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Item 7. Management’s Discussion and Analysis

2024-06-26 compared with 2023-06-27 · 130 added, 152 removed, 155 unchanged (65% of the section changed)

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(the “Company,” “Air T,” “we” or “us” or “our”) 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.

Our goal is to prudently and strategically grow Air T's earnings power, compounding its free-cash-flow per share over time.

We currently operate in four industry segments:

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

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

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.

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 (loss) and Adjusted EBITDA.

Unconsolidated Investments

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See Note 22 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

The Company also has ownership interests in Insignia and CCI.

The Company also has ownership interests in Lendway and CCI.

The operations of these companies are not consolidated into the operations of the Company.

See Note 10 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

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 (loss) and Adjusted EBITDA.

Forward Looking Statements

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Actual results may differ materially from those contemplated by such forward-looking 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 or issuance of debt or equity securities;

• Economic and industry conditions in the Company’s markets;

• The risk that contracts with FedEx could be terminated or adversely modified;

• The risk that contracts with FedEx Corporation (“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 impact of any terrorist activities or armed conflict 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;

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Consolidated revenue increased by $39.5 million (16%) to $286.8 million for the fiscal year ended March 31, 2024 compared to the prior fiscal year.

Following is a table detailing revenue (after elimination of intercompany transactions), in thousands:

Following is a table detailing revenue by segment (after elimination of intercompany transactions), in thousands:

Year Ended March 31, Change

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Total $ 286,834 $ 247,323 $ 39,511 16 %

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).

Revenues from the overnight air cargo segment increased by $25.0 million (28%) 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 (85 aircraft in the prior year compared to 105 in the current fiscal year), and the WASI acquisition mentioned in Note 2 of the Notes to Consolidated Financial Statements of this report, contributed a full year's revenues of $7.5 million in the current fiscal year compared to $0.9 million in the prior fiscal year.

Pass-through costs under the dry-lease agreements with FedEx totaled $36.4 million and $29.2 million for the years ended March 31, 2024 and 2023, respectively.

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.

The ground equipment sales segment contributed approximately $37.2 million and $48.5 million to the Company’s revenues for the fiscal years ended March 31, 2024 and 2023, respectively, representing a $11.3 million (23%) decrease in the current fiscal year.

The decrease was primarily driven by the lower number of deicing trucks sold in the current fiscal year compared to the prior fiscal year.

At March 31, 2024, the ground equipment sales segment’s order backlog was $12.6 million compared to $13.6 million at March 31, 2023.

The commercial jet engines and parts segment contributed $125.5 million of revenues in fiscal year ended March 31, 2024 compared to $101.7 million in the prior fiscal year which is an increase of $23.8 million (23%).

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.

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):

The increase was primarily driven by Contrail's higher component part sales and higher pass-through revenue at Worthington in transactions that Worthington acted as the principal of the consignment agreements in the current fiscal year compared to the prior fiscal year.

In addition, Contrail also sold three engines at zero profit margin in the current year as they had previously written these assets down to the sales price in the prior year.

Revenues from the corporate and other segment increased by $2.0 million (31%) compared to the prior fiscal year, principally

attributed to $1.2 million of increased software subscriptions at Shanwick.

Following is a table detailing operating income (loss) by segment, net of intercompany during Fiscal 2024 and Fiscal 2023 (in thousands):

Year Ended March 31, Change

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Total $ 1,264 $ (4,407) $ 5,671

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.

Consolidated operating income for the fiscal year ended March 31, 2024 was $1.3 million compared to consolidated operating

loss of $4.4 million in the prior fiscal year.

Operating income for the overnight air cargo segment increased by $2.7 million in the current fiscal year, due primarily to higher segment revenues as described above.

Operating loss for the ground equipment sales segment was $1.6 million compared to operating income of $3.1 million in the prior fiscal year, a decrease of $4.7 million attributable to lower sales as described above.

Operating income of the commercial jet engines and parts segment was $4.2 million compared to operating loss of $1.0 million in the prior year.

The increase was primarily attributable to lower inventory write-down of $1.2 million in the current fiscal year compared to $7.3 million in the prior fiscal year, offset by a lower profit margin on component sales in the current year compared to the prior fiscal year.

Operating loss of the corporate and other segment decreased by $2.5 million in the current fiscal year, primarily driven by higher corporate allocations to other segments related to executive salaries, bonuses and audit fees compared to the prior fiscal year and increased revenue as described above.

The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2024 and 2023 (in thousands):

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Corporate and Other (6,230) (8,895) 2,665

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

Total $ 5,622 $ 6,029 $ (407)

Consolidated Adjusted EBITDA for the fiscal year ended March 31, 2024 was $5.6 million, a decrease of $0.4 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 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 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.

Adjusted EBITDA for the overnight air cargo segment increased by $2.6 million in the current fiscal year, due primarily to higher segment operating income as described above.

Adjusted EBITDA for the ground equipment sales segment decreased by $4.7 million in the current fiscal year, primarily due to lower sales as described above.

Adjusted EBITDA of the commercial jet engines and parts segment was $6.1 million, a decrease of $1.0 million from the prior fiscal year.

The decrease was primarily driven by lower profit margins on sales as described above.

The corporate and other segment Adjusted EBITDA loss decreased by $2.7 million from fiscal 2023 to fiscal 2024.

The decrease was primarily driven by $2.4 million higher corporate allocations to other segments related to executive salaries, bonuses and audit fees compared to the prior fiscal year.

Following is a table detailing consolidated non-operating income (expense), net of intercompany during fiscal 2024 and fiscal 2023 (in thousands):

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Interest expense, net $ (6,916) $ (7,935) $ 1,019

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

Income from equity method investments 1,689 1,460 229

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Total $ (5,219) $ (6,946) $ 1,727

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.

The Company had a net non-operating loss of $5.2 million for the fiscal year ended March 31, 2024 compared to a net non-operating loss of $6.9 million in the prior fiscal year.

The decrease in non-operating loss was primarily driven by a $1.0 million decrease in interest expense and a $0.4 million fluctuation in foreign currency exchange rates.

During the year ended March 31, 2024, the Company recorded $0.7 million of income tax expense, which yielded an effective rate of -18.5%.

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 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, 2024 were the foreign rate differentials and changes in valuation allowance.

The net change in the valuation allowance was $2.0 million for the year ended March 31, 2024.

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During the fiscal year ended March 31, 2023, the Company recorded $0.4 million of income tax expense at an effective tax 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, 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.

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.

Market Outlook

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.

Although we have largely emerged from the COVID-19 pandemic, our results of operations in fiscal 2024 reflected some of the COVID-19 pandemic's lingering impact.

Despite the aforementioned, we experienced improved demand for commercial aircraft, jet engines and parts compared to historical periods.

We expect that issues caused by the pandemic and other economic and business issues 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, 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.

As of March 31, 2024, the Company held approximately $7.8 million in total cash, cash equivalents and restricted cash, of which, $0.4 million related to cash reserved for payments of SAIC's insurance claims.

The Company also held $1.4 million in restricted investments held as statutory reserve of SAIC.

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.

As of March 31, 2024, the Company’s working capital amounted to $56.0 million, an increase of $3.8 million compared to March 31, 2023.

The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 13 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.

On June 24, 2024, we obtained a waiver letter from MBT ("Letter") that waives two outstanding events of default.

This Letter provides a one-time waiver for defaults resulting from our inability to meet the debt service coverage ratio as of March 31, 2024 and our failure to submit unaudited financial statements within 45 days following the quarter ending on that date.

Based on the Letter, we are no longer in default of the Company's Credit Agreement with MBT.

The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 13 of Notes to Consol idated 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 13 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.

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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 $15.0 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 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.

The Seller is the founder of Contrail and its current Chief Executive Officer.

The Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on July 18, 2021 ("Contrail RNCI").

As of the date of this filing, neither the Seller nor Air T 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 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:

As of March 31, 2024, AirCo 1, Air T Acquisition 22.1 and Contrail were all in compliance with their respective covenants.

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 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on June 23, 2023, the Company and MBT entered into amendments to the Credit Agreement with MBT and related promissory note.

The amendments extended the maturity date of the credit facility to August 31, 2024 and included the following changes:

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

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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;

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, 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.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on February 22, 2024 the Company, along with its wholly owned subsidiary AAM 24-1, LLC, a Minnesota limited liability company ("AAM 24-1"), entered into a Note Purchase Agreement with Honeywell Common Investment Fund and Honeywell International Inc.

Master Retirement Trust (collectively, "Honeywell") pursuant to which AAM 24-1 agreed to issue and sell 8.5% senior secured notes in the aggregate principal amount of $15.0 million for an aggregate purchase price of $14.9 million.

The notes bear an annual interest rate of 8.5% which is computed on the basis of a 30/360-day year and actual days elapsed and is payable semi-annually in arrears.

The maturity date of the notes is February 22, 2031.

A continuing first priority lien and security interest in and to all of the Company’s right, title and interest in all of the capital stock of AAM 24-1 was created in favor of Honeywell, as collateral for the repayment of the notes.

In addition, 160,000 newly-issued shares of TruPs held by AAM 24-1 are also separately pledged to the Honeywell.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, on March 28, 2024, Contrail entered into Supplement #10 to the Master Loan Agreement with Old National Bank dated June 24, 2019 and Term Loan I.

Term Loan I is a multiple advance term loan in the principal amount of $10.0 million and is secured by a first lien on three engines and other identified collateral recently purchased by Contrail.

The loan requires Contrail to disassemble the collateral and place it in Contrail's inventory.

The loan bears a monthly variable interest rate at the 30 Day Term SOFR + 3.1148%.

The loan requires 18 monthly payments of interest until the loan maturity date of September 20, 2025.

Principal reduction payments are due monthly in an amount equal to 100% of the amount of the gross sales proceeds collected that are derived from any of the engines or other specific collateral listed in the security agreement sold during the prior month.

In addition to the first lien noted above, the loan is also secured by the current $2.0 million limited guarantees of the Company and Joe Kuhn.

The loan may be prepaid without penalty and includes a quarterly rolling cash flow coverage ratio covenant, a tangible net worth covenant and monthly sales reporting.

The loan was fully drawn at closing and the funds were used to prepay the principal balance on Contrail’s existing Main Street Loan (Term Loan G) by $10.0 million.

As mentioned in Note 22 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, Contrail entered into an Operating Agreement with OCAS, Inc.

(the "Seller") providing for the put and call options with regard to the 21% 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 to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on July 18, 2021 ("Contrail RNCI").

After March 31, 2024 and before the financial statements were issued, Contrail redeemed 16% of the 21% of the Seller's interest for consideration consisting of a promissory note and an earnout.

Immediately following the redemption transaction, the Put/Call Option in the Operating Agreement was amended so that the remaining 5% interest in Contrail will be redeemable based on an amount other than fair value.

Refer to Note 2 5 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report for additional details on the transaction..

As mentioned in Note 22 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 22 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 Mill Road Capital ("MRC") have commitments to CAM in the respective amounts of $7.0 million and $44.0 million.

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

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, the Revolver - MBT has no outstanding balance as of March 31, 2024 and matures on August 31, 2024.

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.

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Year Ended March 31, Change

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

Net Cash Provided by Operating Activities $ 17,178 $ 16,909 $ 269

Net Cash Used in Investing Activities (2,499) (6,168) 3,669

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

Net Cash Used in Financing Activities (13,910) (12,380) (1,530)

Effect of foreign currency exchange rates (16) 361 (377)

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.

Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash $ 753 $ (1,278) $ 2,031

Cash provided by operating activities in fiscal year 2024 was relatively flat compared to fiscal year 2023.

Cash used in investing activities for fiscal year 2024 was $2.5 million compared to cash used in investing activities for the prior fiscal year of $6.2 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.

The current fiscal year's cash usage was primarily driven by investment in unconsolidated entities of $4.6 million offset by distributions from unconsolidated entities of $3.2 million.

The prior 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, offset by distributions from unconsolidated entities of $0.7 million.

Cash used in financing activities for fiscal year 2024 was $13.9 million compared to cash used by financing activities for the prior fiscal year of $12.4 million.

This was primarily due to decreased net proceeds from lines of credit of $15.0 million and increased payments to lines of credit of $9.0 million, offset by proceeds from term loans of $14.2 million in addition to the issuance of TruPs of $8.8 million in the current fiscal year.

Off-Balance Sheet Arrangements

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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 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.

Under the terms of its overnight air cargo business contracts the major cost components of that segment's operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed by its customer.

Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

In fiscal 2024, we continued to experience supply chain disruptions that impacted our ability to procure raw materials and certain commodities, which resulted in delays and increased costs.

These disruptions were driven by supply chain market constraints and macroeconomic conditions, including inflation and labor market shortages.

High inflation increased material and component prices, labor rates and supplier costs, and put pressure on our margins.

Current geopolitical conditions, including conflicts and other causes of strained intercountry relations, as well as sanctions and other trade restrictive activities, are contributing to these supply chain issues.

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

Non-GAAP Financial Measures

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

Depreciation expense for leased engines totaled $1.6 million and $0.3 million for the fiscal year ended March 31, 2023 and 2022.

