was primarily driven by a lower volume of truck sales to the USAF in the current fiscal year.

The ground equipment sales segment contributed approximately $48.5 million and $42.2 million to the Company’s revenues for the fiscal years ended March 31, 2023 and 2022, respectively, representing a $6.2 million (15%) increase in the current year.

The increase was primarily driven by a higher volume of truck sales to the USAF and commercial customers in the current fiscal year.

At March 31, 2023, the ground equipment sales segment’s order backlog was $13.6 million compared to $14.0 million at March 31, 2022.

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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, net of intercompany during Fiscal 2022 and Fiscal 2021 (in thousands):

Revenues from the corporate and other segment increased by $3.8 million (139%) compared to the prior fiscal year, principally attributable to having a full year of Shanwick's revenues in fiscal 2023 compared to having only 2 months of revenues in fiscal 2022.

Following is a table detailing operating (loss) income by segment, net of intercompany during Fiscal 2023 and Fiscal 2022 (in thousands):

Year ended March 31, Change

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Total $ (4,407) $ 8,755 $ (13,162)

Consolidated operating income for the fiscal year ended March 31, 2022 was $8.8 million compared to consolidated operating loss of $9.2 million in the prior fiscal year.

Operating income for the air cargo segment increased by $0.6 million in the current fiscal year, due primarily to having higher segment revenues as described above, offset by higher pilot and staff salaries as well as contract labor.

The ground equipment sales segment operating income decreased by $5.7 million from $8.9 million in the prior year to $3.2 million in the current year.

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

Operating income of the commercial jet engines and parts segment was $3.6 million compared to operating loss of $10.9 million in the prior year.

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

In addition, this segment incurred an inventory write-down of $6.4 million in the prior year compared to only $0.8 million in the current year.

Consolidated operating loss for the fiscal year ended March 31, 2023 was $4.4 million compared to consolidated operating income of $8.8 million in the prior fiscal year.

Operating income for the air cargo segment increased by $1.3 million in the current fiscal year, due primarily to having higher segment revenues as described above, offset by higher pilot salaries and aircraft lease costs.

The current fiscal year's ground equipment sales segment operating income was relatively flat compared to the prior fiscal year.

Operating loss of the commercial jet engines and parts segment was $1.0 million compared to operating income of $3.6 million in the prior year.

The change was primarily attributable to the increase in inventory write-down of $6.6 million in the current fiscal year compared to the prior fiscal year, offset by the increase in sales explained above.

Operating loss of the corporate and other segment increased by $9.8 million in the current fiscal year, primarily driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the Employee Retention Credit ("ERC") that did not recur in the current fiscal year.

The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):

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Adjusted EBITDA $ 6,029 $ 11,406 $ (5,377)

Consolidated Adjusted EBITDA for the fiscal year ended March 31, 2022 was $11.4 million, an increase of $12.7 million compared to the prior fiscal year.

Consolidated Adjusted EBITDA for the fiscal year ended March 31, 2023 was $6.0 million, a decrease of $5.4 million compared to the prior fiscal year.

Adjusted EBITDA for the air cargo segment increased by $1.7 million in the current fiscal year, due primarily to having higher segment operating income as described above.

The ground equipment sales segment Adjusted EBITDA decreased by $5.7 million from $9.1 million in the prior year to $3.5 million in the current year.

This decrease was primarily attributable to the decreased operating income noted in the discussion above.

The current fiscal year's ground equipment sales segment Adjusted EBITDA was relatively flat compared to the prior fiscal year's.

Adjusted EBITDA of the commercial jet engines and parts segment was $7.1 million, an increase of $1.9 million from the prior fiscal year.

The increase was primarily driven by the change in operating income (loss) as described above, partially offset by a lower EBITDA adjustment in inventory write-down of $5.5 million in this fiscal year compared to the prior fiscal year.

The corporate and other segment Adjusted EBITDA increased by $8.7 million from fiscal 2021 to fiscal 2022.

The increase was driven by the $9.1 million offset to general and administrative expenses in the current fiscal year as a result of the ERC credit.

The increase was primarily driven by higher component sales explained above.

The corporate and other segment Adjusted EBITDA loss increased by $8.8 million from fiscal 2022 to fiscal 2023.

The increase was driven by the $9.1 million offset to general and administrative expenses in the prior fiscal year as a result of the ERC credit that did not recur in the current fiscal year.

