10-Q 1 airt-20201231x10q.htm 10-Q Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2020
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____to _____
Commission File Number 001-35476
Air T, Inc.
(Exact name of registrant as specified in its charter)
Delaware52-1206400
(State or other jurisdiction of incorporation or organization)(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 each classTrading Symbol(s)Name of each exchange on which registered
Common StockAIRTNASDAQ Global Market
Alpha Income Preferred Securities (also referred to as 8% Cumulative Capital Securities) (“AIP”)AIRTPNASDAQ Global Market
Warrant to purchase AIPAIRTWNASDAQ Global Market

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.
Yes x                    No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted 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 such files).
Yes x                    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. 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 filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐                    No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common StockCommon Shares, par value of $.25 per share
Outstanding Shares at January 29, 20212,881,853







AIR T, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page
PART I
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2020 and March 31, 2020
Item 5.
Exhibit Index
Certifications
Interactive Data Files

3





Item 1.    Financial Statements
AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(in thousands, except (loss) income per share number)Three Months Ended
December 31,
Nine Months Ended
December 31,
2020201920202019
Operating Revenues:
Overnight air cargo$16,322 $18,706 $49,789 $56,771 
Ground equipment sales20,769 15,94948,656 40,939 
Commercial jet engines and parts18,078 38,53628,886 72,665 
Corporate and other6501091,063 806 
55,819 73,300128,394 171,181 
Operating Expenses:
Overnight air cargo14,505 16,806 43,906 51,031 
Ground equipment sales14,966 12,960 36,923 33,049 
Commercial jet engines and parts16,086 29,308 22,861 48,644 
General and administrative8,303 9,550 24,276 28,670 
Depreciation and amortization886 975 2,644 4,610 
Write-down on inventory— — 535 — 
Asset impairment— 129 18 
Loss (Gain) on sale of property and equipment(23)(26)
54,751 69,580 131,275 165,996 
Operating Income (Loss) from continuing operations1,068 3,720 (2,881)5,185 
Non-operating Income (Expense):
Other-than-temporary impairment loss on investments— (1,095)— (2,305)
Interest expense(1,172)(1,227)(3,413)(4,298)
Gain on settlement of bankruptcy— — — 4,527 
Gain (Loss) from equity method investments510 (282)(546)(636)
Other1,039 81 2,125 (75)
377 (2,523)(1,834)(2,787)
Income (Loss) from continuing operations before income taxes1,445 1,197 (4,715)2,398 
Income Taxes (Benefit) Expense(318)616 (2,165)(52)
Net Income (Loss) from continuing operations1,763 581 (2,550)2,450 
Loss from discontinued operations, net of tax— — — (70)
(Loss) Gain on sale of discontinued operations, net of tax— (222)8,137 
Net Income (Loss)1,763 359 (2,546)10,517 
Net Loss (Income) Attributable to Non-controlling Interests$335 $(789)$884 $(3,449)
Net Income (Loss) Attributable to Air T, Inc. Stockholders$2,098 $(430)$(1,662)$7,068 
Income (Loss) from continuing operations per share (Note 6)
Basic$0.73 $(0.07)$(0.58)$(0.36)
Diluted$0.73 $(0.07)$(0.58)$(0.36)
(Loss) Income from discontinued operations per share (Note 6)
Basic$— $(0.07)$— $2.93 
Diluted$— $(0.07)$— $2.93 
Income (Loss) per share (Note 6)
Basic$0.73 $(0.14)$(0.58)$2.57 
Diluted$0.73 $(0.14)$(0.58)$2.57 
Weighted Average Shares Outstanding:
Basic2,882 2,973 2,882 2,752 
Diluted2,887 2,973 2,882 2,756 
See notes to condensed consolidated financial statements.
4





AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

Three Months Ended
December 31,
Nine Months Ended
December 31,
(In Thousands)2020201920202019
Net Income (Loss)$1,763 $359 $(2,546)$10,517 
Foreign currency translation loss(22)(53)(157)(29)
Unrealized gain (loss) on interest rate swaps, net of tax 71 94 100 (170)
Reclassification of interest rate swaps into earnings(1)— (17)— 
Total Other Comprehensive Income (Loss)48 41 (74)(199)
Total Comprehensive Income (Loss)1,811 400 (2,620)10,318 
Comprehensive Loss (Income) Attributable to Non-controlling Interests335 (789)884 (3,464)
Comprehensive Income (Loss) Attributable to Air T, Inc. Stockholders$2,146 $(389)$(1,736)$6,854 
See notes to condensed consolidated financial statements.
5





AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share amounts)December 31, 2020March 31, 2020
ASSETS
Current Assets:
Cash and cash equivalents $43,352 $5,952 
Marketable securities2,234 1,677 
Restricted cash5,473 9,619 
Restricted investments736 1,085 
Accounts receivable, net of allowance for doubtful accounts of $1,093 and $680
19,448 13,077 
Income tax receivable3,451 1,174 
Inventories, net67,671 60,623 
Other current assets5,344 5,279 
Total Current Assets147,709 98,486 
Assets on lease or held for lease, net of accumulated depreciation of $1,295 and $6,526
10,225 27,945 
Property and equipment, net of accumulated depreciation of $4,785 and $4,319
7,588 5,272 
Right-of-use assets7,895 8,116 
Equity method investments4,443 5,208 
Goodwill4,227 4,227 
Other assets3,151 2,173 
Total Assets$185,238 $151,427 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable$7,950 10,864 
Accrued expenses and other (Note 4)11,968 13,024 
Current portion of long-term debt42,388 42,684 
Short-term lease liability1,357 1,174 
Total Current Liabilities63,663 67,746 
Long-term debt85,019 43,136 
Deferred income tax liabilities, net609 579 
Long-term lease liability7,176 7,473 
Other non-current liabilities 1,289 1,402 
Total Liabilities157,756 120,336 
Redeemable non-controlling interest5,554 6,080 
Commitments and contingencies (Note 15)
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, 3,022,745 shares issued, 2,881,853 shares outstanding
756 756 
Treasury stock, 140,892 shares at $18.58
(2,617)(2,617)
Additional paid-in capital1,287 2,636 
Retained earnings22,105 23,768 
Accumulated other comprehensive loss(594)(537)
Total Air T, Inc. Stockholders' Equity20,937 24,006 
Non-controlling Interests991 1,005 
Total Equity21,928 25,011 
Total Liabilities and Equity$185,238 $151,427 

See notes to condensed consolidated financial statements.
6





AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)Nine Months Ended
December 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income$(2,546)$10,517 
Loss from discontinued operations, net of income tax— 70 
Gain on sale of discontinued operations, net of income tax(4)(8,137)
Net (loss) income from continuing operations(2,550)2,450 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization2,644 4,640 
Impairment of investment— 2,305 
Profit from sale of assets on lease(26)(3,846)
Gain on settlement of bankruptcy— (4,527)
Other694 726 
Change in operating assets and liabilities:
Accounts receivable(6,784)(4,708)
Inventories6,118 (7,866)
Accounts payable(2,913)1,753 
Accrued expenses(1,056)1,106 
Other(2,788)(2,925)
Net cash used in operating activities - continuing operations(6,661)(10,892)
Net cash provided by operating activities - discontinued operations1,201 
Net cash used in operating activities(6,657)(9,691)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities(659)(1,103)
Sale of marketable securities2,445 631 
Proceeds from sale of assets on lease1,900 16,956 
Acquisition of businesses, net of cash acquired— (500)
Investment in unconsolidated entities— (2,811)
Capital expenditures related to property & equipment(3,415)(1,017)
Capital expenditures related to assets on lease or held for lease(124)(39,885)
Other(455)157 
Net cash used in investing activities - continuing operations(308)(27,572)
Net cash provided by investing activities - discontinued operations— 20,174 
Net cash used in investing activities(308)(7,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit47,886 133,068 
Payments on lines of credit(54,738)(100,884)
Proceeds from term loan59,277 27,449 
Payments on term loan(18,176)(36,187)
Proceeds from Payroll Protection Program loan ("PPP loan")8,215 — 
Proceeds received from issuance of Trust Preferred Securities ("TruPs")6,041 
Other(2,082)(3,323)
Net cash provided by financing activities - continuing operations40,383 26,164 
Effect of foreign currency exchange rates on cash and cash equivalents(164)(10)
NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH33,254 9,065 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD15,571 12,540 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD$48,825 $21,605 
See notes to condensed consolidated financial statements.
7





AIR T, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)


(In Thousands)Common StockTreasury StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Non-controlling
Interests
Total
Equity
SharesAmountSharesAmount
Balance, March 31, 20192,022 $506 — $— $2,866 $21,191 $(205)$(1,000)$23,358 
Net income*— — — — — 1,782 — 2,034 3,816 
Repurchase of Common Stock(17)(4)— — — (122)— — (126)
Stock Split1,010 252 — — (252)— — — — 
Issuance of Debt - Trust Preferred Securities— — — — — (4,000)— — (4,000)
Issuance of Warrants— — — — — (840)— — (840)
Adoption of ASC - Leasing— — — — — (41)— — (41)
Unrealized loss on interest rate swaps, net of tax— — — — — — (176)— (176)
Foreign currency translation (loss) gain— — — — — — (30)12 (18)
Adjustment to fair value of redeemable non-controlling interests— — — — (985)— — — (985)
Balance, June 30, 20193,015 $754 $— $— $1,629 $17,970 $(411)$1,046 $20,988 
Net income (loss)*— — — — — 5,715 — (17)5,698 
Repurchase of Common Stock— — — (75)— — (73)
Foreign currency translation gain— — — — — — 38 41 
Adjustment to fair value of redeemable non-controlling interest— — — — 781 — — — 781 
Unrealized loss on interest rate swaps, net of tax— — — — — — (88)— (88)
Balance, September 30, 20193,023 $756 $— $— $2,410 $23,610 $(461)$1,032 $27,347 
Net loss*— — — — — (430)— (19)(449)
Repurchase of Common Stock— — 110 (2,157)— — — — (2,157)
Foreign currency translation loss— — — — — — (53)— (53)
Adjustment to fair value of redeemable non-controlling interest— — — — (1,381)— — — (1,381)
Unrealized gain on interest rate swaps, net of tax— — — — — — 94 — 94 
Balance, December 31, 20193,023 $756 $110 $(2,157)$1,029 $23,180 $(420)$1,013 $23,401 