There was no depreciation expense for leased engines in the current fiscal year, whereas there was $1.6 million in the prior fiscal year.

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) from continuing operations, the most directly comparable amounts reported under GAAP.

The table below provides a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA for the fiscal year ended March 31, 2023 and 2022 (in thousands):

The table below provides a reconciliation of operating income (loss) from continuing operations to Adjusted EBITDA for the fiscal years ended March 31, 2024 and 2023 (in thousands):

Twelve Months Ended

March 31, 2024 March 31, 2023

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

Operating income (loss) from continuing operations $ 1,264 $ (4,407)

Depreciation and amortization (excluding leased engines depreciation) 2,798 2,525

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Loss on sale of property and equipment 18 8

Securities expenses 63 252

TruPs issuance expenses 347 63

Adjusted EBITDA $ 5,622 $ 6,029

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

The table below provides Adjusted EBITDA by segment for the fiscal years ended March 31, 2024 and 2023 (in thousands):

Twelve Months Ended

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Adjusted EBITDA $ 5,622 $ 6,029

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.

1 Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2024 was a write-down of $1.2 million on the commercial jet engines and parts segment's inventory attributable to our evaluation of the carrying value of inventory as of March 31, 2024, 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.

Issuer and guarantor subsidiary summarized information

Air T Funding 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 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 13 of Notes to 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 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 Company has an optional right to repay the Junior Subordinated Debentures (i) to Air T Funding 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.

At any time on or after June 7, 2024, the Trust Preferred Securities are subject to mandatory redemption upon the Company's repayment of the Junior Subordinated Debentures at maturity or their earlier redemption in an amount equal to the amount of Junior Subordinated Debentures maturing on or being redeemed at a redemption price equal to the aggregate liquidation amount of the Trust Preferred Securities plus accumulated and unpaid distributions thereon to the date of redemption.

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.

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 on June 7, 2049.

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 March 31, 2024, there are $43.2 million in Trust Preferred Securities outstanding ($9.0 million held by wholly-owned subsidiaries of the Company).

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.

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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The Company believes that the following are its most critical accounting policies:

Business Combinations .

The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations.

Consistent with ASC 805, the Company accounts for each business combination by applying the acquisition method.

Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date.

Goodwill is recognized for the excess of the purchase consideration over the fair value of identifiable net assets acquired.

Included in purchase consideration is the estimated acquisition date fair value of any earn-out obligation incurred.

For business combinations where non-controlling interests remain after the acquisition, assets (including goodwill) and liabilities of the acquired business are recorded at the full fair value and the portion of the acquisition date fair value attributable to non-controlling interests is recorded as a separate line item within the equity section or, as applicable to redeemable non-controlling interests, between the liabilities and equity sections of the Company’s consolidated balance sheets.

There are various estimates and judgments related to the valuation of identifiable assets acquired, liabilities assumed, goodwill and non-controlling interests.

These estimates and judgments have the potential to materially impact the Company’s consolidated financial statements.

Inventories – Inventories are carried at the lower of cost or net realizable value.

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These assumptions and estimates are complex and subjective in nature.

Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic or its effects could impact the assumptions and result in future losses to our inventory.

Changes in economic and operating conditions could impact the assumptions and result in future losses to our inventory.

The Company periodically evaluates the carrying value of inventory.

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These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Valuation of Assets on Lease or Held for Lease - Engine assets on lease or held for lease are stated at cost, less accumulated depreciation.

On a quarterly basis, we monitor the portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment.

These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company’s ability to lease an asset in the future.

On an annual basis, even absent any such ‘triggering event’, we evaluate the assets in our portfolio to determine if their carrying amount may not be recoverable.

If an asset is determined to be unrecoverable, the asset is written down to fair value.

When evaluating for impairment, we test at the individual asset level (e.g., engine, airframe or aircraft), as each asset generates its own stream of cash flows, including lease rents and maintenance reserves.

The Company must make significant and subjective estimates in determining whether any impairment exists.

Those estimates are as follows:

• Fair value – we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data.

• Future cash flows – when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand.

These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model.

If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges.

Accounting for Redeemable Non-Controlling Interest .

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Contrail’s market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.

There are also significant estimates made to determine the estimated redemption value of Shanwick's redeemable non-controlling interest ("Shanwick RNCI").

The analysis uses significant inputs such as forecasted earnings before interest and taxes ("EBIT"), discount rate and expected volatility, which require significant management judgment and assumptions.

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