Following is a table detailing consolidated non-operating income (expense), net of intercompany during fiscal 2023 and fiscal 2022 (in thousands):

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Gain on forgiveness of Paycheck Protection Program ("PPP") — 8,331 (8,331)

Income (loss) from equity method investments 37 (723) 760

Income from equity method investments 1,460 37 1,423

Other (471) 1,221 (1,692)

Total $ (6,946) $ 4,641 $ (11,587)

The Company had net non-operating income of $4.6 million for the year ended March 31, 2022, an increase of $7.2 million from $2.6 million non-operating expense in the prior year.

The increase was primarily attributable to the $8.3 million gain recognized on the SBA's forgiveness of the Company's PPP loan offset by a decrease of $1.5 million in other income primarily driven by prior-year's unrealized and realized gain on sale of investments that did not recur in the current-year.

During the year ended March 31, 2022, the Company recorded $1.2 million of income tax expense related to continuing operations, which yielded an effective rate of 8.7%.

The Company had net non-operating loss of $6.9 million for the fiscal year ended March 31, 2023 compared to a non-operating income of $4.6 million in the prior fiscal year.

The change was primarily attributable to the $8.3 million gain on the SBA's forgiveness of the Company's PPP loan recognized in the prior fiscal year, in addition to the $3.0 million increase in contractual interest expense driven by an increase in Contrail's revolver usage in the current fiscal year.

During the year ended March 31, 2023, the Company recorded $0.4 million of income tax expense, which yielded an effective rate of -3.8%.

The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2023 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, and changes in the valuation allowance.

The net change in the valuation allowance was $3.1 million for the year ended March 31, 2023.

In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance.

The change in the Company’s valuation allowance is primarily due to the realizability of the domestic deferred tax assets, the unrealized losses on investments, the foreign tax credits generated by the operations in the Company’s Puerto Rico branch that is expected to expire before being fully utilized, and the change in full valuation allowances associated with the Delphax entities.

During the fiscal year ended March 31, 2022, the Company recorded $1.2 million of income tax expense at an effective tax rate of 8.7%.

The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2022 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, the exclusion of PPP loan forgiveness proceeds from taxable income, and changes in the valuation allowance.

The change in the valuation allowance is primarily due to unrealized losses on investments and the generation of foreign tax credits through the NOL carryback claim that the Company expects to expire before they are fully utilized, and attribute reduction incurred by Delphax related to dissolution of its French subsidiary.

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

The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2021 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail, state income tax expense, the rate differential for the Net Operating Loss ("NOL") carryback claim and changes in the valuation allowance.

Market Outlook

COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas (such as inflation and supply chain issues) present uncertainty and risk with respect to our financial condition and results of operations.

Many of our businesses may continue to generate reduced operating cash flow and could operate at a loss from time to time beyond fiscal 2022.

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

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

Future economic developments such as inflation and increased interest rates as well as further business issues such as supply chain issues 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 and economic and business issues but we still experienced disruptions, and we experienced 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 flows and could operate at a loss from time to time beyond fiscal 2023.

We expect that issues caused by the pandemic and other economic and business issue will continue to some extent.

The fluidity of this situation precludes any prediction as to the ultimate adverse impact these issues 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.

Liquidity and Capital Resources

As of March 31, 2022, the Company held approximately $8.4 million in total cash, cash equivalents and restricted cash.

Of which, $2.3 million related to cash collateral for three Opportunity Zone fund investments.

As of March 31, 2023, the Company held approximately $7.1 million in total cash, cash equivalents and restricted cash, of which, $0.8 million related to cash collateral for three Opportunity Zone fund investments.

The Company also held $2.2 million in restricted investments held as statutory reserve of SAIC.

The Company also has approximately $0.9 million of marketable securities.

As of March 31, 2022, the Company’s working capital amounted to $97.3 million, an increase of $19.7 million compared to March 31, 2021, primarily driven by the $9.1 million Employee Retention Credit ("ERC") receivable and an increase of $13.2 million in accounts receivable.

The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 1 4 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured once a year at March 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.25.

As of March 31, 2023, the Company’s working capital amounted to $52.3 million, a decrease of $45.1 million compared to March 31, 2022, primarily driven by an increase of $32.3 million in the current portion of long-term debt and a decrease of $8.2 million in the ERC receivable as refunds were received during fiscal 2023.

The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured twice a year at September 30 and March 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.25.

The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation.

The Air T Acquisition 22.1's term loans with ING (the Air T Acquisition 22.1 debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) include several covenants that are measured once a year at December 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.10 and a senior net leverage ratio of 2.10 at December 31, 2022 and 1.50 at subsequent years.

The Contrail Credit Agreement (the Contrail debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates.

The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth ("TNW") of $12 million.

As of March 31, 2023, the Company, AirCo 1, Air T Acquisition 22.1 and Contrail were in compliance with all financial covenants.

As of December 31, 2022, Contrail management forecasted that Contrail would be in violation of the debt service coverage ratio covenant contained in the ONB financing agreements during the twelve-month period subsequent to the filing date of the Form 10-Q for the quarterly period ended December 31, 2022, primarily because the first principal payment of its Term Note G (“Term Note G – ONB”) was to become due in November 2023.

Non-compliance with a debt covenant that is not subsequently cured allows Old National Bank (“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.

In the event of acceleration of maturity of the Contrail Credit Agreement, the Company would not have sufficient cash on hand or available liquidity to repay the outstanding debt.

In response to this condition, Contrail entered into an amendment to the Credit Agreement with ONB whereby, among other things, in exchange for a $20 million principal prepayment of Term Note G, Contrail obtained a waiver of the debt service coverage ratio covenant.

$6.7 million of the $20.0 million prepayment was paid on March 30, 2023 and the remaining $13.3 million payment is currently expected to be paid in September 2023.

These payments will eliminate the need for Contrail to make any future scheduled principal payments on Term Note G until the final maturity of (on) November 24, 2025.

At this time, Contrail management believes it is highly probable that it will have sufficient liquidity to make the $13.3 million prepayment in September 2023.

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

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

As of March 31, 2022, the Company, AirCo 1 and Contrail were in compliance with all financial covenants.

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

As of March 31, 2022, 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 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, during fiscal 2022, the Company received $8.5 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 $23.7 million, based on 1.0 million shares of our outstanding common stock held by non-affiliates and a price of $22.75 per share, which was the price as of March 31, 2022, a date within 60 days of the date that our common stock was last sold on The Nasdaq Global Market on May 26, 2022, calculated in accordance with General Instruction I.B.6 of Form S-3.

After giving effect to the $7.9 million offering limit imposed by General Instruction I.B.6 of Form S-3, we have now reached the offering limit under the current Prospectus Supplement.

As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 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 March 31, 2023, the Overline Note was paid in full and terminated and the unused commitment on the MBT revolver was $8.3 million.

The borrowing base calculation methodology remains unchanged.

As mentioned in Note 10 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on September 30, 2022, the Company executed a promissory note payable to CCI for $2.0 million that bears interest at 10.00% per annum and matured on December 30, 2022.

As of December 31, 2022, this note has been repaid.

As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on November 8, 2022, Contrail entered into the Second Amendment to Master Loan Agreement (the “Amendment”) with ONB.

The Amendment amends the Master Loan Agreement dated as of June 24, 2019, as amended.

The principal revisions made in the Amendment are:

(i) the tangible net worth covenant was revised to require that Contrail maintain a tangible net worth of at least $12.0 million at all times prior to March 31, 2024 and $15.0 million at all times on or following March 31, 2024;

and, (ii) that all proceeds from certain asset sales during the period beginning on October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G.

Contrail executed a Collateral Assignment of two Aircraft engines in connection with the Amendment.

As mentioned in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on March 22, 2023, Contrail entered into the First Amendment to Second Amendment to Master Loan Agreement and Third Amendment to Master Loan Agreement ("the Amendment") with ONB.

The Amendment amends the Master Loan Agreement dated June 24, 2019 with principal revisions to:

(i) Section 3 of the Second Amendment was revised so that exclusion of certain gains and losses from the definition of “net income” applies through September 30, 2023, not March 31, 2023;

(ii) Section 5 of the Second Amendment relating to prepayment of Term Loan G was amended to eliminate the requirement that all asset sales during the period beginning with October 1, 2022 and ending on March 31, 2023 be applied as prepayments on Term Loan G;

instead, the Amendment provision now reflects the agreement that voluntary payments totaling $20.0 million would be made by the borrower on Term Loan G no later than September 30, 2023;

and, (iii) a revolving note resting period covenant was added to the Amendment whereby the outstanding principal balance on the revolving note would be paid to zero (0) for at least thirty (30) consecutive days during each annual period ending on the anniversary date of the revolving note, provided the borrower has not achieved a debt service coverage ratio of 1.10:1.

