AIR T INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS 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, 2023, to and including September 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. These statements reflect our current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” "will," "continue" and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements, because of, among other things, potential risks and uncertainties, such as: • An inability to finance our operations through bank or other financing or through the sale of issuance of debt or equity securities as a result of the existence of substantial doubt about our ability to continue as a going concern; • Economic and industry conditions in the Company’s markets; • The risk that contracts with FedEx could be terminated or adversely modified; • The risk that the number of aircraft operated for FedEx will be reduced; • The risk that GGS customers will defer or reduce significant orders for deicing equipment; • The impact of any terrorist activities on United States soil or abroad; • The Company’s ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels; • The Company's ability to meet debt service covenants and to refinance existing debt obligations; • The risk of injury or other damage arising from accidents involving the Company’s overnight air cargo operations, equipment or parts sold and/or services provided; • Market acceptance of the Company’s commercial and military equipment and services; • Competition from other providers of similar equipment and services; • Changes in government regulation and technology; • Changes in the value of marketable securities held as investments; • Mild winter weather conditions reducing the demand for deicing equipment; • Market acceptance and operational success of the Company’s relatively new aircraft asset management business and related aircraft capital joint venture; and • 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. We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 25 We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (including the information presented therein under Risk Factors), as well other publicly available information. Overview Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth in its free cash flow per share over time. We currently operate in four industry segments: • Overnight air cargo, which operates in the air express delivery services industry; • Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers; • Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and, • 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. Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income and Adjusted EBITDA. Results of Operations Second Quarter Fiscal 2024 Compared to Second Quarter Fiscal 2023 Consolidated revenue for the three-month period ended September 30, 2023 increased by $18.3 million (30.1%) 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 September 30, 2023 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2023 2022 Overnight Air Cargo $ 28,197 $ 22,069 $ 6,128 27.8 % Ground Equipment Sales 12,246 18,019 (5,773) (32.0) % Commercial Jet Engines and Parts 36,478 18,986 17,492 92.1 % Corporate and Other 2,045 1,614 431 26.7 % $ 78,966 $ 60,688 $ 18,278 30.1 % Revenues from the air cargo segment for the three-month period ended September 30, 2023 increased by $6.1 million (27.8%) compared to the second 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 in 2023 but was not part of the segment in the prior comparable quarter. The ground equipment sales segment contributed approximately $12.2 million and $18.0 million to the Company’s revenues for the three-month periods ended September 30, 2023 and 2022 respectively, representing a $5.8 million (32.0%) decrease in the current quarter. The decrease was primarily driven by the lower number of deicing trucks sold in the current year quarter compared to prior year's comparable quarter. At September 30, 2023, the ground equipment sales segment’s order backlog was $7.0 million compared to $21.1 million at September 30, 2022. 26 The commercial jet engines and parts segment contributed $36.5 million of revenues in the quarter ended September 30, 2023 compared to $19.0 million in the comparable prior year quarter, which is an increase of $17.5 million (92.1%). The increase was primarily driven by engine sales at Contrail and higher component part sales across multiple companies within the segment in the current quarter compared to prior year comparable quarter. Revenues from the corporate and other segment for the three-month period ended September 30, 2023 increased by $0.4 million (26.7%) compared to the second quarter of the prior fiscal year. The increase was primarily attributable to increased software subscriptions at Shanwick. Following is a table detailing operating income (loss) by segment during the three months ended September 30, 2023 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2023 2022 Overnight Air Cargo $ 2,039 $ 845 $ 1,194 Ground Equipment Sales (12) 1,887 (1,899) Commercial Jet Engines and Parts 1,152 (204) 1,356 Corporate and Other (2,418) (2,349) (69) $ 761 $ 179 $ 582 Consolidated operating income for the quarter ended September 30, 2023 was $0.8 million, compared to an operating income of $0.2 million in the comparable quarter of the prior year. The air cargo segment's operating income for the three-month period ended September 30, 2023 was $2.0 million compared to operating income of $0.8 million in the same quarter in the prior fiscal year. This increase was primarily attributable to the increased sales noted in the segment revenue discussion above. The ground equipment sales segment's operating loss for the quarter ended September 30, 2023 was $12.0 thousand compared to the prior year comparable quarter's operating income of $1.9 million. This decrease was primarily attributable to the decreased sales noted in the segment revenue discussion above. The commercial jet engines and parts segment generated an operating income of $1.2 million in the current-year quarter compared to an operating loss of $0.2 million in the prior-year quarter. The change was primarily attributable to the increased sales noted in the segment revenue discussion above. In addition, this segment incurred an inventory write-down of $1.0 million in the prior-year comparable quarter compared to none in the current year comparable quarter. The corporate and other segment's operating loss for the three-month period ended September 30, 2023 was relatively flat compared to the same quarter in the prior fiscal year. Following is a table detailing non-operating income (expense) during the three months ended September 30, 2023 compared to the same quarter in the prior fiscal year (in thousands): Three Months Ended September 30, Change 2023 2022 Interest expense $ (1,853) $ (1,996) $ 143 Income from equity method investments 748 266 482 Other (777) (357) (420) $ (1,882) $ (2,087) $ 205 The Company had a net non-operating loss of $1.9 million during the quarter ended September 30, 2023, compared to net non-operating loss of $2.1 million in the prior-year quarter. The decrease in non-operating loss was primarily driven by the increase of net income allocated to the Company from equity method investments and fluctuations in foreign currency exchange rates causing a lower exchange loss of $0.2 million compared to the same quarter in the prior fiscal year. The decrease in non-operating loss is offset by a higher investment loss due to the fair value adjustments on marketable securities. During the three-month period ended September 30, 2023, the Company recorded $0.5 million in income tax expense at an ETR of (43.4)%. The Company has computed the provision for income taxes based on the estimated annual effective tax rate excluding loss 27 jurisdictions with no tax benefit and the application of discrete items, if any, for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended September 30, 2023 were the valuation allowance related to the Company's U.S. consolidated group, Delphax and LGSS, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. During the three-month period ended September 30, 2022, the Company recorded income tax benefit of $0.6 million at an effective tax rate of 30.0%. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended September 30, 2022 were the change in valuation allowance related to Delphax other capital losses, the estimated benefit for the exclusion of income for SAIC under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail. First Six Months of Fiscal 2024 Compared to First Six Months of Fiscal 2023 Following is a table detailing revenue by segment, net of intercompany during the six months ended September 30, 2023 compared to the same period in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2023 2022 Overnight Air Cargo $ 55,925 $ 42,633 $ 13,292 31.2 % Ground Equipment Sales 24,033 23,834 199 0.8 % Commercial Jet Engines and Parts 66,324 41,841 24,483 58.5 % Corporate and Other 4,115 3,242 873 26.9 % $ 150,397 $ 111,550 $ 38,847 34.8 % Revenues from the air cargo segment for the six months ended September 30, 2023 increased by $13.3 million (31.2%) compared to the six months ended September 30, 2022. 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 the full six month period in 2023 but was not part of the segment in the prior-year comparable six-month period. The ground equipment sales segment's revenue for the six-month period ended September 30, 2023 was relatively flat compared to the same period in the prior fiscal year. The commercial jet engines and parts segment contributed $66.3 million of revenues in the six months ended September 30, 2023 compared to $41.8 million in the comparable prior year six months period. The increase was primarily driven by higher component part sales across multiple companies within the segment and engine sales at Contrail that did not occur in the prior fiscal year's six month period. Revenues from the corporate and other segment in the six months ended September 30, 2023 increased by $0.9 million (26.9%) compared to the six months ended September 30, 2022. The increase was primarily attributable increased software subscriptions at Shanwick. Following is a table detailing operating income (loss) by segment during the six months ended September 30, 2023 compared to the same six months in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2023 2022 Overnight Air Cargo $ 3,974 $ 1,922 $ 2,052 Ground Equipment Sales $ (97) $ 2,029 (2,126) Commercial Jet Engines and Parts $ 2,629 $ 2,870 (241) Corporate and Other (5,084) (5,809) 725 $ 1,422 $ 1,012 $ 410 Consolidated operating income for the six months ended September 30, 2023 was $1.4 million compared to an operating income of $1.0 million for the comparable six months of the prior year. 28 The air cargo segment's operating income for the six months ended September 30, 2023 was $4.0 million compared to operating income of $1.9 million in the prior year comparable period primarily due to the revenue increase noted above. The ground equipment sales segment's operating loss for the six months ended September 30, 2023 was $0.1 million compared to operating income of $2.0 million in the prior year comparable period primarily attributable to the decline in revenue in the second fiscal quarter mentioned above as well as an increase in cost of parts due in part to the global supply chain disruption. The commercial jet engines and parts segment generated operating income of $2.6 million in the current-year six-month period compared to operating income of $2.9 million in the prior year six-month period. The decrease was primarily attributable to lower profit margins on component sales at Contrail compared to