SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
FORM
10-K/A(Amendment No. 1)
10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒
| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
| | | | |
| For the fiscal year ended | March 31, 20162020 |
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
| | | | | | | | | | | | | |
For the transition period from _____to _____ | | | to | |
Commission File Number 001-35476
Air T, Inc.
| | | | | |
| Commission file number | 001-35476 |
Air T, Inc.
| |
(Exact name of registrant as specified in its charter)
Delaware | 52-1206400 | | | | | | | | | | | | | |
(
| Delaware | | 52-1206400 | |
| State or other jurisdiction of | | (I.R.S. Employer | |
| incorporation or organization)organization | (I.R.S. Employer | Identification No.) | |
5930
Balsom Ridge Road, Denver, North Carolina 28037(Address of principal executive offices, including zip code)
(
Registrant’sRegistrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Classeach class | Trading
Symbol(s)
| Name of Each Exchangeeach exchange on Which Registeredwhich registered |
Common Stock par value $0.25 per share | The AIRT
| NASDAQ Stock Market |
Alpha Income Preferred Stock Purchase Rights Securities (also referred to as 8% cumulative Capital Securities) ("AIP")* | The AIRTP
| NASDAQ Stock Market |
| Warrant Purchase AIP* | AIRTW | NASDAQ Stock Market |
| *Issued by Air T Funding | | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
☒ No☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
(SeeSee the definitions of “large accelerated
filer”,filer,” “accelerated
filer”,filer,” “smaller reporting
company”,company,” and
“emerging"emerging growth
company”company" in Rule 12b-2 of the Exchange
Act)Act.
| | | | | | | | | | | |
Large accelerated filer ☐Filer | ☐ | Accelerated filer Filer | ☐ |
| | | |
Non-accelerated filer ☐ (Do not check if smaller reporting company)
Filer | ☒ | Smaller reporting company | ☒ |
| | | |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐☐.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
.
The aggregate market value of voting stock held by non-affiliates of the registrant as of September 27, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) based upon the closing price of the common stock on September 30, 201527, 2019 was approximately $29,370,000. As$21,200,000.
Indicate the number of
May 31, 2016, 2,372,527 shares
outstanding of each of the issuer's classes of common stock,
were outstanding.Documents Incorporated By Reference
as of the latest practicable date.
| | | | | |
| Common Stock | Common Shares, par value of $.25 per share |
| Outstanding Shares at May 31, 2020 | 2,881,853 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Company’sCompany’s definitive proxy statement for its 20162020 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is filing this amended Form 10-K/A (“Form 10-K/A”) to amend its Annual Report on Form 10-K for the fiscal year ended March 31, 2016, originally filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2016 (“Original Filing”), to restate our audited consolidated financial statements and related footnote disclosures at March 31, 2016 and for the fiscal year ended March 31, 2016. The previously filed consolidated financial statements for those periods should no longer be relied upon. This Form 10-K/A also amends certain other items in the Original Filing, as listed in “Items Amended in this Form 10-K/A” below.
Restatement Background
As disclosed in the Original Filing, pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the “Securities Purchase Agreement”) among the Company, Delphax Technologies Inc. (“Delphax”) and its subsidiary, Delphax Technologies Canada Limited (“Delphax Canada”), on November 24, 2015 (the “Closing Date”), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax Canada for a combination of cash and the outstanding principal of $500,000 and accrued and unpaid interest under a 90-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events). As further disclosed in the Original Filing, each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represented approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company. Holders of the Series B Preferred Stock, voting as a separate class, were initially entitled to elect (and exercise rights of removal and replacement with respect to) three-sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, were entitled to elect (and to exercise rights of removal and replacement with respect to) four-sevenths of the members of the board of directors of Delphax. The Warrant expires on November 24, 2021 and provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock.
The consolidated financial statements included in the Original Filing reflect the consolidation of Delphax with the Company and its subsidiaries from the Closing Date. Such consolidated financial statements also reflected an attribution of 62% of Delphax’s loss for periods commencing as of the Closing Date to non-controlling interests in the determination of consolidated net income attributable to Air T, Inc. stockholders. Such attribution was based on the Company’s ownership of the Series B Preferred Stock, which represented approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company.
We have concluded that it was not appropriate to base attribution solely on our ownership of the Series B Preferred Stock and that our attribution methodology should be based on consideration of all of Air T’s investments in Delphax and Delphax Canada. As disclosed above, the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses. The effect of interest expense arising under the Senior Subordinated Note and of other intercompany transactions are reflected in the attribution of Delphax net income or losses to non-controlling interests because Delphax is a variable interest entity.
As a result of the application of such methodology, for the fiscal year ended March 31, 2016 the attribution of Delphax losses to non-controlling interests should have been 33%.
In addition, we are also correcting an otherwise immaterial error associated with our elimination of intercompany interest charged by Air T, Inc. to Delphax Canada under the Senior Subordinated Note. We are also correcting an inadvertent transposition of the entries for the fiscal year ended March 31, 2016 for “proceeds from sale of property and equipment” and “capital expenditures” in the presentation of cash flows from investing activities on our Consolidated Statements of Cash Flows (which correction does not affect the reported amount of net cash used in investing activities for that period).
This Form 10-K/A is being filed to restate our audited consolidated financial statements at March 31, 2016 and for the fiscal year ended March 31, 2016 to so correct the treatment of Air T’s interests in Delphax with respect to the attribution of Delphax losses and the elimination of intercompany interest, to correct the transposition of entries on the Consolidated Statements of Cash Flow described above and to correct and expand related disclosures.
Restatement of Other Financial Statements
We are concurrently filing (i) an amendment to our Quarterly Report on Form 10-Q for the period ended December 31, 2015 (the “Q3 2016 Form 10-Q/A”) to similarly restate our unaudited condensed consolidated financial statements and related financial information at and for the three and nine months ended December 31, 2015 and to amend certain other items within that report, (ii) an amendment to our Quarterly Report on Form 10-Q for the period ended June 30, 2016 (the “Q1 2017 Form 10-Q/A”) to similarly restate our unaudited condensed consolidated financial statements and related financial information at June 30, 2016 and March 31, 2016 and for the three months ended June 30, 2016 and to amend certain other items within that report, (iii) an amendment to our Quarterly Report on Form 10-Q for the period ended September 30, 2016 (the “Q2 2017 Form 10-Q/A”) to similarly restate our unaudited condensed consolidated financial statements and related financial information at September 30, 2016 and March 31, 2016 and for the three and six months ended September 30, 2016 and to amend certain other items within that report, and (iv) an amendment to our Quarterly Report on Form 10-Q for the period ended December 31, 2016 (the “Q3 2017 Form 10-Q/A”) to similarly restate our unaudited condensed consolidated financial statements and related financial information at December 31, 2016 and March 31, 2016 and for the three and nine months ended December 31, 2016 and 2015 and to amend certain other items within that report.
Internal Control and Disclosure Controls Considerations
Our Chief Executive Officer and Chief Financial Officer have determined that there were deficiencies in our internal control over financial reporting that constitute material weaknesses, as defined by SEC regulations, at March 31, 2016, with respect to procedures for the determination of the appropriate attribution of Delphax losses to non-controlling interests and with respect to our analysis of the applicable accounting guidance applicable to recognition of our investments in Delphax. Accordingly, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting and disclosure controls and procedures, as defined by SEC regulations, were not effective at March 31, 2016, as discussed in Part II, Item 9A of this Form 10-K/A.
Items Amended in this Form 10-K/A
For the convenience of the reader, this Form 10-K/A sets forth the Original Filing, in its entirety, as modified and superseded as necessary to reflect the restatement described above. The following items in the Original Filing have been amended as a result of, and to reflect, the restatement:
| A.
| Part I, Item 1A. Risk Factors
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| B.
| Part II, Item 6. Selected Financial Data
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| C.
| Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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| D.
| Part II, Item 8. Financial Statements and Supplementary Data
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| E.
| Part II, Item 9A. Controls and Procedures
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| F.
| Part IV, Item 15 Exhibits and Financial Statement Schedules
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In accordance with applicable SEC rules, this Form 10-K/A includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, from our Chief Executive Officer and Chief Financial Officer dated as of the filing date of this Form 10-K/A. In addition, Part III, Item 10 Directors, Executive Officers and Corporate Governance was updated to reflect that our proxy statement for our 2016 annual meeting of stockholders has been filed and the Exhibit Index has been appropriately updated.
AIR T, INC. AND SUBSIDIARIES
2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
AIR T, INC. AND SUBSIDIARIES |
| | 2020 ANNUAL REPORT ON FORM 10-K |
Item 1.
TABLE OF CONTENTS |
| Business
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Item 1A.
| Risk Factors (As Amended)
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Item 7A. | | |
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| Signatures
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| Interactive Data Files (As Restated) | |
Air T, Inc. (the “Company,” “Air T,” “we” or “us”
or “our”) is a
decentralized holding company with
ownership interests in a
broad setportfolio of operating
businesses and financial
assets that are designed to expand, strengthen and diversify our cash earnings power.assets. Our goal is to
build onprudently and strategically diversify Air
T’s core businesses, to expand into adjacent industries,T’s earnings power and when appropriate, to acquire companies that we believe fit intocompound the Air T family.growth in its free cash flow per share over time.
We currently operate
wholly owned subsidiaries in
three corefive industry segments:
| •
| overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, which operates in the air express delivery services industry;
|
ground•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial jet engines and
ground support parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engines and jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services comprised of our Global Aviation Services, LLC (“GAS”) subsidiary,and overhaul and repair services to airlines and commercial aircraft companies;
•Printing equipment and maintenance, which provides ground supportdesigns, manufactures and sells advanced digital print production equipment maintenance and facilitiesprovides maintenance services to domestic airlinescommercial customers; and aviation service providers.
We recently added two
•Corporate and other, businesses, which acts as the capital allocator and resource for other segments.
The Company also has ownership interests in Insignia Systems, Inc. ("Insignia") and Cadillac Casting, Inc. ("CCI"). The operations of these companies are reported in separate segments. In October 2015, we formed a wholly owned equipment leasing subsidiary, Air T Global Leasing, LLC (“ATGL”), which comprises our leasing segment, and in November 2015 we acquired a minority interest in Delphax Technologies, Inc. (“Delphax”), a printing equipment manufacturer and maintenance provider, which comprises our printing equipment and maintenance segment.Fornot consolidated into the fiscal year ended March 31, 2016,operations of the overnight air cargo segment accounted for 46%Company. See
Note 11 of our consolidated revenues, the ground equipment sales segment accounted for 34% of our consolidated revenues, the ground support services segment accounted for 17% of consolidated revenues, while the leasing segment and printing equipment and maintenance segment accounted for less than 1% and 3%, respectively, of our consolidated revenues. Certain financial data with respect to the Company’s segments and geographic areas are set forth in Notes 20 and 21 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.
Air T was incorporated under the laws of the State of Delaware in 1980. The principal place of business of Air T MAC and ATGLMountain Air Cargo, Inc. (“MAC”) is 3524 Airport5930 Balsom Ridge Road, Maiden,Denver, North Carolina;Carolina, the principal place of business of CSA Air, Inc. (“CSA”) is Iron Mountain, Michigan, the principal place of business for GGSGlobal Ground Support, LLC (“GGS”) is Olathe, Kansas, the principal place of business of Delphax Technologies, Inc (“Delphax”) is Minneapolis, Minnesota, the principal place of business for GASDelphax Solutions, Inc. (“DSI”) is Eagan, MinnesotaMississauga, Canada, the principal place of business of Contrail Aviation Support, LLC (“Contrail”) is Verona, Wisconsin, the principal place of business of AirCo, LLC, AirCo 1, LLC, AirCo 2, LLC and AirCo Services, LLC (Collectively, "AirCo”) is Wichita, Kansas, the principal place of business of Jet Yard, LLC (“Jet Yard”) is Marana, Arizona, and the principal place of business of DelphaxWorthington Aviation Parts, Inc. (“Worthington”) is Minneapolis,Eagan, Minnesota.
We maintain an Internet website at http://www.airt.net and our SEC filings may be accessed through links on our website.
The information on our website is available for information purposes only and is not incorporated by reference in this Annual Report on Form 10-K.
Acquisitions.
Worthington Aviation Parts, Inc. On May 4, 2018, Air T, Inc. completed the acquisition of substantially all of the assets and assumed certain liabilities of Worthington, pursuant to the Asset Purchase Agreement dated as of April 6, 2018, by and among the Company, Worthington, and Churchill Industries, Inc., as guarantor of Worthington’s obligations as disclosed in the Asset Purchase Agreement. Worthington is primarily engaged in the business of operating, distributing and selling airplane and aviation parts along with repair services. The Company agreed to acquire the assets and liabilities in exchange for payment to Worthington of $50,000 as earnest money upon execution of the Agreement and a cash payment of $3,300,000 upon closing.
Cadillac Casting, Inc. On November 8, 2019, the Company made an investment of $2.8 million to purchase a 19.9% ownership stake in CCI. The Company determined that CCI is a variable interest entity and that the Company is not the primary beneficiary. This is primarily the result of the Company's conclusion that it does not have the power to direct the activities that most significantly impact the economic performance of CCI. Accordingly, the Company does not consolidate CCI and has determined to account for this investment using equity method accounting. See Note 11 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. MAC and CSA arehave a relationship with FedEx spanning over 35 years and represent two of seven companies in the U.S. that have North American feeder airlines under contract with FedEx. With a relationship with FedEx spanning over 35 years, MAC and CSA operate and maintain Cessna Caravan, ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States and upper Midwest and the Caribbean.Midwest. MAC and CSA’sCSA’s revenues are derived principally pursuant to “dry-lease” service contracts with FedEx. In these “dry- lease" contracts, FedEx provides the aircraft while MAC and CSA provide their own crew and exercise operational control of their flights.
On June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the
revenue aircraft operated by MAC and CSA and
replacereplaced all prior dry-lease service contracts. These dry-lease agreements provide for the lease of specified aircraft by MAC and CSA in return for the payment of monthly rent with respect to each aircraft leased, which monthly rent was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate. These
new dry-lease agreements provide that FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by MAC and CSA, respectively. The
newcurrent dry-lease agreements provide for the reimbursement by FedEx of MAC and CSA’s costs, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs.
Unlike priorThe current dry-lease
contracts, under the new dry-lease agreements, certain operational costs incurred by MAC and CSA in operating the aircraft are not reimbursed by FedEx at cost, and such operational costs are borne solely by MAC and CSA. Under the new dry-lease agreements, MAC and CSA are requiredagreement is set to
perform maintenance of the leased aircraft in return for a maintenance fee based upon an hourly maintenance labor rate, which has been increased from the rate in place under the prior dry-lease service contracts. Under prior dry-lease service contracts, the hourly maintenance labor rate had not been adjusted since 2008. The new dry-lease agreements provide for the payment by FedEx to MAC and CSA of a monthly administrative fee based on the number and type of aircraft leased and routes operated. The amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to reflect the greater monthly lease payment per aircraft and the fact that certain operational costs borne by MAC and CSA are not reimbursed. The amount of the administrative fee is subject to adjustment based on the number of aircraft operated, routes flown and whether aircraft are considered to be soft-parked.The new dry-lease agreements would expire unless renewed, on May 31, 2020.2021. The new dry-lease agreements may be terminated by FedEx or MAC and CSA, respectively, at any time upon 90 days’ written notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written notice. In addition, each of the dry-lease agreements provides that FedEx may terminate the agreement upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes MAC or CSA’s only customer, or MAC or CSA employs lessfewer than six employees. As of the date of this report, FedEx would have beenbe permitted to terminate each of the dry-lease agreements under this provision. The Company believes that the short-term nature of its agreements with FedEx is standard within the airfreight contract delivery service industry, where performance is measured on a daily basis.
Under the dry-lease service contracts in place during the fiscal years ended March 31, 2015 and 2014 and the first two months of the fiscal year ended March 31, 2016, FedEx leased its aircraft to MAC and CSA for a nominal amount and paid a monthly administrative fee to MAC and CSA to operate the aircraft. Under these contracts, all direct costs related to the operation of the aircraft (including fuel, outside maintenance, landing fees and pilot costs) were passed through to FedEx without markup.
As of March 31,
2016,2020, MAC and CSA had an aggregate of
7869 aircraft under
theits dry-lease agreements with FedEx. Included within the
7869 aircraft,
are 3 Cessna Caravan aircraft
that are considered soft-parked. Soft-parked aircraft remain covered under
MAC and CSA’sour agreements with FedEx although at a reduced administrative fee compared to aircraft that are in operation. MAC and CSA continue to perform maintenance on soft-parked aircraft, but they are not crewed and MAC and CSA do not operate soft-parked aircraft on scheduled routes.Revenues from MAC and
CSA’sCSA’s contracts with FedEx accounted for approximately 46%30% and 45%29% of the Company’s consolidated revenue for the fiscal years ended March 31, 20162020 and 2015,2019, respectively. The loss of FedEx as a customer would have a material adverse effect on the Company. FedEx has been a customer of the Company since 1980. MAC and CSA are not contractually precluded from providing services to other parties and MAC occasionally provides third-party maintenance services to other airline customers and the U.S. military.MAC and CSA operate under separate aviation certifications. MAC is certified to operate under Part 121, Part 135 and Part 145 of the regulations of the
Federal Aviation Administration (the “FAA”).FAA. These certifications permit MAC to operate and maintain aircraft that can carry a maximum cargo capacity of 7,500 pounds on the Cessna Caravan 208B under Part 135 and a maximum cargo capacity of 14,000 pounds for the ATR-42 and 17,800 pounds for the ATR-72 aircraft under Part 121. CSA is certified to operate and maintain aircraft under Part 135 of the FAA regulations. This certification permits CSA to operate aircraft with a maximum cargo capacity of 7,500 pounds.
MAC and CSA, together, operated the following FedEx-owned cargo aircraft as of March 31,
2016: Type of Aircraft | | Model Year | | Form of Ownership | | Number of Aircraft | |
Cessna Caravan 208B (single turbo prop) | | 1985-2012 | | Dry lease | | | 61 | |
ATR-42 (twin turbo prop) | | 1992 | | Dry lease | | | 9 | |
ATR-72 (twin turbo prop) | | 1992 | | Dry lease | | | 8 | |
| | | | | | | | 78 | |
2020:
| | | | | | | | | | | | | | | | | |
| Type of Aircraft | Model Year | | Form of Ownership | | Number
of
Aircraft |
| Cessna Caravan 208B (single turbo prop) | 1985-1996 | | Dry lease | | 51 |
| ATR-42 (twin turbo prop) | 1992 | | Dry lease | | 9 |
| ATR-72 (twin turbo prop) | 1992 | | Dry lease | | 9 |
| | | | | |
| | | | | 69 |
The Cessna Caravan 208B aircraft are maintained under an FAA Approved Aircraft Inspection Program (“AAIP”). The inspection intervals range from 100 to 200 hours. The current
engine overhaul period on the Cessna aircraft is 8,000 hours.
The ATR-42 and ATR-72 aircraft are maintained under a FAA Part 121
continuous airworthiness maintenance program. The program consists of A and C service checks as well as calendar checks ranging from weekly to 12 years in duration. The engine overhaul period is
“on condition”.6,000 hours.
MAC and CSA operate in a niche market within a highly competitive contract cargo carrier market. MAC and CSA are two of seven carriers that operate within the United States as FedEx feeder carriers. MAC and CSA are benchmarked against the other five FedEx feeders based on safety, reliability, compliance with federal, state and applicable foreign regulations, price and other
service relatedservice-related measurements.
AccurateThe Company believes accurate industry data is not available to indicate the
Company’sCompany’s position within its marketplace (in large measure because all of the Company’s direct competitors are privately held), but management believes that MAC and CSA, combined, constitute the largest contract carrier of the type described immediately above.FedEx conducts periodic audits of MAC and CSA, and these audits are an integral part of the relationship between the carrier and FedEx. The audits test adherence to the dry-lease agreements and assess the
carrier’scarrier’s overall internal control environment, particularly as related to the processing of invoices of FedEx-reimbursable costs. The scope of these audits typically extends beyond simple validation of invoice data against the third-party supporting documentation. The audit teams generally investigate the operator’s processes and procedures for strong internal control procedures. The Company believes satisfactory audit results are critical to maintaining its relationship with FedEx. The audits conducted by FedEx are not designed to provide any assurance with respect to the Company’s consolidated financial statements, and investors, in evaluating the Company’s consolidated financial statements, should not rely in any way on any such examination of the Company or any of its subsidiaries.The Company’sCompany’s overnight air cargo operations are not materially seasonal.
GGS is located in Olathe, Kansas and manufactures, sells and services aircraft deicers and other specialized equipment sold to domestic and international passenger and cargo airlines, ground handling companies, the United States Air Force (“USAF”), airports and industrial customers.
GGS’sGGS’s product line includes aircraft deicers, scissor-type lifts, military and civilian decontamination units, flight-line tow tractors, glycol recovery vehicles and other specialized equipment. In the fiscal year ended March 31, 2016,2020, sales of deicing equipment accounted for approximately 82%89% of GGS’s revenues, compared to 72%77% in the prior fiscal year.GGS designs and engineers its products. Components acquired from third-party suppliers are used in the assembly of its finished products. Components are sourced from a diverse supply chain. The primary components for mobile deicing equipment are the chassis (which is a commercial medium or heavy-duty truck),
the fluid storage tank, a boom system,
the fluid delivery system and heating equipment. The price of these components is influenced by raw material costs, principally high-strength carbon steels and stainless steel. GGS utilizes continuous improvements and other techniques to improve efficiencies and designs to minimize product price increases to its customers, to respond to regulatory changes, such as emission standards, and to incorporate technological improvements to enhance the efficiency of
GGS’sGGS’s products. Improvements have included the development of single operator mobile deicing units to replace units requiring two operators, a patented premium deicing blend system and a more efficient forced-air deicing system.
GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also offers fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab design, a patented forced-air deicing nozzle, on-board glycol blending system to substantially reduce glycol usage, and color and style of the exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol recovery vehicles and other special purpose mobile equipment.
GGS competes primarily on the basis of the quality and reliability of its products, prompt delivery, service and price. The market for aviation ground service equipment is highly
competitive andcompetitive. Certain of GGS' competitors may have substantially greater financial resources than we do. These entities or investors may be able to accept more risk than our Board believes is in our best interest. In addition, the market for aviation ground services in the past has been directly related to the financial health of the aviation industry, weather patterns and changes in technology.
GGS’s
GGS’s mobile deicing equipment business has historically been seasonal, with revenues typically being lower in the fourth and first fiscal quarters as commercial deicers are typically delivered prior to the winter season. The Company has continued its efforts to reduce GGS’s seasonal fluctuation in revenues and earnings by broadening its international and domestic customer base and its product line. In July 2009, GGS was awarded a new contract to supply deicing trucks to the USAF, which initially expired in July 2014. On May 15, 2014, GGS was awarded a newThis contract to supply deicing trucks tohas since then been annually extended by the USAF. The initial contract awardUSAF and the current expiration date is for two years through July 13, 2016 with four additional2020. Per the contract, GGS has to provide pricing that will be contractual for each one-year extension optionsperiod within the years that the contract is awarded. Further, based upon volume of commercial items purchased during that year, there may be exerciseddiscounts calculated into the pricing and are reflective of the submitted estimated pricing.
GGS sold a total of 26 and 31 deicers under this contract including both GL 1800 and ER 2875 models during fiscal years ended March 31, 2020 and March 31, 2019, respectively and all of the units were accepted by the USAF.
The value of the contract, as well as the number of units to beGGS also completed and delivered
depends upon annual requirements and available funding to the USAF.Although GGS has retainedadditional delivery orders from the USAF deicer contract, GGS sold no deicer units to the USAF under this contract during fiscal year ended March 31, 2016. As a result, GGS revenuesfor both GL 1800 and operating income have resumed their seasonal pattern. At March 31, 2016, GGS had received an order for the pre-production unit for the GL1800 model deicer under this contract, and that unit is included in backlog with completion scheduledER 2875 models during the first quarter of fiscal 2017. Delivery year 2021.
Commercial Jet Enginesand acceptanceParts.
Contrail Aviation Support and Jet Yard (acquired during fiscal year 2017), AirCo (formed in May 2017), and Worthington (acquired in May 2018), comprise the commercial jet engines and parts segment of the
pre-production unitCompany’s operations. Contrail Aviation Support is
typically required bya commercial aircraft trading, leasing and parts solutions provider. Its primary focus revolves around the
USAF before further orders are submitted.In September 2010, GGS was awarded a contract to supply flight-line tow tractors to the USAF. The contract award was for one year commencing September 28, 2010 with four additional one-year extension options that may be exercised by the USAF. All option periods under the contract have been exercisedCFM International CFM56-3/-5/-7 engines and the contract expired in September 2015. ForInternational Aero Engines V2500A5 engine, which power the year endedtwo most prevalent narrow body, single aisle aircraft that are currently flown commercially—the Boeing 737 Classic / 737 NG and the Airbus A320 family. Contrail Aviation Support acquires commercial aircraft, jet engines and components for the purposes of sale, trading, leasing and disassembly/overhaul. Contrail Aviation holds an ASA-100 accreditation from the Aviation Suppliers Association. As of March 31, 2016, GGS revenues included $708,000 of flight-line tow tractor sales to the USAF under this contract ($2,883,000 for the year ended2020 and March 31, 2015).
Because the USAF is not obligated to purchase a set or minimum number of units under these contracts, the value of these contracts, as well as the number of units to be delivered, depends upon the USAF’s requirements2019, Contrail contributed approximately 31% and available funding. GGS’s revenue from sales to the USAF, including under these contracts and for parts for units sold under prior contracts, accounted for approximately 3% and 14%38% of the segment’sCompany's total consolidated revenue for the fiscal years then ended, March 31,respectively.
Jet Yard offers commercial aircraft storage, storage maintenance and aircraft disassembly/part-out services at facilities leased at the Pinal Air Park in Marana, Arizona. The prevailing climate in this area of Arizona provides conditions conducive to long-term storage of aircraft. Jet Yard is registered to operate a repair station under Part 145 of the regulations of the FAA and it leases approximately 48.5 acres of land under a lease agreement with Pinal County, Arizona. Jet Yard was organized in 2014, entered into the lease in June 2016 and
2015, respectively.Ground Support Services.
GAS, whichhad maintained de minimus operations from formation through the date it was startedacquired by the Company in September 2007, providesCompany.
AirCo operates an established business offering commercial aircraft ground support equipment, fleet,parts sales, exchanges, procurement services, consignment programs and facility maintenanceoverhaul and repair services. At March 31, 2016, GAS was providing ground support equipment, fleet,AirCo Services, a wholly-owned subsidiary of AirCo ("AirCo Services"), holds FAA and facilityEuropean Aviation Safety Agency certifications covering aircraft instrumentation, avionics and a range of electrical accessories for civilian, military transport, regional/commuter and business/commercial jet and turboprop aircraft. Customers of AirCo include airlines and commercial aircraft leasing companies.
Worthington Aviation, like AirCo, operates an established business which supplies spare parts, repair programs and aircraft maintenance services to
more than 75 customers at 67 North American airports. Approximately 33%the global aviation community of regional and 36%, respectively,business aircraft fleets. Worthington offers a globally networked infrastructure and 24/7 support, ensuring fast delivery of GAS’s revenuesspare parts and service, with four locations strategically located in the fiscal years ended March 31, 2016 and 2015, were derived from services under contract with LSG SkyChefs. The LSG SkyChefs contract extends to August 31, 2018, and includes a 30-day termination clause for either party.United States, United Kingdom & Australia. In addition, approximately 15%Worthington operates two FAA and EASA Certificated Repair Stations. The Tulsa MRO provides composite aircraft structures, repair and support services. As a strategic resource for flight control, exhaust system and line replacement components, Worthington offers a wide array of GAS’s revenuesservices for complex operations. The Eagan based Repair Station, Worthington Repair Services offers a wide range of capabilities for repair and overhaul of airframe, accessories and power plant components in eachsupport of the fiscal years ended March 31, 2016 and 2015, were derived from services under contract with Delta Airlines.
GAS competes primarily on the basis of the quality, reliability and pricing of its services. The market for ground support equipment and airport facility maintenance services is highly competitive and directly related to the financial health of the aviation industry. GAS’s maintenance service business is not materially seasonal.
external as well as internal sales.
Printing Equipment and Maintenance.On November 24, 2015,
Delphax’s business has included the
Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax’s Canadian subsidiary for a combinationdesign, manufacture and sale of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from that Delphax subsidiary on October 2, 2015 and (ii) for $1,050,000 in cash a total of 43,000 shares (the “Shares”) of Delphax’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events). Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax’s employee stock option plans, at March 31, 2016 the number of shares of common stock underlying the Shares represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of the Shares and approximately 31% of the outstanding shares assuming conversion of the Shares and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax’s employee stock option plans. Under the agreement that provided for the Company’s purchase of these interests, on November 24, 2015 three designees of the Company (including Nick Swenson, the Company’s President, Chief Executive Officer and Chairman, and Michael Moore, the President of our GGS subsidiary) were elected to the board of directors of Delphax, which had a total of seven members following their election. Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to Air T under the Senior Subordinated Note or we continue to hold a specified number of the Shares and interests in the Warrant holders of the Series B Preferred Stock, voting as a separate class, the Company would be entitled to elect, after June 1, 2016, four-sevenths of the members of the board of directors of Delphax and, without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions. As a result of these transactions, we determined that, even though Delphax was not a subsidiary of the Company, we had obtained control over Delphax in conjunction with the acquisition of the interests described above, and we have consolidated the relevant financial information of Delphax in Air T’s consolidated financial statements beginning on November 24, 2015. Delphax’s revenues from the date of our investments through March 31, 2016 were approximately $3,955,000.Delphax designs, manufactures and sells advanced digital print production equipment (including high-speed, high-volume cut-sheet and continuous roll-fed printers), maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment, isspare parts, supplies and consumable items historically were
manufactured, and maintenance and services were provided by Delphax Canada Technologies Limited (“Delphax Canada”) and such products and services were sold through Delphax, Delphax Canada and itsDelphax subsidiaries located in Canada, the United Kingdom and France. A significant portion
Upon petition by the Company, on August 8, 2017 the Ontario Superior Court of Justice in Bankruptcy and Insolvency adjudged Delphax’s net sales has historically been related Canada to service and support provided after the sale, including the sale of consumable items for installed printing systems. Historically,be bankrupt. As a result, Delphax has had a significant presenceCanada ceased to have capacity to deal with its property, which then vested in the check production marketplacetrustee in North America, Europe, Latin America, Asiabankruptcy of Delphax Canada subject to the rights of secured creditors. As of June 30, 2019, the bankruptcy proceedings were finalized in accordance with Canadian law and, therefore, Delphax Canada was legally discharged of its liabilities. The conclusion of the bankruptcy proceedings also resulted in the dissolution of Delphax Canada. In addition, on June 11, 2019, the Company has also fully dissolved Delphax UK. As such, the only Delphax entity that remains in existence as of March 31, 2020 is Delphax France. The Company extinguished the assets and liabilities of Delphax Canada and Delphax UK in June 2019 and recognized a gain on dissolution of entities of $4.5 million.
Delphax’s components of net income (loss) are included in our consolidated statements of income and comprehensive income herein. Revenues and expenses prior to the date of initial consolidation were excluded. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax's net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67%/33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to the Company and the Middle East. Delphax’s primary manufacturing facility, operated by its Canadiannon controlling interests based on the initial 67%/33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.
All of Delphax operations are now run out of the Delphax Solutions, Inc. subsidiary,
is located in Mississauga,
Ontario. Delphax’s common stock is traded on the over-the-counter market under the symbol “DLPX.” Our investments in Delphax were intended to support the commercial rollout and manufacturing costs of the new Delphax elan™ 500 digital color print system, which combines advances in inkjet and paper-handling technologies in a production class sheet-fed system offering full CMYK color and 1600 dpi print quality at speeds of up to 500 letter impressions per minute. Delphax’s legacy consumables productionCanada. We do not expect this business was expected to generate cash flow while Delphax rolled-out its next generation élan commercial inkjet printer. In April 2016, Delphax received notice from its largest (approximately 50% of legacy revenues) customer that it planned to reduce its order volume by approximately 90%; and phase out its use ofsignificant revenues in the legacy Delphax printers within eighteen months. Accordingly, Delphax is reviewing itscoming fiscal year 2016 operating plan and has engaged an experienced turn-around consultant — the Platinum Group — to assist it in developing a go-forward plan. The decline in order volumes from its largest customer is expected to significantly impact Delphax’s results for the quarter ending June 30, 2016.
On April 4, 2016, ATGL purchased two elan™ 500 printers from Delphax for $650,000 for lease to a third party. One of those acquired printers was subject to an existing lease to a third party which has been assigned to ATGL.
year. Backlog.
Leasing .
We organized ATGL on October 6, 2015. ATGL provides funding for equipment leasing transactions, which may include transactions for the leasing of equipment manufactured by GGS and Delphax and transactions initiated by third parties unrelated to equipment manufactured by us. For the fiscal year ended March 31, 2016, ATGL contributed $20,000 to our consolidated revenues.
Backlog.
GGS’sGGS’s backlog consists of “firm” orders supported by customer purchase orders for the equipment sold by GGS. At March 31, 2016,2020, GGS’s backlog of orders was $10.0$51.5 million, all of which GGS expects to be filled in the fiscal year ending March 31, 2017.2021. At March 31, 2015,2019, GGS’s backlog of orders was $2.8$26.1 million. In addition, at March 31, 2016, Delphax’s backlog of “firm” orders supported by customer purchase ordersBacklog is not meaningful for the equipment, goods and services that it sells was $0.8 million, all of which it expects to fill by March 31, 2017.
Company’s other business segments.The Company and its subsidiaries are subject to regulation by various governmental agencies.
The Department of Transportation (“DOT”) has the authority to regulate air service. The DOT has authority to investigate and institute proceedings to enforce its economic regulations, and may, in certain circumstances, assess civil penalties, revoke operating authority and seek criminal sanctions.
Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA requires MAC and CSA to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains evolving and strict security requirements. These requirements are not static but change periodically as the result of regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our operations. It is reasonably possible that these rules or other future security requirements could impose material costs on us.
The
Federal Aviation AdministrationFAA has safety jurisdiction over flight operations generally, including flight equipment, flight and ground personnel training, examination and certification, certain ground facilities, flight equipment maintenance programs and procedures, examination and certification of mechanics, flight routes, air traffic control and communications and other matters. The FAA is concerned with safety and the regulation of flight operations generally, including equipment used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. The Company, through its subsidiaries, holds all operating airworthiness and other FAA certificates that are currently required for the conduct of its business, although these certificates may be suspended or revoked for cause. The FAA periodically conducts routine reviews of MAC and
CSA’sCSA’s operating procedures and flight and maintenance records.
In September 2010, the FAA proposed rules that would significantly reduce the maximum number of hours on duty and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify certain of our aircraft. When the FAA issued final regulations in December 2011, all-cargo carriers, including MAC and CSA, were exempt from these new pilot fatigue requirements, and instead were required to continue complying with previously enacted flight and duty time rules. In December 2012, the FAA reaffirmed the exclusion of all cargo carriers from the new rule.
It is reasonably possible, however,However, legislation has recently been introduced in the U.S. Senate and U.S. House of Representatives that,
future security or flight safety requirementsif adopted, would require all-cargo carriers to comply with the 2011 regulations. Required compliance with the 2011 regulations would make it more difficult to avoid pilot fatigue and could impose
materialsubstantial costs on
us.us in order to maintain operational reliability.
The FAA has authority under the Noise Control Act of 1972, as amended, to monitor and regulate aircraft engine noise. The aircraft operated by the Company are in compliance with all such regulations promulgated by the FAA. Moreover, because the Company does not operate jet aircraft, noncompliance is not likely. Aircraft operated by us also comply with standards for aircraft exhaust emissions promulgated by the U.S. Environmental Protection Agency (“EPA”) pursuant to the Clean Air Act of 1970, as amended.
Jet Yard and AirCo operate repair stations licensed under Part 145 of the regulations of the FAA. These certifications must be renewed annually, or in certain circumstances within 24 months. Certified repair stations are subject to periodic FAA inspection and audit. The repair station may not be relocated without written approval from the FAA.
Because of the extensive use of radio and other communication facilities in its aircraft operations, the Company is also subject to the Federal Communications Act of 1934, as amended.
Maintenance and Insurance.
The Company, through its subsidiaries, is required to maintain the aircraft it operates under the appropriate FAA and manufacturer standards and regulations.
The Company has secured public liability and property damage insurance in excess of minimum amounts required by the United States Department of Transportation.
The Company maintains cargo liability insurance,
workers’workers’ compensation insurance and fire and extended coverage insurance for owned and leased facilities and equipment. In addition, the Company maintains product liability insurance with respect to injuries and loss arising from use of products sold and services provided.In March 2014, the Company formed
Space Age Insurance Company (“SAIC”),SAIC, a captive insurance company licensed in Utah. SAIC insures risks of the Company and its subsidiaries that were not previously insured by the various Company insurance programs (including the risk of loss of key customers and contacts, administrative actions and regulatory changes); and
underwritesmay from time to time underwrite third-party risk through certain reinsurance arrangements.
The activities of SAIC
areis included
within the corporate results in the
accompanyingCompany’s consolidated financial statements.
At March 31,
2016,2020, the Company and its subsidiaries had
approximately 600478 full-time and full-time-equivalent employees.
This does not include employees of Delphax, which is not a subsidiary of the Company. None of the employees of the Company or any of its
consolidated subsidiaries are represented by labor unions. The Company believes its relations with its employees are good.
Item 1A.Risk Factors. (As Amended) The following risk factors,novel coronavirus (COVID-19) and other possible pandemics and similar outbreaks could result in material adverse effects on our business, financial position, results of operations and cash flows.
The outbreak of the COVID-19 virus that has rapidly spread to a growing number of countries, including the United States, has created considerable instability and disruption in the U.S. and world economies. Substantial uncertainty still surrounds COVID-19 and its potential effects, as well as the extent and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures and other information includedrestrictions on travel, congregation and business operations have already resulted in this Annual Report on Form 10-K, should be considered by investors in connection with any investmentsignificant negative impacts in the Company’s common stock. United States and world economies and in relation to our business. The long-term impact of COVID-19 on the U.S. and world economies remains uncertain, but is likely to result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted. The extent to which our financial condition, results of operations and overall value will continue to be affected by the COVID-19 pandemic will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
As useda result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of disruptions, and have experienced and continue to experience a reduction in this Item,demand for commercial aircraft, jet engines and parts which have negatively affected our sales and could materially and adversely affect the financial performance and value of our inventory. All of the markets in which our businesses are located are subject to some level of restrictions on business operations. Even after travel advisories and restrictions are modified or lifted, demand for air travel may remain weak for a significant length of time, which may be a function of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses. We cannot predict if and when the demand for our commercial aircraft, jet engines and parts will return to pre-outbreak levels of volume and pricing. The market and economic challenges created by the COVID-19 pandemic, and measures implemented to prevent its spread, have adversely affected, and may continue to adversely affect our returns and profitability.
Additionally, market fluctuations may affect our ability to obtain necessary funds for the operation of our businesses from current lenders or new borrowings. In addition, we may be unable to obtain financing on satisfactory terms, “we,” “us” and “our” referor at all. Third-party reports relating to market studies or demographics we obtained prior to the CompanyCOVID-19 virus outbreak may no longer be accurate or complete. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our business, financial condition, results of operation and the overall value of our assets.
The global impact of the COVID-19 pandemic continues to evolve rapidly, and the extent of its
subsidiaries.Risks Relatedeffect on our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others. As a result, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial condition and results of operations. In addition, if in the future there is an outbreak of another highly infectious or contagious disease or other health concern, our company may be subject to similar risks as posed by COVID-19.
Our
DependenceAir Cargo Segment is dependent on
Significant Customersa significant customer.
We are significantly dependent on our contractual relationship with FedEx Corporation (“FedEx”), the loss of which would have a material adverse effect on our business, results of operations and financial position.In the fiscal year ended March 31, 2016, 46%2020, 30% of our consolidated operating revenues, and 100%96% of the operating revenues for our overnight air cargo segment, arose from services we provided to FedEx. OurWhile FedEx has been our customer since 1980 under similar terms, our current agreements may be terminated by FedEx upon 90 days’days’ written notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written notice. In addition, FedEx may terminate the dry-lease agreement with MAC or CSA upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes its only customer, or iteither MAC or CSA employs less than six employees. As of the date of issuance of this report, FedEx would have beenbe permitted to terminate each of the new dry-lease agreements under this provision. FedEx has been a customer of the Company since 1980. The loss of these contracts with FedEx would have a material adverse effect on our business, results of operations and financial position.
Recent changes
In April 2019, FedEx informed the Company of a strategic realignment in ourthe Caribbean region. The change affected the service provided by the Company’s wholly-owned subsidiary, MAC, in that region and MAC assets and services were transferred to a new carrier. As a result of this realignment approximately 11 aircraft were transitioned to a different carrier resulting in an approximate $1.7 million reduction in revenue and an approximate $0.1 million reduction in net income at this segment during the fiscal year ended March 31, 2020.
Our dry-lease agreements with FedEx subject us to greater operating risks.
On June 1, 2015, MAC and CSA entered into new
Our dry-lease agreements with FedEx
with terms different from our prior dry-lease service contracts. The new dry-lease agreements provide for the lease of specified aircraft by us in return for the payment of monthly rent with respect to each aircraft leased, which monthly rent was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate.leased. The new dry-lease agreements provide for the reimbursement by FedEx of our costs, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs. UnlikeUnder the prior dry-lease contracts, under the new dry-lease agreements, certain operational costs incurred by us in operating the aircraft are not reimbursed by FedEx at cost, and such operational costs are to be borne solely by us. The new dry-lease agreements provide for the payment by FedEx to us of a monthly administrative fee based on the number and type of aircraft leased and routes operated. The amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to reflect the greater monthly lease payment per aircraft and that certain operational costs are to be borne by MAC and CSA and not reimbursed. Accordingly, as a result in the change in our arrangements with FedEx as reflected in the new dry-lease agreements, we are subject to the risk of rising operational costs that are no longer reimbursed to us at cost and may be in excess of the allocable portion of the increased administrative fee, which could adversely affect results of operations.
Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’sFedEx’s operations.
Because of our dependence on FedEx, we are subject to the risks that may affect
FedEx’sFedEx’s operations. These risks are discussed in “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Risk Factors” in FedEx Corporation’sFedEx’s Annual Report on Form 10-K for the fiscal year ended May 31, 2015.2019 (updated as necessary for the Q3 Form 10-Q for the period ended February 29, 2020). These risks include but are not limited to the following: | ●
| Economic conditions in the global markets in which it operates;
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| ●
| Dependence on its strong reputation and value of its brand;
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| ●
| Potential disruption to the Internet and FedEx’s technology infrastructure, including customer websites;
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| ●
| The price and availability of fuel;
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| ●
| Its ability to manage its assets, including aircraft, to match shifting and future shipping volumes;
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| ●
| Intense competition from other providers of transportation and business services;
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| ●
| Its ability to make prudent strategic acquisitions and realize the expected benefits;
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| Its ability to maintain good relationships with its employees and prevent attempts by labor organizations to organize groups of its employees;
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| ●
| The continued classification of owner-operators in its ground delivery business as independent contractors rather than as employees;
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| ●
| Its ability to execute on its business realignment program to improve profitability;
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| ●
| The impact of terrorist activities including the imposition of stricter governmental security requirements;
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| Regulatory actions affecting global aviation rights or a failure to obtain or maintain aviation rights in important international markets;
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| ●
| Global climate change or legal, regulatory or market responses to such change;
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| ●
| Localized natural or man-made disasters in key locations, including its Memphis, Tennessee super-hub;
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| ●
| Disruptions or modifications in service by the United States Postal Service, a significant customer and vendor of FedEx; and
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| ●
| Widespread outbreak of an illness or other communicable disease or any other public health crisis.
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a.Economic conditions in the global markets in which it operates;
b.Dependence on its strong reputation and value of its brand;
c.Potential disruption to operations resulting from a significant data breach or other disruption to FedEx’s technology infrastructure;
d.The price and availability of fuel;
e.Its ability to manage capital and its assets, including aircraft, to match shifting and future shipping volumes;
f.Changes in international trade policies and relations could significantly reduce the volume of goods transported globally;
g.Intense competition from other providers of transportation and business services;
h.Changes in governmental regulations that may affect its business;
i.Its ability to operate, integrate, leverage and grow acquired businesses;
j.Adverse changes in regulations and interpretations and challenges to its tax positions relating to the Tax Cuts and Jobs Act;
k.Its ability to maintain good relationships with its employees and prevent attempts by labor organizations to organize groups of its employees;
l.Disruptions or modifications in service by the United States Postal Service, a significant customer and vendor of FedEx;
m.The continued classification of owner-operators in its ground delivery business as independent contractors rather than as employees;
n.The impact of the United Kingdom's withdrawal from the European Union;
o.The impact of terrorist activities including the imposition of stricter governmental security requirements;
p.Regulatory actions affecting global aviation rights or a failure to obtain or maintain aviation rights in important international markets;
q.Global climate change or legal, regulatory or market responses to such change;
r.Adverse weather or localized natural or man-made disasters in key locations, including its Memphis, Tennessee super-hub; and
s.Widespread outbreak of an illness or other communicable disease or any other public health crisis.
A material reduction in the aircraft we fly for FedEx could materially adversely affect our business and results of operations.
Under our agreements with FedEx, we are not guaranteed a number of aircraft or routes we are to fly and FedEx may reduce the number of aircraft we lease and operate upon 10
days’days’ written notice. Our compensation under these agreements, including our administrative fees, depends on the number of aircraft leased to us by FedEx. Any material permanent reduction in the aircraft we operate could materially adversely affect our business and results of operations. A temporary reduction in any period could materially adversely affect our results of operations for that period.
Our ground support services segment has beenholding company structure may increase risks related to our operations.
Our business, financial condition and results of operations are dependent upon
the revenues from two significant customers, the lossthose of
which could materially impact the segment’s results.In the fiscal year ended March 31, 2016, approximately 48%our individual businesses, and our aggregate investment in particular industries. We are a holding company with investments in businesses and assets in a number of GAS’s revenues were derived from services under contracts with two customers. The loss of these customers, or a major decline inindustries. Our business, activity with these customers, could materially adversely impact thefinancial condition and results of operations are dependent upon our various businesses and investments and these businesses generally operate independently and in a decentralized manner. Additionally, in the segment.
Other Business Risks
Unless Delphax obtains accessordinary course of business we guarantee the obligations of other entities that we manage and/or invest in. Any material adverse change in one of our businesses or investments, or in a particular industry in which we operate or invest, may cause material adverse changes to adequate sourcesour business, financial condition and results of liquidity, it may be unable to adequately fund its operations or pay its debts as they come due andoperations. The more capital we may be unable tofully recoverour investments in Delphax.
As of March 31, 2016, Delphax maintained a debt facility consisting of a $7.0 million revolving senior secured credit facility, subjectdevote to a borrowing baseparticular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of North American accounts receivable and inventory. Neither Air T nor any of its subsidiaries is a guarantor of Delphax’s obligations under its senior credit facility. The Delphax senior credit facility is secured by substantially all of its North American assets, expiresoperations, possibly in November 2018, prohibits payment of cash dividends by Delphax and is subject to certain financial covenants. As of March 31, 2016, Delphax had aggregate borrowings of $1,833,000 outstanding under its senior credit facility, with a borrowing base that would have permitted additional borrowings of approximately $800,000. Delphax has advised that at March 31, 2016 it was not in compliance with financial covenants under the agreement governing its senior credit facility. Due to Delphax’s non-compliance with financial covenants, the lender has the contractual right to cease permitting borrowings under the facility and to declare all amounts outstanding under the senior credit facility due and payable immediately. As of the date of this report the lender has neither made such declaration, nor waived its right to do so and Delphax has continued to make borrowings under the senior credit facility. As of the date of this report, Delphax has not regained compliance with these financial covenants. In the event that Delphax is denied access to additional borrowings under the senior credit facility, unless it obtains access to other adequate sources of liquidity, which may include cash from operations, Delphax may be unable to adequately fund its operations or pay its debts as they come due. Delphax has recently implemented cost-savings initiatives, including employee furloughs, to minimize ongoing cash needs.
In addition to the Shares of Delphax’s Series B Preferred Stock and the Warrant to acquire additional shares of Series B Preferred Stock, our investments in Delphax include a $2,500,000 Senior Subordinated Note issued by Delphax’s Canadian operating subsidiary and guaranteed by Delphax. An event of default will exist under the Senior Subordinated Note if Delphax’s non-compliance with financial covenants under its senior credit facility is not waived by its senior lender. Under the terms of a subordination agreement with the senior lender under Delphax’s revolving senior secured credit facility entered into at the time we made our investments in Delphax, our rights with respect to payment under and enforcement of the Senior Subordinated Note and enforcement of our related security interests are subordinated to the rights of the senior lender. Accordingly, in the event of a default under the Senior Subordinated Note, we may be limited in the actions we may take to enforce the Senior Subordinated Note or related security interests and we may be unable to collect in full on the Senior Subordinated Note or fully recover our other investments in Delphax.
Our revenues for aircraft maintenance services fluctuate based on the heavy maintenance check schedule, which is based on aircraft usage, for aircraft flown by our overnight air cargo operations.
The maintenance revenues of our overnight air cargo segment are affected based on the level of heavy maintenance checks performed on aircraft operated by our overnight air cargo operations which is affected by the level of usage of the aircraft. Accordingly, the maintenance revenues of our overnight air cargo segment fluctuate from period to period. In addition, if the number of aircraft operated for FedEx were to decrease, we would likely experience fewer maintenance hours and consequently, less maintenance revenue.
Incidents or accidents involving products and services that we sell may result in liability or otherwise adversely affect our operating results for a period.
Incidents or accidents may occur involving the products and services that we sell. While we maintain products liability and other insurance in amounts we believe are customary and appropriate, and may have rights to pursue subcontractors in the event that we have any liability in connection with accidents involving products that we sell, it is possible that in the event of multiple accidents the amount of our insurance coverage would not be adequate.
The suspension or revocation of FAA certifications could have a material adverse effect on our business, results of operations and financial condition.
Our overnight air cargo operations are subject to regulations of the FAA. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. Our overnight air cargo subsidiaries, MAC and CSA, operate under separate FAA certifications. Although it is possible that, in the event that the certification of one of our subsidiaries was suspended or revoked, flights operated by that subsidiary could be transferred to the other subsidiary, we can offer no assurance that we would be able to transfer flight operations in that manner. Accordingly, the suspension or revocation of any one of these certifications could have a material adverse effect on our business, results of operations and financial position.
way.
Sales of deicing equipment can be affected by weather conditions.
Our deicing equipment is used to deice commercial and military aircraft. The extent of deicing activity depends on the severity of winter weather. Mild winter weather conditions permit airports to use fewer deicing units, since less time is required to deice aircraft in mild weather conditions. As a result, airports may be able to extend the useful lives of their existing units, reducing the demand for new units.
Our results of operations may be affected by the value of securities we hold for investment and we may be unable to liquidate our investments in a timely manner or at full value.
We invest a significant portion of our capital not needed for operations in marketable securities, including equity securities of
publicly tradedpublicly-traded companies. At March 31,
2016,2020, the fair value of these marketable securities was approximately
$9.7 million, of which $4.7 million represents the fair$3.2 million. The value of
sharesour investment portfolio fluctuates and we have sustained losses in our investment portfolio in the past and could in the future. Such declines in value of
common stockavailable-for-sale securities will be recognized as losses upon the sale of
Insignia Systems, Inc.such securities or if such declines are deemed to be other than temporary. Our results of operations may be affected by gains or losses recognized upon
such a decline in value of our investments or the sale of these investments
or by losses recognized uponand the
determination that anyCompany may not be able to realize the fair value of such
investment has become impaired or suffered an other than temporary impairment. At March 31, 2016, we had gross unrealized gains associated with marketable securities aggregating $422,000 and gross unrealized losses aggregating $557,000. In addition, from time to time we may hold positions in marketable securities thatinvestments under
then-current marketthen-market conditions
we may be unable to liquidateif liquidation is necessary in a
timely manner at full value. For example, at May 31, 2016, we held approximately 1.65 million sharesshort period of
common stock of Insignia Systems, Inc., representing approximately 14.25% of the outstanding shares and approximately 225 times the average daily trading volume for such shares for the preceding three months. In the event that we are unable to liquidate an investment at full value our gain from the sale of that investment may be reduced or our loss from the sale of that investment may be increased.time.
Our business may be adversely affected by information technology disruptions.
Our business may be impacted by information technology disruptions, including information technology attacks. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data (our own or that of third parties). Although we have adopted certain measures to mitigate potential risks to our systems from information technology-related disruptions, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business
Labor inflation could be materially adversely affected by numerous other risks, including rising healthcare costs, changesimpact our profitability.
The Company operates in
environmental laws and other unforeseen business interruptions.Our business may be negativelyindustries that are heavily impacted by numerous other risks. For example, medicalthe workforce’s labor rates. Significant examples include mechanics and healthcare costs may continuepilots, both of which are exposed to increase. Initiativesthe possibility of material increases in labor costs.
Legacy technology systems require a unique technical skillset which is becoming scarcer.
The Company deploys legacy technology systems in several significant business units. As technology continues to addressrapidly change, the available pool of individuals technically trained in these costs, such as consumer driven health plan packages, may not successfullylegacy systems shrinks. As this scarcity increases, the Company’s ability to efficiently and quickly repair its legacy systems becomes increasingly difficult, which could have a significant impact on the Company’s day-to-day operations.
Future acquisitions and dispositions of businesses and investments are possible, changing the components of our assets and liabilities, and if unsuccessful or unfavorable, could reduce these expenses as needed. Failure to offer competitive employee benefitsthe value of the Company and its securities.
Any future acquisitions or dispositions may result in
significant changes in the composition of our
inability to recruit or maintain key employees. Additional risks toassets and liabilities, as well as our business
include global or local events which could significantly disruptmix and prospects. Consequently, our
operations. Terrorist attacks, natural disasters and electrical grid disruptions and outages are some of the unforeseen risks that could negatively affect our business, financial condition, results of operations and
cash flows.the trading price of our securities may be affected by factors different from those affecting our financial condition, results of operations and trading price at the present time.
We have identified material weaknesses relatedface numerous risks and uncertainties as we expand our business.
We expect the growth and development of our business to come primarily from internal expansion and through acquisitions, investments, and strategic partnering. As we expand our internal controls andbusiness, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties concerning the integration of their controls and systems, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.
Rapid business expansions or new business initiatives may increase risk.
Certain business initiatives, including expansions of existing businesses such as the relatively recent substantial expansion at our commercial jet engines and parts segment, may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes, new business plans and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased credit-related, sovereign and operational risks, and reputational concerns regarding the manner in which these assets are being operated or held. There is no assurance that prior year activity and results will occur in future periods.
The failure of our information technology systems could adversely impact our reputation and financial performance.
We operate in businesses that are dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and/or the cost of maintaining such systems may increase from its current level. Either scenario could have a material weaknesses willadverse effect on us. We rely on third-party service providers to manage certain aspects of our business, including for certain information systems and technology, data processing systems, and the secure processing, storage and transmission of information. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of our operations and could adversely affect our business and reputation.
We may not be identifiedable to insure certain risks adequately or economically.
We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a claim. If an uninsured loss or a loss in excess of insured limits should occur, or if we are required to pay a deductible for an insured loss, results of operations could be adversely affected.
We could experience significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees in our operating businesses.
We compete with many other organizations for skilled management and staff employees, including organizations that operate in different market sectors than us. Costs to recruit and retain adequate personnel could adversely affect results of operations.
Legal liability may harm our business.
Many aspects of our businesses involve substantial risks of liability, and, in the
future.As described elsewhere in Part II, Item 9Anormal course of this report,business, we have identifiedbeen named as a defendant or co-defendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. The expansion of our businesses, including expansions into new products or markets, impose greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability. Substantial legal liability could have a material weaknesses with respectadverse financial effect or cause us significant reputational harm, which in turn could seriously harm our businesses and our prospects. Although our current assessment is that there is no pending litigation that could have a significant adverse impact, if our assessment proves to be in error, then the outcome of such litigation could have a significant impact on our consolidated financial statements.
Future cash flows from operations or through financings may not be sufficient to enable the Company to meet its obligations.
Future cash flow of the Company’s operations can fluctuate significantly. If future cash flows are not sufficient to permit the Company to meet its obligations, this would likely have a material adverse effect on the Company, its businesses, financial condition and results of operations. Additionally, credit market volatility may affect our ability to refinance our existing debt, borrow funds under our existing lines of credit or incur additional debt. There can be no assurances that the Company or its subsidiaries will continue to have access to their lines of credit if their financial performance does not satisfy the financial covenants set forth in the applicable financing agreements. If the Company or its subsidiaries do not meet certain of its financial covenants, and if they are unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management, their ability to access available lines of credit could be limited, their debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.
The Company and/or its subsidiaries may be required to seek additional or alternative financing sources if the Company’s or its subsidiaries’ cash needs are significantly greater than anticipated or they do not materially meet their business plans, or there are unanticipated downturns in the markets for the Company’s and its subsidiaries’ products and services. Future disruption and volatility in credit market conditions could have a material adverse impact on the Company’s ability, or that of its subsidiaries, to refinance debt when it comes due on terms similar to our accountingcurrent credit facilities, to draw upon existing lines of credit or to incur additional debt if needed. There can be no assurance therefore that such financing will be available or available on acceptable terms. The inability to generate sufficient cash flows from operations or through financings could impair the Company’s or its subsidiaries’ liquidity and would likely have a material adverse effect on their businesses, financial condition and results of operations.
Our business strategy includes acquisitions, and acquisitions entail numerous risks, including the risk of management diversion and increased costs and expenses, all of which could negatively affect the Company’s ability to operate profitably.
Our business strategy includes, among other things, strategic and opportunistic acquisitions. This element of our strategy entails several risks, including, but not limited to the diversion of management’s attention from other business concerns and the need to finance such acquisitions with additional equity and/or debt. In addition, once completed, acquisitions entail further risks, including: unanticipated costs and liabilities of the acquired businesses, including environmental liabilities, that could materially adversely affect our results of operations; difficulties in assimilating acquired businesses, preventing the expected benefits from the transaction from being realized or achieved within the anticipated time frame; negative effects on existing business relationships with suppliers and customers; and losing key employees of the acquired businesses. If our acquisition strategy is not successful or if acquisitions are not well integrated into our existing operations, the Company’s profitability could be negatively affected.
We are affected by the risks faced by commercial aircraft operators and maintenance, repair and overhaul companies (“MROs”) because they are our customers.
Commercial aircraft operators are engaged in economically sensitive, highly cyclical and competitive businesses. We are a supplier to commercial aircraft operators and MROs. As a result, we are indirectly affected by all of the risks facing commercial aircraft operators and MROs, with such risks being largely beyond our control. Our results of operations depend, in part, on the financial strength of our customers and our customers’ ability to compete effectively in the marketplace and manage their risks.
Our engine values and lease rates, which are dependent on the status of the types of aircraft on which engines are installed, and other factors, could decline.
The value of a particular model of engine depends heavily on the types of aircraft on which it may be installed and the available supply of such engines. Values of engines generally tend to be relatively stable so long as there is sufficient demand for the host aircraft. However, the value of an engine may begin to decline rapidly once the host aircraft begins to be retired from service and/or used for spare parts in significant numbers. Certain types of engines may be used in significant numbers by commercial aircraft operators that are currently experiencing financial difficulties. If such operators were to go into liquidation or similar proceedings, the resulting over-supply of engines from these operators could have an adverse effect on the demand for the affected engine types and the values of such engines.
Upon termination of a lease, we may be unable to enter into new leases or sell the airframe, engine or its parts on acceptable terms.
We directly or indirectly own the engines or aircraft that we lease to customers and bear the risk of not recovering our entire investment through leasing and selling the engines or aircraft. Upon termination of a lease, we seek to enter a new lease or to sell or part-out the engine or aircraft. We also selectively sell engines on an opportunistic basis. We cannot give assurance that we will be able to find, in a timely manner, a lessee or a buyer for our investmentsengines or aircraft coming off-lease or for their associated parts. If we do find a lessee, we may not be able to obtain satisfactory lease rates and terms (including maintenance and redelivery conditions), and we cannot guarantee that the creditworthiness of any future lessee will be equal to or better than that of the existing lessees of our engines. Because the terms of engine leases may be less than 12 months, we may frequently need to remarket engines. We face the risk that we may not be able to keep our engines on lease consistently.
Failures by lessees to meet their maintenance and recordkeeping obligations under our leases could adversely affect the value of our leased engines and aircraft and therefore our ability to re-lease the engines and aircraft in Delphaxa timely manner following termination of the leases.
The value and income producing potential of an engine or aircraft depends heavily on it being maintained in accordance with an approved maintenance system and complying with all applicable governmental directives and manufacturer requirements. In addition, for an engine or aircraft to be available for service, all records, logs, licenses and documentation relating to maintenance and operations of the engine or aircraft must be maintained in accordance with governmental and manufacturer specifications. Under our leases, our lessees are primarily responsible for maintaining our aircraft and engines and complying with all governmental requirements applicable to the lessee and the aircraft and engines, including operational, maintenance, government agency oversight, registration requirements and airworthiness directives. However, over time, certain lessees have experienced, and may experience in the future, difficulties in meeting their maintenance and recordkeeping obligations as specified by the terms of our leases. Failure by our lessees to maintain our assets in accordance with requirements could negatively affect the value and desirability of our assets and expose us to increased maintenance costs that may not be sufficiently covered by supplemental maintenance rents paid by such lessees.
Our ability to determine the condition of the engines or aircraft and whether the lessees are properly maintaining our assets is generally limited to the lessees’ reporting of monthly usage and any maintenance performed, confirmed by periodic inspections performed by us and third-parties. A lessee’s failure to meet its maintenance or recordkeeping obligations under a lease could result in:
a.a grounding of the related engine or aircraft;
b.a repossession that would likely cause us to incur additional and potentially substantial expenditures in restoring the engine or aircraft to an acceptable maintenance condition;
c.a need to incur additional costs and devote resources to recreate the records prior to the sale or lease of the engine or aircraft;
d.a decline in the market value of the aircraft or engine resulting in lower revenues upon a subsequent lease or sale;
e.loss of lease revenue while we perform refurbishments or repairs and recreate records; and
f.a lower lease rate and/or shorter lease term under a new lease entered into by us following repossession of the engine or aircraft.
Any of these events may adversely affect the value of the engine, unless and until remedied, and reduce our revenues and increase our expenses. If an engine is damaged during a lease and we are unable to recover from the lessee or though insurance, we may incur a loss.
The operating results of our five segments may fluctuate.
The operating results of our five segments have varied from period to period and comparisons to results for preceding periods may not be meaningful. Due to a number of factors, including the risks described in this section, our operating results may fluctuate. These fluctuations may also be caused by:
a.the economic health of the economy and the airplane industry in general;
b. timing and number of purchases and sales of engines or aircraft;
c.the timing and amount of maintenance reserve revenues recorded resulting from the termination of long term leases, for which existed at March 31, 2016.significant amounts of maintenance reserves may have accumulated;
d.the termination or announced termination of production of particular aircraft and engine types;
e.the retirement or announced retirement of particular aircraft models by aircraft operators;
f.the operating history of any particular engine, aircraft or engine or aircraft model;
g.the length of our operating leases; and
h.the timing of necessary overhauls of engines and aircraft.
These risks may reduce our commercial jet engines and parts segment's engine utilization rates, lease margins, maintenance reserve revenues and proceeds from engine sales, and result in higher legal, technical, maintenance, storage and insurance costs related to repossession and the cost of engines being off-lease. As a result of the foregoing and other factors, the availability of engines for lease or sale periodically experiences cycles of oversupply and undersupply of given engine models and generally. The incidence of an erroroversupply of engines may produce substantial decreases in engine lease rates and the appraised and resale value of engines and may increase the time and costs incurred to lease or sell engines. We anticipate that supply fluctuations from period to period will continue in the accountingfuture. As a result, comparisons to results from preceding periods may not be meaningful and results of prior periods should not be relied upon as an indication of our future performance.
We may experience losses and delays in connection with repossession of engines or aircraft when a lessee defaults.
We may not be able to repossess an engine or aircraft when the lessee defaults, and even if we are able to repossess the engine or aircraft, we may have to expend significant funds in the repossession, remarketing and leasing of the asset. When a lessee defaults and such default is not cured in a timely manner, we typically seek to terminate the lease and repossess the engine or aircraft. If a defaulting lessee contests the termination and repossession or is under court protection, enforcement of our rights under the lease may be difficult, expensive and time-consuming. We may not realize any practical benefits from our legal rights and we may need to obtain consents to export the engine or aircraft. As a result, the relevant asset may be off-lease or not producing revenue for a prolonged period of time. In addition, we will incur direct costs associated with repossessing our engine or aircraft, including, but not limited to, legal and similar costs, the attributiondirect costs of net losstransporting, storing and insuring the engine or aircraft, and costs associated with necessary maintenance and recordkeeping to make the asset available for lease or sale. During this time, we will realize no revenue from the leased engine or aircraft, and we will continue to be obligated to pay any debt financing associated with the asset. If an engine is installed on an airframe, the airframe may be owned by an aircraft lessor or other third party. Our ability to recover engines installed on airframes may depend on the cooperation of Delphax attributablethe airframe owner.
The Company and its customers operate in a highly regulated industry and changes in laws or regulations may adversely affect our ability to non-controlling interests, we restatedlease or sell our consolidated financial statements atengines or aircraft.
Certain of the laws and regulations applicable to our business, include:
Licenses and consents. A number of our leases require specific governmental or regulatory licenses, consents or approvals. These include consents for certain payments under the leases and for the fiscal year ended March 31, 2016,export, import or re-export of our engines or aircraft. Consents needed in connection with future leasing or sale of our engines or aircraft may not be received timely or have economically feasible terms. Any of these events could adversely affect our ability to lease or sell engines or aircraft.
Export/import regulations. The U.S. Department of Commerce (the “Commerce Department”) regulates exports. We are subject to the Commerce Department’s and the selected quarterly financial dataU.S. Department of State’s regulations with respect to the lease and sale of engines and aircraft to foreign entities and the export of related parts. These Departments may, in some cases, require us to obtain export licenses for engines exported to foreign countries. The U.S. Department of Homeland Security, through the U.S. Customs and Border Protection, enforces regulations related to the import of engines and aircraft into the United States for maintenance or lease and imports of parts for installation on our engines and aircraft.
Restriction Lists. We are prohibited from doing business with persons designated by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) on its “Specially Designated Nationals List,” and must monitor our operations and existing and potential lessees and other counterparties for compliance with OFAC’s rules. Similarly, sanctions issued by the United Nations, the U.S. government, the European Union or other foreign governments could prohibit or restrict us from doing business in certain countries or with certain persons. As a result, we must monitor our operations and existing and potential lessees and other counterparties for compliance with such sanctions.
Anti-corruption Laws. As a U.S. corporation with international operations, we are required to comply with a number of U.S. and international laws and regulations which combat corruption. For example, the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar world-wide anti-bribery laws generally prohibit improper payments to foreign officials for the final two quarterspurpose of influencing any official act or decision or securing any improper advantage. The scope and enforcement of such anti-corruption laws and regulations may vary. Although our policies expressly mandate compliance with the FCPA and similarly applicable laws, there can be no assurance that none of our employees or agents will take any action in violation of our policies. Violations of such laws or regulations could result in substantial civil or criminal fines or penalties. Actual or alleged violations could also damage our reputation, be expensive to defend, and impair our ability to do business.
Civil aviation regulation. Users of engines and aircraft are subject to general civil aviation authorities, including the FAA and the EASA, who regulate the maintenance of engines and issue airworthiness directives. Airworthiness directives typically set
forth special maintenance actions or modifications to certain engine and aircraft types or a series of specific engines that must be implemented for the engine or aircraft to remain in service. Also, airworthiness directives may require the lessee to make more frequent inspections of an engine, aircraft or particular engine parts. Each lessee of an engine or aircraft generally is responsible for complying with all airworthiness directives. However, if the engine or aircraft is off lease, we may be forced to bear the cost of compliance with such airworthiness directives. Additionally, even if the engine or aircraft is leased, subject to the terms of the lease, if any, we may still be forced to share the cost of compliance.
Our aircraft, engines and parts could cause damage resulting in liability claims.
Our aircraft, engines or parts could cause bodily injury or property damage, exposing us to liability claims. Our leases require our lessees to indemnify us against these claims and to carry insurance customary in the fiscal year then ended,air transportation industry, including general liability and property insurance at agreed upon levels. However, we cannot guarantee that one or more catastrophic events will not exceed insurance coverage limits or that lessees’ insurance will cover all claims that may be asserted against us. Any insurance coverage deficiency or default by lessees under their indemnification or insurance obligations may reduce our recovery of losses upon an event of loss.
An increase in interest rates or in our borrowing margin would increase the cost of servicing our debt and could reduce our profitability.
A portion of our outstanding debt bears interest at floating rates. As a result, to the extent we have not hedged against rising interest rates, an increase in the applicable benchmark interest rates would increase our cost of servicing our debt and could materially and adversely affect our results of operations, financial condition, liquidity and cash flows. In addition, if we refinance our indebtedness and interest rates or our borrowing margins increase between the time an existing financing arrangement was consummated and the time such financing arrangement is refinanced, the cost of servicing our debt would increase and our results of operations, financial condition, liquidity and cash flows could be materially and adversely affected.
The transition away from LIBOR may adversely affect our cost to obtain financing and may potentially negatively impact our interest rate swap agreements.
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for the London Interbank Offered Rate (“LIBOR”) based on observable market transactions. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but that it will not use its powers to compel contributions beyond such date. Accordingly, there is uncertainty regarding the publication of such rates beyond 2021. The Federal Reserve Bank of New York and various other authorities have commenced the publication of reforms and actions relating to alternatives to U.S. dollar LIBOR. The full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear. These changes may have a material adverse impact on the availability and cost of our financing, including LIBOR-based loans, as well as our condensed consolidated financial statementsinterest rate swap agreements.
We have risks in managing our portfolio of aircraft and engines to meet customer needs.
The relatively long life cycles of aircraft and jet engines can be shortened by world events, government regulation or customer preferences. We seek to manage these risks by trying to anticipate demand for particular engine and aircraft types, maintaining a portfolio mix of engines that we believe is diversified, has long-term value and will be sought by lessees in the global market for jet engines, and by selling engines and aircraft that we expect will not experience obsolescence or declining usefulness in the foreseeable future.
Our inability to maintain sufficient liquidity could limit our operational flexibility and also impact our ability to make payments on our obligations as they come due.
In addition to being capital intensive and highly leveraged, our aircraft and engine business requires that we maintain sufficient liquidity to enable us to contribute the non-financed portion of engine and aircraft purchases as well as to service our payment obligations to our creditors as they become due, despite the fact that the timing and amounts of our revenues do not match the timing under our debt service obligations. Our restricted cash is unavailable for general corporate purposes. Accordingly, our ability to successfully execute our business strategy and maintain our operations depends on our ability to continue to maintain sufficient liquidity, cash and available credit under our credit facilities. Our liquidity could be adversely impacted if we are subjected to one or more of the following:
•a significant decline in revenues,
•a material increase in interest expense that is not matched by a corresponding increase in revenues,
•a significant increase in operating expenses,
•a reduction in our available credit under our credit facilities, or
•general economic or national events.
If we do not maintain sufficient liquidity, our ability to meet our payment obligations to creditors or to borrow additional funds could become impaired.
Liens on our engines or aircraft could exceed the value of such assets, which could negatively affect our ability to repossess, lease or sell a particular engine or aircraft.
Liens that secure the payment of repairers’ charges or other liens may, depending on the jurisdiction, attach to engines and aircraft. Engines also may be installed on airframes to which liens unrelated to the engines have attached. These liens may secure substantial sums that may, in certain jurisdictions or for certain types of liens, exceed the value of the particular engine or aircraft to which the liens have attached. In some jurisdictions, a lien may give the holder the right to detain or, in limited cases, sell or cause the forfeiture of the engine or aircraft. Such liens may have priority over our interest as well as our creditors’ interest in the engines or aircraft. These liens and lien holders could impair our ability to repossess and lease or sell the engines or aircraft. We cannot give assurance that our lessees will comply with their obligations to discharge third-party liens on our assets. If they do not, we may, in the future, find it necessary to pay the claims secured by such liens to repossess such assets.
In certain countries, an engine affixed to an aircraft may become an addition to the aircraft and we may not be able to exercise our ownership rights over the engine.
In certain jurisdictions, an engine affixed to an aircraft may become an addition to the aircraft such that the ownership rights of the owner of the aircraft supersede the ownership rights of the owner of the engine. If an aircraft is security for the threeowner’s obligations to a third-party, the security interest in the aircraft may supersede our rights as owner of the engine. Such a security interest could limit our ability to repossess an engine located in such a jurisdiction in the event of a lessee bankruptcy or lease default. We may suffer a loss if we are not able to repossess engines leased to lessees in these jurisdictions.
Higher or volatile fuel prices could affect the profitability of the aviation industry and nine months ended December 31, 2015,our lessees’ ability to meet their lease payment obligations to us.
Historically, fuel prices have fluctuated widely depending primarily on international market conditions, geopolitical and environmental events and currency exchange rates. Factors such as natural disasters can also significantly affect fuel availability and prices. The cost of fuel represents a major expense to airlines that is not within their control, and significant increases in fuel costs or hedges that inaccurately assess the three months ended June 30, 2016,direction of fuel costs can materially and adversely affect their operating results. Due to the threecompetitive nature of the aviation industry, operators may be unable to pass on increases in fuel prices to their customers by increasing fares in a manner that fully offsets the increased fuel costs they may incur. In addition, they may not be able to manage this risk by appropriately hedging their exposure to fuel price fluctuations. The profitability and six months ended September 30, 2016liquidity of those airlines that do hedge their fuel costs can also be adversely affected by swift movements in fuel prices if such airlines are required to post cash collateral under hedge agreements. Therefore, if for any reason fuel prices return to historically high levels or show significant volatility, our lessees are likely to incur higher costs or generate lower revenues, which may affect their ability to meet their obligations to us.
Interruptions in the capital markets could impair our lessees’ ability to finance their operations, which could prevent the lessees from complying with payment obligations to us.
The global financial markets can be highly volatile and the threeavailability of credit from financial markets and nine months ended December 31, 2016financial institutions can vary substantially depending on developments in the global financial markets. Our lessees depend on banks and selected consolidated balance sheet datathe capital markets to provide working capital and to refinance existing indebtedness. To the extent such funding is unavailable, or available only on unfavorable terms, and to the extent financial markets do not provide equity financing as an alternative, our lessees’ operations and operating results may be materially and adversely affected and they may not comply with their respective payment obligations to us.
Our lessees may fail to adequately insure our aircraft or engines which could subject us to additional costs.
While an aircraft or engine is on lease, we do not directly control its operation. Nevertheless, because we hold title to the aircraft or engine, we could, in certain jurisdictions, be held liable for losses resulting from its operation. At a minimum, we may be required to expend resources in our defense. We require our lessees to obtain specified levels of insurance and indemnify us for, and insure against, such operational liabilities. However, some lessees may fail to maintain adequate insurance coverage during a lease term, which, although constituting a breach of the lease, would require us to take some corrective action, such as terminating the lease or securing insurance for the aircraft or engines. Therefore, our lessees’ insurance coverage may not be sufficient to cover all claims that could be asserted against us arising from the operation of our aircraft or engines. Inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations to us will reduce the insurance proceeds that we would otherwise be entitled to receive in the event we are sued and are required to make payments to claimants. Moreover, our lessees’ insurance coverage is dependent on the financial condition of insurance companies and their ability to pay claims. A reduction in insurance proceeds otherwise payable to us as a result of any of these factors could materially and adversely affect our financial results.
If our lessees fail to cooperate in returning our aircraft or engines following lease terminations, we may encounter obstacles and are likely to incur significant costs and expenses conducting repossessions.
Our legal rights and the relative difficulty of repossession vary significantly depending on the jurisdiction in which an aircraft or engines are located. We may need to obtain a court order or consents for de-registration or re-export, a process that can differ substantially from county to country. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may also apply. For example, certain jurisdictions give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease, to assign it to a third party, or to entitle the lessee or another third party to retain possession of the aircraft or engines without paying lease rentals or performing all or some of the obligations under the relevant lease. Certain of our lessees are partially or wholly owned by government-related entities, which can further complicate our efforts to repossess our aircraft or engines in that government’s jurisdiction. If we encounter any of these difficulties, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft or engines.
When conducting a repossession, we are likely to incur significant costs and expenses that are unlikely to be recouped. These include legal and other expenses related to legal proceedings, including the cost of posting security bonds or letters of credit necessary to effect repossession of the aircraft or engines, particularly if the lessee is contesting the proceedings or is in bankruptcy. We must absorb the cost of lost revenue for the time the aircraft or engines are off-lease. We may incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to pay and are necessary to put the aircraft or engines in suitable condition for re-lease or sale. We may also incur significant costs in retrieving or recreating aircraft records required for registration of the aircraft and in obtaining the certificate of airworthiness for an aircraft. It may be necessary to pay to discharge liens or pay taxes and other governmental charges on the aircraft to obtain clear possession and to remarket the aircraft effectively, including, in some cases, liens that the lessee may have incurred in connection with the operation of its other aircraft. We may also incur other costs in connection with the physical possession of the aircraft or engines.
If our lessees fail to discharge aircraft liens for which they are responsible, we may be obligated to pay to discharge the liens.
In the normal course of their businesses, our lessees are likely to incur aircraft and engine liens that secure the payment of airport fees and taxes, custom duties, Eurocontrol and other air navigation charges, landing charges, crew wages, and other liens that may attach to our aircraft. Aircraft may also be subject to mechanic’s liens as a result of routine maintenance performed by third parties on behalf of our customers. Some of these liens can secure substantial sums, and if they attach to entire fleets of aircraft, as permitted for certain kinds of liens, they may exceed the value of the aircraft itself. Although the financial obligations relating to these liens are the contractual responsibility of our lessees, if they fail to fulfill their obligations, the liens may ultimately become our financial responsibility. Until they are discharged, these liens could impair our ability to repossess, re-lease or sell our aircraft or engines. In some jurisdictions, aircraft and engine liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. If we are obliged to pay a large amount to discharge a lien, or if we are unable take possession of our aircraft subject to a lien in a timely and cost-effective manner, it could materially and adversely affect our financial results.
If our lessees encounter financial difficulties and we restructure or terminate our leases, we are likely to obtain less favorable lease terms.
If a lessee delays, reduces, or fails to make rental payments when due, or has advised us that it will do so in the future, we may elect or be required to restructure or terminate the lease. A restructured lease will likely contain terms that are less favorable to us. If we are unable to agree on a restructuring and we terminate the lease, we may not receive all or any payments still outstanding, and we may be unable to re-lease the aircraft or engines promptly and at December 31, 2015,favorable rates, if at all.
Compliance with the regulatory requirements imposed on us as a public company results in significant costs that may have an adverse effect on our results.
As a public company, we are subject to various regulatory requirements including, but not limited to, compliance with the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Compliance with these regulations results in significant additional costs to us both directly, through increased audit and consulting fees, and indirectly, through the time required by our limited resources to address such regulations.
Withdrawal, suspension or revocation of governmental authorizations or approvals could negatively affect our business.
We are subject to governmental regulation and our failure to comply with these regulations could cause the government to withdraw or revoke our authorizations and approvals to do business and could subject us to penalties and sanctions that could harm our business. Governmental agencies throughout the world, including the FAA, highly regulate the manufacture, repair and operation of aircraft operated in the United States and equivalent regulatory agencies in other countries, such as the EASA in Europe, regulate aircraft operated in those countries. With the aircraft, engines and related parts that we purchase, lease and sell to our customers, we include documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. With respect to a particular engine or engine component, we utilize FAA and/or EASA certified repair stations to repair and certify engines and components to ensure marketability. The revocation or suspension of
any of our material authorizations or approvals would have an adverse effect on our business, financial condition and results of operations. New and more stringent government regulations, if enacted, could have an adverse effect on our business, financial condition and results of operations. In addition, certain product sales to foreign countries require approval or licensing from the U.S. government. Denial of export licenses could reduce our sales to those countries and could have a material adverse effect on our business.
A small number of stockholders has the ability to control the Company.
We have a very concentrated stockholder base. As of March 31,
2016, June 30, 2016, September 30, 2016 and December 31, 2016.Risks Related to Ownership of Our Common Stock
Various provisions and laws could delay2020, our three largest stockholders beneficially owned or prevent a change of control.
Certain provisions of our certificate of incorporation and bylaws, our stockholder rights plan and provisions of Delaware corporation law could delay or prevent a change of control or may impedehad the ability to direct the voting of the holdersshares of our common stock representing approximately 55% of the outstanding shares. As a result, these stockholders have the power to changedetermine the outcome of substantially all matters submitted to our management. In particular, our certificatestockholders for approval, including the election of incorporation and bylaws, among other things regulate how shareholders may present proposals or nominate directors for election at shareholders’ meetings and authorize our board of directorsdirectors. In addition, future sales by these stockholders of substantial amounts of our common stock, or the potential for such sales, could adversely affect the prevailing market price of our common stock.
Our business might suffer if we were to issue preferred stocklose the services of certain key employees.
Our business operations depend upon our key employees, including our executive officers. Loss of any of these employees, particularly our Chief Executive Officer, could have a material adverse effect on our business as our key employees have knowledge of our industry and customers that would be difficult to replace.
To service our debt and meet our other cash needs, we will require a significant amount of cash, which may not be available.
Our ability to make payments on, or repay or refinance, our debt, will depend largely upon our future operating performance. Our future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our maintaining specified financial ratios and satisfying financial condition tests and other covenants in the agreements governing our debt. Our business may not generate sufficient cash flow from operations and future borrowings may not be available in amounts sufficient to pay our debt and to satisfy our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to seek alternatives.
If we cannot meet our debt service obligations, we may be forced to reduce or delay investments and aircraft or engine purchases, sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and might require us to comply with more onerous covenants, which could further restrict our business operations. The terms of our debt instruments may restrict us from adopting some of these alternatives. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations or to meet our aircraft or engine purchase commitments as they come due.
Strategic ventures may increase risks applicable to our operations.
We may enter into strategic ventures that pose risks, including a lack of complete control over the enterprise, and other potential unforeseen risks, any of which could adversely impact our financial results. We may occasionally enter into strategic ventures or investments with third parties in order to take advantage of favorable financing opportunities, to share capital or operating risk, or to earn aircraft management fees. These strategic ventures and investments may subject us to various risks, including those arising from our possessing limited decision-making rights in the enterprise or over the related aircraft. If we were unable to resolve a dispute with a strategic partner who controls ultimate decision-making in such a venture or retains material managerial veto rights, we might reach an impasse which may lead to the liquidation of our investment at a time and in a manner that would result in our losing some or all of our original investment and/or the occurrence of other losses, which could adversely impact our financial results.
Our policies and procedures may not be effective in ensuring compliance with applicable law.
Our policies and procedures designed to ensure compliance with applicable laws may not be effective in all instances to prevent violations, and, as a result we may be subject to related governmental investigations. We could become subject to various governmental investigations, audits and inquiries, both formal and informal. Such investigations, regardless of their outcome, could be costly, divert management attention, and damage our reputation. The unfavorable resolution of such investigations could result in criminal liability, fines, penalties or other monetary or non-monetary sanctions and could materially affect our business or results of operations.
Despite our substantial indebtedness, we might incur significantly more debt, and cash may not be available to meet our financial obligations when due or enable us to capitalize on investment opportunities when they arise.
We employ debt and other forms of leverage in the ordinary course of business to enhance returns to our investors and finance our operations, and despite our current indebtedness levels, we expect to incur additional debt in the future to finance our operations, including purchasing aircraft and engines and meeting our contractual obligations as the agreements relating to our debt, including our indentures, term loan facilities, revolving credit facilities, and other financings do not entirely prohibit us from incurring additional debt. We also enter into financing commitments in the normal course of business, which we may be required to fund. If we are required to fund these commitments and are unable to do so, we could be liable for damages pursued against us or a loss of opportunity through default under contracts that are otherwise to our benefit could occur. We are therefore subject to the risks associated with debt financing and refinancing, including but not limited to the following: (i) our cash flow may be insufficient to meet required payments of principal and interest; (ii) payments of principal and interest on borrowings may leave us with insufficient cash resources to pay operating expenses and dividends; (iii) if we are unable to obtain committed debt financing for potential acquisitions or can only obtain debt at high interest rates or on other unfavorable terms, we may have difficulty completing acquisitions or may generate profits that are lower than would otherwise be the case; (iv) we may not be able to refinance indebtedness at maturity due to company and market factors such as the estimated cash flow produced by our assets, the value of our assets, liquidity in the debt markets, and/or financial, competitive, business and other factors; and (v) if we are able to refinance our indebtedness, the terms of a refinancing may not be as favorable as the original terms for such indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may need to utilize available liquidity, which would reduce our ability to pursue new investment opportunities, dispose of one or more series, without shareholder approval. Our stockholder rights planof our assets on disadvantageous terms, or raise equity, causing dilution to existing stockholders.
The terms of our various credit agreements and other financing documents also makes an acquisitionrequire us to comply with a number of a controlling interestcustomary financial and other covenants, such as maintaining debt service coverage and leverage ratios, adequate insurance coverage and certain credit ratings. These covenants may limit our flexibility in conducting our operations and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness, even if we have satisfied and continue to satisfy our payment obligations. Regulatory changes may also result in higher borrowing costs and reduced access to credit.
A large proportion of our capital is invested in physical assets and securities that can be hard to sell, especially if market conditions are poor.
Because our investment strategy can involve public company securities, we may be restricted in our ability to effect sales during certain time periods. A lack of liquidity could limit our ability to vary our portfolio or assets promptly in response to changing economic or investment conditions. Additionally, if financial or operating difficulties of other competitors result in distress sales, such sales could depress asset values in the Companymarkets in which we operate. The restrictions inherent in owning physical assets could reduce our ability to respond to changes in market conditions and could adversely affect the performance of our investments, our financial condition and results of operations. Because there is significant uncertainty in the valuation of, or in the stability of the value of illiquid or non-public investments, the fair values of such investments do not necessarily reflect the prices that would actually be obtained when such investments are realized.
Deficiencies in our public company financial reporting and disclosures could adversely impact our reputation.
As we expand the size and scope of our business, there is a greater susceptibility that our financial reporting and other public disclosure documents may contain material misstatements and that the controls we maintain to attempt to ensure the complete accuracy of our public disclosures may fail to operate as intended. The occurrence of such events could adversely impact our reputation and financial condition. Management is responsible for establishing and maintaining adequate internal controls over financial reporting to give our stakeholders assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”). However, the process for establishing and maintaining adequate internal controls over financial reporting has inherent limitations, including the possibility of human error. Our internal controls over financial reporting may not prevent or detect misstatements in our financial disclosures on a timely basis, or at all. Some of these processes may be new for certain subsidiaries in our structure, and in the case of acquisitions, may take time to be fully implemented. Our disclosure controls and procedures are designed to provide assurance that information required to be disclosed by us in reports filed or submitted under U.S. securities laws is recorded, processed, summarized and reported within the required time periods. Our policies and procedures governing disclosures may not ensure that all material information regarding us is disclosed in a transaction not approved by our boardproper and timely fashion or that we will be successful in preventing the disclosure of directors more difficult. material information to a single person or a limited group of people before such information is generally disseminated.
Item 1B.Unresolved Staff Comments.
None.
Comments
Not applicable.
Item 2.Properties.Since 1979 the
The Company
has leased the Little Mountain Airportowns approximately 4.626 acres in
Maiden,Denver, North Carolina,
from a corporation whose stock is owned in part by former officers and directors ofwhich houses the
Company and an estate of which certain former directors are beneficiaries. The facility consists of approximately 68 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square feet of office space. The operations of Air T
MAC and
ATGL are headquartered at this facility. The lease for this facility provides for monthly rent of $14,862 and expires on January 31, 2018, though the lease may be renewed by us for three additional two-year option periods through January 31, 2024. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance.MAC.
The Company also leases approximately 1,950 square feet of office space and approximately 4,800 square feet of hangar space at the Ford Airport in Iron Mountain, Michigan.
CSA’sCSA’s operations are headquartered at these facilities which are leased from a third party under an annually renewable agreement.The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located
in Kinston, North Carolina under an agreement that extends through January 2023, with the option to extend the lease for four additional five-year periods thereafter. The Company has calculated rent expense under the current lease term. The rental rate under the lease increases by increments for each of the five-year renewal periods.GGS leases an 112,500 square foot production facility in Olathe, Kansas. The facility is leased from a third party under a lease agreement, which expires in August
2019.2024.
As of March 31,
2016,2020, the Company leased hangar, maintenance and office space from third parties at a variety of other locations, at prevailing market terms.
The table of aircraft presented in Item 1 lists the aircraft operated by the Company’s subsidiaries and the form of ownership.Delphax’s Canadian subsidiary
Contrail Aviation leases a 76,73421,000 square foot manufacturing facility in Mississauga, Ontario underVerona, Wisconsin. The lease for this facility expires on July 17, 2021, though Contrail Aviation has the option to renew the lease on the same terms for an additional five-year period. This is a lease whichfrom a related party. See Note 15 “Related Party Matters” of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. Contrail also leases a 1,453 square foot office space in Denver, Colorado. The lease is a 37 month lease that started on 01/01/2019. Jet Yard leases approximately 48.5 acres of land from Pinal County at the Pinal Air Park in Marana, Arizona. The lease expires in May 2046, though Jet Yard has an option to renew the lease for an additional 30-year period (though the lease to a 2.6-acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable. As of the date of issuance, the construction of a demolition pad required by March 31, 2017 under the lease has not been completed and Jet Yard and Pinal County are in discussions with respect to improvements on the leased premises.
DSI leases 12,206 square feet of space in a building located in Mississauga, Canada. The lease expires on
July 31, 2020. DSI’s obligations under the lease have been guaranteed by Air T. DSI has signed a lease extension for 3 years starting August
1 2020 through July 31
2018.2023. This lease extension releases Air T from guaranteeing DSI's obligations by providing a cash deposit equal to 6 months rent.
AirCo and Worthington began work in mid-2019 to consolidate back office operations. This process began with the move of AirCo’s inventory from Wichita to Eagan MN. In parallel to this, Worthington worked with the landlord and property manager on a tenant expansion project to add an additional 2,546 square feet of office space and 11,214 square feet of warehouse to the Eagan MN facility to consolidate inventory and support operations into one facility. AirCo Services occupied the Wichita facility through the end of the lease on April 30, 2020 at which time the Repair Station moved to Eagan, MN. The regulatory transfer process to move the Repair Station is currently underway and progressing in support of the move.
Worthington and AirCo lease a 41,280 square-foot facility in Eagan, Minnesota. The lease for this facility expires in December 2027. In addition, Worthington also leases a 12,000 square-foot storage facility in Hastings, Minnesota. The lease for this facility expires in July 2022. Worthington has two leases in Tulsa, Oklahoma. One lease is 22,582 square feet and expires in January 2022. The other lease is 10,000 square feet and expires in September 2020. Additionally, Worthington also had two facility leases in Australia: Unit E3 is 1,195 square feet and Unit B5 is 1,442 square feet, both of which expired in May 2020.
Item 3.Legal Proceedings. The Company and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business.
We believe that our current proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations. We record a liability when a loss is considered probable, and the amount can be reasonably estimated.
Item 4.Mine Safety Disclosures. PART II
Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The
Company’sCompany’s common stock is publicly traded on the NASDAQ StockGlobal Market under the symbol ��AIRT.“AIRT.”As of March 31,
2016,2020, the number of holders of record of the
Company’sCompany’s Common Stock was 183. The range of high and low sales price per share for the Company’s common stock on the NASDAQ Stock Market from April 1, 2015 through March 31, 2016 is as follows: | | Fiscal Year Ended March 31, | |
| | 2016 | | | 2015 | |
| | High | | | Low | | | High | | | Low | |
First Quarter | | $ | 24.93 | | | $ | 16.38 | | | $ | 13.30 | | | $ | 11.34 | |
Second Quarter | | | 28.00 | | | | 17.21 | | | | 13.22 | | | | 10.68 | |
Third Quarter | | | 26.10 | | | | 16.49 | | | | 27.34 | | | | 12.17 | |
Fourth Quarter | | | 26.62 | | | | 18.70 | | | | 26.14 | | | | 16.91 | |
The Company’s Board of Directors in May 2014 adopted a policy to discontinue the payment of a regularly scheduled annual has not paid any cash dividend.
dividends since 2014.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 shares
(adjusted to 1,125,000 shares after the stock split on June 10, 2019) of the
Company’sCompany’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period. NoThe Company purchased 150,658 shares were purchased pursuant to this authorization during the fiscal year ended March 31, 2016.2020.
The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this report under the heading “Equity Compensation Plan Information”.
Purchases of shares of common stock during the fourth quarter are described below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dates of
Shares Purchased | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number of Shares
Purchased as Part of
Public Announced
Plans or Programs | | Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs |
| Jan 1 - Jan 31, 2020 | | — | | | $ | — | | | 142,564 | | | 969,688 | |
| Feb 1 - Feb 29, 2020 | | — | | | $ | — | | | 142,564 | | | 969,688 | |
| March 1 - March 31, 2020 | | 30,746 | | | $ | 14.94 | | | 173,310 | | | 938,942 | |
As of March 31, 2020, the Company did not sell any securities within the past three years that were not registered under the Securities Act.
Item 6.Selected Financial Data. (As Restated)(In thousands, except per share amounts)
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (As Restated)* | | | | | | | | | | | | | | | | | | | | | |
Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 148,212 | | | $ | 112,181 | | | $ | 100,772 | | | $ | 103,064 | | | $ | 89,382 | | | $ | 83,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income¹ | | | 4,414 | | | | 2,484 | | | | 1,467 | | | | 1,670 | | | | 1,350 | | | | 2,138 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share¹ | | | 1.86 | | | | 1.05 | | | | 0.61 | | | | 0.68 | | | | 0.55 | | | | 0.88 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share¹ | | | 1.84 | | | | 1.04 | | | | 0.60 | | | | 0.68 | | | | 0.55 | | | | 0.87 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Dividend declared per share | | | - | | | | - | | | | 0.30 | | | | 0.25 | | | | 0.25 | | | | 0.33 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance sheet data (at period end): | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 52,155 | | | | 43,456 | | | | 37,221 | | | | 36,055 | | | | 35,083 | | | | 34,221 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 5 | | | | 5,000 | | | | - | | | | - | | | | - | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders' equity¹ | | | 34,231 | | | | 29,795 | | | | 27,360 | | | | 28,124 | | | | 27,053 | | | | 26,241 | |
¹ For 2016, amount disclosed is that amount attributable to Air T, Inc. stockholders.
Not applicable
* Selected financial data for 2016 has been restated to correct certain misstatements. See Note 1A of Notes to Consolidated Financial Statements, included in Part I, Item 8 of this Form 10-K/A, for information about the restatement.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. (As restated)
As discussed in the Explanatory Note in this Form 10-K/A and in Note 1A of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K/A, we are restating our consolidated financial statements and related disclosures at and for the fiscal year ended March 31, 2016. The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.
Air T, Inc. (the “Company,” “Air T,” “we” or “us”
or “our”) is a
decentralized holding company with
ownership interests in a
broad setportfolio of operating
businesses and financial
assets that are designed to expand, strengthen and diversify our cash earnings power.assets. Our goal is to
build onprudently and strategically diversify Air
T’s core businesses, to expand into adjacent industries,T’s earnings power and when appropriate, to acquire companies that we believe fit intocompound the Air T family.growth in its free cash flow per share over time.
We currently operate
wholly owned subsidiaries in
three corefive industry segments:
| •
| overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, which operates in the air express delivery services industry;
|
ground•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial jet 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 engines and parts sales; procurement services and overhaul and repair services to airlines and commercial aircraft companies;
•Printing equipment and maintenance, which designs, manufactures and sells advanced digital print production equipment and provides maintenance services to commercial customers; and
•Corporate and other, which acts as the capital allocator and resource for other segments.
We recently added two other businesses, which are reported in separate segments. In October 2015, we formed a wholly owned equipment leasing subsidiary, Air T Global Leasing, LLC (“ATGL”), which comprises our leasing segment, and in November 2015 we acquired a minority interest in Delphax Technologies Inc. (“Delphax”), a printing equipment manufacturer and maintenance provider, which comprises our printing equipment and maintenance segment.
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.
Forward Looking Statements
Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,” “anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
•Economic conditions in the Company’s markets;
•The risk that contracts with FedEx could be terminated or adversely modified in connection with any renewal;
•The risk that the number of aircraft operated for FedEx will be further reduced;
•The risk that the United States Air Force will defer significant orders for deicing equipment under its contracts with GGS;
•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 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 new 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;
•The Company's ability to meet debt service covenants and to refinance existing debt obligations; and
•The length and severity of the COVID-19 pandemic.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
Results of Operations
Outlook
The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses remain open. However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of disruptions, and have experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Furthermore, while operating expenses at our businesses are likely to decrease, we expect that many of our businesses will generate substantially reduced operating cash flow and may operate at a loss starting in the first quarter of fiscal 2021. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid
development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations.
Fiscal 2020 vs. 2019
Consolidated revenue increased by $21.3 million (10%) to $236.8 million for the fiscal year ended March 31, 2020 compared to the prior fiscal year. Following is a table detailing revenues
by segment and by major customer category:(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | |
Overnight Air Cargo Segment: | | | | | | | | | | | | | | | | |
FedEx | | $ | 68,227 | | | | 46 | % | | $ | 49,865 | | | | 45 | % |
| | | | | | | | | | | | | | | | | |
Ground Equipment Sales Segment: | | | | | | | | | | | | | | | | |
Military | | | 1,639 | | | | 1 | % | | | 6,016 | | | | 5 | % |
Commercial - Domestic | | | 43,536 | | | | 29 | % | | | 27,216 | | | | 24 | % |
Commercial - International | | | 6,000 | | | | 4 | % | | | 8,538 | | | | 8 | % |
| | | | 51,175 | | | | 34 | % | | | 41,770 | | | | 37 | % |
| | | | | | | | | | | | | | | | | |
Ground Support Services Segment | | | 24,835 | | | | 17 | % | | | 20,546 | | | | 18 | % |
| | | | | | | | | | | | | | | | | |
Printing Equipment and Maintenance | | | | | | | | | | | | | | | | |
Domestic | | | 2,753 | | | | 2 | % | | | - | | | | 0 | % |
International | | | 1,202 | | | | 1 | % | | | - | | | | 0 | % |
| | | | 3,955 | | | | 3 | % | | | - | | | | 0 | % |
| | | | | | | | | | | | | | | | | |
Leasing | | | 20 | | | | 0 | % | | | - | | | | 0 | % |
| | | | | | | | | | | | | | | | | |
| | | $ | 148,212 | | | | 100 | % | | $ | 112,181 | | | | 100 | % |
MAC and CSA are two(after elimination of seven companies in the U.S. that have North American feeder airlines under contract with FedEx. With a relationship with FedEx spanning over 35 years, MAC and CSA operate and maintain Cessna Caravan, ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States, upper Midwest and the Caribbean. MAC and CSA’s revenues are derived principally pursuant to “dry-lease” service contracts with FedEx.
intercompany transactions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended March 31, | | | | Change | | |
| (In thousands) | 2020 | | 2019 | | | | |
| Overnight Air Cargo | $ | 75,275 | | | $ | 72,978 | | | $ | 2,297 | | | 3 | % |
| Ground Equipment Sales | 59,156 | | | 47,152 | | | 12,004 | | | 25 | % |
| Printing Equipment and Maintenance | 306 | | | | 655 | | | (349) | | | | (53) | % |
| Commercial Jet Engines and Parts | 101,284 | | | | 93,968 | | | 7,316 | | | 8 | % |
| Corporate and Other | 764 | | | 749 | | | 15 | | | 2 | % |
| Total | $ | 236,785 | | | $ | 215,502 | | | $ | 21,283 | | | 10 | % |
On June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the revenue aircraft operated by MAC and CSA and replace all prior dry-lease service contracts. These dry-lease agreements provide for the lease of specified aircraft by MAC and CSA in return for the payment of monthly rent with respect to each aircraft leased, which monthly rent was increased
Revenues from the
prior dry-lease service contractsair cargo segment increased by $2.3 million (3%) compared to
reflect an estimate of a fair market rental rate. These new dry-lease agreements provide that FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by MAC and CSA, respectively. The new dry-lease agreements provide for the reimbursement by FedEx of MAC and CSA’s costs, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs. Unlike prior dry-lease contracts, under the new dry-lease agreements, certain operational costs incurred by MAC and CSA in operating the aircraft under the new dry-lease agreements are not reimbursed by FedEx at cost, and such operational costs are borne solely by MAC and CSA. Under the new dry-lease agreements, MAC and CSA are required to perform maintenance of the leased aircraft in return for a maintenance fee based upon an hourly maintenance labor rate, which has been increased from the rate in place under the prior dry-lease service contracts. Under prior dry-lease service contracts, the hourly maintenance labor rate had not been adjusted since 2008. The new dry-lease agreements provide for the payment by FedEx to MAC and CSA of a monthly administrative fee based on the number and type of aircraft leased and routes operated. The amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to reflect the greater monthly lease payment per aircraft and that certain operational costs are borne by MAC and CSA and not reimbursed. The amount of the administrative fee is subject to adjustment based on the number of aircraft operated, routes flown and whether aircraft are considered to be soft-parked.On June 1, 2016, the new dry-lease agreements were amended to extend the expiration date to May 31, 2020. The new dry-lease agreements may be terminated by FedEx or MAC and CSA, respectively, at any time upon 90 days’ written notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written notice. In addition, each of the dry-lease agreements provides that FedEx may terminate the agreement upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement, FedEx becomes MAC or CSA’s only customer, or MAC or CSA employs less than six employees. As of the date of this report, FedEx would have been permitted to terminate each of the dry-lease agreements under this provision. The Company believes that the short-term nature of its agreements with FedEx is standard within the airfreight contract delivery service industry, where performance is measured on a daily basis. FedEx has been a customer of the Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company.
Under the dry-lease service contracts in place during the fiscal years ended March 31, 2015 and 2014 and the first two months of the fiscal year, ended March 31, 2016, FedEx leased its aircraftprincipally attributable to MAC and CSA for a nominal amount and paid a monthly administrative feehigher sales to MAC and CSA to operate the aircraft. Under these contracts, all direct costs related to the operationmaintenance customers outside of the aircraft (including fuel, outside maintenance, landing fees and pilot costs) were passed through to FedEx without markup. In connection with the June 1, 2016 amendment extending the term of the new dry-lease agreements to May 31, 2020, the weighted average administrative fee rate paid with respect to leased aircraft was reduced by over 2% from the fee rate in place prior to the amendment. Because a portion of the administrative fee funds the payment of certain operational costs incurred by MAC and CSA in operating the aircraft that are not reimbursed by FedEx and are expected to increase substantially from the levels incurred in the fiscal year ended March 31, 2016, the reduction in the administrative fee is anticipated to have a much more significant impact on the segment’s operating income.
FedEx. Pass-through costs under the dry-lease agreements with FedEx totaled $24,632,000$23.7 million and $32,672,000$23.6 million for the years ended March 31, 20162020 and 2015,2019, respectively.
As of March 31, 2016, MAC
The ground equipment sales segment contributed approximately $59.2 million and
CSA had an aggregate of 78 aircraft under its dry-lease agreements with FedEx. Included within the 78 aircraft are 3 Cessna Caravan aircraft that are considered soft-parked. Soft-parked aircraft remain covered under our agreements with FedEx although at a reduced administrative fee compared to aircraft that are in operation. MAC and CSA continue to perform maintenance on soft-parked aircraft, but they are not crewed and do not operate on scheduled routes.GGS manufactures, sells and services aircraft deicers and other specialized equipment on a worldwide basis. GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also offers fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab design, a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage, color and style of the exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol recovery vehicles and other special purpose mobile equipment. GGS competes primarily on the basis of the quality, performance and reliability of its products, prompt delivery, customer service and price.
In July 2009, GGS was awarded a new contract to supply deicing trucks$47.2 million to the USAF, which expired in July 2014. On May 15, 2014, GGS was awarded a new contract to supply deicing trucks to the USAF. The initial contract award is for two years through July 13, 2016 with four additional one-year extension options that may be exercised by the USAF.
In September 2010, GGS was awarded a contract to supply flight-line tow tractors to the USAF. The contract award was for one year commencing September 28, 2010 with four additional one-year extension options that may be exercised by the USAF. All option periods under the contract have been exercised and the contract expired in September 2015. Because the USAF is not obligated to purchase a set or minimum number of units under these contracts, the value of these contracts, as well as the number of units to be delivered, depends upon the USAF’s requirements and available funding.
At March 31, 2016, GGS’s backlog of orders was $10.0 million, compared to a backlog of $2.8 million at March 31, 2015.
GAS provides the aircraft ground support equipment, fleet, and facility maintenance services. At March 31, 2016, GAS was providing ground support equipment, fleet, and facility maintenance services to more than 75 customers at 67 North American airports.
On November 24, 2015, the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax’s Canadian operating subsidiary for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from that Delphax subsidiary on October 2, 2015 and (ii) for $1,050,000 in cash a total of 43,000 shares (the “Shares”) of Delphax’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events). Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax’s employee stock option plans, at March 31, 2016 the number of shares of common stock underlying the Shares represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of the Shares and approximately 31% of the outstanding shares assuming conversion of the Shares and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax’s employee stock option plans. Under the agreement that providedCompany’s revenues for the Company’s purchase of these interests, on November 24, 2015 three designees of the Company (including Nick Swenson, the Company’s President, Chief Executive Officer and Chairman, and Michael Moore, the President of our GGS subsidiary) were elected to the board of directors of Delphax, which had a total of seven members following their election. Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to Air T under the Senior Subordinated Note or we continue to hold a specified number of the Shares and interests in the Warrant holders of the Series B Preferred Stock, voting as a separate class, the Company would be entitled to elect, after June 1, 2016, four-sevenths of the members of the board of directors of Delphax and, without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions. As a result of these transactions, we determined that, even though Delphax was not a subsidiary of the Company, we had obtained control over Delphax in conjunction with the acquisition of the interests described above, and we have consolidated Delphax in Air T’s consolidated financial statements beginning on November 24, 2015. The operating loss attributable to Delphax in our consolidated financial statements for the yearfiscal periods ended March 31, 2016 was approximately $1,967,000. This operating loss is included in our consolidated net income for that period.
Delphax designs, manufactures2020 and sells advanced digital print production equipment (including high-speed, high-volume cut-sheet and continuous roll-fed printers), maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment is sold through Delphax and its subsidiaries located in Canada, the United Kingdom and France. A significant portion of Delphax’s net sales has historically been related to service and support provided after the sale, including the sale of consumable items for installed printing systems. Our investments in Delphax were intended to support the commercial rollout and manufacturing costs of the new Delphax elan™500 digital color print system, which combines advances in inkjet and paper-handling technologies in2019, respectively, representing a production class sheet-fed system offering full CMYK color and 1600 dpi print quality at speed of up to 500 letter impression per minute. Delphax’s legacy consumables production business was expected to generate cash flow while Delphax rolled-out its next generation élan commercial inkjet printer. In April 2016, Delphax received notice from its largest (approximately 50% of legacy revenues) customer that it planned to reduce its order volume by approximately 90%; and phase out its use of the legacy Delphax printers within eighteen months. Accordingly, Delphax is reviewing its fiscal year 2016 operating plan and has engaged an experienced turn-around consultant — the Platinum Group — to assist it in developing a go-forward plan. The decline in order volumes from its largest customer is expected to significantly impact Delphax’s results for the quarter ending June 30, 2016.
On April 4, 2016, ATGL purchased two elan™ 500 printers from Delphax for $650,000 for lease to a third party. One of those acquired printers was subject to an existing lease to a third party which has been assigned to ATGL.
We organized ATGL on October 6, 2015. ATGL provides funding for equipment leasing transactions, which may include transactions for the leasing of equipment manufactured by GGS and Delphax and transactions initiated by third parties unrelated to equipment manufactured by us.
In March 2014, the Company formed Space Age Insurance Company (“SAIC”$12.0 million (25%), a captive insurance company licensed in Utah, and initially capitalized with $250,000. SAIC insures risks of the Company and its subsidiaries that were not previously insured by the Company’s insurance programs; and underwrites third-party risk through certain reinsurance arrangements. The activities of SAIC are included within the corporate results in the accompanying consolidated financial statements.
Fiscal 2016 Summary
Revenues for our overnight air cargo segment totaled $68,227,000 for the year ended March 31, 2016, representing an $18,362,000 (37%) increase over the prior year. The segment’s administrative fee revenues increased by $13,264,000, reflecting the greater administrative fee amount paid under the new dry-lease agreements which became effective on June 1, 2015. In addition, the segment’s maintenance revenues increased as a result of higher hourly maintenance labor rates during fiscal 2016. The June 2015 agreement effected the first hourly maintenance labor rate increase in eight years. The segment’s operating income increased by $3,264,000 in fiscal 2016. Increased administrative fees were partially offset by the increase in the monthly rental rate for leased aircraft under the June 2015 agreement, which increased monthly rental rates to reflect an estimate of a fair market value rental rate. Operating income for the overnight air cargo segment for the prior fiscal year 2015 included a $374,000 gain from the sale of the Company owned aircraft primarily used to support the overnight air cargo segment’s operations. The segment’s operating income for the prior fiscal year was also adversely affected by a $107,000 regulatory penalty assessed for the prior year and $94,000 incurred for the mandated regulatory rewrite of applicable manuals that began in fiscal 2015.
Revenues for GGS totaled $51,176,000 for the year ended March 31, 2016, an increase of $9,405,000 (23%) from the prior year, while operating income increased by $2,716,000 or 74%.current year. The increase in GGS revenues is attributable to a $14.4 millionwas primarily driven by an increase in sales of commercial and military deicers as a result of increased market requirements and $954,000more business. At March 31, 2020, the ground equipment sales segment’s order backlog was $51.5 million as compared to $26.1 million at March 31, 2019.
The commercial jet engines and parts segment contributed $101.3 million of revenues in fiscal year ended March 31, 2020 compared to $94.0 million in the prior fiscal year which is an increase of $7.3 million (8%). The primary driver of the increase in sales of catering trucks. Operating margins improved approximately 1.6 percentage pointsrevenues was Contrail trading two more aircraft in the segmentcurrent year compared to the prior year asyear.
Following is a
resulttable detailing operating income by segment, net of
the continued cost controls in administrationintercompany during Fiscal 2020 and
continued gains in production efficiencies, principally in connection with assembly of similar units under a significant order by a major airline company received in June 2015 and completed during the second and third fiscal quarters.During the year ended March 31, 2016, revenues from our GAS subsidiary totaled $24,835,000, representing a $4,288,000 (21%) increase from the prior year. SegmentFiscal 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended March 31, | | | | Change | | |
| 2020 | | 2019 | | | | |
| Overnight Air Cargo | $ | 749 | | | $ | 1,918 | | | $ | (1,169) | | | (61) | % |
| Ground Equipment Sales | 7,302 | | | 3,420 | | | 3,882 | | | 114 | % |
| Commercial Jet Engines and Parts | 8,322 | | | 12,298 | | | (3,976) | | | (32) | % |
| Printing Equipment and Maintenance | (1,596) | | | (1,403) | | | (193) | | | (14) | % |
| Corporate and Other | (7,486) | | | (6,902) | | | (584) | | | (8) | % |
| Total | $ | 7,291 | | | $ | 9,331 | | | $ | (2,040) | | | (22) | % |
Consolidated operating
loss increased by $943,000 in fiscal year 2016. Revenue increased with growth into new markets and services for both new and existing customers and strong parts sales. Operating loss increased from the prior year primarily due to costs incurred in fiscal year 2016 under fixed-price service contracts in place in certain markets that significantly exceeded the revenue associated with those contracts. Other increases in annual operating expenses included facility upgrades, administrative infrastructure and programs to help position GAS for growth.Consolidated revenue also increased by $3,955,000 due to the inclusion of the printing equipment and maintenance segment in consolidated results due to the acquisition of interests in Delphax on November 24, 2015. Operating income was adversely affected by the $1,967,000 operating loss of the printing equipment and maintenance segment for the period in which Delphax’s financial results are consolidated in the Company’s financial statements.
Fiscal 2016 vs. 2015
Consolidated revenue increased $36,030,000 (32%) to $148,212,000 for the fiscal year ended March 31, 20162020 decreased by $2.0 million (22%) to $7.3 million compared to operating income of $9.3 million in the prior fiscal year.
Operating income for the air cargo segment decreased by $1.2 million (61%) in the current fiscal year, due primarily to having fewer aircraft compared to the prior fiscal year (69 aircraft in fiscal 2020 compared to 79 aircraft in fiscal 2019) from the loss of the Caribbean service area.
The ground equipment sales segment operating income increased by $3.9 million (114%) from $3.4 million in the prior year to $7.3 million in the current year. This increase was primarily attributable to additional sales and the fact that sales in the current
year contained higher margin orders when compared to the prior year sales that included broader product mix with lower margin orders.
Operating income of the commercial jet engines and parts segment declined by $4.0 million to $8.3 million from $12.3 million in the prior year due to the segment incurring higher operational costs, which consisted mainly of material costs and legal fees on arranging and documenting aircraft and jet engine deals.
The operating loss in the corporate and other segment increased to 7.5 million from $6.9 million in the prior year. The increase in 2016 revenue resulted fromis primarily attributable to significant professional fees and legal spend on complex transactions such as the significant increases in eachdisposition of theGAS.
Following is a table detailing consolidated non-operating expenses, net of intercompany during Fiscal 2020 and Fiscal 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | Change | | |
| 2020 | | 2019 | | | | |
| Other-than-temporary impairment loss on investments | $ | (2,305) | | | $ | (2,000) | | | $ | (305) | | | (15) | % |
| Interest expense, net | (4,692) | | | (3,427) | | | (1,265) | | | (37) | % |
| Gain on settlement of bankruptcy | 4,527 | | | — | | | 4,527 | | | 100 | % |
| Bargain purchase acquisition gain | 49 | | | 1,984 | | | (1,935) | | | (98) | % |
| Income (loss) from equity method investments | (910) | | | 341 | | | (1,251) | | | n/m | |
| Other | (1,336) | | | (261) | | | (1,075) | | | (412) | % |
| $ | (4,667) | | | $ | (3,363) | | | $ | (1,304) | | -1304000 | (39) | % |
The Company
’s legacy operations and the inclusion had net non-operating expenses of revenue of the printing equipment and maintenance segment.Revenues in the overnight air cargo segment increased $18,362,000 (37%) to $68,227,000 principally due to the greater administrative fee amount paid under the new dry-lease agreements as discussed above. In addition, the segment’s maintenance revenues increased to reflect the higher hourly maintenance labor rates in effect in the latter half of fiscal year 2016.
Revenues for GGS totaled $51,176,000$4.7 million for the year ended March 31, 2016,2020, an increase of $9,405,000 (23%)$1.3 million from the prior year. The increase$3.4 million in GGS revenues is attributable to a $14.4 million increase in sales of commercial deicers and $954,000 increase in the sales of catering trucks.
During the year ended March 31, 2016, revenues from our GAS subsidiary totaled $24,835,000, representing a $4,288,000 (21%) increase from the prior year. Revenue increased with growth into new markets and services for both new and existing customers and strong annual part sales.
Consolidated revenue also increased by $3,955,000 due to the inclusion of the printing equipment and maintenance segment in consolidated results due to the acquisition of interests in Delphax on November 24, 2015.
Operating expenses on a consolidated basis increased by $33,416,000 (31%) to $142,180,000 for fiscal year 2016 compared to fiscal year 2015. Operating expenses in the overnight air cargo segment increased $15,098,000 (30%) over the prior year, principally due to an increase in interest expense of $11,609,000 in monthly rent for leased aircraft as$1.3 million and investment losses of $1.3 million. Additionally, the Company had a resultbargain purchase gain of the new rental rate under the new dry-lease agreements to reflect an estimate of a fair market rental rate as discussed above. Of the segment’s $64,943,000 of operating costs in the current year, $24,632,000 were costs passed through to our air cargo customer without markup. Ground equipment sales operating costs increased $6,690,000 (18%) compared to the 23% increase in sales. Operating expenses in the ground support services segment increased by $5,232,000 (25%) driven principally by investments made in infrastructure to help position the segment for growth, including facility upgrades, leadership, marketing and data analysis roles, and training. General and administrative expense increased $3,917,000 (28%) to $18,140,000 in fiscal year 2016. General and administrative expense increased by $1,219,000 due to the inclusion of Delphax in consolidated results. General and administrative expense also increased by $598,000 for the increase in GGS compensation accruals and increased general and administrative expenses for the GAS segment as discussed above.
Operating income for the year ended March 31, 2016 was $6,032,000, a $2,615,000 (77%) increase from fiscal 2015. The overnight air cargo segment saw an increase in its operating income this year resulting from the greater administrative fee amount paid under the new dry-lease agreements, as well as maintenance revenue increases as a result of the higher hourly maintenance labor rate during fiscal year 2016. Operating income for the ground equipment sales segment increased by 74% over the prior year as a result of significantly increased volumes and margin improvements, principally as a result of production efficiencies obtained$2.0 million in connection with the assemblyacquisition of similar units under a significant order by a major airline company receivedWorthington in June 2015 and completed inprior fiscal year, which contributed $1.9 million to the second and third fiscal quarters. The ground support services segment saw anoverall year over year increase in its operating loss from fiscal year 2015 as costs incurred innet non-operating expenses. All of these increases were partially offset by the 2016 fiscal year under fixed-price service contracts in place in certain markets significantly exceededby the revenue associated with those contracts. Other increases in the ground support services segment’s annual operating expenses include facility upgrades, administrative infrastructure and programs to help position the segment for growth. Consolidated operating income included a$4.5 million gain on salesettlement of assets of $6,000 in the current fiscal year comparedbankruptcy related to $869,000 in the prior fiscal year. Gain on sale of assets for the prior year reflects a gain from the sale of the company-owned aircraft used in the air cargo segmentDephax Canada and the sale of leased de-icing units to the respective leasing customers for the ground equipment sales segment.
Non-operating income, net for the year ended March 31, 2016 was $122,000, a $124,000 increase from fiscal year 2015. This increase was caused principally by increased gains on the sale of marketable securities, increased investment income on surplus cash, and by $112,000 due to the gross unrealized foreign exchange gain in the printing equipment and maintenance segment.
UK.
During the year ended March 31, 2016,2020, the Company recorded $2,395,000 in$0.5 million of income tax expense,benefit related to continuing operations, which resulted inyielded an annual tax effective rate of 38.9%, compared-20.7%. The primary factors contributing to the rate of 27.3%, fordifference between the prior year. The effective income tax rates for both periods differ from the U. S. federal statutory rate of 34% partially due to21% and the effect of state income taxes,Company’s effective tax rate for the benefit offiscal year ended March 31, 2020 were the federal domestic production activities deduction under Section 199 of the Internal Revenue Code (IRC), and theestimated benefit for the exclusion of income for SAIC affordedthe Company’s captive insurance company subsidiary under Internal Revenue Code (IRC) Section 831(b). SAIC has elected under Section 831(b) to be taxed solely on their net investment income. Section 831(b) is a special provision for certain insurance companies with net annual written premiums of $1,200,000 or less. The benefit§831(b), the exclusion of the Section 831(b) election forminority owned portion of pretax income of Contrail Aviation Support, LLC as well as state income tax expense, and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and attribute reduction incurred by Delphax, Inc related to cancellation of debt income and dissolution of Canadian and UK subsidiaries.
During the fiscal year ended March 31, 2016 fiscal year end resulted in a decrease to2019, the Company recorded $1.8 million of income tax expense of $316,000. This resulted in a decreaserelated to the Company’s overallcontinuing operations at an effective tax rate of 5.1%29.5%. The reason forprimary factors contributing to the increase indifference between the federal statutory rate of 21% and the Company’s annual effective tax rate for the fiscal year ended March 31, 2016 compared to March 31, 2015 was2019 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail Aviation Support, LLC as well as state income tax expense, and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and losses incurred by Delphax.
Market Outlook
During the last quarter of fiscal 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The global impact of the outbreak has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, there have been international mandates and
mandates in the United States from federal, state and local authorities instituting quarantines and stay-at-home orders, closing schools, and instituting restrictions on travel and/or limiting operations of non-essential offices and retail centers. Such actions are increasing rates of unemployment and adversely impacting many industries, with the airline and transportation industries being particularly adversely affected. The airline and transportation industry is closely related to the inclusionU.S. general economic cycle because business and leisure travelers are directly affected by economic conditions that drive demand. The airline and transportation industry is experiencing a sharp decline in travel demand, and thus directly impacting the Company's commercial aircraft, jet engines and parts industry, due to the impact of Delphax. Delphax contributedthe COVID-19 pandemic and the related governmental restrictions instituted to slow the spread of the virus. Though certain states are beginning to loosen certain aspects of these restrictions, all of the markets in which our business units are located are subject to some form of restrictions on business operations. As a $1,911,000 pre-tax loss, however givenresult of these mandatory restrictions as well as voluntary shutdowns, self-quarantines or actual viral health issues, we initially experienced a substantial number of disruptions, and have experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.
The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our results of operations, cash flows and liquidity. We expect that
Delphax is not includedthese impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our businesses and investments. The full extent of the impact and effects of COVID-19 will depend on future developments which are highly uncertain and cannot be predicted with confidence, including, among other factors, the duration, severity and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown. In addition, if in the
Air T, Inc.’s consolidated tax returnsfuture there is a pandemic, epidemic or outbreak of another highly infectious or contagious disease or other health concern affecting states or regions in which we operate, we and
has established a full deferred tax valuation allowance, there was no tax benefit recorded for Delphax’s loss. This had the effect of increasing the Company’s annual effective tax rateour investments may be subject to similar risks and uncertainties as posed by
9.0%.Net income attributable to Air T, Inc. stockholders for fiscal year 2016 was $4,414,000, or $1.84 per diluted share, compared to $2,484,000, or $1.04 per diluted share, for fiscal year 2015.
COVID-19.
Liquidity and Capital Resources
The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured once a year at March 31, including but not limited to a negative covenant requiring a debt service coverage ratio of 1.25. Contrail’s Credit Agreement with Old National Bank (the Contrail debt in Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured quarterly, including but not limited to a negative covenant requiring a debt service coverage ratio of 1.25. As of March 31, 2016,2020, both the Company and Contrail were in compliance with all financial covenants. As of March 31, 2020, the Company held approximately
$6.2$15.6 million in cash and cash
equivalents. Of this amount, $821,000 wasequivalents and restricted
with $250,000cash, $9.6 million of which related to restricted cash collateralized for the three Opportunity Zone fund investments. The Company also held $1.1 million in
cashrestricted investments held as statutory reserve of SAIC and
the remaining $571,000$68,981 of restricted investments pledged to secure
SAIC’sSAIC’s participation in certain reinsurance pools, and $2,732,000 was invested in accounts not insured by the Federal Deposit Insurance Corporation (“FDIC”).pools. The Company also has approximately $1.7 million of marketable securities.
As of March 31, 2016,2020, the Company’sCompany’s working capital amounted to $23,225,000, a decrease$30.7 million, an increase of $7,200,000$12.2 million compared to March 31, 2015.As2019, primarily driven by an increase in inventory of $33.2 million offset by an increase in short-term borrowings of $17.9 million. See
Note 14 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report for a summary of “Financing Arrangements” as of March 31, 2016,2020. In addition, the exercise of warrants ("Warrants") to purchase trust preferred capital securities ("TruPs") issued on June 10, 2019 has generated cash proceeds of $8.5 million during the year ended March 31, 2020, which is disclosed in the financing section on our consolidated statements of cash flows.
On February 25, 2020, Air T, Inc. and MBT entered into Amendment No. 3 to the Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment extends the termination date for the revolving credit commitment and the supplemental revolving credit commitment to the earlier of August 31, 2021, the date the Company had a senior secured revolving credit facilityreduces the respective commitment to zero or termination due to an event of $20.0 million (the “Revolving Credit Facility”). The Revolving Credit Facility includes a sublimit for issuancesdefault. Thirteen of lettersthe Company’s subsidiaries continue to, jointly and severally, guaranty the full and prompt payment and performance of credit of up to $500,000. Under the Revolving Credit Facility, eachall debts and obligations of the Company MAC, CSA, GGS, GASto MBT and ATGL may make borrowings. Initially, borrowings undercontinue to grant a first priority security interest in each subsidiary’s assets to MBT as collateral for such obligations.
On February 25, 2020, AirCo 1, LLC, entered into Amendment No. 1 to the Revolving Credit Facility bear interest (payable monthly)Loan Agreement with MBT (the “First Amendment”). The First Amendment extends the stated termination date of the revolving facility to August 31, 2021.
We are closely monitoring the impact of the COVID-19 pandemic on our business and continue to assess the situation at an annual rateour businesses and operations on a daily basis. Each of one-month LIBOR plus 1.50%, althoughour businesses remains open for business. However, as a result of measures taken to limit the interest rates underimpact of COVID-19, self-quarantines or actual viral health issues, we continue to experience a reduction in demand for commercial aircraft, jet engines and parts which have negatively could materially and adversely affect the Revolving Credit Facilityfinancial performance and value of our inventory. All of the markets in which our businesses are located are subject to incremental increases basedsome level of restrictions on business operations. For the months of April and May, revenues for the Overnight Air Cargo, Ground Equipment Sales and Commercial jet Engines and Parts segments were down 14%, 26% and 67%, respectively. We expect that the unprecedented reduction in demand for air travel and the resulting extreme financial pressure put on commercial aviation businesses will negatively impact our consolidated cash flow from operations in the first quarter of 2021. However, the continuing impact of COVID-19 on future quarters cannot be determined with certainty at this time. Even after travel advisories and restrictions are modified or lifted, demand for commercial aircraft, jet engines and parts may remain weak for a consolidated leverage ratio. In addition,significant length of time as demand for travel may still remain low, which may be a commitment fee accruesfunction of continued concerns over safety, unwillingness to travel, and decreased consumer spending due to economic conditions, including job losses. We cannot predict if and when the demand for our commercial aircraft, jet engines and parts will return to pre-outbreak levels of volume and pricing.
Due to the impact of COVID-19 on its business, as of March 31, 2020, Contrail forecasted a probable non-compliance with its financial covenants for the quarter ended September 30, 2020. Non-compliance with a debt covenant that is not subsequently cured gives Old National Bank (“ONB”) the right to declare the amount of Contrail’s outstanding debt at the time of non-compliance immediately due and payable and exercise its remedies with respect to the unused amountcollateral that secures the debt.
As of the
Revolving Credit Facility at an annual rate of 0.15%. The Company includes commitment fee expense within the interest expense and other line item of the accompanying consolidated statements of income. Amounts applied to repay borrowings under the Revolving Credit Facility may be reborrowed, subject to the terms of the facility. The Revolving Credit Facility matures on April 1, 2017.Borrowings under the Revolving Credit Facility, together with hedging obligations, if any, owing to the lender under the Revolving Credit Facility or any affiliate of such lender, are secured by a first-priority security interest in substantially all assets of the Company and the other borrowers (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing), but excluding interests in real property.
The agreement governing the Revolving Credit Facility contains affirmative and negative covenants, including covenants that restrict the ability of the Company and the other borrowers to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of their business, enter into certain operating leases, and make certain capital expenditures. The Credit Agreement also contains financial covenants, including a minimum consolidated tangible net worth of $22.0 million, a minimum consolidated fixed charge coverage ratio of 1.35 to 1.0, a minimum consolidated asset coverage ratio of 1.75 to 1.0, and a maximum consolidated leverage ratio of 3.5 to 1.0. The agreement governing the Revolving Credit Facility contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, certain changes of control of the Company, termination of, or modification to materially reduce the scope of the services required to be provided under, certain agreements with FedEx, and the occurrence of a material adverse effect upon the Company and the other borrowers as a whole.
The Company is exposed to changes in interest rates on its prior line of credit and its current revolving credit facility. If the LIBOR interest rate had been increased by one percentage point, based on the weighted average balance outstanding for the year, the change in annual interest expense would have been negligible.
As of March 31, 2016, Delphax maintained a debt facility consisting of a $7.0 million revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable and inventory. Because Delphax’s senior credit facility prohibits the payment of cash dividends, it is not a source of liquidity to Air T, Inc. or any of its subsidiaries. Neither Air T nor any of its subsidiaries is a guarantor of Delphax’s obligations under its senior credit facility.
The Delphax senior credit facility is secured by substantially all of its North American assets, expires in November 2018, prohibits payment of cash dividends by Delphax and is subject to certain financial covenants. The Delphax senior credit facility provides for interest based upon the prime rate plus a margin (4.25% as of March 31, 2016). As of March 31, 2016, Delphax had aggregate borrowings of $1,833,000 outstanding under its senior credit facility, with a borrowing base that would have permitted additional borrowings of approximately $800,000. Delphax has advised that at March 31, 2016 it was not in compliance with financial covenants under the agreement governing its senior credit facility. Due to Delphax’s non-compliance with financial covenants, the lender has the contractual right to cease permitting borrowings under the facility and to declare all amounts outstanding under the senior credit facility due and payable immediately. As of theissuance date of this report, the lender has neither made such declaration, nor waivedContrail is in discussion with ONB to seek a waiver to its rightfinancial covenants, and/or secure alternative financing to do soavoid an event of non-compliance. With respect to alternative financing, Contrail and Delphax has continuedONB intend to make borrowingsaccess debt financing under the seniorMain Street (“Main Street”) Lending Program, established by the Federal Reserve in response to economic uncertainty caused by the COVID-19 pandemic. Main Street loans are intended to provide additional credit facility. Asto companies that were in sound condition prior to the onset of the dateCOVID-19 pandemic. While Contrail and ONB believe that Contrail qualifies under the criteria set forth under the Main Street Lending Program, there is no assurance that Contrail will obtain credit under the Main Street program sufficient to refinance the amount of this report, Delphax hasdebt outstanding with ONB.
The obligations of Contrail under the Contrail Credit Agreement with ONB ("Contrail Credit Agreement") are also guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not regained complianceliable for any other assets or liabilities of Contrail and there are no cross-default provisions with these financial covenants.respect to Contrail’s debt in any of the Company’s debt agreements with other lenders. In the event that Delphax is denied accesspossible absence of Contrail’s operation as a going concern, the Company believes it, along with the rest of its businesses, will continue to additional borrowingsoperate as a going concern, given the maximum guarantee of Contrail’s obligations of $1.6 million.
We have taken several measures intended to help maintain financial flexibility. Subsequent to March 31, 2020, we obtained loans totaling approximately $8.2 million under the senior credit facility, unless it obtains accessPaycheck Protection Program (the “PPP”) to help pay for payroll costs, mortgage interest, rent or utility costs related to our businesses.
Based on information currently available and our current projected operating cash flow needs and interest and debt repayments, we believe we have adequate cash for at least the next twelve months to fund our business operations, meet all of our financial commitments, and other
adequate sources ofobligations. However, we cannot predict whether future developments related to the COVID-19 pandemic will adversely affect our liquidity
which may include cash from operations, Delphax may be unable to adequately fund its operations or pay its debts as they come due. Delphax has recently implemented cost-savings initiatives, including employee furloughs, to minimize ongoing cash needs.position.
Cash Flows
Following is a table of changes in cash flow for the respective years ended March 31,
20162020 and
2015: | | Year Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | | | |
Net Cash Provided by Operating Activities | | $ | 3,215,000 | | | $ | 6,840,000 | |
Net Cash Used in Investing Activities | | | (5,266,000 | ) | | | (1,980,000 | ) |
Net Cash (Used in) Provided by Financing Activities | | | (5,994,000 | ) | | | 5,020,000 | |
Effect of foreign currency exchange rates on cash and cash equivalents | | | 2,000 | | | | - | |
| | | | | | | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | $ | (8,043,000 | ) | | $ | 9,880,000 | |
2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | Change |
| Net Cash Provided by (Used in) Operating Activities | $ | (26,231) | | | $ | 22,356 | | | $ | (48,587) | |
| Net Cash Used in Investing Activities | (11,568) | | | (22,853) | | | 11,285 | |
| Net Cash Provided by Financing Activities | 19,240 | | | 9,546 | | | 9,694 | |
| Effect of foreign currency exchange rates | 260 | | | 96 | | | 164 | |
| Net Increase in Cash and Cash Equivalents and Restricted Cash | $ | (18,299) | | | $ | 9,145 | | | $ | (27,444) | |
Cash
used in operating activities was $26.2 million in fiscal year 2020 compared to cash provided by operating activities
was $3,625,000 lessof $22.4 million in fiscal
2016 compared toyear 2019. Cash used in operating activities in fiscal
2015 principallyyear 2020 increased due to
the change inadditional purchases of inventory.
Cash used in investing activities for fiscal year 2020 was $3,286,000 more$11.6 million compared to cash used in fiscal 2016 primarily due the higher proceeds from the sale of the Company-owned aircraft, and leased deicers ininvesting activities for the prior fiscal year.
year of $22.9 million. There was 11.3 million less cash used in investing activities in fiscal year 2020 primarily because the Company received $26.5 million more of proceeds from sale of assets on lease or held for lease.
Cash
used inprovided by financing activities for fiscal year 2020 was $11,014,000$9.7 million more incompared to the prior fiscal 2016 than in the corresponding prior year periodyear. This was primarily due primarily to increased net repayments on Air T, Inc.’s lineproceeds from term loans and lines of credit in fiscal 2016, whereas there were net borrowings in fiscal 2015. Cash used in financing activities in 2016 was also affected by a net $1,213,000 repaymentaddition to proceeds received from the exercise of Delphax’s senior credit facility in fiscal 2016. As of March 31, 2016, no amounts were outstanding under Air T, Inc.’s Revolving Credit Facility. Delphax had outstanding borrowings of approximately $1,833,000 under its senior credit facility as of March 31, 2016.In June 2016, the Company acquired land and entered into an agreement to construct a new corporate headquarters facility in Denver, North Carolina for an aggregate amount of approximately $1.9 million, with construction anticipated to be completed in fiscal year 2018. This facility will replace the Company’s current headquarters which is leased from an entity owned by certain former officers and directors at an annual rental payment of approximately $178,000. There are currently no other commitments for significant capital expenditures.
In May 2014, the Company’s Board of Directors adopted a policy to discontinue the payment of a regularly scheduled annual cash dividend.
warrants.
Off-Balance Sheet Arrangements
The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.
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
its customers. Under the terms of its overnight air cargo business contracts the major cost components of its 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.
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.
The Company had worked to reduce GGS’s seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year. In July 2009, GGS was awarded a new contract to supply deicing trucks to the USAF, which expired in July 2014. On May 15, 2014, GGS was awarded a new contract to supply deicing trucks to the USAF. The initial contract award is for two years through July 13, 2016 with four additional one-year extension options that may be exercised by the USAF. The value of the contract, as well as the number of units to be delivered, depends upon annual requirements and available funding to the USAF. Although GGS has retained the USAF deicer contract, orders under the contract have not been sufficient to offset the seasonal trend for commercial sales. As a result, GGS revenues and operating income have resumed their seasonal nature. Our other reportingOther segments are not susceptible to
material seasonal trends.
Critical Accounting Policies and Estimates.
The Company’sCompany’s significant accounting policies are more fully described in Note 1 of Notes to the Consolidated Financial Statements inincluded under Part II, Item 8.8 of this report. The preparation of the Company’s 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. The Company believes that the following are its most significantcritical accounting policies:Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on management’s estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of outstanding receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.
Inventories. The Company’s inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories. Historical parts usage, current period sales, estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment, changes in the financial strength of the aviation industry, and market developments impacting both legacy and next-generation products and services of our printing equipment and maintenance segment.
Warranty Reserves. The Company warranties its ground equipment products for up to a three-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. Delphax warranties its equipment for a period of 90 days commencing with installation, except in the European Union, where it is generally one year from product shipment date. Similarly, Delphax warranties spare parts and supplies for a period of 90 days from shipment date. These warranty reserves are reviewed quarterly and adjustments are made based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims.
Income Taxes. Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Revenue Recognition. Cargo revenue is recognized upon completion of contract terms. Revenues from maintenance and ground support services and services within our printing equipment and maintenance segment are recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer.
Business Combinations.Combinations. The Company accounts for business combinations in accordance with FASBFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification Section(“ASC”) 805, (“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 estimatedpurchase consideration over the fair value of the acquiree’s equity over the 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.
Variable Interest Entities. In accordance with applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which we have a variable interest is a variable interest entity. There are various estimates and judgments in our analysis to determine if we must consolidate a variable interest entity as its primary beneficiary.
Inventories – Inventories are carried at the lower of cost or net realizable value. Within the Company’s commercial jet engines and parts segment, there are various estimates and judgments made in relief of inventory as parts are sold from established groups of parts from one engine purchase.
The estimates and judgments made in relief of inventory are based on assumptions that are consistent with a market participant’s future expectations for the commercial aircraft, jet engines and parts industry and the economy in general and our expected intent for the inventory. 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 could impact the assumptions and result in future losses to our inventory.
Accounting for Redeemable Non-Controlling Interest. Policies related to redeemable non-controlling interest involve judgment and complexity, specifically on the classification of the non-controlling interest in the Company’s consolidated balance sheet. Further, there is significant judgment in determining whether an equity instrument is currently redeemable or not currently redeemable but probable that the equity instrument will become redeemable. Additionally, there are also significant estimates made in the valuation of the redeemable non-controlling interest.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Air T, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the "Company") as of March 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the two years in the period ended March 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
June 26, 2020
We have served as the Company's auditor since 2018.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | |
| | | |
| Year Ended March 31, | | |
| (In thousands, except per share data) | 2020 | | 2019 |
| Operating Revenues: | | | |
| Overnight air cargo | $ | 75,275 | | | $ | 72,978 | |
| Ground equipment sales | 59,156 | | | 47,152 | |
| Commercial jet engines and parts | 101,284 | | | 93,968 | |
| Printing equipment and maintenance | 306 | | | 655 | |
| Corporate and other | 764 | | | 749 | |
| 236,785 | | | 215,502 | |
| | | |
| Operating Expenses: | | | |
| Overnight air cargo | 67,391 | | | 65,100 | |
| Ground equipment sales | 46,472 | | | 38,911 | |
| Commercial jet engines and parts | 70,188 | | | 60,949 | |
| Printing equipment and maintenance | 164 | | | 350 | |
| General and administrative | 39,617 | | | 33,607 | |
| Depreciation and amortization | 5,681 | | | 7,239 | |
| Impairment of property and equipment | 18 | | | 35 | |
| Gain on sale of property and equipment | (37) | | | (20) | |
| 229,494 | | | 206,171 | |
| | | |
| Operating Income from continuing operations | 7,291 | | | 9,331 | |
| | | |
| Non-operating Income (Expense): | | | |
| Other-than-temporary impairment loss on investments | (2,305) | | | (2,000) | |
| Interest expense, net | (4,692) | | | (3,427) | |
| Gain on settlement of bankruptcy | 4,527 | | | — | |
| Bargain purchase acquisition gain | 49 | | | 1,984 | |
| Income (loss) from equity method investments | (910) | | | 341 | |
| Other | (1,336) | | | (261) | |
| (4,667) | | | (3,363) | |
| | | |
| Income from continuing operations before income taxes | 2,624 | | | 5,968 | |
| | | |
| Income Taxes (Benefit) | (544) | | | 1,761 | |
| | | |
| Net income from continuing operations | 3,168 | | | 4,207 | |
| | | |
| Loss from discontinued operations, net of tax | (114) | | | (1,006) | |
| Gain on sale of discontinued operations, net of tax | 8,179 | | | — | |
| | | | |
| Net income | 11,233 | | | 3,201 | |
| | | |
| | | |
| Net Income Attributable to Non-controlling Interests | (3,577) | | | (1,861) | |
| | | |
| Net Income Attributable to Air T, Inc. Stockholders | $ | 7,656 | | | $ | 1,340 | |
| | | |
| Income (Loss) from continuing operations per share (Note 24) | | | |
| Basic | $ | (0.15) | | | $ | 0.77 | |
| Diluted | $ | (0.15) | | | $ | 0.77 | |
| | | |
| Income (Loss) from discontinued operations per share (Note 24) | | | |
| Basic | $ | 2.89 | | | $ | (0.33) | |
| Diluted | $ | 2.88 | | | $ | (0.33) | |
| | | |
| Income per share (Note 24) | | | |
| Basic | $ | 2.74 | | | $ | 0.44 | |
| Diluted | $ | 2.73 | | | $ | 0.44 | |
| | | |
| Weighted Average Shares Outstanding: | | | |
| Basic | 2,791 | | | 3,052 | |
| Diluted | 2,798 | | | 3,060 | |
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | |
| Year Ended March 31, | | |
| (In thousands) | 2020 | | 2019 |
| Net Income | $ | 11,233 | | | $ | 3,201 | |
| | | |
| Other Comprehensive Income: | | | |
| | | |
| Foreign currency translation gain | 212 | | | 225 | |
| | | |
| Unrealized loss on interest rate swaps, net of tax of $157 and $70 | (529) | | | (236) | |
| | | |
| Total Other Comprehensive Loss | (317) | | | (11) | |
| | | |
| Total Comprehensive Income | 10,916 | | | 3,190 | |
| | | |
| Comprehensive Income Attributable to Non-controlling Interests | (3,592) | | | (1,900) | |
| | | |
| Comprehensive Income Attributable to Air T, Inc. Stockholders | $ | 7,324 | | | $ | 1,290 | |
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| | | |
| (In thousands) | March 31, 2020 | | March 31, 2019 |
| ASSETS | | | |
| Current Assets: | | | |
| Cash and cash equivalents | $ | 5,952 | | | $ | 12,417 | |
| Marketable securities | 1,677 | | | 1,760 | |
| Restricted cash | 9,619 | | | 123 | |
| Restricted investments | 1,085 | | | 831 | |
| Accounts receivable, less allowance for doubtful accounts of $680 and $408 | 13,077 | | | 10,881 | |
| Income tax receivable | 1,174 | | | 142 | |
| Inventories, net | 60,623 | | | 27,455 | |
| Other current assets | 5,279 | | | 6,138 | |
| Current assets of discontinued operations | — | | | 11,601 | |
| Total Current Assets | 98,486 | | | 71,348 | |
| | | |
| Assets on lease or held for lease, net of accumulated depreciation of $6,526 and $6,689 | 27,945 | | | 25,164 | |
| Property and equipment, net of accumulated depreciation of $4,319 and $3,470 | 5,272 | | | 4,264 | |
| Right-of-use assets | 8,116 | | | | — | |
| Cash surrender value of life insurance policies, net of policy loans | 243 | | | 122 | |
| Other tax receivables-long-term | — | | | 311 | |
| Deferred income tax assets, net | — | | | 548 | |
| Investments in securities | 815 | | | 1,086 | |
| Equity method investments | 5,208 | | | 5,611 | |
| Intangible assets, net of accumulated amortization of $2,380 and $2,097 | 749 | | | 998 | |
| Goodwill | 4,227 | | | 4,227 | |
| Other assets | 366 | | | | 200 | |
| Non-current assets of discontinued operations | — | | | | 1,264 | |
| Total Assets | $ | 151,427 | | | $ | 115,143 | |
| | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Current Liabilities: | | | |
| Accounts payable | $ | 10,864 | | | 11,409 | |
| Income tax payable | — | | | 888 | |
| Accrued expenses and other (Note 12) | 13,024 | | | 14,175 | |
| Current portion of long-term debt | 42,684 | | | 24,735 | |
| Short-term lease liability | 1,174 | | | — | |
| Current liabilities of discontinued operations | — | | | 1,587 | |
| Total Current Liabilities | 67,746 | | | 52,794 | |
| | | |
| Long-term debt | 43,136 | | | 32,918 | |
| Long-term lease liability | 7,473 | | | — | |
| Deferred income tax liabilities, net | 579 | | | — | |
| Other non-current liabilities | 1,402 | | | 597 | |
| | | |
| Total Liabilities | 120,336 | | | $ | 86,309 | |
| | | |
| Redeemable non-controlling interest | 6,080 | | | 5,476 | |
| | | |
| Commitments and contingencies (Note 25) | | | |
| | | |
| Equity: | | | |
| | | |
| Preferred stock, $1.00 par value, 50,000 shares authorized | — | | | — | |
| Common stock, $.25 par value; 4,000,000 shares authorized, 3,022,745 and 2,022,637 shares issued, 2,881,853 and 2,022,637 shares outstanding | 756 | | | 506 | |
| Treasury stock, 140,892 shares at $18.58 | (2,617) | | | — | |
| Additional paid-in capital | 2,636 | | | 2,867 | |
| Retained earnings | 23,768 | | | 21,191 | |
| Accumulated other comprehensive loss | (537) | | | (205) | |
| Total Air T, Inc. Stockholders' Equity | 24,006 | | | 24,359 | |
| Non-controlling Interests | 1,005 | | | (1,001) | |
| Total Equity | 25,011 | | | 23,358 | |
| Total Liabilities and Equity | $ | 151,427 | | | $ | 115,143 | |
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| | | |
| Year Ended March 31, | | |
| (In thousands) | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 11,233 | | | $ | 3,201 | |
| Loss from discontinued operations, net of income tax | 114 | | | 1,006 | |
| Gain on sale of discontinued operations, net of income tax | (8,179) | | | — | |
| Net income from continuing operations | 3,168 | | | 4,207 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 5,712 | | | 7,265 | |
| Bargain purchase acquisition gain | (49) | | | (1,984) | |
| Impairment of investment | 2,305 | | | 2,000 | |
| Profit from sale of assets on lease and held for lease | (5,277) | | | (946) | |
| Gain on settlement of bankruptcy | (4,509) | | | — | |
| Other | 1,161 | | | (743) | |
| | | | | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | (2,242) | | | (1,856) | |
| Costs and estimated earnings in excess of billings and uncompleted projects | — | | | 2,012 | |
| Notes receivable and other non-trade receivables | 727 | | | (4,942) | |
| Inventories | (29,614) | | | 9,566 | |
| Accounts payable | 1,512 | | | 1,085 | |
| Accrued expenses | 2,145 | | | 5,234 | |
| Other | (1,270) | | | 1,458 | |
| Total adjustments | (28,742) | | | 12,557 | |
| Net cash (used in) provided by operating activities - continuing operations | (26,231) | | | 22,356 | |
| Net cash provided by (used in) operating activities - discontinued operations | 1,157 | | | (1,420) | |
| Net cash (used in) provided by operating activities | (25,074) | | | 20,936 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchases of marketable securities | (626) | | | (2,014) | |
| Sale of marketable securities | 239 | | | 890 | |
| Proceeds from sale of assets on lease and held for lease | 30,688 | | | 4,193 | |
| Acquisition of businesses, net of cash acquired | (500) | | | (3,376) | |
| Investment in unconsolidated entities | (2,812) | | | (2,000) | |
| Capital expenditures related to property & equipment | (2,439) | | | (1,169) | |
| Capital expenditures related to assets on lease or held for lease | (36,253) | | | (19,150) | |
| Other | 135 | | | (227) | |
| Net cash used in investing activities - continuing operations | (11,568) | | | (22,853) | |
| Net cash provided by (used in) investing activities - discontinued operations | 20,173 | | | (151) | |
| Net cash provided by (used in) investing activities | 8,605 | | | (23,004) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Proceeds from lines of credit | 174,647 | | | 107,512 | |
| Payments on lines of credit | (147,881) | | | (109,935) | |
| Proceeds from term loan | 35,949 | | | 27,725 | |
| Payments on term loan | (47,438) | | | (15,731) | |
| Proceeds received from issuance of TruPs | 8,522 | | | — | |
| Proceeds from life insurance policy loan | — | | | 2,328 | |
| Other | (4,559) | | | (2,353) | |
| Net cash provided by financing activities - continuing operations | 19,240 | | | 9,546 | |
| Effect of foreign currency exchange rates on cash and cash equivalents | 260 | | | 96 | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | 3,031 | | | 7,574 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | 12,540 | | | 4,966 | |
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | 15,571 | | | 12,540 | |
| | | | | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: | | | | | |
| Non-cash capital expenditures related to property & equipment | — | | | 58 | |
| Equipment leased to customers transferred to Inventory | 4,932 | | | — | |
| Equipment in Inventory transferred to Assets on Lease | 501 | | | — | |
| | | |
| Issuance of Debt - Trust Preferred Securities | 4,000 | | | — | |
| Issuance of warrant liability | 840 | | | — | |
| | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
| Operating cash payments for operating leases | 1,485 | | | — | |
| Cash paid during the year for interest | 3,310 | | | 2,880 | |
| Cash paid during the year for income taxes | $ | 1,485 | | | $ | 527 | |
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Common Stock | | | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interests* | | Total Equity |
| Shares | | Amount | | | | | | | | | | |
| Balance, March 31, 2018 | 2,044 | | | $ | 511 | | | $ | 4,172 | | | $ | 20,696 | | | $ | (261) | | | $ | (875) | | | $ | 24,243 | |
| | | | | | | | | | | | | |
| Net income (loss)* | | | | | | | | | | 1,340 | | | | | | (166) | | | 1,174 | |
| | | | | | | | | | | | | | | | | | | | |
| Adoption of ASU 2016-01 | | | | | | | | | | (106) | | | 106 | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation gain | | | | | | | | | | | | | 185 | | | 40 | | | 225 | |
| | | | | | | | | | | | | | | | | | | | |
| Repurchase of common stock | (23) | | | (6) | | | — | | | (739) | | | | | | | | | (745) | |
| | | | | | | | | | | | | | | | | | | | |
| Exercise of stock options | 2 | | | 1 | | | 17 | | | | | | | | | | | | 18 | |
| | | | | | | | | | | | | | | | | | | | |
| Unrealized loss on interest rate swaps, net of tax | | | | | | | | | | | | | (235) | | | | | | (235) | |
| | | | | | | | | | | | | | | | | | | | |
| Adjustment to fair value of redeemable non-controlling interest | | | | | | | (1,322) | | | | | | | | | | | | (1,322) | |
| | | | | | | | | | | | | | | | | | | | |
| Balance, March 31, 2019 | 2,023 | | | $ | 506 | | | $ | 2,867 | | | $ | 21,191 | | | $ | (205) | | | $ | (1,001) | | | $ | 23,358 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Common Stock | | | | Treasury Stock | | | | | | | | | | | | |
| Share | | Amount | | Share | | Amount | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non-controlling Interests* | | Total Equity |
| Balance, March 31, 2019 | 2,023 | | | $ | 506 | | | | | | | $ | 2,867 | | | $ | 21,191 | | | $ | (205) | | | $ | (1,001) | | | $ | 23,358 | |
| | | | | | | | | | | | | | | | | |
| Net income* | | | | | | | | | | | | | 7,656 | | | | | | 1,991 | | | 9,647 | |
| | | | | | | | | | | | | | | | | |
| Stock Split | 1,010 | | 252 | | | | | | | (252) | | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | | | |
| Repurchase of common stock | (10) | | | (2) | | | 141 | | (2,617) | | | | | | (198) | | | | | | | | | (2,817) | |
| | | | | | | | | | | | | | | | | |
| Issuance of Debt - Trust Preferred Securities | | | | | | | | | | | | | | (4,000) | | | | | | | | | (4,000) | |
| | | | | | | | | | | | | | | | | |
| Issuance of Warrants | | | | | | | | | | | | | | (840) | | | | | | | | | (840) | |
| | | | | | | | | | | | | | | | | |
| Adoption ASC 842 - Leasing | | | | | | | | | | | (41) | | | | | | | (41) | |
| | | | | | | | | | | | | | | | | |
| Foreign currency translation gain | | | | | | | | | | | | | | | | | 197 | | | 15 | | | 212 | |
| | | | | | | | | | | | | | | | | |
| Adjustment to fair value of redeemable non-controlling interest | | | | | | | | | | 21 | | | | | | | | | | | | 21 | |
| | | | | | | | | | | | | | | | | |
| Unrealized loss on interest rate swaps, net of tax | | | | | | | | | | | | | | | | (529) | | | | | | (529) | |
| | | | | | | | | | | | | | | | | |
| Balance, March 31, 2020 | 3,023 | | | $ | 756 | | | 141 | | | $ | (2,617) | | | $ | 2,636 | | | $ | 23,768 | | | $ | (537) | | | $ | 1,005 | | | $ | 25,011 | |
*Excludes amount attributable to redeemable non-controlling interest in Contrail Aviation.
See notes to consolidated financial statements.
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31,2020AND2019
Air T, Inc. (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 of free cash flow per share over time.
We currently operate in five 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 jet 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 jet engines and jet aircraft parts sales; procurement services and overhaul and repair services to airlines and commercial aircraft companies;
•Printing equipment and maintenance, which designs, manufactures and sells advanced digital print production equipment and provides maintenance services to commercial customers; and
•Corporate and other, which acts as the capital allocator and resource for other segments.
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.
Discontinued Operations
On September 30, 2019, the Company completed the sale of Global Aviation Services, LLC ("GAS"). The results of operations of GAS are reported as discontinued operations in the consolidated statements of operations for the fiscal years ended March 31, 2020 and 2019. Refer to Footnote 2 - "Discontinued Operations" for additional information. The Company's results of operations related to GAS have been reclassified as discontinued operations on a retrospective basis for all years presented. Unless otherwise indicated, the disclosures accompanying the consolidated financial statements reflect the Company's continuing operations. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as well as its non-wholly owned subsidiaries, Contrail Aviation and Delphax. All intercompany transactions and balances have been eliminated in consolidation.
Accounting Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During the last quarter of fiscal 2020, there was a global outbreak of a novel coronavirus, or COVID-19, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The impact of the outbreak on the U.S. and world economies has been rapidly evolving, and as cases of COVID-19 have continued to be identified in additional countries, there have been international mandates, and mandates in the United States from federal, state and local authorities, instituting quarantines and stay-at-home orders, closing schools, and instituting restrictions on travel and/or limiting operations of non-essential offices and retail centers. Such actions are adversely impacting many industries, with the aviation industries being particularly adversely affected. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. 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 March 31,
2020, however uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.
Segments - The Company has 5 reportable operating segments: overnight air cargo, ground equipment sales, ground support services, commercial jet engine and parts, printing equipment and maintenance, corporate and other. The Company assesses the performance of these segments on an individual basis (see Note 23). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information by business segment for purposes of allocating resources and evaluating financial performance. 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.
Variable Interest Entities – In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.
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.
The acquisition method permits the Company a period of time after the acquisition date during which the Company may adjust the provisional amounts recognized in a business combination. This period of time is referred to as the “measurement period”. The measurement period provides an acquirer with a reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete.
Under accounting standards in effect as of the Company’s acquisition of interests in Delphax, the Company had two alternatives available to account for subsequent adjustments to the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Under the first method, which will no longer be an available option beginning with the Company’s first fiscal 2017 quarter, the Company would retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained. Under the second method, which will be the only allowed method beginning with the Company’s first fiscal 2017 quarter,Accordingly, the Company is required to recognize adjustments to the provisional amounts, with a corresponding adjustment to goodwill, in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the Company would adjust its consolidated financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. The Company has adopted the second of the two above-described methods.Income statement activity of an acquired business is reflected within the
Company’sCompany’s consolidated statements of income and comprehensive income commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.Acquisition-related costs are costs the Company incurs to
effectaffect a business combination. Those costs may include such items as
finder’s fees;finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.Attribution of net income or loss of partially-owned consolidated entities: In the case of Delphax, we determined that the attribution of net income or loss should be based on consideration of all of Air T’s investmentsChanges in Delphax and Delphax Canada. Our investment in the Warrant provides that in the event that dividends are paid on the common stockestimate of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses. The effect of interest expense arising under the Senior Subordinated Note and of other intercompany transactions are reflected in the attribution of Delphax net income or losses to non-controlling interests because Delphax is a variable interest entity.
The above-described attribution methodology applies only to our investments in Delphax. We establish the appropriate attribution methodology on an entity-specific basis.
Recent Accounting Pronouncements
In May 2014, a comprehensive new revenue recognition standard was issued that will supersede nearly all existing revenue recognition guidance. The new guidance introduces a five-step model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management is currently evaluating the new guidance, including possible transition alternatives, to determine the impact it will have on the Company’s consolidated financial statements.
In February 2015, a standard was issued that amends the guidance that reporting entities apply when evaluating whether certain legal entities should be consolidated. The Company will be required to adopt the standard as of the first quarter of its fiscal year ending March 31, 2017. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In April 2015, a standard was issued that amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is evaluating the impact of adoption of the standard on its consolidated financial statements.
In July 2015, a standard was issued that amends existing guidance to simplify the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. It is effective for fiscal years beginning after December 15, 2016 and for interim periods therein. The Company is evaluating the impact of the adoption of the standard on its consolidated financial statements.
In September 2015, a standard was issued that simplifies the accounting for measurement period adjustments associated with a business combination by eliminating the requirement to restate prior period financial statements for measurement period adjustments when measurements were incomplete as of the end of the reporting period that includes the business combination. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. It is effective for interim and annual periods beginning after December 15, 2015. The Company will adopt this new standard beginning with the first quarter of fiscal 2017.
In January 2016, the Financial Accounting Standard Board (FASB) published Accounting Standards Update (ASU) 2016-01 Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities that amends the guidance on the classification and measurement of financial instruments. ASU 2016-01 becomes effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods therein. ASU 2016-01 removes equity securities from the scope of Accounting Standards Codification (ASC) Topic 320 and creates ASC Topic 321, Investments – Equity Securities. Under the new Topic, all equity securities with readily determinable fair values are measured at fair value on the statement of financial position, with changes in fair value recorded through earnings. The update eliminates the option to record changes in the fair value of equity securities through other comprehensive income. The Company is evaluatingearn-out obligations subsequent to the impactacquisition date are not accounted for as part of the adoption of the standard on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as either sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presentedacquisition, rather, they are recognized directly in the financial statements, with certain practical expedients available. The Company is evaluating the impact of the adoption of the standard on its consolidated financial statements.
Forward Looking Statements
Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,” “anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:
| ●
| Economic conditions in the Company’s markets;
|
| ●
| The risk that contracts with FedEx could be terminated or adversely modified in connection with any renewal;
|
| ●
| The risk that the number of aircraft operated for FedEx will be further reduced;
|
| ●
| The risk that the United States Air Force will continue to defer significant orders for deicing equipment under its contracts with GGS;
|
| ●
| The risk that Delphax’s future operating performance will result in Air T, Inc. being unable to fully recover its investments in Delphax;
|
| ●
| The risk that Delphax will not maintain access to sources of liquidity adequate to fund its operations and permit it to pay its debts as they come due;
|
| ●
| 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 risk of injury or other damage arising from accidents involving the Company’s overnight air cargo operations, equipment sold by GGS or services provided by GAS;
|
| ●
| Market acceptance of the Company’s new 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; and
|
| ●
| Mild winter weather conditions reducing the demand for deicing equipment.
|
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 8. Financial Statements and Supplementary Data. (As Restated)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Air T, Inc. and Subsidiaries
Denver, North Carolina
We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the “Company”) as of March 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Air T, Inc. and subsidiaries as of March 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1A to the consolidated financial statement, the accompanying financial statements at and for the year ended March 31, 2016 have been restated.
/s/ Dixon Hughes Goodman LLP
Charlotte, North Carolina
June 29, 2016, except for the effects of the restatement discussed in Note 1A, as to which the date is October 13, 2017.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (AS RESTATED)
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
| | | (As Restated)* | | | | | |
Operating Revenues: | | | | | | | | |
Overnight air cargo | | $ | 68,226,891 | | | $ | 49,864,547 | |
Ground equipment sales | | | 51,175,818 | | | | 41,770,395 | |
Ground support services | | | 24,834,616 | | | | 20,546,216 | |
Printing equipment and maintenance | | | 3,954,797 | | | | - | |
Leasing | | | 19,816 | | | | - | |
| | | | 148,211,938 | | | | 112,181,158 | |
| | | | | | | | | |
Operating Expenses: | | | | | | | | |
Flight-air cargo | | | 35,990,031 | | | | 22,219,794 | |
Maintenance-air cargo | | | 23,597,111 | | | | 22,889,035 | |
Ground equipment sales | | | 38,060,345 | | | | 31,949,363 | |
Ground support services | | | 20,752,753 | | | | 17,495,471 | |
Printing equipment and maintenance | | | 3,611,024 | | | | - | |
Research and development | | | 777,942 | | | | - | |
General and administrative | | | 18,139,830 | | | | 14,222,996 | |
Depreciation, amortization and impairment | | | 1,257,207 | | | | 856,911 | |
Gain on sale of property and equipment | | | (5,968 | ) | | | (869,116 | ) |
| | | | 142,180,275 | | | | 108,764,455 | |
| | | | | | | | | |
Operating Income | | | 6,031,663 | | | | 3,416,703 | |
| | | | | | | | | |
Non-operating Income: | | | | | | | | |
Gain on sale of marketable securities | | | 49,720 | | | | 8,487 | |
Foreign currency gain, net | | | 79,654 | | | | - | |
Other investment income (loss), net | | | 73,115 | | | | (10,265 | ) |
Interest expense and other | | | (80,743 | ) | | | - | |
| | | | 121,746 | | | | (1,778 | ) |
| | | | | | | | | |
Income Before Income Taxes | | | 6,153,409 | | | | 3,414,926 | |
| | | | | | | | | |
Income Taxes | | | 2,395,452 | | | | 931,000 | |
| | | | | | | | | |
Net Income | | | 3,757,957 | | | | 2,483,926 | |
| | | | | | | | | |
Net Loss Attributable to Non-controlling Interests | | | 655,953 | | | | - | |
| | | | | | | | | |
Net Income Attributable to Air T, Inc. Stockholders | | $ | 4,413,910 | | | $ | 2,483,926 | |
| | | | | | | | | |
Earnings Per Share: | | | | | | | | |
Basic | | $ | 1.86 | | | $ | 1.05 | |
Diluted | | $ | 1.84 | | | $ | 1.04 | |
| | | | | | | | | |
Weighted Average Shares Outstanding: | | | | | | | | |
Basic | | | 2,372,527 | | | | 2,359,610 | |
Diluted | | | 2,396,824 | | | | 2,379,928 | |
See notes to consolidated financial statements.
* The Consolidated Statement of Income for the year ended March 31, 2016 has been restated. See Note 1A.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (AS RESTATED)
| | | Twelve Months Ended March 31, | |
| | | 2016 | | | 2015 | |
| | | (As Restated)* | | | | | |
| | | | | | | | | |
Net Income | | $ | 3,757,957 | | | $ | 2,483,926 | |
| | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | |
| | | | | | | | | |
Foreign currency translation loss | | | (78,004 | ) | | | - | |
| | | | | | | | | |
Unrealized gains (losses) on marketable securities | | | 23,182 | | | | (209,215 | ) |
| | | | | | | | | |
Tax effect of unrealized (gains) losses on marketable securities available for sale | | | (8,346 | ) | | | 76,566 | |
| | | | | | | | | |
Total unrealized gain (loss) on marketable securities, net of tax | | | 14,836 | | | | (132,649 | ) |
| | | | | | | | | |
Reclassification of gains on marketable securities included in net income | | | 49,720 | | | | 8,487 | |
| | | | | | | | | |
Tax effect of reclassification on marketable securities included in net income | | | (17,899 | ) | | | (2,970 | ) |
| | | | | | | | | |
Reclassification adjustment for realized gains, net of tax | | | 31,821 | | | | 5,517 | |
| | | | | | | | | |
Total Other Comprehensive Loss | | | (31,347 | ) | | | (127,133 | ) |
| | | | | | | | | |
Total Comprehensive Income | | | 3,726,610 | | | | 2,356,793 | |
| | | | | | | | | |
Comprehensive Loss Attributable to Non-controlling Interests | | | 681,694 | | | | - | |
| | | | | | | | | |
Comprehensive Income Attributable to Air T, Inc. Stockholders | | $ | 4,408,304 | | | $ | 2,356,793 | |
See notes to consolidated financial statements.
* The Consolidated Statement of Comprehensive Income for the year ended March 31, 2016 has been restated. See Note 1A.earnings.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AS RESTATED)
| | | March 31, 2016 | | | March 31, 2015 | |
| | | (As Restated)* | | | | | |
ASSETS | | | | | | | | |
Current Assets: | | | | | | | | |
Cash and cash equivalents (Delphax $249,528)** | | $ | 5,345,455 | | | $ | 13,388,767 | |
Marketable securities | | | 4,944,572 | | | | 5,278,752 | |
Restricted cash | | | 820,651 | | | | 776,353 | |
Accounts receivable, less allowance for doubtful accounts of $426,000 and $222,000 (Delphax $1,433,494)** | | | 12,303,128 | | | | 9,534,563 | |
Notes and other receivables-current | | | 592,721 | | | | 816,606 | |
Income tax receivable | | | 719,899 | | | | 195,000 | |
Inventories (Delphax $4,642,298)** | | | 12,274,104 | | | | 7,789,649 | |
Deferred income taxes | | | 291,000 | | | | 278,000 | |
Prepaid expenses and other ($1,034,067)** | | | 1,668,004 | | | | 612,334 | |
Total Current Assets | | | 38,959,534 | | | | 38,670,024 | |
| | | | | | | | | |
Investments in Available-For-Sale Securities | | | 4,711,343 | | | | - | |
| | | | | | | | | |
Property and Equipment, net (Delphax $625,684)** | | | 4,577,774 | | | | 2,571,499 | |
Cash Surrender Value of Life Insurance Policies | | | 2,100,057 | | | | 1,990,671 | |
Notes and other receivables-long-term | | | 103,996 | | | | - | |
Other Assets (Delphax $26,020)** | | | 317,528 | | | | 224,188 | |
Intangible assets, net (Delphax $1,109,112)** | | | 1,109,112 | | | | - | |
Goodwill (Delphax $275,408)** | | | 275,408 | | | | - | |
Total Assets | | $ | 52,154,752 | | | $ | 43,456,382 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable (Delphax $1,684,802)** | | $ | 7,003,660 | | | $ | 4,715,708 | |
Income tax payable (Delphax $11,312)** | | | 11,312 | | | | - | |
Accrued expenses (Delphax $1,926,340)** | | | 6,842,874 | | | | 3,529,451 | |
Short-term debt (Delphax $1,859,300)** | | | 1,859,300 | | | | - | |
Total Current Liabilities | | | 15,717,146 | | | | 8,245,159 | |
| | | | | | | | | |
Long-Term Debt (Delphax $4,835)** | | | 4,835 | | | | 5,000,000 | |
Deferred Income Taxes | | | 546,000 | | | | 416,000 | |
Other Non-current Liabilities (Delphax $606,358)** | | | 615,241 | | | | - | |
| | | | | | | | | |
Commitments and Contingencies (Notes 8, 11, and 22) | | | | | | | | |
| | | | | | | | | |
Equity: | | | | | | | | |
Air T, Inc. Stockholders' Equity: | | | | | | | | |
Preferred stock, $1.00 par value, 50,000 shares authorized | | | - | | | | - | |
Common stock, $.25 par value; 4,000,000 shares authorized, 2,372,527 shares issued and outstanding | | | 593,131 | | | | 593,131 | |
Additional paid-in capital | | | 4,956,171 | | | | 4,929,090 | |
Retained earnings | | | 28,821,825 | | | | 24,407,915 | |
Accumulated other comprehensive loss, net | | | (140,519 | ) | | | (134,913 | ) |
Total Air T, Inc. Stockholders' Equity | | | 34,230,608 | | | | 29,795,223 | |
Non-controlling Interests | | | 1,040,922 | | | | - | |
Total Equity | | | 35,271,530 | | | | 29,795,223 | |
Total Liabilities and Equity | | $ | 52,154,752 | | | $ | 43,456,382 | |
See notes to consolidated financial statements.
* The Consolidated Balance Sheet as of March 31, 2016 has been restated. See Note 1A.
** Amounts related to Delphax as of March 31, 2016.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED)
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
| | | (As Restated)* | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 3,757,957 | | | $ | 2,483,926 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Gain on sale of marketable securities | | | (49,720 | ) | | | (8,487 | ) |
Gain on sale of property and equipment | | | (5,968 | ) | | | (869,116 | ) |
Change in accounts receivable and inventory reserves | | | (462,439 | ) | | | (370,756 | ) |
Depreciation, amortization and impairment | | | 1,257,207 | | | | 856,911 | |
Change in cash surrender value of life insurance | | | (109,386 | ) | | | (103,060 | ) |
Deferred income taxes | | | 90,484 | | | | (372,000 | ) |
Warranty reserve | | | 140,768 | | | | 169,683 | |
Compensation expense related to stock options | | | 29,334 | | | | 8,958 | |
Change in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (1,530,289 | ) | | | 640,944 | |
Notes receivable and other non-trade receivables | | | 119,889 | | | | 871,882 | |
Inventories | | | (877,993 | ) | | | 3,760,133 | |
Prepaid expenses and other assets | | | (422,547 | ) | | | 147,659 | |
Accounts payable | | | 605,940 | | | | (1,710,347 | ) |
Accrued expenses | | | 1,217,786 | | | | 767,231 | |
Income taxes payable/ receivable | | | (524,900 | ) | | | 566,000 | |
Non-current liabilities | | | (21,606 | ) | | | - | |
Total adjustments | | | (543,440 | ) | | | 4,355,635 | |
Net cash provided by operating activities | | | 3,214,517 | | | | 6,839,561 | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchases of marketable securities | | | (4,481,030 | ) | | | (4,527,784 | ) |
Proceeds from sale of marketable securities | | | 226,759 | | | | 515,045 | |
Net cash flow from business combination | | | 78,000 | | | | - | |
Proceeds from sale of property and equipment | | | 200,634 | | | | 3,358,660 | |
Capital expenditures | | | (1,246,071 | ) | | | (799,666 | ) |
Decrease in restricted cash | | | (44,298 | ) | | | (526,352 | ) |
Net cash used in investing activities | | | (5,266,006 | ) | | | (1,980,097 | ) |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from line of credit | | | 14,296,108 | | | | 6,330,888 | |
Payment on line of credit | | | (19,302,273 | ) | | | (1,330,888 | ) |
Proceeds from line of credit - Delphax | | | 1,832,600 | | | | - | |
Payment of debt - Delphax | | | (2,827,609 | ) | | | - | |
Proceeds from funding of lease | | | 7,428 | | | | - | |
Repurchase of stock options | | | - | | | | (130,335 | ) |
Proceeds from exercise of stock options, net of excess tax benefit | | | - | | | | 150,750 | |
Net cash (used in) provided by financing activities | | | (5,993,746 | ) | | | 5,020,415 | |
| | | | | | | | | |
Effect of foreign currency exchange rates on cash and cash equivalents | | | 1,923 | | | | - | |
| | | | | | | | | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (8,043,312 | ) | | | 9,879,879 | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | | 13,388,767 | | | | 3,508,888 | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 5,345,455 | | | $ | 13,388,767 | |
| | | | | | | | | |
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: | | | | | | | | |
Finished goods inventory transferred to equipment leased to customers | | $ | 1,288,474 | | | $ | 1,132,115 | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES: | | | | | | | | |
Non-controlling interests in acquired business | | $ | 1,712,935 | | | $ | - | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the year for: | | | | | | | | |
Interest | | $ | 47,052 | | | $ | 19,000 | |
Income taxes | | | 2,827,000 | | | | 737,000 | |
See notes to consolidated financial statements.
* The Consolidated Statement of Cash Flow for the year ended March 31, 2016 has been restated. See Note 1A.
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED MARCH 31, 2016 AND 2015 (AS RESTATED) *
| | | Air T, Inc. Stockholders' Equity | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | Common Stock | | | Additional | | | | | | | Other | | | | | | | | | |
| | | | | | | | | | | Paid-In | | | Retained | | | Comprehensive | | | Non-controlling | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | interests | | | Equity | |
Balance, March 31, 2014 | | | 2,355,027 | | | $ | 588,756 | | | $ | 4,855,093 | | | $ | 21,923,988 | | | $ | (7,780 | ) | | $ | - | | | $ | 27,360,057 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 2,483,926 | | | | - | | | | - | | | | 2,483,926 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss from marketable securities, net of tax | | | - | | | | - | | | | - | | | | - | | | | (127,133 | ) | | | - | | | | (127,133 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 17,500 | | | | 4,375 | | | | 146,375 | | | | - | | | | - | | | | - | | | | 150,750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation expense related to stock options | | | - | | | | - | | | | 8,958 | | | | - | | | | - | | | | - | | | | 8,958 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Tax effect from exercise, forfeiture and repurchase of stock options | | | - | | | | - | | | | 49,000 | | | | - | | | | - | | | | - | | | | 49,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of stock options | | | - | | | | - | | | | (130,335 | ) | | | - | | | | - | | | | - | | | | (130,335 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2015 | | | 2,372,527 | | | $ | 593,131 | | | $ | 4,929,090 | | | $ | 24,407,915 | | | $ | (134,913 | ) | | $ | - | | | $ | 29,795,223 | |
| | | Air T, Inc. Stockholders' Equity | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | Common Stock | | | Additional | | | | | | | Other | | | | | | | | | |
| | | | | | | | | | | Paid-In | | | Retained | | | Comprehensive | | | Non-controlling | | | Total | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | interests | | | Equity | |
Balance, March 31, 2015 | | | 2,372,527 | | | $ | 593,131 | | | $ | 4,929,090 | | | $ | 24,407,915 | | | $ | (134,913 | ) | | $ | - | | | $ | 29,795,223 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Initial consolidation of Delphax | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,712,935 | | | | 1,712,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | - | | | | - | | | | - | | | | 4,413,910 | | | | - | | | | (655,953 | ) | | | 3,757,957 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain from marketable securities, net of tax | | | - | | | | - | | | | - | | | | - | | | | 46,657 | | | | - | | | | 46,657 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | | | - | | | | - | | | | - | | | | - | | | | (52,263 | ) | | | (25,741 | ) | | | (78,004 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funding on residual sharing agreements | | | - | | | | - | | | | 7,428 | | | | - | | | | - | | | | - | | | | 7,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation expense related to stock options | | | - | | | | - | | | | 19,653 | | | | - | | | | - | | | | 9,681 | | | | 29,334 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2016 (As Restated) | | | 2,372,527 | | | $ | 593,131 | | | $ | 4,956,171 | | | $ | 28,821,825 | | | $ | (140,519 | ) | | $ | 1,040,922 | | | $ | 35,271,530 | |
See notes to consolidated financial statements.
* The Consolidated Statement of Equity for the year ended March 31, 2016 has been restated. See Note 1A.
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDEDMARCH 31, 2016 AND 2015 (AS RESTATED)
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings power. Our goal is to build on Air T’s core businesses, to expand into adjacent industries, and when appropriate, to acquire companies that we believe fit into the Air T family.
We currently operate wholly owned subsidiaries in three core industry segments:
| •
| overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, which operates in the air express delivery services industry;
|
ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers; and
ground support services, comprised of our Global Aviation Services, LLC (“GAS”) subsidiary, which provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers.
We recently added two other businesses, which are reported in separate segments. In October 2015, we formed a wholly owned equipment leasing subsidiary, Air T Global Leasing, LLC (“ATGL”), which comprises our leasing segment, and in November 2015 we acquired a minority interest in Delphax Technologies Inc.(“Delphax”), a printing equipment manufacturer and maintenance provider, which comprises our printing equipment and maintenance segment.
In March 2014, the Company formed a wholly-owned subsidiary, Space Age Insurance Company (“SAIC”), as a single parent hybrid captive insurance company to insure risks of the Company and its subsidiaries that were not previously insured by the various Company insurance programs. SAIC also underwrites third-party risks through certain reinsurance arrangements. The activities of SAIC are included within the corporate results in the accompanying consolidated financial statements.
1A. | Restatement of Previously Issued Consolidated Financial Statements
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Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the “Securities Purchase Agreement”) among the Company, Delphax Technologies Inc. (“Delphax”) and its subsidiary, Delphax Technologies Canada Limited (“Delphax Canada”), on November 24, 2015 (the “Closing Date”), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the “Senior Subordinated Note”) issued by Delphax Canada for a combination of cash and the outstanding principal of $500,000 and accrued and unpaid interest under a 90-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax’s Series B Preferred Stock (the “Series B Preferred Stock”) and a Stock Purchase Warrant (the “Warrant”) to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events). As further disclosed in the Original Filing, each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represented approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company. Holders of the Series B Preferred Stock, voting as a separate class, were initially entitled to elect (and exercise rights of removal and replacement with respect to) three-sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, were entitled to elect (and to exercise rights of removal and replacement with respect to) four-sevenths of the members of the board of directors of Delphax. The Warrant expires on November 24, 2021 and provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock.
The consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016, originally filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2016 (“Original Filing”), reflect the consolidation of Delphax with the Company and its subsidiaries from the November 24, 2015 Closing Date. Such condensed consolidated financial statements also reflect an attribution of 62% of Delphax’s loss for periods commencing as of the Closing Date to non-controlling interests in the determination of consolidated net income attributable to Air T, Inc. stockholders. Such attribution was based on the Company’s ownership of the Series B Preferred Stock, which represented approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company.
The Company has concluded that the Company’s methodology in attributing 62% of Delphax’s net income or loss to non-controlling interests during the period of consolidation was not appropriate and that attribution should be based on consideration of all of Air T’s investments in Delphax and Delphax Canada. The Company’s policy with regarding attribution of Delphax’s net income or loss to non-controlling interests based on consideration of all of Air T’s investments in Delphax and Delphax Canada is set forth below in Note 1. Summary of Significant Accounting Policies (As Restated). As a result of the application of such policy, for the fiscal year ended March 31, 2016 the attribution of Delphax losses to non-controlling interests should have been 33%.
In addition, we are also correcting an otherwise immaterial error associated with our elimination of intercompany interest charged by Air T, Inc. to Delphax Canada under the Five-Year Senior Subordinated Promissory Note and an inadvertent transposition of entries in our Consolidated Statement of Cash Flows described below.
Accordingly, the Company is restating its consolidated financial statements at March 31, 2016 and for the fiscal year ended March 31, 2016, to so correct the treatment of Air T’s interests in Delphax with respect to the attribution of Delphax losses and the elimination of intercompany interest, to correct an inadvertent transposition of the entries for the fiscal year ended March 31, 2016 for “proceeds from sale of property and equipment” and “capital expenditures” in the presentation of cash flows from investing activities on our Consolidated Statements of Cash Flows (which correction does not affect the reported amount of net cash used in investing activities for that period), and to correct and expand related disclosures.
The combined impacts of all the adjustments to the applicable line items in our consolidated financial statements for the periods covered by this Form 10K/A are provided in the tables below.
Financial Statement Presentation
In addition to the restatement of our consolidated financial statements, we have also restated the following Notes for the effects of the errors above.
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| Note 1. Summary of Significant Accounting Policies (As Restated)
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| Note 2. Earnings Per Common Share (As Restated)
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| Note 8. Acquisition of Interests in Delphax (As Restated)
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| Note 9. Variable Interest Entities (As Restated)
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| Note 19. Quarterly Financial Information (Unaudited) (As Restated)
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The following tables present the effect of the correction of the error on selected line items of our previously reported consolidated financial statements at March 31, 2016 and for the fiscal year ended March 31, 2016:
| | | As Previously Reported | | | As Restated | |
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Consolidated Balance Sheet Information (at March 31, 2016): | | | | | | | | |
Additional paid-in capital | | $ | 4,947,665 | | | $ | 4,956,171 | |
Retained earnings | | | 29,350,980 | | | | 28,821,825 | |
Accumulated other comprehensive loss, net | | | (117,898 | ) | | | (140,519 | ) |
Total Air T, Inc. stockholders' equity | | | 34,773,878 | | | | 34,230,608 | |
Non-controlling interests | | | 497,652 | | | | 1,040,922 | |
Total equity | | | 35,271,530 | | | | 35,271,530 | |
Total liabilities and equity | | | 52,154,752 | | | | 52,154,752 | |
Consolidated Statement of Income (Loss) (for the fiscal year ended March 31, 2016): | | | | | | | | |
Net loss attributable to non-controlling interests | | $ | 1,185,108 | | | $ | 655,953 | |
Net income attribuable to Air T, Inc. stockholders | | | 4,943,065 | | | | 4,413,910 | |
Earnings per share - basic | | | 2.08 | | | | 1.86 | |
Earnings per share - diluted | | | 2.06 | | | | 1.84 | |
Consolidated Statement of Comprehensive Income (for the fiscal year ended March 31, 2016): | | | | | | | | |
Comprehensive loss attributable to non-controlling interests | | $ | 1,233,470 | | | $ | 681,694 | |
Comprehensive income attributable to Air T, Inc. stockholders | | | 4,960,080 | | | | 4,408,304 | |
Consolidated Statement of Cash Flows (for the fiscal year ended March 31, 2016): | | | | | | | | |
Proceeds from sale of property and equipment | | $ | (1,246,071 | ) | | $ | 200,634 | |
Capital expenditures | | | 200,634 | | | | (1,246,071 | ) |
1.
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (AS RESTATED)
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Principles of Consolidation – The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and Delphax. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications - Certain prior period amounts have been reclassified to conform with the current period presentation. Such reclassifications had no impact on previously reported levels of consolidated net income or equity.
Accounting Estimates – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported and disclosed. Actual results could differ from those estimates.
Concentration of Credit Risk – The Company’s potential exposure to concentrations of credit risk consists of trade accounts and notes receivable, and bank deposits. Accounts receivable are normally due within 30 days and the Company performs periodic credit evaluations of its customers’ financial condition. Notes receivable payments are normally due monthly. The required allowance for doubtful accounts is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of past-due outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.
At various times throughout the year, the Company had deposits with banks in excess of amounts covered by federal depository insurance and investments in corporate notes that are not covered by insurance.
A majority of the Company’s revenues are concentrated in the aviation industry and revenues can be materially affected by current economic conditions and the price of certain supplies such as fuel, the cost of which is passed through to the Company’s cargo customer. The Company has a customer concentration in its overnight air cargo segment which provides service to one major customer. The loss of a major customer would have a material impact on the Company’s results of operations. See Note 16 “Major Customers”.
Cash and Cash Equivalents – Cash equivalents consist of liquid investments with maturities of three months or less when purchased.
Inventories – Inventories are carried at the lower of cost or net realizable value. When finished goods units are leased to customers under operating leases, the units are transferred to Assets on Lease or Held For Lease. The classification of cash flows associated with the purchase and sale of finished goods is based on the activity that is likely to be the predominant source
Foreign exchange - Delphax, which
or use of cash flows for the items. Consistent with aviation industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.
Investments under the Equity Method – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is headquarteredpresumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. For investments that have a different fiscal year-end, if the difference is not more than three months, the Company elects a 3-month lag to record the change in the United States, has subsidiariesinvestment.
The Company assesses the carrying value of its investments whenever events or changes in
Canada, France,circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the investment to the estimated future undiscounted cash flows of the investment, which take into account current, and expectations for future, market conditions and the
United Kingdom. The functional currencyCompany’s intent with respect to holding or disposing of the
Delphax’s Canadian subsidiary isinvestment. Changes in economic and operating conditions, including those occurring as a result of the
U.S. dollar, whereasimpact of the
functional currency of Delphax’s subsidiaries in FranceCOVID-19 pandemic, that occur subsequent to a current impairment analysis and the
United Kingdom is the Euro and Pound Sterling, respectively. The balance sheets of foreign operations with a functional currency of other than the U.S. dollar are translated to U.S. dollars using rates of exchange asCompany’s ultimate use of the
applicable balance sheet date. The statements of income items of foreign operations are translatedinvestment could impact the assumptions and result in future impairment losses to
U.S. dollar using average rates of exchangethe investments. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the
applicable period.amount by which the carrying value exceeds the fair value. The
gains and losses resulting from translation of the financial statements of Delphax’s foreign operations are recorded within the accumulated other comprehensive income (loss) and non-controlling interests categories of the Company’s consolidated equity.Goodwill - Goodwill of approximately $375,000 was provisionally recorded in connection with the acquisition of interests in Delphax (Note 8). Goodwill reflects the excess of the estimated fair value of Delphax’s shareholders’ equity at the date of the Company’s investment over the fair values assigned to Delphax’s identifiable net assets as of the same date. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment.
determined through quoted prices in active markets or various valuation techniques, including internally developed discounted cash flow models or comparable market transactions.
Goodwill - The Company intends to perform its annualtests goodwill for impairment test of Delphax’s goodwill as of September 30, which is the end of Delphax’s fiscal year.at least once annually. An impairment test will also be carried out anytime events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. The Company has determined that the reporting unit for all goodwill as of March 31, 2016 is at the consolidated Delphax level. The applicable accounting standards provide for two methods to assess goodwill for possible impairment, one qualitative and the other a two-step quantitative method. The Company is permitted to first assess qualitative factors to determine whether it is more likely than not (this is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value, including goodwill. In qualitatively evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances such as macroeconomic conditions, industry and market developments, cost factors, and the overall financial performance of the reporting unit. If, after assessing these events and circumstances, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the quantitative goodwill impairment test are unnecessary. In the first step of the quantitative method, recoverability of goodwill is evaluated by estimating the fair value of the reporting
unit’sunit’s goodwill using multiple techniques, including a discounted cash flow model income approach and a market approach. The estimated fair value is then compared to the carrying value of the reporting unit. If the fair value of a reporting unit is less than its carrying value, a second step is performed to determine the amount of impairment loss, if any. The second step requires allocation of the reporting unit’s fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations. Any residual fair value is allocated to goodwill. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.Considering all relevant factors,
Goodwill consisted of the following (in thousands):
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| Year Ended March 31, | | |
| 2020 | | 2019 |
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| Goodwill, at original cost | $ | 4,603 | | | $ | 4,603 | |
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| Less accumulated impairment | (376) | | | (376) | |
| Goodwill, net of impairment | $ | 4,227 | | | $ | 4,227 | |
As of March 31, 2020, the Company identifiedhad approximately $4.2 million of goodwill, which is entirely related to the acquisition of Contrail Aviation. We performed our annual impairment assessment for goodwill of the Contrail reporting unit. In 2020, the occurrence of COVID-19 has greatly impacted the macroeconomic conditions and the outlook of the airline industry. Due to this, the Company performed a potential goodwill impairment duringquantitative analysis using a combination of the quarter endedincome approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow
analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The forecasts and assumptions are based on our annual and long-term business plans. Contrail’s market approach requires management to make significant assumptions related to market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.
Based on the results of our annual quantitative assessment conducted as of March 31,
2016. After review,2020, the
Company estimatedfair value of our Contrail reporting unit exceeded its carrying value, and
recorded anmanagement concluded that no impairment charge
in the amount of $100,000.was warranted.
Intangible Assets - – Amortizable intangible assets consist of acquired patents, tradenames, customer relationships, and tradenamesother finite-lived identifiable intangibles. Such intangibles are initially recorded at fair value in connection with the acquisition of interests in Delphax (Note 8).and subsequently subject to amortization. Amortization is recorded using the straight-line method over the estimated useful lives of the assets. In accordance with the applicable accounting guidance, the Company evaluates the recoverability of amortizable intangible assets whenever events occur that indicate potential impairment. In doing so, the Company assesses whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the estimated fair value of the asset. Considering all relevant factors, the Company estimated and recorded a tradename impairment charge in the amount of $50,000 in the quarter ended March 31, 2016.
The estimated amortizable lives of the intangible assets are as follows:
| | Years
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Tradenames
| | | 5 | Years |
Patents
Software | 3 |
| Trade names | 5 |
| Certification | 95 |
| Non-compete | 5 |
| License | 5 |
| Patents | 9 |
| Customer relationship | 10 |
Marketable Securities – In accordance with Accounting Standards Codification (“ASC”) 320, Investments –Debt and Equity Securities , and based on our intentions regarding these instruments, we classify all of our marketable equity securities as available-for-sale. Marketable equity securities are reported at fair value, with all unrealized gains (losses) reflected net of tax in stockholders’ equity on our consolidated balance sheets, and as a line item in our consolidated statements of comprehensive income. If we determine that an investment has other than a temporary decline in fair value, we recognize the investment loss in non-operating income, net in the accompanying consolidated statements of comprehensive income. We regularly evaluate our investments for impairment using both quantitative and qualitative criteria. For equity securities we consider the length of time and magnitude of the amount of each security that is in an unrealized loss position. Other than our investment in Insignia Systems, Inc., all of our marketable securities investments are classified as current based on the nature of the investments and their availability for use in current operations.
Inventories – Inventories related to the Company’s manufacturing and service operations are carried at the lower of cost (first in, first out) or market. When finished goods units are leased to customers under operating leases, the units are transferred to Property and Equipment. Consistent with aviation industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.
Property and Equipment and Assets on Lease or Held for Lease – Property and equipment is stated initially at cost, or fair value if purchased as part of a business combination or, in the case of equipment under capital leases, the present value of future lease payments. Rotable parts represent aircraft parts which are repairable, capitalized and depreciated over their estimated useful lives. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Leased equipmentEquipment leased to customers is depreciated using the acceleratedstraight line method. Useful lives range from three years for computer equipment, seven years for flight equipment, and ten years for deicers and other equipment leased to customers.
customers and 30 years for buildings.
Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. Certain costs incurred in connection with the acquisition of engine assets are capitalized as part of the cost of such assets. Major overhauls which improve functionality or extend original useful life are capitalized and depreciated over the estimated remaining useful life of the equipment. The Company depreciates the engines on a straight-line basis over the assets useful life from the acquisition date to a residual value. The Company adjusts its estimates annually for these older generation assets, including updating estimates of an engine’s or aircraft’s remaining operating life as well as future residual value expected from part-out based on the current technical status of the engine or aircraft. The Company believes this methodology accurately reflects the typical holding period for the assets and, that the residual value assumption reasonably approximates the selling price of the assets.
When engine assets are committed for sales, the assets are transferred to Inventory. The classification of cash flows associated with the purchase and sale of engine assets is based on the activity that is likely to be the predominant source or use of cash flows for the items.
The Company assesses long-lived assets
used in operations for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of the estimated undiscounted cash flows from those assets, the Company then will write-down the value of the assets by
such excess.Asset Retirement Obligation - Under the termsexcess of carrying value over fair value.
Accounting for Debt Preferred Securities and Warrant Liability – On June 10, 2019, the Company issued an aggregate of 1.6 million TruPs in the amount of $4.0 million in a lease fornon-cash transaction. These TruPs are mandatorily redeemable preferred security obligations of the Company. In accordance with ASC 480, the Company presented mandatorily redeemable preferred securities that do not contain a manufacturing facilityconversion option as a liability on the balance sheet. In connection with the issuance of the TruPs, the Company also issued an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in Canada, Delphax is responsible for restoring the leased property to its original condition, normal wear and tear excepted. The Company’s provisional accounting for the acquisition of Delphax reflects an estimated asset retirement obligation (“ARO”) liability for this matter of approximately $560,000. The ARO liability was determined using the presentstated value of TruPs). A warrant for mandatorily redeemable shares conditionally obligates the estimated facility restoration costs. Determinationissuer to ultimately transfer assets—
the obligation is conditioned only on the warrant's being exercised because the shares will be redeemed. Thus, warrants for mandatorily redeemable shares are liabilities under ASC 480. Accordingly, the Warrants are recorded within "Other non-current liabilities" on our consolidated balance sheets. The Warrants are recorded at fair value as of
this estimated liability involves significant judgment.March 31, 2020. Fair value measurement was based on market activity and trading volume as observed on the NASDAQ Global Market. The liability is
reflected on the accompanying March 31, 2016 consolidated balance sheet within other long-term liabilities. The liability will be periodically adjusted to reflect revisions to estimated future costs and the accretion of interest. The liabilityclassified as
reflectedLevel 2 in the
Company’s consolidated balance sheet will also change with movementhierarchy (Level 2 is defined as quoted prices in
markets that are not active or inputs which are observable, either directly or indirectly, for substantially the
U.S. dollar to Canadian dollar exchange rate. The balance at March 31, 2016 was left unchanged compared to the amount estimated for purchase accounting because there was no change of estimate between November 24, 2015 and March 31, 2016 and because the impact of interest accretion and exchange rate movement was deemed inconsequential.Restricted Cash — Restricted cash consists of cash held by SAIC as statutory capital reserves and cash collateral securing SAIC’s participation in certain reinsurance pools.
Revenue Recognition – Cargo revenue is recognized upon completion of contract terms. Revenues from maintenance and ground support services and services within our printing equipment and maintenance segment are recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer.
Operating Expenses Reimbursed by Customer – The Company, under the terms of its overnight air cargo dry-lease service contracts, passes through to its air cargo customer certain cost components of its operations without markup. The cost of flight crews, fuel, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer, at cost, and included in overnight air cargo revenue on the accompanying statements of income. These pass through costs totaled $24,632,000 and $32,672,000 for the years ended March 31, 2016 and 2015, respectively.
Stock Based Compensation – The Company maintains a stock option plan for the benefit of certain eligible employees and directors of the Company. The Company recognizes compensation expense on stock options based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company uses the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expectedfull term of the option, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.
Warranty Reserves – The Company warranties its ground equipment products for up to a three-year period from date of sale. The Company’s printing equipment and maintenance segment provides a limited short-term (typically 90 days) warranty on equipment and spare parts. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known.
asset or liability). Product warranty reserve activity is as follows:
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
Beginning Balance | | $ | 231,803 | | | $ | 242,000 | |
Amounts charged to expense | | | 140,768 | | | | 169,683 | |
Actual warranty costs paid | | | (166,916 | ) | | | (179,880 | ) |
Delphax acquisition | | | 60,800 | | | | - | |
Ending Balance | | $ | 266,455 | | | $ | 231,803 | |
Income Taxes – Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Attribution
A valuation allowance against net deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. Tax credits are accounted for as a reduction of net income or losstaxes in the year in which the credit originates. All deferred income taxes are classified as non-current in the consolidated balance sheets. The Company recognizes the benefit of partially-owned consolidated entities - In the casea tax position taken on a tax return, if that position is more likely than not of Delphax, we determined that the attribution of net income or loss should bebeing sustained on audit, based on considerationthe technical merits of the position. An uncertain income tax position is not recognized if it has a less than a 50% likelihood of being sustained.
Accounting for Redeemable Non-Controlling Interest – In 2016, Contrail Aviation entered into an Operating Agreement (the “Operating Agreement”) with the Seller providing for the governance of and the terms of membership interests in Contrail Aviation and including put and call options (“Put/Call Option”) with regard to the 21% non-controlling interest retained by the Seller. The Put/Call Option permits the Seller to require Contrail Aviation to purchase all of Air T’s investmentsthe Seller’s equity membership interests in Delphax and Delphax Canada. Our investmentContrail Aviation commencing on the fifth anniversary of the acquisition, which is on July 18, 2021. Per the agreement, the price is to be agreed upon by the parties or, failing such agreement, to be determined pursuant to third-party appraisals in a process specified in the Warrant providesagreement. Applicable accounting guidance requires an equity instrument that inis redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that dividends are paid onis not solely within the common stock of Delphax, the holdercontrol of the Warrant is entitled to participate in such dividends onissuer.
As a ratable basis as ifresult of this redemption feature, the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid toCompany recorded the non-controlling interests. We concluded that this was a substantive distribution right which should be consideredinterest as redeemable and classified it in the attribution of Delphax nettemporary equity within its Consolidated Balance Sheets initially at its acquisition-date fair value. The non-controlling interest is adjusted each reporting period for income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and(or loss) attributable to the non-controlling interest (67% /33%) until such amountsas well as any applicable distributions made. A measurement period adjustment, if any, is then made to adjust the non-controlling interest to the higher of the redemption value (fair value) or carrying value each reporting period. These fair value adjustments are reducedrecognized through retained earnings and are not reflected in the Company's Consolidated Statements of Income. When calculating earnings per share attributable to zero. Additional losses are then fully attributedthe Company, the Company adjusts net income attributable to our debt investments until they too are reducedthe Company for the measurement period adjustment to zero. This sequencing reflects the relative priorityextent the redemption value exceeds the fair value of debt to equity. Any further losses are then attributed to Air Tthe non-controlling interest on a cumulative basis. The fair value of the non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the non-controlling interests based onmarket approach, utilizing the initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approachguideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to previous losses.forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The effectforecasts and assumptions are based on our annual and long-term business plans. Contrail’s market approach requires management to make significant assumptions related to market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.
As of March 31, 2020, the fair value of the redeemable non-controlling interest is $6.1 million. The net change in the redemption value compared to March 31, 2019 is an increase of $0.6 million, of which $21,000 was related to the net change in fair value during the fiscal year ended March 31, 2020, which is reflected on our consolidated statements of equity.
Revenue Recognition – Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less, as a result, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price, to expense arisingcosts incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations.We evaluate gross versus net presentation on revenues from products or services purchased and resold in accordance with the revenue recognition criteria outlined in ASC 606-10, Principal Agent Considerations.
The Company, under the Senior Subordinated Noteterms of its overnight air cargo dry-lease service contracts, passes through to its air cargo customer certain cost components of its operations without markup. The cost of fuel, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer, at cost, and included in overnight air cargo revenue on the accompanying statements of income. These pass-through costs totaled $23.7 million and $23.6 million for the years ended March 31, 2020 and 2019, respectively.
Certain reclassifications have been made to the prior period amounts to conform to the current presentation.
Liquidity – The Contrail Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other intercompany transactions are reflectedthings, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the attributionnature of Delphaxits business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net income or losses to non-controlling interests because Delphax is a variable interest entity.The above-described attribution methodology applies only to our investments in Delphax. We establish the appropriate attribution methodology on an entity-specific basis.
Research and Development Costs – All research and development costs are expensed as incurred. The research and development costs for the period November 24, 2015 throughworth of $15 million. As of March 31, 2016 amounted $778,000. There were no research and development costs2020, Contrail's management believes based on forecasted results for the fiscal year ended March 31, 2015.
2021, it is probable that they may not be in compliance with the debt service coverage ratio for the quarter ended September 30, 2020. Non-compliance with a debt covenant that is not subsequently cured gives ONB the right to 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 as described in Note 14. Additionally, the Contrail Credit Agreement contains a provision whereby Contrail is required to pay down the total outstanding principal balance of the Contrail revolving credit facility to zero for at least thirty consecutive days during each fiscal year. With the next paydown requirement date on March 31, 2021, it is probable that Contrail may not be in compliance with this provision.
Contrail management is currently in discussion with ONB to obtain a waiver to its financial covenants and applicable paydown provision mentioned above, and/or secure alternative financing to avoid an event of non-compliance. With respect to alternative financing, Contrail intends to access debt financing under the Main Street Lending Program, established by the Federal Reserve in response to economic uncertainty caused by the COVID-19 pandemic. Main Street loans are intended to provide additional credit to companies that were in sound condition prior to the onset of the COVID-19 pandemic. While Contrail believes that they qualify under the criteria set forth under the Main Street Lending Program, there is no assurance that Contrail will obtain funding under the Main Street program or if such credit would be sufficient.
The obligations of Contrail under the Contrail Credit Agreement are also guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with other lenders. If Contrail were to cease operations, the Company believes it, along with the rest of its businesses, will continue to operate, given the maximum guarantee of Contrail’s obligations of $1.6 million, plus costs of collection.
Subsequent to March 31, 2020, the Company obtained loans under the PPP, as authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs. The Company may apply to MBT for forgiveness of the PPP Loan, however, forgiveness is not fully assured. The company believes it is probable that the cash on hand (including that obtained from the PPP), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
Recently AdoptedAccounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) as amended by multiple standards updates. The new standard provides that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
The Company adopted the standard in the fiscal year beginning April 1, 2019 using the modified retrospective transition method that does not require retrospective adjustment of the comparative periods. The Company reviewed existing leases to determine the impact of the adoption of the standard on its consolidated financial statements. Implementation had an immaterial cumulative effect on retained earnings. Adoption resulted in the recognition of right-of-use assets of approximately $10.7 million, and lease liabilities of approximately $11.2 million.
2.
| EARNINGS PER COMMON SHARE (AS RESTATED)
|
Basic earnings per share has been calculated by dividing
Upon adoption, the Company elected practical expedients related to a) short term lease exemption b) not separate lease and non-lease components c) not reassess whether expired or existing contracts contain leases, d) not reassess lease classification for existing or expired leases and e) not consider whether previously capitalized initial direct costs would be appropriate under the new standard.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables. The standard requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company adopted this standard on April 1, 2020. As of the date of adoption, the standard did not have a material impact on the Company's consolidated financial statements and disclosures. The Company will continue to assess the impact of this standard in fiscal year 2021.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step Two from the goodwill impairment test. Step Two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, an entity will recognize an impairment charge for the amount by which the carrying value of a reporting unit exceeds its fair value. The standard is effective for any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this amendment on April 1, 2020. As of the date of adoption, the amendment did not have a material impact on the Company's consolidated financial statements and disclosures. The Company will continue to assess the impact of this update in fiscal year 2021.
In October 2018, the FASB updated the Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities of the Accounting Standards Codification. The amendments in this update affect reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall. Indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures.
In December 2019, the FASB updated the Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes of the Accounting Standards Codification. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The amendments in this Update simplify the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income), among other changes. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures.
In January 2020, the FASB updated the Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04- Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions
affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the weighted average numberamendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of common shares outstandingDecember 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Further, in accordance with the amendments in this Update, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of this amendment on our contracts, hedging relationships, and other transactions affected by reference rate reform.
2. DISCONTINUED OPERATIONS
On September 30, 2019, the Company completed the sale of 100% of the equity ownership in GAS to PrimeFlight Aviation Services, Inc., a Delaware corporation. The agreement included a purchase price of $21.0 million as well as an earn-out provision of $4.0 million if certain performance metrics were achieved by March 31, 2020. The Company received approximately $20.5 million of total proceeds at closing after the initial net working capital adjustment, and has concluded that the performance metrics with regard to the earn-out provision have not been met. The Company recognized a pre-tax gain on the sale of GAS of approximately $10.5 million with tax impact of $2.3 million for a net of tax gain of $8.2 million during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. For thefiscal year ended March 31, 2016 all options2020. The gain is subject to acquire shareschange pending final transaction costs and net working capital adjustments. As of Air T, Inc. common stock were included in computing earnings per share because their effects were dilutive. The computationMarch 31, 2020, the settlement statement has not been finalized.
Summarized results of
earnings per common share is as follows:| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
| | | (As Restated)* | | | | | |
| | | | | | | | | |
Net earnings attributable to Air T, Inc. Stockholders, as previously reported | | $ | 4,943,065 | | | $ | 2,483,926 | |
Net earnings attributable to Air T, Inc. Stockholders, as restated | | $ | 4,413,910 | | | $ | 2,483,926 | |
Earnings Per Share: | | | | | | | | |
Basic, as previously reported | | $ | 2.08 | | | $ | 1.05 | |
Basic, as restated | | $ | 1.86 | | | $ | 1.05 | |
Diluted, as previously reported | | $ | 2.06 | | | $ | 1.04 | |
Diluted, as restated | | $ | 1.84 | | | $ | 1.04 | |
Weighted Average Shares Outstanding: | | | | | | | | |
Basic | | | 2,372,527 | | | | 2,359,610 | |
Diluted | | | 2,396,824 | | | | 2,379,928 | |
* Earnings per common share have been restatedoperations of GAS for the year ended March 31, 2016. See Note 1A.
Marketable securities at March 31, 2016 consisted2020 and 2019 through the date of investments in publicly traded companies with a fair valuedisposition are as follows (in thousands):
| | | | | | | | | | | |
| Year ended March 31, | | |
| March 31, 2020 | | March 31, 2019 |
| Net sales | $ | 16,637 | | | | $ | 34,332 | |
| Operating Expense | (17,319) | | | | (35,597) | |
| Loss from discontinued operations before income taxes | (682) | | | | (1,265) | |
| Income tax benefit | (568) | | | (259) | |
| Loss from discontinued operations, net of tax | $ | (114) | | | | $ | (1,006) | |
The following table presents summary balance sheet information of $9,656,000, an aggregate cost basis of $9,791,000, gross unrealized gains aggregating $422,000 and gross unrealized losses aggregating $557,000. Marketable securities at March 31, 2015 consisted of investments with a fair market value of $5,279,000, an aggregate cost basis of $5,490,000, gross unrealized gains aggregating $0 and gross unrealized losses aggregating $211,000. SecuritiesGAS that had been in a continuous unrealized loss position for less than 12 monthsis presented as discontinued operations as of March 31, 2016 had an aggregate fair value2019 (in thousands):
| | | | | | | |
| Assets: | | | March 31, 2019 |
| Cash and cash equivalents | | | $ | 107 | |
| Accounts receivable, net | | | 8,197 | |
| Income tax receivable | | | 16 | |
| Inventories, net | | | 2,512 | |
| Other current assets | | | 769 | |
| Current assets of discontinued operations | | | 11,601 | |
| Property and equipment, net | | | 554 | |
| Intangible assets, net | | | 228 | |
| Goodwill | | | 190 | |
| Other non-current assets | | | 292 | |
| Non-current assets of discontinued operations | | | 1,264 | |
| Liabilities: | | | | |
| Accounts payable | | | 1,144 | |
| Income tax payable | | | (226) | |
| Accrued expenses | | | 669 | |
| Current liabilities of discontinued operations | | | $ | 1,587 | |
The following table presents capital expenditures, depreciation and unrealized lossamortization and other significant operating non-cash items of $5,903,000our discontinued operations for fiscal 2020 and $163,000, respectively ($4,168,0002019 (in thousands):
| | | | | | | | | | | |
| Fiscal year | | |
| 2020 | | 2019 |
| Capital expenditures | 82 | | | | 151 | |
| Depreciation and amortization | 165 | | | | 446 | |
| Goodwill and asset impairments | 405 | | | | — | |
3. MAJOR CUSTOMER
Approximately 30% and $176,000, respectively,29% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2020 and 2019, respectively. Approximately 16% and 20% of the Company’s consolidated accounts receivable at March 31, 2015). Securities that had been in a continuous unrealized loss position for more than 12 months2020 and 2019, respectively, were due from FedEx Corporation.
4. BUSINESS COMBINATIONS
Acquisition of Worthington Aviation Parts, Inc.
On May 4, 2018, the Company completed the acquisition (the “Transaction”) of substantially all of the assets and assumed certain liabilities of Worthington Aviation Parts, Inc. (“Worthington”), pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated as of March 31, 2016 had an aggregate fair valueApril 6, 2018, by and unrealized lossamong the Company, Worthington, and Churchill Industries, Inc., as guarantor of $4,711,000Worthington’s obligations as disclosed in the Purchase Agreement.
Worthington is primarily engaged in the business of operating, distributing and
$395,000, respectively ($1,111,000selling airplane and
$35,000, respectively, at March 31, 2015).aviation parts along with repair services. The Company
realized gainsagreed to acquire the assets and liabilities in exchange for payment to Worthington of $50,000
and $9,000 from the sale of securities during the years ended March 31, 2016 and March 31, 2015, respectively.Inventories consistedas earnest money upon execution of the following:
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
Ground support service parts | | $ | 1,566,694 | | | $ | 938,072 | |
Ground equipment manufacturing: | | | | | | | | |
Raw materials | | | 1,549,810 | | | | 2,583,797 | |
Work in process | | | 408,213 | | | | 1,535,152 | |
Finished goods | | | 4,328,812 | | | | 3,045,761 | |
Printing equipment and maintenance | | | | | | | | |
Raw materials | | | 3,319,939 | | | | - | |
Work in process | | | 759,446 | | | | - | |
Finished goods | | | 562,912 | | | | - | |
Total inventories | | | 12,495,826 | | | | 8,102,782 | |
Reserves | | | (221,722 | ) | | | (313,133 | ) |
| | | | | | | | | |
Total, net of reserves | | $ | 12,274,104 | | | $ | 7,789,650 | |
PropertyPurchase Agreement and equipment consisteda cash payment of the following:
| | | March 31, | |
| | | 2016 | | | 2015 | |
Furniture, fixtures and improvements | | $ | 5,559,885 | | | $ | 4,931,748 | |
Equipment leased to customers | | | 2,898,639 | | | | 1,672,402 | |
| | | | 8,458,523 | | | | 6,604,150 | |
Less accumulated depreciation | | | (3,880,750 | ) | | | (4,032,650 | ) |
| | | | | | | | | |
Property and equipment, net | | $ | 4,577,774 | | | $ | 2,571,499 | |
6.
| INTANGIBLE ASSETS AND GOODWILL
|
Intangible assets as of March 31, 2016 are presented$3.3 million upon closing. Total consideration is summarized in the table below. below (in thousands):
| | | | | |
| Earnest money | $ | 50 | |
| Cash consideration | 3,300 |
| Cash acquired | (24) | |
| Total consideration | $ | 3,326 | |
The Company had no intangible assetsTransaction was accounted for as a business combination in accordance with ASC Topic 805 "Business Combinations." Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of May 4, 2018, with the endexcess of fair value of net assets acquired recorded as a bargain purchase gain. The most significant asset acquired was Worthington’s inventory. The following table outlines the consideration transferred and purchase price allocation at the respective estimated fair values as of May 4, 2018 (in thousands):
| | | | | |
| May 4, 2018 |
| |
| ASSETS | |
| Accounts receivable | $ | 1,929 | |
| Inventories | 4,564 | |
| Other current assets | 150 | |
| Property and equipment | 392 | |
| Other assets | 189 | |
| Intangible assets - tradename | 138 | |
| Total assets | 7,362 | |
| |
| LIABILITIES | |
| Accounts payable | 1,289 | |
| Accrued expenses | 175 | |
| Deferred tax liability | 589 | |
| Total liabilities | 2,053 | |
| |
| |
| Net assets acquired | $ | 5,309 | |
| |
| Consideration paid | $ | 3,350 | |
| Less: Cash acquired | (24) | |
| Bargain purchase gain | $ | 1,983 | |
The transaction resulted in a bargain purchase gain because Worthington was a non-marketed transaction and in financial distress at the time of the
prior fiscal year.| | | March 31, 2016 | |
| | | | | |
Tradenames | | $ | 120,000 | |
Patents | | | 1,090,000 | |
| | | | 1,210,000 | |
Less accumulated amortization and impairment | | | (100,888 | ) |
Intangible assets, net | | $ | 1,109,112 | |
Amortizationacquisition. The seller engaged in a formal bidding process and determined that the Company was the best option for Worthington. The tax impact related to the bargain purchase gain was to record a deferred tax liability and record tax expense against the bargain purchase gain of approximately $0.6 million. The resulting net bargain purchase gain after taxes was approximately $51,000 for the period November 24, 2015 through March 31, 2016. There is no amortization expense for the year ended March 31, 2015 as all intangibles were acquired through the Company’s investment in Delphax on November 24, 2015. The Company’s consolidated statement of income for the year ended March 31, 2016 reflects a tradename impairment charge in the amount of $50,000.
Annual future amortization expense for these intangible assets is as follows:
Year ending March 31, | | | | |
2017 | | $ | 135,111 | |
2018 | | | 135,111 | |
2019 | | | 135,111 | |
2020 | | | 135,111 | |
2021 | | | 126,695 | |
Thereafter | | | 441,973 | |
| | | $ | 1,109,112 | |
The Company provisionally recorded goodwill of approximately $375,000$2.0 million. Total transaction costs incurred in connection with its investment in Delphax (Note 8). The Company estimated a subsequent impairment of this goodwill in the amount of $100,000 which has been reflected in the accompanying fiscal year 2016 consolidated financial statements.
Accrued expenses consisted of the following:
| | | March 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | | |
Salaries, wages and related items | | $ | 3,288,169 | | | $ | 1,571,347 | |
Profit sharing | | | 1,769,261 | | | | 1,088,089 | |
Health insurance | | | 353,825 | | | | 405,826 | |
Warranty reserves | | | 266,455 | | | | 231,803 | |
Other | | | 1,165,164 | | | | 232,386 | |
Total | | $ | 6,842,874 | | | $ | 3,529,451 | |
8.
| ACQUISITION OF INTERESTS IN DELPHAX (AS RESTATED)
|
Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the "Securities Purchase Agreement") among the Company, Delphax Technologies, Inc. and its subsidiary, Delphax Technologies Canada Limited ("Delphax Canada"), on November 24, 2015 (the "Closing Date"), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the "Senior Subordinated Note") issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax's Series B Preferred Stock (the "Series B Preferred Stock") and a Stock Purchase Warrant (the "Warrant") to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events).
Principal under the Senior Subordinated Note is due on October 24, 2020 and bears interest at an annual rate of 8.5%. Interest is to be paid in kind until, in the absence of specified events, November 24, 2017. Thereafter, interest is to be paid in cash. Interest in kind is to be paid monthly, while interest payable in cash is to be paid quarterly. The Senior Subordinated Note is guaranteed by Delphax and is secured by security interests granted by Delphax and Delphax Canada in their respective inventories, equipment, accounts receivable, cash, deposit accounts, contract rights and other specified property, as well as a pledge by Delphax of the outstanding capital stock of its subsidiaries, including Delphax Canada. Pursuant to the terms of a subordination agreement (the "Subordination Agreement") entered into on October 2, 2015 by Delphax, Delphax Canada, the Company and the senior lender (the "Senior Lender") that provides a revolving credit facility under an agreement with Delphax and Delphax Canada (the "Senior Credit Agreement"), the Company's rights with respect to payment under and enforcement of the Senior Subordinated Note, and enforcement of its security interests are subordinated to the rights of the Senior Lender under the Senior Credit Agreement.
Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax's employee stock option plans at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company representacquisition were approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company and approximately 31% of the outstanding shares of common stock assuming conversion of the Series B Preferred Stock and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax's employee stock option plans.
Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Series B Preferred Stock and interests in the Warrant sufficient to permit it to acquire up to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock acquired in connection with the exercise of the Warrant equal to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant), then
● holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and exercise rights of removal and replacement with respect to) three-sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and to exercise rights of removal and replacement with respect to) four-sevenths of the members of the board of directors of Delphax; and
● without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions.
$83,000. Pursuant to the provision described above, beginning on November 24, 2015, three designees of the Company were elected to the board of directors of Delphax, which had a total of seven members following their election.
The Warrant expires on November 24, 2021. In the event that Delphax were to declare a cash dividend on its common stock, the Warrant provides that the holder of the Warrant would participate in the dividend as if the Warrant had been exercised in full and the shares of Series B Preferred Stock acquired upon exercise had been fully converted into Delphax common stock. The Warrant provides that, prior to any exercise of the Warrant, the holder of the Warrant must first make a good faith written tender offer to existing holders of Delphax common stock to purchase an aggregate amount of common stock equal to the number of shares of common stock issuable upon conversion of the Series B Preferred Stock that would be purchased upon such exercise of the Warrant. The Warrant requires that the per share purchase price to be offered in such tender offer would be equal to the then-current exercise price of the Warrant divided by the then-current conversion rate of the Series B Preferred Stock. To the extent that shares of common stock are purchased by the holder in the tender offer, the amount of shares of Series B Preferred Stock purchasable under the Warrant held by such holder is to be ratably reduced. The Warrant is to provide that it may be exercised for cash, by surrender of principal and interest under the Senior Subordinated Note equal to 0.95 times the aggregate exercise price or by surrender of a portion of the Warrant having a value equal to the aggregate exercise price based on the difference between the Warrant exercise price per share and an average market value, measured over a 20-trading day period, of Delphax common stock that would be acquired upon conversion of one share of Series B Preferred Stock.
As a result of the above transactions, the Company determined that it had obtained control over Delphax and it included Delphax in its consolidated financial statements beginning on November 24, 2015.
The following table summarizes the provisional fair values of consolidated Delphax assets and liabilities as of the Closing Date:
| | | November 24, 2015 | |
| | | | | |
ASSETS | | | | |
Cash and cash equivalents | | $ | 586,061 | |
Accounts receivable | | | 1,740,210 | |
Inventories | | | 3,972,802 | |
Other current assets | | | 693,590 | |
Property and equipment | | | 722,714 | |
Intangible assets - trade name | | | 120,000 | |
Intangible assets - patents | | | 1,090,000 | |
Goodwill | | | 375,408 | |
Total assets | | $ | 9,300,785 | |
| | | | | |
LIABILITIES | | | | |
Accounts payable | | $ | 1,663,199 | |
Accrued expenses | | | 1,949,522 | |
Income tax payable | | | 11,312 | |
Debt | | | 3,313,317 | |
Other long-term liabilities | | | 650,500 | |
Total liabilities | | $ | 7,587,850 | |
| | | | | |
| | | | | |
Net Assets | | $ | 1,712,935 | |
The Company determined that it was reasonable to use the price which it paid for its equity interest as the basis for estimating the total fair value of Delphax’s equity as of November 24, 2015 acquisition date. The effect of the Company’s equity and debt investments of $1,050,000 and $2,500,000, respectively, are not reflected in the above table. As such, the amounts presented reflect the provisional fair values of Delphax’s assets and liabilities immediately prior to the Company’s investments. The net assets amount presented above is the estimated acquisition date fair value of the non-controlling interests in Delphax.
Delphax’s debt immediately prior to the acquisition included approximately $508,000 due under the 90-Day Senior Subordinated Note. The goodwill is not tax deductible for income tax purposes.
The Company’s initial accounting for its acquisition of interests in Delphax was, as of the date of the Original Filing incomplete. Therefore, as permitted by the applicable accounting guidance, the above amounts are provisional. Determination of the acquisition date fair values of certain of Delphax assets and liabilities, particularly inventories and the ARO liability (see Note 1) involves significant management judgment and is a time-intensive undertaking. The Company anticipates finalizing its accounting of this business combination in the first quarter of fiscal year 2017, but by no later than the end of the second fiscal 2017 quarter.
Direct costs relating to the above transactions of $110,000 were expensed as incurred during the year ended March 31, 2016, and are included in the general and administrative expenses in the consolidated statements of income and comprehensive income.
Pro forma financial information is not presented as the results are not material to the Company’sCompany’s consolidated financial statements.
9.
| VARIABLE INTEREST ENTITIES (AS RESTATED)
|
5. VARIABLE INTEREST ENTITIES
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810 - Consolidation, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both: | ●
| the power to direct the activities that most significantly impact the economic performance of the VIE; and
|
| ●
| the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
|
As described in Note 8,
•the Company acquired Delphax Series B Preferred Stock, loaned fundspower to Delphax,direct the activities that most significantly impact the economic performance of the VIE; and acquired
•the Warrant. In accordance with ASC 810,right to receive benefits from, or the Company evaluated whether Delphax was aobligation to absorb losses of, the VIE as of November 24, 2015. Based principally onthat could be potentially significant to the fact that the Company granted Delphax subordinated financial support, the Company determined that Delphax was a VIE on that date. Therefore, it was necessary for the Company to assess whether it held any “variable interests”, as defined in ASC 810, in Delphax. VIE.
The Company concluded that its investments in
Delphax’sDelphax’s equity and debt, and its investment in the Warrant,Delphax warrant, each constituted a variable interest. Based on its determination that it held variable interests in a VIE, the Company was required to assess whether it was Delphax’s “primary beneficiary”, as defined in ASC 810.After considering all relevant facts and circumstances,In addition, the Company concluded that it became the primary beneficiary of Delphax on November 24, 2015. While various factors informed the Company’s determination, the Company assigned considerable weight to both 1) the shortness of time until June 1, 2016 when the Company would become entitled to elect four-sevenths of the members of the board of directors of Delphax and 2) the anticipated financial significance of Delphax’s activities in the periods subsequent to June 1, 2016. Since the Company became Delphax’s primary beneficiary on November 24, 2015, theThe Company consolidated Delphax in its consolidated financial statements beginning on that date.
Refer
Upon petition by the Company, on August 8, 2017 the Ontario Superior Court of Justice in Bankruptcy and Insolvency adjudged Delphax Canada to Note 8 forbe bankrupt. As a result, Delphax Canada ceased to have capacity to deal with its property, which
then vested in the
provisional fair valuetrustee in bankruptcy of
Delphax Canada subject to the rights of secured creditors. As of June 30, 2019, the bankruptcy proceedings were finalized in accordance with Canadian law and, therefore, Delphax Canada was legally discharged of its liabilities. The conclusion of the bankruptcy proceedings also resulted in the dissolution of Delphax Canada. In addition, on June 11, 2019, the Company also fully dissolved Delphax UK. As such, the only Delphax entity that remains in existence as of March 31, 2020 is Delphax France. The Company extinguished the assets and liabilities of Delphax
Canada and Delphax UK during the quarter ended June 30, 2019 and recognized a gain on
the acquisition date.dissolution of entities of $4.5 million.
The following table sets forth theDelphax had total assets and liabilities with carrying values of Delphax’s assets$0 million and liabilities$0.5 million, as of March 31, 2016:
| | | March 31, 2016 | |
| | | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 249,528 | |
Accounts receivable, net | | | 1,433,494 | |
Inventories | | | 4,642,298 | |
Other current assets | | | 1,034,067 | |
Total current assets | | | 7,359,387 | |
Property and equipment | | | 625,684 | |
Intangible assets | | | 1,109,112 | |
Goodwill | | | 275,408 | |
Other Assets | | | 26,020 | |
Total assets | | $ | 9,395,611 | |
| | | | | |
LIABILITIES | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 1,684,802 | |
Income tax payable | | | 11,312 | |
Accrued expenses | | | 1,926,340 | |
Short-term debt | | | 1,859,300 | |
Total current liabilities | | | 5,481,754 | |
Long-term debt | | | 2,581,107 | |
Other long-term liabilities | | | 606,358 | |
Total liabilities | | $ | 8,669,219 | |
| | | | | |
| | | | | |
Net Assets | | $ | 726,392 | |
Long-term debt2020 and $0.4 million and $7.1 million, as reflected in the above table includes approximately $76,000 of accrued interest, due to the Company from Delphax Canada under the Senior Subordinated Note. This debt and accrued interest was eliminated for purposes of the Company’s accompanying March 31, 2016 consolidated balance sheet.
The assets2019.
Delphax’s components of
Delphax can only be used to satisfy the obligations of Delphax. Furthermore, Delphax’s creditors do not have recourse to the assets of Air T, Inc. or its subsidiaries.Delphax’s revenues and expensesnet income (loss) are included in our consolidated financial statements beginning November 24, 2015. Revenues and expenses prior to the date of initial consolidation are excluded. The following table sets forth the revenue and expenses of Delphax that are included in the Company’s consolidated statements of income and comprehensive income herein. For the years ended March 31, 2020 and 2019, Delphax did not recognize any revenue. For the year ended March 31, 2020, Delphax recorded net income of $6.1 million, broken out between an operating loss of $0.2 million and non-operating income of $6.3 million, the majority of which was the result of the gain on dissolution of entities of $4.5 million. For the year ended March 31, 2019, Delphax recorded net loss of $0.5 million, broken out between an operating loss of $0.3 million and non-operating expense of $0.2 million.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and reports financial assets and liabilities at fair value, on a recurring basis. Fair value measurement is classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following consolidated balance sheet items are measured at fair value (in thousands):
| | | | | | | | | | | |
| Fair Value Measurements at March 31, | | |
| 2020 | | 2019 |
| Marketable securities (Level 1) | $ | 3,240 | | | $ | 3,213 | |
| Interest rate swaps (Level 2) | $ | 914 | | | $ | 227 | |
| Acquisition contingent consideration obligations (Level 3) | $ | — | | | $ | 489 | |
| Redeemable non-controlling interest (Level 3) | $ | 6,080 | | | $ | 5,476 | |
The fair values of our interest rate swaps are based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instruments are held, the derivatives are classified as Level 2 in the hierarchy.
The fair value of the acquisition contingent consideration obligations is based on a discounted cash flow analysis using projected EBITDA over the earn-out period and is classified as Level 3 in the hierarchy.
The fair value of the redeemable non-controlling interest is based on a combination of market approach and income approach and is classified as Level 3 in the hierarchy.
The fair value measurements which use significant observable inputs (Level 3), changed due to the following (in thousands):
| | | | | | | | | | | |
| Acquisition
Contingent
Consideration
Obligations | | Redeemable Non-
Controlling
Interest |
| Beginning Balance as of April 1, 2019 | $ | 489 | | | $ | 5,476 | |
| Payment of contingent consideration | (489) | | | — | |
| Contribution from non-controlling member | — | | | — | |
| Distribution to non-controlling member | — | | | (961) | |
| Net income attributable to non-controlling interests | — | | | 1,586 | |
| Fair value adjustment | — | | | (21) | |
| Interest accrued on contingent consideration | — | | | | |
| Ending Balance as of March 31, 2020 | $ | — | | | $ | 6,080 | |
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable approximate their fair value at March 31, 2020 and 2019.
7. INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Ground equipment manufacturing: | | | |
| Raw materials | 4,192 | | | 2,498 | |
| Work in process | 2,731 | | | 1,659 | |
| Finished goods | 1,725 | | | 972 | |
| Printing equipment and maintenance: | | | |
| Raw materials | 464 | | | 401 | |
| Finished goods | 910 | | | 1,048 | |
| Commercial jet engines and parts: | 51,084 | | | 21,032 | |
| Total inventories | 61,106 | | | 27,610 | |
| Reserves | (483) | | | (155) | |
| | | |
| Total, net of reserves | $ | 60,623 | | | $ | 27,455 | |
8. ASSETS ON LEASE
The Company leases equipment to third parties, primarily through Contrail which leases engines to aviation customers with lease terms between 2 and 3 years under operating lease agreements. All rental payments are fixed. For the assets currently on lease, there are no options for the lessees to purchase the assets at the end of the leases.
As of March 31, 2020, future fixed rental payments to be received under non-cancelable leases are as follows (in thousands):
| | | | | |
| Year ended March 31, | |
| 2021 | $ | 1,172 | |
| 2022 | 83 | |
| 2023 | 61 | |
| 2024 | 6 | |
| 2025 | — | |
| Thereafter | — | |
| Total | $ | 1,322 | |
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Furniture, fixtures and improvements | $ | 7,633 | | | $ | 6,100 | |
| Building | 1,958 | | | 1,634 | |
| 9,591 | | | 7,734 | |
| Less accumulated depreciation | (4,319) | | | (3,470) | |
| Property and equipment, net | $ | 5,272 | | | $ | 4,264 | |
10. INVESTMENTS IN SECURITIES
During the year ended March 31, 2020, the Company had gross unrealized gains aggregating to $8,360 and gross unrealized losses aggregating to $0.5 million, which are included in the Consolidated Statements of Income.
11. EQUITY METHOD INVESTMENTS
The Company’s investment in Insignia is accounted for under the equity method of accounting. The Company has elected a three-month lag upon adoption of the equity method. At March 31, 2019, the Company held approximately 3.5 million shares of Insignia’s common stock representing approximately 30% of the outstanding shares for a total net investment basis of approximately $5.2 million. For the year ended March 31, 2019, the Company recorded approximately $0.4 million as its share of Insignia’s net income along with a basis difference adjustment of approximately $92,000.
At March 31, 2020, the Company held approximately 3.5 million of Insignia’s common stock representing approximately 29% of the outstanding shares. For the year ended March 31, 2020, the Company recorded a loss of approximately $1.5 million as its share of Insignia’s net loss for the twelve months ended December 31, 2019 along with a basis difference adjustment of $96,000. In addition, due to adverse financial results in addition to consideration of analyst reports and other qualitative factors, the Company recorded total impairment charges of $2.3 million on the investment for the year ended March 31,
2016:| | | From November 24, 2015 through March 31, 2016 | |
| | | | | |
| | | | | |
Operating Revenues | | $ | 3,954,797 | |
| | | | | |
Operating Expenses: | | | | |
Cost of sales | | | 3,611,024 | |
General and administrative | | | 1,218,564 | |
Research and development | | | 777,942 | |
Depreciation, amortization and impairment | | | 313,893 | |
| | | | 5,921,423 | |
Operating Loss | | | (1,966,626 | ) |
| | | | | |
Non-operating Loss | | | (21,111 | ) |
| | | | | |
Loss Before Income Taxes | | | (1,987,737 | ) |
| | | | | |
Income Taxes | | | - | |
| | | | | |
Net Loss | | $ | (1,987,737 | ) |
Non-operating income,2020. The Company's net includes interest expenseinvestment basis in Insignia is approximately $1.3 million as of approximately $76,000 associated withMarch 31, 2020.
On November 8, 2019, the Senior Subordinated Note. This interest expense was eliminated for purposesCompany made an investment of $2.8 million to purchase a 19.90% ownership stake in CCI. The Company concluded that we are not the primary beneficiary of CCI, which is primarily the result of the Company’s accompanying consolidated statementsCompany's conclusion that it does not have the power to direct the activities that most significantly impact the economic performance of incomeCCI. Accordingly, the Company does not consolidate CCI and comprehensive incomehas determined to account for this investment using equity method accounting.
Due to the differing fiscal year-ends, the Company has elected a three-month lag to record the CCI investment at cost, with a basis difference of $0.3 million. For the year ended March 31,
2016.We determined2020, Air T recorded income of $0.6 million as its share of CCI's net income for the three months ended December 31, 2019 prorated for the period under Air T's ownership, along with a basis difference adjustment of $6,042.
Summarized audited financial information for the Company's equity method investees for the twelve months ended December 31, 2019 and December 31, 2018 are as follows (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended
December 31, 2019 | | Twelve Months Ended December 31, 2018 |
| Revenue | $ | 108,751 | | | $ | 135,345 | |
| Gross Profit | 7,570 | | | 22,734 | |
| Operating income (loss) | (2,653) | | | 3,340 | |
| Net income (loss) | (3,645) | | | 2,486 | |
| Net income attributable to Air T, Inc. stockholders | $ | (887) | | | $ | 391 | |
12. ACCRUED EXPENSES
| | | | | | | | | | | |
| Year ended March 31, | | |
| (In thousands) | 2020 | | 2019 |
| | | |
| Salaries, wages and related items | $ | 3,616 | | | $ | 6,049 | |
| Profit sharing and bonus | 3,349 | | 2,077 |
| Other deposits | 1,722 | | 1,526 |
| Other | 4,337 | | 4,523 |
| Total | $ | 13,024 | | | $ | 14,175 | |
13. LEASE ARRANGEMENTS
The Company has operating leases for the use of real estate, machinery, and office equipment. The majority of our leases have a lease term of 2 to 5 years; however, we have certain leases with longer terms of up to 30 years. Many of our leases include options to extend the lease for an additional period.
The lease term for all of the Company’s leases includes the non-cancellable period of the lease, plus any additional periods covered by either a Company option to extend the lease that the attributionCompany is reasonably certain to exercise, or an option to extend the lease controlled by the lessor that is considered likely to be exercised.
Payments due under the lease contracts include fixed payments plus, for some of Delphax net incomeour leases, variable payments. Variable payments are typically operating costs associated with the underlying asset and are recognized when the event, activity, or loss should be basedcircumstance in the lease agreement on considerationwhich those payments are assessed occurs. Our leases do not contain residual value guarantees.
The Company has elected to combine lease and non-lease components as a single component and not to recognize leases on the balance sheet with an initial term of one year or less.
The interest rate implicit in lease contracts is typically not readily determinable, and as such the Company utilizes the incremental borrowing rate to calculate lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease cost for the twelve months ended March 31, 2020 are as follows (in thousands):
| | | | | |
| Twelve Months Ended March 31, 2020 |
| Operating lease cost | 2,093 | |
| Short-term lease cost | 439 | |
| Variable lease cost | 342 | |
| Sublease income | — | |
| Total lease cost | $ | 2,874 | |
Amounts reported in the consolidated balance sheets for leases where we are the lessee as of the year ended March 31, 2020 were as follows (in thousands):
| | | | | |
| March 31, 2020 |
| Operating leases | |
| Operating lease ROU assets | 8,116 |
| Operating lease liabilities | 8,647 |
| |
| Weighted-average remaining lease term | |
| Operating leases | 14 years, 4 months |
| |
| Weighted-average discount rate | |
| Operating leases | 4.50 | % |
Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the year ended March 31, 2020 are as follows (in thousands):
| | | | | |
| Operating Leases |
| 2021 | $ | 1,624 | |
| 2022 | 1,512 |
| 2023 | 1,331 |
| 2024 | 960 |
| 2025 | 694 |
| Thereafter | 6,388 |
| Total undiscounted lease payments | 12,509 |
| Less: Interest | (3,299) | |
| Less: Discount | (563) | |
| Total lease liabilities | $ | 8,647 | |
14. FINANCING ARRANGEMENTS
On February 25, 2020, the Company and Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”), entered into Amendment No. 3 to the Amended and Restated Credit Agreement (the “Third Amendment”). The Third Amendment extends the termination date for the revolving credit commitment and the supplemental revolving credit commitment to the earlier of August 31, 2021, the date the Company reduces the respective commitment to zero or termination due to an event of default. Thirteen of the Company’s subsidiaries continue to, jointly and severally, guaranty the full and prompt payment and performance of all debts and obligations of Air T’s investmentsthe Company to MBT and continue to grant a first priority security interest in Delphaxeach subsidiary’s assets to MBT as collateral for such obligations.
On February 25, 2020, AirCo 1, LLC, entered into Amendment No. 1 to the Loan Agreement with MBT (the “First Amendment”). The First Amendment extends the stated termination date of the revolving facility to August 31, 2021.
Borrowings of the Company and Delphax Canada. As disclosed in Note 2,its subsidiaries are summarized below at March 31, 2020 and March 31, 2019, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Maturity Date | | Interest Rate | | Unused commitments |
| Air T Debt | | | | | | | | | |
| Revolver - MBT | $ | — | | | $ | 12,403 | | | 8/31/21 | | Prime - 1% | | $ | 17,000 | |
| Term Note A - MBT | 7,750 | | | 8,750 | | | 1/1/28 | | 1-month LIBOR + 2% | | |
| Term Note B - MBT | 3,875 | | | 4,375 | | | 1/1/28 | | 4.50% | | |
| Term Note D - MBT | 1,540 | | | 1,607 | | | 1/1/28 | | 1-month LIBOR + 2% | | |
| Debt - Trust Preferred Securities | 12,877 | | | — | | | 6/7/49 | | 8.00% | | |
| Supplemental Revolver - MBT | 9,550 | | | — | | | 6/30/20 | | Greater of 1-month LIBOR + 1.25% and 3% | | 450 | |
| Total | 35,592 | | | 27,135 | | | | | | | |
| | | | | | | | | |
| AirCo Debt | | | | | | | | | |
| Revolver - MBT | — | | | 3,820 | | | 5/21/19 | | 7.50% | | | |
| Revolver - MBT | 8,335 | | | — | | | 8/31/21 | | Greater of 6.5% or Prime + 2% | | 1,665 | |
| Term Loan - MBT | — | | | 450 | | | 12/17/19 | | 7.50% | | |
| Term Loan - MBT | — | | | 400 | | | 6/17/20 | | 7.25% | | |
| Term Loan - Park State | — | | | 2,100 | | | 6/17/20 | | 8.50% | | |
| Total | 8,335 | | | 6,770 | | | | | | | |
| | | | | | | | | |
| Contrail Debt | | | | | | | | | |
| Revolver - ONB | 21,284 | | | — | | | 9/5/211 | | 1-month LIBOR + 3.45% | | 18,716 | |
| Term Loan A - ONB | 6,285 | | | 8,617 | | | 1/26/21 | | 1-month LIBOR + 3.75% | | |
| Term Loan B - ONB | — | | | 15,500 | | | 9/14/21 | | 1-month LIBOR + 3.75% | | |
| Term Loan D - ONB | — | | | — | | | 10/30/21 | | 1-month LIBOR + 3.75% | | |
| Term Loan E - ONB | 6,320 | | | — | | | 12/1/22 | | 1-month LIBOR + 3.75% | | |
| Term Loan F - ONB | 8,358 | | | — | | | 2/1/25 | | 1-month LIBOR + 3.75% | | |
| Total | 42,247 | | | 24,117 | | | | | | | |
| | | | | | | | | |
| Total Debt | 86,174 | | | 58,022 | | | | | | | |
| | | | | | | | | |
| Less: Unamortized Debt Issuance Costs | (354) | | | (369) | | | | | | | |
| Total Debt, net | $ | 85,820 | | | $ | 57,653 | | | | | | | |
1 The Contrail revolving credit facility contains a provision where Contrail is required to pay down the Warrant provides thattotal outstanding principal balance of its revolver to zero for at least thirty consecutive days during each annual period ending on the revolver's anniversary. Due to this requirement, the entire outstanding balance of the revolver as of March 31, 2020 was classified as "Current portion of long-term debt" on the Consolidated Balance Sheets, and included in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses. The effect of interest expense arising under the Senior Subordinated Note and of other intercompany transactions are reflected in the attribution of Delphax net income or losses to non-controlling interests because Delphax is a VIE.As a result of the application of the above-described attribution methodology, for thecontractual financing obligations due by fiscal year ended March 31, 2016, the attribution of Delphax losses to non-controlling interests was 33%.
10.
| FINANCING ARRANGEMENTS
|
As2021 below.
The weighted average interest rate on short term borrowings outstanding as of March 31, 2016, the Company had a senior secured2020 and March 31, 2019 was 3.7% and 5.3%, respectively.
The Air T revolving credit facility
of $20.0 million (the “Revolving Credit Facility”). The Revolving Credit Facility includes a sublimit for issuances of letters of credit of up to $500,000. Under the Revolving Credit Facility, each of the Company, MAC, CSA, GGS, GAS and ATGL may make borrowings. Initially, borrowings under the Revolving Credit Facility bear interest (payable monthly) at an annual rate of one-month LIBOR plus 1.50%, although the interest rates under the Revolving Credit Facility are subject to incremental increases based on a consolidated leverage ratio. In addition, a commitment fee accrues with respect to the unused amount of the Revolving Credit Facility at an annual rate of 0.15%. The Company includes commitment fee expense within the interest expense and other line item of the accompanying consolidated statements of income. Amounts applied to repay borrowings under the Revolving Credit Facility may be reborrowed, subject to the terms of the facility. The Revolving Credit Facility matures on April 1, 2017.Borrowings under the Revolving Credit Facility, together with hedging obligations, if any owing to the lender under the Revolving Credit Facility or any affiliate of such lender, are secured by a first-priority security interest in substantially all assets of the Company and the other borrowers (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing), but excluding interests in real property.
The agreement governing the Revolving Credit Facility containsContrail revolving credit facility contain affirmative and negative covenants, including covenants that restrict the ability of the Company and the other borrowersits subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of theirits business, enter into certain operating leases, and make certain capital expenditures. engage in transactions with affiliates.
The
obligations of Contrail under the Contrail Credit Agreement
with Old National Bank are secured by a first-priority security interest in substantially all of the assets of Contrail. The obligations of Contrail under the Contrail Credit Agreement are also
contains financial covenants, including a minimum consolidated tangible net worth of $22.0 million, a minimum consolidated fixed charge coverage ratio of 1.35guaranteed by the Company, up to
1.0, a minimum consolidated asset coverage ratio of 1.75 to 1.0, and a maximum
consolidated leverage ratio of
3.5 to 1.0. The agreement governing the Revolving Credit Facility contains events$1.6 million, plus costs of
default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, certain changes of control of the Company, termination of, or modification to materially reduce the scope of the services required to be provided under, certain agreements with FedEx, and the occurrence of a material adverse effect upon the Company and the other borrowers as a whole.collection. The Company is exposednot liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to changesContrail’s debt in interest rates on its prior lineany of credit and its current revolving credit facility. If the LIBOR interest rate had been increased by one percentage point, based on the weighted average balance outstanding for the year, the change in annual interest expense would have been negligible. No borrowings were outstanding under the credit facility onCompany’s debt agreements with MBT.
At March 31,
2016.Amounts advanced under the credit facility bear interest at the 30-day “LIBOR” rate plus 150 basis points. The LIBOR rate at March 31, 2016 was approximately .44%. 2020, our contractual financing obligations, including payments due by period, are as follows (in thousands):
| | | | | | | | |
| Fiscal year ended | | Amount |
| 2021 | | $ | 42,684 | |
| 2022 | | 13,901 | |
| 2023 | | 4,991 | |
| 2024 | | 3,267 | |
| 2025 | | 3,126 | |
| Thereafter | | 18,205 | |
| | 86,174 | |
| Less: Unamortized Debt Issuance Costs | | (354) | |
| | $ | 85,820 | |
The Company
wasassumes various financial obligations and commitments in
compliance with all covenantsthe normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under
this credit facility at March 31, 2016.existing contractual arrangements such as debt and lease agreements.
Fair Value of Debts—As of March 31, 2016, Delphax maintained a debt facility consisting of a $7.0 million revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable2020 and inventory. Because Delphax’s senior credit facility prohibits2019, the payment of cash dividends, the facility is not a source of liquidity to Air T, Inc. or any of its subsidiaries. Neither Air T nor any of its subsidiaries is a guarantor of Delphax’s obligations under its senior credit facility.The Delphax senior credit facility is secured by substantially all of its North American assets, expires in November 2018, prohibits payment of cash dividends by Delphax and is subject to certain financial covenants. The Delphax senior credit facility provides for interest based upon the prime rate plus a margin (4.25% as of March 31, 2016). As of March 31, 2016, Delphax had aggregate borrowings of $1,833,000 outstanding under its senior credit facility, with a borrowing base that would have permitted additional borrowings of approximately $800,000. Delphax has advised that at March 31, 2016 it was not in compliance with financial covenants under the agreement governing its senior credit facility. Due to Delphax’s non-compliance with financial covenants, the lender has the contractual right to cease permitting borrowings under the facility and to declare all amounts outstanding under the senior credit facility due and payable immediately. As of the date of this report the lender has neither made such declaration, nor waived its right to do so and Delphax has continued to make borrowings under the senior credit facility. As of the date of this report, Delphax has not regained compliance with these financial covenants. In the event that Delphax is denied access to additional borrowings under the senior credit facility, unless it obtains access to other adequate sources of liquidity, which may include cash from operations, Delphax may be unable to adequately fund its operations or pay its debts as they come due. Delphax has recently implemented cost-savings initiatives, including employee furloughs, to minimize ongoing cash needs.
The Company has operating lease commitments for office equipment and its office and maintenance facilities. The Company leases its corporate offices from a company controlled by certain of the Company’s former officers and directors. The lease for this facility provides for monthly rent of $14,862 and expires on January 31, 2018, though the lease may be renewed by us for three additional two-year option periods through January 31, 2024.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located in Kinston, North Carolina under an agreement that extends through January 2023, with the option to extend the lease for four additional five-year periods thereafter. The Company has calculated rent expense under the current lease term.
GGS leases its production facility under an agreement that extends through August 2019.
GAS leases several maintenance facilities across the country and an administrative office in Eagan, Minnesota. Most of the leases are on one year agreements with renewal clauses, but some of these are multi-year leases extending out as far as March 2021.
Delphax leases its production facility in Mississauga, Ontario under an agreement extending through August 2018. Annual rents remaining under the agreement are CDN $384,000 (approximately $222,000 using the March 31, 2016 exchange rate) per year. In addition, Delphax is obligated to pay as additional rent the related operating expenses of the landlord. Under the terms of the lease, Delphax is also subject to a facility restoration obligation (see Note 1).
Delphax has office space in the United Kingdom under an operating lease that extends through January 2017. The annual lease payment for this facility is £62,400 (approximately $90,000 using the March 31, 2016 exchange rate). In addition to the contracted lease amount, the lease payments include a pro rata portion of the operating expenses incurred by the landlord.
At March 31, 2016, future minimum annual lease payments (foreign currency amounts translated using applicable March 31, 2016 exchange rates) under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
Year ended March 31, | | | | |
2017 | | $ | 3,278,000 | |
2018 | | | 2,611,000 | |
2019 | | | 1,660,000 | |
2020 | | | 1,018,000 | |
2021 | | | 564,000 | |
Thereafter | | | 632,000 | |
Total minimum lease payments | | $ | 9,763,000 | |
The Company’s rent expense excluding Delphax for operating leases totaled approximately $3,038,000 and $2,309,000 for fiscal 2016 and 2015, respectively, and includes amounts to related parties of $178,000 and $177,000 in fiscal 2016 and 2015, respectively. Delphax’s rent expense from November 24, 2015 through March 31, 2016 totaled approximately $226,000.
12.
| EQUIPMENT LEASED TO CUSTOMERS
|
The Company leases equipment to third parties. As of March 31, 2016, minimum future rentals under non-cancelable operating leases are as follow:
Year ended March 31, | | | | |
2017 | | $ | 206,000 | |
2018 | | | 46,040 | |
2019 | | | 46,040 | |
2020 | | | 46,040 | |
2021 | | | 46,040 | |
Thereafter | | | 3,837 | |
Total minimum lease payments | | $ | 393,994 | |
Delphax leases a printer to a third party under an operating lease agreement entered into in June 2015. The term of this lease extends through May 2018. This agreement provides for monthly rent of $20,000. At March 31, 2016, future minimum annual lease payments receivable are as follows:
Year ended March 31, | | | | |
2017 | | $ | 240,000 | |
2018 | | | 240,000 | |
2019 | | | 40,000 | |
| | | $ | 520,000 | |
13.
| FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company measures and reports financial assets and liabilities at fair value, on a recurring basis. Fair value measurement is classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The Company’s assets and liabilities measured at fair value (all Level 1 categories) were as follows:
| | | Fair Value Measurements at March 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | | |
Marketable securities | | $ | 9,655,915 | | | $ | 5,278,752 | |
The carrying amounts reported in the consolidated balance sheets for cashthe Company’s debt instruments approximate the fair values. Estimated fair values are determined by comparing current borrowing rates and cash equivalents, accounts receivable, notes receivable and accrued expenses approximate theirrisk spreads offered in the market (Level 2 fair value atmeasures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debts.
Interest Expense, net - The components of net interest expense during the years ended March 31, 20162020 and 2015.14.
| AIR T, INC. STOCKHOLDERS’ EQUITY
|
March 31, 2019 are as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2020 | | March 31, 2019 |
| Contractual interest | 4,458 | | | 3,291 | |
| Amortization of deferred financing costs | 237 | | | 194 | |
| Interest income | (3) | | | (58) | |
| Total | 4,692 | | | 3,427 | |
Other - On June 10, 2019, the Company completed a transaction with all holders of the Company’s Common Stock to receive a special, pro-rata distribution of the securities enumerated below:
•A dividend of one additional share for every two shares already held (a 50% stock dividend, or the equivalent of a 3-for-2 stock split). See Note 24. •The authorizedCompany issued and distributed to existing common shareholders, via a non-cash transaction from equity, an aggregate of 1.6 million trust preferred capital structuresecurity shares (aggregate $4.0 million stated value) and an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in stated value of TruPs).
On January 14, 2020, Air T Inc. includes 4,000,000effected a one-for-ten reverse split of its TruPs. As a result of the reverse split, the stated value of the TruPs will be $25.00 per share. Further, each Warrant conferred upon its holder the right to purchase one-tenth of a share of TruPs for $2.40, representing a 4% discount to the new stated value of $2.50 for one-tenth of a share.
As of March 31, 2020, approximately 3.6 million Warrants have been exercised. As a result, the amount outstanding on the Company's Debt - Trust Preferred Securities is $12.9 million as of March 31, 2020.
At March 31, 2020, the Company had Warrants outstanding and exercisable to purchase approximately 4.8 million shares of common stock,its TruPs at an exercise price of $2.40 per one-tenth of a share. The Warrants are exercisable and as of March 31, 2020, will expire on June 7, 2020 or earlier upon redemption or liquidation.
As part of the Company’s interest rate risk management strategy, the Company, from time to time, uses derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings (Air T Term Note A and Term Note D). To meet these objectives, the Company entered into interest rate swaps with notional amounts consistent with the outstanding debt to provide a parfixed rate of 4.56% and 5.09%, respectively, on Term Notes A and D. The swaps mature in January 2028.
As of August 1, 2018, these swap contracts have been designated as cash flow hedging instruments and qualified as effective hedges in accordance with ASC 815-30. The effective portion of changes in the fair value on these instruments is recorded in other comprehensive income and is reclassified into the consolidated statement of income as interest expense in the same period in which the forecasted transactions (interest payments) affects earnings. As of March 31, 2020 and March 31, 2019, the fair value of $0.25 per share. In May 2014, the Company’s Boardinterest-rate swap contracts was a liability of Directors adopted$0.9 million and $0.2 million, respectively, which is included within other non-current liabilities in the consolidated balance sheets. During the year ended March 31, 2020, the Company recorded a policyloss of approximately $0.5 million, net of tax, in the consolidated statement of comprehensive income for changes in the fair value of the instruments.
15. RELATED PARTY MATTERS
Contrail Aviation Support, LLC leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn Properties, LLC, a limited liability company whose membership interests are owned by Mr. Joseph Kuhn, Chief Executive Officer and Mrs. Miriam Cohen-Kuhn, Chief Financial Officer equally. The facility consists of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental payments of approximately $0.2 million to discontinueCohen Kuhn Properties, LLC pursuant to such lease during the paymentperiod from April 1, 2019 through March 31, 2020. The lease for this facility expires on June 30, 2021, though the Company has the option to renew the lease for a period of 5 years on the same terms. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance. The Company believes that the terms of such leases are no less favorable to the Company than would be available from an independent third party.
Gary S. Kohler, a
regularly scheduleddirector of the Company, entered into an employment agreement with BCCM, a wholly-owned subsidiary of the Company, to serve as its Chief Investment Officer in return for an annual
cash dividend.salary of $50,000 plus variable compensation based on the management and incentive fees to be paid to the subsidiary by certain of these investment funds and eligibility to participate in discretionary annual bonuses.
Nick Swenson, CEO of the Company, is also the majority shareholder of CCI. As of March 31, 2020, Mr. Swenson has 69% of ownership interests in CCI. Under the VIE model, Mr. Swenson is the primary beneficiary of CCI due to the high extent of his ownership relative to other shareholders of CCI,and the lack of shared power between Mr. Swenson and the Company ("the related party group") to direct the activities of CCI that most significantly impact CCI’s economic performance.
16. SHARE REPURCHASE
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000
(retrospectively adjusted to 1,125,000 after the stock split on June 10, 2019) shares of the
Company’sCompany’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period.In addition to common stock, During the year ended March 31, 2020, the Company may issue up to 50,000repurchased 150,658 shares at an aggregate cost of $1.00 par value preferred stock, in one or more series, on such terms$2.8 million. 9,766 of these shares are reflected as retired and with such rights, preferences and limitations140,892 of these shares were recorded as determined by the Board of Directors. A total of 5,000treasury shares of preferred stock are authorized for issuance as Series A Junior Participating Preferred Stock and 5,000 shares of preferred stock are authorized for issuance as Series B Junior Participating Preferred Stock, of which 3,000 shares had been reserved for issuance pursuant to the Company’s Rights Agreement, described below. If issued, each share of Series B Junior Participating Preferred Stock would be entitled, in connection with the declaration of a dividend on the Company’s common stock, to a preferential dividend payment equal to the greater of (i) $1.00 per share and (ii) an amount equal to 1,000 times the related dividend declared per share of common stock. Subject to customary anti-dilution provisions, in the event of liquidation, the holders of Series B Junior Participating Preferred Stock would be entitled to a preferential liquidation payment equal to the greater of (a) $100 per share and (b) an amount equal to 1,000 times the liquidation payment made per share of common stock. In addition, if issued, each share of Series B Junior Participating Preferred Stock would entitle the holder thereof to one thousand votes on all matters submitted to a vote of the stockholders of the Company. No shares of preferred stock of any series have been issued as of March 31, 2016.
On December 14, 2014, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock of the Company. The Rights are governed by a Rights Agreement (the “Rights Agreement”) dated as of December 15, 2014. The dividend was payable on December 26, 2014 (the “Record Date”) to the stockholders of record on that date. In addition, one Right attaches to each share of common stock issued thereafter.
The Rights initially represent the right to purchase one one-thousandth of a share of Series B Junior Participating Preferred Stock. The Rights will become exercisable upon the occurrence of specified events, including if any person or group (other than an “exempt person”) acquires beneficial ownership of 20 percent or more of the Company’s common stock. Under the Rights Agreement, an “exempt person” means each person that beneficially owns as of the date of the Rights Agreement 20% or more of the outstanding shares of common stock of the Company, except that each such person will be considered an exempt person only if and so long as the shares of common stock that are beneficially owned by such person do not exceed the number of shares which are beneficially owned by such person on the date of the Rights Agreement, plus any additional shares representing not more than 1% of the shares of common stock then outstanding, and except that a person will cease to be an exempt person immediately at such time as such person ceases to be the beneficial owner of 20% or more of the shares of common stock then outstanding. Upon a person or group (other than an exempt person) acquiring 20 percent or more of the Company’s common stock, each Right (other than Rights owned by such person or group) entitles its holder to purchase, for an exercise price of $85 per share, a number of shares of the Company’s common stock (or in certain circumstances, cash, property or other securities of the Company) having a market value of twice the exercise price, and under certain conditions, common stock of an acquiring company having a market value of twice the exercise price. If any person or group (other than an exempt person) acquires beneficial ownership of 20 percent or more of the Company’s common stock, the Company may, at its option, exchange the outstanding Rights (other than Rights owned by such acquiring person or group) for shares of the Company’s common stock or Company equity securities deemed to have the same value as one share of common stock or a combination thereof, at an exchange ratio of one share of common stock per Right. The Rights are subject to adjustment if certain events occur. Unless earlier redeemed, exchanged or amended by the Company, the Rights will expire on December 26, 2017. The Rights Agreement provides that the Company’s Board of Directors may, at its option and in the absence of certain events, redeem all of the outstanding Rights at a redemption price of $0.01 per Right.
15.
| EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
|
Pursuant to equity compensation plans last approved by 2020.
17. EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
Air T, Inc.
stockholders in 2005, the Company has granted options to purchase up tomaintains a
total of 256,000 shares of common stock
to key employees, officers and non-employee directors with exercise prices at 100% of the fair market value on the date of grant. As of March 31, 2016, no further awards may be granted under the plans, and options to acquire a total of 40,000 shares remained outstanding. The employee options generally vested one-third per year beginning with the first anniversary from the date of grant. The non-employee director options generally vested one year from the date of grant.Compensation expense related to Air T, Inc. stock options was $0 and $9,000option plan for the years ended March 31, 2016benefit of certain eligible employees and 2015, respectively. As of March 31, 2016, there was no unrecognized compensation expense, related to the stock options. There were no stock options granted during the years ended March 31, 2016 and March 31, 2015.
directors. In addition, Delphax maintains a number of stock option plans. These plans were in place atCompensation expense is recognized over the timerequisite service period for stock options which are expected to vest based on their grant-date fair values. The Company uses the Black-Scholes option pricing model to value stock options granted under the Air T, Inc. plan and the Delphax plans. The key assumptions for this valuation method include the expected term of the Companyoption, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.
NaN options were granted under Air T, Inc.’s
acquisition of interests in Delphax. Subsequent tostock option plan during the
acquisition, Delphax granted 1.2 million non-qualified options to purchase shares of its common stock to certain of its employees at an exercise price of $0.33 per share. For the period from the acquisition date throughfiscal years ended March 31,
2016 Delphax recognized approximately $30,000 of2020 and 2019. NaN stock-based compensation expense
for its stock-based compensation arrangements. As of March 31, 2016, Delphax had a total of $373,000 in unrecognized compensation cost associated with
its stock option plans.Option activity, which only reflects the activity of Air T, Inc., is summarized as follows:
| | | | | | | Weighted | | | Weighted | | | | | |
| | | | | | | Average | | | Average | | | Aggregate | |
| | | | | | | Exercise Price | | | Remaining | | | Intrinsic | |
| | | Shares | | | Per Share | | | Life(Years) | | | Value | |
| | | | | | | | | | | | | | | | | |
Outstanding at March 31, 2014 | | | 101,500 | | | $ | 8.73 | | | | 3.39 | | | $ | 342,000 | |
Granted | | | - | | | | | | | | | | | | | |
Exercised | | | (17,500 | ) | | | 8.61 | | | | | | | | | |
Forfeited | | | (6,000 | ) | | | 8.29 | | | | | | | | | |
Repurchased | | | (32,000 | ) | | | 8.96 | | | | | | | | | |
Outstanding at March 31, 2015 | | | 46,000 | | | $ | 8.68 | | | | 2.87 | | | $ | 732,000 | |
Granted | | | - | | | | | | | | | | | | | |
Exercised | | | - | | | | - | | | | | | | | | |
Forfeited | | | (6,000 | ) | | | 8.29 | | | | | | | | | |
Repurchased | | | - | | | | - | | | | | | | | | |
Outstanding at March 31, 2016 | | | 40,000 | | | | 8.74 | | | | 2.09 | | | $ | 617,000 | |
Exercisable at March 31, 2016 | | | 40,000 | | | $ | 8.74 | | | | 2.09 | | | $ | 617,000 | |
Duringrespect to this plan was recognized for the year ended March 31, 2015, options2020 and 2019, respectively. At March 31, 2020, there was 0 unrecognized compensation expense related to purchase 10,000 shares vestedthe Air T Inc. stock options.
There was no activity during the fiscal years ended March 31, 2019 and 2020 under the Delphax option plans. Option activity during the fiscal years ended March 31, 2019 (retrospectively adjusted to account for the stock split on June 10, 2019) and 2020 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value |
| Outstanding at March 31, 2018 | 13,773 | | | $ | 6.69 | | | 5.13 | | $ | 140,193 | |
| Granted | — | | | — | | | | | |
| Exercised | (2,523) | | | 7.04 | | | | | |
| Forfeited | — | | | — | | | | | |
| Repurchased | — | | | — | | | | | |
| Outstanding at March 31, 2019 | 11,250 | | | 6.61 | | | 4.07 | | 152,075 | |
| Granted | — | | | — | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited | — | | | — | | | | | |
| Repurchased | — | | | — | | | | | |
| Outstanding at March 31, 2020 | 11,250 | | | $ | 6.61 | | | 3.07 | | $ | 66,388 | |
| Exercisable at March 31, 2020 | 11,250 | | | $ | 6.61 | | | 3.07 | | $ | 66,388 | |
18. REVENUE RECOGNITION
Performance Obligations
The following is a description of the Company’s performance obligations as of March 31, 2014 2,500 options vested.2020:
| | | | | |
| Type of Revenue | Nature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms |
| Product Sales | The Company generates revenue from sales of various distinct products such as parts, aircraft equipment, printing equipment, jet engines, airframes, and scrap metal to its customers. A performance obligation is created when the Company accepts an order from a customer to provide a specified product. Each product ordered by a customer represents a performance obligation. The Company recognizes revenue when obligations under the terms of the contract are satisfied; generally, this occurs at a point-in-time upon shipment or when control is transferred to the customer. Transaction prices are based on contracted terms, which are at fixed amounts based on standalone selling prices. While the majority of the Company's contracts do not have variable consideration, for the limited number of contracts that do, the Company records revenue based on the standalone selling price less an estimate of variable consideration (such as rebates, discounts or prompt payment discounts). The Company estimates these amounts based on the expected incentive amount to be provided to customers and reduces revenue accordingly. Performance obligations are short-term in nature and customers are typically billed upon transfer of control. The Company records all shipping and handling fees billed to customers as revenue. The terms and conditions of the customer purchase orders or contracts are dictated by either the Company’s standard terms and conditions or by a master service agreement or by the contract. |
| Support Services | The Company provides a variety of support services such as aircraft maintenance, printer maintenance, and short-term repair services to its customers. Additionally, the Company operates certain aircraft routes on behalf of FedEx. A performance obligation is created when the Company agrees to provide a particular service to a customer. For each service, the Company recognizes revenues over time as the customer simultaneously receives the benefits provided by the Company's performance. This revenue recognition can vary from when the Company has a right to invoice to the output or input method depending on the structure of the contract and management’s analysis. For repair-type services, the Company records revenue over-time based on an input method of costs incurred to total estimated costs. The Company believes this is appropriate as the Company is enhancing an asset that the customer controls as repair work, such as labor hours are incurred, and parts installed, is being performed. The vast majority of repair-services are short term in nature and are typically billed upon completion of the service. Some of the Company’s contracts contain a promise to stand ready as the Company is obligated to perform certain maintenance or administrative services. For most of these contracts, the Company applies the 'as invoiced' practical expedient as the Company has a right to consideration from the customer in an amount that corresponds directly with the value of the entity's performance completed to date. A small number of contracts are accounted for as a series and recognized equal to the amount of consideration the Company is entitled to less an estimate of variable consideration (typically rebates). These services are typically ongoing and are generally billed on a monthly basis. |
In addition to the above type of revenues, the Company also has Leasing Revenue, which is in scope under Topic 842 (Leases) and out of scope under Topic 606 and Other Revenues (Freight, Management Fees, etc.) which are immaterial for disclosure under Topic 606. In the current fiscal year, the Company also generated revenue from the sale of assets on lease or held for lease.
The following table summarizes disaggregated revenues by type (in thousands):
| | | | | | | | | | | |
| Year Ended | | |
| March 31, 2020 | | March 31, 2019 |
| Product Sales | | | |
| Air Cargo | $ | 23,690 | | | $ | 23,043 | |
| Ground equipment sales | 58,082 | | | 45,897 | |
| Commercial jet engines and parts | 86,625 | | | 78,174 | |
| Printing equipment and maintenance | 261 | | | 592 | |
| Corporate and other | — | | | — | |
| Support Services | | | | |
| Air Cargo | 51,469 | | | 49,781 | |
| Ground equipment sales | 485 | | | 648 | |
| Commercial jet engines and parts | 3,675 | | | 5,239 | |
| Printing equipment and maintenance | 42 | | | 47 | |
| Corporate and other | 104 | | | 89 | |
| Leasing Revenue | | | | |
| Air Cargo | — | | | — | |
| Ground equipment sales | 189 | | | 76 | |
| Commercial jet engines and parts | 10,797 | | | 10,189 | |
| Printing equipment and maintenance | — | | | — | |
| Corporate and other | 152 | | | 126 | |
| Other | | | | |
| Air Cargo | 116 | | | 154 | |
| Ground equipment sales | 400 | | | 531 | |
| Commercial jet engines and parts | 187 | | | 366 | |
| Printing equipment and maintenance | 3 | | | 16 | |
| Corporate and other | 508 | | | 534 | |
| | | |
| Total | $ | 236,785 | | | $ | 215,502 | |
The following table summarizes total revenues by segment (in thousands):
| | | | | | | | | | | |
| Year ended | | |
| March 31, 2020 | | March 31, 2019 |
| Air Cargo | $ | 75,275 | | | $ | 72,978 | |
| Ground equipment sales | 59,156 | | | 47,152 | |
| Commercial jet engines and parts | 101,284 | | | 93,968 | |
| Printing equipment and maintenance | 306 | | | 655 | |
| Corporate and other | 764 | | | 749 | |
| | | |
| Total | $ | 236,785 | | | $ | 215,502 | |
See Note 22 for the Company's disaggregated revenues by geographic region and Note 23 for the Company’s disaggregated revenues by segment. These notes disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Contract Balances and Costs
Contract liabilities relate to deferred revenue and advanced customer deposits with respect to product sales. Performance obligations related to product sales are expected to be satisfied within one year. Contract liabilities are included in accrued expenses on the accompanying consolidated balance sheets. The following table presents outstanding contract liabilities and the amount of outstanding April 1, 2019 contract liabilities that were recognized as revenue during the year ended March 31,
2016, no options were purchased.2020 (in thousands):
16.
| MAJOR CUSTOMERS
| | | | | | | | | | |
| Outstanding Contract Liabilities | | Outstanding Contract Liabilities
Recognized as Revenue |
| As of March 31, 2020 | $ | 1,853 | | | |
| As of April 1, 2019 | $ | 1,867 | | | |
| For the year ended March 31, 2020 | | | $ | 1,781 | |
Approximately 46% and 45% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2016 and 2015, respectively. Approximately 24% and 26% of the Company’s consolidated accounts receivable at March 31, 2016 and 2015, respectively, were due from FedEx Corporation.
The components of income tax expense were as follows:
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
Current: | | | | | | | | |
Federal | | $ | 1,817,000 | | | $ | 1,209,000 | |
State | | | 316,000 | | | | 159,000 | |
Foreign | | | 171,000 | | | | (65,000 | ) |
Total current | | | 2,304,000 | | | | 1,303,000 | |
Deferred: | | | | | | | | |
Federal | | | 152,000 | | | | (315,000 | ) |
State | | | (61,000 | ) | | | (57,000 | ) |
Total deferred | | | 91,000 | | | | (372,000 | ) |
| | | | | | | | | |
Total | | $ | 2,395,000 | | | $ | 931,000 | |
Income tax expense was different from the amount computed by applying the statutory federal income tax rate of 34% as shown in the following table:
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
Expected Federal income tax expense U.S. statutory rate | | $ | 2,092,000 | | | | 34.0 | % | | $ | 1,161,000 | | | | 34.0 | % |
State income taxes, net of Federal benefit | | | 169,000 | | | | 2.7 | % | | | 67,000 | | | | 2.0 | % |
Permanent differences, other | | | 47,000 | | | | 0.8 | % | | | 42,000 | | | | 1.2 | % |
Section 831(b) benefit | | | (316,000 | ) | | | -5.1 | % | | | (364,000 | ) | | | -10.6 | % |
Change in valuation allowance | | | 557,000 | | | | 9.0 | % | | | | | | | | |
Domestic production activities deductions | | | (193,000 | ) | | | -3.1 | % | | | (107,000 | ) | | | -3.1 | % |
Other differences, net | | | 39,000 | | | | 0.6 | % | | | 132,000 | | | | 3.8 | % |
Income tax expense | | $ | 2,395,000 | | | | 38.9 | % | | $ | 931,000 | | | | 27.3 | % |
Delphax, which generated a loss for the period from November 24, 2015 through March 31, 2016 and is not included in the Air T, Inc.’s consolidated tax returns, is the source of the above valuation allowance effect.
Deferred tax assets and liabilities consisted of the following as of:
| | | March 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | | |
Inventory reserves | | $ | 504,000 | | | $ | 115,000 | |
Accrued vacation | | | 439,000 | | | | 244,000 | |
Stock option compensation | | | 141,000 | | | | 47,000 | |
Warranty reserve | | | 74,000 | | | | 85,000 | |
Accounts and notes receivable reserve | | | 181,000 | | | | 83,000 | |
Net operating loss carryforwards | | | 5,353,000 | | | | - | |
Federal credits | | | 4,784,000 | | | | - | |
263A inventory capitalization | | | 60,000 | | | | 145,000 | |
Other | | | 112,000 | | | | 79,000 | |
Total deferred tax assets | | | 11,648,000 | | | | 798,000 | |
| | | | | | | | | |
Deferred Revenue | | | (52,000 | ) | | | - | |
Prepaid expenses | | | (563,000 | ) | | | (473,000 | ) |
Property and equipment | | | (70,000 | ) | | | (463,000 | ) |
Intangibles | | | (388,000 | ) | | | - | |
Total deferred tax liabilities | | | (1,073,000 | ) | | | (936,000 | ) |
Net deferred tax (liability) asset | | $ | 10,575,000 | | | $ | (138,000 | ) |
Less Valuation Allowance | | | (10,830,000 | ) | | | - | |
Net deferred tax (liability) asset after Valuation Allowance | | $ | (255,000 | ) | | $ | (138,000 | ) |
The deferred tax items are reported on a net current and non-current basis in the accompanying fiscal 2016 and 2015 consolidated balance sheets according to the classification of the underlying asset and liability.
The Company accounts for uncertain tax positions in accordance with accounting principles generally accepted in the United States of America. The Company has analyzed filing positions in all of the federal, state and international jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The periods subject to examination for the Company’s federal return are the fiscal 2012 through 2014 tax years. The periods subject to examination for the Company’s state returns are generally the fiscal 2011 through 2014 tax years. As of March 31, 2016 and 2015, the Company did not have any unrecognized tax benefits. The Company does not believe there will be any material changes in unrecognized tax positions over the next twelve months.
It is the Company’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 31, 2016 and 2015, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended March 31, 2016 and 2015.
As described in Note 8, effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately 38%, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has three foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is no longer subject to examinations by income tax authorities for tax years before 2011.
Delphax maintains a September 30 fiscal year. As of September 30, 2015, Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of $6.0 million and $7.9 million, respectively. As of that date, they had estimated foreign research and development credit carryforwards of $4.5 million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year 2023. Domestic alternative minimum tax credits of approximately $325,000 are available to offset future income tax with no expiration date. The Company is currently evaluating whether the investment in Delphax by Air T resulted in an ownership change for purposes of Section 382. The Company anticipates completing this analysis prior to filing it’s first quarterly report for fiscal year 2017. Should there be an ownership change for purposes of Section 382 or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards will be significantly limited.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets will be recovered. In accounting for the Delphax acquisition on November 24, 2015, the Company established a full valuation allowance against Delphax’s net deferred tax assets of approximately $10,273,000. The corresponding valuation allowance at March 31, 2016 was approximately $10,830,000. The cumulative losses incurred by Delphax in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established against Delphax’s net deferred tax assets.
U.S. income tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries for Delphax that is indefinitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable because of the complexities of the hypothetical calculation.
19. EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(E) defined contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are immediately eligible to participate in the Plans. The
Company’sCompany’s contribution to the Plans for the years ended March 31, 20162020 and 20152019 was approximately $376,000 and $299,000, respectively$0.6 million, and was recorded in general and administrative expenses in the consolidated statements of income.The Company, in each of the past three years, has paid a discretionary profit sharing bonus in which all employees have participated. Profit sharing expense in fiscal
20162020 and
20152019 was approximately
$1,748,000$3.5 million and
$1,150,000,$2.4 million, respectively, and was recorded in general and administrative expenses in the consolidated statements of income.
20. INCOME TAXES
Income tax expense (benefit) attributable to (loss) income from continuing operations consists of (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Current: | | | |
| Federal | $ | 43 | | | $ | 2,484 | |
| State | (8) | | | 418 | |
| Foreign | — | | | 23 | |
| Total current | 35 | | | 2,925 | |
| Deferred: | | | |
| Federal | (481) | | | (1,101) | |
| State | (98) | | | (63) | |
| Total deferred | (579) | | | (1,164) | |
| | | |
| Total | $ | (544) | | | $ | 1,761 | |
Income tax expense attributable to (loss) income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 21% to pretax (loss) income from continuing operations as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | | | |
| 2020 | | | | 2019 | | |
| Expected Federal income tax expense U.S. statutory rate | $ | 551 | | | 21.0 | % | | $ | 1,253 | | | 21.0 | % |
| State income taxes, net of federal benefit | (519) | | | -19.8 | % | | 201 | | | 3.4 | % |
| Nontaxable cancellation of debt income | (1,331) | | | -50.7 | % | | — | | | 0.0 | % |
| Micro-captive insurance benefit | (172) | | | -6.6 | % | | (197) | | | -3.3 | % |
| Change in valuation allowance | (7,789) | | | -296.8 | % | | 1,405 | | | 23.5 | % |
| Income attributable to minority interest - Contrail | (325) | | | -12.4 | % | | (434) | | | -7.3 | % |
| Write-off Delphax tax attributes | 9,353 | | | 356.4 | % | | — | | | 0.0 | % |
| Acquired NOL carrybacks; CARES Act | (363) | | | -13.8 | % | | — | | | 0.0 | % |
| Other differences, net | 51 | | | 1.9 | % | | (467) | | | -7.8 | % |
| Income tax (benefit) expense | $ | (544) | | | -20.7 | % | | $ | 1,761 | | | 29.5 | % |
During the fiscal period ended March 31, 2020, the Company sold GAS. See Note 2. The tax benefit related to this entity that have been allocated to discontinued operations for the March 31, 2020 and March 31, 2019 fiscal years were $0.6 million and $0.3 million, respectively. In addition, a gain on the sale of discontinued operations was recognized, resulting in a net of tax gain of $8.2 million.
Delphax has a defined contribution salary deferral plan covering substantially all U.S. employees under Section 401(k)Solutions and Delphax Technologies are not included in Air T, Inc.’s consolidated tax return and account for $0.2 million and $(8.9) million of the Internal Revenue Code.above valuation allowance effect for each year, respectively. The plan allows eligible employeesvaluation allowance release in March 31, 2020 relates to make contributions up to the maximum amount provided under the Code. Delphax contributes an amount equal to 50%attribute reduction for cancellation of debt income and dissolution of the participants’ before-tax contributions upCanadian and UK subsidiaries (See Note 5). There is a separate return filed for Delphax Solutions and Delphax Technologies for the fiscal years ending March 31, 2020 and March 31, 2019. Impairment on investments and changes in unrealized losses related to 6%available-for-sale securities accounted for the remaining valuation allowance effect for each year.
Deferred tax assets and liabilities were comprised of base salary. The employer contribution vests after the employee has completed three years of eligible service. The contribution made by following (in thousands):
| | | | | | | | | | | |
| 2020 | | 2019 |
| Net operating loss & attribute carryforwards | $ | 3,524 | | | $ | 7,516 | |
| Federal/Canadian tax credits | — | | | 4,486 | |
| Unrealized losses on investments | 1,693 | | | 833 | |
| Investment in foreign subsidiaries | 1,369 | | | 1,431 | |
| Investment in partnerships | 840 | | | 534 | |
| Disallowed capital loss | — | | | 463 | |
| Lease liabilities | 1,909 | | | — | |
| Other deferred tax assets | 1,019 | | | 738 | |
| Total deferred tax assets | 10,354 | | | 16,001 | |
| | | |
| Bargain purchase gain | (385) | | | (434) | |
| Property and equipment | (485) | | | (233) | |
| Right-of-use assets | (1,791) | | | — | |
| Capital gain deferment | (1,700) | | | — | |
| Other deferred tax liabilities | (167) | | | (198) | |
| Total deferred tax liabilities | (4,528) | | | (865) | |
| | | |
| Net deferred tax asset | $ | 5,826 | | | $ | 15,136 | |
| | | |
| Less valuation allowance | (6,405) | | | (14,658) | |
| | | |
| Net deferred tax (liability) asset | $ | (579) | | | $ | 478 | |
Delphax during the period from
As described in Note 5, effective on November 24, 2015, throughAir T, Inc. purchased interests in Dephax. With an equity investment level by the Company of approximately 38%, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has foreign subsidiaries located in France, and historically had foreign subsidiaries located in Canada and the United Kingdom; all of which file(d) tax returns in those jurisdictions. With few exceptions, Delphax, is no longer subject to examinations by income tax authorities for tax years before 2015.
Delphax maintains a September 30 fiscal year end. The returns for the fiscal year ended September 30, 2019 have not yet been filed. Included in the deferred tax balances above and related to Delphax and its subsidiaries are estimated foreign and U.S. federal loss carryforwards of $2.3 million and $9.1 million, respectively. The net operating losses expire in varying amounts beginning in the year 2023.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets will be recovered. In accounting for the Delphax tax attributes, the Company has established a full valuation allowance of $4.8 million at March 31,
20162020, and $13.0 million at March 31, 2019. The cumulative tax losses incurred by Delphax in recent years was
$15,000.Delphax also hasthe primary basis for the Company’s determination that a defined contribution plan covering substantially all Canadian employees. Canadian employees contribute 2%full valuation allowance should be established against Delphax’s net deferred tax assets.
The Company continues to assert that it will permanently reinvest any foreign earnings of gross salaryDSI in a foreign country and will not repatriate those earnings back to the plan,U.S. As a result of its permanent reinvestment assertion, the Company has not recorded deferred taxes related to DSI under the indefinite exception.
In March of 2020, the CARES Act was enacted and
Delphax makes a contributionmade significant changes to federal tax laws, including certain changes that were retroactive to the
plan of 3% or 4% of gross salary depending on employee classification. The employer contribution vests over two years. The contribution made by Delphax duringMarch 31, 2020 tax year. Changes in tax laws are accounted for in the period
from November 24, 2015 through March 31, 2016 was $41,000.of enactment and the retroactive effects are recognized in these financial statements. There were no material income tax consequences of this enacted legislation on the reporting period of these financial statements. 19.
| QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (AS RESTATED)
|
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
| | | First | | | Second | | | Third | | | Fourth | |
| | | Quarter | | | Quarter | | | Quarter | | | Quarter | |
| | | | | | | | | | | (As Restated)* | | | (As Restated)* | |
2016 | | | | | | | | | | | | | | | | |
Operating Revenues | | $ | 22,359 | | | $ | 44,654 | | | $ | 46,619 | | | $ | 34,581 | |
Operating Income (Loss) | | | (1,049 | ) | | | 5,505 | | | $ | 3,890 | | | | (2,314 | ) |
Net Income (Loss), as previously reported | | | (736 | ) | | | 3,794 | | | | 2,971 | | | | (1,086 | ) |
Net Income (Loss), as restated | | | (736 | ) | | | 3,794 | | | | 2,726 | | | | (1,370 | ) |
Basic Earnings (Loss) per share, as previously reported | | | (0.31 | ) | | | 1.60 | | | | 1.25 | | | | (0.46 | ) |
Basic Earnings (Loss) per share, as restated | | | (0.31 | ) | | | 1.60 | | | | 1.15 | | | | (0.58 | ) |
Diluted Earnings (Loss) per share, as previously reported | | | (0.31 | ) | | | 1.58 | | | | 1.24 | | | | (0.46 | ) |
Diluted Earnings (Loss) per share, as restated | | | (0.31 | ) | | | 1.58 | | | | 1.14 | | | | (0.57 | ) |
| | | | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | | | | |
Operating Revenues | | $ | 21,779 | | | $ | 34,625 | | | $ | 30,893 | | | $ | 24,885 | |
Operating Income (Loss) | | | 99 | | | | 2,597 | | | | 2,141 | | | | (1,420 | ) |
Net Income (Loss) | | | 73 | | | | 1,818 | | | | 1,448 | | | | (856 | ) |
Basic Earnings (Loss) per share | | | 0.03 | | | | 0.77 | | | | 0.61 | | | | (0.36 | ) |
Diluted Earnings (Loss) per share | | | 0.03 | | | | 0.77 | | | | 0.61 | | | | (0.36 | ) |
* Results of operations for the third and fourth quarter of 2016 have been restated. See Note 1A.
20.
| GEOGRAPHICAL INFORMATION
|
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2020 | | | | | | | |
| Operating Revenues | $ | 47,188 | | | | $ | 50,693 | | | | $ | 73,300 | | | | $ | 65,604 | |
| Income (Loss) from continuing operations, net of tax | 3,991 | | | | (2,122) | | | | 581 | | | | 718 | |
| Less: (Income) attributable to non-controlling interests | (2,373) | | | | (287) | | | | (789) | | | | (128) | |
| Income (Loss) from continuing operations attributable to Air T, Inc. Stockholders | 1,618 | | | | (2,409) | | | | (208) | | | | 590 | |
| Income (Loss) from discontinued operations, net of tax | 165 | | | | 8,124 | | | | (222) | | | | (2) | |
| | | | | | | | | | | | | | |
| Basic Income (Loss) per share from continuing operations | 0.72 | | | | (0.80) | | | | (0.07) | | | | 0.20 | |
| Basic Income (Loss) per share from discontinued operations | 0.07 | | | | 2.69 | | | | (0.07) | | | | — | |
| Basic Income (Loss) per share | 0.79 | | | | 1.89 | | | | (0.14) | | | | 0.20 | |
| | | | | | | | | | | | | | |
| Diluted Income (Loss) per share from continuing operations | 0.72 | | | | (0.80) | | | | (0.07) | | | | 0.20 | |
| Diluted Income (loss) per share from discontinued operations | 0.07 | | | | 2.68 | | | | (0.07) | | | | — | |
| Diluted Income (Loss) per share | $ | 0.79 | | | | $ | 1.88 | | | | $ | (0.14) | | | | $ | 0.20 | |
| Antidilutive shares Excluded from Computation of income (loss) per share from continuing operations (in shares) | — | | | | 5 | | | | 6 | | | | — | |
| Antidilutive shares Excluded from Computation of income (loss) per share from discontinued operations (in shares) | — | | | | — | | | | 6 | | | | 7 | |
| Antidilutive shares Excluded from Computation of income (loss) per share (in shares) | — | | | | — | | | | 6 | | | | — | |
| | | | | | | | | | | | | | |
| 2019 | | | | | | | | | | | | | | |
| Operating Revenues | $ | 51,820 | | | | $ | 40,867 | | | | $ | 55,486 | | | | $ | 67,329 | |
| Income (Loss) from continuing operations, net of tax | 3,414 | | | | (779) | | | | (1,941) | | | | 3,513 | |
| Less: Net (income) Loss attributable to non-controlling interests | (453) | | | | 106 | | | | (398) | | | | (1,116) | |
| Income (Loss) from continuing operations attributable to Air T, Inc. Stockholders | 2,961 | | | | (673) | | | | (2,339) | | | | 2,397 | |
| (Loss) Income from discontinued operations, net of tax | (132) | | | | (648) | | | | (376) | | | | 150 | |
| | | | | | | | | | | | | | |
| Basic Income (loss) per share from continuing operations | 0.97 | | | | (0.22) | | | | (0.77) | | | | 0.79 | |
| Basic (Loss) Income per share from discontinued operations | (0.04) | | | | (0.21) | | | | (0.12) | | | | 0.05 | |
| Basic Income (Loss) per share | 0.92 | | | | (0.43) | | | | (0.89) | | | | 0.84 | |
| | | | | | | | | | | | | | |
| Diluted Income (Loss) per share from continuing operations | 0.96 | | | | (0.22) | | | | (0.77) | | | | 0.79 | |
| Diluted Income (loss) per share from discontinued operations | (0.04) | | | | (0.21) | | | | (0.12) | | | | 0.05 | |
| Diluted Income (Loss) per share | $ | 0.92 | | | | $ | (0.43) | | | | $ | (0.89) | | | | $ | 0.84 | |
| Antidilutive shares Excluded from Computation of income (loss) per share from continuing operations (in shares) | — | | | | 8 | | | | 8 | | | | — | |
| Antidilutive shares Excluded from Computation of income (loss) per share from discontinued operations (in shares) | 9 | | | | 8 | | | | 8 | | | | — | |
| Antidilutive shares Excluded from Computation of income (loss) per share (in shares) | — | | | | 8 | | | | 8 | | | | — | |
22. GEOGRAPHICAL INFORMATION
Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and similar tangible long-lived assets, net of accumulated depreciation, held outside the United States are summarized in the following table as of March 31,
20162020 and March 31,
2015:| | | March 31, | | | March 31, | |
| | | 2016 | | | 2015 | |
United States, the Company’s country of domicile | | $ | 4,544,050 | | | $ | 2,571,499 | |
Foreign | | | 33,724 | | | | - | |
Total property and equipment, net | | $ | 4,577,774 | | | $ | 2,571,499 | |
2019 (in thousands):
| | | | | | | | | | | |
| March 31,
2020 | | March 31,
2019 |
| United States | $ | 19,086 | | | $ | 4,393 | |
| Foreign | 14,131 | | | 25,035 | |
| Total tangible long-lived assets, net | $ | 33,217 | | | $ | 29,428 | |
The Company’s tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent primarily engines on lease at March 31, 2020. The net book value located within each individual country at March 31, 2020 is listed below (in thousands):
| | | | | | | | | | | | | | |
| Country | | March 31, 2020 | | March 31, 2019 |
| Mexico | | $ | 1,845 | | | $ | 2,681 | |
| Netherlands | | 4,778 | | | 5,541 | |
| China | | — | | | 16,808 | |
| Estonia | | 7,408 | | | — | |
| Other | | 100 | | | 5 | |
| | $ | 14,131 | | | $ | 25,035 | |
Total revenue, located in the United States,
and outside the
Company’s Country of domicileUnited States is summarized in the following table as of March 31, 20162020 and March 31, 2015:| | | March 31, | | | March 31, | |
| | | 2016 | | | 2015 | |
United States, the Company’s country of domicile | | $ | 141,010,279 | | | $ | 103,642,292 | |
Foreign | | | 7,201,659 | | | | 8,538,866 | |
Total revenue | | $ | 148,211,938 | | | $ | 112,181,158 | |
| | | | | | | | | | | |
| March 31,
2020 | | March 31,
2019 |
| United States | $ | 187,710 | | | $ | 177,484 | |
| Foreign | 49,075 | | | 38,018 | |
| Total revenue | $ | 236,785 | | | $ | 215,502 | |
23. SEGMENT INFORMATION
The Company has
five business segments. The5 reportable segments: overnight air cargo,
segment, comprised of the Company’s Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, operates in the air express delivery services industry. The ground equipment sales, segment, comprised of the Company’s Global Ground Support, LLC (“GGS”) subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the U.S. military and industrial customers. The ground support services, segment, comprised of the Company’s Global Aviation Services, LLC (“GAS”) subsidiary, provides ground support equipment maintenancecommercial jet engine and facilities maintenance services to domestic airlines and aviation service providers. Theparts, printing equipment and maintenance, segment is comprised of Delphaxcorporate and its subsidiaries, which was consolidated for financial accounting purposes beginning November 24, 2015. Delphax designs, manufactures and sells advanced digital print production equipment, maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment is sold through Delphax and its subsidiaries located in Canada, the United Kingdom and France. A significant portion of Delphax’s net sales is related to service and support provided after the sale. Delphax has a significant presence in the check production marketplace in North America, Europe, Latin America, Asia and the Middle East. The Company’s newly established leasing segment, comprised of the Company’s Air T Global Leasing, LLC subsidiary, provides funding for equipment leasing transactions, which may include transactions for the leasing of equipment manufactured by GGS and Delphax and transactions initiated by third parties unrelated to equipment manufactured by the Company or any of its subsidiaries. Air T Global Leasing, LLC commenced operations during the quarter ended December 31, 2015.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. For the fiscal year ended March 31, 2016, the premiums paid to SAIC by the Company were allocated among the operating segments based on segment revenue and certain identified corporate expenses were allocated to the segments based on the relative benefit of those expenses to each segment. The prior period amounts have been reclassified to conform to the current period allocations of these expenses.other. Segment data is summarized as follows:
| | | Year Ended March 31, | |
| | | 2016 | | | 2015 | |
Operating Revenues: | | | | | | | | |
Overnight Air Cargo | | $ | 68,226,891 | | | $ | 49,864,547 | |
Ground Equipment Sales: | | | | | | | | |
Domestic | | | 45,175,818 | | | | 33,231,529 | |
International | | | 6,000,000 | | | | 8,538,866 | |
Total Ground Equipment Sales | | | 51,175,818 | | | | 41,770,395 | |
Ground Support Services | | | 24,834,616 | | | | 20,546,216 | |
Printing Equipment and Maintenance | | | | | | | | |
Domestic | | | 2,753,138 | | | | - | |
International | | | 1,201,659 | | | | - | |
Total Printing Equipment and Maintenance | | | 3,954,797 | | | | - | |
Leasing | | | 19,816 | | | | - | |
Total | | $ | 148,211,938 | | | $ | 112,181,158 | |
| | | | | | | | | |
Operating Income (Loss): | | | | | | | | |
Overnight Air Cargo | | $ | 3,283,495 | | | $ | 19,519 | |
Ground Equipment Sales | | | 6,390,287 | | | | 3,674,598 | |
Ground Support Services | | | (1,035,929 | ) | | | (92,532 | ) |
Printing Equipment and Maintenance | | | (1,966,626 | ) | | | - | |
Leasing | | | 8,324 | | | | - | |
Corporate | | | (647,888 | ) | | | (184,881 | ) |
Total | | $ | 6,031,663 | | | $ | 3,416,703 | |
| | | | | | | | | |
Capital Expenditures: | | | | | | | | |
Overnight Air Cargo | | $ | 92,707 | | | $ | 245,548 | |
Ground Equipment Sales | | | 341,124 | | | | 228,025 | |
Ground Support Services | | | 520,243 | | | | 256,918 | |
Printing Equipment and Maintenance | | | 16,438 | | | | - | |
Corporate | | | 275,559 | | | | 69,175 | |
Total | | $ | 1,246,071 | | | $ | 799,666 | |
| | | | | | | | | |
Depreciation and Amortization: | | | | | | | | |
Overnight Air Cargo | | $ | 138,639 | | | $ | 158,179 | |
Ground Equipment Sales | | | 518,013 | | | | 502,648 | |
Ground Support Services | | | 224,878 | | | | 167,743 | |
Printing Equipment and Maintenance | | | 163,893 | | | | - | |
Leasing | | | 8,724 | | | | - | |
Corporate | | | 53,060 | | | | 28,340 | |
Total | | $ | 1,107,207 | | | $ | 856,911 | |
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Operating Revenues: | | | |
| Overnight Air Cargo | $ | 75,275 | | | $ | 72,978 | |
| Ground Equipment Sales: | | | |
| Domestic | 54,108 | | | 40,707 | |
| International | 5,048 | | | 6,445 | |
| Total Ground Equipment Sales | 59,156 | | | 47,152 | |
| Printing Equipment and Maintenance: | | | |
| Domestic | 200 | | | 322 | |
| International | 271 | | | 347 | |
| Total Printing Equipment and Maintenance | 471 | | | 669 | |
| Commercial Jet Engines and Parts: | | | |
| Domestic | 60,813 | | | 68,857 | |
| International | 43,756 | | | 31,225 | |
| Total Commercial Jet Engines and Parts | 104,569 | | | 100,082 | |
| Corporate and Other | 2,264 | | | 1,976 | |
| Intercompany | (4,950) | | | (7,355) | |
| Total | $ | 236,785 | | | $ | 215,502 | |
| | | |
| Operating Income (Loss): | | | |
| Overnight Air Cargo | $ | 709 | | | $ | 1,911 | |
| Ground Equipment Sales | 7,302 | | | 3,420 | |
| Printing Equipment and Maintenance | (1,767) | | | (1,388) | |
| Commercial Jet Engines and Parts | 7,977 | | | 11,609 | |
| Corporate and Other | (7,771) | | | (6,899) | |
| Intercompany | 841 | | | 678 | |
| Total | $ | 7,291 | | | $ | 9,331 | |
| | | |
| Capital Expenditures: | | | |
| Overnight Air Cargo | $ | 299 | | | $ | 58 | |
| Ground Equipment Sales | 881 | | | 372 | |
| Printing Equipment and Maintenance | — | | | — | |
| Commercial Jet Engines and Parts | 34,873 | | | 19,680 | |
| Corporate and Other | 1,096 | | | 209 | |
| Total | $ | 37,149 | | | $ | 20,319 | |
| | | |
| Depreciation, Amortization and Impairment: | | | |
| Overnight Air Cargo | $ | 72 | | | $ | 82 | |
| Ground Equipment Sales | 279 | | | 264 | |
| Printing Equipment and Maintenance | 34 | | | 9 | |
| Commercial Jet Engines and Parts | 4,771 | | | 6,302 | |
| Corporate and Other | 558 | | | 585 | |
| Intercompany | (15) | | | 32 | |
| Total | $ | 5,699 | | | $ | 7,274 | |
22.
| COMMITMENTS AND CONTINGENCIES
|
24. EARNINGS PER COMMON SHARE
Basic earnings per share has been calculated by dividing net income attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive.
The computation of earnings per common share is as follows (in thousands, except per share data):
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
| Net income from continuing operations | $ | 3,168 | | | $ | 4,207 | |
| Net income from continuing operations attributable to non-controlling interests | (3,577) | | | (1,861) | |
| Net (loss) income from continuing operations attributable to Air T, Inc. Stockholders | (409) | | | 2,346 | |
| | | |
| (Loss) income from continuing operations per share: | | | |
| Basic | $ | (0.15) | | | $ | 0.77 | |
| Diluted | $ | (0.15) | | | $ | 0.77 | |
| Antidilutive shares Excluded from Computation of income (loss) per share from continuing operations (in shares) | 7 | | | | — | |
| | | |
| Loss from discontinued operations, net of tax | (114) | | | (1,006) | |
| Gain on sale of discontinued operations, net of tax | 8,179 | | | — | |
| Gain (loss) from discontinued operations attributable to Air T, Inc. stockholders | 8,065 | | | (1,006) | |
| | | |
| Income (loss) from discontinued operations per share: | | | | | |
| Basic | $ | 2.89 | | | $ | (0.33) | |
| Diluted | $ | 2.88 | | | $ | (0.33) | |
| Antidilutive shares Excluded from Computation of income (loss) per share from discontinued operations (in shares) | — | | | | 8 | |
| | | |
| Income per share: | | | | | | |
| Basic | $ | 2.74 | | | | $ | 0.44 | |
| Diluted | $ | 2.73 | | | | $ | 0.44 | |
| Antidilutive shares Excluded from Computation of income (loss) per share (in shares) | — | | | | — | |
| | | | | |
| Weighted Average Shares Outstanding: | | | | | |
| Basic | 2,791 | | | 3,052 | |
| Diluted | 2,798 | | | 3,060 | |
25. COMMITMENTS AND CONTINGENCIES
Impact of COVID-19 — As further discussed in Note 1, the full extent of the impact of COVID-19 on the U.S. and world economies generally, and the Company’s business in particular, is uncertain. As of March 31, 2020, no contingencies have been recorded on the Company’s consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term impacts on the Company’s financial condition, results of operations, and cash flows. Refer to Note 1 for further discussion of COVID-19.
26. SUBSEQUENT EVENTS
COVID-19 Pandemic
The Company is
involved in various legal actions and claims arising inclosely monitoring the
ordinary courseimpact of
the COVID-19 pandemic on all aspects of its business.
Management believes that these matters, if adversely decided, would not have a material adverse effect on the Company's results of operations or financial position.In June 2016,As described below, the Company acquired landobtained loans under the Paycheck Protection Program in April 2020, which measures were intended to help maintain financial flexibility given the significant impact on U.S. and world economies as a result of the COVID-19 pandemic. As a result of the COVID-19 pandemic and measures taken to limit the pandemic and its impact, the Company experienced decreases in revenues during the months of April and May 2020. The extent to which the COVID-19 pandemic continues to impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
Paycheck Protection Program (the “PPP”) Loans
On April 10, 2020, the Company entered into an agreement to construct a new corporate headquarters facilityloan with MBT in Denver, North Carolina for an aggregatea principal amount of approximately $1.9$8.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note (“Note”). The PPP Loan bears interest at a fixed annual rate of one percent (1%), with construction anticipatedthe first six months of interest deferred. Beginning on November 10, 2020, the Company will make seventeen (17) equal monthly installments of principal and interest payments with the final payment due on April 10, 2022. The Note provides for customary events of default including, among other things, cross-defaults on any other loan with MBT. The PPP Loan may be accelerated upon the occurrence of an event of default.
The PPP Loan is unsecured and guaranteed by the United States Small Business Administration. The Company may apply to MBT for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the eight-week period beginning on April 10, 2020, calculated in accordance with the terms of the CARES Act.
Extension of expiration date of Warrants
On June 9, 2020, Air T, Inc. announced the extension of the expiration date of the Warrants (“Warrants”) to purchase Alpha Income Preferred Securities (also referred to as 8% Cumulative Capital Securities) (“AIP”). The Warrants, previously scheduled to expire on June 10, 2020, are extended and now will expire on September 8, 2020.
Credit Agreement Amendments
On June 26, 2020, the Company entered into a Second Amended and Restated Credit Agreement with MBT, together with certain related documents. Pursuant to the Amended Credit Agreement, MBT agreed to convert outstanding revolving credit advances in an amount equal to $9.5 million to a Term Loan. The new Term Loan has a maturity date of June 25, 2025. The new Term Loan, together with the existing Air T Revolving Credit Facility and other existing Term Loans are and continue to be
completed in fiscal year 2018. This facility will replace the Company’s current headquarters which is leased from an entity ownedguaranteed by certain
former officers and directors at an annual rental payment of approximately $178,000. There are currently no other commitments for significant capital expenditures.Since 1979 the Company has leased the Little Mountain Airport in Maiden, North Carolina from a corporation whose stock is owned in part by former officers and directorssubsidiaries of the Company and an estate of which certain former directors are beneficiaries. The facility consists of approximately 68 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square feet of office space. The operations of Air T, MAC and ATGL are headquartered at this facility. The lease for this facility provides for monthly rent of $14,862 and expires on January 31, 2018, thoughsecured under the lease may be renewedexisting Security Agreement executed by us for three additional two-year option periods through January 31, 2024. The lease agreement provides that the Company shall be responsible for maintenanceand the guarantors, certain real property and by certain pledged collateral accounts.
In connection with the execution and delivery of the
leased facilities and for utilities, taxes and insurance.Since April 1, 2015, the Company’s leasing subsidiary has acquired interests in two equipment leases originated by Vantage Financial, LLC (“Vantage”) for aggregate payments to Vantage of approximately $401,250. The interests in the acquired leases entitle the Company’s leasing subsidiary to receive lease payments from the third parties leasing the equipment for a specified period. Pursuant to the agreements between the Company’s leasing subsidiary and Vantage, Vantage’s fees for servicing the equipment leases for the leasing subsidiary (approximately $1,000) were included in the acquisition payments. William R. Foudray, a directorAmended Credit Agreement, certain subsidiaries of the Company isentered into new collateral account pledge agreements. In connection with the Executive Vice President and a co-founder of Vantage. The amounts paid by the Company’s leasing subsidiary to Vantage to acquire these lease assets represent approximately 1% of Vantage’s outstanding lease assets at March 31, 2016 and the servicing income represents less than 1% of Vantage’s annual revenues.
Management performs an evaluation of events that occur after a balance sheet date but before financial statements are issued or available to be issued for potential recognition or disclosure of such events in its financial statements. The Company evaluated subsequent events through the date that these consolidated financial statements were issued.
On April 4, 2016, ATGL purchased two elan TM 500 printers from Delphax for $650,000 for lease to a third party. One of those acquired printers was subject to an existing lease to a third party (see Note 12) which has been assigned to ATGL.
On June 1, 2016, the dry-lease agreements between MAC and CSA and FedEx Corporation were amended to extend the term of the agreements to May 31, 2020 andAmended Credit Agreement, MBT further agreed to reduce the administrative fee per aircraft operated by MAC and CSA under the dry-lease agreements by approximately 2% (on a weighted average basis) comparedinterest rate floor applicable to the administrative fee rateexisting Revolving Credit Facility from 4.00% to 2.50%.
The above discussion is qualified in
place priorits entirety by reference to the
amendment. Because a portionForm of
Amended Credit Agreement Amendment, Term Note, Amended and Restated Revolving Note, and the
administrative fee funds the payment of certain operational costs incurredJet Yard and Ambry Hill Collateral Account Agreements filed as Exhibits 10.99, 10.100, 10.101, 10.102 and 10.103 to this Report, which are incorporated herein by
MAC and CSA in operating aircraft that are not reimbursed by FedEx and are expected to increase substantially from the levels incurred in the fiscal year ended March 31, 2016, the reduction in administrative fee is anticipated to have a much more significant impact on the segment’s operating income.reference.
In June 2016, the Company acquired land and entered into an agreement to construct a new corporate headquarters in Denver, North Carolina for an aggregate amount of approximately $1.9 million, with construction anticipated to be completed in fiscal year 2018. The facility will replace the Company’s current headquarters which is leased from an entity owned by certain former officers and directors at an annual rental payment of approximately $178,000.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Item 9A.Controls and Procedures. (As Amended) Disclosure Controls
In connection with the preparation of the Original Filing, an evaluation was carried out by the Company’s management, with the participation of our
Our Chief Executive Officer and Chief Financial Officer,
ofreferred to collectively herein as the
effectiveness ofCertifying Officers, are responsible for establishing and maintaining our disclosure controls and procedures
(as definedthat are designed to ensure that information relating to the Company required to be disclosed in
Rules 13a-15(e) and 15d-15(e)the reports that the Company files or submits under the Securities Exchange Act of 1934
(Exchange Act)) as of March 31, 2016. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
required byspecified in the
U.S. Securities and Exchange Commission’s rules and forms,
andincluding ensuring that such information is accumulated and communicated to
the Company’s management, including the Chief Executive Officer and
the Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosures. Atdisclosure. The Certifying Officers have reviewed and evaluated the
timeeffectiveness of the
Original Filing was filed on June 29, 2016, ourCompany’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of March 31, 2020. Our Chief Executive Officer and Chief Financial Officer concluded
ourthat, as of March 31, 2020, the Company’s disclosure controls and procedures were
effective as of March 31, 2016.Subsequent to that evaluation, management reassessed the effectiveness of our disclosure controls and procedures as of March 31, 2016. As a result of this reassessment, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2016. Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting which existed as of March 31, 2016 and are described below. However,effective. In addition, we believe that the consolidated financial statements in this annual report fairly present, in all material respects, the Company’sCompany’s consolidated financial condition as of March 31, 2016,2020, and consolidated results of its operations and cash flows for the yearsyear then ended, in conformity with U.S. generally accepted accounting principles (“GAAP”).
Management’s
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
Internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In connection with under the preparation of the Original Filing andExchange Act, is a process designed by, or under the supervision and withof, the participation of management, including ourCompany's Chief Executive Officer and Chief Financial Officer, we conducted an evaluationor persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining policies and procedures designed to maintain the adequacy of the Company's internal control over financial reporting, including those policies and procedures that:
(1)Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
The Company's management has evaluated the effectiveness of
ourthe Company's internal
controlscontrol over financial reporting
as of March 31, 2020 based on the
frameworkcriteria established in
a report entitled Internal
Control — IntegratedControl-Integrated Framework (2013)
, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). This evaluation did not include an evaluation of effectiveness of internal controls over financial reporting with respect to Delphax. As described in Part I, Item 1 of this Form 10-K/A, we acquired equityCommission. Based on our assessment and
other interests in Delphax on November 24, 2015 and have determinedthose criteria, the Company's management has concluded that
even though Delphax was not a subsidiary of the
Company, we had obtained control over Delphax in conjunction with the acquisition of the interests, and we have consolidated the relevant financial information of Delphax in Air T’s consolidated financial statements beginning on November 24, 2015. Delphax’s operating revenues from the date of our investments through March 31, 2016 were approximately $3,955,000 (3% of consolidated operating revenues). Delphax’s total assets at March 31, 2016 were $9,372,000 (18% of consolidated total assets).At the time the Original Filing was filed on June 29, 2016, based on this evaluation our Chief Executive Officer and Chief Financial Officer concluded ourCompany's internal control over financial reporting was effective at the reasonable assurance level as of March 31, 2016. Subsequent to that evaluation, management reassessed the effectiveness2020.
Because of ourits inherent limitations, internal control over financial reporting asmay not prevent or detect misstatements. Also, projections of March 31, 2016. As a resultany evaluation of this reassessment, our Chief Executive Officer and Chief Financial Officer have concludedeffectiveness to future periods are subject to the risk that our internal control over financial reporting was not effective ascontrols may become inadequate because of March 31, 2016, based onchanges in conditions, or that the criteria in Internal Control — Integrated Framework (2013) issued by COSO, in lightdegree of compliance with the material weaknessespolicies or procedures may deteriorate.
There were no changes in our internal control over financial reporting
described below.A material weakness is a deficiency,identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or a combination of deficiencies, in internal control over financial reporting, such15d-15 that there is a reasonable possibility that a material misstatement of our consolidated annual or interim financial statements will not be prevented or detected on a timely basis. Our management has concluded that, as ofoccurred during fiscal quarter ended March 31, 2016, the following material weaknesses existed:
| ●
| we did not establish an appropriate methodology for attributing the net income or loss of Delphax to the non-controlling interests. Specifically, our attribution was based solely on our ownership of the Series B Preferred Stock rather than on a methodology2020 that gave appropriate consideration to all of Air T’s investments in Delphax and Delphax Canada. As a result of our failure to establish an appropriate attribution methodology it was necessary to restate our unaudited condensed consolidated financial statements as included in the Original Filing; and
|
| ●
| a lack of effective internal controls for the analysis of the accounting guidance applicable to recognition of our investments in Delphax. Specifically, our previous conclusions that Delphax was a VIE and that Air T was Delphax’s primary beneficiary were based in part on considerations which were not supportable under GAAP.
|
The Company’s development of its plan to remediate these material weaknesses is ongoing. While such plan has not yet been finalized, the Company anticipates that its plan will include the further engagement of accounting consultants to assist the Company with respect to accounting for complex accounting transactions.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Limitations on Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and controls may become inadequate if conditions change. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of fiscal year 2016 that may have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Item 9B.Other Information.None
(a) Other Information
Credit Agreement Amendments
On June 26, 2020, the Company entered into a Second Amended and Restated Credit Agreement with MBT, together with certain related documents. Pursuant to the Amended Credit Agreement, MBT agreed to convert outstanding revolving credit advances in an amount equal to $9.5 million to a Term Loan. The new Term Loan has a maturity date of June 25, 2025. The new Term Loan, together with the existing Air T Revolving Credit Facility and other existing Term Loans are and continue to
be guaranteed by certain subsidiaries of the Company and secured under the existing Security Agreement executed by the Company and the guarantors, certain real property and by certain pledged collateral accounts.
In connection with the execution and delivery of the Amended Credit Agreement, certain subsidiaries of the Company entered into new collateral account pledge agreements. In connection with the Amended Credit Agreement, MBT further agreed to reduce the interest rate floor applicable to the existing Revolving Credit Facility from 4.00% to 2.50%.
The above discussion is qualified in its entirety by reference to the Form of Amended Credit Agreement Amendment, Term Note, Amended and Restated Revolving Note, and the Jet Yard and Ambry Hill Collateral Account Agreements filed as Exhibits 10.99, 10.100, 10.101, 10.102 and 10.103 to this Report, which are incorporated herein by reference.
Item 10.Directors, Executive Officers and Corporate Governance. (As Amended)Information concerning Directors and Executive Officers may be foundGovernance
The information contained under the captionsheadings “Proposal 1 –- Election of Directors”Directors,” “Executive Officers,” “ Committees of the Board of Directors,” and “Executive Officers”“Delinquent Section 16(a) Reports” in our definitive proxy statementProxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
Audit Committee Report
The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for our 2016 annual meetingthe financial statements and the reporting process. The Company’s independent registered public accounting firm is responsible for expressing an opinion on the conformity of stockholders (the “2016 Proxy Statement”), which was filedthe Company’s audited financial statements to generally accepted accounting principles.
In this context, the Audit Committee has reviewed and discussed with management and the independent registered public accounting firm the audited financial statements as of and for the year ended March 31, 2020. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committee, as adopted by the Public Company Accounting Oversight Board and currently in effect. In addition, the Audit Committee discussed with the independent registered public accounting firm the written disclosures and letter required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, regarding the independent registered public accounting firm’s communication with the Audit Committee concerning independence and discussed with them their independence from the Company and its management. The Audit Committee also has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with their independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020 for filing with the Securities and Exchange
Commission within 120 days after the close of our fiscal year. Such information is incorporated herein by reference.The information in the 2016 Proxy Statement set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
Commission.
June 26, 2020
AUDIT COMMITTEE
Travis Swenson, Chair
Peter McClung
Ray Cabillot
The Company has adopted a code of ethics applicable to its executive officers and other employees. A copy of the code of ethics is available on the
Company’sCompany’s internet website at http://www.airt.net. The Company intends to post waivers of and amendments to its code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions on its Internet website.
Item 11.Executive Compensation.
Information concerning executive compensation may be found
The information contained under the captionsheading “Executive Officer Compensation” Compensation,” “Base Salary,” “Incentive and Bonus Compensation,” “Retirement and Other Benefits,” “Executive Compensation Tables,” “Employment Agreement and Retirement Savings Plan”
and “Director Compensation”
in our Proxy Statement to be filed within 120 days of our
2016 Proxy Statement. Such informationfiscal year end, is incorporated herein by
reference.reference..
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information contained under the heading “Certain Beneficial Owners of Common Stock,” “Director and Executive Officer Stock Ownership,” in our Proxy Statement to be filed within 120 days of our fiscal year end, is incorporated herein by reference..
Equity Compensation Plan Information
The following table provides information as of March 31,
2016,2020, regarding shares outstanding and available for issuance under Air T, Inc.
’s existing equity compensation plans.Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities listed in first column) | |
Equity compensation plans approved by security holders | | | 40,000 | | | $ | 8.74 | | | | - | |
| | | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
Total | | | 40,000 | | | $ | 8.74 | | | | - | |
The other information in our 2016 Proxy Statement set forth under the captions “Certain Beneficial Owners of Common Stock” and “Director and Executive Officer Stock Ownership” is incorporated herein by reference.
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
listed in first column) |
| Equity compensation plans approved by security holders | | 11,250 | | | $ | 6.61 | | | — | |
| | | | | | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 11,250 | | | $ | 6.61 | | | — | |
Item 13.Certain Relationships and Related Transactions and Director Independence. The information
contained under the heading “Director Independence” and “Certain Transactions” in our
2016 Proxy Statement
set forth under the caption “Certain Transactions”to be filed within 120 days of our fiscal year end, is incorporated herein by reference.
Item 14.Principal AccountingAccountant Fees and Services. The information contained under the heading “Audit Committee Pre-approval of Auditor Engagements” and “Audit Fees” in our 2016 Proxy Statement set forth under the caption “Proposal 3 – Ratificationto be filed within 120 days of our fiscal year end, is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1.Financial Statements
a.The following are incorporated herein by reference in Item 8 of Part II of this report:
(i)Report of Independent Registered Public Accounting Firm” is incorporated herein by reference.PART IV
Item 15.Firm – Deloitte & Touche LLP
(ii)Consolidated Balance Sheets as of March 31, 2020 and 2019.
(iii)Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2020 and 2019.
(iv)Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2020 and 2019.
(v)Consolidated Statements of Cash Flows for the years ended March 31, 2020 and 2019.
(vi)Notes to Consolidated Financial Statements.
3. Exhibits
and Financial Statement Schedules (As Amended) a. | The following are incorporated herein by reference in Item 8 of Part II of this report:
|
| (i)
| Report of Independent Registered Public Accounting Firm - Dixon Hughes Goodman LLP
|
| (ii)
| Consolidated Balance Sheets as of March 31, 2016 and 2015 (As Restated)
|
| (iii)
| Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2016 and 2015
|
No. | Description |
| 3.1 | (As Restated)
|
| (iv)
| Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2016 and 2015 (As Restated)
|
| (v)
| Consolidated Statements of Cash Flows for the years ended March 31, 2016 and 2015 (As Restated)
|
| (vi)
| Notes to Consolidated Financial Statements (As Restated)
|
| 3.2
| Amended and Restated By-laws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K dated November 21, 2012 (Commission File No. 001-35476)
|
| 4.1
| Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K for fiscal year ended March 31, 1994 (Commission File No. 001-35476)
|
| 4.2
| Rights Agreement, dated as of December 15, 2014, between Air T, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 15, 2014 (Commission File No. 001-35476)
|
| 10.1
| Aircraft Dry Lease and Services Agreement effective as of June 1, 2015 between Federal Express Corporation and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 (Commission File No. 001-35476) (Certain information has been omitted from this exhibit pursuant to the request for confidential treatment submitted to the Securities and Exchange Commission. The omitted information has been separately filed with the Securities and Exchange Commission.)
|
| 10.2
| Premises and Facilities Lease dated November 16, 1995 between Global TransPark Foundation, Inc. and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.5 to Amendment No. 1 on Form 10-Q/A to the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 1995 (Commission File No. 001-35476)
|
| 10.3
| Second Amendment to Premises and Facilities Lease dated as of October 15, 2015 between Global TransPark Foundation, Inc. and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (Commission File No. 001-35476)
|
| 10.4
| Lease Agreement dated as of December 17, 2013 between R.W.B.C., L.L.C. and Global Ground Support, LLC, incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 (Commission File No. 001-35476)
|
| 10.5
| Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain Air Cargo, Inc., dated June 16, 2006, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2006 (Commission File No. 001-35476)
|
| 10.6
| Amendment to Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain Air Cargo, Inc. dated May 27, 2014 incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (Commission File No. 001-35476)
|
| 10.7
| Credit Agreement dated April 1, 2015 between Air T, Inc., Mountain Air Cargo, Inc., Global Ground Support, LLC, CSA Air, Inc. Global Aviation Services, LLC and Branch Banking and Trust Company., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 7, 2015 (Commission File No. 001-35476)
|
| 10.8
| Securities Purchase Agreement dated as of October 2, 2015 among Delphax Technologies, Inc., Delphax Technologies Canada Limited and Air T, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10 Q for the period ended December 31, 2015 (Commission File No. 001-35476)
|
| 10.9
| Air T, Inc. 2005 Equity Incentive Plan, incorporated by reference to Annex C to the Company’s proxy statement on Schedule 14A for its annual meeting of stockholders on September 28, 2005, filed with the SEC on August 12, 2005* (Commission File No. 001-35476)
|
| 10.10
| Amendment No. 1 to Omnibus Securities Award Plan incorporated by reference to Exhibit 10 of the Company’s Annual Report on Form 10-K for the year ended March 31, 2000* (Commission File No. 001-35476)
|
| 10.11
| Form of Air T, Inc. Employee Stock Option Agreement (2005 Equity Incentive Plan), incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006* (Commission File No. 001-35476)
|
| 10.12
| Form of Air T, Inc. Director Stock Option Agreement (2005 Equity Incentive Plan), incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006* (Commission File No. 001-35476)
|
| 10.13
| Employment Agreement dated as of March 26, 2014 between the Company and Nicholas J. Swenson, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 26, 2014* (Commission File No. 001-35476)
|
| 21.1
| List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 (Commission File No. 001-35476)
|
| 23.1
| Consent of Dixon Hughes Goodman LLP (filed herewith)
|
| 31.1
| Section 302 Certification of Chief Executive Officer (filed herewith)
|
| 31.2
| Section 302 Certification of Chief Financial Officer (filed herewith)
|
| 32.1
| Section 1350 Certification of Chief Executive Officer (filed herewith)
|
| 32.2 | Section 1350 Certification of Chief Financial Officer (filed herewith) |
| 101 | The following financial information from the Annual Report on Form 10-K for the year ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income and Comprehensive Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholders Equity, and (v) the Notes to the Consolidated Financial Statements.
|
__________________
* Management compensatory plan or arrangement required to be filed as an exhibit to this report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
| /s/ Candice Otey
| | |
| Candice Otey, Chief Financial Officer
| | |
| (Principal Financial and Accounting Officer)
| | Date: October 13, 2017
|
EXHIBIT INDEX (AS AMENDED)
| No . | Description
|
| | |
| | |
| No.
| Description
|
| 10.7
| Credit Agreement dated April 1, 2015 between Air T, Inc., Mountain Air Cargo, Inc., Global Ground Support, LLC, CSA Air, Inc. Global Aviation Services, LLC and Branch Banking and Trust Company., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 7, 2015 (Commission File No. 001-35476)
|
| 10.13
|
| 10.6 |
| |
| |
| 10.7 | | |
| |
| 10.8 | |
| |
| 10.9 | Assignment, Assumption and Amendment Agreement dated November 2, 2018 between Contrail Aviation Support, LLC, WWTAI AIROPCO II DAC, and Blue Air Aviation SA f/k/a Blue Air – Airline Management Solutions SRL, assigning the Engine Lease Agreement, dated January 10, 2018, incorporated by reference to Exhibit 10.2 to theCompany’s Current Report on Form 8-K dated November 8, 2018 (Commission File No. 001-35476)** |
| |
| 10.10 | |
| |
| 10.11 | |
| |
| 10.12 | |
| |
| 21.1
| | | | |
| 10.13 | |
| |
| 10.14 | |
| |
| 10.15 | |
| |
| 10.16 | |
| |
| 10.17 | |
| |
| 10.18 | |
| |
| 10.19 | |
| |
| 10.20 | |
| |
| 10.21 | |
| |
| 10.22 | |
| |
| 10.23 | |
| |
| 10.24 | |
| |
| 10.25 | |
| |
| 10.26 | |
| |
| 10.27 | |
| |
| 10.28 | |
| |
| | | | | |
| 10.29 | |
| |
| 10.30 | |
| |
| 10.31 | |
| |
| 10.32 | |
| |
| 10.33 | |
| |
| 10.34 | |
| |
| 10.35 | |
| |
| 10.36 | |
| |
| 10.37 | |
| |
| 10.38 | |
| |
| 10.39 | |
| |
| 10.40 | |
| |
| 10.41 | |
| |
| 10.42 | |
| |
| 10.43 | |
| |
| 10.44 | |
| |
| 10.45 | |
| |
| 10.46 | |
| |
| | | | | |
| 10.47 | |
| |
| 10.48 | |
| |
| 10.49 | |
| |
| 10.50 | |
| |
| 10.51 | |
| |
| 10.52 | |
| |
| 10.53 | |
| |
| 10.54 | |
| |
| 10.55 | |
| |
| 10.56 | |
| |
| 10.57 | |
| |
| 10.58 | |
| |
| 10.59 | Trustee Aircraft Security Agreement, dated August 16, 2019 by and between Wells Fargo Trust Company, National Association, Contrail Aviation Support, LLC, Contrail Aviation Leasing, LLC, and Old National Bank, incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 (Commission File No. 001-35476)** |
| |
| 10.60 | |
| |
| 10.61 | |
| |
| | | | | |
| 10.62 | |
| |
| 10.63 | |
| |
| 10.64 | |
| |
| 10.65 | |
| |
| 10.66 | |
| |
| 10.67 | |
| |
| 10.68 | |
| |
| 10.69 | |
| |
| 10.70 | |
| |
| 10.71 | |
| |
| 10.72 | |
| |
| 10.73 | |
| |
| 10.74 | |
| |
| 10.75 | |
| |
| | | | | |
| 10.76 | |
| |
| 10.77 | |
| |
| 10.78 | Form of Aircraft Security Agreement, dated December 19, 2019 by and between Contrail Aviation Support, LLC, Contrail Aviation Leasing, LLC, Contrail Aviation Leasing Ireland DAC, CRO No. 662616, and Old National Bank, incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K dated December 26, 2019 (Commission File No. 001-35476)** |
| |
| 10.79 | |
| |
| 10.80 | |
| |
| 10.81 | |
| |
| 10.82 | |
| |
| 10.83 | |
| |
| 10.84 | |
| |
| 10.85 | |
| |
| 10.86 | Form of Acknowledgement and Agreement of AirCo, LLC, CSA Air, LLC, Global Ground Support, Inc., Jet Yard, LLC, Mountain Air Cargo, Inc., Stratus Aero Partners, LLC, Air T Global Leasing, LLC, AirCo Services, LLC, Space Age Insurance Company, Worthington Acquisition, LLC, Worthington Aviation, LLC and Worthington MRO, LLC, dated December 31, 2019 in favor of Minnesota Bank & Trust, incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K dated January 7, 2020 (Commission File No. 001-35476) |
| |
| 10.87 | |
| |
| 10.88 | |
| | | | | |
| |
| 10.89 | |
| |
| 10.90 | |
| |
| 10.91 | |
| |
| 10.92 | |
| |
| 10.93 | |
| |
| 10.94 | |
| |
| 10.95 | |
| |
| 10.96 | |
| |
| 10.97 | |
| |
| 10.98 | |
| |
| 10.99 | |
| |
| 10.100 | |
| |
| 10.101 | |
| |
| 10.102 | |
| |
| 10.103 | |
| |
| 21.1 | |
| |
| 101 | The following financial information from the Annual Report on Form 10-K for the year ended March 31, 2016,2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income and Comprehensive Income, (ii) the ConsolidatedConsolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholders Equity, and (v) the Notes to the Consolidated Financial Statements (filed herewith). |
____________________
* Management compensatory plan or arrangement required to be filed as an exhibit to this report.
** Certain information has been omitted from this exhibit pursuant to the request for confidential treatment submitted to the Securities and Exchange Commission. The omitted information has been separately filed with the Securities and Exchange Commission.
Item 16. Form 10-K Summary
We have chosen not to include an optional summary of the information required by this Form 10-K. For a reference to the information in this Form 10-K, investors should refer to the Table of Contents to this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| AIR T, INC. | | |
| | | |
| By: | /s/ Nick Swenson | | |
| Nick Swenson, Chairman, President and
Chief Executive Officer and Director (Principal Executive Officer) | | Date: June 26, 2020 |
| | | |
| By: | /s/ Brian Ochocki | | |
| Brian Ochocki, Chief Financial Officer
(Principal Financial Officer) | | Date: June 26, 2020 |
| | | |
| By: | /s/ Seth Barkett | | |
| Seth Barkett, Director | | Date: June 26, 2020 |
| | | |
| By: | /s/ Raymond Cabillot | | |
| Raymond Cabillot, Director | | Date: June 26, 2020 |
| | | |
| By: | /s/ William R. Foudray | | |
| William R. Foudray, Director | | Date: June 26, 2020 |
| | | |
| By: | /s/ Gary S. Kohler | | |
| Gary S. Kohler, Director | | Date: June 26, 2020 |
| | | |
| By: | / s/ Peter McClung | | |
| Peter McClung, Director | | Date: June 26, 2020 |
| | | |
| By: | /s/ Travis Swenson | | |
| Travis Swenson, Director | | Date: June 26, 2020 |