As mentioned in Note 2 and Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on January 31, 2022 the Company funded the WASI acquisition through (i) a promissory note to Worldwide Aviation, LLC, (ii) cash, and (iii) an additional secured loan from MBT.

The promissory note to Worldwide Aviation, LLC ("Seller's Note") in the amount of $1.5 million bears a fixed interest rate of 6.00% and is payable via periodic payments up to the January 1, 2026 maturity date.

In connection with the acquisition, the Company and Jet Yard, LLC entered Amendment No.

2 to the Third Amended and Restated Credit Agreement (“Amendment No.

2”) with MBT.

Amendment No.

2 amends the Third Amended and Restated Credit Agreement dated as of August 31, 2021 as amended by that certain Amendment No.

1 to the Third Amended and Restated Credit Agreement dated June 9, 2022.

Amendment No.

2 provides for a new term loan (“Term Loan F”) in the amount of $1.0 million to help finance a portion of the consideration paid by the Company.

Pursuant to the amendment, the Company executed Term Note F in favor of MBT in the original principal amount of $1.0 million.

The note bears interest at a rate equal to the greater of six percent (6.00%) or the prime rate plus one percent (1.00%).

The note obligates the Company to make monthly payments of principal plus accrued interest commencing March 1, 2023.

The note may be prepaid, in whole or part, at any time without penalty and final payment of all amounts due under the note is due January 31, 2028.

As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, 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 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 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’s origination and asset management expertise.

CAM will serve 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 million, which is comprised of an $8 million initial commitment from the Company and an approximately $45 million initial commitment from MRC.

As of March 31, 2022, CAM's remaining capital commitments are approximately $2.0 million from the Company and $22.0 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 the date of this filing, $75.8 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 that obtained from the PPP and other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.

As mentioned in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, the Company has ownership interest in Contrail Asset Management, LLC (“CAM”).

The operations of CAM are not consolidated into the operations of the Company.

For its Investment Function (as defined in Note 24 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report), CAM’s initial commitment to CJVII was approximately $51.0 million.

The Company and MRC have commitments to CAM in the respective amounts of $7.0 million and $44.0 million.

As of March 31, 2023, the Company has fulfilled its capital commitments to CAM.

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.

As of the date of this report, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note to extend the maturity date of the credit facility to August 31, 2024 and include the following changes:

A $2.0 million seasonal increase in the maximum amount available under the facility.

The maximum amount of the facility will now increase to $19.0 million between May 1 and November 30 of each year and will decrease to $17.0 million between December 1 and April 30 of each year;

The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread.

The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA).

Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25% and 3.25%;

The unused commitment fee on the revolving credit facility will increase from 0.11% to 0.15%;

The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $5.0 million of “Other Investments” per year.

We are currently seeking to refinance the Contrail revolver prior to its maturity date;

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

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.

Following is a table of changes in cash flow from continuing operations for the respective years ended March 31, 2023 and 2022 (in thousands):

Year Ended March 31, Change

Net Cash Used in Operating Activities $ (33,084) $ (1,823) $ (31,261)

Net Cash (Used) Provided by Investing Activities (33,388) 2,516 (35,904)

Net Cash Provided by Financing Activities 59,254 71 59,183

Net Cash Provided by (Used in) Operating Activities $ 16,909 $ (33,084) $ 49,993

Net Cash Used in Investing Activities (6,168) (33,388) 27,220

Net Cash (Used in) Provided by Financing Activities (12,380) 59,254 (71,634)

Effect of foreign currency exchange rates 361 (341) 702

Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash $ (7,559) $ 352 $ (7,911)

Cash used in operating activities was $33.1 million in fiscal year 2022 compared to cash used in operating activities of $1.8 million in fiscal year 2021.

During fiscal year 2022, the Company's purchase of engines and components received into inventory exceeded amounts spent in fiscal year 2021 by $17.5 million.

Further, less cash was collected this year due to timing and less concentration of cash receipts compared to the prior year as accounts receivable increased by $13.2 million.

Cash used in investing activities for fiscal year 2022 was $33.4 million compared to cash provided by investing activities for the prior fiscal year of $2.5 million.

This difference was primarily driven by cash used for the acquisitions of Wolfe Lake assets of $13.4 million, GdW's acquisition of $12.8 million, and investment in unconsolidated entities of $6.8 million.

Cash provided by financing activities for fiscal year 2022 was $59.2 million more compared to the prior fiscal year.

This was primarily due to the current year's increase in net proceeds from lines of credit of $33.0 million, increase in proceeds received from issuance of Trust Preferred Securities ("TruPs") of $10.0 million, and decrease in payments on line of credit of $21.0 million compared to prior year, offset by prior year's proceeds from PPP loan of $8.2 million that did not recur in the current year.

Net Decrease in Cash and Cash Equivalents and Restricted Cash $ (1,278) $ (7,559) $ 6,281

Cash provided by operating activities was $16.9 million in fiscal year 2023 compared to cash used in operating activities of $33.1 million in fiscal year 2022.

The fluctuation was primarily driven by the $17.3 million change in the ERC receivable:

in the prior fiscal year, the Company applied for the ERC in the amount of $9.1 million, of which, in the current fiscal year, the Company received $8.2 million.

In addition, the fluctuation was further increased by the $27.8 million change in inventories, primarily due to Contrail and GGS generating more sales of their inventories compared to the prior fiscal year.

Cash used in investing activities for fiscal year 2023 was $6.2 million compared to cash used in investing activities for the prior fiscal year of $33.4 million.

The current fiscal year's cash usage was primarily driven by cash used for the acquisition of WASI of $2.5 million and investment in unconsolidated entities of $3.1 million.

The prior fiscal year's cash usage was primarily driven by cash used for the acquisitions of Wolfe Lake assets of $13.4 million, Shanwick's acquisition of $12.8 million, and investment in unconsolidated entities of $6.8 million.

Cash used in financing activities for fiscal year 2023 was $12.4 million compared to cash provided by financing activities for the prior fiscal year of $59.3 million.

This was primarily due to decreased net proceeds from lines of credit of $8.4 million, less proceeds from term loans of $23.6 million in addition to increased payments on term loans of $24.0 million.

Lastly, the change was also due to the fact that there was no proceeds received from issuance of TruPs in the current fiscal year compared to $11.3 million in the prior fiscal year.

Off-Balance Sheet Arrangements

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The Company is not currently engaged in the use of any of these arrangements.

Systems and Network Security

Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including hacking, viruses, malicious software, break-ins, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems.

Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information or other interruption to our business operations.

As techniques used to obtain unauthorized access to sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against these attacks.

If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction.

We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks.

Cyber-attacks may target us or other participants, or the communication infrastructure on which we depend.

Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants.

Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.

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.

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.

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.

We continue to look for proactive ways to mitigate potential impacts of supply chain disruptions at our businesses.

In addition, 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 and interests rates which has created a hyper-competitive wage environment and increased debt costs.

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, continued increases in interest rates, 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.

We continue to look for proactive ways to mitigate potential impacts of these issues at our businesses.

The Company believes that inflation has not had a material effect on its manufacturing and commercial jet engine and parts operations, because increased costs to date have been passed on to customers.

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March 31, 2023 March 31, 2022

Operating income (loss) from continuing operations $ 8,755 $ (9,175)

Operating (loss) income from continuing operations $ (4,407) $ 8,755

Depreciation and amortization (excluding leased engines depreciation) 2,525 1,589

Asset impairment, restructuring or impairment charges 1 7,840 805

Loss (gain) on sale of property and equipment 5 (10)

Security issuance expenses 252 32

Loss on sale of property and equipment 8 5

Securities expenses 63 252

Adjusted EBITDA $ 6,029 $ 11,406

Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2022 was a write-down of $0.8 million on the commercial jet engines and parts segment's inventory.

The write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2022, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2023 and 2022 (in thousands):

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Adjusted EBITDA $ 6,029 $ 11,406

1 Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2023 was a write-down of $7.3 million on the commercial jet engines and parts segment's inventory, of which, $5.4 million was due to a management decision to monetize three engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds.

The remainder of the write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2023, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

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

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Further, there is significant judgment in determining whether an equity instrument is currently redeemable or not currently redeemable but probable that the equity instrument will become redeemable.

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

Additionally, there are also significant estimates made in the valuation of Contrail's RNCI.

The fair value of Contrail's non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis