What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-11 compared with 2023-02-10 · 96 added, 170 removed, 87 unchanged (75% of the section changed)

2 unchanged sentences

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 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.

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, 2023, to and including June 30, 2023 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.

21 unchanged sentences

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

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

Further, Corporate and other also comprises insignificant businesses and business interests.

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

1 unchanged sentence

Results of Operations

Impacts from Geopolitical, Macroeconomic, and COVID-19 Challenges

We continue to be exposed to macroeconomic pressures as a result of the lingering impacts of the COVID-19 pandemic, supply chain challenges, foreign currency fluctuations, 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 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 December 31, 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 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.

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):

First Quarter Fiscal 2024 Compared to First Quarter Fiscal 2023

Consolidated revenue for the three-month period ended June 30, 2023 increased by $20.6 million (40.4%) compared to the same quarter in the prior fiscal year.

Following is a table detailing revenue by segment, net of intercompany during the three months ended June 30, 2023 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Overnight Air Cargo $ 27,728 $ 20,564 $ 7,164 34.8 %

3 unchanged sentences

$ 71,431 $ 50,862 $ 20,569 40.4 %

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 $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 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 December 31, 2022 compared to the same quarter in the prior fiscal year (in thousands):

Revenues from the air cargo segment for the three-month period ended June 30, 2023 increased by $7.2 million (34.8%) compared to the first quarter of the prior fiscal year.

The increase was principally attributable to higher administrative fees due to increased fleet, higher pass-through revenues from FedEx, and the WASI acquisition mentioned in Note 2 of the Notes to Condensed Consolidated Financial Statements of this report, which contributed revenues for a full quarter but was not part of the segment in the 2022 comparable quarter.

The ground equipment sales segment contributed approximately $11.8 million and $5.8 million to the Company’s revenues for the three-month periods ended June 30, 2023 and 2022 respectively, representing a $6.0 million (102.7%) increase in the current quarter.

The increase was primarily driven by the higher number of deicing trucks sold in the current year quarter compared to prior year's comparable quarter.

At June 30, 2023, the ground equipment sales segment’s order backlog was $13.7 million compared to $17.2 million at June 30, 2022.

The commercial jet engines and parts segment contributed $29.8 million of revenues in the quarter ended June 30, 2023 compared to $22.9 million in the comparable prior year quarter, which is an increase of $7.0 million (30.6%).

The increase was primarily driven by higher component part sales at Contrail in the current quarter compared to prior year comparable quarter.

Revenues from the corporate and other segment for the three-month period ended June 30, 2023 increased by $0.4 million (27.1%) compared to the first quarter of the prior fiscal year.

The increase was primarily attributable to more subscriptions sales at Shanwick.

Following is a table detailing operating income (loss) by segment during the three months ended June 30, 2023 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Overnight Air Cargo $ 1,935 $ 1,077 $ 858

3 unchanged sentences

$ 658 $ 834 $ (176)

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.

Consolidated operating income for the quarter ended June 30, 2023 was $0.7 million, compared to an operating income of $0.8 million in the comparable quarter of the prior year.

The air cargo segment's operating income for the three-month period ended June 30, 2023 was $1.9 million compared to operating income of $1.1 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 loss for the quarter ended June 30, 2023 was $0.1 million compared the prior year comparable quarter's operating income of $0.1 million.

This change 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 $1.5 million in the current-year quarter compared to operating income of $3.1 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):

The decrease was primarily attributable to lower gross profit margins on components sales mentioned above due to parts coming from the tear down of higher priced aircraft.

The corporate and other segment's operating loss for the three-month period ended June 30, 2023 was $2.7 million compared to an operating loss of $3.5 million in the same quarter in the prior fiscal year.

The change was primarily attributable to the revenue increase mentioned above.

Following is a table detailing non-operating income (expense) during the three months ended June 30, 2023 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended

December 31, Change

June 30, Change

Interest expense $ (1,808) $ (1,822) $ 14

Income from equity method investments 691 532 159

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

Other 643 (154) 797

$ (474) $ (1,444) $ 970

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.

The Company had a net non-operating loss of $0.5 million during the quarter ended June 30, 2023, compared to net non-operating loss of $1.4 million in the prior-year quarter.

The decrease in non-operating loss was primarily driven by changes in the fair value of the Contrail swap on Term Note G of $0.3 million and the reclassification of previously recorded gain in other comprehensive income into earnings of $0.2 million as the swap was no longer an effective hedge.

See Note 8 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%.

In addition, the non-operating loss was further decreased by fluctuations in foreign currency exchange rates causing a gain of $0.1 million in the current year quarter compared to a loss of $0.2 million in the prior year quarter.

During the three-month period ended June 30, 2023, the Company recorded $0.2 million in income tax expense at an effective tax rate of 114.7%.

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

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

Nine Months Ended

December 31, Change

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

Ground Equipment Sales 39,981 32,603 7,378 22.6 %

Commercial Jet Engines and Parts 63,577 35,902 27,675 77.1 %

Corporate and Other 4,924 1,189 3,735 314.1 %

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

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 $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 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 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

Ground Equipment Sales 3,122 2,929 193

Commercial Jet Engines and Parts 3,603 2,000 1,603

Corporate and Other (8,509) (6,268) (2,241)

$ 1,147 $ 724 $ 423

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 $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 $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)

Income from equity method investments 2,917 197 2,720

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 $3.7 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 $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%.

consolidated group, Delphax and LGSS, 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 foreign rate differentials for Air T's operations located in the Netherlands, Puerto Rico, and Singapore.

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

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

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

The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended June 30, 2022 were the change in valuation allowance related to the Company's subsidiaries in the corporate and other segment, Delphax, other capital losses, the estimated benefit for the exclusion of income for SAIC under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

Critical Accounting Policies and Estimates

4 unchanged sentences

Accordingly, actual results could differ materially from estimates.

There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended December 31, 2022.

There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended June 30, 2023.

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

Other segments have typically not experienced material seasonal trends.

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 in the future, 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 COVID-19 pandemic including its impact on our business operations.

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

Additionally, the United States is experiencing workforce shortages and increasing inflation which has created a competitive wage environment.

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

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

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

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, presents material uncertainty and risk with respect to us and our results of operations.

The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of June 30, 2023.

Liquidity and Capital Resources

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.

As of June 30, 2023, the Company held approximately $6.4 million in cash and cash equivalents and restricted cash, $0.2 million of which related to restricted cash collateralized held for three opportunity zone investments made by the Company - Air T OZ 1, LLC, Air T OZ 2, LLC, and Air T OZ 3, LLC (the "Opportunity Zone Funds"), each a Minnesota limited liability company and a subsidiary of the Company.

The Company also held $1.6 million in restricted investments held as statutory reserve of SAIC.

The Company has approximately $0.6 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.

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 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 10.00% per annum and matured 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.

The Company has approximately $2.5 million of marketable securities and an aggregate of approximately $25.5 million in available funds under its lines of credit as of June 30, 2023.

As of June 30, 2023, the Company’s working capital amounted to $63.1 million, a decrease of $10.8 million compared to March 31, 2023 primarily driven by the decrease in short-term debt due to the extension of the Air T revolver's maturity date to August 31, 2024.

As mentioned in Note 12 of Notes to Condensed Consolidated Financial Statements included under Part I, Item 1 of this Report on Form 10-Q, on June 23, 2023, the Company and MBT entered into amendments to the MBT revolving credit agreement and related promissory note.

The amendments extended 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.

As mentioned in Note 16 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.

4 unchanged sentences

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

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

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

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

CAM serves two separate and distinct functions:

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

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

As of December 31, 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, 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.

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

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

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)

As mentioned in Note 16 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report, on May 5, 2021, the Company formed CAM and acquired its ownership interest in CAM.

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

For its Investment Function (as defined in Note 16 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 June 30, 2023, the Company has fulfilled its capital commitments to CAM.

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 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 revolving line of credit at Contrail with ONB has a due date or expires within the next twelve months.

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.

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 three months ended June 30, 2023 and 2022 (in thousands):

Three Months Ended June 30,

Net Cash Provided by (Used in) Operating Activities $ 3,484 $ (2,531)

Net Cash Used in Investing Activities (21) (1,060)

Net Cash Provided by Financing Activities 4,866 29,079

Net Cash (Used in) Provided by Financing Activities (4,076) 4,573

Effect of foreign currency exchange rates on cash and cash equivalents (56) 173

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.

Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash $ (669) $ 1,155

Net cash provided by operating activities was $3.5 million for the three-month period ended June 30, 2023 compared to net cash used in operating activities of $2.5 million in the prior year three-month period.

The change in net cash provided by operating activities was primarily driven by a decrease in inventory of $14.6 million offset by an increase in accounts receivable of $8.6 million due to increased sales in the current quarter.

Net cash used in investing activities for the three-month period ended June 30, 2023 was $21.0 thousand compared to net cash used in investing activities of $1.1 million in the prior-year period.

The decrease in cash usage in investing activities was primarily driven by less contributions to and more distributions received from unconsolidated entities.

Net cash used in financing activities for the three-month period ended June 30, 2023 was $4.1 million compared to net cash provided by financing activities of $4.6 million in the prior-year period.

The change in cash usage in financing activities was primarily driven by increased payments on the lines of credit in the current quarter, as well as receipt of proceeds from a term note in the prior quarter that did not recur in the current quarter.

Non-GAAP Financial Measures

2 unchanged sentences

Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items.

The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes.

The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and

depreciation and amortization to earnings before income taxes.

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

Depreciation expense for leased engines totaled $0.5 million and $70.4 thousand for the three months ended December 31, 2022 and 2021, respectively.

There was no depreciation expense for leased engines for the three months ended June 30, 2023 and $0.3 million for the three months ended June 30, 2022.

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 nine months ended December 31, 2022 and 2021 (in thousands):

Three months ended Nine months ended

The tables below provide a reconciliation of operating income (loss) to Adjusted EBITDA for the three months ended June 30, 2023 and 2022 (in thousands):

Three months ended

6/30/2023 6/30/2022

1 unchanged sentence

Depreciation and amortization (excluding leased engines depreciation) 690 605

Asset impairment, restructuring or impairment charges 638 — 2,174 —

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

Gain on sale of property and equipment (6) (2)

Securities expenses 45 15

Adjusted EBITDA $ 1,387 $ 1,452

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

The table below provides Adjusted EBITDA by segment for the three months ended June 30, 2023 and 2022 (in thousands):

Three months ended

6/30/2023 6/30/2022

5 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis