Air T, Inc.
2018 Annual Report
Dear Shareholders,
Air T, Inc. is a portfolio of powerful businesses and financial assets, each of which is independent yet interrelated.
Your management focuses resources to help our partners and stakeholders activate growth and overcome challenges.
And the more we find win-win solutions, the more we generate reciprocal goodwill and tangible value. When people
are trusting and take courage, they face challenges and become better. We want Air T and its people moving toward
their goals over a long period of time, accruing value for all stakeholders along the way.
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We have been building Air T steadily since current management started running the company in October of 2013.
Your management values the balance and diversification of the holdings within the company. We believe shareholders
will value our continual focus on generating after-tax cash flow per share. Your management believes Air T’s balance
of businesses and assets have significant potential. We are grateful that they are run by a fantastic group of business
leaders and employees.
Air T’s holdings include operating businesses, assets and marketable securities. At a glance:
Business or Asset
Type
MAC & CSA
Global Ground Support
Global Aviation Services
Insignia Systems (ISIG)
Contrail
Oxbridge RE (OXBR)
JetYard
AirCo & AirCo Services
Delphax Solutions
Blue Clay Capital
Worthington Aviation
Operating business
Operating business
Operating business
Marketable security
Operating business
Marketable security
Operating business
Operating business
Operating business
Operating business
Operating business
(1) Ground support equipment (“GSE”)
Date
Joined
Original
1998
2008
2014
2016
2016
2016
2017
2017
2017
2018
Brief Description
FedEx feeders
GSE manufacturing (1)
GSE maintenance (1)
Shopper-marketing network
Jet engine asset management
Reinsurance
Aircraft storage, teardown & logistics
Airframe & avionics asset mgmt
Commercial inkjet printing
Equity manager and fund services
Airframe asset management
By organizing as a portfolio of businesses, we can deliver calibrated investments at the Air T level that we believe
offer the right kind of upside versus downside potential. In addition, our excellent managers will likely find and
capitalize on unexpected opportunities within the businesses they operate.
Air T measures itself against four strategic horizons:
1. Wise federalist governance: driving better decisions from local, real-time information; making space for
excellent leaders; tailoring limited and convex exposures.
2. People building a system: dynamic people within a sound system; building edge, process and flow.
3.
Idea factories: finding ideas with significant impact; researching better; maximizing our industrial network;
developing talent systematically.
4. Compounding capital: delivering exceptional returns on capital; portfolio management disciplines;
uncorrelated capital partners; linking to meaningful reciprocal relationships.
The Air T management team is working every day to deliver for you, our shareholder.
Nick Swenson
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President and Chief Executive Officer
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended March 31, 2018
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange A
period from _____to _____
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ct of 1934 for the transition
Commission File Number 001-35476
Air T, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
52-1206400
(I.R.S. Employer Identification No.)
5930 Balsom Ridge Road, Denver, North Carolina 28037
(Address of principal executive offices, including zip code)
(828) 464 8741
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, par value $0.25 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
13 or Section 15(d) of the
Yes
No
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Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. (See the definitions of “large accelerated filer”,
“accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange
Act)
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. (cid:31)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
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Yes
No
The aggregate market value of voting stock held by non-affiliates of the registrant as of September 30, 2017 based
upon the closing price of the common stock on September 30, 2017 was approximately $18,034,000. As of May 31,
2018, 2,043,607 shares of common stock were outstanding.
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Documents Incorporated by Reference
Portions of the Company’s definitive proxy statement for its 2018 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.
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Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
Interactive Data Files
Page
6
15
18
19
19
19
20
20
21
40
89
89
91
91
92
92
93
93
93
96
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Item 1. Business.
PART I
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a
broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings
power. Our goal is to build on Air T’s core businesses.
We currently operate wholly-owned subsidiaries in three legacy industry segments:
(cid:120)
(cid:120)
(cid:120)
overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”)
subsidiaries, which operates in the air express delivery services industry;
ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which
manufactures and provides mobile deicers and other specialized equipment products to passenger and
cargo airlines, airports, the military and industrial customers; and
ground support services, comprised of our Global Aviation Services, LLC (“GAS”) subsidiary, which
provides ground support equipment maintenance and facilities maintenance services to domestic airlines
and aviation service providers.
In the past three years, we have organized or acquired businesses operating in four other segments. The additional
segments include:
(cid:120) Air T Global Leasing, LLC (“ATGL”), our wholly-owned leasing subsidiary, comprises our leasing
segment.
(cid:120) Delphax Technologies, Inc. (“Delphax”) and our newly-formed subsidiary Delphax Solutions, Inc.,
comprises our printing equipment and maintenance segment.
(cid:120) Majority-owned Contrail Aviation Support, LLC (“Contrail Aviation”), Jet Yard, LLC (“Jet Yard”),
AirCo, LLC, AirCo 1, LLC and AirCo Services, LLC (collectively, “AirCo”) comprise our commercial
jet engine and parts segment.
(cid:120)
Results of BCCM Advisors, LLC (“BCCM”), an investment management firm acquired recently, are
included within the Corporate segment.
Each business segment has separate management teams and infrastructures that offer different products and services.
We evaluate the performance of our business segments based on a number of metrics, including operating income.
Certain financial data with respect to the Company’s segments and geographic areas is set forth in Notes 21 and 22 of
Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.
Air T was incorporated under the laws of the State of Delaware in 1980. The principal place of business of Air T,
MAC and ATGL is 5930 Balsom Ridge Road, Denver, North Carolina, the principal place of business of CSA is Iron
Mountain, Michigan, the principal place of business for GGS is Olathe, Kansas, the principal place of business for
GAS is Eagan, Minnesota, the principal place of business of Delphax is Minneapolis, Minnesota, the principal place of
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business of Contrail Aviation is Verona, Wisconsin, the principal place of business of AirCo is Wichita, Kansas, the
principal place of business of Jet Yard is Marana, Arizona and the principal place of business for BCCM is
Minneapolis, Minnesota. We maintain an Internet website at http://www.airt.net and our SEC filings may be accessed
through links on our website. The information on our website is available for information purposes only and is not
incorporated by reference in this Annual Report on Form 10-K.
Acquisitions.
Contrail, Jet Yard and AirCo. On July 18, 2016, Contrail Aviation, a subsidiary of the Company, completed the
purchase of substantially all of the business assets of Contrail Aviation Support, Inc. (“Contrail Seller”). Prior to the
asset sale, Contrail Seller, based in Verona, Wisconsin, engaged in the business of acquiring surplus commercial jet
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engines and components and supplying surplus and aftermarket commercial jet engine components. In connection with
the acquisition, Contrail Aviation offered employment to all of Contrail Seller’s employees. The acquisition
consideration paid to Contrail Seller included equity membership units in Contrail Aviation representing 21% of the
total equity membership units in Contrail Aviation. As a result, the Company owns equity membership units in
Contrail Aviation representing the remaining 79% of the total equity membership units in Contrail Aviation. In
addition, Contrail Aviation has agreed to pay as additional deferred consideration to Contrail Seller up to a maximum
of $1.5 million per year and $3.0 million in the aggregate based on Contrail Aviation’s EBITDA (as defined in the
purchase agreement) measured during periods over the five years following the acquisition. Contrail Aviation and
Contrail Seller also entered into put and call options permitting, at any time after the fifth anniversary of the asset sale
closing date, Contrail Aviation at its election to purchase from Contrail Seller, and permitting Contrail Seller at its
election to require Contrail Aviation to purchase from Contrail Seller, all of Contrail Seller’s equity membership
interests in Contrail Aviation at a price to be agreed upon, or failing such an agreement to be determined pursuant to
third-party appraisals in a specified process.
On October 3, 2016, a newly formed subsidiary of the Company, Stratus Aero Partners, LLC (formerly, Global
Aviation Partners, LLC), acquired 100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”). Jet Yard is
registered to operate a repair station under Part 145 of the regulations of the Federal Aviation Administration (the
“FAA”) and its principal asset at the time of the Company’s acquisition was a lease from Pinal County, Arizona to
approximately 48.5 acres of land at the Pinal Air Park in Marana, Arizona. Jet Yard was organized in 2014, entered
into the lease in June 2016 and prior to our acquisition maintained de minimus operations.
The aggregate cash consideration paid in these two acquisition transactions described above, after closing date
adjustments and not including potential deferred payments to Contrail Seller, was approximately $4,048,000.
On May 2, 2017 and June 1, 2017, our newly formed subsidiaries, AirCo, LLC and AirCo Services, LLC (collectively,
“AirCo”) acquired the inventory and principal business assets, and assumed specified liabilities, of Aircraft Instrument
and Radio Company, Incorporated, and Aircraft Instrument and Radio Services, Inc. (collectively, the “AirCo
Sellers”). The acquired business, which is based in Wichita, Kansas, distributes and sells airplane and aviation parts
and maintains a license under Part 145 of the regulations of the Federal Aviation Administration. The consideration
paid for the acquired business was $2,400,000.
D&D GSE Support. On October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the
assets of D&D GSE Support, Inc. (“D&D”) which was in the business of marketing, selling and providing aviation
repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount
paid at closing in connection with this acquisition was $400,000, with an additional $100,000 paid 30 days after
closing and an additional $100,000 payable in equal monthly installments of $16,667 commencing on November 1,
2016. Earn-out payments of $100,000 were paid in October 2017 based on specified performance for the twelve-
month period ending September 30, 2017.
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TFS Partners LLC. On June 7, 2017, Space Age Insurance Company (“SAIC”) invested $500,000 for a 40% interest
in TFS Partners LLC (“TFS Partners”), a single-purpose investment entity organized by SAIC and other investors, for
the purpose of making an investment in a limited liability company, The Fence Store LLC (“Fence Store LLC”),
organized for the purpose of acquiring substantially all of the assets of The Fence Store, Inc. (“Fence Store Inc.”).
TFS Partners acquired a 60% interest in Fence Store LLC, which has completed the purchase of substantially all of the
assets of Fence Store Inc. Prior to this transaction, Fence Store Inc. operated a business under the tradename “Town
and Country Fence” selling and installing residential and commercial fencing in the greater Twin Cities, Minnesota
area. Fence Store LLC intends to continue this business.
Blue Clay Capital Management, LLC. On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-
owned subsidiary of the Company, completed the acquisition of Blue Clay Capital Management, LLC (“Blue Clay
Capital”). In connection with the transaction, BCCM acquired the assets of, and assumed certain liabilities of, Blue
Clay Capital in return for payment to Blue Clay Capital of $1.00, subject to adjustment for Blue Clay Capital’s net
working capital as of the closing date.
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In connection with the acquisition, a Partnership Interest Conversion and General Partner Admittance Agreement
(“Conversion Agreement”) was entered into effective December 31, 2017 between Blue Clay Capital, BCCM
Advisors, and various Blue Clay Capital investment funds. Per the Conversion Agreement, Blue Clay Capital sold to
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BCCM Advisors, and BCCM Advisors purchased from Blue Clay, the general partnership interests in certain
investment funds previously managed by Blue Clay Capital (as specified above) for a purchase price equal to, with
respect to each general partnership, of (i) one percent (1%) of the aggregate capital accounts of each fund as valued on
December 31, 2017 and (ii) $100,000 (or $10,000 in the case of Blue Clay Capital SMid-Cap LO, LP). Upon
acquisition of each of the general partnership interests, BCCM Advisors was admitted as the general partner of each
fund.
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Overnight Air Cargo.
MAC and CSA are two of seven companies in the U.S. that have North American feeder airlines under contract with
FedEx. With a relationship with FedEx spanning over 35 years, MAC and CSA operate and maintain Cessna Caravan,
ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States, upper
Midwest and the Caribbean. MAC and CSA’s revenues are derived principally pursuant to “dry-lease” service
contracts with FedEx.
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On June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the
revenue aircraft operated by MAC and CSA and replaced all prior dry-lease service contracts. These dry-lease
agreements provide for the lease of specified aircraft by MAC and CSA in return for the payment of monthly rent with
respect to each aircraft leased, which monthly rent was increased from the prior dry-lease service contracts to reflect
an estimate of a fair market rental rate. These dry-lease agreements provide that FedEx determines the type of aircraft
and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by MAC and CSA,
respectively. The current dry-lease agreements provide for the reimbursement by FedEx of MAC and CSA’s costs,
without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees,
third-party maintenance, parts and certain other direct operating costs. Unlike prior dry-lease contracts, under the dry-
lease agreements, certain operational costs incurred by MAC and CSA in operating the aircraft are not reimbursed by
FedEx at cost, and such operational costs are borne solely by MAC and CSA. Under the dry-lease agreements, MAC
and CSA are required to perform maintenance of the leased aircraft in return for a maintenance fee based upon an
hourly maintenance labor rate, which has been increased from the rate in place under the prior dry-lease service
contracts. Under prior dry-lease service contracts, the hourly maintenance labor rate had not been adjusted since
2008. The dry-lease agreements provide for the payment by FedEx to MAC and CSA of a monthly administrative fee
based on the number and type of aircraft leased and routes operated. The amount of the monthly administrative fee
under the new dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to
reflect the greater monthly lease payment per aircraft and the fact that certain operational costs borne by MAC and
CSA are not reimbursed. The amount of the administrative fee is subject to adjustment based on the number of aircraft
operated, routes flown and whether aircraft are considered to be soft-parked. Since MAC and CSA entered into the
new dry-lease agreements in 2015, they have periodically entered into amendments to the ag
reements with FedEx that
have adjusted the administrative fees payable under these agreements. These adjustments, which have generally been
made on an annual basis, have resulted in annual period-to-period volatility
in MAC and CSA’s profitability. MAC
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and CSA entered into such an amendment effective as of June 1, 2017.
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On June 1, 2016, the current dry-lease agreements were amended to extend the expiration date to May 31, 2020. The
dry-lease agreements may be terminated by FedEx or MAC and CSA, respectively, at any time upon 90 days’ written
notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written
notice. In addition, each of the dry-lease agreements provides that FedEx may terminate the agreement upon written
notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the
dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement,
FedEx becomes MAC or CSA’s only customer, or MAC or CSA employs fewer than six employees. As of the date of
this report, FedEx would be permitted to terminate each of the dry-lease agreements under this provision. The
Company believes that the short-term nature of its agreements with FedEx is standard within the airfreight contract
delivery service industry, where performance is measured on a daily basis.
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As of March 31, 2018, MAC and CSA had an aggregate of 79 aircraft under its dry-lease agreements with FedEx.
Included within the 79 aircraft, four Cessna Caravan aircrafts are considered soft-parked. Soft-parked aircraft remain
covered under our agreements with FedEx although at a reduced administrative fee compared to aircraft that are in
operation. MAC and CSA continue to perform maintenance on soft-parked aircraft, but they are not crewed and do
not operate on scheduled routes.
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Revenues from MAC and CSA’s contracts with FedEx accounted for approximately 38% and 47% of the Company’s
consolidated revenue for the fiscal years ended March 31, 2018 and 2017, respectively. The loss of FedEx as a
customer would have a material adverse effect on the Company. FedEx has been a customer of the Company since
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1980. MAC and CSA are not contractually precluded from providing services to other parties and MAC occasionally
provides third-party maintenance services to other airline customers and the U.S. military.
MAC and CSA operate under separate aviation certifications. MAC is certified to operate under Part 121, Part 135
and Part 145 of the regulations of the FAA. These certifications permit MAC to operate and maintain aircraft that can
carry a maximum cargo capacity of 7,500 pounds on the Cessna Caravan 208B under Part 135 and a maximum cargo
capacity of 14,000 pounds for the ATR-42 and 17,800 pounds for the ATR-72 aircraft under Part 121. CSA is certified
to operate and maintain aircraft under Part 135 of the FAA regulations. This certification permits CSA to operate
aircraft with a maximum cargo capacity of 7,500 pounds.
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MAC and CSA, together, operated the following FedEx-owned cargo aircraft as of March 31, 2018:
Type of Aircraft
Model Year
Form of Ownership
Cessna Caravan 208B
(single turbo prop)
ATR-42 (twin turbo prop)
ATR-72 (twin turbo prop)
1985-2012
1992
1992
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Dry lease
Dry lease
Dry lease
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Number
of
Aircraft
61
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79
The Cessna Caravan 208B aircraft are maintained under an FAA Approved Aircraft Inspection Program (“AAIP”).
The inspection intervals range from 100 to 200 hours. The current engine overhaul period on the Cessna aircraft is
8,000 hours.
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The ATR-42 and ATR-72 aircraft are maintained under a FAA Part 121 continuous airworthiness maintenance
program. The program consists of A and C service checks as well as calendar checks ranging from weekly to 12 years
in duration. The engine overhaul period is 6,000 hours.
MAC and CSA operate in a niche market within a highly competitive contract cargo carrier market. MAC and CSA
are two of seven carriers that operate within the United States as FedEx feeder carriers. MAC and CSA are
benchmarked against the other five FedEx feeders based on safety, reliability, compliance with federal, state and
applicable foreign regulations, price and other service related measurements. Accura
te industry data is not available to
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indicate the Company’s position within its marketplace (in large measure because all of the Company’s direct
competitors are privately held), but management believes that MAC and CSA, combined, constitute the largest
contract carrier of the type described immediately above.
FedEx conducts periodic audits of MAC and CSA, and these audits are an integral part of the relationship between the
carrier and FedEx. The audits test adherence to the dry-lease agreements and assess the carrier’s overall internal
control environment, particularly as related to the processing of invoices of FedEx-reimbursable costs. The scope of
these audits typically extends beyond simple validation of invoice data against the third-party supporting
documentation. The audit teams generally investigate the operator’s processes and procedures for strong internal
control procedures. The Company believes satisfactory audit results are critical to maintaining its relationship with
FedEx. The audits conducted by FedEx are not designed to provide any assurance with respect to the Company’s
consolidated financial statements, and investors, in evaluating the Company’s consolidated financial statements,
should not rely in any way on any such examination of the Company or any
of its subsidiaries.
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The Company’s overnight air cargo operations are not materially seasonal.
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Ground Equipment Sales.
GGS is located in Olathe, Kansas and manufactures, sells and services aircraft deicers and other specialized equipment
sold to domestic and international passenger and cargo airlines, ground handling companies, the United States Air
Force (“USAF”), airports and industrial customers. GGS’s product line includes aircraft deicers, scissor-type lifts,
military and civilian decontamination units, flight-line tow tractors, glycol recovery vehicles and other specialized
equipment. In the fiscal year ended March 31, 2018, sales of deicing equipment accounted for approximately 77% of
GGS’s revenues, compared to 49% in the prior fiscal year.
GGS designs and engineers its products. Components acquired from third-party suppliers are used in the assembly of
its finished products. Components are sourced from a diverse supply chain. The primary components for mobile
deicing equipment are the chassis (which is a commercial medium or heavy-duty truck), the fluid storage tank, a boom
system, the fluid delivery system and heating equipment. The price of these components is influenced by raw material
costs, principally high-strength carbon steels and stainless steel. GGS utilizes continuous improvements and other
techniques to improve efficiencies and designs to minimize product price increases to its customers, to respond to
regulatory changes, such as emission standards, and to incorporate technological improvements to enhance the
efficiency of GGS’s products. Improvements have included the development of single operator mobile deicing units
to replace units requiring two operators, a patented premium deicing blend system and a more efficient forced-air
deicing system.
GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons.
GGS also offers fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer,
including single operator configuration, fire suppressant equipment, open basket or enclosed cab design, a patented
forced-air deicing nozzle, on-board glycol blending system to substantially reduce glycol usage, and color and style of
the exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and
maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol
recovery vehicles and other special purpose mobile equipment.
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GGS competes primarily on the basis of the quality and reliability of its products, prompt delivery, service and price.
The market for aviation ground service equipment is highly competitive and directly related to the financial health of
the aviation industry, weather patterns and changes in technology.
GGS’s mobile deicing equipment business has historically been seasonal, with revenues typically being lower in the
fourth and first fiscal quarters as commercial deicers are typically delivered prior to the winter season. The Company
has continued its efforts to reduce GGS’s seasonal fluctuation in revenues and earnings by broadening its international
and domestic customer base and its product line. In July 2009, GGS was awarded a new contract to supply deicing
trucks to the USAF, which expired in July 2014. On May 15, 2014, GGS was awarded a new contract to supply
deicing trucks to the USAF. The initial contract award is for two years through July 13, 2016 with four additional
one-year extension options that may be exercised by the USAF, the first of which was exercised, extending the
contract term to July 13, 2018. The value of the contract, as well as the number of units to be delivered, depends upon
annual requirements and available funding to the USAF.
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Last year, GGS sold one deicer, the pre-production unit for the GL 1800 model deicer under this contract, to the USAF
under the above contract during the fiscal year ended March 31, 2017, which pre-production unit was accepted by the
USAF. This year, GGS sold one deicer, the pre-production unit for the ER 2875 model deicer under this contract, to
the USAF under the above contract during the fiscal year ended March 31, 2018 and the unit was accepted by the
USAF. Also, during this year, GGS has received delivery orders from the USAF for both GL 1800 and ER 2875
models, has put them in the production schedule and is successfully completing and having the units accepted per
normal operations. As the delivery and acceptance of the pre-production units was required and completed by the
USAF, additional orders have been submitted and additional orders are expected.
In September 2010, GGS was awarded a contract to supply flight-line tow tractors to the USAF. The contract award
was for one year commencing September 28, 2010 with four additional one-year extension options exercisable by the
USAF. All option periods under the contract were exercised and the contract expired in September 2015, though it
continues to govern orders placed under the contract prior to its expiration. Sale of flight-line tow tractors under this
contract have been at very low margins. This contract was completed in March 2017 and GGS had no revenues for
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sales of flight-line tow tractors in the fiscal year ended March 31, 2018, compared to sales of approximately
$3,174,000 for the fiscal year ended March 31, 2017.
Ground Support Services.
GAS provides aircraft ground support equipment, fleet, and facility maintenance services. At March 31, 2018, GAS
was providing ground support equipment, fleet, and facility maintenance services
to more than 145 customers at 128
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North American airports.
Approximately 24% and 28%, respectively, of GAS’s revenues in the fiscal years ended March 31, 2018 and 2017,
were derived from services under a contract with LSG SkyChefs. The LSG SkyChefs contract is an evergreen
agreement without a specific termination date but does include a 60-day termination clause for either party. In
addition, approximately 23% and 14% of GAS’s revenues for the fiscal years ended March 31, 2018 and 2017, were
derived from services under a contract with Delta Airlines. In December 2016, Delta awarded GAS a five-year
contract at 28 locations in connection with their periodic request-for-proposal (RFP) process. Most significantly, GAS
was awarded the maintenance of the baggage handling system and passenger boarding bridges for Delta’s hub
operation at the Minneapolis-St. Paul airport. Not all Delta locations serviced by GAS were included in this RFP. At
March 31, 2018, GAS had over 132 technicians serving Delta in 47 locations. In addition to expanded locations with
Delta, during the fiscal year 2018, GAS added multiple service locations to other key customers. In total, during the
fiscal year 2018, GAS added 2 new served locations and over 22 additional technicians.
GAS competes primarily on the basis of the quality, reliability and pricing of its services. The market for ground
support equipment and airport facility maintenance services is highly competitive and directly related to the financial
health of the aviation industry. GAS’s maintenance service business is not materially seasonal.
Printing Equipment and Maintenance.
The Company determined that for accounting purposes, it had obtained control over Delphax in conjunction with the
acquisition of the equity and debt interests on November 24, 2015 and has consolidated Delphax in Air T’s
consolidated financial statements beginning on November 24, 2015. Delphax’s business has included the design,
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manufacture and sale of advanced digital print production equipment (including high-speed, high-volume cut-sheet
and continuous roll-fed printers), maintenance contracts, spare parts, supplies and consumable items for these systems.
The equipment, spare parts, supplies and consumable items have been manufactured, and maintenance and services
have been provided by Delphax Canada and such products and services have been sold through Delphax, Delphax
Canada and Delphax subsidiaries located in Canada, the United Kingdom and France. A significant portion of
Delphax’s net sales has historically been related to service and support provided after the sale, including the sale of
consumable items for installed printing systems. Delphax’s legacy consumables production business had been
expected to generate cash flow while Delphax rolled-out its next generation elan® commercial inkjet printer.
The Company’s investments in Delphax were intended to support the commercial rollout and manufacturing costs of
the new Delphax elan® ™ 500 digital color print system, which combines advances in inkjet and paper-handling
technologies in a production class sheet-fed system offering full CMYK color and 1600 dpi print quality at speeds of
up to 500 letter impressions per minute. During the quarter ended June 30, 2016, Delphax was informed by its largest
customer that the customer had decided to accelerate its plans for removing Delphax legacy printing systems from
production and that Delphax should, as a consequence, expect the future volume of legacy product orders from the
customer to decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be
expected from this customer was sharply curtailed. In addition to this specific customer communication, Delphax also
experienced a broad-based decline in legacy product customer demand during the first quarter of fiscal year 2017.
m
Sales of Delphax’s new elan® printer system also had not materialized to expectations.
y
aa
ff
The above described adverse business developments drove significant negative operating results and led to severe
liquidity constraints for Delphax. In addition to other measures intended to respond to developments, Delphax engaged
an outside advisory firm to assist with operations, cost reductions and expense rationalization, and to provide an
objective assessment and recommendations regarding Delphax’s business outlook and alternative courses of action.
During the quarter ended June 30, 2016, a number of Delphax employees were either severed or furloughed. For most
of fiscal year 2017, Delphax’s operations have been maintained at a significantly curtailed level.
k
aa
11
On January 6, 2017, the Company acquired all rights, and assumed all obligations, of a third-party lender under a
senior credit agreement (the “Delphax Senior Credit Agreement”) with Delphax and Delphax Canada providing for a
$7.0 million revolving senior secured credit facility, subject to a borrowing base of North American accounts
u
receivable and inventory, including obligations, if any, to fund future borrowings under the Delphax Senior Credit
Agreement. In connection with this transaction, the Company, Delphax and Delphax Canada entered into an
amendment to the Delphax Senior Credit Agreement to, among other things, reduce the maximum amount of
borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million
and to revise the borrowing base to include in the borrowing base 100% of purchase orders from customers for
products up to $500,000. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain “Events
of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax Senior Credit
Agreement.
Notwithstanding the existence of events of default under the Delphax Senior Credit Agreement, during the first six
calendar months of 2017, the Company permitted additional borrowings under the Delphax Senior Credit Agreement
to, among other things, fund a final production run by Delphax Canada of consumable products for Delphax’s legacy
printing systems, which production run was primarily completed over the first six months of calendar 2017.
In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of final
production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on July 13, 2017,
the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On
August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The
Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax
Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured
creditors and shareholders on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under
the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted
an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking
that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax
Canada to be bankrupt. The recipients of the foreclosure notice did not object to
the foreclosure or redeem. As a result,
f
the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to
undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
f
With it being adjudged bankrupt on August 8, 2017, Delphax Canada ceased to have capacity to deal with its property.
The property of Delphax Canada vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured
aa
creditors. The Company’s rights under Delphax Senior Credit Agreement permitted it to foreclose upon the personal
property and rights of undertakings of Delphax Canada. Since the Company foreclosed on Delphax Canada’s assets
within very close time proximity to the commencement of bankruptcy proceedings and because the bankruptcy and
foreclosure were undertaken in contemplation of one another, the Company
treated these as one single financial
mm
reporting event. In accordance with applicable accounting guidance, the Company considered whether Delphax
Canada was still a business post-bankruptcy and foreclosure of the assets by the Company and concluded that Delphax
Canada no longer constituted a business as it is defined by accounting principles generally accepted in the United
States of America and, accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is
legally released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of March 31,
2018, the bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax Canada was
still the primary obligor of its liabilities.
Air T has contributed certain of the assets acquired in foreclosure to a newly formed subsidiary, Delphax Solutions,
Inc. (“Delphax Solutions”), which has contracted with Delphax to make available for purchase legacy parts and
consumables, as well as to serve as a temporary fulfilment provider to Delphax for logistics and sales order processing.
In addition, Delphax Solutions intends to pursue market success for the elan® printer system, as Delphax is no longer
actively selling its product lines. Delphax Solutions has entered into an agreement with Delphax for a license for
intellectual property and rights to the elan® printing system and technologies in return for royalties based on sales.
m
Delphax Solutions intends pursue sales of the elan® printing system and related product lines both directly and
through qualified resellers and agents.
12
Commercial Jet Engines and Parts.
Contrail Aviation and Jet Yard, added during fiscal year 2017, and AirCo, formed in May 2017 to acquire the business
of the AirCo Sellers, comprise the commercial jet engines and parts segment of the Company’s operations. Contrail
Aviation is a supplier of surplus and aftermarket commercial jet engine components. Its primary focus revolves around
the CFM International CFM56-3/-5/-7 engines and the International Aero Engines V2500A5 engine, which power the
two most prevalent narrow body, single aisle aircraft that are currently flown commercially—the Boeing 737 Classic /
737 NG and the Airbus A320 family. Contrail Aviation acquires commercial jet engines and components for
disassembly and/or overhaul to useable components. Components are overhauled by third-party FAA-authorized
repair agencies and are then held in inventory for resale. Customers include major airlines, original equipment
manufacturers and maintenance, repair and overhaul (MRO) service providers. Contrail Aviation holds an ASA-100
accreditation from the Aviation Suppliers Association. Contrail Aviation’s operations are housed in a 21,000 square-
foot office and warehouse facility in Verona, Wisconsin that is leased from an entity owned by the shareholder of
Contrail Seller, who joined Contrail Aviation as its Chief Executive Officer in connection with the acquisition, and by
the individual appointed as Chief Financial Officer of Contrail Aviation following the acquisition.
ff
Jet Yard offers commercial aircraft storage, storage maintenance and aircraft disassembly/part-out services at facilities
leased at the Pinal Air Park in Marana, Arizona. The prevailing climate in this area of Arizona provides conditions
conducive to long-term storage of aircraft. Jet Yard is registered to operate a repair station under Part 145 of the
regulations of the FAA and it leases approximately 48.5 acres of land under a lease agreement with Pinal County,
Arizona. Jet Yard was organized in 2014, entered into the lease in June 2016 and had maintained de minimus
operations from formation through the date it was acquired by the Company. The lease expires in May 2046 with an
option to renew for an additional 30-year period (though the lease to a 2.6-acre parcel of the leased premises may be
terminated by Pinal County upon 90 days’ notice). The lease provides for an
initial annual rent of $27,000, which
a
rental rate escalates based on a schedule in annual increments during the first seven years of the lease (at which time
the annual rental rate would be $152,000) and increases by an additional five percent for each three-year period
thereafter. Because the rental expense will be accounted for on a straight-line basis over the term of the lease, the
rental expense in the initial years will exceed the corresponding cash payments. The lease agreement permits Pinal
County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the
leased premises in phases in accordance with a specified timetable, which includes, as the initial phase, the
construction of a demolition pad to be completed by March 2017 and, as the final and most significant phase, the
construction of an aircraft maintenance hangar large enough to house a Boeing B777-300 by the first quarter of 2021.
The construction of the demolition pad specified under the lease has not been completed, and Jet Yard and Pinal
County are in discussions with respect to improvements on the leased premises. As of the date of issuance, the
Company was informed that the Pinal County is working on the rezoning of Pinal Airpark, which prevents any tenant
from construction on the Airpark.
AirCo operates an established business offering commercial aircraft parts sales, exchanges, procurement services,
consignment programs and overhaul and repair services. Its repair station and support facility hold FAA and European
Aviation Safety Agency certifications covering aircraft instrumentation, avionics and a range of accessories for
civilian, military transport, regional/commuter and business/commercial jet and turboprop aircraft. AirCo operates at a
20,000 square-foot facility leased from the shareholder of the AirCo Seller. The lease duration is one year with an
option for AirCo to extend the lease up to four additional one-year periods at the same terms. The lease provides that
AirCo may terminate the lease on 90 days’ notice during the first year. Customers of AirCo include airlines and
commercial aircraft leasing companies.
m
Leasing.
The Company organized ATGL on October 6, 2015. ATGL provides funding for equipment leasing transactions,
which may include transactions for the leasing of equipment manufactured by GGS and Delphax and transactions
initiated by third parties unrelated to equipment manufactured by the Company.
Backlog.
GGS’s backlog consists of “firm” orders supported by customer purchase orders for the equipment sold by GGS. At
March 31, 2018, GGS’s backlog of orders was $13.3 million, all of which GGS expects to be filled in the fiscal year
13
ending March 31, 2019. At March 31, 2017, GGS’s backlog of orders was $2.8 million. Backlog is not meaningful for
the Company’s other business segments.
Research and Development.
During the fiscal years ended March 31, 2018 and 2017, Delphax incurred research and development expenses of
$196,000 and $1,042,000, respectively. Research and development expense incurred by Delphax relates to the
development of its elan® ™ 500 digital color print system.
Governmental Regulation.
The Company and its subsidiaries are subject to regulation by various governmental agencies.
The Department of Transportation (“DOT”) has the authority to regulate
air service. The DOT has authority to
investigate and institute proceedings to enforce its economic regulations, and may, in certain circumstances, assess
civil penalties, revoke operating authority and seek criminal sanctions.
rr
Under the Aviation and Transportation Security Act of 2001, as amended, the Transportation Security Administration
(“TSA”), an agency within the Department of Homeland Security, has responsibility for aviation security. The TSA
requires MAC and CSA to comply with a Full All-Cargo Aircraft Operator Standard Security Plan, which contains
evolving and strict security requirements. These requirements are not static but change periodically as the result of
regulatory and legislative requirements, imposing additional security costs and creating a level of uncertainty for our
operations. It is reasonably possible that these rules or other future security
requirements could impose material costs
on us.
t
uu
The FAA has safety jurisdiction over flight operations generally, including flight equipment, flight and ground
personnel training, examination and certification, certain ground facilities, flight equipment maintenance programs and
procedures, examination and certification of mechanics, flight routes, air traffic control and communications and other
matters. The FAA is concerned with safety and the regulation of flight operations generally, including equipment
used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the
authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if
questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it
issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations.
The Company, through its subsidiaries, holds all operating airworthiness and other FAA certificates that are currently
required for the conduct of its business, although these certificates may be suspended or revoked for cause. The FAA
periodically conducts routine reviews of MAC and CSA’s operating procedures and flight and maintenance records.
In September 2010, the FAA proposed rules that would significantly reduce the maximum number of hours on duty
and increase the minimum amount of rest time for our pilots, and thus require us to hire additional pilots and modify
certain of our aircraft. When the FAA issued final regulations in December 2011, all-cargo carriers, including MAC
and CSA, were exempt from these new pilot fatigue requirements, and instead were required to continue complying
r
with previously enacted flight and duty time rules. In December
2012, the FAA reaffirmed the exclusion of all cargo
carriers from the new rule. It is reasonably possible, however, that future security or flight safety requirements could
impose material costs on us.
aa
tt
The FAA has authority under the Noise Control Act of 1972, as amended, to monitor and regulate aircraft engine
noise. The aircraft operated by the Company are in compliance with all such regulations promulgated by the FAA.
Moreover, because the Company does not operate jet aircraft, noncompliance is not likely. Aircraft operated by us also
comply with standards for aircraft exhaust emissions promulgated by the U.S. Environmental Protection Agency
(“EPA”) pursuant to the Clean Air Act of 1970, as amended.
Jet Yard and AirCo operate repair stations licensed under Part 145 of the regulations of the FAA. These certifications
must be renewed annually, or in certain circumstances within 24 months. Certified repair stations are subject to
periodic FAA inspection and audit. The repair station may not be relocated without
written approval from the FAA.
aa
Because of the extensive use of radio and other communication facilities in its aircraft operations, the Company is also
subject to the Federal Communications Act of 1934, as amended.
14
Maintenance and Insurance.
The Company, through its subsidiaries, is required to maintain the aircraft it operates under the appropriate FAA and
manufacturer standards and regulations.
The Company has secured public liability and property damage insurance in excess of minimum amounts required by
the United States Department of Transportation.
The Company maintains cargo liability insurance, workers’ compensation insurance and fire and extended coverage
insurance for owned and leased facilities and equipment. In addition, the Company ma
intains product liability
insurance with respect to injuries and loss arising from use of products sold and services
provided.
d
n
In March 2014, the Company formed Space Age Insurance Company (“SAIC”), a captive insurance company licensed
in Utah. SAIC insures risks of the Company and its subsidiaries that were not previously insured by the various
Company insurance programs (including the risk of loss of key customers and contacts, administrative actions and
regulatory changes); and may from time to time underwrite third-party risk through certain reinsurance arrangements.
SAIC is included in the Company’s consolidated financial statements.
Employees.
At March 31, 2018, the Company and its subsidiaries had 775 full-time and full-time-equivalent employees. None of
the employees of the Company or any of its subsidiaries are represented by labor unions. The Company believes its
relations with its employees are good.
Item 1A. Risk Factors.
The following risk factors, as well as other information included in this Annual Report on Form 10-K, should be
considered by investors in connection with any investment in the Company’s common stock.
Risks Related to Our Dependence on Significant Customers
We are significantly dependent on our contractual relationship with FedEx Corporation, the loss of which would
have a material adverse effect on our business, results of operations and financial position.
In the fiscal year ended March 31, 2018, 38% of our consolidated operating revenues, and 100% of the operating
revenues for our overnight air cargo segment, arose from services we provided to FedEx. Our current agreements may
be terminated by FedEx upon 90 days’ written notice and FedEx may at any time terminate the lease of any particular
aircraft thereunder upon 10 days’ written notice. In addition, FedEx may terminate the dry-lease agreement with
MAC or CSA upon written notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from
reimbursement payments under the dry-lease agreement) is derived from the services performed by it pursuant to the
respective dry-lease agreement, FedEx becomes its only customer, or it employs less than six employees. As of the
date of this report, FedEx would be permitted to terminate each of the new dry-lease agreements under this provision.
FedEx has been a customer of the Company since 1980. The loss of these contracts with FedEx would have a material
adverse effect on our business, results of operations and financial position.
Changes in our agreements with FedEx subject us to greater operating risks.
On June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx with terms different from our
prior dry-lease service contracts. The dry-lease agreements provide for the lease of specified aircraft by us in return
for the payment of monthly rent with respect to each aircraft leased, which monthly rent was increased from the prior
dry-lease service contracts to reflect an estimate of a fair market rental rate. The dry-lease agreements provide for the
reimbursement by FedEx of our costs, without mark up, incurred in connection with the operation of the leased aircraft
for the following: fuel, landing fees, third-party maintenance, parts and certain other direct operating costs. Unlike the
prior dry-lease contracts, under the new dry-lease agreements, certain operational costs incurred by us in operating the
aircraft are not reimbursed by FedEx at cost, and such operational costs are to be borne solely by us.
The dry-lease agreements with FedEx provide for the lease of specified aircraft by us in return for the payment of
monthly rent with respect to each aircraft leased. The dry-lease agreements provide for the reimbursement by FedEx of
15
t
our costs, without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel,
n operational costs incurred
landing fees, third-party maintenance, parts and certain other direct operating costs. Certai
by us in operating the aircraft are not reimbursed by FedEx at cost, and such operational costs are borne solely by
us. The current dry-lease agreements provide for the payment by FedEx to us of a monthly administrative fee based on
the number and type of aircraft leased and routes operated. The amount of the monthly administrative fee under the
current dry-lease agreements is greater than under the prior dry-lease service contracts with FedEx, in part to reflect
the greater monthly lease payment per aircraft and that certain operational costs are to be borne by MAC and CSA and
not reimbursed. Accordingly, as a result in the change in our arrangements with FedEx as reflected in the new dry-
lease agreements, we are subject to the risk of rising operational costs that are not
reimbursed to us at cost and may be
in excess of the allocable portion of the increased administrative fee, which could adversely affect results of
operations. In addition, since MAC and CSA entered into the new dry-lease agreements in 2015, they have
periodically entered into amendments to the agreements with FedEx that have adjusted the administrative fees payable
under these agreements. These adjustments, which have generally been made on an annual basis, have resulted in
annual period-to-period volatility in MAC and CSA’s profitability. Although MAC and CSA have entered into such
an amendment effective as of June 1, 2017 which positively affected MAC and CSA’s profitability compared to
results for the fiscal year ended March 31, 2017 as discussed within Management’s Discussion and Analysis, future
amendments may reduce the administrative fees and accordingly negatively affect MAC and CSA’s profitability.
k
Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’s operations.
Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’s operations. These risks are
discussed in “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Risk
Factors” in FedEx Corporation’s Annual Report on Form 10-K for the fiscal year ended
May 31, 2017. These risks
include but are not limited to the following:
K
Economic conditions in the global markets in which it operates;
(cid:120)
(cid:120) Dependence on its strong reputation and value of its brand;
(cid:120)
Potential disruption to the Internet and FedEx’s technology infrastructure, including customer websites,
including cyberattacks;
The price and availability of fuel;
Its ability to manage its assets, including aircraft, to match shifting and future shipping volumes;
Intense competition from other providers of transportation and business services;
Changes in governmental regulations that may affect its business;
Its ability to make prudent strategic acquisitions and realize the expected benefits;
Its ability to maintain good relationships with its employees and prevent attempts by labor organizations to
organize groups of its employees;
The continued classification of owner-operators in its ground delivery business as independent contractors
rather than as employees;
The impact of the United Kingdom’s planned withdrawal from the European Union;
The impact of terrorist activities including the imposition of stricter governmental security requirements;
Regulatory actions affecting global aviation rights or a failure to obtain or mainta
important international markets;
in aviation rights in
ff
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120) Global climate change or legal, regulatory or market responses to such change;
Localized natural or man-made disasters in key locations, including its Memphis, Tennessee super-hub;
(cid:120)
(cid:120) Disruptions or modifications in service by the United States Postal Service, a significant customer and vendor
of FedEx; and
(cid:120) Widespread outbreak of an illness or other communicable disease or any other public health crisis.
ll
A material reduction in the aircraft we fly for FedEx could materially adversely affect our business and results of
operations.
Under our agreements with FedEx, we are not guaranteed a number of aircraft or routes we are to fly and FedEx may
reduce the number of aircraft we lease and operate upon 10 days’ written notice. Our compensation under these
agreements, including our administrative fees, depends on the number of aircraft leased to us by FedEx. Any material
permanent reduction in the aircraft we operate could materially adversely affect our business and results of operations.
A temporary reduction in any period could materially adversely affect our results of operations for that period.
16
Our ground support services segment has been dependent upon the revenues from two significant customers, the
loss of which could materially impact the segment’s results.
In the fiscal year ended March 31, 2018, approximately 47% of GAS’s revenues were derived from services under
contracts with two customers. The loss of these customers, or a major decline in business activity with these
customers, could materially adversely impact the results of the segment.
Other Business Risks
Our revenues for aircraft maintenance services fluctuate based on the heavy maintenance check schedule, which is
based on aircraft usage, for aircraft flown by our overnight air cargo operations.
The maintenance revenues of our overnight air cargo segment are affected based on the level of heavy maintenance
checks performed on aircraft operated by our overnight air cargo operations which is affected by the level of usage of
the aircraft. Accordingly, the maintenance revenues of our overnight air cargo segment fluctuate from period to
period. In addition, if the number of aircraft operated for FedEx were to decrease, we would likely experience fewer
maintenance hours and consequently, less maintenance revenue.
f
Incidents or accidents involving products and services that we sell may result in liability or otherwise adversely
affect our operating results for a period.
Incidents or accidents may occur involving the products and services that we sell. While we maintain products
liability and other insurance in amounts we believe are customary and appropriate and may have rights to pursue
subcontractors in the event that we have any liability in connection with accidents involving products that we sell, it is
possible that in the event of multiple accidents the amount of our insurance coverage would not be adequate.
The suspension or revocation of FAA certifications could have a material adverse effect on our business, results of
operations and financial condition.
Our overnight air cargo operations are subject to regulations of the FAA. The FAA can suspend or revoke the
authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if
questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it
issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations.
Our overnight air cargo subsidiaries, MAC and CSA, operate under separate FAA certifications. Although it is
possible that, in the event that the certification of one of our subsidiaries was
suspended or revoked, flights operated
ff
by that subsidiary could be transferred to the other subsidiary, we can offer no assurance that we would be able to
transfer flight operations in that manner. Accordingly, the suspension or revocation of any one of these certifications
could have a material adverse effect on our business, results of operations and financial position.
e
Sales of deicing equipment can be affected by weather conditions.
Our deicing equipment is used to deice commercial and military aircraft. The extent of deicing activity depends on the
severity of winter weather. Mild winter weather conditions permit airports to use fewer deicing units, since less time
is required to deice aircraft in mild weather conditions. As a result, airports may be able to extend the useful lives of
their existing units, reducing the demand for new units.
Our results of operations may be affected by the value of securities we hold for investment and we may be unable to
liquidate our investments in a timely manner at full value.
We invest a significant portion of our capital not needed for operations in marketable securities, including equity
securities of publicly traded companies. At March 31, 2018, the fair value of these marketable securities was
approximately $2.6 million. Our results of operations may be affected by gains or losses recognized upon the sale of
these investments or by losses recognized upon the determination that any such investment has become impaired or
suffered an “other-than-temporary” impairment. At March 31, 2018, we had gross unrealized gains associated with
marketable securities aggregating $36,000 and gross unrealized losses aggregating $69,000.
17
Any investment with a fair value of less than its cost basis is assessed for possible “other-than-temporary” impairment
regularly and at each reporting date. Other-than-temporary impairments of available-for-sale marketable equity
securities are recognized in the consolidated statement of income (loss).
On the basis of its June 30, 2016, March 31, 2017 and June 30, 2017 assessments, the Company concluded that it had
common stock of Insignia Systems, Inc.
suffered an “other-than-temporary” impairment in its investment in the
(NASDAQ: ISIG) (“Insignia”). Consistent with the applicable accounting guidance, the Company’s cost basis in the
Insignia investment was lowered to $3,604,000 at June 30, 2016, to $2,643,000 at March 31, 2017 and to $1,724,000
at June 30, 2017 to reflect the impairment charges.
mm
On the basis of its December 31, 2017 “other-than-temporary” impairment assessment, the Company concluded that it
had suffered an other-than-temporary impairment in its investment in the common stock of Oxbridge Re Holdings
Limited (NASDAQ: OXBR) (Oxbridge). The Company’s cost basis in its Oxbridge investment was lowered from
$1,516,000 to $727,000 at December 31, 2017 which represents an other-than temporary impairment of $789,000.
In addition, from time to time we may hold positions in marketable securities that under then-current market
conditions we may be unable to liquidate in a timely manner at full value.
Our business may be adversely affected by information technology disruptions.
Our business may be impacted by information technology disruptions, including information technology attacks.
Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to
gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems,
unauthorized release of confidential or otherwise protected information and corruption of data (our own or that of third
parties). Although we have adopted certain measures to mitigate potential risks to our systems from information
technology-related disruptions, given the unpredictability of the timing, nature and scope of such disruptions, we could
potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or
ability to provide products and services to our customers, the compromising of confidential or otherwise protected
information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use
of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or
damage to our reputation, any of which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Our business could be materially adversely affected by numerous other risks, including rising healthcare costs,
changes in environmental laws and other unforeseen business interruptions.
Our business may be negatively impacted by numerous other risks. For example, medical and healthcare costs may
continue to increase. Initiatives to address these costs, such as consumer driven health plan packages, may not
successfully reduce these expenses as needed. Failure to offer competitive employee benefits may result in our
inability to recruit or maintain key employees. Additional risks to our business include global or local events which
could significantly disrupt our operations. Terrorist attacks, natural disasters and electrical grid disruptions and outages
are some of the unforeseen risks that could negatively affect our business, financial condition, results of operations and
cash flows.
aa
Risks Related to Ownership of Our Common Stock
Various provisions and laws could delay or prevent a change of control.
Certain provisions of our certificate of incorporation and bylaws and provisions of Delaware corporation law could
delay or prevent a change of control or may impede the ability of the holders of our common stock to change our
management. In particular, our certificate of incorporation and bylaws, among other things regulate how shareholders
may present proposals or nominate directors for election at shareholders’ meetings and authorize our board of directors
to issue preferred stock in one or more series, without shareholder approval.
Item 1B. Unresolved Staff Comments.
None.
18
Item 2. Properties.
Since 1979, the Company leased the Little Mountain Airport in Maiden, North Carolina from a corporation whose
stock is owned in part by former officers and directors of the Company and an estate of which certain former directors
are beneficiaries. The facility consisted of approximately 68 acres with one 3,000-foot paved runway, approximately
20,000 square feet of hangar space and approximately 12,300 square feet of office space. As noted below, the
operations of Air T, MAC and ATGL were headquartered at this facility until they were relocated on July 31, 2017.
The lease expired on January 31, 2018 and was not renewed.
a
f
The Company acquired approximately 4.626 acres in Denver, North Carolina for the construction of facilities to house
the operations of Air T, MAC and ATGL which had been housed at the Little Mountain Airport facility. Construction
of the new facility has been completed, and the Company relocated its corporate offices to the facility on July 31,
2017. Acquisition and construction of this facility was financed by borrowings from a bank lender.
The Company also leases approximately 1,950 square feet of office space and approximately 4,800 square feet of
hangar space at the Ford Airport in Iron Mountain, Michigan. CSA’s operations are headquartered at these facilities
which are leased from a third party under an annually renewable agreement.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located in
Kinston, North Carolina under an agreement that extends through January 2023, with the option to extend the lease for
four additional five-year periods thereafter. The Company has calculated rent expense under the current lease term.
The rental rate under the lease increases by increments for each of the five-year renewal periods.
ff
t
GGS leases an 112,500 square foot production facility in Olathe, Kansas. The facility is leased from a third party
under a lease agreement, which expires in August 2019.
As of March 31, 2018, the Company leased hangar, maintenance and office space from third parties at a variety of
other locations, at prevailing market terms.
Contrail Aviation leases a 21,000 square foot facility in Verona, Wisconsin. The lease for this facility expires on July
17, 2021, though Contrail Aviation has the option to renew the lease on the same terms for an additional five-year
period.
Jet Yard leases approximately 48.5 acres of land from Pinal County at the Pinal Air Park in Marana, Arizona. The
lease expires in May 2046, though Jet Yard has an option to renew the lease for an additional 30-year period (though
the lease to a 2.6-acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The
lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the
construction of facilities on the leased premises in phases in accordance with a specified timetable. The construction of
a demolition pad required by March 31, 2017 under the lease has not been completed and Jet Yard and Pinal County
are in discussions with respect to improvements on the leased premises.
Delphax Solutions leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease expires
on July 31, 2020. Delphax Solutions’ obligations under the lease have been guaranteed by Air T.
aa
AirCo leases a 20,000 square-foot facility from the shareholder of the AirCo Seller which expires in on May 1, 2018,
though AirCo may prior thereto terminate the lease on 90-days’ notice and may renew the lease for up to four
successive one-year terms. As of the date of issuance, AirCo has renewed the lease through May 1, 2019.
r
Item 3. Legal Proceedings.
The Company and its subsidiaries are subject to legal proceedings and claims that ar
business.
u
ise in the ordinary course of their
Item 4. Mine Safety Disclosures.
Not applicable.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
The Company’s common stock is publicly traded on the NASDAQ Stock Market under the symbol “AIRT.”
As of March 31, 2018, the number of holders of record of the Company’s Common Stock was 170. The range of high
and low sales price per share for the Company’s common stock on the NASDAQ Stock Market from April 1, 2017
through March 31, 2018 is as follows:
Fiscal Year Ended March 31,
2018
2017
High
Low
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
21.55
21.55
20.95
20.95
25.00
25.00
34.83
34.83
$
18.10
18.10
14.40
14.40
17.26
17.26
24.00
24.00
$
26.99
26.99
23.50
23.50
25.96
25.96
22.55
22.55
21.50
17.75
17.24
20.17
The Company’s Board of Directors in May 2014 adopted a policy to discontinue the payment of a regularly scheduled
annual cash dividend.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to
750,000 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. No shares were purchased pursuant to
this authorization during the fiscal year ended March 31, 2018.
As of March 31, 2018, the Company did not sell any securities within the past three years that were not registered
under the Securities Act.
Item 6. Selected Financial Data.
Not applicable
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a
broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings
power. Our goal is to build on Air T’s core businesses.
We currently operate wholly owned subsidiaries in three legacy industry segments:
•
•
•
overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”)
subsidiaries, which operates in the air express delivery services industry;
ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which
manufactures and provides mobile deicers and other specialized equipment products to passenger and
cargo airlines, airports, the military and industrial customers; and
ground support services, comprised of our Global Aviation Services, LLC (“GAS”) subsidiary, which
provides ground support equipment maintenance and facilities maintenance services to domestic airlines
and aviation service providers.
In the past three years, we have organized or acquired businesses operating in four other segments. The additional
segments include:
In October 2015, we formed a wholly owned equipment leasing subsidiary, Air T Global Leasing, LLC (“ATGL”),
which comprises our leasing segment.
In November 2015, we acquired debt and equity interests in Delphax Technologies, Inc. (“Delphax”), a printing
equipment manufacturer and maintenance provider, which comprises our printing equipment and maintenance
segment along with the newly formed subsidiary, Delphax Solutions, Inc.
In July 2016, our majority owned subsidiary, Contrail Aviation Support, LLC (“Contrail Aviation”), acquired the
principal assets of a business based in Verona, Wisconsin engaged in acquiring surplus commercial jet engines and
components and supplying surplus and aftermarket commercial jet engine components. In October 2016, we acquired
100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”) to provide commercial aircraft storage,
maintenance and aircraft disassembly/part-out services at facilities leased at the Pinal Air Park in Marana, Arizona. In
May 2017, our newly formed subsidiaries, AirCo, LLC, AirCo 1, LLC and AirCo Services, LLC (collectively,
“AirCo”), acquired the inventory and principal assets of a business based in Wichita, Kansas that distributes and sells
airplane and aviation parts. Contrail Aviation, Jet Yard and AirCo comprise the commercial jet engines and parts
segment of the Company’s operations. This segment, formerly referred to as the commercial jet engines segment, was
renamed to reflect its broader product and service offerings.
On December 15, 2017, BCCM, a newly-formed, wholly-owned subsidiary of the Company completed the acquisition
of Blue Clay Capital Management, LLC (“Blue Clay Capital”), an investment management firm based in Minneapolis,
Minnesota. BCCM is included within Corporate in the segment information disclosed in this report.
Each business segment has separate management teams and infrastructures that offer different products and services.
We evaluate the performance of our business segments based on operating income.
Following is a table detailing revenues (after elimination of intercompany transactions
customer category:
f
) by segment and by major
21
(Dollars in thousands)
Overnight Air Cargo Segment:
FedEx
Ground Equipment Sales Segment:
Military
Commercial - Domestic
Commercial - International
Ground Support Services Segment
Printing Equipment and Maintenance
Domestic
International
Commercial Jet Engines and Parts
Domestic
International
Leasing
Corporate
Year Ended March 31,
2018
2017
$
72,845
37%
69,558
69,558
47%
9,195
9,195
38,168
38,168
2,642
2,642
50,005
35,698
35,698
3,432
3,432
2,712
2,712
6,144
16,069
16,069
13,438
13,438
29,507
137
137
183
183
5%
20%
1%
26%
18%
2%
1%
3%
8%
7%
15%
0%
0%
2,627
2,627
24,536
24,536
4,284
4,284
31,447
31,447
1%
17%
3%
21%
30,453
30,453
21%
4,863
4,863
4,156
4,156
9,019
9,019
2,682
2,682
4,774
4,774
7,456
7,456
539
539
-
-
3%
3%
6%
2%
3%
5%
0%
0%
$
194,519
100%
$
148,472
148,472
100%
MAC and CSA are two of seven companies in the U.S. that have North American feeder airlines under contract with
FedEx. With a relationship with FedEx spanning over 35 years, MAC and CSA operate and maintain Cessna Caravan,
ATR-42 and ATR-72 aircraft that fly daily small-package cargo routes throughout the eastern United States, upper
Midwest and the Caribbean. MAC and CSA’s revenues are derived principally pursuant to “dry-lease” service
contracts with FedEx.
y
On June 1, 2015, MAC and CSA entered into new dry-lease agreements with FedEx which together cover all of the
revenue aircraft operated by MAC and CSA and replaced all prior dry-lease service contracts. These dry-lease
agreements provide for the lease of specified aircraft by MAC and CSA in return for the payment of monthly rent with
respect to each aircraft leased, which monthly rent was increased from the prior dry-lease service contracts to reflect
an estimate of a fair market rental rate. These dry-lease agreements provide that FedEx determines the type of aircraft
and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by MAC and CSA,
respectively. The current dry-lease agreements provide for the reimbursement by FedEx of MAC and CSA’s costs,
without mark up, incurred in connection with the operation of the leased aircraft for the following: fuel, landing fees,
third-party maintenance, parts and certain other direct operating costs. Unlike prior dry-lease contracts, under the
current dry-lease agreements, certain operational costs incurred by MAC and CSA in operating the aircraft under the
dry-lease agreements are not reimbursed by FedEx at cost, and such operational costs are borne solely by MAC and
CSA. Under the dry-lease agreements, MAC and CSA are required to perform maintenance of the leased aircraft in
return for a maintenance fee based upon an hourly maintenance labor rate, which has been increased from the rate in
place under the prior dry-lease service contracts. Under prior dry-lease service contracts, the hourly maintenance labor
rate had not been adjusted since 2008. The dry-lease agreements provide for the payment by FedEx to MAC and CSA
of a monthly administrative fee based on the number and type of aircraft leased and routes operated. The amount of
the monthly administrative fee under the current dry-lease agreements is greater than under the prior dry-lease service
contracts with FedEx, in part to reflect the greater monthly lease payment per aircraft and that certain operational costs
are borne by MAC and CSA and not reimbursed. The amount of the administrative fee is subject to adjustment based
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22
on the number of aircraft operated, routes flown and whether aircraft are considered to be soft-parked. Since MAC and
CSA entered into the current dry-lease agreements in 2015, they have periodically entered into amendments to the
agreements with FedEx that have adjusted the administrative fees payable under these agreements. These adjustments,
which have generally been made on an annual basis, have resulted in annual period-to-period volatility in MAC and
CSA’s profitability. MAC and CSA have entered into such an amendment effective as of June 1, 2017, which
positively affected MAC and CSA’s profitability for the fiscal year ended March 31, 2018 compared to the fiscal year
ended March 31, 2017.
aa
On June 1, 2016, the current dry-lease agreements were amended to extend the expiration date to May 31, 2020. The
dry-lease agreements may be terminated by FedEx or MAC and CSA, respectively, at any time upon 90 days’ written
notice and FedEx may at any time terminate the lease of any particular aircraft thereunder upon 10 days’ written
notice. In addition, each of the dry-lease agreements provides that FedEx may terminate the agreement upon written
notice if 60% or more of MAC or CSA’s revenue (excluding revenues arising from reimbursement payments under the
dry-lease agreement) is derived from the services performed by it pursuant to the respective dry-lease agreement,
FedEx becomes MAC or CSA’s only customer, or MAC or CSA employs less than six employees. As of the date of
this report, FedEx would be permitted to terminate each of the dry-lease agreements under this provision. The
Company believes that the short-term nature of its agreements with FedEx is standard within the airfreight contract
delivery service industry, where performance is measured on a daily basis. FedEx has been a customer of the
Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company.
rr
Pass-through costs under the dry-lease agreements with FedEx totaled $23,380,000 and $23,379,000 for the years
ended March 31, 2018 and 2017, respectively.
As of March 31, 2018, MAC and CSA had an aggregate of 79 aircraft under its dry-lease agreements with FedEx.
Included within the 79 aircraft are 4 Cessna Caravan aircraft that are considered soft-parked. Soft-parked aircraft
remain covered under our agreements with FedEx although at a reduced administrative fee compared to aircraft that
are in operation. MAC and CSA continue to perform maintenance on soft-parked aircraft, but they are not crewed and
do not operate on scheduled routes.
aa
GGS manufactures, sells and services aircraft deicers and other specialized equipment on a worldwide basis. GGS
manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS
d
also offers fixed-pedestal-mounted deicers. Each model can be customized
as requested by the customer, including
u
single operator configuration, fire suppressant equipment,
open basket or enclosed cab design, a patented forced-air
deicing nozzle and on-board glycol blending system to substantially reduce glycol usage, color and style of the
exterior finish. GGS also manufactures five models of scissor-lift equipment, for catering, cabin service and
maintenance service of aircraft, and has developed a line of decontamination equipment, flight-line tow tractors, glycol
recovery vehicles and other special purpose mobile equipment. GGS competes primarily on the basis of the quality,
performance and reliability of its products, prompt delivery, customer service and price.
u
t
In July 2009, GGS was awarded a new contract to supply deicing trucks to the USAF, which expired in July 2014. On
May 15, 2014, GGS was awarded a new contract to supply deicing trucks to the USAF. The initial contract award was
for two years through July 13, 2016 with four additional one-year extension options that may be exercised by the
USAF, the first two of which was exercised, extending the contract term to July 13, 2018.
In September 2010, GGS was awarded a contract to supply flight-line tow tractors to the USAF. The contract award
was for one year commencing September 28, 2010 with four additional one-year extension options exercisable by the
USAF. All option periods under the contract have been exercised and the contract expired in September 2015, though
it continues to govern orders placed under the contract prior to its expiration. Sales of flight-line tow tractors under this
contract have been at very low margins. For the fiscal year ended March 31, 2017, GGS revenues included $3,174,000
of flight-line tow tractors sales to USAF under this contract. This contract was completed in March 2017.
At March 31, 2018, GGS’s backlog of orders was $13.3 million, compared to a backlog of $2.8 million at March 31,
2017.
GAS provides aircraft ground support equipment, fleet, and facility maintenance services. At March 31, 2018, GAS
was providing ground support equipment, fleet, and facility maintenance services to more than 114 customers at 84
23
North American airports. During the quarter ended March 31, 2017, GAS entered into new agreements with its
principal customer which replaced certain fixed price agreements covering certain locations that had been
unprofitable. GAS anticipates the terms of these new agreements will permit it to operate with improved profitability
at those locations. In addition, in December 2016, GAS was awarded a five-year contract to provide a major airline
customer with ground support equipment services at 28 locations. In the contract award, which was part of a periodic
request-for-bid process, GAS retained 21 of its 22 incumbent locations with the customer covered by the RFP process
and added seven new locations.
On October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D GSE
Support, Inc. (“D&D”) which was in the business of marketing, selling and providing aviation repair, equipment,
parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount paid at closing in
connection with this acquisition was $400,000, with an additional $100,000 paid 30 days after closing and an
additional $100,000 payable in equal monthly installments of $16,667 commencing on November 1, 2016. Earn-out
payments of up to $100,000 may also be payable based on specified performance for the twelve-month period ending
September 30, 2017. Based on actual revenue earned by D&D through September 30, 2017, the earn-out payment
under the purchase agreement was $100,000, which was paid in October 2017.
y
As described in Note 10 of the accompanying Notes to Consolidated Financial Statements, we determined that for
accounting purposes we had obtained control over Delphax in conjunction with the acquisition of the equity and debt
interests on November 24, 2015, and we have consolidated Delphax in Air T’s consolidated financial statements
beginning on November 24, 2015. Delphax’s business has included the design, manufacture and sale of advanced
digital print production equipment (including high-speed, high-volume cut-sheet and continuous roll-fed printers),
maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment, spare parts,
supplies and consumable items have been manufactured, and maintenance and services have been provided by
Delphax Canada and such products and services have been sold through Delphax, Delphax Canada and Delphax
subsidiaries located in Canada, the United Kingdom and France. A significant portion of Delphax’s net sales has
historically been related to service and support provided after the sale, including the sale of consumable items for
installed printing systems. Delphax’s legacy consumables production business had been expected to generate cash
flow while Delphax rolled-out its next generation elan® commercial inkjet printer.
d
aa
As described in Note 10 of the accompanying Notes to Consolidated Financial Statements, adverse business
developments at Delphax during the quarter ended June 30, 2016 and the significantly deteriorated outlook for future
orders of Delphax legacy and elan® product caused the Company to reevaluate the recoverability of Delphax’s assets,
both tangible and intangible. Based on this reevaluation, the Company concluded that a significant increase to
inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both
amortizable assets and goodwill, should be fully impaired. The Company also recorded a partial impairment of
Delphax related long-lived tangible assets. Furthermore, there was an assessment regarding whether, at June 30, 2016,
future severance actions under existing Delphax employee benefit plans were both probable and estimable. This
assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these
various adjustments, which aggregated to approximately $5,610,000, were reflected in the operating results of Delphax
for the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017.
a
During the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017, the Company recognized an
impairment charge of $1.4 million which resulted in the remaining net book value of Delphax intangible assets being
fully written off.
On January 6, 2017, the Company acquired all rights, and assumed all obligations, of a third-party lender under a
senior credit agreement (the “Delphax Senior Credit Agreement”) with Delphax and Delphax Canada providing for a
$7.0 million revolving senior secured credit facility, subject to a borrowing base of North American accounts
u
receivable and inventory, including obligations, if any, to fund future borrowings under the Delphax Senior Credit
Agreement. In connection with this transaction, the Company, Delphax and Delphax Canada entered into an
amendment to the Delphax Senior Credit Agreement to, among other things, reduce the maximum amount of
borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million
and to revise the borrowing base to include in the borrowing base 100% of purchase orders from customers for
products up to $500,000. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain “Events
of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax Senior Credit
Agreement.
24
Notwithstanding the existence of events of default under the Delphax Senior Credit Agreement, during the first six
calendar months of 2017, the Company permitted additional borrowings under the Delphax Senior Credit Agreement
to, among other things, fund a final production run by Delphax Canada of consumable products for Delphax’s legacy
printing systems, which production run was primarily completed over the first six months of calendar 2017.
In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of final
production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on July 13, 2017,
the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On
August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The
Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax
Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured
creditors and shareholders on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under
the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted
an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking
that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax
Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result,
the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to
undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
a
With its being adjudged bankrupt on August 8, 2017, Delphax Canada ceased to have capacity to deal with its
property. The property of Delphax Canada vested in the trustee in
bankruptcy of Delphax Canada subject to the rights
of secured creditors. The Company’s rights under Delphax Senior Credit Agreement permitted it to foreclose upon the
personal property and rights of undertakings of Delphax Canada. Since the Company foreclosed on Delphax Canada’s
assets within very close time proximity to the commencement of bankruptcy proceedings and because the bankruptcy
and foreclosure were undertaken in contemplation of one another, the Company treated these as a single financial
reporting event. In accordance with applicable accounting guidance, the Company considered whether Delphax
Canada was still a business post-bankruptcy and foreclosure of the assets by the Company and concluded that Delphax
Canada no longer constituted a business as it is defined by accounting principles generally accepted in the United
States of America and, accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is
legally released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of March 31,
2018, the bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax Canada was
still the primary obligor of its liabilities.
Air T has contributed certain of the assets acquired in foreclosure to a newly formed subsidiary, Delphax Solutions,
Inc. (“Delphax Solutions”), which has contracted with Delphax to supply legacy parts and consumables, as well as to
serve as a fulfilment provider to Delphax for logistics and sales order processing.
In addition, Delphax Solutions
intends to pursue market success for the elan® printer system, as Delphax is no longer actively selling its product
lines. Delphax Solutions has entered into an agreement with Delphax for a license for intellectual property and rights
to the elan® printing system and technologies in return for royalties based on sales. Delphax Solutions intends pursue
sales of the elan® printing system and related product lines both directly and through qualified resellers and agents.
a
We organized ATGL on October 6, 2015. ATGL provides funding for equipment leasing transactions, which may
include transactions for the leasing of equipment manufactured by GGS and Delphax an
d transactions initiated by
third parties unrelated to equipment manufactured by us. On April 4, 2016, ATGL purchased two elan® ™ 500
printers from Delphax for $650,000 for lease to a third party. One of those acquired printers was subject to an existing
lease to a third party which has been assigned to ATGL.
ff
On July 18, 2016, Contrail Aviation, a subsidiary of the Company, completed the purchase of substantially all of the
business assets of Contrail Aviation Support, Inc. (the “Contrail Seller”). Prior to the asset sale, the Contrail Seller,
based in Verona, Wisconsin, engaged in the business of acquiring surplus commercial jet engines or components and
supplying surplus and aftermarket commercial jet engine components. The acquisition consideration paid to the
Contrail Seller included equity membership units in Contrail Aviation representing 21% of the total equity
membership units in Contrail Aviation. As a result, the Company owns equity membership units in Contrail Aviation
representing the remaining 79% of the total equity membership units in Contrail Aviation. In addition, Contrail
Aviation has agreed to pay as additional deferred consideration to the Contrail Seller up to a maximum of $1.5 million
tt
25
per year and $3.0 million in the aggregate based on Contrail Aviation’s EBITDA (as defined in the purchase
agreement) measured during periods over the five years following the acquisition. Contrail Aviation and the Contrail
Seller also entered into put and call options permitting, at any time after the fifth anniversary of the asset sale closing
date, Contrail Aviation at its election to purchase from Contrail Seller, and permitting Contrail Seller at its election to
require Contrail Aviation to purchase from Contrail Seller, all of Contrail Seller’s equity membership interests
Contrail Aviation at price to be agreed upon, or failing such an agreement to be determined pursuant to third-party
appraisals in a specified process.
tt
tt
On October 3, 2016, a newly formed subsidiary of the Company, Stratus Aero Partners, LLC (formerly, Global
Aviation Partners LLC), acquired 100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”). Jet Yard
was organized in 2014, entered into the lease in June 2016 and prior to our acquisition maintained de minimus
operations.
The aggregate cash consideration paid in these two acquisition transactions, after closing date adjustments and not
including potential deferred payments to the Contrail Seller describe
d above, was approximately $4,048,000.
aa
On May 2, 2017 and June 1, 2017, our newly formed subsidiaries, AirCo, LLC, AirCo 1, LLC and AirCo Services,
LLC (collectively, “AirCo”) acquired the inventory and principal business assets, and assumed specified liabilities, of
Aircraft Instrument and Radio Company, Incorporated, and Aircraft Instrument and Radio Services, Inc. (collectively,
the “AirCo Sellers”). The acquired business, which is based in Wichita, Kansas, distributes and sells airplane and
aviation parts and maintains a license under Part 145 of the regulations of the Federal Aviation Administration. The
consideration paid for the acquired business was $2,400,000.
In March 2014, the Company formed Space Age Insurance Company (“SAIC”), a captive insurance company licensed
in Utah, and initially capitalized with $250,000. SAIC insures risks of the Company and its subsidiaries that were not
previously insured by the Company’s insurance programs; and underwrites third-party risk through certain reinsurance
arrangements. SAIC is included in the Company’s consolidated financial statements.
On June 7, 2017, SAIC invested $500,000 for a 40% interest in TFS Partners LLC (“TFS Partners”), a single-purpose
investment entity organized by SAIC and other investors, for the purpose of making an investment in a limited liability
company, The Fence Store LLC (“Fence Store LLC”), organized for the purpose of acquiring substantially all of the
assets of The Fence Store, Inc. (“Fence Store Inc.”). TFS Partners acquired a 60% interest in Fence Store LLC, which
has completed the purchase of substantially all of the assets of Fence Store Inc. Prior to this transaction, Fence Store
Inc. operated a business under the tradename “Town and Country Fence” selling and installing residential and
commercial fencing in the greater Twin Cities, Minnesota area. Fence Store LLC intends to continue this business.
t
On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company,
completed the acquisition of Blue Clay Capital Management, LLC (“Blue Clay Capital”). In connection with the
transaction, BCCM acquired the assets of, and assumed certain liabilities of, Blue Clay Capital in return for payment
to Blue Clay Capital of $1.00, subject to adjustment for Blue Clay Capital’s net working capital as of the closing date.
a
In connection with the acquisition, a Partnership Interest Conversion and General Partner Admittance Agreement
t
(“Conversion Agreement”) was entered into effective December 31, 2017 between Blue Clay Capital, BCCM
Advisors, and various Blue Clay Capital investment funds. Per the Conversion Agreement, Blue Clay Capital sold to
BCCM Advisors, and BCCM Advisors purchased from Blue Clay, the general partnership interests in certain
) for a purchase price equal to, with
y
investment funds previously managed by Blue Clay Capital (as specified above
respect to each general partnership, of (i) one percent (1%) of the aggregate capital accounts of each fund as valued on
December 31, 2017 and (ii) $100,000 (or $10,000 in the case of Blue Clay Capital SMid-Cap LO, LP). Upon
acquisition of each of the general partnership interests, BCCM Advisors was admitted as the general partner of each
fund.
At March 31, 2018, we held approximately 3.4 million shares of common stock of Insignia Systems, Inc. (“Insignia”),
representing approximately 28% of the outstanding shares, which shares were acquired commencing in our fiscal year
ended March 31, 2015. Any investment with a fair value of less than its cost basis is assessed for possible “other-than-
temporary” impairment regularly and at each reporting date. Other-than-temporary impairments of available-for-sale
marketable equity securities are recognized in the consolidated statement of income (loss). On the basis of its June 30,
2016, March 31, 2017 and June 30, 2017 assessments, the Company concluded that it had suffered an other-than-
26
temporary impairment in its investment in the common stock of Insignia. Consistent with the applicable accounting
guidance, the Company’s cost basis in the Insignia investment was lowered from $5,106,000 to $3,604,000 at June 30,
2016 and then to $2,643,000 at March 31, 2017 and to $1,724,000 at June 30, 2017 after the acquisition during the
quarter of shares having a cost basis of $32,000, reflecting, in the aggregate, an other-than-temporary impairment of
$3,414,000. On January 6, 2017, Insignia paid a special dividend of $0.70 per share to stockholders owning Insignia
shares on that date. The receipt of such special dividend is included in the other investment income (loss) in the
Company’s consolidated statements of income (loss) for the fiscal year ended March 31, 2017.
t
At March 31, 2018, the Company held 456,206 shares of common stock of Oxbridge Re Holdings Limited
(NASDAQ: OXBR) (Oxbridge). On the basis of its December 31, 2017 “other-than-temporary” impairment
assessment, the Company concluded that it had suffered an other-than-temporary impairment in its investment in the
common stock of Oxbridge. The Company’s cost basis in its Oxbridge investment was lowered from $1,516,000 to
$727,000 at December 31, 2017 which represents an other-than temporary impairment of $789,000.
mm
Fiscal 2018 Summary
For fiscal year 2018, the Company’s revenues, net of intercompany eliminations, increased by $46,048,000 (31%)
from the prior year. Operating income, net of intercompany eliminations, increased by $7,346,000 (237%) compared
y
to the prior fiscal year, principally due to the prior fiscal year’s loss in the printing equipment and maintenance
segment related to events discussed in Note 10 that did not reoccur this fiscal year.
Revenues for our overnight air cargo segment totaled $72,845,000 for the year ended March 31, 2018, representing a
d
$3,287,000 (5%) increase over the prior year. The segment’s administrative fee revenues increased
by $2,076,000,
reflecting the greater administrative fee amount paid under the dry-lease agreements which became effective on June
1, 2017. The administrative fees include the additional ATR monthly rental rate for leased aircraft under the
agreement, to reflect an estimate of a fair market value rental rate. In additio
n, the segment’s maintenance revenues
ff
increased as a result of higher maintenance labor billable hours during fiscal 2018. The segment’s operating income
increased by $1,403,000 in fiscal 2018.
ff
Revenues for GGS, net of intercompany eliminations, totaled approximately $50,005,000 for the year ended March 31,
2018, an increase of $18,557,000 (59%) from the prior year, while net operating income increased by $1,171,000
(44%). The increases in GGS revenues and operating income are due to an increase in sales volume of deicing trucks
and catering trucks to some of the Company’s largest customers.
During the year ended March 31, 2018, revenues from our GAS subsidiary totaled approximately $35,698,000,
representing a $5,245,000 (17%) increase from the prior year. The segment’s fiscal year 2018 operating loss,
$165,000, was an improvement of $336,000 (67%) compared to the 2017 loss of $501,000 principally due to the
impact of increased revenues. Revenue increased with growth in services for both new and existing customers and new
contracts.
The commercial jet engines and parts segment contributed $29,507,000 of revenues, net of intercompany eliminations,
for the year ended March 31, 2018, while operating income, net of intercompany eliminations, was $609,000. The
segment was formed through the acquisitions of the businesses of Contrail Aviation, AirCo and Jet Yard. In the prior
fiscal year, the commercial jet engines and parts segment consisted only of Contrail Aviation and Jet Yard which
contributed revenues of $7,456,000 and operating income of $532,000. The increase in revenue is directly attributable
to new customers compared to the prior fiscal year and the acquisition of AirCo. Further, Contrail, which was acquired
in July 2016, contributed a full year of revenue in fiscal year 2018 compared to nine months in fiscal year 2017.
Revenues for the printing equipment and maintenance segment, net of intercompany eli
minations, totaled
approximately $6,144,000 representing a $2,875,000 (32%) decrease from the prior fiscal year. The segment’s net
operating income for the fiscal year 2018 was approximately $550,000 compared to an operating loss of $6,104,000
representing an increase of approximately $6,654,000. The decrease in revenues and the increase in operating income
are directly related to lost customers stemming from the events outlined in Note 10 of the accompanying Notes to
Consolidated Financial Statements and further described below related to the bankruptcy of Delphax Canada.
f
In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of final
production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on July 13, 2017,
27
the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On
August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The
Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax
Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured
creditors and shareholders on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under
the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted
an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking
that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax
Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result,
the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to
undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
f
With it being adjudged bankrupt on August 8, 2017, Delphax Canada ceased to have capacity to deal with its property.
The property of Delphax Canada vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured
aa
creditors. The Company’s rights under Delphax Senior Credit Agreement permitted it to foreclose upon the personal
property and rights of undertakings of Delphax Canada. Since the Company foreclosed on Delphax Canada’s assets
within very close time proximity to the commencement of bankruptcy proceedings and because the bankruptcy and
foreclosure were undertaken in contemplation of one another, the Company treated these as a single financial reporting
event. In accordance with applicable accounting guidance, the Company considered whether Delphax Canada was still
a business post-bankruptcy and foreclosure of the assets by the Company and concluded that Delphax Canada no
longer constituted a business as it is defined by accounting principles generally accepted in the United States of
America and, accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is legally
released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of March 31, 2018, the
bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax Canada was still the
primary obligor of its liabilities.
Air T has contributed certain of the assets acquired in foreclosure to a newly formed subsidiary, Delphax Solutions,
Inc. (“Delphax Solutions”), which has contracted with Delphax to supply legacy parts and consumables, as well as to
serve as a fulfilment provider to Delphax for logistics and sales order processing.
In addition, Delphax Solutions
intends to pursue market success for the elan® printer system, as Delphax is no longer actively selling its product
lines. Delphax Solutions has entered into an agreement with Delphax for a license for intellectual property and rights
to the elan® printing system and technologies in return for royalties based on sales. Delphax Solutions intends pursue
sales of the elan® printing system and related product lines both directly and through qualified resellers and agents.
a
During fiscal year 2018, the Company recognized approximately $1,560,000 in other-than-temporary impairment
losses on investments.
Fiscal 2018 vs. 2017
For fiscal year 2018, the Company’s revenues, net of intercompany eliminations, increased by $46,048,000 (31%)
from the prior year. Operating income, net of intercompany eliminations, increased by $7,346,000 (237%) compared
y
to the prior fiscal year, principally due to the prior fiscal year’s loss in the printing equipment and maintenance
segment related to events discussed in Note 10 that did not reoccur this fiscal year.
Revenues for our overnight air cargo segment totaled $72,845,000 for the year ended March 31, 2018, representing a
$3,287,000 (5%) increase over the prior year. The segment’s operating income increased by $1,403,000 in fiscal 2018
due to the increases in the administrative fee revenues and the maintenance revenues, offset by an increase in flight
operations cost.
Revenues for GGS, net of intercompany eliminations, totaled approximately $50,005,000 for the year ended March 31,
2018, an increase of $18,557,000 (59%) from the prior year, while operating income increased by $1,171,000
(44%). The increases in GGS revenues and operating income are due to an increase in sales volume of deicing trucks
and catering trucks to some of the Company’s largest customers.
During the year ended March 31, 2018, revenues from our GAS subsidiary totaled approximately $35,698,000,
representing a $5,245,000 (17%) increase from the prior year. The segment’s fiscal year 2018 operating loss,
$165,000, was an improvement of $336,000 (67%) compared to the 2017 loss of $501,000 principally due to the
28
impact of increased revenues. Revenue increased with growth in services for both new and existing customers and new
contracts.
The commercial jet engines and parts segment contributed $29,507,000 of revenues, net of intercompany eliminations,
for the year ended March 31, 2018, while operating income, net of intercompany eliminations, was $609,000. The
increase in revenue is directly attributable to new customers compared to the prior fiscal year and the acquisition of
AirCo. Further, Contrail, which was acquired in July 2016, contributed a full
year of revenue in fiscal year 2018
qq
compared to nine months in fiscal year 2017.
Revenues for the printing and equipment segment, net of intercompany eliminations, totaled approximately
$6,144,000 representing a $2,875,000 (32%) decrease from the prior fiscal year. The segment’s net operating income
for the fiscal year 2018 was approximately $550,000 compared to an operating loss of $6,104,000 representing an
increase of approximately $6,654,000. The decrease in revenues and the increase in operating income are directly
related to lost customers stemming from the events outlined in Note 10 of the accompanying Notes to Consolidated
Financial Statements and further described below related to the bankruptcy of Delphax Canada.
Consolidated operating expenses, net of intercompany eliminations, increased by $38,701,000 (26%) to $190,274,000
for fiscal year 2018 compared to fiscal year 2017. Operating expenses in the overnight air cargo segment increased
$1,884,000 (3%) over the prior year principally due to increased flight crew costs. Ground equipment sales operating
costs increased $17,386,000 (60%) compared to the prior fiscal year principally due to the increase in production of
deicing trucks and catering trucks to some of the Company’s largest customers. Operating expenses in the ground
support services segment increased by $4,909,000 (16%) driven principally by an increase in salaries due to new
locations and employee count.
t
General and administrative expense increased $6,963,000 (31%) to $29,169,000 in fiscal year 2018. General and
administrative expense increased by $3,427,000 due to inclusion of AirCo, Delphax Solutions, BCCM, and
$2,729,000 due to the inclusion of Contrail and Jet Yard for the full year in fiscal year 2018.
f
Operating income for the year ended March 31, 2018 was $4,246,000, a $7,346,000 (237%) increase from fiscal
2017’s operating loss. The printing equipment and maintenance segment experienced a decrease in operating loss of
$6,654,000 (thus a favorable change to consolidated operating income) principally due to the events outlined in Note
10 of the accompanying Notes to Consolidated Financial Statements. In addition, the overnight air cargo’s operating
income increased by $1,403,000 in fiscal 2018 due to the increases in the administrative fee revenues and the
maintenance revenues, offset by an increase in flight operations cost. GGS’s operating income increased by
$1,171,000 due to an increase in sales volume of deicing trucks and catering trucks to some of the Company’s largest
customers. GAS’s fiscal year 2018 operating loss was an improvement of $336,000 (67%) from the 2017 loss of
services for both new and existing
t
$501,000 principally due to the impact of increased revenues from growth in
customers and new contracts. These increases are offset by an increase in Corporate’s operating loss of $2,045,000,
driven by an increase in general and administrative expense.
rr
Non-operating loss, net for the year ended March 31, 2018 was $1,594,000 a $476,000 increase from fiscal year 2017.
This change was caused principally by the decrease in investment income of $1,224,000, the increase in interest
expense of $1,153,000 offset by the decrease in other-than-temporary impairment losses on investment of $1,195,000
and the gain in equity in income of associated company of $707,000 during the fiscal year 2018.
tt
During the year ended March 31, 2018, the Company recorded $195,000 in income tax expense at an effective rate of
7.35%. One factor contributing to the difference between the federal statutory rate of 30.79% and the Company’s
effective tax rate for the fiscal year ended March 31, 2018 was the change in valuation allowance relating to the other
than temporary impairment of available for sale securities included in the pretax activity in the period. Additionally,
the estimated annual effective tax rate differs from the U. S. federal statutory rate due to the benefit for the Section
831(b) income exclusion for SAIC, the benefit for the federal domestic production activities deduction, the change in
the valuation allowance related to the activity of Delphax, and state income tax expense. As a result of tax reform, the
rate was also impacted by the recognition of the minimum tax credit carryforward and the expense relating to the
revaluing of the deferred tax asset and liability balances to the new federal statutory rate. During the year ended
March 31, 2017, the Company recorded $725,000 in income tax expense, which resulted in an annual tax effective rate
of (17.1%). The individually largest factor contributing to the difference betw
een the federal statutory rate and the
Company’s effective tax rate for the year ended March 31, 2017 was the recognition of a valuation allowance against
ff
29
Delphax’s pretax activity in the period. The income tax provision for the year ended March 31, 2017 differs from the
federal statutory rate due also in part to the effect of state income taxes and the federal domestic production activities
deduction. Additionally, the rate for the year ended March 31, 2017 includes the estimated benefit for the exclusion of
income for the Company’s captive insurance company subsidiary afforded under Section 831(b). Furthermore, for the
year ended March 31, 2017 a partial valuation allowance was recorded for the other-than-temporary loss relating to the
investment in Insignia and a benefit was reflected for the dividend received deduction which provides an exclusion
from taxable income of 70% of the dividends the Company received.
m
Net income attributable to Air T, Inc. stockholders for fiscal year 2018 was $2,277,000 or $1.11 per diluted share,
compared to a net loss attributable to Air T, Inc. stockholders of $3,214,000, or $1.51 per diluted share, for fiscal year
2017.
Liquidity and Capital Resources
As of March 31, 2018, the Company held approximately $4.8 million in cash and cash equivalents. The Company also
held approximately $1.5 million in restricted cash and investments with $250,000 in cash held as statutory reserve of
SAIC and the remaining $1.2 million pledged to secure SAIC’s participation in certain reinsurance pool. $535,000 was
invested in accounts not insured by the Federal Deposit Insurance Corporation (“FDIC”).
As of March 31, 2018, the Company’s working capital amounted to $30,493,000 an increase of $1,903,000 compared
to March 31, 2017.
d
On December 21, 2017, the Company refinanced its previously existing financing arrangement with Branch Banking
and Trust Company (“BB&T) by entering into a Credit Agreement (“MBT Credit Agreement”) with Minnesota Bank
& Trust (“MBT”), pursuant to which MBT extended to the Company an aggregate of $26,900,000 in financing in the
form of a floating-rate, $10,000,000 revolving credit facility, and three term loans in the amounts of $10,000,000
(“Term Loan A”), $5,000,000 (“Term Loan B”) and $1,900,000 (“Term Loan C”), respectively. The interest rate on
the $10,000,000 revolving note floats at a rate equal to the prime rate plus one percent (1%); the interest rate on Term
Note A floats at the month LIBOR rate plus two percent (2%); the interest rate on Term Note B is fixed at four and
one-half percent (4.50%); and, the interest on Term Note C floats at a rate equal to prime minus one percent (1%),
subject to a floor of three and one quarter percent (3.25%). In connection with the financing, the Company entered into
t
a swap agreement to fix the interest rate on Term Note A at four and 56/100ths percent (4.56%). The revolving note is
due on November 30, 2019, Term Loan A and Term Loan B mature in ten years from the date of issuance, and Term
Loan C matures on January 1, 2019. The loans are guaranteed by certain subsidiaries of the Company, secured by a
first lien on all personal property of the Company and the guaranteeing subsidiaries. The Company applied a portion
of the proceeds from the financing to refinance the obligations of the Company and certain of its subsidiaries under its
Prior Revolving Credit Facility (as defined below) with BB&T.
On December 21, 2017, the Company entered into an interest rate swap pursuant to an International Swap Dealer’s
Association, Inc. Master Agreement with MBT. The effective date of the swap was January 1, 2018 and the
termination date of the swap agreement is January 1, 2028. As of January 1, 2018, the notional amount was
$10,000,000, which amount adjusts each month consistent with the amortization schedule of Term Note A. The
purpose of the swap is to fix the interest rate on the Company’s $10,000,000 Term Note A at four and 56/100ths
percent (4.56%), thereby mitigating the interest rate risk inherent in Term Note A.
On February 15, 2018, the Company entered into certain financing documents with MBT pursuant to which MBT
extended a new $1,680,000 real estate loan (“Term Note D”) to the Company and amended the $1,900,000 term loan
evidenced by Term Note C to reduce the principal amount of Term Note C to $1,000,000 and to adjust the
amortization schedules set forth therein to reflect the reduced principal balance. The interest rate on Term Note D
floats at a rate equal to the one-month LIBOR rate plus 2%. In connection with the financing, the Company entered
into a swap agreement to fix the interest rate on Term Note D at five and 9/100th percent (5.09%). The principal
balance of Term Note D is payable in equal monthly installments of $5,600 each commencing on March 1, 2018 and
continuing until January 1, 2028 at which time the entire principal balance of Term Note D will be due and payable in
full. The interest rate on Term Note C will continue to float at a rate equal to prime minus 1% subject to a floor of
3.25%. The maturity date of Term Note C continues to be January 1, 2019. The monthly installments of principal
under Term Note C have been reduced from $158,333.33 a month to $90,909.09 per month to reflect the reduced
30
principal balance. Term Note D is secured by a first mortgage on the real property of the Company located at 5930
Balsom Ridge Road, Denver, NC 28037. In addition, both Term Note C and Term Note D, along with all other
financing extended by MBT to the Company, have been guaranteed by certain subsidiaries of the Company, and are
secured by a first lien on all personal property of the Company and the guaranteeing subsidiaries.
f
The MBT agreements contain affirmative and negative covenants, including covenants providing compliance
certificates and borrowing base certificates, notices of events of default or other events deemed to have a material
adverse effect on the Company, as defined in the credit agreement, and limitations on certain types of additional debt
and certain types of investments. The MBT Credit Agreement also contains financial covenants applicable to the
Company and the obligation subsidiaries, including the maintenance of a Debt Service Coverage Ratio of 1.25 to 1.00
and an Asset Coverage Ratio of 1.50 to 1.00.
rr
The MBT agreements contains events of default, as defined therein, including, without limitation, nonpayment of
principal, interest or other obligations, violation of covenants, cross-default to other debt, bankruptcy and other
insolvency events, actual or asserted invalidity of loan documentation, or material adverse changes in the Company’s
or the guaranteeing subsidiaries’ financial condition. At March 31, 2018, the Company and the subsidiaries were in
compliance with all applicable covenants under this credit facility.
aa
aa
Prior to December 21, 2017, the Company had a senior secured revolving credit facility of $25.0 million with BB&T
with a maturity date of April 1, 2019 (the “Prior Revolving Credit Facility”). Initially, borrowings under the Prior
Revolving Credit Facility bore interest (payable monthly) at an annual rate of one-month LIBOR plus an incremental
amount ranging from 1.50% to 2.00% based on a consolidated leverage ratio. In addition, a commitment fee accrued
with respect to the unused amount of the Prior Revolving Credit Facility at an annual rate of 0.15%. The Company
included the commitment fee expense within the interest expense and other line item of the accompanying
consolidated statements of income. Amounts applied to repay borrowings under the Prior Revolving Credit Facility
could be reborrowed, subject to the terms of the facility.
n
d
On May 2, 2017, the Company and certain of its subsidiaries entered into an amendment to the agreement governing
the Prior Revolving Credit Facility to establish a separate $2.4 million term loan facility under that agreement. Each of
the Company and such subsidiaries were obligors with respect to the term loan, which matured on May 1, 2018, with
equal $200,000 installments of principal due monthly, commencing June 1, 2017. Interest on the term loan was
payable monthly at a per annum rate equal to 25 basis points above the interest rate applicable to the Prior Revolving
Credit Facility. The proceeds of the term loan were used to fund the acquisition of the AirCo business. The term loan
was secured by the existing collateral securing borrowings under the Prior Revolving Credit Facility, including such
acquired assets.
Effective as of June 28, 2017, the Company and certain of its subsidiaries agreed to amend the Prior Revolving Credit
Facility to provide that the interest rates on the revolving loans and the above-referenced term loan under the Prior
Revolving Credit Facility were each increased by an additional 0.25% per annum from the date of the amendment
until the second business day after delivery of a compliance certificate for the quarter ended March 31, 2017 or any
subsequent fiscal quarter end showing compliance with the financial covenants required under the Prior Revolving
Credit Facility, other than with respect to covenants as to which compliance had been waived. The compliance
certificate for the quarter ended June 30, 2017, was so delivered on October 26, 2017 and accordingly, the additional
0.25% per annum additional interest ceased to accrue commencing on October 26, 2017.
The Prior Revolving Credit Facility contained a number of affirmative and negative covenants as well as financial
covenants. Revisions to the terms of the Prior Revolving Credit Facility and waiver of compliance with certain
covenants by the lender occurred pursuant to a number of amendments to the facility.
a
On October 31, 2016, the Company and its subsidiaries, MAC, GGS, CSA, GAS, ATGL, Jet Yard and Stratus Aero
Partners, LLC, entered into a loan agreement dated as of October 31, 2016, (the “Construction Loan Agreement”) with
the Prior Revolving Credit Facility lender to borrow up to $1,480,000 to finance the acquisition and development of
the Company’s new corporate headquarters facility located in Denver, North Carolina. Under the Construction Loan
Agreement, the Company was permitted to make monthly drawings to fund construction costs until October 2017.
Borrowings under the Construction Loan Agreement bore interest at the same rate charged under the Revolving Credit
Facility. Monthly interest payments began in November 2016. Monthly princip
al payments (based on a 25-year
a
amortization schedule) commenced in November 2017, with the final payment of the remaining principal balance due
f
31
in October 2026. Borrowings under the Construction Loan Agreement were secured by a mortgage on the new
headquarters facility and a collateral assignment of the Company’s rights in life insurance policies with respect to
certain former executives, as well as the same collateral securing borrowings under the Revolving Credit Facility. The
Construction Loan included the same covenants as in the Prior Revolving Credit Facility.
n
ff
All of the obligations of the Company and its subsidiaries under the Prior Revolving Credit Facility including the
Construction Loan Agreement referenced above were repaid in full with proceeds of the MBT Credit Agreement, and
the Prior Revolving Credit Facility was terminated effective as of December 21, 2017.
k
In connection with and upon consummation of the Contrail Aviation acquisition in July 2016, Contrail Aviation
entered into a Credit Agreement (the “Contrail Credit Agreement”) with a bank lender. The Contrail Credit Agreement
provided for revolving credit borrowings by Contrail Aviation in an amount up to the lesser of $12,000,000 or a
borrowing base. The borrowing base was computed monthly and was equal to the sum of 75% of the value of eligible
inventory (up to a maximum of $9,000,000) and 80% of outstanding eligible accounts receivable. The borrowing base
at March 31, 2017 was $3.2 million, and the outstanding principal balance of borrowings under the Contrail Credit
Agreement were $0 as of that date. Borrowings under the Contrail Credit Agreement bear interest at a rate equal to
one-month LIBOR plus 2.80% and mature in January 2018. The obligations of Contrail Aviation under the Contrail
Credit Agreement were required to be guaranteed by each of its subsidiaries (if any), and were (and the guaranty
obligations of any such subsidiary guarantors were required to be) secured by a first-priority security interest in
substantially all of the assets of Contrail Aviation and any such subsidiary guarantors, as applicable (including,
without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights
and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment
property, documents and instruments, real property, and proceeds of the foregoing). The obligations of Contrail
Aviation under the Contrail Credit Agreement were also guaranteed by the Company, with such guaranty limited in
amount to a maximum of $1,600,000, plus interest on such amount at the rate of interest in effect under the Contrail
Credit Agreement, plus costs of collection.
The Contrail Credit Agreement contained affirmative and negative covenants, including covenants that restricted the
ability of Contrail Aviation 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 contained
financial covenants applicable to Contrail Aviation and its subsidiaries, including a minimum debt service coverage
ratio of 1.75 to 1.0, a maximum ratio of total liabilities to tangible net worth of 2.5 to 1.0, and a $10,000 limitation on
annual operating lease payments. At March 31, 2017, Contrail Aviation was in compliance with its bank covenants.
t
On May 5, 2017, Contrail Aviation entered into a Business Loan Agreement with Old National Bank (“ONB Loan
Agreement”). The ONB Loan Agreement provides for revolving credit borrowings by Contrail in an amount up to
$15,000,000 and replaces the Contrail Credit Agreement entered into with BMO Harris Bank N.A on July 18, 2016.
Borrowings under the Loan Agreement bear interest at an annual rate equal to one-month LIBOR plus 3.00%.
On March 7, 2018, Contrail Aviation entered into a new Business Loan Agreement (the “Amended ONB Loan
Agreement”) with Old National Bank (“ONB”). The Amended ONB Loan Agreement and related Promissory Note
replace the ONB Loan Agreement dated May 5, 2017. The Amended ONB Loan Agreement provides for revolving
credit borrowings by Contrail Aviation in an amount up to $20,000,000 with a maturity date of May 5, 2019.
Borrowings under the Loan Agreement will bear interest at a variable rate equal to the 1-month LIBOR plus 300 basis
points. At March 31, 2018, $14,826,000 of aggregate borrowings were outstanding under the loan agreement and
$5,174,000 was available for borrowing.
On January 31, 2018, Contrail Aviation executed an additional Business Loan Agreement with Old National Bank
(“Additional ONB Loan Agreement”). The Additional ONB Loan Agreement provides for borrowings by Contrail
Aviation in an amount equal to $9,920,000 and is in addition to the revolving credit facility described above.
Borrowings under the Additional ONB Loan Agreement will bear interest at an annual rate equal to 1-month LIBOR
plus 375 basis points and matures on January 26, 2021. Pursuant to the Additional ONB Loan Agreement, Contrail
Aviation is required to make quarterly payments equal to $250,000, plus an additional “excess cash flow payment”
equal to seventy percent (70%) of the gross lease income of the Collateral minus $250,000. At March 31, 2018, the
outstanding balance on the Additional Loan Agreement was $9,920,000.
a
32
The obligations of Contrail Aviation under the Amended ONB Loan Agreement and the Additional ONB Loan
Agreement are secured by a first-priority security interest in certain assets of Contrail and are also guaranteed by the
Company, with such guaranty limited in amount to a maximum of $1,600,000 plus interest on such amount at the rate
of interest in effect under the Loan Agreement, plus costs of collection.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain affirmative and negative
covenants, including covenants that restrict Contrail’s ability to make acquisitions or investments, make certain
changes to its capital structure, and engage in any business substantially different than it presently conducts. The
agreements also contain financial covenants applicable to Contrail, including maintenance of a Cash Flow Coverage
Ratio of 2.0 to 1.0, a Tangible Net Worth of not less than $3,500,000, and a Debt Service Coverage Ratio of 1.1 to 1.0,
as such terms are defined in the agreements.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain Events of Default, as defined,
including, without limitation, nonpayment of principal, interest or other obligatio
ns, violation of covenants, if both
Contrail’s current chief executive officer and chief financial officer cease to oversee day-to-day operations of Contrail,
cross-default to other debt, bankruptcy and other insolvency events, actual or asserted invalidity of loan
documentation, or material adverse changes in Contrail’s financial condition. At March 31, 2018, Contrail was in
compliance with these covenants.
f
On October 27, 2017 AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a loan in the amount of
$3,441,000 from Minnesota Bank & Trust in order to finance, in part, the purchase of a 737-800 airframe for the
purpose of disassembling the plane and selling it for parts. The plane will be disassembled by Jet Yard, LLC, an
affiliate, and the parts will be placed on consignment with AirCo, LLC, which will market them to third parties.. AirCo
1, LLC is a special purpose entity formed for the purpose of this transaction. At March 31, 2018, the outstanding
balance on this loan was approximately $2,360,000 which is reported net of deferred financing costs of $44,500 on the
consolidated balance sheet.
The loan contains affirmative and negative covenants and is secured by a security interest in all of AirCo 1, LLC’s
assets, a collateral assignment of the purchase agreement for the plane, assignments of the disassembly contract and
the consignment agreement, and bailee agreements with Jet Yard, LLC and AirCo, LLC. AirCo, LLC is a wholly-
owned subsidiary of Stratus Aero Partners LLC. At March 31, 2018, AirCo 1, LLC was in compliance with these
covenants.
On February 22, 2018, AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a revolving loan in the
maximum amount of $5,000,000 (“Revolving Loan Agreement”) from MBT to finance, in part, the ongoing purchase
of decommissioned narrow body airframes including but not limited to Boeing 737 NG and A320 family aircraft by
AirCo 1, LLC for the purpose of disassembling the airframes and selling them for parts. The airframes will be
disassembled by Jet Yard, LLC, and the parts would be placed on consignment with AirCo, LLC, which will market
them to third parties. Borrowings under the Revolving Loan Agreement will bear interest at a fixed rate of 7.50% per
year with interest payments due on the first day of each month commencing on April 1, 2018. The entire remaining
principal balance of this Revolving Loan Agreement and any accrued, unpaid interest shall be due and payable on
February 21, 2019. At March 31, 2018, the outstanding balance on this loan was approximately $4,950,000 which is
reported net of deferred financing costs of $50,000 on the consolidated balance sheet.
d
While AirCo 1, LLC was originally formed with the intention of being a special purpose entity for the purchase of a
specific Boeing 737-800 airframe in October 2017, AirCo 1, LLC will no longer be a special purpose entity and will
be involved in the ongoing purchase of narrow body airframes including but not limited to Being 737 NG and A320
family aircraft for purposes of disassembling them and selling them for parts. The revolving line of credit described
above will be available to finance the purchase of additional decommissioned airframes to be disassembled and sold as
parts by consignment to AirCo, LLC.
u
The loan contains affirmative and negative covenants and is secured by security interests in all of AirCo 1, LLC’s
assets, a collateral assignment of the purchase agreements for the Boeing 737 airframes, assignments of the
disassembly contracts and the consignment agreements, and bailee agreements with Jet Yard, LLC and AirCo, LLC.
The loan is also secured by a pledge by AirCo, LLC of all of the membership interests of AirCo 1, LLC. At March 31,
2018, AirCo 1, LLC was in compliance with these covenants.
33
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.
Following is a table of changes in cash flow for the respective years ended March 31, 2018 and 2017:
Year Ended March 31,
2018
2017
Net Cash Used in Operating Activities
Net Cash Used in Investing Activities
Net Cash Provided by Financing Activities
Effect of foreign currency exchange rates on cash and cash equivalents
$
(278,000)
(278,000)
(26,416,000)
(26,416,000)
28,737,000
28,737,000
(3,000)
(3,000)
(7,554,000)
(3,700,000)
8,688,000
(16,000)
Net Increase (Decrease) in Cash and Cash Equivalents
$
2,040,000
2,040,000
(2,582,000)
Cash used in operating activities was $7,276,000 less for fiscal year 2018 compared to the prior fiscal year principally
due to the net income generated during the period compared to a net loss in prior fiscal year.
Cash used in investing activities for fiscal year 2018 was $22,716,000 more than the prior fiscal year due primarily to
capital expenditures of $20,216,000 during the fiscal period. The majority of the capital expenditures are concentrated
within Contrail Aviation which purchased engines with the intention of leasing those engines to customers.
Cash provided by financing activities for fiscal year 2018 was $20,049,000 more compared to the prior fiscal year.
This was primarily due to proceeds from the loan agreements with Old National Bank, offset by the repayment of the
previous revolving credit facility.
Off-Balance Sheet Arrangements
The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual
arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a
contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any
obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development
t
arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.
Impact of Inflation
The Company believes that inflation has not had a material effect on its manufacturing operations, because increased
costs to date have been passed on to its customers. Under the terms of its overnight air cargo business contracts the
major cost components of its operations, consisting principally of fuel, crew and other direct operating costs, and
certain maintenance costs are reimbursed by its customer. Significant increases in inflation rates could, however, have
a material impact on future revenue and operating income.
Seasonality
GGS’s business has historically been seasonal, with the revenues and operating income typically being lower in the
first and fourth fiscal quarters as commercial deicers are typically delivered prior to the winter season.
The Company had worked to reduce GGS’s seasonal fluctuation in revenues and earnings by increasing military and
international sales and broadening its product line to increase revenues and earnings throughout the year. In July
2009, GGS was awarded a new contract to supply deicing trucks to the USAF, which expired in July 2014. On May
15, 2014, GGS was awarded a new contract to supply deicing trucks to the USAF. The initial contract award was for
two years through July 13, 2016 with four additional one-year extension options that may be exercised by the USAF,
the first two of which was exercised, extending the contract term to July 13, 2018. The value of the contract, as well as
the number of units to be delivered, depends upon annual requirements and available funding to the USAF. Although
34
GGS has retained the USAF deicer contract, orders that have been received under the contract have typically not been
sufficient to offset the seasonal trend for commercial sales. As a result, GGS revenues and operating income generally
resume their seasonal nature. Our other reporting segments are not susceptible to seasonal trends.
Critical Accounting Policies and Estimates.
The Company’s significant accounting policies are more fully described in Note 1 of Notes to the Consolidated
Financial Statements in Item 8. The preparation of the Company’s consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires the use of estimates and assumptions to
determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon
the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions
could change materially as conditions within and beyond our control change. Accordingly, actual results could differ
materially from estimates. The Company believes that the following are its most significant accounting policies:
Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable is established based on
management’s estimates of the collectability of accounts receivable. The required allowance is determined using
information such as customer credit history, industry information, credit reports, customer financial condition and the
collectability of outstanding receivables. The estimates can be affected by changes in the financial strength of the
aviation industry, customer credit issues or general economic conditions.
Inventories. The Company’s inventories are valued at the lower of cost or net realizable value. Provisions for excess
and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories.
Historical parts usage, current period sales, estimated future demand and anticipated transactions between willing
buyers and sellers provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced
equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground
equipment, changes in the financial strength of the aviation industry, and market developments impacting both legacy
and next-generation products and services of our printing equipment and maintenance segment.
Warranty Reserves. The Company warranties its ground equipment products for up to a three-year period from date of
sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are
adjusted as actual warranty cost becomes known. Delphax warrantied its equipment for a period of 90 days
commencing with installation, except in the European Union, where it is generally one year from product shipment
date. Similarly, Delphax warrantied spare parts and supplies for a period of 90 days from shipment date. These
warranty reserves are reviewed quarterly and adjustments are made based on actual claims experience in order to
properly estimate the amounts necessary to settle future and existing claims.
Income Taxes. Income taxes have been provided using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date.
The Tax Cuts and Jobs Act (TCJA) was signed into law by the President on Friday December 22, 2017. The TCJA
includes the reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%, changes in business
deductions, and many international provisions. The drop in the corporate rate is effective for tax years beginning after
December 31, 2017. IRC Section 15 indicates that “if any rate of tax imposed…changes, and if the taxable year
includes the effective date of the change…, then tentative taxes shall be computed by applying the rate for the period
before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the
entire taxable year, and the tax for such taxable year shall be the sum of that proportion of each tentative tax which the
number of days in each period bears to the number of days in the entire taxable year.” (§15(a)). As the Company is a
fiscal year taxpayer, they will receive a partial benefit for the drop in the federal corporate tax rate for their fiscal year
ended March 31, 2018. The weighted average federal tax rate computed in accordance with IRC Section 15 is 30.79%
for the current fiscal year.
t
35
The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in
the future, which is generally the 21% federal corporate tax rate. The net impact from this revaluing resulted in a tax
expense recognized in the current fiscal year of $158,000. Additionally, the reduced corporate rate led to a reduction
of Delphax’ gross deferred tax asset by $2,139,000. This redu
ction was fully offset by the change in valuation
allowance, so the net tax expense was $0 related to Delphax.
y
t
The TCJA also repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the
extent not utilized refundable for tax years beginning after December 31, 2017. As a result, Delphax will be able to
receive a refund of its minimum tax credit carryforward of $311,000 beginning in their fiscal year ended September
30, 2019. Previously, a valuation allowance was established against the minimum tax credit carryforward. As a result
of the TCJA relating to the refundability of the minimum tax credit carryforward, an income tax benefit was
recognized by the Company during the current fiscal year and a long-term income tax receivable was established.
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. The Company remeasured deferred tax assets and liabilities based
on the rates at which they are expected to reverse in the future, which is generally the 21% federal corporate tax rate.
The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that
includes the enactment date.
Revenue Recognition. The Company recognizes revenue when it is earned. This occurs when services have been
rendered or products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed
or determinable selling price, title and risk of loss have been transferred, and collectability is reasonably assured.
Revenues from our Overnight Air Cargo segment are generally recognized as flight operation and maintenance
services are provided or, in the case of certain pass-through costs for things like maintenance parts and fuel, as the
Company incurs the related expenditure. Within the Company’s Ground Equipment Sales segment, revenues are
generally recognized at the time the related equipment has been shipped to the customer and risk of loss has
transferred. In the case of certain contracts with the U.S. Government or related prime contractors, the Company
applies contract accounting and uses either the percentage-of-completion or completed contract method, as
appropriate. Revenues of our Ground Support Services segment are generally recognized as the contracted services are
completed. Substantially all Printing Equipment and Maintenance segment revenues ar
e recognized upon product
shipment, which is generally when transfer to the customer of loss occurs. Service revenue is recognized upon
completion of services. Similarly, Commercial Jet Engines and Parts segment revenues are recognized upon shipment
of parts and transfer of loss or, as applicable, upon completion of services. Leasing revenues are recognized consistent
with contract terms and are generally recognized on a straight-line basis due to the operating lease classification of the
underlying leases.
aa
Although infrequent, the Company does occasionally enter into customer arrangements that involve the delivery of
multiple elements. For any such arrangements, the Company applies the applicable accounting guidance in order to
identify the individual accounting elements and to determine the most appropriate revenue recognition model for such
elements.
We evaluate gross versus net presentation on revenues from products or services purchased and resold in accordance
with the revenue recognition criteria outlined in Codification section 605-45,
Principal Agent Considerations.
ff
Business Combinations. The Company accounts for business combinations in accordance with FASB Codification
Section 805 (“ASC 805”) Business Combinations. Consistent with ASC 805, the Company accounts for each business
combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable
assets acquired and liabilities assumed at their respective fair values on the acquisition date. Goodwill is recognized
for the excess of the 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 oblig
ation 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 sheet.
r
r
36
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.
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 estimate of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as
part of the acquisition but are rather recognized in directly in earnings.
Accounting for Redeemable Non-Controlling Interest. As more fully described in Note 9 to the consolidated financial
statements, the Company is party to a put/call option agreement concerning the non-controlling ownership interest
held in the Company’s consolidated subsidiary, Contrail Aviation. The put/call option permits Contrail Aviation, at
any time after the fifth anniversary of the Company’s acquisition of Contrail Aviation, to purchase the non-controlling
interest from the holder of such interest. The agreement also permits the holder of the non-controlling interest to sell
such interest to Contrail Aviation. 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. 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. Based on
this guidance, the Company has classified the Contrail Aviation non-controlling interest between the liabilities and
equity sections of the accompanying March 31, 2018 consolidated balance sheet. If an equity instrument subject to the
guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet
date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity
instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the
guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the
period from the date of issuance (or from the date that it becomes probable that the instrument will become
redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b)
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 amount presented in temporary equity should be
no less than the initial amount reported in temporary equity for the instrument. Because the Contrail Aviation equity
instrument will become redeemable solely based on the passage of time, the Company determined that it is probable
that the Contrail Aviation equity instrument will become redeemable. Company has elected to apply the first of the
two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from
the application of the above guidance does not impact net income or comprehensive income in the consolidated
financial statements. Rather, such adjustments are treated as equity transactions.
f
Attribution of Net Income or Loss of Partially-Owned Consolidated Entities. In
the case of Delphax, we determined
that the attribution of net income or loss should be based on consideration of all of Air T’s investments in Delphax and
Delphax Canada. Our investment in the Warrant provides that in the event that dividends are paid on the common
stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the
Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been
converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67%
of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this
was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to
non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered
in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant
investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero. Additional losses
d
d
t
37
are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative
priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the
initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous
losses. The effect of interest expense arising under the Senior Subordinated Note and, since January 6, 2017, under the
Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net
income or losses to non-controlling interests because Delphax is a variable interest entity. As a result, 30% of Delphax
net losses were attributed to the non-controlling interests for the fiscal year ended March 31, 2017 and a favorable
adjustment of 8% of Delphax’s net losses were attributed to the non-controlling interests for the fiscal year ended
March 31, 2018.
The above-described attribution methodology applies only to our investments in Delphax. We establish the appropriate
attribution methodology on an entity-specific basis. In the case of Contrail Aviation, we concluded that an attribution
methodology based solely on equity ownership percentages was appropriate.
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.
Goodwill. The Company tests goodwill for impairment at least once annually. An impairment test will also be carried
out anytime events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested for
impairment at a level of reporting referred to as a reporting unit. The applicable accounting standards provide for two
methods to assess goodwill for possible impairment, one qualitative and the other a two-step quantitative method. The
Company is permitted to first assess qualitative factors to determine whether it is more likely than not (this is, a
likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value, including
f
goodwill. In qualitatively evaluating whether it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, the Company assesses relevant events and circumstances such as macroeconomic conditions,
industry and market developments, cost factors, and the overall financial performance of the reporting unit. If, after
assessing these events and circumstances, it is determined that it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then the first and second steps of the quantitative goodwill impairment
test are unnecessary. In the first step of the quantitative method, recoverability of goodwill is evaluated by estimating
the fair value of the reporting unit’s goodwill using multiple techniques, including a discounted cash flow model
income approach and a market approach. The estimated fair value is then compared to the carrying value of the
reporting unit. If the fair value of a reporting unit is less than its carrying value, a second step is performed to
determine the amount of impairment loss, if any. The second step requires allocation of the reporting unit’s fair value
to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business
combinations. Any residual fair value is allocated to goodwill. Impairment losses, limited to the carrying value of
goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.
t
Long-lived Assets. Long-lived assets are tested for impairment whenever events or changes in circumstances indicate
the carrying value of the assets may not be recoverable. Factors which may cause an impairment include extended
operating cash flow losses from the assets and management's decisions regarding the future use of assets. To conduct
impairment testing, the Company groups assets and liabilities at the lowest level for which identifiable cash is largely
independent of cash flows of other assets and liabilities. For assets that are to be held and used, impairment is
than the carrying value.
recognized when the estimated undiscounted cash flows associated with an asset group is less
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. Fair values are determined considering quoted market values, discounted cash flows or internal and
external appraisals, as applicable.
d
Marketable Securities. On a quarterly basis, the Company reviews marketable securities for declines in market value
that may be considered other than temporary. Market value declines are considered to be other than temporary based
on the length of time and the magnitude of the amount of each security that is in an unrealized loss position. The
Company also consider the nature of the underlying investments and other market conditions or when other evidence
indicates impairment. If the Company determines that an investment has other than a temporary decline in fair value,
the Company recognizes the investment loss in non-operating income, net in the accompanying consolidated
statements of comprehensive income (loss).
m
38
Going Concern. In connection with preparing its consolidated financial statements, Company management evaluates
whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the consolidated financial statements are
available to be issued.
Forward Looking Statements
Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within
d
the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial
condition, results of operations, plans, objectives, future performance and business. Forward-looking statements
include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,”
“anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements,
because of, among other things, potential risks and uncertainties, such as:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Economic conditions in the Company’s markets;
The risk that contracts with FedEx could be terminated or adversely modified in connection with any
renewal;
The risk that the number of aircraft operated for FedEx will be further reduced;
The risk that the United States Air Force will continue to defer significant orders for deicing equipment
under its contracts with GGS;
The risk that Delphax’s future operating performance will result in Air T, Inc. being unable to fully
recover its investments in Delphax;
The impact of any terrorist activities on United States soil or abroad;
The Company’s ability to manage its cost structure for operating expenses, or unanticipated capital
r
requirements, and match them to shifting customer service requirements and production volume levels;
The risk of injury or other damage arising from accidents involving the Company’s overnight air cargo
operations, equipment or parts sold by GGS, Contrail Aviation, AirCo or Jet Yard or services provided
by GAS or Jet Yard;
(cid:120) Market acceptance of the Company’s new commercial and military equipment and services;
(cid:120)
(cid:120)
(cid:120)
Competition from other providers of similar equipment and services;
f
Changes in government regulation and technology;
Changes in the value of marketable securities held as investments; and
(cid:120) Mild winter weather conditions reducing the demand for deicing equipment.
A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future
events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to
update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
39
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Air T, Inc.
Denver, North Carolina
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Air T, Inc. (the “Company”) and subsidiaries as of
March 31, 2018 and 2017, the related consolidated statements of income (loss), comprehensive income (loss), equity,
and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company and subsidiaries at March 31, 2018 and 2017, and the results of their operations and their
cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States
of America.
f
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2016.
Charlotte, North Carolina
June 29, 2018
40
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Operating Revenues :
Overnight air cargo
Ground equipment sales
Ground s upport s ervices
Commercial jet engines and parts
Printing equipment and maintenance
Corporate
Leasing
Operating Expens es:
Overnight air cargo
Ground equipment sales
Ground s upport s ervices
Printing equipment and maintenance
Commercial jet engines and parts
Leasing
Research and development
General and adminis trative
Depreciation, amortization and impairment
Operating Income (Los s)
Non-operating Income (Los s):
Gain on sale of marketable securities
Foreign currency gain (los s)
Other-than-temporary impairment loss es on inves tments
Other inves tment income, net
Interest expense and other
Gain on ass et retirement obligation
Bargain purchas e acquisition gain, net of tax
Unrealized loss on interes t rate swap
Unrealized gain on trans ition to equity method
Equity in income of ass ociated company
Income (Loss ) Before Income Taxes
Income Taxes
Net Income (Loss )
Net (Income) Los s Attributable to Non-controlling
Interests
Year Ended March 31,
2018
2017
$
72,845,353
72,845,353
50,004,507
50,004,507
35,698,171
35,698,171
29,506,873
29,506,873
6,144,403
6,144,403
182,722
182,722
137,316
137,316
194,519,345
63,049,619
63,049,619
41,567,109
41,567,109
30,135,613
30,135,613
2,975,999
2,975,999
20,502,205
20,502,205
-
-
195,653
195,653
29,168,766
29,168,766
2,678,858
2,678,858
190,273,822
69,558,334
31,447,408
30,453,246
7,455,797
9,019,155
-
537,719
148,471,659
61,661,072
24,350,264
25,089,412
9,490,906
4,501,030
49,460
1,042,496
22,205,947
3,181,845
151,572,432
4,245,523
4,245,523
(3,100,773)
93,066
93,066
(228,714)
(228,714)
(1,559,972)
(1,559,972)
121,860
121,860
(1,724,771)
(1,724,771)
562,500
562,500
501,880
501,880
(66,706)
(66,706)
721,585
721,585
(14,644)
(14,644)
(1,593,916)
2,651,607
2,651,607
195,000
195,000
576,162
286,596
(2,755,318)
1,345,798
(571,651)
-
-
-
-
-
(1,118,413)
(4,219,186)
725,000
2,456,607
2,456,607
(4,944,186)
(179,498)
(179,498)
1,730,647
Net Income (Loss ) Attributable to Air T, Inc. Stockholders
$
2,277,109
(3,213,539)
Earnings (Los s) Per Share:
Bas ic
Diluted
Weighted Average Shares Outs tanding:
Bas ic
Diluted
See notes to consolidated financial s tatements.
$
1.11
$
1.11
(1.51)
(1.51)
2,042,806
2,042,806
2,047,685
2,047,685
2,125,224
2,125,224
41
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net Income (Loss)
Other Comprehensive Loss:
Year Ended March 31,
2018
2017
$
2,456,607
(4,944,186)
Foreign currency translation income (loss)
229,615
229,615
(309,680)
Unrealized net losses on marketable securities
(1,788,532)
(1,788,532)
(1,779,017)
Tax effect of unrealized net losses on marketable securities
282,115
282,115
640,446
Reclassification due to the Tax Cuts and Jobs Act
42,475
42,475
-
Total unrealized net losses on marketable securities, net of tax
(1,463,942)
(1,463,942)
(1,138,571)
Reclassification of other-than-temporary impairment losses on
investments, net of gains on sale of marketable securities, included in
income (loss) before income taxes
1,466,906
1,466,906
2,179,155
Tax effect of reclassification
(277,622)
(277,622)
(784,446)
Reclassification adjustment, net of tax
1,189,284
1,189,284
1,394,709
Total Other Comprehensive Loss
(45,043)
(45,043)
(53,542)
Total Comprehensive Income (Loss)
2,411,564
2,411,564
(4,997,728)
Comprehensive (Income) Loss Attributable to Non-controlling Interests
(183,309)
(183,309)
1,712,660
Comprehensive Income (Loss) Attributable to Air T, Inc. Stockholders
$
2,228,255
(3,285,068)
See notes to consolidated financial statements.
42
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2018
March 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents (Delphax $241,430 and $328,327)*
Marketable securities
Restricted cash
Restricted investments
Accounts receivable, less allowance for doubtful accounts
of $801,000 and $979,000 (Delphax $317,000 and $1,728,411)*
Costs and estimated earnings in excess of billings on uncompleted projects
Notes and other receivables-current
Income tax receivable
Inventories, net (Delphax $0 and $1,941,729)*
Prepaid expenses and other (Delphax $72,269 and $932,794)*
Total Current Assets
Investments in available-for-sale securities
Property and equipment, net (Delphax $0 and $8,007)*
Cash surrender value of life insurance policies
Notes and other tax receivables-long-term
Deferred income taxes
Investments in funds
Equity method investments
Other assets
Intangible assets, net
Goodwill
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Delphax $2,145,847 and $2,482,578)*
Income tax payable (Delphax $11,312 and $11,312)*
Accrued expenses (Delphax $3,244,514 and $3,602,162)*
Short-term debt
Total Current Liabilities
Long-term debt (Delphax $0 and $0)*
Deferred income taxes
Other non-current liabilities
4,803,238
4,803,238
290,449
290,449
269,659
269,659
1,235,405
1,235,405
15,157,855
15,157,855
2,012,121
2,012,121
658,630
658,630
1,557,180
1,557,180
34,231,005
34,231,005
1,455,566
1,455,566
61,671,108
61,671,108
1,026,920
1,026,920
20,273,171
20,273,171
2,356,507
2,356,507
311,000
311,000
-
-
324,854
324,854
5,032,268
5,032,268
420,981
1,312,472
1,312,472
4,417,605
97,146,886
$
10,181,143
10,181,143
23,000
23,000
11,743,973
11,743,973
9,229,690
9,229,690
31,177,806
31,177,806
38,855,260
92,000
92,000
785,797
785,797
2,763,365
2,130,544
890,369
-
18,923,787
-
2,297,007
402,688
19,778,843
1,672,475
48,859,078
2,463,123
5,324,488
2,251,450
66,771
204,000
-
-
371,975
1,376,699
4,417,605
65,335,189
11,571,156
-
8,672,815
25,000
20,268,971
18,412,521
8,000
3,039,402
Total Liabilities
70,910,863
70,910,863
41,728,894
Redeemable non-controlling interest
1,992,939
1,992,939
1,443,901
Commitments and contingencies (Notes 8, 11, and 22)
Equity:
Air T, Inc. Stockholders' Equity:
Preferred stock, $1.00 par value, 50,000 shares authorized
Common stock, $.25 par value; 4,000,000 shares authorized,
2,043,607 shares issued and outstanding at March 31, 2018,
2,042,789 shares issued and outstanding at March 31, 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Air T, Inc. Stockholders' Equity
Non-controlling Interests
Total Equity
Total Liabilities and Equity
See notes to consolidated financial statements.
43
-
-
-
510,901
510,901
4,171,869
4,171,869
20,695,981
20,695,981
(260,900)
(260,900)
25,117,851
25,117,851
(874,767)
(874,767)
24,243,084
24,243,084
97,146,886
97,146,886
$
510,696
4,205,536
18,461,347
(212,047)
22,965,532
(803,138)
22,162,394
65,335,189
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31,
2018
2017
$
2,456,607
(4,944,186)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (los s )
Adjus tments to reconcile net income (los s ) to net
cas h us ed in operating activities :
Gain on s ale of marketable s ecurities
Los s on s ale of property and equipment
Change in inventory res erves
Change in accounts receivable res erves
Depreciation, amortization and impairment
Change in cas h s urrender value of life ins urance
Deferred income taxes
Gain on as s et retirement obligation
Gain on bargain purchas e, net of tax
Warranty res erve
Other-than-temporary impairment los s on inves tments
Unrealized los s on interes t rate s wap
Unrealized gain on trans ition to equity method
Change in operating as s ets and liabilities :
Accounts receivable
Cos ts and es timated earnings in exces s of billings on uncomplete
Notes receivable and other non-trade receivables
Inventories
Prepaid expens es and other as s ets
Accounts payable
Accrued expens es
Income taxes payable/ receivable
Non-current liabilities
Total adjus tments
Net cas h us ed in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchas es of marketable s ecurities
Proceeds from s ale of marketable s ecurities
Net cas h us ed for bus ines s combinations
Net cas h us ed for equity method inves tments
Inves tment in funds
Capital expenditures
Proceeds from s ale of property and equipment
Increas e (Decreas e) in res tricted cas h
Net cas h us ed in inves ting activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit
Payments on line of credit
Proceeds from line of credit - Delphax
Payments of debts - Delphax
Proceeds from term loan
Payments on term loan
Debt is s uance cos ts
Earnout payments
Contribution from non-controlling member
Proceeds from exercis e of s tock options
Stock repurchas e
Net cas h provided by financing activities
(93,066)
(93,066)
30,232
30,232
(1,851,036)
(1,851,036)
(177,394)
(177,394)
2,678,857
2,678,857
(105,057)
(105,057)
(10,566)
(10,566)
(562,500)
(562,500)
(501,880)
(501,880)
122,686
122,686
1,559,972
1,559,972
66,706
66,706
(721,585)
(721,585)
4,744,262
4,744,262
(2,012,121)
(2,012,121)
1,640,461
1,
(6,757,766)
(6,757,766)
331,466
331,466
(1,689,030)
(1,689,030)
1,664,200
1,664,200
(1,442,493)
(1,442,493)
351,208
351,208
(2,734,444)
(2,734,444)
(277,837)
(277,837)
(2,519,045)
(2,519,045)
720,452
(2,400,000)
(2,400,000)
(2,301,026)
(2,301,026)
(324,854)
(324,854)
(20,215,594)
(20,215,594)
3,859
3,859
620,710
620,710
(26,415,498)
(26,415,498)
115,533,307
115,
(119,176,727)
(119,176,727)
-
-
-
-
38,441,000
38,441,000
(4,816,825)
(4,816,825)
(404,845)
(404,845)
(1,100,000)
(1,100,000)
252,000
252,000
8,638
8,638
-
-
28,736,548
28,736,548
Effect of foreign currency exchange rates on cas h and cas h equivalen
(3,340)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
2,039,873
2,039,873
2,763,365
2,763,365
4,803,238
4,803,238
$
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Finis hed goods inventory trans ferred to equipment leas ed to cus tomers
Equipment leas ed to cus tomers trans ferred to inventory
Non-controlling interes ts in acquired bus ines s
Acquired bus ines s earnout contracts and payable
$
251,643
251,643
2,057,417
2,057,417
-
-
-
-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
(576,162)
25,47
0
2,188,192
194,286
3,181,845
(151,393)
(659,000)
-
-
(15,173)
2,755,318
-
-
(5,524,446)
-
(1,600,290)
(7,845,801)
(129,532)
4,146,921
1,618,10
0
306,90
0
(525,143)
(2,609,908)
(7,554,094)
(2,719,369)
6,002,601
(4,573,700)
-
-
(2,346,431)
6,281
(69,718)
(3,700,336)
68,275,140
(49,805,658)
5,387,338
(7,251,473)
-
-
-
-
-
-
(7,917,009)
8,688,338
(15,998)
(2,582,090)
5,345,455
2,763,365
272,622
-
1,312,501
3,016,667
Cas h paid during the year for:
Interes t
Income taxes
$
1,065,785
1,659,064
1,659,064
298,150
1,092,679
44
AIR T, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Air T, Inc. Stockholders' Equity
Equity
Balance, March 31, 2016
Common Stock
Shares
2,372,527
Amount
2,372,527 $
593,131 $
Additional
Paid-In
Capital
4,956,171 $
4,956,171
Retained
Earnings
28,821,825
28,821,825
Accumulated
Other
Comprehensive
Income (Loss)
Non-controlling
Interests
1,040,922.00
1,040,922.00
(140,519) $
(140,519)
Total
Equity
35,271,530
Repurchase of common stock
(329,738)
(329,738)
(82,435)
(82,435)
(687,635)
(687,635)
(7,146,939) -
(7,146,939)
-
-
(7,917,009)
Net loss*
Net change from marketable
securities, net of tax
Foreign currency translation loss
Stock-based compensation
Balance, March 31, 2017
-
-
-
-
-
-
--
-
-
-
(3,213,539)
(3,213,539)
-
(1,862,047)
(1,862,047)
(5,075,586)
-
-
-
-
-
-
-
-
-
(63,000)
(63,000)
-
-
-
-
-
256,139
256,139
256,139
(327,667)
(327,667)
17,987
(309,680)
-
-
-
(63,000)
2,042,789 $
2,042,789
510,696 $
4,205,536 $
4,205,536
18,461,347 $
18,461,347
(212,047)
(212,047)
*Excludes amount attributable to redeemable non-controlling interest in Contrail Aviation $131,400
Air T, Inc. Stockholders' Equity
Equity
Balance, March 31, 2017
Common Stock
Shares
2,042,789
Amount
2,042,789 $
510,696 $
Additional
Paid-In
Capital
4,205,536 $
4,205,536
Retained
Earnings
18,461,347 $
18,461,347
Accumulated
Other
Comprehensive
Income (Loss)
(212,047)
(212,047)
(803,138)
(803,138)
22,162,394
Non-controlling
Interests*
Total
Equity
(803,138)
(803,138)
22,162,394
Exercise of stock options
818
818
205
205
-
-
8,433
8,433
-
-
-
8,638
Net loss*
Net change from marketable
securities, net of tax
Foreign currency translation income
Redeemable non-controlling interest
Reclassification due to the Tax Cuts and Jobs Act
Balance, March 31, 2018
-
-
-
-
-
-
--
-
-
-
-
-
-
2,277,109
2,277,109
(75,440)
(75,440)
2,201,669
-
-
-
-
-
-
-
-
-
(42,100)
(42,100)
-
-
-
-
(317,132)
(317,132)
-
(317,132)
225,804
225,804
3,811
3,811
229,615
-
-
-
(42,100)
-
-
-
(42,475)
(42,475)
-
-
42,475
42,475
-
2,043,607 $
2,043,607
510,901 $
4,171,869 $
4,171,869
20,695,981 $
20,695,981
(260,900)
(260,900)
(874,767)
(874,767)
24,243,084
*Excludes amount attributable to redeemable non-controlling interest in Contrail Aviation $254,938
See notes to consolidated financial statements.
45
AIR T, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2018 AND 2017
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a
broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings
power. Our goal is to build on Air T’s core businesses.
We currently operate wholly-owned subsidiaries in three legacy industry segments:
•
•
•
overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”)
subsidiaries, which operates in the air express delivery services industry;
ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which
manufactures and provides mobile deicers and other specialized equipment products to passenger and
cargo airlines, airports, the military and industrial customers; and
ground support services, comprised of our Global Aviation Services, LLC (“GAS”) subsidiary, which
provides ground support equipment maintenance and facilities maintenance services to domestic airlines
and aviation service providers.
In the past three years, we have organized or acquired businesses operating in four other segments. The additional
segments include:
(cid:120) Air T Global Leasing, LLC (“ATGL”), our wholly-owned leasing subsidiary, comprises our leasing
segment.
(cid:120) Delphax Technologies, Inc. (“Delphax”) and our newly-formed subsidiary Delphax Solutions, Inc.,
comprise our printing equipment and maintenance segment.
(cid:120) Majority-owned Contrail Aviation Support, LLC (“Contrail Aviation”), and Jet Yard, LLC (“Jet Yard”),
AirCo, LLC and AirCo Services, LLC (collectively, “AirCo”) compromise our commercial jet engine
and parts segment.
(cid:120)
Results of BCCM Advisors, LLC (“BCCM”), an investment management firm acquired recently, are
included within the Corporate segment.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Contrail Aviation and Delphax. All intercompany transactions and balances have
been eliminated in consolidation.
aa
Investments under the Equity Method – The Company utilizes the equity method to account for investments
when the Company possesses the ability to exercise significant influence, but not control, over the operating
and financial policies of the investee. The ability to exercise significant influence is presumed when an
investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome
based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is
restricted. The Company applies the equity method to investments in common stock and to other investments
when such other investments possess substantially identical subordinated interests to common stock.
t
In applying the equity method, the Company records the investment at cost and subsequently increase or
decrease the carrying amount of the investment by our proportionate share of the net earnings or losses. The
Company records dividends or other equity distributions as reductions in the carrying value of the investment.
In the event that net losses of the investee reduce the carrying amount to zero, additional net losses may be
recorded if other investments in the investee are at-risk, even if the Company has not committed to provide
financial support to the investee. Such additional equity method losses, if
any, are based upon the change in
h
the Company’s claim on the investee’s book value.
46
For investments that have a different fiscal year-end, if the difference is not more than three months, the
Company uses the investment’s most recent financial statements to record the change in the investment.
t
Accounting Estimates – The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported and disclosed. Actual results could differ from those estimates.
Concentration of Credit Risk – The Company’s potential exposure to concentrations of credit risk consists of
trade accounts and notes receivable, and bank deposits. Accounts receivable are normally due within 30 days
and the Company performs periodic credit evaluations of its customers’ financial condition. Notes receivable
payments are normally due monthly. The required allowance for doubtful accounts is determined using
information such as customer credit history, industry information, credit reports, customer financial condition
and the collectability of past-due outstanding accounts receivables. The estimates can be affected by changes
in the financial strength of the industries the Company operates in, customer credit issues or general
economic conditions.
uu
At various times throughout the year, the Company had deposits with banks in excess of amounts covered by
federal depository insurance and investments in corporate notes that are not covered by insurance.
A majority of the Company’s revenues are concentrated in the aviation industry and revenues can be
materially affected by current economic conditions and the price of certain supplies such as fuel, the cost of
which is passed through to the Company’s cargo customer. The Company has a customer concentration in its
overnight air cargo segment which provides service to one major customer. The loss of a major customer
would have a material impact on the Company’s results of operations. See Note 16 “Major Customer”.
Cash and Cash Equivalents – Cash equivalents consist of liquid investments with maturities of three months
or less when purchased.
Foreign Exchange - Delphax, which is headquartered in the United States, has subsidiaries in Canada, France,
and the United Kingdom. The functional currency of the Delphax’s Canadian subsidiary is the U.S. dollar,
whereas the functional currency of Delphax’s subsidiaries in France and the United Kingdom is the Euro and
Pound Sterling, respectively. Delphax Solutions is headquartered in Canada. The functional currency of
Delphax Solutions is the Canadian dollar. The balance sheets of foreign operations with a functional currency
of other than the U.S. dollar are translated to U.S. dollars using rates of exchange as of the applicable balance
sheet date. The statements of income (loss) items of foreign operations are translated to U.S. dollar using
average rates of exchange for the applicable period. The gains and losses resulting from translation of the
financial statements of Delphax’s foreign operations are recorded within the accumulated other
comprehensive income (loss) and non-controlling interests categories of the Company’s consolidated equity.
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.
t
Goodwill - Goodwill reflects the excess of the purchase consideration in business combinations over the
estimated fair value of identifiable net assets acquired. Goodwill is not amortized; rather, it is subject to a
periodic assessment for impairment.
Business Combinations – The Company accounts for business combinations in accordance with FASB
Codification Section 805 (“ASC 805”) Business Combinations. Consistent with ASC 805, the Company
accounts for each business combination by applying the acquisition method. Under the acquisition method,
the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on
the acquisition date. Goodwill is recognized for the excess of the 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 sheet.
47
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 effect 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 estimate 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.
The Company tests goodwill for impairment at least once annually. An impairment test will also be carried
out anytime events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested
for impairment at a level of reporting referred to as a reporting unit.
t
The Company is permitted to first assess qualitative factors to determine whether it is more likely than not
(this is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying
value, including goodwill. In qualitatively evaluating whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances such
as macroeconomic conditions, industry and market developments, cost factors, and the overall financial
performance of the reporting unit. If, after assessing these events and circumstances, it is determined that it is
not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first
and second steps of the quantitative goodwill impairment test are unnecessary. In the first step of the
quantitative method, recoverability of goodwill is evaluated by estimating the fair value of the reporting
unit’s goodwill using multiple techniques, including a discounted cash flow model income approach and a
market approach. The estimated fair value is then compared to the carrying value of the reporting unit. If the
fair value of a reporting unit is less than its carrying value, a second step is performed to determine the
amount of impairment loss, if any. The second step requires allocation of the reporting unit’s fair value to all
of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business
d
combinations. Any residual fair value is allocated to goodwill. Impairment losses, limited to the carrying
value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.
rr
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
events occur that indicate potential
rr
evaluates the recoverability of amortizable intangible assets whenever
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.
d
The estimated amortizable lives of the intangible assets are as follows:
48
Software
Tradenames
Certification
Non-compete
Licens e
Patents
Cus tomer relations hips
Years
3
5
5
5
5
9
10
u
Attribution of Net Income or Loss of Partially-Owned Consolidated Entities – In the case of Delphax, we
determined that the attribution of net income or loss should be based on consideration of all of Air T’s
investments in Delphax and it subsidiary, Delphax Canada Technologies Limited (“Delphax Canada”). Our
investment in the Warrant provides that in the event that dividends are paid on the common stock of Delphax,
the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had
been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been
converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to
approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling
interests. We concluded that this was a substantive distribution right which should be considered in the
attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our
investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are
attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest
(67%/33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt
investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity.
Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67%/33%
share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.
See Note 8, “Acquisitions—Acquisitions of Interests in Delphax,” for a description of our investments in
Delphax and Delphax Canada and for the definitions of the capitalized terms used in this paragraph. The
effect of interest expense arising under the Senior Subordinated Note and, since January 6, 2017, under the
mm
Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of
Delphax net income or losses attributed to non-controlling interests because Delphax is a variable interest
entity.
r
The above-described attribution methodology applies only to our investments in Delphax. We establish the
appropriate attribution methodology on an entity-specific basis. In the case of Contrail Aviation, we
y
concluded that an attribution methodology based solely on equity ownership percentages was appropriate.
Marketable Securities – In accordance with Accounting Standards Codification (“ASC”) 320, Investments –
Debt and Equity Securities, and based on our intentions regarding these instruments, we classify all of our
marketable equity securities as available-for-sale. Marketable equity securities are reported at fair value, with
all unrealized gains (losses) reflected net of tax in stockholders’ equity on our consolidated balance sheets,
and as a line item in our consolidated statements of comprehensive income (loss). If we determine that an
investment has other than a temporary decline in fair value, we recognize the investment loss in non-
operating income, net in the accompanying consolidated statements of income (loss). We regularly evaluate
our investments for impairment using both quantitative and qualitative criteria. For equity securities, we
consider the length of time and magnitude of the amount of each security that is
in an unrealized loss
position. As of March 31, 2018, other than our investment in Oxbridge Re Holdings Limited, all of our
marketable securities investments are classified as current based on the nature of the investments and their
availability for use in current operations.
r
t
t
Inventories – Inventories related to the Company’s manufacturing and service operations are carried at the
lower of cost (determined by use of the first in, first out method) or net realizable value. When finished
goods units are leased to customers under operating leases, the units are transferred to Property and
Equipment. Consistent with aviation industry practice, the Company includes expendable aircraft parts and
supplies in current assets, although a certain portion of these inventories may not be used or sold within one
year.
Property and Equipment – Property and equipment is stated initially at cost, or fair value if purchased as part
of a business combination or, in the case of equipment under capital leases, the present value of future lease
49
payments. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life.
Equipment leased to customers is depreciated using an accelerated 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 30 years for buildings.
Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. Certain costs
incurred in connection with the acquisition of engine assets are capitalized as part of the cost of such assets.
Major overhauls which improve functionality or extend original useful life are capitalized and depreciated
over the estimated remaining useful life of the equipment. The Company depreciates the engines on a
straight-line basis over the assets useful life from the acquisition date to a residual value. The Company
believes this methodology accurately reflects the typical holding period for the assets and, that the residual
value assumption reasonably approximates the selling price of the assets.
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. 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.
Asset Retirement Obligation – Under the terms of a lease for a manufacturing facility in Canada, Delphax is
responsible for restoring the leased property to its original condition, normal wear and tear excepted. The
Company’s accounting for the acquisition of Delphax reflects an estimated asset retirement obligation
aa
(“ARO”) liability for this matter of approximately $560,000. The ARO liability was determined using the
present value of the estimated facility restoration costs. Determination of this estimated liability involves
significant judgment. The liability is reflected on the accompanying March 31, 2017 consolidated balance
sheet within current liabilities. The liability was effectively extinguished during the quarter ended September
30, 2017 which resulted in a gain of approximately $563,000 being recorded on the consolidated statement of
income.
r
Restricted Cash — Restricted cash consists of cash held by SAIC as statutory capital reserves and cash
collateral securing SAIC’s participation in certain reinsurance pools.
d
k
Revenue Recognition – The Company recognizes revenue when it is earned. This occurs when services have
been rendered or products are shipped to the customer in accordance with the terms of an agreement of sale,
there is a fixed or determinable selling price, title and risk of loss have been transf
ff
erred, and collectability is
reasonably assured. Revenues from our Overnight Air Cargo segment are generally recognized as flight
operation and maintenance services are provided or, in the case of certain pass-through costs for maintenance
parts and fuel, as the Company incurs the related expenditure. Within the Company’s Ground Equipment
Sales segment, revenue is generally recognized at the time the related equipment has been shipped to the
customer and risk of loss has been transferred. In the case of certain contracts with the U.S. Government or
related prime contractors, the Company applies contract accounting and uses either the percentage-of-
completion or completed contract method, as appropriate. Revenues of our Ground Support Services segment
are generally recognized as the contracted services are completed. Substantially all Printing Equipment and
Maintenance segment revenues are recognized upon product shipment, which is generally when transfer to
the customer of loss occurs. Service revenue is recognized upon completion of services. Similarly,
Commercial Jet Engines and Parts segment revenues are recognized upon shipment of parts and transfer of
loss or, as applicable, upon completion of services. Leasing revenues are recognized consistent with contract
terms and are generally recognized on a straight-line basis due to the operating lease classification of the
underlying leases. Management fee revenues are recognized when earned based on the services provided as
outlined in the Investment Management Agreements between BCCM Advisors, Inc. and the investment funds
that it manages.
t
Although infrequent, the Company does occasionally enter into customer arrangements that involve the
delivery of multiple elements. For any such arrangements, the Company applies the applicable accounting
guidance in order to identify the individual accounting elements and to determine the most appropriate
revenue recognition model for such elements.
50
We evaluate gross versus net presentation on revenues from products or services purchased and resold in
accordance with the revenue recognition criteria outlined in Codification section 605-45, Principal Agent
Considerations.
Operating Expenses Reimbursed by Customer – The Company, under the terms of its overnight air cargo dry-
lease service contracts, passes through to its air cargo customer certain cost components of its operations
without markup. The cost of 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
$23,380,000 and $23,379,000 for the years ended March 31, 2018 and 2017, respectively.
Stock Based Compensation – The Company has maintained a stock option plan for the benefit of certain
eligible employees and directors of the Company, though no further awards may be made under this plan.
The Company recognizes compensation expense on stock options based on their fair values over the requisite
service period. The compensation cost we record for these awards is based on their fair value on the date of
grant. The Company uses the Black Scholes option-pricing model as its method for valuing stock options.
The key assumptions for this valuation method include the 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.
d
Warranty Reserves – The Company warranties its ground equipment products for up to a three-year period
from date of sale. The Company’s printing equipment and maintenance segment provides a limited short-
term (typically 90 days) warranty on equipment and spare parts. Product warranty reserves are recorded at
time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes
known.
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
that includes the enactment
rates on deferred tax assets and liabilities is recognized in income in the period
date.
n
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 noncurrent 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.
The Tax Cuts and Jobs Act (TCJA) was signed into law by the President on Friday December 22, 2017. The
TCJA includes the reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%, changes in
business deductions, and many international provisions. The drop in the corporate rate is effective for tax
years beginning after December 31, 2017. IRC Section 15 indicates that “if any rate of tax
imposed…changes, and if the taxable year includes the effective date of the change…, then tentative taxes
shall be computed by applying the rate for the period before the effective date of the change, and the rate for
the period on and after such date, to the taxable income for the entire taxable year, and the tax for such
taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period
bears to the number of days in the entire taxable year.” (§15(a)). As the Company is a fiscal year taxpayer, it
will receive a partial benefit for the drop in the federal corporate tax rate for their fiscal year ended March 31,
2018. The weighted average federal tax rate computed in accordance with IRC Section 15 is 30.79% for the
current fiscal year.
The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to
reverse in the future, which is generally the 21% federal corporate tax rate. The net impact from this
51
revaluing resulted in a tax expense recognized in the current fiscal year of $158,000. Additionally, the
reduced corporate rate led to a reduction of Delphax’ gross deferred tax asset by $2,139,000. This reduction
was fully offset by the change in valuation allowance, so the net tax expense was $0 related to Delphax.
The TCJA also repealed the corporate alternative minimum tax and made any minimum tax credit
carryforwards to the extent not utilized refundable for tax years beginning after December 31, 2017. As a
result, Delphax will be able to receive a refund of its minimum tax credit carryforward of $311,000 beginning
in their fiscal year ended September 30, 2019. Previously, a valuation allowance was established against the
minimum tax credit carryforward. As a result of the TCJA relating to the refundability of the minimum tax
credit carryforward, an income tax benefit was recognized by the Company during the current fiscal year and
a long-term income tax receivable was established.
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.
Research and Development Costs – All research and development costs are expensed as incurred. The
research and development costs for the fiscal year 2018 amounted approximately $196,000 compared to
$1,042,000 for fiscal year 2017. All research and development expenses are incurred by our printing
equipment and maintenance segment.
tt
Accounting for Redeemable Non-Controlling Interest – As more fully described in Note 8 to the consolidated
financial statements, the Company is party to a put/call option agreement concerning the non-controlling
ownership interest held in the Company’s consolidated subsidiary, Contrail Aviation. The put/call option
permits Contrail Aviation, at any time after the fifth anniversary of the Company’s acquisition of Contrail
Aviation, to purchase the non-controlling interest from the holder of such interest. The agreement also
permits the holder of the non-controlling interest to sell such interest to Contrail Aviation. 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. 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. Based on this
guidance, the Company has classified the Contrail Aviation non-controlling interest between the liabilities
and equity sections of the accompanying March 31, 2018 and 2017 consolidated balance sheets. If an equity
instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum
redemption amount at the balance sheet date. If the equity instrument su
is not currently
u
bject to the guidance
redeemable but it is probable that the equity instrument will become redeemable (for example, when the
redemption depends solely on the passage of time), the guidance permits either of the following measurement
methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the
date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption
date of the instrument using an appropriate methodology, or (b) 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 amount presented in temporary equity should be no less than the initial
amount reported in temporary equity for the instrument. Because the Contrail Aviation equity instrument will
become redeemable solely based on the passage of time, the Company determined that it is probable that the
Contrail Aviation equity instrument will become redeemable. The Company has elected to apply the first of
the two measurement options described above. An adjustment to the carrying amount of a non-controlling
interest from the application of the above guidance does not impact net income or comprehensive income in
the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
t
t
Going Concern – In connection with preparing its consolidated financial statements, Company management
evaluates whether there are conditions and events, considered in the aggregate, that raise substantial doubt
52
about the Company’s ability to continue as a going concern within one year after the date that the
consolidated financial statements are available to be issued.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) to supersede existing revenue
recognition guidance. During 2016, the FASB issued additional ASU's to further amend the new revenue
recognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company
to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. Topic 606 al
so requires additional
disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and about assets recognized for costs
incurred to obtain or fulfill a contract.
r
The new revenue recognition standards are effective for annual reporting periods beginning after December
15, 2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. Topic 606
may be adopted using either a full retrospective approach, under which all years included in the financial
statements will be presented under the revised guidance, or a modified retrospective approach, under which
financial statements will be prepared under the revised guidance for the year of adoption, but not for prior
years. Under the latter method, entities recognize a cumulative catch-up adjustment to the opening balance of
retained earnings at the effective date for open contract performance at that time.
The Company's adoption efforts have included the identification of revenue within the scope of the standard,
the evaluation of customer contracts in conjunction with new guidance and an assessment of the qualitative
and quantitative impacts of the new standard on its financial statements. The evaluation included the
application of each of the five steps identified in the Topic 606 revenue recognition model.
The new standard will be effective for the Company’s annual and interim periods beginning April 1, 2018.
The Company will use the modified retrospective transition method. Results for reporting periods beginning
after April 1, 2018 will be presented according to ASU 2014-09 while prior period amounts will not be
adjusted and will continue to be reported in accordance with the Company’s historic accounting policies. The
main area impacted by ASU 2014-09 includes the recognition of revenue with the Company’s Ground
Equipment Sales segment transitioning from percentage of completion to point in time. The Company
calculated the transition adjustments and concluded that there would be an immaterial impact due to the
adoption of ASC 606. Beginning in the first quarter of fiscal 2019, the Company plans to provide expanded
recognition disclosures based on the new qualitative and quantitative disclosure requirements of the standard.
t
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This
standard amends existing guidance to simplify the measurement of inventory by requiring certain inventory to
be measured at the lower of cost or net realizable value. The amendment in ASU 2015-11 is for fiscal years
beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15,
2017. The amendment should be applied prospectively with earlier application permitted as of the beginning
of an interim or annual reporting period. The Company has adopted ASU 2015-11 and concluded that the
nn
adoption did not have a material impact on the Company's consolidated financial statements and related
disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic
740). This standard eliminates the current requirement to present deferred tax liabilities and assets as current
and noncurrent in a classified balance sheet. Under this new guidance, entities will be required to classify all
deferred tax assets and liabilities as noncurrent. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2016 with earlier adoption permitted. We adopted this amendment with
the quarter ended June 30, 2017 on a prospective basis.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, that amends the guidance on the classification and measurement of financial
instruments (Subtopic 825-10). ASU 2016-01 becomes effective in fiscal years beginning after December 15,
53
2017, including interim periods therein. ASU 2016-01 removes equity securities from the scope of
Accounting Standards Codification (“ASC”) Topic 320 and creates ASC Topic 321, Investments – Equity
Securities. Under the new guidance, all equity securities with readily determinable fair values are measured at
fair value on the statement of financial position, with changes in fair value recorded through earnings. The
update eliminates the option to record changes in the fair value of equity securities through other
comprehensive income. The Company is evaluating the impact of the adoption of the standard on its
consolidated financial statements. The Company currently has investments in available for sale securities and
the fair value changes of such securities are, other than in the case of possible other-than-temporary
impairments, currently reflected in other comprehensive income. Provided that the Company continues to
hold available for sale securities after adoption of the amended guidance, earnings are likely to become more
volatile.
r
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-
of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet
ed as either finance or operating, with
for all leases with terms longer than 12 months. Leases will be classifi
classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases
as either sales-type, finance or operating, with classification affecting the pattern of income recognition.
Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as
well as substantive control have been transferred through a lease contract. The new standard is effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early
adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the consolidated financial statements,
with certain practical expedients available. The Company is evaluating the impact of the adoption of the
standard on its consolidated financial statements.
t
In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic
323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement that
when an investment qualifies for use of the equity method as a result of an increase in the level of ownership
interest or degree of influence, an investor must adjust the investment, results
of operations, and retained
earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous
periods that the investment had been held. The amendments require that the equity method investor add the
cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held
interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity
method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive
adjustment of the investment is required. ASU 2016-07 is effective for annual reporting periods beginning
after December 15, 2016 and earlier adoption is permitted. We adopted this amendment for the year ended
March 31, 2018 in connection with the Company’s investment in Insignia Systems, Inc. as discussed in Note
4.
d
n
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting, which addresses several aspects of the
accounting for employee share-based payment transactions, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash
flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and earlier
adoption is permitted. The new standard requires that an entity recognize all excess tax benefits and tax
deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period
in which they occur. Under the previous standard, excess tax benefits are recognized in additional paid-in
capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the
income statement. This accounting guidance became effective for the Company beginning with the June 30,
2017 quarter but had no impact on the consolidated financial statements for the year ended March 31, 2018.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This standard significantly changes how entities
will measure credit losses for most financial assets and certain other instruments that are not measured at fair
value through net income, including trade receivables. The standard requires an entity to estimate its lifetime
“expected credit loss” for such assets at inception, and record an allowance that, when deducted from the
amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial
54
asset. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods
therein. The Company is currently evaluating the impact of the adoption of the standard on its consolidated
financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how cash receipts and cash payments in
certain transactions are presented and classified in the statement of cash flows. The effective date of this
update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,
with early adoption permitted. The update requires retrospective application to all periods presented but may
be applied prospectively if retrospective application is impracticable. The Company is currently evaluating
the impact of the adoption of the standard on its consolidated financial statements and disclosures.
TT
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
.
ASU 2016-18 requires that the statement of cash flows explain the changes in the combined total of restricted
and unrestricted cash balance. Amounts generally described as restricted cash or restricted cash equivalents
will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of
period balances on the statement of cash flows. Further, the ASU requires a reconciliation of balances from
the statement of cash flows to the balance sheet in situations in which the balance sheet includes more than
one-line item of cash, cash equivalents, and restricted cash. Companies will also be disclosing the nature of
the restrictions. ASU 2016-18 is effective for financial statements issued for fiscal years beginning after
December 15, 2017. The Company is currently evaluating the impact of the standard on its consolidated
financial statements and disclosures.
TT
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). This
ASU clarifies the definition of a business with the objective of adding guidance to assist entities with
evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The guidance is effective for fiscal years that begin after December 15, 2017 and is to be applied
prospectively. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements.
f
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for
impairment by eliminating Step Two from the goodwill impairment test. Step Two measures a goodwill
impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount
of that goodwill. Under this standard, an entity will recognize an impairment charge for the amount by which
the carrying value of a reporting unit exceeds its fair value. The standard is effective for any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019 and is to be applied prospectively. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company is currently evaluating the effects that the adoption of this ASU will have on
its consolidated financial statements.
tt
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of
Modification Accounting, which provides guidance on determining which changes to the terms and conditions
of share-based payment awards require an entity to apply modification accounting. This update is effective
for all entities for fiscal years beginning after December 15, 2017, and interim periods within those years.
Early adoption is permitted. The Company is currently evaluating the effects that the adoption of this ASU
will have on its consolidated financial statements. The Company has not yet concluded how the new standard
will impact the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities, which provides guidance on hedge accounting for both
financial and commodity risks. The provisions in this standard create more transparency around how
economic results are presented, both on the face of the financial statements and in the footnotes, for investors
and analysts. The standard is effective for public companies for fiscal years beginning after December 15,
2018. Early adoption is permitted in any interim period or fiscal years before the effective date of the
standard. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements.
55
In January 2018, the FASB released guidance relating to the reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, which requires companies to reclassify the stranded effects in
other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts
and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application to each
period (or periods) in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is
recognized. The impact of the reclassification from other comprehensive income to retained earnings is
approximately $42,000 and was recorded as of December 31, 2017.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies
results of operations or cash
are not expected to have a material impact on the Company’s financial position,
flows.
m
2.
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 dilutive effect of options was excluded in fiscal 2017 given that there was a net loss attributable
to Air T, Inc. stockholders.
The computation of earnings per common share is as follows:
Net earnings attributable to Air T, Inc.
Stockholders
Earnings Per Share:
Basic
Diluted
Weighted Average Shares Outstanding:
Basic
Diluted
3.
INVESTMENTS IN SECURITIES
Year Ended March 31,
2018
2017
$
2,277,109
(3,213,539)
$
1.11
$
1.11
(1.51)
(1.51)
2,042,806
2,042,806
2,047,685
2,047,685
2,125,224
2,125,224
Marketable securities at March 31, 2018 consisted of investments in publicly traded companies with a fair
value of $7,861,000, an aggregate net cost basis of $6,463,000, gross unrealized gains aggregating
$1,467,000 and gross unrealized losses aggregating $69,000. Marketable securities at March 31, 2017
consisted of investments with a fair market value of $4,594,0
00, an aggregate cost basis of $4,331,000, gross
unrealized gains aggregating $279,000 and gross unrealized losses aggregating $16,000. Securities that had
been in a continuous unrealized loss position for less than 12 months as of March 31, 2018 had an aggregate
fair value and unrealized loss of $1,063,000 and $69,000, respectively ($441,000 and $16,000, respectively,
at March 31, 2017). As of March 31, 2018, and 2017, none of the Company’s investments in securities have
been in a continuous loss for more than 12 months. The Company realized gains of $93,000 and $576,000
from the sale of securities during the years ended March 31, 2018 and March 31, 2017, respectively.
r
At March 31, 2017, the Company held approximately 1.65 million shares of common stock of Insignia
Systems, Inc. (NASDAQ: ISIG) (“Insignia”). On the basis of its June 30, 2016 and March 31, 2017
assessments, the Company concluded that it had suffered an other-than-temporary impairment in its
investment in the common stock of Insignia totaling $2,643,000. On January 6, 2017, Insignia paid a special
dividend of $0.70 per share to stockholders owning Insignia shares on that date. The receipt of such special
dividend is included in the other investment income (loss) in the Company’s consolidated statements of
income (loss) for the fiscal year ended March 31, 2017.
kk
ff
56
On the basis of its June 30, 2017 assessments, the Company concluded that it had suffered an “other-than-
temporary” impairment in its investment in the common stock of Insignia totaling $771,000. The Company’s
cost basis in the Insignia investment was lowered to $1,724,000 at June 30, 2017 to reflect the impairment
charge.
On January 16, 2018, the Company purchased approximately 1,133,000 shares of Insignia. After this
purchase, the Company owned approximately 26% of Insignia’s total common stock and thus, Insignia
became an equity method investment. See discussion in Note 4.
At March 31, 2018, the Company held 456,206 shares of common stock of Oxbridge Re Holdings Limited
(NASDAQ: OXBR) (“Oxbridge”). On the basis of its December 31, 2017 “other-than-temporary”
impairment assessment, the Company concluded that it had suffered an other-than-temporary impairment in
its investment in the common stock of Oxbridge. The Company’s cost basi
s in its Oxbridge investment was
f
lowered from $1,516,000 to $727,000 at December 31, 2017 which represents an other-than temporary
impairment of $789,000.
4.
EQUITY METHOD INVESTMENTS
On June 7, 2017, the Company’s SAIC subsidiary invested $500,000 for a 40% interest in TFS Partners LLC
(“TFS Partners”), a single-purpose investment entity organized by SAIC and other investors for the purpose
of making an investment in a limited liability company, The Fence Store LLC (“Fence Store LLC”),
organized for the purpose of acquiring substantially all of the assets of The Fence Store, Inc. (“Fence Store
Inc.”). TFS Partners acquired a 60% interest in Fence Store LLC, which has completed the purchase of
substantially all of the assets of Fence Store Inc. Prior to this transaction, Fence Store Inc. operated a
business under the tradename “Town and Country Fence”, selling and installing residential and commercial
fencing in the greater Twin Cities, Minnesota area. Fence Store LLC intends to continue this business. The
total value of the Company’s investment in TFS Partners was $433,000 at March 31, 2018.
On January 16, 2018, the Company purchased approximately 1,133,000 shares of Insignia at a price of $1.25
per share for a total cost of approximately $1.4 million. After this purchase, the Company owned
approximately 26% of Insignia’s total common stock and the Company adopted the equity method of
accounting. Insignia Systems, Inc. markets in-store advertising products, programs and services to retailers
and consumer packaged goods manufacturers. Subsequent to January 16, 2018, the Company purchased
q
additional shares for a total cost of approximately $385,000. The Company adopted the equity method to
account for this investment because of its ability to exercise significant influence, but not control, over the
operating and financial policies of Insignia. Air T has elected a three-month lag upon adoption of the equity
method and thus will report its investment in Insignia at cost as of March 31, 2018. At March 31, 2018, the
Company held approximately 3.4 million shares of Insignia’s common stock representing approximately 28%
of the outstanding shares for a total net investment basis of $4,599,000. No basis difference adjustments or
allocation of earnings or loss from Insignia will be recorded as of March 31, 2018. Previous Accumulated
Other Comprehensive Income of $722,000 was relieved into earnings as of the date equity method accounting
was triggered, January 16, 2018.
5.
INVENTORIES
Inventories consisted of the following:
57
Ground support service parts
Ground equipment manufacturing:
Raw materials
Work in process
Finished goods
Printing equipment and maintenance:
Raw materials
Work in process
Finished goods
Commercial jet engines and parts
Total inventories
Reserves
Year Ended March 31,
2018
2,518,942
2,518,942
$
3,314,676
3,314,676
20,089
20,089
1,768,897
1,768,897
1,161,410
1,161,410
-
-
553,847
553,847
25,452,022
25,452,022
34,789,883
34,789,883
(558,878)
(558,878)
2017
2,447,395
1,452,201
832,635
10,001,193
3,325,142
324,949
790,345
3,407,339
22,581,199
(2,802,356)
Total, net of reserves
$
34,231,005
19,778,843
6.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Furniture, fixtures and improvements
Building
Equipment leased to customers
Less accumulated depreciation
Year Ended March 31,
2018
$
7,696,590
7,696,590
1,633,992
1,633,992
17,289,842
17,289,842
26,620,424
(6,347,253)
(6,
2017
8,377,988
1,335,333
272,622
9,985,943
(4,661,455)
Property and equipment, net
$
20,273,171
20,273,171
5,324,488
7.
INTANGIBLE ASSETS AND GOODWILL
Amortizable intangible assets consisted of the following:
Tradenames
Customer relationships
Non-compete
Certification
License
Patents
Software
Other
Less accumulated amortization and impairment
Intangible assets, net
Year Ended March 31,
2018
2017
$
442,000
751,000
751,000
69,700
69,700
47,000
47,000
250,000
250,000
1,090,000
1,090,000
429,128
429,128
22,242
22,242
3,101,070
(1,788,598)
(1,788,598)
$ 1,312,472
442,000
751,000
69,700
47,000
-
1,090,000
420,360
22,242
2,842,302
(1,465,603)
$ 1,376,699
Amortization expense was approximately $323,000 for the fiscal year 2018 compared to $105,000 for the
prior fiscal year. Most of the net book value of the Company’s amortizable intangibles stems from the
Company’s acquisitions of Contrail Aviation, D&D and Jet Yard (see Note 8). The Company’s consolidated
58
statement of income (loss) for the year ended March 31, 2017 reflects a tradename and patent impairment
charge in the amount of $1,110,000. These impairment charges in the prior year were incurred by Delphax
(see Note 9).
Annual future amortization expense for these intangible assets for the five succeeding years is as follows:
Year ending March 31,
2019
2020
2021
2022
2023
Thereafter
$
351,715
214,129
152,568
125,573
115,578
353,179
1,312,742
$
Goodwill consisted of the following:
Year Ended March 31,
2018
2017
Goodwill, at original cost
$
4,793,013
4,793,013
4,793,013
Less accumulated impairment
Goodwill, net of impairment
(375,408)
(375,408)
$ 4,417,605
(375,408)
$ 4,417,605
The Company recorded goodwill of approximately $375,000 in connection with its investment in Delphax
(Note 8). The Company estimated an impairment of $275,000 in connection with its investment in Delphax
during the quarter ended June 30, 2016 which reduced the goodwill balance to $0 (t
here was an impairment
d
of $100,000 recorded during the year ended March 31, 2016).
Certain business acquisitions have resulted in the recording of goodwill, which is not amortized. As of March
31, 2018, the Company had approximately $4.4 million of goodwill, $4.2 million of wh
ich is related to the
acquisition of Contrail Aviation Support, Inc. (“Contrail”). We performed our annual impairment assessment
for goodwill of the Contrail reporting unit. In conducting a quantitative assessment, the Company analyzes a
variety of events or factors that may influence the fair value of the Contrail reporting unit including, but not
limited to: changes in the carrying amount of the reporting unit; actual and projected revenue and operating
margin; relevant market data for both the Company and its peer companies; industry outlooks;
macroeconomic conditions; liquidity; changes in key personnel; and the Company's competitive position.
Significant judgment is used to evaluate the totality of these events and factors to make the determination of
whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.
dd
yy
In 2018, the Company elected to bypass the qualitative assessment and perform a quantitative analysis using
an income approach and market approaches, to evaluate goodwill. The discounted cash flow method under
(income approach) uses the reporting unit's projections of estimated operating results and cash flows that are
discounted using a market participant discount rate based on a weighted-average cost of capital. The financial
projections reflect management's best estimate of economic and market conditions over the projected period
including forecasted revenue growth, operating margins, tax rate, capital expenditures, depreciation and
amortization and changes in working capital requirements. Other assumptions include discount rate and
compared to their respective carrying
terminal growth rate. The estimated fair value of the reporting unit is
values. A market approach estimates fair value by applying guideline compan
y market multiples to the
reporting unit's applicable financial metrics. The multiples are derived from comparable publicly traded and
transacted/acquired companies with similar operating and investment characteristics of the reporting units.
y
ff
59
Based on the results of our annual quantitative assessment conducted as of March 31, 2018, the fair value of
our Contrail reporting unit exceeded its carrying value by approximately 38%, and management concluded
that no impairment charge was warranted.
8.
ACCRUED EXPENSES
Accrued expenses consisted of the following:
Year Ended March 31,
2018
2017
Salaries, wages and related items
Profit sharing and bonus
Earnout liabilities, current portion
Health insurance
Warranty reserves
Asset retirement obligation
Claims reserve
Customer discounts
Taxes
Other deposits
Other
Total
Beginning Balance
Amounts charged to expense
Actual warranty costs paid
Ending Balance
9.
ACQUISITIONS
Acquisition of Interests in Contrail Aviation
$
6,431,517
6,431,517
1,201,440
1,201,440
1,500,000
1,500,000
370,806
370,806
109,490
109,490
-
-
446,529
446,529
263,957
263,957
157,739
157,739
590,000
590,000
672,495
672,495
11,743,973
$
5,398,877
413,522
-
423,680
164,240
562,500
308,528
-
508,615
325,000
567,853
8,672,815
Year Ended March 31,
2018
$
$
164,240
164,240
122,686
122,686
(177,436)
(177,436)
109,490
109,490
2017
266,455
(15,173)
(87,042)
164,240
On July 18, 2016 (the “Contrail Closing Date”), pursuant to an asset purchase agreement (the “Asset
Purchase Agreement”) between Contrail Aviation Support, LLC (“Contrail Aviation”), a subsidiary of the
Company, Contrail Aviation Support, Inc. (the “Seller” or “Contrail”) and Joseph Kuhn, the sole shareholder
of the Seller, Contrail Aviation completed the purchase of all of the assets owned, used or usable by the
Seller, other than cash, equity in the Seller’s IC-DISC subsidiary and certain other specified excluded assets.
Pursuant to the Asset Purchase Agreement, Contrail Aviation also assumed certain liabilities of the Seller.
Prior to this acquisition, the Seller, based in Verona, Wisconsin, engaged in the business of acquiring surplus
commercial jet engines and components and supplying surplus and aftermarket commercial jet engine
components. In connection with the acquisition, Contrail Aviation offered employment to all of the Seller’s
employees and Mr. Kuhn was appointed Chief Executive Officer of Contrail Aviation.
f
The acquisition consideration consisted of (i) $4,033,368 in cash, (ii) equity membership units in Contrail
Aviation representing 21% of the total equity membership units in Contrail Aviation, and (iii) and contingent
additional deferred consideration payments which are more fully described below. In addition to the net
assets of the seller, beginning equity of Contrail included cash of approximately $904,000.
tt
60
Pursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent additional deferred
consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate (collectively, the
“Earnout Payments” and each, an “Earnout Payment”), calculated as follows:
r
(i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any
Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with
respect to such Earnout Period;
(ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an
amount equal to the product of (x) the EBITDA generated with respect to such Earnout Period minus
$1,500,000, and (y) two (2);
(iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be
equal to $1,000,000;
(iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and
(v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in
excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is
owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv),
above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal
to the difference between $3,000,000 and the aggregate Earnout Payments already received or
payable pursuant to clauses (i) through (iv), above.
As used in the Asset Purchase Agreement, “Earnout Period” means each of the first five twelve-full-calendar-
month periods following the closing of the acquisition. The Company has estimated its liability with respect
to the Earnout Payment to be $2,900,000, which amount is included in the “Other non-current liabilities” in
the consolidated balance sheet at March 31, 2017. As a result of the EBITDA of Contrail Aviation being
approximately $2.1 million for the first Earnout Period, the Earnout Payment with respect to that Earnout
Period is $1,000,000, which was paid in October 2017. The remaining liability of $1,955,000, which includes
a current portion of $1,500,000 and a non-current portion of $455,000, is included in the “Accrued expenses”
and “Other non-current liabilities”, respectively, in the consolidated balance sheet at March 31, 2018.
tt
On the Contrail Closing Date, Contrail Aviation and the Seller entered into an Operating Agreement (the
“Operating Agreement”) providing for the governance of and the terms of membership interests in Contrail
Aviation and including put and call options (“Put/Call Option”) permitting, at any time after the fifth
anniversary of the Contrail Closing Date, Contrail Aviation at its election to purchase from the Seller, and
permitting the Seller at its election to require Contrail Aviation to purchase from the Seller, all of the Seller’s
equity membership interests in Contrail Aviation at a price to be agreed upon, or failing su
ch an agreement to
be determined pursuant to third-party appraisals in a process specified in the Operating Agreement.
d
The following table summarizes the fair values of assets acquired and liabilities assumed by Contrail
Aviation as of the Contrail Closing Date:
61
ASSETS
Accounts receivable
Inventories
Prepaid expenses
Property and equipment
Intangible assets - non-compete
Intangible assets - tradename
Intangible assets - certification
Intangible assets - customer relationship
Goodwill
Total assets
LIABILITIES
Accounts payable
Accrued expenses
Earnout liability
Total liabilities
July 18, 2016
$ 1,357,499
2,118,475
30,121
33,095
69,700
322,000
47,000
451,000
4,227,205
$ 8,656,095
$ 366,575
43,652
2,900,000
$ 3,310,227
Net Assets
$ 5,345,868
The Company’s purchase accounting reflects the estimated net fair value of the Seller’s assets acquired and
liabilities assumed as of the Contrail Closing Date. Purchase accounting also reflects the Company’s current
estimate that the Earnout Payments will be due at the above-specified maximum level. The Contrail Closing
Date balance sheet information disclosed above reflects the present value of such estimated Earnout
Payments.
The Company has finalized its Contrail Aviation acquisition accounting.
d
The Put/Call Option specifies a fair value strike price as of the exercise date. As such, the Company assigned
no value to the Put/Call Option for purposes of purchase accounting. Because the Put/Call Option permits the
Seller to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail
Aviation, the Company has presented this redeemable non-c
ontrolling interest in Contrail Aviation between
the liabilities and equity sections of the accompanying consolidated balance sheets. For the fiscal year ended
March 31, 2018, the redeemable non-controlling interest balance was increased by the Seller’s proportionate
share of Contrail Aviation’s net earnings. The redeemable non-controlling interest balance was also increased
by a portion of the estimated change in Contrail Aviation’s fair value during the 2018 fiscal year and the
additional capital contribution of $252,000 made by the non-controlling member in the third quarter (the
Company funded an additional $948,000 as well to maintain the current ownership percentages). The total
increase in the redeemable non-controlling interest balance was approximately $549,000 from March 31,
2017 to March 31, 2018.
Acquisition of AirCo Assets
On May 2, 2017 and June 1, 2017, our newly formed subsidiaries, AirCo, LLC
and AirCo Services, LLC
d
(collectively, “AirCo”) acquired the inventory and principal business assets, and assumed specified liabilities,
of Aircraft Instrument and Radio Company, Incorporated, and Aircraft Instrument and Radio Services, Inc.
(collectively, the “AirCo Sellers”). The acquired business, which is based in Wichita, Kansas, distributes and
sells airplane and aviation parts and maintains a license under Part 145 of the regulations of the Federal
Aviation Administration. The consideration paid for the acquired business was $2,400,000.
d
n
62
The following table summarizes the fair values of assets acquired and liabilities assumed by AirCo as of June
1, 2017, the date of the completion of the acquisition (the “AirCo Closing Date”):
Assets acquired and liabilities assumed at fair value:
Accounts receivables
Inventories
Property and equipment
Accounts payable
Accrued expenses
Net assets acquired
Net assets acquired
Consideration paid
Bargain purchase gain
June 1, 2017
$
$
$
748,936
3,100,000
26,748
(313,117)
(382,687)
3,179,880
3,179,880
2,400,000
779,880
The Company’s purchase price accounting reflects the estimated net fair value of the AirCo Sellers assets
acquired and liabilities assumed as of the AirCo Closing Date. The Company’s initial accounting for this
acquisition is incomplete as of the date of these consolidated financial statements. Therefore, as permitted by
applicable accounting guidance, the foregoing amounts are provisional.
The transaction resulted in a bargain purchase because AirCo was a non-marketed transaction and in financial
distress at the time of the acquisition. The inventory was not being marketed appropriately and as a result,
the company was unable to realize market prices for the parts. The tax impact related to the bargain purchase
gain was to record a deferred tax liability and tax expense against the bargain purchase gain of approximately
$278,000. The resulting net bargain purchase gain after taxes was approximately $502,000.
aa
Pro forma financial information is not presented as the results are not material to the Company’s consolidated
financial statements.
Other Acquisitions
On October 3, 2016, a newly formed subsidiary of the Company, Stratus Aero Partners LLC, acquired 100%
of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”) from the holder thereof. The cash purchase
price was $15,000 and there are no contractual provisions, such as an earn-out, which could result in an
increase to this price. Jet Yard is registered to operate a repair station under Part 145 of the regulations of the
Federal Aviation Administration and its principal asset on the acquisition date was a contract with Pinal
County, Arizona to lease approximately 48.5 acres of land at the Pinal Air Park in Marana, Arizona. Jet Yard
was organized in 2014, entered into the lease in June 2016 and had maintained de minimus operations from
formation through the acquisition date. The lease expires in May 2046 with an option to renew for an
additional 30-year period (though the lease to a 2.6 acre parcel of the leased premises may be terminated by
Pinal County upon 90 days’ notice). The lease provides for an initial annual rent of $27,000, which rental rate
escalates based on a schedule in annual increments during the first seven years of the lease (at which time the
annual rental rate would be $152,000) and increases by an additional five percent for each three-year period
thereafter. Because the rental expense will be accounted for on a straight-line basis over the term of the lease,
the rental expense in the initial years will exceed the corresponding cash payments. The lease agreement
permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the
construction of facilities on the leased premises in phases in accordance with a specified timetable, which
includes, as the initial phase, the construction of a demolition pad to be completed by
March 2017 and, as the
final and most significant phase, the construction of an aircraft maintenance hangar large enough to house a
Boeing B777-300 by the first quarter of 2021. The construction of the demolition pad required by March 31,
2017 under the lease has not been completed and Jet Yard and Pinal County are in discussions with respect to
improvements on the leased premises. As of the date of issuance, the Company was informed that the Pinal
n
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63
County is working on the rezoning of Pinal Airpark, which prevents any tenant from construction on the
Airpark.
The acquired Jet Yard business is included in the Company’s commercial jet engine segment.
Pursuant to an Asset Purchase Agreement signed on October 31, 2016, GAS acquired, effective as of October
1, 2016, substantially all of the assets of D&D which was in the business of marketing, selling and providing
aviation repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport.
The total amount paid at closing in connection with this acquisition was $400,000. Additionally, $100,000
was due within 30 days after closing and an additional $100,000 is payable in equal monthly installments of
$16,667 commencing on November 1, 2016. Earn-out payments of up to $100,000 may also be payable based
on specified performance for the twelve-month period ending September 30, 2017. For purposes of purchase
accounting, the Company estimated that the above-mentioned earn-out will be paid in full. Therefore, the
Company estimates the total purchase consideration at approximately $700,000. The Company allocated the
purchase consideration to identifiable tangible and intangible assets. No liabilities were assumed in the
acquisition. The estimated fair value of identifiable tangible and intangibles assets was approximately
$200,000 and $300,000, respectively. The $200,000 excess of the purchase consideration over the estimated
fair value of identifiable assets was recorded as goodwill. The basis of the acquired assets will be “stepped
d
up” for income tax purposes. As such, no deferred taxes were recognized in purchase accounting.
The acquired D&D business is operated by GAS and included in the Company’s ground support services
segment. The Company has finalized its D&D acquisition accounting. Based on actual revenue earned by
D&D through September 30, 2017, the earnout payment with respect to the purchase agreement was
$100,000, which amount was paid in October 2017.
On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company,
completed the acquisition of Blue Clay Capital Management, LLC (“Blue Clay Capital”), an investment
management firm based in Minneapolis, Minnesota. In connection with the transaction, BCCM acquired the
assets of, and assumed certain liabilities of, Blue Clay Capital in return for payment to Blue Clay Capital of
$1.00, subject to adjustment for Blue Clay Capital’s net working capital as of the closing date. The fair value
of the assets acquired and liabilities assumed in connection with the transaction are provisional. Gary S.
Kohler, a director of the Company, was the sole owner of Blue Clay Capital. In connection with the
transaction, (i) BCCM replaced Blue Clay Capital as the managing general partner of certain investment
funds managed by Blue Clay Capital (Blue Clay Capital Partners, LP, Blue Clay Capital Partners CO I, LP,
Blue Clay Capital Partners CO III, LP and Blue Clay Capital SMid-Cap LO, LP); (ii) Mr. Kohler entered into
a
an employment agreement with BCCM to serve as its Chief Investment Officer in return for an annual salary
of $50,000 plus variable compensation based on the management and incentive fees to be paid to the
subsidiary by certain of these investment funds and eligibility to participate in discretionary annual bonuses;
and (iii) David Woodis, President of Blue Clay Capital, entered into an employment agreement with BCCM
to serve as its Chief Operating Officer and Chief Financial Officer in re
turn for an annual salary of $125,000
a
plus revenue sharing and eligibility to participate in discretiona
ry annual bonuses.
a
rr
ff
In connection with the Blue Clay Capital acquisition, a Partnership Interest Conversion and General Partner
Admittance Agreement (“Conversion Agreement”) was entered into effective December 31, 2017 between
Blue Clay Capital, BCCM, BCCM Advisors, LLC (“BCCM Advisors”), a wholly-owned subsidiary of
BCCM, and various Blue Clay Capital investment funds. Per the Conversion Agreement, Blue Clay Capital
sold to BCCM Advisors, and BCCM Advisors purchased from Blue Clay, the general partnership interests in
certain investment funds previously managed by Blue Clay Capital (as specified above) for a purchase price
equal to, with respect to each general partnership, of (i) one percent (1%) of the aggregate capital accounts of
each fund as valued on December 31, 2017 and (ii) $100,000 (or $10,000 in the case of Blue Clay Capital
SMid-Cap LO, LP). Upon acquisition of each of the general partnership interests, BCCM Advisors was
admitted as the general partner of each fund. Blue Clay Capital retained the incentive allocations associated
with Blue Clay Capital Partners CO I, LP and Blue Clay Capital Partners CO III. BCCM Advisors will
receive all future incentive allocations accruing as of January 1, 2018 and thereafter associated with Blue
Clay Capital Partners, LP which is the onshore feeder fund to the Blue Clay
Capital Master Fund Ltd.
Management determined that the price paid of $227,000 for the combined general partnership interests
m
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64
approximates the fair value of those interests. The portion of the purchase price paid for the general
partnership interest in Blue Clay Capital Partners, LP is allocated as an equity interest in the Blue Clay
Capital Master Fund, Ltd.
Additionally, effective December 31, 2017, BCCM Advisors entered into an Investment Management
Agreement in which it agreed to manage the investments of the following funds: Blue Clay Capital Master
Fund Ltd., Blue Clay Capital Fund Ltd. and Blue Clay Capital Partners LP. In conne
ction with the effective
date of the Investment Management Agreement, BCCM Advisors became the Incentive Allocation
Shareholder of the Blue Clay Capital Master Fund Ltd.
a
Pro forma financial information is not presented for the above acquisitions
t
the Company’s consolidated financial statements.
as the results are not material to
10.
VARIABLE INTEREST ENTITIES
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to
finance its activities without additional subordinated financial support, or (ii) has equity investors who lack
the characteristics of a controlling financial interest. Under ASC 810 - Consolidation, an entity that holds a
variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary
of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be
considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
d
(cid:120)
(cid:120)
the power to direct the activities that most significantly impact the economic performance of the
VIE; and
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be
potentially significant to the VIE.
Consolidated Variable Interest Entity
Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the "Securities Purchase
Agreement") among the Company, Delphax Technologies, Inc. and its subsidiary, Delphax Technologies
Canada Limited, on November 24, 2015 (the "Closing Date"), the Company purchased (i) at face value a
$2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the "Senior Subordinated
Note") issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of
$500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated
Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the
Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax's Series B
Preferred Stock (the "Series B Preferred Stock") and a Stock Purchase Warrant (the "Warrant") to acquire an
additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment
for specified dilutive events).
y
Principal under the Senior Subordinated Note is due on October 24, 2020 and bears interest at an annual rate
of 8.5%. Interest is to be paid in kind until, in the absence of specified events, November 24, 2017.
d
Thereafter, interest is to be paid in cash. Interest in kind is to be paid monthly, while interest payable in cash
is to be paid quarterly. The Senior Subordinated Note is guaranteed by Delphax and is secured by security
interests granted by Delphax and Delphax Canada in their respective inventories, equipment, accounts
receivable, cash, deposit accounts, contract rights and other specified property, as well as a pledge by
Delphax of the outstanding capital stock of its subsidiaries, including Delphax Canada. Pursuant to the terms
of a subordination agreement (the "Subordination Agreement") entered into on October 2, 2015 by Delphax,
Delphax Canada, the Company and the senior lender (the "Senior Lender") that then provided a revolving
credit facility under an agreement with Delphax and Delphax Canada (the "Delphax Senior Credit
Agreement"), the Company's rights with respect to payment under and enforcement of the Senior
Subordinated Note, and enforcement of its security interests were subordinated to the rights of the Senior
Lender under the Delphax Senior Credit Agreement.
65
Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to
anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No
dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable
dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock
of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance
under Delphax's employee stock option plans at the Closing Date, the number of shares of common stock
underlying the Series B Preferred Stock purchased by the Company represent approximately 38% of the
shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock
held by the Company.
Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under
the Senior Subordinated Note or the Company continues to hold a specified number of the Series B Preferred
Stock and interests in the Warrant sufficient to permit it to acquire up to 50% of the number of shares of
Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock
acquired in connection with the exercise of the Warrant equal to 50% of the number of shares of Series B
Preferred Stock initially purchasable under the Warrant), then
f
(cid:404) holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and
exercise rights of removal and replacement) with respect to three-sevenths of the board of directors
of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate
class, would be entitled to elect (and to exercise rights of removal and replacement of) with respect
to four-sevenths of the members of the board of directors of Delphax; and
(cid:404) without the written consent or waiver of the Company, Delphax may not enter into specified
corporate transactions.
Pursuant to the provision described above, beginning on November 24, 2015, three designees of the Company
were elected to the board of directors of Delphax, which had a total of seven members following their
election.
The Warrant expires on November 24, 2021. In the event that Delphax were to declare a cash dividend on its
common stock, the Warrant provides that the holder of the Warrant would participate in the dividend as if the
Warrant had been exercised in full and the shares of Series B Preferred Stock acquired upon exercise had
been fully converted into Delphax common stock. The Warrant provides that, prior to any exercise of the
Warrant, the holder of the Warrant must first make a good faith written tender offer to existing holders of
Delphax common stock to purchase an aggregate amount of common stock equal to the number of shares of
common stock issuable upon conversion of the Series B Preferred Stock that would be purchased upon such
exercise of the Warrant. The Warrant requires that the per share purchase price to be offered in such tender
offer would be equal to the then-current exercise price of the Warrant divided by the then-current conversion
rate of the Series B Preferred Stock. To the extent that shares of common stock are purchased by the holder in
the tender offer, the amount of shares of Series B Preferred Stock purchasable under the Warrant held by such
holder is to be ratably reduced. The Warrant is to provide that it may be exercised for cash, by surrender of
principal and interest under the Senior Subordinated Note equal to 0.95 times the aggregate exercise price or
by surrender of a portion of the Warrant having a value equal to the aggregate exercise price based on the
difference between the Warrant exercise price per share and an average market value, measured over a 20-
trading day period, of Delphax common stock that would be acquired upon conversion of one share of Series
B Preferred Stock.
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In accordance with ASC 810, the Company evaluated whether Delphax was a VIE as of November 24, 2015.
Based principally on the fact that the Company granted Delphax subordinated financial support, the Company
determined that Delphax was a VIE on that date. Therefore, it was necessary for the Company to assess
whether it held any “variable interests”, as defined in ASC 810, in Delphax. The Company concluded that its
investments in Delphax’s equity and debt, and its investment in the Warrant, each constituted a variable
interest. Based on its determination that it held variable interests in a VIE, the Company was required to
assess whether it was Delphax’s “primary beneficiary”, as defined in ASC 810.
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After considering all relevant facts and circumstances, the Company concluded that it became the primary
nformed the Company’s determination,
beneficiary of Delphax on November 24, 2015. While various factors i
the Company assigned considerable weight to both 1) the shortness of time until June 1, 2016 when the
Company would become entitled to elect four-sevenths of the members of the board of directors of Delphax
and 2) the anticipated financial significance of Delphax’s activities in the periods subsequent to June 1, 2016.
Since the Company became Delphax’s primary beneficiary on November 24, 2015, the Company
consolidated Delphax in its consolidated financial statements beginning on that date.
d
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The following table sets forth the carrying values of Delphax’s assets and liabilities as of March 31, 2018 and
2017:
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other tax receivables-long-term
Total assets
LIABILITIES
Current liabilities:
Accounts payable
Income tax payable
Accrued expenses
Short-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
March 31, 2018
March 31, 2017
$ 241,430
316,542
-
72,269
630,241
-
-
-
311,000
$ 941,241
$ 328,327
2,036,221
1,941,729
1,145,274
5,451,551
8,007
-
-
-
$ 5,459,558
$ 2,145,847
11,312
3,244,514
1,788,285
7,189,958
-
-
$ 7,189,958
$ 2,482,578
11,312
3,627,162
4,714,257
10,835,309
-
-
$ 10,835,309
Net assets
$ (6,248,717)
$ (5,375,751)
The short-term debt is comprised of amounts due from Delphax to Air T, Inc. Those amounts have been
eliminated in consolidation. As of March 31, 2018, the outstanding principal amount of the Senior
Subordinated Note was approximately $900,000 ($2,500,000 as of March 31, 2017) and the outstanding
borrowings under the Delphax Senior Credit Agreement were $0 ($1,541,000 as of March 31, 2017). Short-
term debt as reflected in the above table includes approximately $888,000 and $388,000 of accrued interest,
due to the Company from Delphax Technologies, Inc. under the Senior Subordinated Note as of March 31,
2018 and March 31, 2017, respectively. Short term debt as of March 31, 2017 also includes approximately
$112,000 of accrued interest, due to the Company from Delphax Canada and Delphax Technologies, Inc.
under the Delphax Senior Credit Agreement. As a result of the foreclosure completed by the Company on
August 10, 2017, the amount secured by the Delphax Senior Credit Agreement was satisfied.
The assets of Delphax can only be used to satisfy the obligations of Delphax. Furthermore, Delphax’s
creditors do not have recourse to the assets of Air T, Inc. or its subsidiaries.
On January 6, 2017, the Company acquired all rights, and assumed all obligations, of the Senior Lender under
the Delphax Senior Credit Agreement with Delphax and Delphax Canada providing for a $7.0 million
revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable
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and inventory, including obligations, if any, to fund future borrowings under the Delphax Senior Credit
d
Agreement. In connection with this transaction, the Company paid to the Senior Lender an amount equal to
the approximately $1.26 million outstanding borrowing balance, plus accrued and unpaid interest and fees.
Also in connection with this transaction, the Company, Delphax and Delphax Canada entered into an
amendment to the Delphax Senior Credit Agreement to reduce the maximum amount of borrowings permitted
to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million, to revise the
borrowing base to include in the borrowing base 100% of purchase orders from customers for products up to
$500,000, to provide that the interest rate on all borrowings outstanding until all loans under the Delphax
Senior Credit Agreement are repaid in full will be a default rate equal to 2.5% per month to be paid monthly,
and to provide for the payment to the Company from Delphax Canada and Delphax of fees equal to $25,000
upon execution of the amendment and of $50,000 upon repayment in full of all loans under the Delphax
Senior Credit Agreement. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain
“Events of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax
Senior Credit Agreement and that the Company was reserving all rights to exercise remedies under the
Delphax Senior Credit Agreement and that no delay in exercising any such remedy is to be construed as a
waiver of any of its remedies. Also, on January 6, 2017, the Company and Delphax Canada entered into a
Forbearance and Amendment Agreement dated as of January 6, 2017, which amended the Senior
Subordinated Note to increase the default rate of interest from an annual rate of 10.5% to an annual rate of
18%, to be in effect until all amounts under the Senior Subordinated Note are paid in full, and which provides
that so long as no Event of Default (as defined in the Senior Subordinated Note) occurs under the Senior
Subordinated Note, other than Events of Default that existed as of January 6, 2017, the Company agreed to
forbear from exercising its remedies under the Senior Subordinated Note until May 31, 2017 and further
provided for the payment by Delphax Canada to the Company of a forbearance fee equal to approximately
$141,000. Notwithstanding the existence of events of default, during the first six calendar months of 2017,
the Company permitted additional borrowings under the Delphax Senior Credit Agreement to, among other
things, fund a final production run by Delphax Canada of consumable products for its legacy printing
systems, which production run was primarily completed over that period. Delphax Canada was Delphax's sole
manufacturing subsidiary.
During the quarter ended June 30, 2016, Delphax was informed by its largest customer that the customer had
decided to accelerate its plans for removing Delphax legacy printing systems from production and that
Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to
decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be
expected from this customer was being sharply curtailed. In addition to this specific customer
communication, Delphax also experienced a broad-based decline in legacy product customer demand during
the first quarter. Sales of Delphax’s new elan® printer system also had not materialized to expectations.
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The adverse business developments during the quarter ended June 30, 2016 and the significantly deteriorated
outlook for future orders of legacy and elan® product caused the Company to reevaluate the recoverability of
Delphax’s assets, both tangible and intangible. Based on this reevaluation, which involved material
estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the
Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company
concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully
impaired. The Company also recorded a partial impairment of Delphax related long-lived tangible assets.
Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under
existing Delphax employee benefit plans were both probable and estimable. This assessment led to the
Company establishing an estimated accrual for future severance actions. The effects of these various
adjustments, which aggregated to approximately $5,610,000, were reflected in the operating results of
Delphax for the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017.
The Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should
be fully impaired. The Company recorded goodwill of approximately $375,000 in connection with its
investment in Delphax. The Company estimated a subsequent impairment of this goodwill during the fiscal
year ended March 31, 2016 of $100,000 and an additional impairment of $275,000 during the quarter ended
June 30, 2016. These impairment losses are reflected on the consolidated statement of income (loss) within
the “depreciation, amortization and impairment” line item.
68
u
Intangible assets of Delphax had a net book value of approximately $1.4 million as of March 31, 2016.
mm
During the quarter ended June 30, 2016, the Company recognized an im
pairment charge which resulted in the
remaining net book value of Delphax intangible assets being fully written off. The Company estimated and
recorded a tradename and patent impairment charge related to Delphax in the amount of approximately
$1,385,000 during the quarter ended June 30, 2016. An impairment charge in the amount of $50,000 was
recorded during the fiscal year 2016. These impairment losses are reflected on the consolidated statement of
income (loss) for the year ended March 31, 2017 within the “depreciation, amortization and impairment” line
item.
The above described adverse business developments drove significant negative operating results and led to
severe liquidity constraints for Delphax. In addition to other measures intended to respond to developments,
Delphax engaged an outside advisory firm to assist with operations, cost reductions and expense
rationalization, and to provide an objective assessment and recommendations regarding Delphax’s business
outlook and alternative courses of action. During the quarter ended June 30, 2016, a number of Delphax
employees were either severed or furloughed. For most of fiscal year 2017, Delphax’s operations were
maintained at a significantly curtailed level.
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In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of
final production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on
July 13, 2017, the Company delivered a demand for payment and Notice of Intention to Enforce Security to
Delphax Canada. On August 10, 2017, the Company foreclosed on all personal property and rights to
undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts
owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of
its intent to foreclose to Delphax Canada and its secured creditors and shareholders on July 26, 2017. The
outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement
on July 26, 2017 was approximately $1,510,000. The Company also submitted an application to the Ontario
Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Co
urt") seeking that Delphax Canada
be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax Canada to be
bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result, the
foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights
to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit
f
Agreement.
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With it being adjudged bankrupt on August 8, 2017, Delphax Canada ceased to have capacity to deal with its
property. The property of Delphax Canada vested in the trustee in bankruptcy of Delphax Canada subject to
the rights of secured creditors. The Company’s rights under Delphax Senior Credit Agreement permitted it to
foreclose upon the personal property and rights of undertakings of Delphax Canada. Since the Company
foreclosed on Delphax Canada’s assets within very close time proximity to the commencement of bankruptcy
proceedings and because the bankruptcy and foreclosure were undertaken in contemplation of one another,
the Company treated these as one single financial reporting event. In accordance with applicable accounting
guidance, the Company considered whether Delphax Canada was still a business post-bankruptcy and
foreclosure of the assets by the Company and concluded that Delphax Canada no longer constituted a
business as it is defined by accounting principles generally accepted in the United States of America and,
accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is legally
released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of March 31,
2018, the bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax
Canada was still the primary obligor of its liabilities.
f
The intercompany balances under the Delphax Senior Subordinated Note as of
March 31, 2018 are eliminated
in the presentation of the consolidated financial statements. The effect of interest expense arising under the
Senior Subordinated Note and, from January 6, 2017 to August 10, 2017, under the Delphax Senior Credit
Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or
loss to non-controlling interests because Delphax is a variable interest entity.
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Delphax’s revenues and expenses are included in our consolidated financial statements beginning November
24, 2015 through March 31, 2018. Revenues and expenses prior to the date of initial consolidation were
69
excluded. We have determined that the attribution of Delphax net income or loss should be based on
consideration of all of Air T’s investments in Delphax and Delphax Canada. The Warrant provides that in the
event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to
participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of
Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common
stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid,
with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive
distribution right which should be considered in the attribution of Delphax net income or loss to non-
controlling interests. We furthermore concluded that our investment in the debt of Delphax should be
considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock
and Warrant investments and to the non-controlling interest (67%/33%) until such amounts are reduced to
zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero.
This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T
and the non-controlling interests based on the initial 67%/33% share. Delphax net income is attributed using a
backwards-tracing approach with respect to previous losses.
As a result of the application of the above-described attribution methodology, for the fiscal years ended
March 31, 2018 and 2017, the attribution of Delphax losses to non-controlling interests was 33% and 30%,
respectively.
The following table sets forth the revenue and expenses of Delphax that are included in the Company’s
consolidated statements of income (loss) and comprehensive income (loss) for the years ended March 31,
2018 and 2017:
March 31, 2018
March 31, 2017
Operating revenues
$
5,835,266
5,835,266
9,809,997
Operating expenses:
Cost of sales
General and administrative
Research and development
Depreciation, amortization and impairment
Operating income (loss)
Non-operating expense, net
Income (Loss) before income taxes
Income tax benefit
Net income (loss)
3,261,156
3,261,156
1,399,034
1,399,034
195,653
195,653
8,007
8,007
4,863,850
971,416
971,416
(742,120)
(742,120)
229,296
229,296
311,000
311,000
10,090,073
2,876,132
1,042,496
1,738,819
15,747,520
(5,937,523)
(361,098)
(6,298,621)
-
$
540,296
(6,298,621)
Non-operating expense, net, includes intercompany interest expense of approximately $670,000 associated
with the Senior Subordinated Note and the Delphax Senior Credit Agreement for the fiscal year ended March
31, 2018 and approximately $425,000 for the fiscal year ended March 31, 2017. This interest expense was
eliminated for purposes of net income (loss) presented in the Company’s accompanying consolidated
statements of income (loss) and comprehensive income (loss) for the years ended March 31, 2018 and 2017,
though the effect of intercompany interest expense under the Senior Subordinated Note and the Delphax
Senior Credit Agreement is reflected in the attribution of Delphax net income or losses attributed to non-
controlling interests.
Unconsolidated Variable Interest Entities and Other Entities
As discussed in Note 2, BCCM Advisors holds equity interests in certain investment funds as of March 31,
2018. The Company determined that the equity interest it holds as the general partner in the following funds
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are variable interests based on the applicable GAAP guidance: Blue Clay Capital Partners CO I LP, Blue
Clay Capital Partners CO III LP, Blue Clay Capital SMid-Cap LO LP and AO Partners II LP. However, the
Company further determined that these funds should not be consolidated as BCCM Advisors is not the
primary beneficiary of these variable interest entities. The Company determined that its equity interest in the
Blue Clay Capital Master Fund Ltd. is not a variable interest and should not be consolidated based on the
applicable GAAP guidance. The Company’s total investment within these investment funds at March 31,
2018 is valued at approximately $325,000. The Company’s exposure to loss is limited to its initial
investment.
11.
FINANCING ARRANGEMENTS
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On December 21, 2017, the Company refinanced its previously existing financing arrangement with Branch
Banking and Trust Company (“BB&T) by entering into a Credit Agreement (“MBT Credit Agreement”) with
Minnesota Bank & Trust (“MBT”), pursuant to which MBT extended to the Company an aggregate of
$26,900,000 in financing in the form of a floating-rate, $1
0,000,000 revolving credit facility, and three term
loans in the amounts of $10,000,000 (“Term Loan A”), $5,000,000 (“Term Loan B”) and $1,900,000 (“Term
Loan C”), respectively. The interest rate on the $10,000,000 revolving note floats at a rate equal to the prime
rate plus one percent (1%); the interest rate on Term Note A floats at the month LIBOR rate plus two percent
(2%); the interest rate on Term Note B is fixed at four and one-half percent (4.50%); and, the interest on
Term Note C floats at a rate equal to prime minus one percent (1%), subject to a floor of three and one
quarter percent (3.25%). In connection with the financing, the Company entered into a swap agreement to fix
the interest rate on Term Note A at four and 56/100ths percent (4.56%). The revolving note is due on
November 30, 2019, Term Loan A and Term Loan B mature in ten years from the date of issuance, and Term
Loan C matures on January 1, 2019. The loans are guaranteed by certain subsidiaries of the Company,
secured by a first lien on all personal property of the Company and the guaranteeing subsidiaries. The
Company applied a portion of the proceeds from the financing to pay off the obligations of the Company and
certain of its subsidiaries under its Prior Revolving Credit Facility (as defined below) with BB&T.
On December 21, 2017, the Company entered into an interest rate swap pursuant to an International Swap
Dealer’s Association, Inc. Master Agreement with MBT. The effective date of the swap was January 1, 2018
and the termination date of the swap agreement is January 1, 2028. As of January 1, 2018, the notional
amount was $10,000,000, which amount adjusts each month consistent with the amortization schedule of
Term Note A. The purpose of the swap is to fix the interest rate on the Company’s $10,000,000 Term Note A
at four and 56/100ths percent (4.56%), thereby mitigating the interest rate risk inherent in Term Note A. The
fair value of the interest rate swap as of March 31, 2018 was a liability of approximately $8,500. The interest
rate swap was not designated as a hedging instrument. The change in the fair value of the swap from the trade
date to March 31, 2018 is recorded in the consolidated statements of income (loss).
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On February 15, 2018, the Company entered into certain financing documents with MBT pursuant to which
MBT extended a new $1,680,000 real estate loan (“Term Note D”) to the Company and amended the
$1,900,000 term loan evidenced by Term Note C to reduce the principal amount of Term Note C to
$1,000,000 and to adjust the amortization schedules set forth therein to reflect the reduced principal balance.
The interest rate on Term Note D floats at a rate equal to the one-month LIBOR rate plus 2%. In connection
with the financing, the Company entered into a swap agreement to fix the interest rate on Term Note D at five
and 9/100th percent (5.09%). The principal balance of Term Note D is payable in equal monthly installments
of $5,600 each commencing on March 1, 2018 and continuing until January 1, 2028 at which time the entire
principal balance of Term Note D will be due and payable in full. Term Note D is secured by a first mortgage
on the real property of the Company located at 5930 Balsom Ridge Road, Denver, NC 28037. The interest
rate on Term Note C will continue to float at a rate equal to prime minus 1% subject to a floor of 3.25%. The
maturity date of Term Note C continues to be January 1, 2019. The monthly installments of principal under
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Term Note C have been reduced from $158,333.33 a month to $90,909 per month to reflect the reduced
principal balance. In addition, both Term Note C and Term Note D, along with all other financing extended
by MBT to the Company, have been guaranteed by certain subsidiaries of the Company, and are secured by a
first lien on all personal property of the Company and the guaranteeing subsidiaries.
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On February 20, 2018, the Company entered into an interest rate swap pursuant to an International Swap
Dealer’s Association, Inc. Master Agreement with MBT. The effective date of the swap was February 20,
2018 and the termination date of the swap agreement is January 1, 2028. As of February 20, 2018, the
notional amount was $1,680,000, which amount adjusts each month consistent with the amortization schedule
of Term Note D. The purpose of the swap is to fix the interest rate on the Company’s $1,680,000 Term Note
D five and 9/100th percent (5.09%), thereby mitigating the interest rate risk inherent in Term Note D. The fair
value of the interest rate swap as of March 31, 2018 was a liability of approximately $58,000. The interest
rate swap was not designated as a hedging instrument. The change in the fair value of the swap from the trade
date to March 31, 2018 is recorded in the consolidated statements of income (loss).
The MBT agreements contains affirmative and negative covenants, including covenants providing
compliance certificates and borrowing base certificates, notices of events of default or other events deemed to
have a material adverse effect on the Company, as defined in the credit agreement, and limitations on certain
types of additional debt and certain types of investments. The MBT Credit Agreement also contains financial
covenants applicable to the Company and the obligation subsidiaries, including the maintenance of a Debt
Service Coverage Ratio of 1.25 to 1.00 and an Asset Cove
rage Ratio of 1.50 to 1.00.
f
The MBT agreements contains events of default, as defined therein, including, without limitation,
nonpayment of principal, interest or other obligations, violation of covenants, cross-default to other debt,
bankruptcy and other insolvency events, actual or asserted invalidity of loan documentation, or material
adverse changes in the Company’s or the guaranteeing subsidiaries’ financial condition. At March 31, 2018,
the Company and the subsidiaries were in compliance with all applicable covenants under
this credit facility.
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aa
Prior to December 21, 2017, the Company had a senior secured revolving credit facility of $25.0 million with
BB&T with a maturity date of April 1, 2019 (the “Prior Revolving Credit Facility”). Initially, borrowings
under the Prior Revolving Credit Facility bore interest (payable monthly) at an annual rate of one-month
LIBOR plus an incremental amount ranging from 1.50% to 2.00% based on a consolidated leverage ratio. In
addition, a commitment fee accrued with respect to the unused amount of the Prior Revolving Credit Facility
at an annual rate of 0.15%. The Company included the commitment fee expense within the interest expense
and other line item of the accompanying consolidated statements of income (loss). Amounts applied to repay
borrowings under the Prior Revolving Credit Facility could be reborrowed, subject to the terms of the facility.
On May 2, 2017, the Company and certain of its subsidiaries entered into an amendment to the agreement
governing the Prior Revolving Credit Facility to establish a separate $2.4 million term loan facility under that
agreement. Each of the Company and such subsidiaries were obligors with respect to the term loan, which
matured on May 1, 2018, with equal $200,000 installments of principal due monthly, commencing June 1,
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2017. Interest on the term loan was payable monthly at a per annum rate equal to 25 basis points above the
interest rate applicable to the Prior Revolving Credit Facility. The proceeds of the term loan were used to
fund the acquisition of the AirCo business. The term loan was secured by the existing collateral securing
borrowings under the Prior Revolving Credit Facility, including such acquired assets.
r
Effective as of June 28, 2017, the Company and certain of its subsidiaries agreed to amend the Prior
Revolving Credit Facility to provide that the interest rates on the revolving loans and the above-referenced
term loan under the Prior Revolving Credit Facility were each increased by an additional 0.25% per annum
from the date of the amendment until the second business day after delivery of a compliance certificate for
the quarter ended March 31, 2017 or any subsequent fiscal quarter end showing compliance with the financial
covenants required under the Prior Revolving Credit Facility, other than with respect to covenants as to which
compliance had been waived. The compliance certificate for the quarter ended June 30, 2017, was so
delivered on October 26, 2017 and accordingly, the additional 0.25% per annum additional interest ceased to
accrue commencing on October 26, 2017.
The Prior Revolving Credit Facility contained a number of affirmative and negative covenants as well as
financial covenants. Revisions to the terms of the Prior Revolving Credit Facility and waiver of compliance
with certain covenants by the lender occurred pursuant to a number of amendments to the facility.
On October 31, 2016, the Company and its subsidiaries, MAC, GGS, CSA, GAS, ATGL, Jet Yard and Stratus
Aero Partners, LLC, entered into a loan agreement dated as of October 31, 2016, (the “Construction Loan
72
Agreement”) with the Prior Revolving Credit Facility lender to borrow up to $1,480,000 to finance the
acquisition and development of the Company’s new corporate headquarters facility located in Denver, North
Carolina. Under the Construction Loan Agreement, the Company was permitted to make monthly drawings to
fund construction costs until October 2017. Borrowings under the Construction Loan Agreement bore interest
at the same rate charged under the Revolving Credit Facility. Monthly interest payments began in November
2016. Monthly principal payments (based on a 25-year amortization schedule) commenced in November
2017, with the final payment of the remaining principal balance due in October 2026. Borrowings under the
Construction Loan Agreement were secured by a mortgage on the new headquarters facility and a collateral
assignment of the Company’s rights in life insurance policies with respect to certain former executives, as
well as the same collateral securing borrowings under the Revolving Credit Facility. The Construction Loan
included the same covenants as in the Prior Revolving Credit Facility.
All of the obligations of the Company and its subsidiaries under the Prior Revolving Credit Facility including
the Construction Loan Agreement referenced above were repaid in full with proceeds of the MBT Credit
Agreement, and the Prior Revolving Credit Facility was terminated effective as of December 21, 2017.
In connection with and upon consummation of the Contrail Aviation acquisition in July 2016, Contrail
Aviation entered into a Credit Agreement (the “Contrail Credit Agreement”) with a bank lender. The Contrail
Credit Agreement provided for revolving credit borrowings by Contrail Aviation in an amount up to the
lesser of $12,000,000 or a borrowing base. The borrowing base was computed monthly and was equal to the
sum of 75% of the value of eligible inventory (up to a maximum of $9,000,000) and 80% of outstanding
eligible accounts receivable. The borrowing base at March 31, 2017 was $3.2 million, and the outstanding
principal balance of borrowings under the Contrail Credit Agreement were
$0 as of that date. Borrowings
r
under the Contrail Credit Agreement bore interest at a rate equal to one-month LIBOR plus 2.80% and
matured in January 2018. The obligations of Contrail Aviation under the Contrail Credit Agreement were
required to be guaranteed by each of its subsidiaries (if any), and were (and the guaranty obligations of any
such subsidiary guarantors were required to be) secured by a first-priority security interest in substantially all
of the assets of Contrail Aviation and any such subsidiary guarantors, as applicable (including, without
limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights
and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures,
investment property, documents and instruments, real property, and proceeds of the foregoing). The
obligations of Contrail Aviation under the Contrail Credit Agreement were also guaranteed by the Company,
with such guaranty limited in amount to a maximum of $1,600,000, plus interest on such amount at the rate of
interest in effect under the Contrail Credit Agreement, plus costs of collection.
The Contrail Credit Agreement contained affirmative and negative covenants, including covenants that
restricted the ability of Contrail Aviation 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 contained financial covenants applicable to Contrail Aviation and its
subsidiaries, including a minimum debt service coverage ratio of 1.75 to 1.0, a maximum ratio of total
liabilities to tangible net worth of 2.5 to 1.0, and a $10,000 limitation on annual operating lease payments. At
March 31, 2017, Contrail Aviation was in compliance with its bank covenants.
On May 5, 2017, Contrail Aviation entered into a Business Loan Agreement with Old National Bank (“ONB
Loan Agreement”). The ONB Loan Agreement provides for revolving credit borrowings by Contrail in an
amount up to $15,000,000 and replaces the Contrail Credit Agreement entered into with BMO Harris Bank
N.A on July 18, 2016. Borrowings under the Loan Agreement bear interest at an annual rate equal to one-
month LIBOR plus 3.00%.
On March 7, 2018, Contrail Aviation entered into a new Business Loan Agreement (the “Amended ONB
Loan Agreement”) with Old National Bank (“ONB”). The Amended ONB Loan Agreement and related
Promissory Note replace the ONB Loan Agreement dated May 5, 2017. The Amended ONB Loan Agreement
provides for revolving credit borrowings by Contrail Aviation in an amount up to $20,000,000 with a
maturity date of May 5, 2019. Borrowings under the Loan Agreement bear interest at a variable rate equal to
the one-month LIBOR plus 3.00%. At March 31, 2018, $14,826,000 of aggregate borrowings were
outstanding under the loan agreement and $5,174,000 was available for borrowing.
73
On January 31, 2018, Contrail Aviation executed an additional Business Loan Agreement with Old National
Bank (“Additional ONB Loan Agreement”). The Additional ONB Loan Agreement provides for borrowings
by Contrail Aviation in an amount equal to $9,920,000 and is in addition to the revolving credit facility
described above. Borrowings under the Additional ONB Loan Agreement will bear interest at an annual rate
equal to 1-month LIBOR plus 3.75% and matures on January 26, 2021. Pursuant to the Additional ONB Loan
Agreement, Contrail Aviation is required to make quarterly payments equal to $250,000, plus an additional
“excess cash flow payment” equal to seventy percent (70%) of the gross lease income of the Collateral minus
$250,000. At March 31, 2018, the outstanding balance on the Additional Loan Agreement was $9,920,000.
The obligations of Contrail Aviation under the Amended ONB Loan Agreement and the Additional ONB
Loan Agreement are secured by a first-priority security interest in certain assets of Contrail and are also
guaranteed by the Company, with such guaranty limited in amount to a maximum of $1,600,000 plus interest
on such amount at the rate of interest in effect under the Loan Agreement, plus costs of collection.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain affirmative and
negative covenants, including covenants that restrict Contrail’s ability to
make acquisitions or investments,
aa
make certain changes to its capital structure, and engage in any business substantially different than it
presently conducts. The agreements also contain financial covenants applicable to Contrail, including
maintenance of a Cash Flow Coverage Ratio of 2.0 to 1.0, a Tangible Net Worth of not less than $3,500,000,
and a Debt Service Coverage Ratio of 1.1 to 1.0, as such terms are defined in the agreements.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain Events of Default, as
defined, including, without limitation, nonpayment of principal, interest or other obligations, violation of
covenants, if both Contrail’s current chief executive officer and chief financial officer cease to oversee day-
to-day operations of Contrail, cross-default to other debt, bankruptcy and other insolvency events, actual or
asserted invalidity of loan documentation, or material adverse changes in Contrail’s financial condition. At
March 31, 2018, Contrail was in compliance with these covenants.
t
On October 27, 2017 AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a loan in the amount
of $3,441,000 from MBT in order to finance, in part, the purchase of a 737-800 airframe for the purpose of
disassembling the plane and selling it for parts. The loan is due March 26, 2019. The plane will be
disassembled by Jet Yard, LLC, an affiliate, and the parts will be placed
on consignment with AirCo, LLC,
ff
which will market them to third parties.. AirCo 1, LLC is a special purpose entity formed for the purpose of
this transaction. At March 31, 2018, the outstanding balance on this loan was approximately $2,360,000
which is reported net of deferred financing costs of $44,500 on the consolidated balance sheet.
The loan contains affirmative and negative covenants and is secured by a security interest in all of AirCo 1,
LLC’s assets, a collateral assignment of the purchase agreement for the plane, assignments of the disassembly
contract and the consignment agreement, and bailee agreements with Jet Yard, LLC and AirCo, LLC. AirCo,
LLC is a wholly-owned subsidiary of Stratus Aero Partners LLC.
On February 22, 2018, AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a revolving loan in
the maximum amount of $5,000,000 (“ Revolving Loan Agreement”) from MBT to finance, in part, the
ongoing purchase of decommissioned narrow body airframes including but not limited to Boeing 737 NG and
A320 family aircraft by AirCo 1, LLC for the purpose of disassembling the airframes and selling them for
parts. The airframes will be disassembled by Jet Yard, LLC, and the parts would be placed on consignment
with AirCo, LLC, which will market them to third parties. Borrowings under the
Revolving Loan Agreement
will bear interest at a fixed rate of 7.50% per year with interest payments due on the first day of each month
commencing on April 1, 2018. The entire remaining principal balance of this Revolving Loan Agreement and
any accrued, unpaid interest shall be due and payable on February 21, 2019. At March 31, 2018, the
outstanding balance on this loan was approximately $4,950,000 which is reported net of deferred financing
costs of $50,000 on the consolidated balance sheet.
d
aa
While AirCo 1, LLC was originally formed with the intention of being a special purpose entity for the
purchase of a specific Boeing 737-800 airframe in October 2017, AirCo 1, LLC will no longer be a special
74
purpose entity and will be involved in the ongoing purchase of narrow body airframes including but not
limited to Being 737 NG and A320 family aircraft for purposes of disassembling them and selling them for
parts. The revolving line of credit described above will be available to finance the purchase of additional
decommissioned airframes to be disassembled and sold as parts by consignment to AirCo, LLC.
The loan contains affirmative and negative covenants and is secured by security interests in all of AirCo 1,
LLC’s assets, a collateral assignment of the purchase agreements for the Boeing 737 airframes, assignments
of the disassembly contracts and the consignment agreements, and bailee agreements with Jet Yard, LLC and
AirCo, LLC. The loan is also secured by a pledge by AirCo, LLC of all of the membership interests of AirCo
1, LLC.
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.
At March 31, 2018, our contractual financing obligations, including payments due by period, are as follows:
Fiscal year ended
2019
2020
2021
2022
2023
Thereafter
Less: Unamortized Debt
Issuance Costs
Amount
$
9,324,278
16,888,073
10,640,086
1,567,200
1,567,200
8,463,400
48,450,237
(365,288)
$
48,084,950
12.
LEASE ARRANGEMENTS
The Company has operating lease commitments for office equipment and some of its office and maintenance
facilities.
The Company previously leased property used for its corporate offices from a company controlled by certain
of the Company’s former officers and directors. The lease for this facility provided for monthly rent of
$14,862 and expired on January 31, 2018. The Company relocated its corporate offices to an owned facility
in July 2017 and did not renew this lease.
ff
The Company also leases approximately 1,950 square feet of office space and approximately 4,800 square
feet of hangar space at the Ford Airport in Iron Mountain, Michigan. CSA’s operations are headquartered at
these facilities which are leased from a third party under an annually renewable agreement.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility
located in Kinston, North Carolina under an agreement that extends through January 2023, with the option to
extend the lease for four additional five-year periods thereafter. The Company has calculated rent expense
under the current lease term. The rental rate under the lease increases by increments for each of the five-year
renewal periods.
t
GGS leases a 112,500 square foot production facility in Olathe, Kansas. The facility is leased from a third
party under a lease agreement, which expires in August 2019.
GAS leases several maintenance facilities across the country and an administrative office in Eagan,
Minnesota. Most of the leases are on one-year agreements with renewal clauses, but some of these are multi-
year leases extending out as far as March 2021.
75
As of March 31, 2018, the Company leased maintenance and office space from third parties at a variety of
other locations, at prevailing market terms. The table of aircraft presented in Item 1 lists the aircraft operated
by the Company’s subsidiaries and the form of ownership.
Contrail Aviation leases a 21,000 square foot facility in Verona, Wisconsin. The lease for this facility expires
on July 17, 2021, though Contrail Aviation has the option to renew the lease on the same terms for an
additional five-year period. The lease provides for monthly rent of approximately $13,000 (see Note 24).
Jet Yard leases approximately 48.5 acres of land from Pinal County at the Pinal Air Park in Marana, Arizona.
The lease expires in May 2046, though Jet Yard has an option to renew the lease for an additional 30-year
period (though the lease to a 2.6-acre parcel of the leased premises may be terminated by Pinal County upon
90 days’ notice). The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make
substantial progress toward the construction of facilities on the leased premises in phases in accordance with
a specified timetable. The construction of a demolition pad required by March 31, 2017 under the lease has
not been completed and Jet Yard and Pinal County are in discussions with respect to improvements on the
leased premises.
Delphax’s Canadian subsidiary leased a 76,734 square foot manufacturing facility in Mississauga, Ontario
under a lease which has been terminated effective upon removal of the property foreclosed upon by Air T.
Delphax Solutions leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease
expires on July 31, 2020 and the subsidiary’s obligations under the lease have been guaranteed by Air T. The
lease commenced on August 1, 2017 and terminates on July 31, 2020. Annual rent under the lease escalates
annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000
(CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T.
AirCo leases a 20,000 square-foot facility from the shareholder of the AirCo Seller which expires on May 1,
2018, though AirCo may prior thereto terminate the lease on 90-days’ notice and may renew the lease for up
to four successive one-year terms. Total rent cost for fiscal 2018 is approximately $121,000. The Company
renewed the lease for another term through May 1, 2019.
ff
At March 31, 2018, future minimum annual lease payments (foreign currency amounts translated using
applicable March 31, 2018 exchange rates) under non-cancelable operating leases with initial or remaining
terms of more than one year are as follows:
Year ended March 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
3,007,000
2,262,000
1,400,000
1,078,000
885,000
5,381,000
14,013,000
The Company’s rent expense excluding Delphax for operating leases totaled approximately $4,520,000 and
$3,872,000 for fiscal 2018 and 2017, respectively, and includes amounts to related parties of $337,000 and
$289,000 in fiscal 2018 and 2017, respectively. Delphax’s rent expense totaled $95,000 and $391,000 for
fiscal 2018 and 2017 respectively.
76
13.
EQUIPMENT LEASED TO CUSTOMERS
The Company leases equipment to third parties. ATGL leases a printer to a third party under an operating
lease agreement. Contrail Aviation leases engines to third parties under operating lease agreements as well.
As of March 31, 2018, minimum future rentals under non-cancelable operating leases are as follow:
Year ended March 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
2,547,888
1,392,588
732,588
83,288
66,547
-
4,822,899
14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and reports financial assets and liabilities at fair value, on a recurring basis. Fair
value measurement is classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or
indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market activity).
The following consolidated balance sheet items are measured at fair value:
Fair Value Measurements at March 31,
2018
2017
Marketable securities (Level 1)
Interest rate swaps (Level 2)
Acquisition contingent consideration obligations (Level 3)
Redeemable Non-Controlling Interest (Level 3)
$ 2,552,774
$ 66,706
$ 1,955,987
$ 1,992,939
$ 4,593,667
$ -
$ 3,023,031
$ 1,443,901
The fair values of our interest rate swaps are based on the market standard methodology of netting the
discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable
cash receipts are based on an expectation of future interest rates derived from observed market interest rate
forward curves. Since these inputs are observable in active markets over the terms that the instruments are
held, the derivatives are classified as Level 2 in the hierarchy.
The fair value of the acquisition contingent consideration obligations is based on a discounted cash flow
analysis using projected EBITDA over the earn-out period and is classified as Level 3 in the hierarchy.
The fair value of the redeemable non-controlling interest is based on a market approach using a book value
multiple and is classified as Level 3 in the hierarchy.
t
The fair value measurements which use significant observable inputs (Level 3), changed due to the following:
77
Beginning Balance
Payment of contingent consideration
Capital contribution by non-controlling member
Net income attributable to non-controlling interests
Fair value adjustment
Interest accrued on contingent consideration
Acquisition
Contingent
Consideration
Obligations
$
3,023,031
3,023,031
(1,100,000)
(1,100,000)
-
-
-
-
-
-
32,956
32,956
$
1,955,987
Redeemable Non-
Controlling
Interest
1,443,901
-
252,000
254,938
42,100
-
1,992,939
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts
receivable, notes receivable and accounts payable approximate their fair value at March 31, 2018 and 2017.
15.
AIR T, INC. STOCKHOLDERS’ EQUITY
The authorized capital structure of Air T, Inc. includes 4,000,000 shares of common stock, with a par value of
$0.25 per share. In May 2014, the Company’s Board of Directors adopted a policy to discontinue the
payment of a regularly scheduled annual cash dividend.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to
repurchase up to 750,000 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.
h
In addition to common stock, the Company may issue up to 50,000 shares of $1.00 par value preferred stock,
in one or more series, on such terms and with such rights, preferences and limitations as determined by the
Board of Directors. A total of 5,000 shares of preferred stock are authorized for issuance as Series A Junior
Participating Preferred Stock and 5,000 shares of preferred stock are authorized for issuance as Series B
Junior Participating Preferred Stock, of which 3,000 shares had been reserved for issuance pursuant to the
Company’s former Rights Agreement, described below.
On December 14, 2014, the Board of Directors declared a dividend of one preferred share purchase right (a
“Right”) for each outstanding share of common stock of the Company. The Rights were governed by a
Rights Agreement (the “Rights Agreement”) dated as of December 15, 2014. On September 26, 2016, a
special committee of independent members of the Company’s Board of Directors, under authority delegated
to such committee by the Board of Directors of the Company, resolved to amend the Rights Agreement to
accelerate the expiration of the Rights (as defined in the Rights Agreement) from 5:00 p.m., Eastern time, on
December 26, 2017 to 5:00 p.m., Eastern time, on September 26, 2016. Thereafter, on September 26, 2016,
the Company entered into an amendment to the Rights Agreement to accelerate the expiration of the Rights
from 5:00 p.m., Eastern time, on December 26, 2017 to 5:00 p.m., Eastern time, on September 26, 2016 (the
“Final Expiration Time”). As a result of such amendment, the Rights Agreement was effectively terminated
on September 26, 2016 and all of the Rights distributed to holders of the Company’s common stock pursuant
to the Rights Agreement expired at the Final Expiration Time.
On July 1, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase
Agreement”) with Sardar Biglari, Biglari Capital Corp. and The Lion Fund II, L.P. (collectively, the “Biglari
Group”), pursuant to which the Company purchased 329,738 shares of common stock, par value $0.25 (the
“Common Stock”), of the Company for $24.01 per share (the “Per Share Purchase Price”), resulting in an
aggregate purchase price of $7,917,009. The Per Share Purchase Price was equal, and determined by
reference, to the volume-weighted average price of the Common Stock for the thirty (30) trading days
preceding the date of the Securities Purchase Agreement.
d
Pursuant to the terms of the Securities Purchase Agreement, for a period of four years following the date of
the Securities Purchase Agreement, each member of the Biglari Group agreed to customary standstill
78
restrictions (including customary provisions regarding matters submitted to shareholders and other
uu
governance matters), and the parties to the Securities Purchase Agreement agreed to abide by customary non-
disparagement provisions in connection with the parties’ relationship with the Company.
rr
The Common Stock was retired upon repurchase. The accompanying consolidated statement of equity for the
year ended March 31, 2017 reflects the resultant respective reductions in common stock, additional paid-in
capital, and retained earnings.
16.
EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
Pursuant to equity compensation plans last approved by Air T, Inc. stockholders in 2005, the Company has
y
granted options to purchase up to a total of 256,000 shares of common stock to key employees, officers and
non-employee directors with exercise prices at 100% of the fair market value on the date of grant. As of
March 31, 2016, no further awards may be granted under the plans, and options to acquire a total of 40,000
shares remained outstanding. The employee options generally vested one-t
t
hird per year beginning with the
mm
first anniversary from the date of grant. The non-employee director options generally vested one year from
the date of grant.
f
There was no compensation expense related to Air T, Inc. stock options for the years ended March 31, 2018
and 2017. As of March 31, 2018, there was no unrecognized compensation expense, related to the stock
options. There were no stock options granted during the years ended March 31, 2018 and March 31, 2017.
As of March 31, 2017, 36,000 shares of Air T stock options expired, of which 6,000 expired in fiscal year
ended March 31, 2016 and 30,000 expired in fiscal year ended March 31, 2017. In order to remove the
deferred tax asset related to these stock options, a decrease of $63,000 was recorded through additional paid
in capital.
818 shares were exercised in fiscal year ended March 31, 2018 at weighted average exercise price per share
of $10.56. The number of outstanding options at March 31, 2018 was 9,182.
In addition, Delphax maintains a number of stock option plans. These plans were in place at the time of the
Company’s acquisition of interests in Delphax. Subsequent to the acquisition, Delphax granted 1.2 million
non-qualified options to purchase shares of its common stock to certain of its employees at an exercise price
of $0.33 per share.
Option activity, which only reflects the activity of Air T, Inc., is summarized as follows:
f
Outstanding at March 31, 2016
Granted
Exercised
Forfeited
Repurchas ed
Outstanding at March 31, 2017
Granted
Exercised
Forfeited
Repurchas ed
Outstanding at March 31, 2018
Exercisable at March 31, 2018
Shares
40,000
40,000
-
-
-
-
(30,000)
(30,000)
-
-
10,000
10,000
-
-
(818)
(818)
-
-
-
-
9,182
9,182
9,182
9,182
Weighted
Average
Exercis e Price
Per Share
Weighted
Average
Remaining
Life (Years )
Aggregate
Intrinsic
Value
$
8.74
-
-
-
-
10.08
10.08
-
10.56
-
-
10.03
10.03
$
$
2.09
617,000
6.15
101,000
5.13
5.13
140,193
140,193
17.
MAJOR CUSTOMER
Approximately 38% and 47% of the Company’s consolidated revenues were derived from services performed
for FedEx Corporation in fiscal 2018 and 2017, respectively. Approximately 15% and 15% of the Company’s
79
consolidated accounts receivable at March 31, 2018 and 2017, respectively, were due from FedEx
Corporation.
18.
INCOME TAXES
The components of income tax expense (benefit) were as follows:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Total
Year Ended March 31,
2018
2017
$
(133,000)
(133,000)
183,000
183,000
156,000
156,000
206,000
206,000
(14,000)
(14,000)
3,000
(11,000)
(11,000)
$
195,000
1,124,000
128,000
132,000
1,384,000
(592,000)
(67,000)
(659,000)
725,000
Income tax expense was different from the amount computed by applying the statutory federal income tax
rate of 30.8% and 34% for fiscal years ended March 31, 2018 and March 31, 2017 each respectively as shown
in the following table:
Expected Federal income tax expense
U.S. statutory rate
State income taxes, net
of Federal benefit
Permanent differences, other
Dividend received deduction
Section 831(b) benefit
Change in valuation allowance
Domestic production activities deductions
Income attributable to minority interest - Contrail Aviation
Bargain purchase gain
Tax rate change applied to deferreds
Deferred benefit for outside basis difference recorded on Delphax CFC's
Deferred benefit for increase in Canadian tax credits for Dephax
Recognition of AMT credit as tax receivable
Deferred state income taxes, net of Federal benefit for Delphax
Other differences, net
Year Ended March 31,
2018
2017
$
818,000
818,000
30.8%
(1,434,000)
(1,434,000)
34.0%
129,000
129,000
21,000
21,000
-
-
(320,000)
(320,000)
(1,116,000)
(1,116,000)
(15,000)
(15,000)
(79,000)
(79,000)
(155,000)
(155,000)
2,297,000
2,297,000
(811,000)
(811,000)
(149,000)
(149,000)
(311,000)
(311,000)
-
-
(114,000)
(114,000)
4.9%
0.8%
0.0%
-12.1%
-42.1%
-0.6%
-3.0%
-5.8%
86.6%
-30.6%
-5.6%
-11.7%
0.0%
-4.3%
7.3%
40,000
40,000
156,000
156,000
(302,000)
(302,000)
(281,000)
(281,000)
3,868,000
3,868,000
(64,000)
(64,000)
(45,000)
(45,000)
-
-
-
-
(1,015,000)
(1,015,000)
-
-
(102,000)
(102,000)
(96,000)
(96,000)
-0.9%
-3.7%
7.2%
6.7%
-91.8%
1.5%
1.1%
0.0%
0.0%
24.1%
0.0%
2.4%
2.3%
725,000
725,000
-17.1%
Income tax expense
$
195,000
195,000
Delphax, which generated a loss for the period ended March 31, 2018 and March 31
, 2017 is not included in
Air T, Inc.’s consolidated tax return and accounts for $973,000 and $3,212,000 of the above valuation
allowance effect for each year, respectively. Changes in unrealized losses related to available-for-sale
securities accounted for the remaining valuation allowance effect for each year. Deferred tax assets and
liabilities consisted of the following as of March 31:
aa
80
Inventory reserves
Accrued vacation
Stock option compensation
Property and equipment
Warranty reserve
Accounts and notes receivable reserve
Employee severance reserve
Net operating loss carryforwards
Federal/Canadian tax credits
263A inventory capitalization
Unrealized gains/losses and outside basis difference for CFC's
Intangibles
Outside basis difference
Other
Total deferred tax assets
Deferred revenue
Prepaid expenses
263A inventory capitalization
Bargain purchase gain
Gain on marketable securities (OCI)
Outside basis difference
Total deferred tax liabilities
2018
$
50,000
50,000
343,000
343,000
67,000
67,000
264,000
264,000
25,000
25,000
103,000
103,000
549,000
549,000
6,083,000
6,083,000
4,486,000
4,486,000
-
-
2,324,000
2,324,000
25,000
25,000
69,000
14,388,000
14,388,000
(11,000)
(11,000)
(337,000)
(337,000)
(28,000)
(28,000)
(179,000)
(179,000)
(72,000)
(72,000)
(270,000)
(270,000)
(897,000)
(897,000)
2017
785,000
475,000
108,000
169,000
39,000
290,000
460,000
6,461,000
4,648,000
10,000
1,995,000
43,000
-
78,000
15,561,000
(35,000)
(505,000)
-
-
(94,000)
(34,000)
(668,000)
Net deferred tax asset (liability)
$
13,491,000
13,491,000
14,893,000
Less valuation allowance
Net deferred tax asset (liability)
(13,583,000)
(13,583,000)
(14,698,000)
$
(92,000)
(
)
,
$
195,00
0
The Company accounts for uncertain tax positions in accordance with accounting principles generally
accepted in the United States of America. The Company has analyzed filing positions in all of the federal,
state and international jurisdictions where it is required to file income tax returns, as well as all open tax years
in these jurisdictions. The years subject to examination for the Company’s federal return are the fiscal 2014
through 2016 tax years. The years subject to examination for the Company’s state returns are generally the
fiscal 2013 through 2016 tax years. As of March 31, 2018 and 2017, the Company did not have any
unrecognized tax benefits. The Company does not believe there will be any material changes in
unrecognized tax positions over the next twelve months.
It is the Company’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of March 31, 2018 and 2017, the Company did not have any accrued
interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized
during the years ended March 31, 2018 and 2017.
As described in Note 10, effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With
an equity investment level by the Company of approximately 38%, Delphax is required to continue filing a
separate United States corporate tax return. Furthermore, Delphax has three foreign subsidiaries located in
Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions,
Delphax is no longer subject to examinations by income tax authorities for tax years before 2013.
Delphax maintains a September 30 fiscal year. As of September 30, 2016, Delphax and its subsidiaries had
estimated foreign and domestic tax loss carryforwards of $9.7 million and $14.5 million, respectively. As of
that date, they had estimated foreign research and development credit carryforwards of $4.5 million, which
are available to offset future income tax. The credits and net operating losses expire in varying amounts
beginning in the year 2023. As previously noted, the TCJA repealed the corporate alternative minimum tax
and made any minimum tax credit carryforwards to the extent not utilized refundable for tax years beginning
after December 31, 2017. As a result, Delphax will be able to receive a refund of its minimum tax credit
carryforward of $311,000 beginning in their fiscal year ended September 30, 2019. Previously, a valuation
allowance was established against the minimum tax credit carryforward. As a result of the TCJA relating to
r
81
rr
the refundability of the minimum tax credit carryforward, an income tax benefit was recognized by the
Company during the current period and a long-term income tax receivable was established. Should there be
an ownership change for purposes of Section 382 or any equivalent foreign tax rules, the utilization of the
previously mentioned carryforwards may be significantly limited. Furthermore, Delphax is currently
undergoing bankruptcy proceedings with their Ca
nadian entity (see Note 10) and intends to liquidate both the
United Kingdom and French entities too. The Company anticipates those proceedings will be completed
within the next fiscal year. Upon completion, any remaining tax attributes, including net operating losses and
credit carryforwards in each respective jurisdiction will be lost. The Company has recorded an outside basis
difference in the stock of these entities of $2.3 million which is the estimated loss that will be recognized in
the United States upon their liquidation. See additional information regarding Delphax Canada in Note 10.
The returns for the fiscal year ended September 30, 2017 have not yet been filed.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining
whether it is more likely than not that deferred tax assets will be recovered. In accounting for the Delphax tax
attributes, the Company has established a full valuation allowance of $13.0 million at March 31, 2018 and
$14.0 million at March 31, 2017. The cumulative losses incurred by Delphax in recent years was the primary
basis for the Company’s determination that a full valuation allowance should be established against
Delphax’s net deferred tax assets.
19.
EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(E) defined
contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are
immediately eligible to participate in the Plans. The Company’s contribution to the Plans for the years ended
March 31, 2018 and 2017 was approximately $559,000 and $529,000, respectively, and was recorded in the
consolidated statements of income (loss).
mm
a
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 2018 and 2017 was approximately $1,188,000
and $390,000, respectively, and was recorded in general and administrative expenses in the consolidated
statements of income (loss). The profit sharing expense in fiscal 2018 included approximately $602,000
related to Air T, and approximately $536,000 related to Contrail.
Delphax had a defined contribution plan covering substantially all Canadian employees. Canadian employees
contribute 2% of gross salary to the plan, and Delphax makes a contribution to the plan of 3% or 4% of gross
salary depending on employee classification. The employer contribution vests over two years. The
contribution made by Delphax during fiscal 2018 and 2017 was $0 and $78,000 respectively.
aa
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
Operating Revenues
Operating Income
Net Income (Loss) Attributable to Air T, Inc Stockholders
Basic Earnings (Loss) per share
Diluted Earnings (Loss) per share
2017
Operating Revenues
Operating Income (Loss)
Net Income (Loss) Attributable to Air T, Inc Stockholders
Basic Earnings (Loss) per share
Diluted Earnings (Loss) per share
82
$
47,697
47,697 $
2,213
2,213
48,861
48,861 $
476
476
422
0.21
0.21
44,501
44,501
552
552
(672)
(672)
(0.33)
(0.33)
(0.33)
(0.33)
968968
0.470.47
0.470.47
$
30,493 $
30,493
(7,073)
(7,073)
(5,751)
(5,751)
(2.42)
(2.42)
(2.42)
(2.42)
38,523 $
38,523
1,022
1,022
1,084
1,084
0.53
0.53
0.53
0.53
35,769
35,769
1,639
1,639
1,220
1,220
0.60
0.60
0.60
0.60
53,460
1,005
1,559
0.76
0.76
43,687
1,311
233
0.11
0.11
During the quarter ended June 30, 2016, Delphax was informed by its largest customer that the customer had
decided to accelerate its plans for removing Delphax legacy printing systems from production and that
Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to
decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be
expected from this customer was being sharply curtailed. In addition to this specific customer
communication, Delphax also experienced a broad-based decline in legacy product customer demand during
the quarter. Sales of Delphax’s new elan® printer system also did not materialize to expectations in the
quarter.
y
The adverse business developments during the quarter ended June 30, 2016 and the significantly deteriorated
outlook for future orders of legacy and elan® product caused the Company to reevaluate the recoverability of
Delphax’s assets, both tangible and intangible. Based on this reevaluation, which involved material
estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the
Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company
concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully
impaired. This impairment totaled approximately $1,385,000 during the quarter ended June 30, 2016. The
Company also recorded a partial impairment of Delphax related long-lived tangible assets, totaling
approximately $249,000 during the quarter ended June 30, 2016. These impairment losses are reflected on the
consolidated statements of income (loss) within the “depreciation, amortization and impairment” line item.
Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under
existing Delphax employee benefit plans were both probable and estimable. This assessment led to the
Company establishing an estimated accrual for future severance actions. The effects of these various
adjustments discussed above, which aggregated to approximately $5,610,000, are reflected in the operating
results of Delphax for the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017.
In addition, results for the quarter ended June 30, 2016 included a non-operating charge of approximately
$1,502,000 related to the Company’s investment in marketable securities of Insignia due in part to the
magnitude of the loss position in the investment, which increased sharply during the quarter, and the fact that
the investment had been in a continuous loss position for well over one year.
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 Ma
rch 31, 2018 and March 31, 2017:
d
March 31,
2018
March 31,
2017
United States, the Company’s country of domicile
Foreign
Total property and equipment, net
$
$
5,209,831
15,063,340
20,273,171
$
$
5,323,471
1,017
5,324,488
The Company’s tangible long-lived assets, net of accumulated depreciation, held outside of the United States
represent engines on lease at March 31, 2018. The net book value located within each individual country at
March 31, 2018 is listed below:
Mexico
Netherlands
Romania
$
4,352,257
7,084,947
3,626,136
15,063,340
$
Total revenue, located in the United States, the Company’s Country of
d
States is summarized in the following table as of March 31, 2018 and March 31, 2017:
domicile, and outside the United
83
United States, the Company’s country of domicile
Foreign
Total revenue
22.
SEGMENT INFORMATION
March 31,
2018
175,727,524
18,791,821
194,519,345
$
$
March 31,
2017
$
$
135,257,659
13,214,000
148,471,659
The Company has seven business segments: overnight air cargo, ground equipment sales, ground support
services, commercial jet engine and parts segment, printing equipment and maintenance, leasing and
corporate. Segment data is summarized as follows:
84
Year Ended M arch 31,
2018
$
72,845,353
72,845,353
Operating Revenues:
Overnight Air Cargo
Ground Equipment Sales:
Domestic
International
Total Ground Equipment Sales
Ground Support Services
Printing Equipment and M aintenance
Domestic
International
Total Printing Equipment and M aintenance
Commercial Jet Engines and Parts:
Domestic
International
Total Commercial Jet Engines
Leasing
Corporate
Intercompany
Total
Operating Income (Loss):
Overnight Air Cargo
Ground Equipment Sales
Ground Support Services
Printing Equipment and M aintenance
Commercial Jet Engines and Parts
Leasing
Corporate
Intercompany
Total
Capital Expenditures:
Overnight Air Cargo
Ground Equipment Sales
Ground Support Services
Printing Equipment and M aintenance
Commercial Jet Engines and Parts
Leasing
Corporate
Intercompany
Total
Depreciation, Amortization and Impairme
Overnight Air Cargo
Ground Equipment Sales
Ground Support Services
Printing Equipment and M aintenance
Commercial Jet Engines and Parts
Leasing
Corporate
Intercompany
Total
47,394,193
47,394,193
2,641,842
50,036,035
35,710,005
35,710,005
3,675,193
3,675,193
2,711,689
6,386,882
6,386,882
25,324,231
25,324,231
13,438,290
38,762,521
38,762,521
137,316
137,316
2,520,521
2,520,521
(11,879,288)
(11,879,288)
194,519,345
$
$
4,127,322
4,127,322
3,840,907
3,840,907
(179,152)
(179,152)
(749,846)
(749,846)
2,003,111
2,003,111
6,079
6,079
(3,541,853)
(3,541,853)
(1,261,045)
(1,261,045)
4,245,523
$
$
40,668
40,668
219,592
219,592
363,420
363,420
181,895
181,895
18,305,930
18,305,930
-
-
1,104,089
1,104,089
-
-
$
20,215,594
$
110,810
110,810
433,184
433,184
471,776
471,776
13,135
13,135
1,174,764
1,174,764
59,244
59,244
421,243
421,243
(5,298)
(5,298)
2,678,858
$
2017
69,558,334
26,922,009
4,284,000
31,206,009
30,453,246
5,653,997
4,156,000
9,809,997
2,688,902
4,774,000
7,462,902
537,719
1,136,311
(1,692,859)
148,471,659
2,723,933
2,378,812
(500,712)
(5,937,522)
534,762
422,913
(2,787,760)
64,801
(3,100,773)
95,270
21,766
465,718
9,927
60,104
3,070,037
1,690,109
(3,066,500)
2,346,431
124,793
597,240
383,963
1,738,819
109,807
247,323
174,510
(194,610)
3,181,845
During fiscal year 2017, the elimination of intercompany revenues is related to the sale of two elan® printers
by Delphax to ATGL, along with the premiums paid to SAIC, and the elimination of intercompany operating
income for such period reflects the margins on the sales of those assets, elimination of excess depreciation
85
and amortization related to the margin on those assets, and the premiums paid to SAIC.
During fiscal year 2018, the elimination of intercompany revenues is primarily related to the sale of aircrafts
from Contrail Aviation to AirCo along with the premiums paid to SAIC. The elimination of intercompany
operating income for such period reflects the margins on the sales of those assets.
23.
COMMITMENTS AND CONTINGENCIES
The Company is involved in various other legal actions and claims arising in the ordinary course of business.
Management believes that these matters, if adversely decided, would not have a material adverse effect on the
Company's results of operations or financial position.
In July 2016, pursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent
additional deferred consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate
(collectively, the “Earnout Payments” and each, an “Earnout Payment”), calculated as follows:
(i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any
Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with
respect to such Earnout Period;
(ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an
amount equal to the product of (x) the EBITDA generated with respect to such Earnout Period minus
$1,500,000, and (y) two (2);
(iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be
equal to $1,000,000;
(iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of
$4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and
(v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in
excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is
owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv),
above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal
to the difference between $3,000,000 and the aggregate Earnout Payments already received or
payable pursuant to clauses (i) through (iv), above.
As used in the Asset Purchase Agreement, “Earnout Period” means each of the first five twelve-full-calendar-
month periods following the closing of the acquisition. The Company has estimated its liability with respect
to the Earnout Payment of $2,900,000, which amount is included in the “Other non-current liabilities” in the
consolidated balance sheet at March 31, 2017. As a result of the EBITDA of Contrail Aviation being
approximately $2.1 million for the first Earnout Period, the Earnout Payment with respect to that Earnout
Period is $1,000,000, which was paid in October 2017. The remaining liability of $1,955,000, which includes
a current portion of $1,500,000 and a non-current portion of $455,000, is included in the “Accrued expenses”
and “Other non-current liabilities”, respectively, in the consolidated balance sheet at March 31, 2018.
tt
On the Contrail Closing Date, Contrail Aviation and the Seller entered into an Operating Agreement (the
“Operating Agreement”) providing for the governance of and the terms of membership interests in Contrail
Aviation and including put and call options (“Put/Call Option”) permitting, at any time after the fifth
anniversary of the Contrail Closing Date, Contrail Aviation at its election to purchase from the Seller, and
permitting the Seller at its election to require Contrail Aviation to purchase from the Seller, all of the Seller’s
equity membership interests in Contrail Aviation at a price to be agreed upon, or failing su
ch an agreement to
be determined pursuant to third-party appraisals in a process specified in the Operating Agreement.
d
a
86
On October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D
GSE Support, Inc. (“D&D”) which was in the business of marketing, selling and providing aviation repair,
equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total
amount paid at closing in connection with this acquisition was $400,000, with an additional $100,000 paid 30
days after closing and an additional $100,000 payable in equal monthly installments of $16,667 commencing
on November 1, 2016. Based on actual revenue earned by D&D through September 30, 2017, the earnout
payment with respect to the purchase agreement was $100,000, which amount was paid in October 2017.
As discussed in Note 11, the obligations of Contrail Aviation under the Amended ONB Loan Agreement and
the Additional ONB Loan Agreement are secured by a first-priority security interest in certain assets of
Contrail and are also guaranteed by the Company, with such guaranty limited in amount to a maximum of
$1,600,000 plus interest on such amount at the rate of interest in effect under the Loan Agreement, plus costs
of collection.
Delphax Solutions leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease
commenced on August 1, 2017 and terminates on July 31, 2020. Annual rent under the lease escalates
annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000
(CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T. The
lease of production facilities in Mississauga, Ontario by Delphax Canada has been terminated effective upon
removal of the property foreclosed upon by Air T.
d
a
The Company currently expects that none of Delphax Canada’s unsecured creditors will receive payment in
connection with the ongoing bankruptcy proceedings. This is because the Company’s priority claims under
the Delphax Senior Credit Agreement permitted it to foreclose upon all of Delphax Canada’s personal
property and rights of undertakings. Unsecured creditors of Delphax Canada may attempt to advance claims
against the Company, whether as direct claims or alleging successor liability in light of the foreclosure. The
Company does not believe that any such claims will be successfully advanced and therefore expects no
significant adverse effect on the Company’s financial position or results of operations as a result of such
possible claims.
The Company has various operating lease commitments for office equipment and its office and maintenance
facilities. See Note 11.
24. RELATED PARTY MATTERS
Since 1979 the Company has leased the Little Mountain Airport in Maiden, North Carolina from a
corporation whose stock is owned in part by former officers and directors of the Company and an estate of
which certain former directors are beneficiaries. The facility consists of approximately 68 acres with one
3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square
feet of office space. The operations of Air T, MAC and ATGL were headquartered at this facility. The lease
for this facility provided for monthly rent of $14,862 and expired on January 31, 2018. Operations conducted
at this facility were relocated to a newly constructed, owned facility on July 31, 2017.
During the fiscal year ended March 31, 2016, the Company’s leasing subsidiary acquired interests in two
equipment leases originated by Vantage Financial, LLC (“Vantage”) for aggregate payments to Vantage of
approximately $401,250. The interests in the acquired leases entitle the Company’s leasing subsidiary to
receive lease payments from the third parties leasing the equipment for a specified period. Pursuant to the
agreements between the Company’s leasing subsidiary and Vantage, Vantage’s fees for servicing the
equipment leases for the leasing subsidiary (approximately $1,000) were included in the acquisition
payments. William R. Foudray, a director of the Company, is the Executive Vice President and a co-founder
of Vantage. The amounts paid by the Company’s leasing subsidiary to Vantage to acquire these lease assets
represent approximately 1% of Vantage’s outstanding lease assets at March 31, 2017 and March 31, 2018 and
the servicing income represents less than 1% of Vantage’s annual revenues.
u
Contrail Aviation leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn
Properties, LLC, a corporation whose stock is owned equally by Mr. Joseph Kuhn, Chief Executive Officer of
87
Contrail Aviation, and Mrs. Miriam Kuhn, Chief Financial Officer of Contrail Aviation. The facility consists
of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental
payments of $158,738 for the fiscal year ended March 31, 2018 and $111,189 during the period from July 18,
2016 through March 31, 2017 to Cohen Kuhn Properties, LLC pursuant to such lease. The lease for this
facility expires on June 30, 2021, though the Company has the option to renew the lease for a period of five
years on the same terms. The lease agreement provides that the Company shall be responsible for
maintenance of the leased facilities and for utilities, taxes and insurance. The Company believes that the
terms of such leases are no less favorable to the Company than would be available from an independent third
party.
On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company,
completed the previously announced acquisition of Blue Clay Capital Management, LLC (“Blue Clay
Capital”), an investment management firm based in Minneapolis, Minnesota. In connection with the
transaction, BCCM acquired the assets of, and assumed certain liabilities of, Blue Clay Capital in return for
payment to Blue Clay Capital of $1.00, subject to adjustment for Blue Clay Capital’s net working capital as
of the closing date. Gary S. Kohler, a director of the Company, was the sole owner of Blue Clay Capital.
Mr. Kohler entered into an employment agreement with BCCM to serve as its Chief Investment Officer in
return for an annual salary of $50,000 plus variable compensation based on the management and incentive
fees to be paid to the subsidiary by certain of these investment funds and eligibility to participate in
discretionary annual bonuses. Effective December 27, 2017, Blue Clay Capital Master Fund Ltd., one of the
investment funds managed by Blue Clay Capital prior to the conversion to BCCM Advisors on December 31,
2017, sold approximately 52,000 shares of the Company’s stock.
25.
SUBSEQUENT EVENTS
Management performs an evaluation of events that occur after a balance sheet date but before financial
statements are issued or available to be issued for potential recognition or disclosure of such events in its
financial statements. The Company evaluated subsequent events through the date that these consolidated
financial statements were issued.
On April 6, 2018, the Company entered into an Asset Purchase Agreement with Worthington Aviation Parts,
Inc., a Minnesota Corporation (“Worthington”), primarily engaged in the business of operating, distributing
and selling airplane and aviation parts along with repair services, and Churchill Industries, Inc., a Minnesota
corporation, as guarantor of Worthington’s obligations as disclosed in the Agreement, to acquire substantially
all the assets of, and assume certain liabilities of Worthington in return for payment to Worthington of
$50,000 as earnest money upon execution of the Agreement and a payment of $3,400,000 upon closing of the
Agreement, subject to adjustment for Worthington’s net working capital as of the closing date. In connection
with Amendment No. 2 to the Asset Purchase Agreement, dated May 2, 2018, the cash purchase price was
reduced by $100,000 to $3,300,000. On May 4, 2018, the Company completed the acquisition.
y
t
On May 25, 2018, the Company’s wholly-owned subsidiaries Worthington Acquisition, LLC, Worthington
Aviation, LLC and Worthington MRO, LLC, as Borrowers, completed a loan transaction with MBT pursuant
to which Borrowers obtained from MBT a new revolving loan in the amount of up to $1,500,000 (the
“Revolving Loan”) and new term loan in the amount of $3,400,000 (the “Term Loan” and together with the
Revolving Loan, the “Loans”). The entire loan proceeds were disbursed by MBT on May 25, 2018 and were
used to reduce amounts previously advanced on the Company’s line of credit financing with MBT. Until the
Term Loan is paid in full and certain other conditions met, the Company guaranteed up to $3,000,000 of the
Loans. The guaranty is thereafter reduced to $1,500,000. The interest rate on Term Loan floats at a rate equal
to the one-month LIBOR rate plus 2.5% and the interest rate on the Revolving Loan floats at a rate equal to
the one-month LIBOR rate plus 2.0%. The Loans mature on November 30, 2019, at which time the entire
unpaid balance of the Loans will be due and payable in full. In addition, the loan agreement contains
affirmative and negative covenants and the loans are secured by a first lien on all of the assets of the
Borrowers and a pledge of certain assets held by Stratus Aero Partners, LLC, a subsidiary of the Company.
88
Item 9. Changes in and Disagreements with Accountants on Accounting and Fi
tt
nancial Disclosure.
None
Item 9A. Controls and Procedures.
Disclosure Controls
Our Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, are
responsible for establishing and maintaining our disclosure controls and procedures that are designed to ensure that
information relating to the Company required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is
accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Certifying Officers have
reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules
240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of March 31, 2018. Our
Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018, the Company’s disclosure
controls and procedures were effective. In addition, we believe that the consolidated financial statements in this annual
report fairly present, in all material respects, the Company’s consolidated financial condition as of March 31, 2018,
and consolidated results of its operations and cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles (“GAAP”).
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a15(f) and 15d-15(f). Under the supervision and with the participation
of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the framework in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
This evaluation did not include an evaluation of effectiveness of internal controls over financ
ial reporting with respect
to AirCo and BCCM. As described in Part I, Item 1 of this Form 10-K, we acquired AirCo and BCCM during the
fiscal year ended March 31, 2018. Due to the proximity of these acquisitions to year-end, we excluded them from our
assessment of the effectiveness of our internal control over financial reporting as of March 31, 2018. These acquired
businesses are associated with total assets of $6.5 million and total revenues of $7.6 million included in the
Consolidated Financial Statements of Air T, Inc. and subsidiaries as of and for the year ended March 31, 2018. For
additional information on these acquisitions, see Note 9—Acquisitions, of Item 8, “Financial Statements and
Supplementary Data.
rr
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of our consolidated annual or interim financial
statements will not be prevented or detected on a timely basis. The Company's management conducted an evaluation
of the effectiveness of internal control over financial reporting based on the
Internal Control—Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation
, 2018, the Company's Chief Executive
of the Company's internal control over financial reporting as of March 31
Officer and Chief Financial Officer concluded that, as of such date, the Company's internal control over financial
reporting is effective.
r
tt
Changes in Internal Control Over Financial Reporting
Management previously identified material weaknesses in the Company's internal control over financial reporting as
of March 31, 2017. During the period covered by this report, management took various actions to remediate these
weaknesses.
Revenue recognition for Global Aviation Services:
(cid:120) Management identified a weakness due to a lack of formalized procedures for the documentation of revenue
arrangements, including a lack of procedures requiring service contracts to be signed by all parties, for
89
documentation of oral service contracts and acceptance of parts and services by customers, and to confirm
that invoices are appropriately sent to customers.
Remediation:
(cid:120)
Implemented a control whereby any new customer or new line of business with an existing customer requires
an executed agreement prior to any work being performed;
(cid:120) Developed a detailed accounts receivable aging analysis and bad debt reserve calculation (including a look-
back analysis each quarter) which is reviewed by management.
Revenue recognition for Global Ground Support:
(cid:120) Management identified a weakness in determining when to apply the completed contract method for certain
contracts with the U.S. Government or related prime contractors and determining when contracts for which
we apply the completed contract method are “substantially complete” for revenue recognition purposes.
Remediation:
(cid:120)
(cid:120)
Formalized the Company’s revenue recognition methodology and policy regarding contracts with the U.S.
Government;
Implemented a control whereby the percentage of completion reconciliation and calculations are reviewed on
a quarterly basis.
Debt Covenant Compliance:
(cid:120) Management identified a weakness with respect to internal controls over monitoring compliance with
financial covenants stipulated by our senior secured revolving credit facility.
Remediation:
(cid:120) On a quarterly basis, debt covenants are formally communicated to all business units and compliance is
confirmed with each business unit’s Finance/Accounting Head;
(cid:120) Debt covenant calculations are prepared on a quarterly basis (or as needed if a significant transaction or
economic event were to occur that could cause a potential covenant violation) to assess whether a covenant
violation has occurred. This includes calculations based on actual results and forward-looking calculations
based on projected future operating results. The calculations are reviewed by another member of management
prior to being finalized.
Management believes that these remedial actions have strengthened the Company's internal control over financial
reporting and have fully remediated the material weaknesses in the Company's internal control over financial
reporting.
Delphax:
(cid:120) Management identified the below weaknesses in internal c
ontrol over financial reporting as of March 31,
2017, September 30, 2017 and December 31, 2017, which are attributable to one-time events that are
attributable to the investment in Delphax Technologies, Inc. (“Delphax”). These one-time events have been
t
addressed previously and no longer impact the Company’s internal control framework.
kk
o A lack of an effective internal control environment at Delphax, including insufficient account
reconciliation, financial statement review, and segregation of duties controls, as well as a lack of
procedures for the proper maintenance of records to support balances within Delphax’s financial
statements;
o A lack of effective internal controls for the analysis of the accounting guidance applicable to
recognition of our investments in Delphax. Specifically, our previous conclusions that Delphax was
a VIE and that Air T was Delphax’s primary beneficiary were based in part on considerations which
were not supportable under GAAP; also, our VIE analysis of the general partnership interests and
equity interests in certain investment funds entered into during the quarter ended December 31,
2017;
o An application of an inappropriate methodology for attributing the net income or loss of Delphax to
the non-controlling interests. Specifically, our attribution was based solely on our ownership of the
90
Series B Preferred Stock rather than on a methodology that gave appropriate consideration to all of
Air T’s investments in Delphax and Delphax Canada. As a result of our failure to establish an
appropriate attribution methodology it was necessary to restate our fiscal year 2016 consolidated
financial statements originally included on Form 10-K for the fiscal year ended March 31, 2016 and
our unaudited condensed consolidated financial statements originally included on Form 10-Q for the
periods ended December 31, 2015, June 30, 2016, September 30, 2016, and December 31, 2016; and
o Lack of effective internal control for the analysis of the accounting guidance applicable to the
foreclosure and bankruptcy of Delphax Canada.
Delphax’s operations were significantly curtailed during the fiscal year ended March 31, 2018 due to a loss of
customers, as many of the Delphax’s legacy customers notified the Delphax that they would be taking their legacy
printers offline. In August 2017, Delphax Canada, a subsidiary of Delphax and the primary manufacturing arm of the
Company, declared bankruptcy and the Company foreclosed on all assets as the senior secured lender. Delphax France
submitted to an involuntary liquidation during the fiscal year ended March 31, 2018 and it is anticipated that Delphax
UK will be shut down and cease to exist at some point in the fiscal year ended March 31, 2019. As of March 31, 2018,
remediation is complete.
ff
Changes in Internal Control Over Financial Reporting
Except as noted above with respect to the remediation procedures for the previously identified material weaknesses,
there were no other changes in our internal control over financial reporting during the year ended March 31, 2018 that
have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
None
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information contained under the headings “Proposal 1 - Election of Directors,” “Executive Officers,” “
Committees of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement is incorporated herein by reference.
Audit Committee Report
The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors.
Management has the primary responsibility for the financial statements and the reporting process. The Company’s
independent registered public accounting firm is responsible for expressing an opinion on the conformity of the
Company’s audited financial statements to generally accepted accounting principles.
In this context, the Audit Committee has reviewed and discussed with management and the independent registered
public accounting firm the audited financial statements as of and for the year ended March 31, 2018. The Audit
Committee has discussed with the independent registered public accounting firm the matters required to be discussed
by Auditing Standard No. 1301, Communications with Audit Committee, as adopted by the Public Company
Accounting Oversight Board and currently in effect. In addition, the Audit Committee discussed with the independent
registered public accounting firm the written disclosures and letter required by Public Company Accounting Oversight
Board Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence,
regarding the independent registered public accounting firm’s communication with the Audit Committee concerning
independence and discussed with them their independence from the Company and its management. The Audit
91
Committee also has considered whether the independent registered public accounting firm’s provision of non-audit
services to the Company is compatible with their independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors
that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended
March 31, 2018 for filing with the Securities and Exchange Commission.
a
June 29, 2018
Code of Ethics
AUDIT COMMITTEE
Travis Swenson, Chair
Peter McClung
Andrew J. Stumpf
The Company has adopted a code of ethics applicable to its executive officers and other employees. A copy of the
code of ethics is available on the Company’s internet website at http://www.airt.net. The Company intends to post
waivers of and amendments to its code of ethics applicable to its principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions on its Internet website.
Item 11. Executive Compensation.
The information contained under the heading “Executive Compensation,” “Base Salary,” “Incentive and Bonus
Compensation,” “Retirement and Other Benefits,” “Executive Compensation Tables,” “Employment Agreement and
Retirement Savings Plan” and “Director Compensation” in the Proxy Statement is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the heading “Certain Beneficial Owners of Common Stock,” “Director and
Executive Officer Stock Ownership,” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of March 31, 2018, regarding shares outstanding and available for
issuance under Air T, Inc.’s existing equity compensation plans.(cid:3)
92
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities listed in first
column)
9,182
$
-
9,182
$
10.03
-
10.03
0
-
0
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information contained under the heading “Director Independence” and “Certain Transactions” in the Proxy
Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information contained under the heading “Audit Committee Pre-approval of Auditor Engagements” and “d Audit
Fees” in the Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules no changes made except for year references under 1(a)
1.
Financial Statements
a.
The following are incorporated herein by reference in Item 8 of Part II of this report:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Report of Independent Registered Public Accounting Firm – BDO USA, LLP
Consolidated Balance Sheets as of March 31, 2018 and 2017.
Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2018
and 2017.
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2018 and 2017.
Consolidated Statements of Cash Flows for the years ended March 31, 2018 and 2017.
Notes to Consolidated Financial Statements.
3.
Exhibits
No.
3.1
3.2
Description
Restated Certificate of Incorporation, Certificate of Amendment to Certificate of Incorporation dated
September 25, 2008, Certificate of Designation dated March 26, 2012 and Certificate of Designation
dated December 15, 2014, incorporated by reference to Exhibit 3.1 of the Company’s Quarterly
Report on Form 10 Q for the period ended December 31, 2014 (Commission File No. 001-35476)
Amended and Restated By-laws of the Company, incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K dated November 21, 2012 (Commission File No. 001-
35476)
93
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company’s
Annual Report on Form 10 K for fiscal year ended March 31, 1994 (Commission File No. 001-
35476)
Aircraft Dry Lease and Services Agreement effective as of June 1, 2015 between Federal Express
Corporation and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10 Q for the quarterly period ended June 30, 2015
(Commission File No. 001-35476) (Certain information has been omitted from this exhibit pursuant
to the request for confidential treatment submitted
to the Securities and Exchange Commission. The
omitted information has been separately filed with the Securities and Exchange Commission.)
ff
Premises and Facilities Lease dated November 16, 1995 between Global TransPark Foundation, Inc.
and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.5 to Amendment No. 1 on
Form 10-Q/A to the Company’s Quarterly Report on Form 10-Q for the period ended December 31,
1995 (Commission File No. 001-35476)
Second Amendment to Premises and Facilities Lease dated as of October 15, 2015 between Global
TransPark Foundation, Inc. and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.3
to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016
(Commission File No. 001-35476)
Lease Agreement dated as of December 17, 2013 between R.W.B.C., L.L.C. and Global Ground
Support, LLC, incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form
10-K for the fiscal year ended March 31, 2014 (Commission File No. 001-35476)
Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain Air Cargo, Inc.,
dated June 16, 2006, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10 Q for the period ended June 30, 2006 (Commission File No. 001-35476)
Amendment to Lease Agreement between Little Mountain Airport Associates, Inc. and Mountain
Air Cargo, Inc. dated May 27, 2014 incorporated by reference to Exhibit 10.6 to the Company’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (Commission File No. 001-
35476)
Credit Agreement dated April 1, 2015 between Air T, Inc., Mountain Air Cargo, Inc., Global
Ground Support, LLC, CSA Air, Inc. Global Aviation Services, LLC and Branch Banking and Trust
Company, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8 K
dated April 7, 2015 (Commission File No. 001-35476)
First Amendment dated as of July 15, 2016 among Air T, Inc., Mountain Air Cargo, Inc., Global
Ground Support, LLC, CSA Air, Inc., Global Aviation Services, LLC, Air T Global Leasing, LLC
and Branch Banking and Trust Company, incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K dated July 19, 2016 (Commission File No. 001-35476)
Consolidated Second Amendment dated as of August 9, 2016 among Air T, Inc., Mountain Air
Cargo, Inc., Global Ground Support, LLC, CSA Air, Inc., Global Aviation Services, LLC, Air T
Global Leasing, LLC and Branch Banking and Trust Company, incorporated by reference to Exhibit
10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2016
(Commission File No. 001-35476)
10.10 Securities Purchase Agreement dated as of October 2, 2015 among Delphax Technologies, Inc.,
Delphax Technologies Canada Limited and Air T, Inc., incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10 Q for the period ended December 31, 2015
(Commission File No. 001-35476)
10.11 Securities Purchase Agreement dated as of July 1, 2016 among Sardar Biglari, Biglari Capital Corp.,
The Lion Fund II, L.P. and Air T, Inc., incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K dated July 1, 2016 (Commission File No. 001-35476)
10.12 Asset Purchase Agreement dated as of July 18, 2016 between Contrail Aviation Support, LLC,
Contrail Aviation Support, Inc. and Joseph Kuhn, incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K dated July 19, 2016 (Commission File No. 001-35476)
94
10.13 Credit Agreement dated as of July 18, 2016 between Contrail Aviation Support, LLC and BMO
Harris Bank N.A., incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K dated July 19, 2016 (Commission File No. 001-35476)
10.14 Air T, Inc. 2005 Equity Incentive Plan, incorporated by reference to Annex C to the Company’s
proxy statement on Schedule 14A for its annual meeting of stockholders on September 28, 2005,
filed with the SEC on August 12, 2005* (Commission File No. 001-35476)
10.15 Form of Air T, Inc. Director Stock Option Agreement (2005 Equity Incentive Plan), incorporated by
reference to Exhibit 10.22 to the Company’s Annual Report on Form 10 K for the fiscal year ended
March 31, 2006* (Commission File No. 001-35476)
10.16
*Employment Agreement dated as of March 26, 2014 between the Company and Nicholas J.
Swenson, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8 K
dated March 26, 2014* (Commission File No. 001-35476)
10.17 Form of Air T, Inc. Term Note D in the principal amount of $1,680,000 to Minnesota Bank & Trust,
incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated February
20, 2018 (Commission File No. 001-35476)
10.18 Form of Air T, Inc. Amended and Restated Term Note C in the principal amount of $1,000,000 to
Minnesota Bank & Trust, incorporated by reference to Exhibit 10.3 of the Company’s Current Report on
aa
Form 8-K dated February 20, 2018 (Commissi
on File No. 001-35476)
t
10.19 Form of Air T, Inc. Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Financing Statement, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on
aa
Form 8-K dated February 20, 2018 (Commissi
on File No. 001-35476)
10.20 Form of Guarantor Acknowledgment, incorporated by reference to Exhibit 10.5 of the Company’s
y
Current Report on Form 8-K dated February 20, 2018 (Commission File No. 001-35476)
10.21 Second Loan Agreement between AirCo 1, LLC and Minnesota Bank & Trust dated February 22, 2018,
incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated February
28, 2018 (Commission File No. 001-35476)
10.22 Form of AirCo 1, LLC Airframe Acquisition Note in the principal amount of $5,000,000 to Minnesota
Bank & Trust dated February 22, 2018, incorporated by reference to Exhibit 10.2 of the Company’s
y
Current Report on Form 8-K dated February 28, 2018 (Commission File No. 001-35476)
10.23 Form of AirCo, LLC Pledge Agreement dated February 22, 2018, incorporated by reference to Exhibit
10.3 of the Company’s Current Report on Form 8-K dated February 28, 2018 (Commission File No. 001-
35476)
10.24 Promissory Note and Business Loan Agreement executed as of March 7, 2018 between Contrail Aviation
Support, LLC as Borrower, and Old National Bank as the Lender, incorporated by reference to Exhibit
10.1 of the Company’s Current Report on Form 8-K dated March 8, 2018 (Commission File No. 001-
35476)
10.25 Asset Purchase Agreement by and among Air T, Worthington Aviation Parts, Inc. and Churchill
Industries, Inc. dated as of April 6, 2018, incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated April 12, 2018 (Commission File No. 001-35476)
10.26 *Employment Agreement between Air T, Inc. and Brett Reynolds dated May 7, 2018, incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated May 9, 2018
(Commission File No. 001-35476) (18816904)
10.27 Form of Warrant to Purchase Common Stock, incorporated by reference to Exhibit 10.2 of the
Company’s Current Report on Form 8-K dated May 9, 2018 (Commission File No. 001-35476)
(18816904)
95
10.28 Amendment No. 1 to Asset Purchase Agreement by and among Air T, Inc., Worthington Aviation, LLC,
Worthington Aviation Parts, Inc., and Churchill Industries, Inc., dated as of April 27, 2018, incorporated
by reference to Exhibit 10.2 of the Company’s Current Report
f
(Commission File No. 001-35476) (18818205)
on Form 8-K dated May 9, 2018
10.29 Amendment No. 2 to Asset Purchase Agreement by and among Air T, Inc., Worthington Aviation, LLC,
Worthington Aviation Parts, Inc., and Churchill Industries, Inc., dated as of May 2, 2018, incorporated by
reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K dated May 9, 2018
(Commission File No. 001-35476) (18818205)
10.30 Form of Loan Agreement between Worthington Acquisition, LLC, Worthington Aviation, LLC and
Worthington MRO, LLC, as Borrowers and Minnesota Bank & Trust, incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated May 31, 2018 (Commission File No.
001-35476)
10.31 Form of Revolving Loan Note in the amount of $1,500,000 between Worthington Acquisition, LLC,
Worthington Aviation, LLC and Worthington MRO, LLC, as Borrowers and Minnesota Bank & Trust,
incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated May 31,
2018 (Commission File No. 001-35476)
10.32 Form of Term Loan Note in the principal amount of $3,400,000 between Worthington Acquisition, LLC,
Worthington Aviation, LLC and Worthington MRO, LLC, as Borrowers to Minnesota Bank & Trust,
incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K dated May 31,
2018 (Commission File No. 001-35476)
10.33 Form of Stratus Aero Partners, LLC Pledge Agreement, incorporated by reference to Exhibit 10.4 of the
Company’s Current Report on Form 8-K dated May 31, 2018 (Commission File No. 001-35476)
10.34 Form of Air T, Inc. Guaranty, incorporated by reference to Exhibit 10.5 of the Company’s Current Report
on Form 8-K dated May 31, 2018 (Commission File No. 001-35476)
21.1
23.1
31.1
31.2
32.1
32.2
101
List of subsidiaries of the Company (filed herewith)
f
Consent of BDO USA, LLP (filed herewith)
Section 302 Certification of Chief Executive Officer (filed herewith)
Section 302 Certification of Chief Financial Officer (filed herewith)
Section 1350 Certification of Chief Executive Officer (filed herewith)
Section 1350 Certification of Chief Financial Officer (filed herewith)
The following financial information from the Annual Report on Form 10-K for the year ended
March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the
Consolidated Statements of Income and Comprehensive Income, (ii) the Consolidated Balance
Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of
Stockholders Equity, and (v) the Notes to the Consolidated Financial Statements (filed herewith).
__________________
* Management compensatory plan or arrangement required to be filed as an exhibit to this report.
Item 16.
Form 10-K Summary
We have chosen not to include an optional summary of the information required by this Form 10-K. For a reference to
the information in this Form 10-K, investors should refer to the Table of Contents to this Form 10-K.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
By:
AIR T, INC.
/s/ Nick Swenson
Nick Swenson, Chairman, President and
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Brett Reynolds
Brett Reynolds, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By:
/s/ Seth Barkett
Seth Barkett, Director
By:
/s/ Raymond Cabillot
Raymond Cabillot, Director
Date: June 29, 2018
Date: June 29, 2018
Date: June 29, 2018
Date: June 29, 2018
By:
/s/ William R. Foudray
William R. Foudray, Director
Date: June 29, 2018
By:
/s/ Gary S. Kohler
Gary S. Kohler, Director
By:
/ s/ Peter McClung
Peter McClung, Director
By:
/s/ J. Andrew Reeves
J. Andrews Reeves, Director
By:
By:
/s/ Andrew Stumpf
Andrew Stumpf, Director
/s/ Travis Swenson
Travis Swenson, Director
Date: June 29, 2018
Date: June 29, 2018
Date: June 29, 2018
Date: June 29, 2018
Date: June 29, 2018
BOARD OF DIRECTORS
EXECUTIVE OFFICERS CORPORATE INFORMATION
Seth G. Barkett
Portfolio Manager
Groveland Capital, LLC,
an investment fund
Nicholas J. Swenson
Chief Executive Officer and
President
CORPORATE OFFICE
5930 Balsom Ridge Road
Denver, NC 28037
(828) 464-8741
Brett Reynolds
Senior Vice President,
Chief Financial Officer,
and Secretary
INDEPENDENT AUDITORS
BDO USA, LLP
Charlotte, North Carolina
BANK
Minnesota Bank and Trust
Edina, Minnesota
TRANSFER AGENT
American Stock Transfer & Trust Company
New York, New York
STOCK MARKET INFORMATION
Nasdaq Capital Market
Trading Symbol: AIRT
Raymond E. Cabillot
Chief Executive Officer
Farnam Street Capital, Inc. and
Farnam Street Partners, LP,
a private investment partnership
William R. Foudray
Executive Vice President
Vantage Financial, LLC,
an equipment leasing and
finance company
Gary S. Kohler
Chief Investment Officer
BCCM, Inc, an Air T owned
investment management firm
Peter McClung
Chief Executive Officer
The Jump, a social network company
John A. Reeves
Airline Executive, retired
Andrew J. Stumpf
Partner
Storm Lake Capital, LLC,
a private investment group
Nicholas J. Swenson
Chairman of the Board and
Chief Executive Officer - Air T, Inc.
Travis Swenson
Senior Managing Director
CBRE, Inc., a commercial
real estate firm
Air T, Inc.
5930 Balsom Ridge Road
Denver, NC 28037