NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2022 AND 2021
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 four industry segments:
•Overnight air cargo, which operates in the air express delivery services industry;
•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
•Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;
•Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable 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 (loss) and Adjusted EBITDA.
Discontinued Operations
On September 30, 2019, the Company completed the sale of GAS. The results of operations of GAS are reported as discontinued operations in the condensed consolidated statements of operations for the year ended March 31, 2021. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
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, Shanwick and Delphax. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the prior period amounts to conform to the current presentation.
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.
COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses implemented measures to attempt to limit the impact of COVID-19 but we still experienced a number of disruptions, and we experienced and continue to experience to a lesser degree a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Many of our businesses may continue to generate reduced operating cash flow and may continue to operate at a loss from time to time beyond fiscal 2022. We expect that the impact of COVID-19 will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2022, however; uncertainty over the ultimate direct and indirect 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, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19.
Segments - The Company has four reportable operating segments: overnight air cargo, ground equipment sales, commercial jet engine and parts and corporate and other. The Company assesses the performance of these segments on an individual basis (see Note 22). 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 (loss) and Adjusted EBITDA.
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. 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.
Income statement activity of an acquired business is reflected within the Company’s consolidated statements of income (loss) commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.
Acquisition-related costs are costs the Company incurs to affect a business combination. Those costs may include such items as 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.
Changes in estimates of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as part of the acquisition, rather, they are recognized directly in earnings.
Cash and Cash Equivalents – Cash equivalents consist of liquid investments with maturities of three months or less when purchased.
Financial Instruments Designated for Trading – Except for short sales of equity securities, the Company accounts for all other financial instruments (including derivative instruments) designated for trading in accordance with ASC 815. All changes in the fair value of the financial instruments designated for trading are recognized in earnings as they occur. Further, all gains and losses on derivative instruments designated for trading are presented net on the consolidated Statements of Income (Loss). The fair value of derivative instruments designated for trading in a gain position are recorded in Other Current Assets and the fair value of derivative instruments designated for trading in a loss position are recorded in Accrued Expenses and Other on the consolidated Balance Sheets.
The Company accounts for short sales of equity securities in accordance with ASC 942 and ASC 860. The obligations incurred in short sales are reported in Accrued Expenses and Other on the consolidated Balance Sheets. They are subsequently measured at fair value through the income statement at each reporting date with gains and losses on securities. Interest on the short positions are accrued periodically and reported as interest expense. The market value of the Company’s equity securities and cash held by the broker are used as collateral against any outstanding margin account borrowings for purposes of short selling equities. This collateral is recorded in Other Current Assets on the consolidated Balance Sheets.
The Company reports all cash receipts and payments resulting from the purchases and sales of securities, loans, and other assets that are acquired specifically for resale as operating cash flows.
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 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.
The Company periodically evaluates the carrying value of inventory. In these evaluations, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Any slow moving, obsolete or damaged inventory and inventory with costs exceeding net realizable value are evaluated for write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.
In accordance with industry practice, all inventories are classified as a current asset including portions with long production cycles, some of which may not be realized 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 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 investment.
The Company assesses the carrying value of its investments whenever events or changes in 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 Company’s intent with respect to holding or disposing of the investment. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and the Company’s ultimate use of the investment could impact the assumptions and result in future impairment losses to the 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 amount by which the carrying value exceeds the fair value. The fair value is 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 evaluates goodwill on an annual basis or anytime events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The Company is permitted to first assess qualitative factors to determine whether it is more likely than not (that 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 there may be an impairment, then a quantitative analysis is performed. In the first step of the quantitative method, recoverability of goodwill is evaluated by estimating the fair value of the reporting unit’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. The Company will recognize an impairment charge for the amount by which the carrying value of the reporting unit exceeds its fair value, if any.
Goodwill consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
| | | |
Goodwill, at original cost | $ | 10,502 | | | $ | 4,603 | |
| | | |
Less accumulated impairment | (376) | | | (376) | |
Goodwill, net of impairment | $ | 10,126 | | | $ | 4,227 | |
As of March 31, 2022, $4.2 million of the goodwill balance is attributable to the acquisition of Contrail and included within the Commercial Jet Engines and Parts segment. $5.9 million of the goodwill balance is attributable to the acquisition of GdW in February 2022, and included within the Corporate and Other segment.
We performed our annual impairment assessment for goodwill of the Contrail reporting unit at March 31, 2022. In the fiscal year 2022, COVID-19 continued to greatly impact the macroeconomic conditions and the outlook of the airline industry. Due to this, the Company performed a quantitative analysis using a combination of the income 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, 2022, the fair value of our Contrail reporting unit exceeded its carrying value, and management concluded that no impairment charge was warranted.
Intangible Assets – Amortizable intangible assets consist of acquired patents, tradenames, customer relationships, and other finite-lived identifiable intangibles. Such intangibles are initially recorded at fair value 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.
The estimated amortizable lives of the intangible assets are as follows:
| | | | | |
| Years |
Purchased software | 3 |
Internally developed software | 10-15 |
In-place lease and other intangibles | Over lease term |
Trade names | 5 |
Certification | 5 |
Non-compete | 5 |
License | 5 |
Patents | 9 |
Customer relationships | 10-15 |
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. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Equipment leased to customers is depreciated using the straight line method. Useful lives range from three years for computer equipment, seven years for flight equipment, ten years for deicers and other equipment leased to customers and thirty 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. If assets are not actively being leased (i.e. held for lease), then they are not being depreciated. Major overhauls which improve functionality or extend original useful life are capitalized and depreciated over the engine assets' useful life to a residual value. 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. The Company believes this methodology accurately reflects the typical holding period for the assets and, that the residual value assumption, which is dependent on the Company's eventual plan for the engine assets (i.e. whole asset sale, part-out, etc.), 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 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. When evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model. We determine fair value of the assets by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from manufacturers as well as specific market sales. 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 the excess of carrying value over fair value.
Accounting for Debt - Trust 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 non-cash transaction. In connection with the issuance of these TruPs, the Company also issued an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in stated value of TruPs). A warrant for mandatorily redeemable shares conditionally obligates the issuer 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. Fair value measurement was based on quoted price for a similar asset or liability as observed on the NASDAQ Global Market. The liability is classified as Level 2 in the hierarchy. As of March 31, 2022, 5.3 million Warrants were exercised. The remaining 3.1 million Warrants were not exercised and expired on August 30, 2021.
On May 14, 2021, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (the “sales agent” or “Ascendiant”), pursuant to which it may sell and issue its TruPs having an aggregate offering price of up to $8.0 million from time to time. The Company has no obligation to sell any TruPs, and may at any time suspend offers under the ATM Agreement or terminate the ATM Agreement.
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 conversion option as a liability on the balance sheet. Further, as the redemption date and the redemption amount are both fixed, in accordance with ASC 825, we measured these TruPs at the present value of the amount to be paid at settlement, discounted by using the implicit rate at inception.
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.
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 income taxes 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 a tax position taken on a tax return, if that position is more likely than not of being sustained on audit, based on the 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, in connection with the Company's acquisition of Contrail, Contrail entered into an Operating Agreement (the “Operating Agreement”) with the Seller providing for the governance of and the terms of membership interests in Contrail. The Operating Agreement includes put and call options (“Contrail Put/Call Option”) with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail and its current Chief Executive Officer. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was 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 agreement.
In February 2022, in connection with the Company's acquisition of GdW, a consolidated subsidiary of Shanwick, the Company entered into a shareholder agreement with the 30% non-controlling interest owners of Shanwick, providing for the governance of and the terms of membership interests in Shanwick. The shareholder agreement includes put and call options (“Shanwick Put/Call Option”) with regard to the 30% non-controlling interest. The non-controlling interest holders are the executive management of the underlying business. The Shanwick Put/Call Option grants the Company an option to purchase the 30% interest at the call option price ("Call Option") that equals to the average EBIT over the 3 Financial Years prior to the exercise of the Call Option multiplied by 8. In addition, the Shanwick Put/Call Option also grants the non-controlling interest owners an option ("Put Option") to require Air T to purchase from them their respective ownership interests at the Put Option price, that is equal to the average EBIT over the 3 Financial Years prior to the exercise of the Put Option multiplied by 7.5. The Call Option and the Put Option may be exercised at any time from the fifth anniversary of the shareholder agreement and then only at the end of each fiscal year of Air T.
Applicable accounting guidance requires an equity instrument that is 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 is not solely within the control of the issuer. As a result of this feature, the Company recorded the non-controlling interests as redeemable and classified them in temporary equity within its Consolidated Balance Sheets initially at their acquisition-date estimated redemption value or fair value.
Per the Operating Agreement, the Contrail's non-controlling interest is redeemable at fair value, which is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. 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 earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail. The Contrail's non-controlling interest is adjusted each reporting period for income (or loss) attributable to the non-controlling interest as 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 recognized through retained earnings and are not reflected in the Company's Consolidated Statements of Income (Loss). When calculating earnings per share attributable to the Company, the Company adjusts net income attributable to the Company for the measurement period adjustment to the extent the redemption value exceeds the fair value of the non-controlling interest on a cumulative basis. As of March 31, 2022, the fair value of the Contrail's redeemable non-controlling interest is $7.2 million. See Note 24, Commitments and Contingencies. The Shanwick's non-controlling interest is redeemable at established multiples of EBIT and, as such, is considered redeemable at other than fair value. It is recorded on our consolidated balance sheets at estimated redemption value within redeemable non-controlling interests, and changes in its estimated redemption value are recorded on our consolidated statements of operations within non-controlling interests. As of March 31, 2022, the estimated redemption value of Shanwick's redeemable non-controlling interest is $3.6 million. See Note 24, Commitments and Contingencies. 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 costs 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 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 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 (loss). These pass-through costs totaled $23.0 million and $19.9 million for the years ended March 31, 2022 and 2021, respectively.
Liquidity – The Company’s Credit Agreement with MBT (the Air T debt in Note 14) includes several covenants that are measured once a year at March 31, including, but not limited to, a financial covenant requiring a debt service coverage ratio of 1.25. The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 14) contains an affirmative covenant relating to collateral valuation. As of March 31, 2022, the Company and AirCo 1 were in compliance with all financial covenants.
The Contrail Credit Agreement (the Contrail debt in Note 14) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum TNW of $8 million. As of March 31, 2022, Contrail was in compliance with all financial covenants.
The Company believes it is probable that the cash on hand (including that obtained from other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
Recently Issued Accounting Pronouncements
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 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 amendments 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 December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of this ASU. An entity may elect to apply the amendments prospectively 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.
In July 2021, the FASB updated the Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. The amendments in this Update address stakeholders’ concerns by amending the lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met:
1.The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3.
2.The lessor would have otherwise recognized a day-one loss.
When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The leased asset continues to be subject to the measurement and impairment requirements under other applicable GAAP. The amendments in this Update are effective for fiscal years beginning after December 15, 2021, for all entities, and interim periods within those fiscal years for public business entities. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures.
Recently Adopted Accounting Pronouncements
In October 2021, the FASB updated the 2021-08—Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to record for the acquired revenue contracts. Generally, this should result in an acquirer recognizing and measuring the acquired
contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements (if the acquiree prepared financial statements in accordance with GAAP). However, there may be circumstances in which the acquirer is unable to assess or rely on how the acquiree applied Topic 606, such as if the acquiree does not follow GAAP, if there were errors identified in the acquiree’s accounting, or if there were changes identified to conform with the acquirer’s accounting policies. In those circumstances, the acquirer should consider the terms of the acquired contracts, such as timing of payment, identify each performance obligation in the contracts, and allocate the total transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception (that is, the date the acquiree entered into the contracts) or contract modification to determine what should be recorded at the acquisition date. The amendments in this Update also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination.
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments.
Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application.
The Company early adopted the amendments as of April 1, 2021. As a result, we recognized and measured contract assets and contract liabilities acquired from the acquisition of GdW in accordance with Topic 606 as if we had originated the contracts.
In November 2021, the FASB issued an update on the 2021-10—Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in this Update apply to business entities that account for a transaction with a government by applying a grant or contribution accounting model by analogy to other accounting guidance (for example, a grant model within IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, or Subtopic 958-605, Not-For-Profit Entities—Revenue Recognition).
The amendments in this Update require the following annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy:
1. Information about the nature of the transactions and the related accounting policy used to account for the transactions
2. The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item
3. Significant terms and conditions of the transactions, including commitments and contingencies.
The amendments in this Update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early application of the amendments is permitted. An entity should apply the amendments in this Update either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions.
On January 24, 2022, the Company filed an application with the Internal Revenue Service for an ERC in an amount approximating $9.1 million. The Company early adopted the amendments as of April 1, 2021 and made all the required disclosures pertaining to our ERC application in Note 11.
2. Acquisitions
Wolfe Lake HQ, LLC
On December 2, 2021, the Company, through its wholly-owned subsidiary Wolfe Lake HQ, LLC, completed the purchase of the real estate located in St. Louis Park, Minnesota pursuant to the real estate purchase agreement with WLPC East, LLC, a Minnesota limited liability company dated October 11, 2021. The real estate purchased consists of a 2-story office building, asphalt-paved driveways and parking areas, and landscaping. The building was constructed in 2004 with an estimated 54,742 total square feet of space. The real estate purchased is where the Air T's executive office is currently located. With this purchase, the Company assumed 11 leases from existing tenants occupying the building.
The total amount recorded for the real estate was $13.4 million, which included the purchase price of $13.2 million and total direct capitalized acquisition costs of $0.2 million. The consideration paid for the real estate consisted of approximately $3.3 million in cash and a new secured loan from Bridgewater Bank ("Bridgewater") with an aggregate principal amount of $9.9 million and a fixed interest rate of 3.65% which matures on December 2, 2031. See Note 14.
In accordance with ASC 805, the purchase price consideration was allocated as follows (in thousands):
| | | | | |
Land | $ | 2,794 | |
Building | 8,439 | |
Site Improvements | 798 | |
Tenant Improvements | 269 | |
In-place lease and other intangibles | 1,108 | |
| $ | 13,408 | |
GdW Beheer B.V.
On February 10, 2022, the Company acquired GdW, a Dutch holding company in the business of providing global aviation data and information. The acquisition was completed through a wholly-owned subsidiary of the Company, Air T Acquisition 22.1, LLC ("Air T Acquisition 22.1", “Subsidiary”), a Minnesota limited liability company, through its Dutch subsidiary, Shanwick, and was funded with cash, investment by executive management of the underlying business, and the loans described in Note 14. As part of the transaction, the executive management of the underlying business purchased 30% of Shanwick. Air T Acquisition 22.1 and its consolidated subsidiaries are included within the Corporate and other segment. Total consideration is summarized in the table below (in thousands):
| | | | | |
| February 10, 2022 |
Consideration paid | $ | 15,256 | |
Less: Cash acquired | (2,452) | |
Less: Net assets acquired | (6,855) | |
Goodwill | $ | 5,949 | |
The transaction 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 fair values as of February 10, 2022, with the excess of total consideration over fair value of net assets acquired recorded as goodwill. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of February 10, 2022 (in thousands):
| | | | | |
| February 10, 2022 |
ASSETS | |
Accounts Receivable | $ | 715 | |
Other current assets | 67 |
Property, plant and equipment, net | 40 |
Intangible - Proprietary Database | 2,936 |
Intangible - Customer Relationships | 7,354 |
| |
Total assets | 11,112 |
| |
LIABILITIES | |
Accounts payable | 15 |
Accrued expenses and deferred revenue | 1,670 |
Deferred income tax liabilities, net | 2,572 |
Total liabilities | 4,257 |
| |
Net assets acquired | $ | 6,855 | |
As of March 31, 2022, the purchase price allocation is considered preliminary. The Company’s initial accounting for this acquisition is incomplete as of the date of this report. Therefore, as permitted by applicable accounting guidance, the foregoing amounts are provisional. All relevant facts and circumstances are still being considered by management prior to finalization of the purchase price allocation.
The following table sets forth the revenue and expenses of GdW, prior to intercompany eliminations, that are included in the Company’s condensed consolidated statement of income for the fiscal year ended March 31, 2022 (in thousands):
| | | | | |
| Income Statement Post-Acquisition |
Revenue | $ | 887 | |
Cost of Sales | 145 | |
Operating Expenses | 701 | |
Operating Income | 41 | |
Non-operating income | 19 | |
Net income | $ | 60 | |
Pro forma financial information is not presented as the results are not material to the Company’s consolidated financial statements.
3. MAJOR CUSTOMER
Approximately 41% and 37% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2022 and 2021, respectively. Approximately 15% and 35% of the Company’s consolidated accounts receivable at March 31, 2022 and 2021, respectively, were due from FedEx Corporation.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and reports financial assets and liabilities at fair value. 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).
Assets Measured and Recorded at Fair Value on a Recurring Basis
The following consolidated balance sheet items are measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | |
| | Fair Value Measurements at March 31, |
| | 2022 | | 2021 |
Marketable securities (including restricted investments) (Level 1) | | $ | 2,550 | | | $ | 2,914 | |
Interest rate swaps (Level 2) | | 889 | | | 593 | |
| | | | |
Warrants Liability (Level 2) | | — | | | 414 | |
Contrail's redeemable non-controlling interest (Level 3) | | $ | 7,178 | | | $ | 6,598 | |
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. See Note 9. The fair value of Contrail's redeemable non-controlling interest is based on a combination of market approach and income approach and is classified as Level 3 in the hierarchy. See Note 24. The fair value measurements which use significant observable inputs (Level 3), changed due to the following (in thousands):
| | | | | | |
| | Contrail's Redeemable Non- Controlling Interest |
Beginning Balance as of April 1, 2021 | | $ | 6,598 | |
Contribution from non-controlling member | | 285 | |
Distribution to non-controlling member | | — | |
Net income attributable to non-controlling interests | | 826 | |
Fair value adjustment - Contrail (Note 24) | | (531) | |
Ending Balance as of March 31, 2022 | | $ | 7,178 | |
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 values at March 31, 2022 and 2021.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of engine assets on lease or held for lease by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors such as current data from manufacturers as well as specific market sales. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. The Company used Level 2 inputs to measure write-downs of engine assets on lease or held for lease. As of March 31, 2022, as a result of our year-end valuation, we did not identify any impairment on our engine assets on lease or held for lease.
5. INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
Overnight air cargo | $ | 28 | | | $ | — | |
Ground equipment manufacturing: | | | |
Raw materials | 4,688 | | | 4,695 | |
Work in process | 2,437 | | | 5,820 | |
Finished goods | 9,264 | | | 1,691 | |
Corporate and other: | | | |
Raw materials | 705 | | | 462 | |
Finished goods | 728 | | | 889 | |
Commercial jet engines and parts: | 60,439 | | | 60,516 | |
Total inventories | 78,289 | | | 74,073 | |
Reserves | (3,122) | | | (2,102) | |
Total inventories, net of reserves | $ | 75,167 | | | $ | 71,971 | |
A write-down of $0.8 million was recorded on the inventory of the commercial jet engines and parts segment during the fiscal year ended March 31, 2022. The write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2022, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.
6. LESSOR ARRANGEMENTS
Assets on lease
The Company leases equipment to third parties, primarily through Contrail which leases engines to aviation customers with lease terms between 1 and 3 years under operating lease agreements. For the assets currently on lease, there are no options for the lessees to purchase the assets at the end of the leases. The Company depreciates the engines on a straight-line basis over the assets' useful life from the acquisition date to a residual value. Depreciation expense relating to engines on lease was $0.3 million and $1.9 million for the fiscal years ended March 31, 2022 and 2021, respectively.
Future minimum rental payments to be received do not include contingent rentals that may be received under certain leases because amounts are based on usage. Contingent rent earned totaled approximately $0.1 million and $4.9 thousand for the fiscal years ended March 31, 2022 and 2021, respectively. As of March 31, 2022, future minimum rental payments to be received under non-cancelable leases are as follows (in thousands):
| | | | | |
Year ended March 31, | |
2023 | $ | 4,380 | |
2024 | 72 | |
2025 | — | |
2026 | — | |
2027 | — | |
Thereafter | — | |
Total | $ | 4,452 | |
As of March 31, 2022, Contrail has one engine on lease that includes a return-to-condition compensation ("engine compensation") provision upon the lease termination in December 2022. The engine compensation is determined as the sum of $3.6 million, plus a variable component calculated based on various escalation factors, including usage of flight hours and consumption of material, labor and utility. The Company estimated the engine compensation as of March 31, 2022 to be $4.4 million, which was recorded within "Other current assets" on our consolidated balance sheets. $3.6 million of the engine compensation is fixed, and thus is included within the $4.4 million of future rental payments to be received during the fiscal year ended March 31, 2023.
Office leases
The Company, through its wholly owned subsidiary, Wolfe Lake, leases offices to third parties with lease terms between 5 and 29 years under operating lease agreements. For the offices currently on lease, there are no options for the lessees to purchase the spaces at the end of the leases. The Company depreciates the assets on a straight-line basis over the assets' useful life. Depreciation expense relating to office leases was $0.1 million for the fiscal year ended March 31, 2022.
We recognized rental and other revenues related to operating lease payments of $0.4 million, of which variable lease payments were $0.2 million during the year ended March 31, 2022. Future minimum rental payments to be received do not include variable lease payments that may be received under certain leases because amounts are based on usage. The following table sets forth the undiscounted cash flows for future minimum base rents to be received from customers for office leases in effect at March 31, 2022:
| | | | | |
Year ended March 31, | |
2023 | $ | 827 | |
2024 | 780 | |
2025 | 774 | |
2026 | 746 | |
2027 | 728 | |
Thereafter | 3,729 | |
Total | $ | 7,584 | |
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
Furniture, fixtures and equipment | $ | 6,470 | | | $ | 4,852 | |
Leasehold improvements | 6,297 | | | 5,541 | |
Building | 13,850 | | | 2,636 | |
| 26,617 | | | 13,029 | |
Less: accumulated depreciation | (5,405) | | | (4,510) | |
Property and equipment, net | $ | 21,212 | | | $ | 8,519 | |
8. INTANGIBLES
Intangibles consisted of the following (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
Purchased software | $ | 447 | | | $ | 407 | |
Internally developed software | 4,112 | | 828 |
In-place lease and other intangibles | 1,108 | | — | |
Customer relationships | 7,694 | | 451 |
Patents | 1,112 | | 1,112 |
Other | 1,391 | | 1,024 |
| 15,864 | | 3,822 |
Less: accumulated amortization | (2,947) | | (2,467) |
| 12,917 | | | 1,355 | |
In-process software | 343 | | 245 |
Intangible assets, total | $ | 13,260 | | | $ | 1,600 | |
The components of purchased intangible assets for Wolfe Lake were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 |
| Average Remaining Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
| | | | | | | |
In-place lease and other intangibles | 9 years, 3 months | | $ | 1,108 | | | $ | 63 | | | $ | 1,045 | |
The components of purchased intangible assets for GdW were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 |
| Average Remaining Amortization Period | | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
| | | | | | | |
Internally developed software | 9 years, 10 months | | $ | 2,892 | | | $ | 49 | | | $ | 2,843 | |
Customer relationship | 14 years, 10 months | | 7,243 | | 82 | | 7,161 |
| 13 years, 5 months | | $ | 10,135 | | | $ | 131 | | | $ | 10,004 | |
Based on the intangible assets recorded at March 31, 2022 and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
| | | | | |
(In thousands) | Amortization |
2023 | $ | 1,312 | |
2024 | 1,181 |
2025 | 1,107 |
2026 | 1,037 |
2027 | 997 |
Thereafter | 7,283 |
| $ | 12,917 | |
9. INVESTMENTS IN SECURITIES AND DERIVATIVE INSTRUMENTS
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 Air T - 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 fixed rate of 4.56% and 5.09%, respectively, on Term Notes A and D. The swaps mature in January 2028.
On August 31, 2021, Air T and MBT refinanced Term Note A and fixed its interest rate at 3.42%. As a result of this refinancing, the Company determined that the interest rate swap on Term Note A was no longer an effective hedge. The Company will amortize the fair value of the interest-rate swap contract included in accumulated other comprehensive income (loss) associated with Term Note A at the time of de-designation into earnings over the remainder of its term. In addition, any changes in the fair value of Term Note A's swap after August 31, 2021 are recognized directly into earnings. The remaining swap contract associated with Term Note D is designated as an effective cash flow hedging instrument in accordance with ASC 815.
On January 7, 2022, Contrail completed an interest rate swap transaction with Old National Bank ("ONB") with respect to the $43.6 million loan made to Contrail in November 2020 pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve ("Contrail - Term Note G"). The purpose of the floating-to-fixed interest rate swap transaction was to effectively fix the loan interest rate at 4.68%. As of February 24, 2022, this swap contract has been designated as a cash flow hedging instrument and qualified as an effective hedge in accordance with ASC 815. During the period between January 7, 2022 and February 24, 2022, the Company recorded a loss of approximately $0.1 million in the consolidated statement of income (loss) due to the changes in the fair value of the instrument prior to the designation and qualification of this instrument as an effective hedge. After it was deemed an effective hedge, the Company recorded changes in the fair value of the instrument in the consolidated statement of comprehensive income (loss).
For the swaps related to Air T Term Note D and Contrail - Term Note G, the effective portion of changes in the fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the consolidated statement of income (loss) as interest expense in the same period in which the underlying hedged transactions affect earnings. The interest rate swaps are considered Level 2 fair value measurements. As of March 31, 2022 and March 31, 2021, the fair value of the interest-rate swap contracts was an asset of $0.9 million and a liability of $0.6 million, respectively, which is included within other assets and other non-current liabilities, respectively in the consolidated balance sheets. During the twelve months ended March 31, 2022 and 2021, the Company recorded a gain of approximately $0.9 million and $0.3 million, net of tax, respectively, in the consolidated statement of comprehensive income (loss) for changes in the fair value of the instruments.
The Company may, from time to time, employ trading strategies designed to profit from market anomalies and opportunities it identifies. Management uses derivative financial instruments to execute those strategies, which may include options, and futures contracts. These derivative instruments are priced using publicly quoted market prices and are considered Level 1 fair value measurements. During the fiscal year ended March 31, 2022, the Company did not record any gain or loss related to these derivative instruments. During the fiscal year ended March 31, 2021, the Company had a gross gain aggregating to $0.8 million and a gross loss aggregating to $23.7 thousand related to these derivative instruments.
The Company also invests in exchange-traded marketable securities and accounts for that activity in accordance with ASC 321, Investments- Equity Securities. Marketable equity securities are carried at fair value, with changes in fair market value included in the determination of net income (loss). The fair market value of marketable equity securities is determined based on quoted market prices in active markets. During the fiscal year ended March 31, 2022, the Company had a gross unrealized gain aggregating to $2.8 million and a gross unrealized loss aggregating to $2.4 million. During the fiscal year ended March 31, 2021, the Company had a gross unrealized gain aggregating to $1.2 million and a gross unrealized loss aggregating to $1.2 million. These unrealized gains and losses are included in Other income (loss) on the consolidated statement of income (loss).
The market value of the Company’s equity securities and cash held by the broker are periodically used as collateral against any outstanding margin account borrowings. As of March 31, 2022 and 2021, the Company had no outstanding borrowings under its margin account. As of March 31, 2022 and 2021, the Company had cash margin balances related to exchange-traded equity securities and securities sold short of $0 and $0.9 million, respectively, which is reflected in other current assets on the consolidated balance sheets.
10. 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. As of March 31, 2022, the number of Insignia's shares owned by the Company was adjusted to 0.5 million, representing approximately 27% of the outstanding shares. During the fiscal year ended March 31, 2021, due to loss attributions and impairments taken in prior fiscal years, the Company's net investment basis in Insignia was reduced to $0. As such, the Company did not record any additional share of Insignia's net loss for the fiscal year ended March 31, 2022. On August 23, 2021, Insignia restated its 10-K for the fiscal year ended December 31, 2020 and its 10-Q for the quarter ended March 31, 2021. The Company evaluated these restatements and determined that they would not result in any additional impact on the Company's condensed consolidated financial statements.
The Company's 18.98% investment in CCI is accounted for under the equity method of 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 fiscal year ended March 31, 2022, the Company recorded a loss of $0.8 million as its share of CCI's net loss for the twelve months ended December 31, 2021, along with a basis difference adjustment of $50.0 thousand. Additionally, due to the adverse financial results as reported in CCI's financial statements for the quarters ended June 30, 2021 and September 30, 2021, in addition to consideration of industry reports and other qualitative factors, the Company determined that it suffered from an other-than-temporary impairment in its investment in CCI. As such, the Company recorded an impairment charge of $0.3 million during the quarter ended December 31, 2021. The Company's net investment basis in CCI is $2.6 million as of March 31, 2022.
Summarized audited financial information for the Company's equity method investees for the twelve months ended December 31, 2021 and December 31, 2020 are as follows (in thousands):
| | | | | | | | | | | |
| Twelve Months Ended December 31, 2021 | | Twelve Months Ended December 31, 2020 |
Revenue | $ | 115,051 | | | $ | 91,245 | |
Gross Profit | 5,642 | | | 4,589 | |
Operating loss | (9,627) | | | (10,551) | |
Net loss | (7,473) | | | (1,960) | |
Net loss attributable to Air T, Inc. stockholders | $ | (815) | | | $ | (760) | |
11. EMPLOYEE RETENTION CREDIT
The ERC, as originally enacted on March 27, 2020 by the CARES Act, is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act (the “Relief Act”), enacted on December 27, 2020, amended, and extended the ERC. The Relief Act extended and enhanced the ERC for qualified wages paid after December 31, 2020 through June 30, 2021. Under the Relief Act, eligible employers may claim a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an eligible employer pays to employees after December 31, 2020 through June 30, 2021. Under the American Rescue Plan Act of 2021 ("ARPA"), which was signed into law on March 11, 2021, the ERC was further extended through December 31, 2021. The purpose of the ERC is to encourage employers to keep employees on the payroll, even if they are not working during the covered period because of the COVID-19 outbreak.
The Company qualified for federal government assistance through the ERC provisions for the period between January 1, 2021 and September 30, 2021. We recognize government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. As of March 31, 2022, the Company's expected one-time refunds totaling $9.1 million, are included on the Consolidated Balance Sheets as an Employee Retention Credit receivable, as well as on the Consolidated Statements of Income (Loss) as an offset to the related employee expenses within general and administrative expenses.
We expect to receive the employee retention credit payment in fiscal 2023. Upon receipt, we expect to allocate these funds towards a combination of further investment in our team members, growth investments, capital expenditures, and deferred maintenance capital spending.
12. ACCRUED EXPENSES
| | | | | | | | | | | |
| Year ended March 31, |
(In thousands) | 2022 | | 2021 |
| | | |
Salaries, wages and related items | $ | 4,232 | | | $ | 5,427 | |
Profit sharing and bonus | 1,365 | | 2,706 |
Other deposits | 2,948 | | 1,251 |
Other | 4,846 | | 3,403 |
Total | $ | 13,391 | | | $ | 12,787 | |
13. LESSEE 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 Company 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 our leases, variable payments. Variable payments are typically operating costs associated with the underlying asset and are recognized when the event, activity, or circumstance in the lease agreement on which 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, 2022 and 2021 are as follows (in thousands):
| | | | | | | | |
| Twelve Months Ended March 31, 2022 | Twelve Months Ended March 31, 2021 |
Operating lease cost | $ | 2,102 | | $ | 2,134 | |
Short-term lease cost | 603 | | 316 | |
Variable lease cost | 722 | | 760 | |
Total lease cost | $ | 3,427 | | $ | 3,210 | |
Amounts reported in the consolidated balance sheets for leases where we are the lessee as of the years ended March 31, 2022 and 2021 were as follows (in thousands):
| | | | | | | | |
| March 31, 2022 | March 31, 2021 |
Operating leases | | |
Operating lease ROU assets | $ | 7,354 | | $ | 7,757 | |
Operating lease liabilities | $ | 8,177 | | $ | 8,445 | |
| | |
Weighted-average remaining lease term | | |
Operating leases | 13 years, 5 months | 13 years, 9 months |
| | |
Weighted-average discount rate | | |
Operating leases | 4.33 | % | 4.37 | % |
Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the year ended March 31, 2022 are as follows (in thousands):
| | | | | |
| Operating Leases |
2023 | $ | 1,736 | |
2024 | 1,375 |
2025 | 1,119 |
2026 | 870 |
2027 | 704 |
Thereafter | 5,300 |
Total undiscounted lease payments | 11,104 |
Less: Interest | (2,446) | |
Less: Discount | (481) | |
Total lease liabilities | $ | 8,177 | |
14. FINANCING ARRANGEMENTS
Borrowings of the Company and its subsidiaries are summarized below at March 31, 2022 and March 31, 2021, respectively.
On April 13, 2020, the Company entered into a loan with MBT in a principal amount of $8.2 million pursuant to a PPP Loan under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As of March 31, 2022, the Company's PPP Loan was fully forgiven by the SBA. As such, the Company accounted for its then outstanding principal and accrued interest as a gain on extinguishment in accordance with ASC 470.
As mentioned in Note 2, on February 10, 2022, the Company acquired GdW, a Dutch holding company in the business of providing global aviation data and information. The acquisition was completed through a wholly-owned subsidiary of the Company, Air T Acquisition 22.1, a Minnesota limited liability company, through its Dutch subsidiary, Shanwick, and was funded with cash, investment by executive management of the underlying business, and loans as described below. As part of the transaction, Shanwick obtained a EUR 4.0 million loan package from ING Bank ("ING") to further fund this transaction. The ING loan package includes a EUR 3.0 million term loan (translated into $3.3 million Term Loan A - ING below) which carries an interest rate of 3.5% and a maturity date of February 1, 2027, and a EUR 1.0 million term loan (translated into $1.1 million Term Loan B - ING below) which carries an interest rate of 4% and a maturity date of May 1, 2027. The ING loan is non-recourse to the Company and Subsidiary and is secured by the shares of GdW.
The Company secured the funds necessary to fund its portion of the GdW acquisition consideration on February 8, 2022 through (i) a new secured loan from Bridgewater Bank ("Bridgewater"), a Minnesota banking corporation and (ii) cash. The loan is in the principal amount of $5.0 million and bears a fixed interest rate of 4.00%. The loan provides for monthly payments of accrued interest and annual principal payments of $0.5 million each for years 2023 through 2027, and matures on February 8, 2027 at which time the entire unpaid balance will be due and payable in full. In addition, the loan agreement contains affirmative and negative covenants. The loan is secured by a first lien on all of the assets of the Subsidiary, a pledge of $5.0 million 8.0% TruPs, and a personal guaranty of the Company’s Chairman, President and Chief Executive Officer Nicholas Swenson.
The following table provides certain information about the current financing arrangements of the Company's and its subsidiaries as of March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In Thousands) | March 31, 2022 | | March 31, 2021 | | Maturity Date | | Interest Rate | | Unused commitments |
Air T Debt | | | | | | | | | |
Revolver - MBT | $ | 10,969 | | | $ | — | | | 8/31/2023 | | Greater of 2.50% or Prime - 1.00% | | $ | 6,031 | |
Term Note A - MBT | 8,542 | | | 6,750 | | | 8/31/2031 | | 3.42% | | |
Term Note B - MBT | 3,014 | | | 3,375 | | | 8/31/2031 | | 3.42% | | |
Term Note D - MBT | 1,405 | | | 1,472 | | | 1/1/2028 | | 1-month LIBOR + 2.00% | | |
Term Note E - MBT | 2,316 | | | 4,706 | | | 6/25/2025 | | Greater of LIBOR + 1.50% or 2.50% | | |
Debt - Trust Preferred Securities | 25,567 | | | 14,289 | | | 6/7/2049 | | 8.00% | | |
PPP Loan | — | | | 8,215 | | | 12/24/20221 | | 1.00% | | |
Total | 51,813 | | | 38,807 | | | | | | | |
| | | | | | | | | |
AirCo 1 Debt | | | | | | | | | |
Term Loan - Park State Bank ("PSB") | 6,393 | | | 6,200 | | | 12/11/2025 | | 3-month LIBOR + 3.00% | | |
Total | 6,393 | | | 6,200 | | | | | | | |
| | | | | | | | | |
Jet Yard Debt | | | | | | | | | |
Term Loan - MBT | 1,943 | | | — | | | 8/31/2031 | | 4.14% | | |
Total | 1,943 | | | — | | | | | | | |
| | | | | | | | | |
Contrail Debt | | | | | | | | | |
Revolver - ONB | 3,843 | | | — | | | 9/5/2023 | | 1-month LIBOR + 3.45% | | 21,157 | |
Term Loan G - ONB | 44,918 | | | 43,598 | | | 11/24/2025 | | 1-month LIBOR + 3.00% | | |
Term Loan H - ONB | 8,698 | | | — | | | 8/18/2023 | | Wall Street Journal (WSJ) Prime Rate + 0.75% | | |
Total | 57,459 | | | 43,598 | | | | | | | |
| | | | | | | | | |
Delphax Solutions Debt | | | | | | | | | |
Canadian Emergency Business Account Loan | 32 | | | 32 | | | 12/31/2025 | | 5.00% | | |
Total | 32 | | | 32 | | | | | | | |
| | | | | | | | | |
Wolfe Lake Debt | | | | | | | | | |
Term Loan - Bridgewater | 9,837 | | | — | | | 12/2/2031 | | 3.65% | | |
Total | 9,837 | | | — | | | | | | | |
| | | | | | | | | |
Air T Acquisition 22.1 | | | | | | | | | |
Term Loan - Bridgewater | 5,000 | | | — | | | 2/8/2027 | | 4.00% | | |
Term Loan A - ING | 3,341 | | | — | | | 2/1/2027 | | 3.50% | | |
Term Loan B - ING | 1,114 | | | — | | | 5/1/2027 | | 4.00% | | |
Total | 9,455 | | | — | | | | | | | |
| | | | | | | | | |
Total Debt | 136,932 | | | 88,637 | | | | | | | |
| | | | | | | | | |
Less: Unamortized Debt Issuance Costs | (1,124) | | | (1,141) | | | | | | | |
Total Debt, net | $ | 135,808 | | | $ | 87,496 | | | | | | | |
1 The PPP loan was fully forgiven by the SBA in September 2021.
Fiscal 2022's weighted average interest rate on short term borrowings outstanding was 3.90% . The weighted average interest rate on short term borrowings outstanding as of March 31, 2021 was 0.00%, due to the fact that all short-term borrowings outstanding as of March 31, 2021 have zero balances.
The Air T revolving credit facility and the Contrail revolving credit facility contain affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates.
The obligations of Contrail under the Contrail Credit Agreement with ONB 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 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 MBT.
At March 31, 2022, our contractual financing obligations, including payments due by period, are as follows (in thousands):
| | | | | | | | |
Fiscal year ended | | Amount |
2023 | | $ | 6,482 | |
2024 | | 29,854 | |
2025 | | 10,242 | |
2026 | | 41,459 | |
2027 | | 5,354 | |
Thereafter | | 43,541 | |
| | 136,932 | |
Less: Unamortized Debt Issuance Costs | | (1,124) | |
| | $ | 135,808 | |
The Company assumes various financial obligations and commitments in the 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 existing contractual arrangements such as debt and lease agreements.
Fair Value of Debts - As of March 31, 2022 and 2021, the carrying amounts reported in the consolidated balance sheets for the Company’s debt instruments approximate the fair values. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) 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, 2022 and March 31, 2021 are as follows (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
Contractual interest | $ | 4,808 | | | $ | 4,352 | |
Amortization of deferred financing costs | 367 | | | 288 | |
Interest income | (227) | | | (16) | |
Total | $ | 4,948 | | | $ | 4,624 | |
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 23. •The Company issued and distributed to existing common shareholders, via a non-cash transaction from equity, an aggregate of 1.6 million trust preferred capital security 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 effected a one-for-ten reverse split of its TruPs. As a result of the reverse split, the stated value of the TruPs currently is $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, 2022, approximately 5.3 million Warrants were exercised. The remaining 3.1 million Warrants were not exercised and expired on August 30, 2021.
During fiscal 2022, the Company received $8.5 million in gross proceeds from the sale of TruPs through a S-3 Registration Statement filed by the Company. The TruPs were sold and issued under the S-3 “shelf” Registration Statement base prospectus filed with the Securities and Exchange Commission on March 10, 2021 and declared effective by the SEC on March 19, 2021, and under an At the Market Offering Agreement and a First Amendment to the At the Market Offering Agreement filed with the SEC on May 14, 2021 and November 19, 2021, respectively, and prospectus supplements filed with the SEC on May 14, 2021 and November 19, 2021, respectively.
The amount outstanding on the Company's Debt - Trust Preferred Securities is $25.6 million as of March 31, 2022.
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, Contrail's Chief Executive Officer and Mrs. Miriam Cohen-Kuhn, Contrail's 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 Cohen Kuhn Properties, LLC pursuant to such lease during the period from April 1, 2021 through March 31, 2022. This lease expires on July 17, 2026. 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 director of the Company, entered into an employment agreement with Blue Clay Capital Management, a wholly-owned subsidiary of the Company, in the Corporate and other segment, to serve as its Chief Investment Officer in return for an annual salary of $50.0 thousand 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, 2022, Mr. Swenson owned 66.9% 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.
As mentioned in Note 14, Air T Acquisition 22.1's term loan with Bridgewater is secured by a first lien on all of the assets of the Subsidiary, a pledge of $5.0 million 8.0% TruPs, and a personal guaranty of the Company’s Chairman, President and Chief Executive Officer Nicholas Swenson. In November 2021, Air T engaged Thomas Funds Americas, LLC ("TFA") to perform certain investment consultation services for the Company. Manit Rye, an employee of Air T, is the managing member of TFA. As of March 31, 2022, the Company has paid approximately $0.2 million to TFA to compensate for services rendered.
16. EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
Air T, Inc. maintains two stock option plans for the benefit of certain eligible employees and directors. The first Air T stock option plan is the 2012 Stock Option Plan. The second Air T stock option plan is the 2020 Omnibus Stock and Incentive Plan. In addition, Delphax maintains a number of stock option plans. Compensation expense is recognized over the requisite 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. plans and the Delphax plans. The key assumptions for this valuation method include the expected 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.
Air T's 2012 Stock Option Plan
No options were granted under Air T, Inc.’s 2012 Stock Option Plan during the fiscal years ended March 31, 2022 and 2021. No stock-based compensation expense with respect to this plan was recognized for the year ended March 31, 2022 and 2021, respectively. At March 31, 2022, there was no unrecognized compensation expense related to the Air T's 2012 stock options.
Option activity during the fiscal years ended March 31, 2021 and 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value |
Outstanding at March 31, 2020 | 11,250 | | | $ | 6.61 | | | 3.07 | | $ | 66,388 | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Forfeited | — | | | — | | | | | |
Repurchased | — | | | — | | | | | |
Outstanding at March 31, 2021 | 11,250 | | | 6.61 | | | 2.07 | | 193,063 | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Forfeited | — | | | — | | | | | |
Repurchased | — | | | — | | | | | |
Outstanding at March 31, 2022 | 11,250 | | | 6.61 | | | 1.07 | | 182,000 | |
Exercisable at March 31, 2022 | 11,250 | | | $ | 6.61 | | | 1.07 | | $ | 182,000 | |
Air T's 2020 Omnibus Stock and Incentive Plan
On December 29, 2020, the Company’s Board of Directors unanimously approved the 2020 Omnibus Stock and Incentive Plan (the "Plan"), which was subsequently approved by the Company's stockholders at the August 18, 2021 Annual Meeting of Stockholders. The total number of shares authorized under the Plan is 420,000. Among other instruments, the Plan permits the Company to grant stock option awards. Through March 31, 2022, options to purchase up to 326,000 shares have been granted under the Plan. Vesting of options is based on the grantee meeting specified service conditions. Furthermore, the number of vested options that a grantee is able to exercise, if any, is based on the Company’s stock price as of the vesting dates specified in the respective option grant agreements. The Company uses the Black-Scholes option pricing model to value stock options granted under the Air T's 2020 Omnibus Stock and Incentive Plan. We determined that the fair value of the Plan is $1.3 million.
The key assumptions used in the Plan's Black-Scholes option pricing model are as follows:
| | | | | |
Risk-free interest rate | 0.94 | % |
Expected dividend yield | — | |
Expected term | 10 years |
Expected volatility | 44.29 | % |
We do not anticipate significant forfeitures and elected to account for forfeitures as they occur. As of March 31, 2022, total compensation cost recognized under the Plan was $0.4 million. The unrecognized compensation cost related to nonvested awards is $0.9 million, which is expected to be recognized over a weighted average period of 9.25 years.
17. REVENUE RECOGNITION
Performance Obligations
Substantially all of the Company’s non-lease 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 costs incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations.
The following is a description of the Company’s performance obligations as of March 31, 2022:
| | | | | |
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 performing labor hours and installing parts to enhance an asset that the customer controls. 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, 2022 | | Year Ended March 31, 2021 |
Product Sales | | | |
Air Cargo | $ | 23,011 | | | $ | 19,892 | |
Ground equipment sales | 40,676 | | | 59,794 | |
Commercial jet engines and parts | 49,356 | | | 40,066 | |
Corporate and other | 285 | | | 327 | |
Support Services | | | |
Air Cargo | 51,344 | | | 46,330 | |
Ground equipment sales | 518 | | | 291 | |
Commercial jet engines and parts | 7,049 | | | 4,743 | |
Corporate and other | 1,167 | | | 132 | |
Leasing Revenue | | | |
Air Cargo | — | | | — | |
Ground equipment sales | 383 | | | 149 | |
Commercial jet engines and parts | 1,156 | | | 1,730 | |
Corporate and other | 571 | | | 136 | |
Other | | | |
Air Cargo | 54 | | | 29 | |
Ground equipment sales | 662 | | | 445 | |
Commercial jet engines and parts | 128 | | | 254 | |
Corporate and other | 717 | | | 803 | |
| | | |
Total | $ | 177,077 | | | $ | 175,121 | |
See Note 21 for the Company's disaggregated revenues by geographic region and Note 22 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. The following table presents outstanding contract liabilities as of April 1, 2021 and March 31, 2022 and the amount of contract liabilities that were recognized as revenue during the year ended March 31, 2022 (in thousands):
| | | | | | | | | | | |
| Outstanding Contract Liabilities | | Outstanding Contract Liabilities Recognized as Revenue |
As of March 31, 2022 | $ | 4,727 | | | |
As of April 1, 2021 | 1,358 | | | |
For the Year ended March 31, 2022 | | | $ | (1,183) | |
18. 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’s contribution to the Plans for the years ended March 31, 2022 and 2021 was approximately $0.6 million and $0.5 million, respectively, and was recorded in the consolidated statements of income (loss).
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 2022 and 2021 was approximately $2.0 million and $1.5 million, respectively, and was recorded in general and administrative expenses in the consolidated statements of income (loss).
19. INCOME TAXES
Income tax expense (benefit) attributable to (loss) income from continuing operations consists of (in thousands):
| | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
Current: | | | |
Federal | $ | 1,358 | | | $ | (3,330) | |
State | 44 | | | 130 | |
Foreign | 134 | | | 39 | |
Total current | 1,536 | | | (3,161) | |
Deferred: | | | |
Federal | (507) | | | 91 | |
State | 140 | | | (317) | |
Total deferred | (367) | | | (226) | |
| | | |
Total | $ | 1,169 | | | $ | (3,387) | |
Income tax expense attributable to income (loss) from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 21% to pretax income (loss) from continuing operations as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2022 | | 2021 |
Expected Federal income tax expense (benefit) U.S. statutory rate | $ | 2,813 | | | 21.0 | % | | $ | (2,472) | | | 21.0 | % |
State income taxes, net of federal benefit | 177 | | | 1.3 | % | | (271) | | | 2.3 | % |
Permanent Items | (165) | | | -1.2 | % | | — | | | |
Micro-captive insurance benefit | (233) | | | -1.8 | % | | (217) | | | 1.8 | % |
Change in valuation allowance | (2,251) | | | -16.8 | % | | 621 | | | -5.3 | % |
Income attributable to minority interest - Contrail | (174) | | | -1.3 | % | | 247 | | | -2.1 | % |
Write-off Delphax Tech SAS | 2,225 | | | 16.6 | % | | — | | | 0.0 | % |
PPP Loan Forgiveness | (1,650) | | | -12.3 | % | | — | | | 0.0 | % |
NOL Carryback - Rate Differential | — | | | 0.0 | % | | (1,468) | | | 12.5 | % |
Other differences, net | 427 | | | 3.2 | % | | 173 | | | -1.4 | % |
Income tax expense (benefit) | $ | 1,169 | | | 8.7 | % | | $ | (3,387) | | | 28.8 | % |
The Company did not record any liabilities for uncertain tax positions for the fiscal years ended March 31, 2022 and March 31, 2021.
The Company has state gross operating losses of $3.9 million at March 31, 2022. These net operating losses will begin to expire in tax year 2031. The Company has foreign tax credits of $0.3 million that will begin to expire in tax year 2027.
DSI and Delphax (collectively known as the “Delphax entities”) are not included in Air T’s consolidated tax return. During the year ended March 31, 2022, DSI and Delphax accounted for $0.2 million and $(2.2) million, respectively, of fiscal year 2022's valuation allowance effect. During the year ended March 31, 2021, each entity, respectively, accounted for $0.3 million and $(0.1) million of the fiscal year 2021's valuation allowance effect. Impairment on investments and changes in unrealized losses related to available-for-sale securities and foreign tax credits accounted for the valuation allowance effect for each year.
Deferred tax assets and liabilities were comprised of the following (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Net operating loss & attribute carryforwards | $ | 3,794 | | | $ | 4,094 | |
Unrealized losses on investments | 1,669 | | | 1,504 | |
Investment in foreign subsidiaries | — | | | 1,331 | |
Inventory reserve | 682 | | | 489 | |
Accrued vacation | 327 | | | 339 | |
Foreign tax credit | 263 | | | 535 | |
Accounts and notes receivable | 235 | | | 221 | |
Interest rate swaps | 138 | | | 149 | |
Investment in partnerships | 671 | | | 821 | |
Lease liabilities | 1,691 | | | 1,999 | |
Other deferred tax assets | 286 | | | 258 | |
Total deferred tax assets | 9,756 | | | 11,740 | |
| | | |
Bargain purchase gain | (447) | | | (470) | |
Property and equipment | (1,532) | | | (1,184) | |
Right-of-use assets | (1,511) | | | (1,838) | |
Capital gain deferment | (1,696) | | | (1,782) | |
GdW intangible assets | (2,572) | | | — | |
Other deferred tax liabilities | (36) | | | (35) | |
Total deferred tax liabilities | (7,794) | | | (5,309) | |
| | | |
Net deferred tax asset | $ | 1,962 | | | $ | 6,431 | |
| | | |
Less valuation allowance | (4,774) | | | (7,026) | |
| | | |
Net deferred tax liability | $ | (2,812) | | | $ | (595) | |
Delphax entities
Effective on November 24, 2015, Air T, Inc. purchased interests in Dephax. With an equity investment level by the Company of approximately 67%, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax historically had foreign subsidiaries located in France, 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 2016.
Delphax maintains a September 30 fiscal year end and DSI maintains a March 31 fiscal year end. The returns for the fiscal years ended September 30, 2021 and March 31, 2022 have not yet been filed. Included in the deferred tax balances above and related to the Delphax entities are estimated foreign, U.S. federal and U.S. state loss carryforwards of $4.3 million, $8.4 million and $2.2 million, respectively. The net operating losses expire in varying amounts beginning in the tax year 2027.
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 entities' tax attributes, the Company has established a full valuation allowance of $3.1 million at March 31, 2022, and $5.0 million at March 31, 2021. The cumulative tax losses incurred by the Delphax entities in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established against the Delphax entities’ net deferred tax assets.
The Company continues to assert that it will permanently reinvest any foreign earnings of DSI in a foreign country and will not repatriate those earnings back to the U.S. As a result of its permanent reinvestment assertion, the Company has not recorded deferred taxes related to DSI under the indefinite exception.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
2022 | | | | | | | |
Operating Revenues | $ | 36,968 | | | $ | 43,238 | | | $ | 45,433 | | | $ | 51,438 | |
Operating Income (Loss), net of tax | 327 | | | 8,003 | | | (1,189) | | | 5,086 | |
Less: Income attributable to non-controlling interests | (38) | | | (448) | | | (73) | | | (740) | |
Income (Loss) attributable to Air T, Inc. Stockholders | 289 | | | 7,555 | | | (1,262) | | | 4,346 | |
| | | | | | | |
Basic Income (Loss) per share | $ | 0.10 | | | $ | 2.62 | | | $ | (0.44) | | | $ | 1.51 | |
Diluted Income (Loss) per share | $ | 0.10 | | | $ | 2.60 | | | $ | (0.44) | | | $ | 1.51 | |
Antidilutive shares excluded from computation of income (loss) per share | — | | | — | | | 11 | | | — | |
| | | | | | | |
2021 | | | | | | | |
Operating Revenues | 36,970 | | | 35,604 | | | 55,819 | | | 46,728 | |
(Loss) Income from continuing operations, net of tax | (956) | | | (3,357) | | | 1,763 | | | (5,844) | |
Less: Loss attributable to non-controlling interests | 115 | | | 433 | | | 335 | | | 230 | |
(Loss) Income from continuing operations attributable to Air T, Inc. Stockholders | (841) | | | (2,924) | | | 2,098 | | | (5,614) | |
Income from discontinued operations, net of tax | — | | | 4 | | | — | | | — | |
| | | | | | | |
Basic (Loss) Income per share from continuing operations | $ | (0.29) | | | $ | (1.01) | | | $ | 0.73 | | | $ | (1.96) | |
Basic Income (Loss) per share from discontinued operations | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Basic (Loss) Income per share | $ | (0.29) | | | $ | (1.01) | | | $ | 0.73 | | | $ | (1.96) | |
| | | | | | | |
Diluted (Loss) Income per share from continuing operations | $ | (0.29) | | | $ | (1.01) | | | $ | 0.73 | | | $ | (1.96) | |
Diluted Income (Loss) per share from discontinued operations | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Diluted (Loss) Income per share | $ | (0.29) | | | $ | (1.01) | | | $ | 0.73 | | | $ | (1.96) | |
Antidilutive shares excluded from computation of income (loss) per share from continuing operations | 5 | | | 5 | | | — | | | 8 | |
Antidilutive shares excluded from computation of income (loss) per share from discontinued operations | — | | | — | | | — | | | — | |
Antidilutive shares excluded from computation of income (loss) per share | 5 | | | 5 | | | — | | | 8 | |
21. 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, 2022 and March 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
United States | $ | 34,067 | | | $ | 8,632 | |
Foreign | 1,654 | | | 2,018 | |
Total tangible long-lived assets, net | $ | 35,721 | | | $ | 10,650 | |
The Company’s tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent primarily engines on lease or held for lease at March 31, 2022. The net book value located within each individual country at March 31, 2022 is listed below (in thousands):
| | | | | | | | | | | |
Country | March 31, 2022 | | March 31, 2021 |
Macau | $ | 1,351 | | | $ | 1,896 | |
Other | 303 | | | 122 | |
Total tangible long-lived assets, net | $ | 1,654 | | | $ | 2,018 | |
Total revenue, located in the United States, and outside the United States is summarized in the following table as of March 31, 2022 and March 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
United States | $ | 142,898 | | | $ | 147,010 | |
Foreign | 34,179 | | | 28,111 | |
Total revenue | $ | 177,077 | | | $ | 175,121 | |
22. SEGMENT INFORMATION
The Company has four reportable segments: overnight air cargo, ground equipment sales, commercial jet engine and parts and corporate and other. We have presented prior periods based on the current presentation. Segment data is summarized as follows (in thousands):
| | | | | | | | | | | |
(In Thousands) | Year Ended March 31, |
| 2022 | | 2021 |
Operating Revenues: | | | |
Overnight Air Cargo: | | | |
Domestic | $ | 65,441 | | | $ | 66,251 | |
International | 8,968 | | | — | |
Total Overnight Air Cargo | 74,409 | | | 66,251 | |
Ground Equipment Sales: | | | |
Domestic | 35,089 | | | 51,558 | |
International | 7,150 | | | 9,121 | |
Total Ground Equipment Sales | 42,239 | | | 60,679 | |
Commercial Jet Engines and Parts: | | | |
Domestic | 40,798 | | | 28,235 | |
International | 16,891 | | | 18,558 | |
Total Commercial Jet Engines and Parts | 57,689 | | | 46,793 | |
Corporate and Other: | | | |
Domestic | 1,571 | | | 967 | |
International | 1,169 | | | 431 | |
Total Corporate and Other | 2,740 | | | 1,398 | |
Total | 177,077 | | | 175,121 | |
| | | |
Operating Income (Loss): | | | |
Overnight Air Cargo | 2,794 | | | 2,178 | |
Ground Equipment Sales | 3,220 | | | 8,948 | |
Commercial Jet Engines and Parts | 3,619 | | | (10,882) | |
Corporate and Other | (878) | | | (9,419) | |
Total | 8,755 | | | (9,175) | |
| | | |
Capital Expenditures: | | | |
Overnight Air Cargo | 148 | | | 74 | |
Ground Equipment Sales | 156 | | | 124 | |
Commercial Jet Engines and Parts | 1,204 | | | 5,774 | |
Corporate and Other | 50 | | | 33 | |
Total | 1,558 | | | 6,005 | |
| | | |
Depreciation and Amortization: | | | |
Overnight Air Cargo | 58 | | | 66 | |
Ground Equipment Sales | 234 | | | 184 | |
Commercial Jet Engines and Parts | 965 | | | 2,438 | |
Corporate and Other | 603 | | | 419 | |
Total | $ | 1,860 | | | $ | 3,107 | |
The table below provides a reconciliation of operating income (loss) to Adjusted EBITDA by reportable segment for the fiscal year ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal year 2022 | | |
| Overnight Air Cargo | | Ground Equipment Sales | | Commercial Jet Engines and Parts | | Corporate and Other | | Total |
Operating income (loss) from continuing operations | $ | 2,794 | | | $ | 3,220 | | | $ | 3,619 | | | $ | (878) | | | $ | 8,755 | |
Depreciation and amortization (excluding leased engines depreciation) | 58 | | | 234 | | | 694 | | | 603 | | | 1,589 | |
Asset impairment, restructuring or impairment charges | — | | | — | | | 885 | | | (80) | | | 805 | |
Loss on sale of property and equipment | 2 | | | 1 | | | 2 | | | — | | | 5 | |
Security issuance expenses | — | | | — | | | — | | | 252 | | 252 | |
Adjusted EBITDA | $ | 2,854 | | | $ | 3,455 | | | $ | 5,200 | | | $ | (103) | | | $ | 11,406 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal year 2021 | | |
| Overnight Air Cargo | | Ground Equipment Sales | | Commercial Jet Engines and Parts | | Corporate and Other | | Total |
Operating income (loss) from continuing operations | $ | 2,178 | | | $ | 8,948 | | | $ | (10,882) | | | $ | (9,419) | | | $ | (9,175) | |
Depreciation and amortization (excluding leased engines depreciation) | 66 | | | 184 | | | 562 | | | 419 | | | 1,231 | |
Asset impairment, restructuring or impairment charges | — | | | — | | | 6,405 | | | 187 | | | 6,592 | |
Loss (gain) on sale of property and equipment | 4 | | | — | | | (18) | | | 4 | | | (10) | |
Security issuance expenses | — | | | — | | | — | | | 32 | | | 32 | |
Adjusted EBITDA | $ | 2,248 | | | $ | 9,132 | | | $ | (3,933) | | | $ | (8,777) | | | $ | (1,330) | |
23. EARNINGS PER COMMON SHARE
Basic earnings per share has been calculated by dividing net income (loss) 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, |
| 2022 | | 2021 |
Net income (loss) from continuing operations | $ | 12,227 | | | $ | (8,394) | |
Net (income) loss from continuing operations attributable to non-controlling interests | (1,299) | | | 1,113 | |
Net income (loss) from continuing operations attributable to Air T, Inc. Stockholders | 10,928 | | | (7,281) | |
| | | |
Income (loss) from continuing operations per share: | | | |
Basic | $ | 3.79 | | | $ | (2.53) | |
Diluted | $ | 3.78 | | | $ | (2.53) | |
Antidilutive shares excluded from computation of income (loss) per share from continuing operations | — | | | 6 | |
| | | |
Gain on sale of discontinued operations, net of tax | — | | | 4 | |
Gain from discontinued operations attributable to Air T, Inc. stockholders | — | | | 4 | |
| | | |
Income from discontinued operations per share: | | | |
Basic | $ | — | | | $ | — | |
Diluted | $ | — | | | $ | — | |
Antidilutive shares excluded from computation of income per share from discontinued operations | — | | | — | |
| | | |
Income (loss) per share: | | | |
Basic | $ | 3.79 | | | $ | (2.53) | |
Diluted | $ | 3.78 | | | $ | (2.53) | |
Antidilutive shares excluded from computation of income (loss) per share | — | | | 6 | |
| | | |
Weighted Average Shares Outstanding: | | | |
Basic | 2,880 | | 2,882 |
Diluted | 2,888 | | 2,882 |
24. COMMITMENTS AND CONTINGENCIES
Contrail entered into an Operating Agreement in connection with the acquisition of Contrail providing for the governance of and the terms of membership interests in Contrail and including put and call options with the Seller of Contrail. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was on July 18, 2021. The Company has presented this redeemable non-controlling interest in Contrail between the liabilities and equity sections of the accompanying consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Contrail RNCI is a Level 3 fair value measurement that is valued at $7.2 million as of March 31, 2022. The change in the redemption value compared to March 31, 2021 is an increase of $0.6 million. The increase was driven by $0.3 million of contributions
made from the non-controlling interest and $0.8 million of net income attributable to the non-controlling interest, offset by $0.5 million of the net change in fair value. As of the date of this filing, neither the Seller nor Air T has indicated an intent to exercise the put and call options. If either side were to exercise the option, the Company anticipates that the price would approximate the fair value of the Contrail RNCI, as determined on the transaction date. The Company currently expects that it would fund any required payment from cash provided by operations.
On May 5, 2021, the Company formed an aircraft asset management business called CAM, and an aircraft capital joint venture called CJVII. The new venture focuses on acquiring commercial aircraft and jet engines for leasing, trading and disassembly. CJVII targets investments in current generation narrow-body aircraft and engines, building on Contrail’s origination and asset management expertise. CAM serves two separate and distinct functions: 1) to direct the sourcing, acquisition and management of aircraft assets owned by CJVII, and 2) to directly invest into CJVII alongside other institutional investment partners. CAM has an initial commitment to CJVII of approximately $53.0 million, which is comprised of an $8.0 million initial commitment from the Company and an approximately $45.0 million initial commitment from MRC. As of March 31, 2022, CAM's remaining capital commitments are approximately $2.0 million from the Company and $22.0 million from MRC. In connection with the formation of CAM, MRC has a fixed price put option of $1 million to sell its common equity in CAM to Air T at each of the first 3 anniversary dates. At the later of (a) 5 years after execution of the agreement and (b) distributions to MRC per the waterfall equal to their capital contributions, Air T has a call option and MRC has a put option on the MRC common interests in CAM. If either party exercises the option, the exercise price will be fair market value if Air T pays in cash at closing or 112.5% of fair market value if Air T opts to pay in three equal annual installments after exercise. As of March 31, 2022, Air T recorded MRC's $1.0 million put option within "Other non-current liabilities" on our consolidated balance sheets. We also reflected it within on our consolidated statements of equity as "Put option issued to co-investor in CAM".
In February 2022, in connection with the Company's acquisition of GdW, a consolidated subsidiary of Shanwick, the Company entered into a shareholder agreement with the 30% non-controlling interest owners of Shanwick, providing for the governance of and the terms of membership interests in Shanwick. The shareholder agreement includes the Shanwick Put/Call Option with regard to the 30% non-controlling interest. The non-controlling interest holders are the executive management of the underlying business. The Shanwick Put/Call Option grants the Company an option to purchase the 30% interest at the call option price that equals to the average EBIT over the 3 Financial Years prior to the exercise of the Call Option multiplied by 8. In addition, the Shanwick Put/Call Option also grants the non-controlling interest owners an option to require Air T to purchase from them their respective ownership interests at the Put Option price, that is equal to the average EBIT over the 3 Financial Years prior to the exercise of the Put Option multiplied by 7.5. The Call Option and the Put Option may be exercised at any time from the fifth anniversary of the shareholder agreement and then only at the end of each fiscal year of Air T.
The Company has presented this redeemable non-controlling interest in Shanwick between the liabilities and equity sections of the accompanying condensed consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the estimated redemption value at the end of each reporting period. As the Shanwick RNCI will be redeemed at established multiples of EBIT, it is considered redeemable at other than fair value. Changes in its estimated redemption value are recorded on our consolidated statements of operations within non-controlling interests. The Shanwick RNCI's estimated redemption value is at $3.6 million as of March 31, 2022, which was comprised of the following (in thousands):
| | | | | | | | |
| | Shanwick's Redeemable Non- Controlling Interest |
Beginning Balance as of April 1, 2021 | | $ | — | |
Contribution from non-controlling members | | 3,226 |
Distribution to non-controlling members | | — | |
Net income attributable to non-controlling interests | | 10 |
Redemption value adjustments | | 348 |
Ending Balance as of March 31, 2022 | | $ | 3,584 | |
25. SHARES 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’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. During the year ended March 31, 2022, the Company repurchased 15,435 shares at an aggregate cost of $0.4 million, in which all were recorded as treasury shares. The Company has a total of 156,327 treasury shares as of March 31, 2022.
26. SUBSEQUENT EVENTS
Sale of CF34-3B engines
On May 3, 2022, wholly-owned subsidiary AirCo1 completed an agreement to sell two CF34-3B engine leases to an outside party. Previous to the sale, the engines were leased by AirCo1 to an unrelated third party and the leases were included in the transaction. Total proceeds for the transaction were $3.9 million.
Amendment No.1 to Third Amended And Restated Credit Agreement with MBT and Overline Note
On June 9, 2022, the Company, Jet Yard and MBT entered into Amendment No. 1 to Third Amended and Restated Credit Agreement (“Amendment”) and a related Overline Note (“Overline Note”) in the original principal amount of $5.0 million. The Amendment and Note memorialize an increase to the amount that may be drawn by the Company on the MBT revolving credit agreement from $17.0 million to $22.0 million. The total amount of borrowings under the facility as revised is now the Company’s calculated borrowing base or $22.0 million. The borrowing base calculation methodology remains unchanged.
The interest rate on borrowings under the facility that are less than $17 million remains at the greater of 2.50% or Prime minus 1%. The interest rate applicable to borrowings under the facility that exceed $17.0 million is the greater of 2.50% or Prime plus 0.5%. The commitment fee on unused borrowings below $17.0 million remains at 0.11%. The commitment fee on unused borrowings above $17.0 million is 0.20%. The Amendment also includes an additional covenant to the credit agreement, namely the requirement that the Company provide inventory appraisals for AirCo, AirCo Services and Worthington to MBT twice a year.
The Overline loan and commitment mature on the earlier of March 31, 2023 or the date on which the Company receives all funds from the Company’s ERC application (estimated at approximately $9.1 million) filed on or about January 24, 2022 plus the full receipt of the Company’s carryback tax refund for the year (estimated at approximately $2.6 million) filed on or about August 19, 2021. Both were applied for under different components of the CARES Act. It is not possible to estimate when, or if, these funds may be received.
Each of the Company subsidiaries that has guaranteed the MBT revolving facility executed a guaranty acknowledgment in which they agreed to guaranty the Overline Loan and acknowledged, among other things, that the Overline Loan would not impair the lenders rights under the previously executed guaranty or security agreement.