the prior year comparable period. The corporate and other segment's operating loss for the six-month period ended September 30, 2023 was $5.1 million compared to an operating loss of $5.8 million in the prior year comparable period. The decrease in operating loss was primarily driven by the revenue increase noted above. Following is a table detailing non-operating income (expense) during the six months ended September 30, 2023 compared to the same six months in the prior fiscal year (in thousands): Six Months Ended September 30, Change 2023 2022 Interest expense (3,662) (3,818) $ 156 Income from equity method investments 1,439 798 641 Other (136) (509) 373 (2,359) (3,529) $ 1,170 The Company had a net non-operating loss of $2.4 million for the six months ended September 30, 2023 compared to a net non-operating loss of $3.5 million in the prior-year six-month period. The decrease in non-operating loss was primarily driven by the increase of net income allocated to the Company from equity method investments and fluctuations in foreign currency exchange rates causing a lower exchange loss of $0.5 million compared to prior fiscal year. During the six-month period ended September 30, 2023, the Company recorded income tax expense of $0.7 million at an ETR of (74.5)%. The Company has computed the provision for income taxes based on the estimated annual effective tax rate excluding loss jurisdictions with no tax benefit and the application of discrete items, if any, for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the six-month period ended September 30, 2023 were the valuation allowance related to the Company's U.S. consolidated group, Delphax and LGSS, and the foreign rate differentials for Air T's operations located in the Netherlands and Puerto Rico. During the six-month period ended September 30, 2022, the Company recorded income tax benefit of $0.4 million at an effective tax rate of 15.1%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company's effective tax rate for the six-month period ended September 30, 2022 were the change in valuation allowance related to Delphax and other capital losses, the estimated benefit for the exclusion of income for SAIC under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail. Critical Accounting Policies and Estimates The Company’s significant accounting policies are fully described in Note 1 to the condensed consolidated financial statements and in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2023. The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended September 30, 2023. Seasonality 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. 29 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, Inflation, and Interest Rates Future economic developments such as inflation and increased interest rates as well as further business issues present uncertainty and risk with respect to our financial condition and results of operations. Supply chain disruption caused an increase in material costs, which has directly impacted the performance of our ground equipment sales segment. We expect that issues caused by economic and business issues will continue beyond fiscal 2024. 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 September 30, 2023. Liquidity and Capital Resources As of September 30, 2023, the Company held approximately $5.9 million in cash and cash equivalents and restricted cash. The Company also held $1.3 million in restricted investments held as statutory reserve of SAIC. The Company has an aggregate of approximately $24.4 million in available funds under its lines of credit as of September 30, 2023. As of September 30, 2023, the Company’s working capital amounted to $47.5 million, a decrease of $4.8 million compared to March 31, 2023. 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: 1. 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; 2. 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%; 3. The unused commitment fee on the revolving credit facility will increase from 0.11% to 0.15%; and, 4. 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 1 5 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. The Seller is the founder of Contrail and its current Chief Executive Officer. The Put/Call Option permits the Seller or the Company to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail Aviation commencing on July 18, 2021. As of the date of this filing, neither the Seller nor the Company has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations. As mentioned in Note 1 5 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 30 into the operations of the Company. For its Investment Function (as defined in Note 1 5 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. 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 was paid in September 2023. 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 September 5, 2023, Contrail entered into the Sixth Amendment to Supplement #2 to Master Loan Agreement and the Fifth Amended and Restated Promissory Note with ONB. The principal purpose of the amended documents was to extend the maturity date of the revolving $25.0 million facility to November 24, 2025 or such earlier date on which the revolving note becomes due and payable pursuant to the supplement or the master loan agreement. The Company’s financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The revolving line of credit at Air T with MBT with $16.4 million outstanding as of September 30, 2023 matures on August 31, 2024. The Company does not have sufficient cash on hand or available liquidity to repay the outstanding debt which is due within one year after the date that the financial statements are issued. This condition raises substantial doubt about the Company’s ability to continue as a going concern. In response to this condition, management has plans to alleviate the substantial doubt. We are currently seeking to refinance the Revolver - MBT 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. Other plans include raising additional funds via sales of our TruPs through the Company's at-the-market offering that commenced on October 18, 2023 or through a private placement offering including possible incremental sales to existing shareholders, implementing cost reduction measures, reevaluating future investments in selected startups, and considering liquidation or sale of select investments in addition to the reduction of capital expenditures. As a result of these plans, management believes it is probable that the cash on hand and current financings, net cash provided by operations from operating segments will be sufficient to meet 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. Cash Flows Following is a table of changes in cash flow for the six months ended September 30, 2023 and 2022 (in thousands): Six Months Ended September 30, 2023 2022 Net cash provided by (used in) operating activities $ 15,897 $ (13,946) Net cash provided by (used in) investing activities 156 (1,776) Net cash (used in) provided by financing activities (17,229) 16,757 Effect of foreign currency exchange rates on cash and cash equivalents 9 62 Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash $ (1,167) $ 1,097 Net cash provided by operating activities was $15.9 million for the six-month period ended September 30, 2023 compared to net cash used in operating activities of $13.9 million in the prior year six-month period. The change in operating cash flows was primarily driven by a net decrease in inventory of $17.0 million driven by increased sales in the current six month period compared to prior year period's net increase of $14.2 million due to higher inventory purchases. Net cash provided by investing activities for the six-month period ended September 30, 2023 was $0.2 million compared to net cash used in investing activities of $1.8 million in the prior-year period. The cash provided by investing activities was primarily driven by higher distributions received from equity method investments in the current year compared to the prior year six month period. 31 Net cash used in financing activities for the six-month period ended September 30, 2023 was $17.2 million compared to net cash provided by financing activities of $16.8 million in the prior-year period. The cash used in financing activities in the current year six month period was primarily driven by less proceeds and more payments on the Company's term loans and revolving lines of credit compared to the prior year six month period. Non-GAAP Financial Measures The Company uses adjusted earnings before taxes, interest, and depreciation and amortization ("Adjusted EBITDA"), a non-GAAP financial measure as defined by the SEC, to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures. 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. 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 and $0.4 million for the three months ended September 30, 2023 and 2022, respectively. Management believes that Adjusted EBITDA is a useful measure of the Company's performance because it provides investors additional information about the Company's operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EBITDA is not intended to replace or be an alternative to operating income (loss), the most directly comparable amounts reported under GAAP. The tables below provide a reconciliation of operating income to Adjusted EBITDA for the three and six months ended September 30, 2023 and 2022 (in thousands): Three months ended Six months ended 9/30/2023 9/30/2022 9/30/2023 9/30/2022 Operating income $ 761 $ 179 $ 1,422 $ 1,012 Depreciation and amortization (excluding leased engines depreciation) 700 645 1,389 1,252 Asset impairment, restructuring or impairment charges 3 1,488 5 1,536 Gain on sale of property and equipment (2) (1) (8) (2) TruPs issuance expenses 47 19 93 34 Adjusted EBITDA $ 1,509 $ 2,330 $ 2,901 $ 3,832 The table below provides Adjusted EBITDA by segment for the three and six months ended September 30, 2023 and 2022 (in thousands): Three months ended Six months ended 9/30/2023 9/30/2022 9/30/2023 9/30/2022 Overnight Air Cargo $ 2,125 $ 1,204 $ 4,140 $ 2,300 Ground Equipment Sales 23 1,933 (28) 2,124 Commercial Jet Engines and Parts 1,339 979 3,009 4,248 Corporate and Other (1,978) (1,786) (4,220) (4,840) Adjusted EBITDA $ 1,509 $ 2,330 $ 2,901 $ 3,832 32 Issuer and guarantor subsidiary summarized information Air T Funding (the “Trust”) is a statutory business trust formed under Delaware law in September 2018. Air T Funding exists for the exclusive purposes of (i) issuing and selling its Alpha Income Trust Preferred Securities (also referred to as the 8.0% Cumulative Securities, Capital Securities or “Trust Preferred Securities”), par value $25.00 per share, (ii) using the proceeds from the sale of the Trust Preferred Securities to acquire Junior Subordinated Debentures issued by the Company, and (iii) engaging in only those other activities necessary, advisable or incidental thereto (such as registering the transfer of the Trust Preferred Securities). Accordingly, the Junior Subordinated Debentures are the sole assets of Air T Funding, and payments by the Company under the Junior Subordinated Debentures and a related expense agreement are the sole revenues of Air T Funding. Air T Funding’s business and affairs are conducted by a Property Trustee, a Delaware Trustee and two individual Administrative Trustees who are officers of Air T. Distributions on the Trust Preferred Securities are payable to record holders at the annual rate of 8% of the stated $25.00 liquidation amount, payable quarterly in arrears on the 15th day of February, May, August, and November in each year. The Trust Preferred Securities issued by the Trust are fully and unconditionally and jointly and severally guaranteed on a senior unsecured basis by Air T. Air T guarantees the payment of distributions by Air T Funding and payments on liquidation of or redemption of the Trust Preferred Securities (subordinate to the right to payment of senior and subordinated debt of Air T, as defined in Note 12 of Notes to condensed Consolidated Financial Statements included under Part I, Item 1 of this report). If Air T Funding has insufficient funds to pay distributions on the Trust Preferred Securities (i.e., if Air T has failed to make required payments under the Junior Subordinated Debentures), a holder of the Trust Preferred Securities would have the right to institute a legal proceeding directly against Air T to enforce payment of such distributions. All of the Common Securities of the Air T Funding are owned by Air T. The Common Securities rank pari passu, and payments will be made thereon pro rata, with the Trust Preferred Securities, except that upon the occurrence and during the continuance of an event of default under the Trust Agreement, as amended resulting from an event of default under the indenture, the rights of the Company as holder of the common securities to payment in respect of distributions and payments upon liquidation, redemption or otherwise would be subordinated to the rights of the holders of the Trust Preferred Securities. The Trust Preferred Securities are subject to mandatory redemption at any time on or after June 7, 2024. Upon the repayment or redemption at any time, in whole or in part, of any Junior Subordinated Debentures, the proceeds from such repayment or redemption would be applied to redeem a like amount of the Trust Preferred Securities, at the liquidation amount plus any accumulated and unpaid distributions. If less than all of the Junior Subordinated Debentures are to be repaid or redeemed on a redemption date, then the proceeds from such repayment or redemption would be allocated to the redemption of the Trust Preferred Securities pro rata. The Company also has an optional right to redeem the Junior Subordinated Debentures (i) on or after June 7, 2024, in whole at any time or in part from time to time at a redemption price equal to the accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof, or (ii) at any time, in whole (but not in part), upon the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event (each as defined in the indenture) at a redemption price equal to the accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof. In the event a Tax Event, an Investment Company Event or Capital Treatment Event has occurred and is continuing and the Company does not elect to redeem the Junior Subordinated Debentures and thereby cause a mandatory redemption of the Trust Preferred Securities or to liquidate Air T Funding and cause the Junior Subordinated Debentures to be distributed to holders of the Trust Securities in liquidation of Air T Funding, such Trust Preferred Securities will remain outstanding and additional sums may be payable on the Junior Subordinated Debentures. So long as no Debenture event of default has occurred and is continuing, at any time on or after June 7, 2024, the Company has the right under the indenture to defer the payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each such period (each, an “Extension Period”), provided that no Extension Period may extend beyond the stated maturity of the Junior Subordinated Debentures. As a consequence of any such election, quarterly distributions on the Trust Preferred Securities will be deferred by Air T Funding during any such Extension Period. Distributions to which holders of Trust Preferred Securities are entitled will accumulate additional amounts thereon at the rate per annum of 8% thereof, compounded quarterly from the relevant Distribution Date, to the extent permitted under applicable law. During any such Extension Period, the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company’s capital stock (which includes common and preferred stock) or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Junior Subordinated Debentures or make any guarantee payments with respect to any guarantee by the Company of the debt securities of any subsidiary of the Company if such guarantee ranks pari passu with or junior in interest to the Junior Subordinated Debentures (other than (a) dividends or distributions in common stock of the Company, (b) any declaration of a dividend in connection with the implementation of a stockholders’ rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the guarantee and (d) purchases of common stock for issuance under any of the Company’s benefit plans for its directors, officers or employees). Prior to the termination of any such Extension Period, the Company may further extend such Extension Period, provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or extend beyond the stated maturity. Upon the termination of any such Extension Period and the payment of all amounts then due, and subject to the foregoing limitations, the Company may elect to begin a new Extension Period. Subject to the foregoing, there is no limitation on the number of times that the Company may elect to begin an Extension Period. The Company has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. Air T Funding has a term of 30 years, but may terminate earlier as provided in the Trust Agreement, as amended. The Trust Agreement was most recently amended on March 3, 2021 and on January 28, 2022 and currently allows for the issuance of up to $100.0 million of Trust Preferred Securities. As of September 30, 2023, there are $25.6 million in Trust Preferred Securities outstanding. The Trust is a “finance subsidiary” of Air T within the meaning of Rule 3‑10 of Regulation S‑X under the Securities Act of 1933, as amended, and as a result the Air T Funding does not file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended. 33