(In Thousands)Common StockTreasury StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Non-controlling
Interests
Total
Equity
SharesAmountSharesAmount
Balance, Balance, March 31, 20203,023 $756 $141 $(2,617)$2,636 $23,768 $(537)$1,005 $25,011 
Net loss*— — — — — (841)— (5)(846)
Unrealized loss on interest rate swaps, net of tax— — — — — — (26)— (26)
Foreign currency translation (loss)— — — — — — (67)— (67)
Adjustment to fair value of redeemable non-controlling interest— — — — 429 — — — 429 
Balance, June 30, 20203,023 756 141 (2,617)3,065 22,927 (630)1,000 24,501 
Net loss*— — — — — (2,920)— (8)(2,928)
Foreign currency translation (loss)— — — — — — (68)— (68)
Adjustment to fair value of redeemable non-controlling interest— — — — (890)— — — (890)
Unrealized gain on interest rate swaps, net of tax— — — — — — 55 — 55 
Balance, September 30, 20203,023 756 141 (2,617)2,175 20,007 (643)992 20,670 
Net income (loss)*— — — — — 2,098 — (1)2,097 
Foreign currency translation (loss)— — — — — — (22)— (22)
Adjustment to fair value of redeemable non-controlling interest— — — — (888)— — — (888)
Unrealized gain on interest rate swaps, net of tax— — — — — — 71 — 71 
Balance, December 31, 20203,023 $756 $141 $(2,617)$1,287 $22,105 $(594)$991 $21,928 

*Excludes amount attributable to redeemable non-controlling interest in Contrail.
See notes to condensed consolidated financial statements.
8





AIR T, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Financial Statement Presentation
The condensed consolidated financial statements of Air T, Inc. (“Air T”, the “Company”, “we”, “us” or “our”) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results for the periods presented have been made.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2020. The results of operations for the period ended December 31, 2020 are not necessarily indicative of the operating results for the full year.
Certain reclassifications have been made to the prior period amounts to conform to the current presentation.
Discontinued Operations
On September 30, 2019, the Company completed the sale of Global Aviation Services, LLC ("GAS"). The results of operations of GAS are reported as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended December 31, 2020 and 2019. Refer to Footnote 3 - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Liquidity
Contrail Aviation Support, LLC ("Contrail") is a subsidiary of the Company in the Commercial Jet Engines and Parts segment. The Contrail Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth of $15 million.
On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with Old National Bank ("ONB"). The material changes within the Third Amendment are: (a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021; and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million (the “Contrail Main Street Loan”) for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve (the "Fed"). The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020. The loan proceeds are to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines. The proceeds will also be used to pay down the Contrail Revolver. The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement.

The principal terms of the Contrail Main Street Loan ("Term Note G") are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing November 24, 2021; (b) 15% principal payments plus 15% of the amount of capitalized interest are due on November 24, 2023 and 2024, with the remainder due on the loan maturity date – November 24, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains affirmative covenants as to cash flow coverage and tangible net worth. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of Contrail.

AirCo 1, LLC ("AirCo 1") is a wholly-owned subsidiary of AirCo, LLC, which is a wholly-owned subsidiary of Stratus Aero Partners LLC, which is a wholly-owned subsidiary of the Company in the Commercial Jet Engines and Parts segment. On December 11, 2020, AirCo 1 and Park State Bank (“PSB”), entered into a loan in the aggregate amount of $6.2 million (the “AirCo 1 Main Street Loan”) for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the Fed. The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020. The loan proceeds were used to pay off the AirCo 1 revolving line of credit with Minnesota Bank & Trust ("MBT").

The principal terms of the AirCo 1 Main Street Loan ("Term Loan - PSB") are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing December 11, 2021; (b) 15% principal payments (including any capitalized interest accrued thereon) are due on December 11, 2023, and 2024, with the remainder due on the loan maturity date – December 11, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains an affirmative covenant relating to collateral valuation. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of AirCo 1 and a pledge of AirCo’s membership interest in AirCo 1.

The revolving line of credit at Air T with MBT has a due date or expires within the next twelve months. We are currently seeking to refinance this obligation prior to August 31, 2021; however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance this obligation, that the terms of such refinancing would be as favorable as the terms of our existing credit facility.

In April 2020, the Company obtained loans under the PPP, as authorized by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs. The Company will apply to MBT for forgiveness of the PPP Loan, however, forgiveness is not fully assured. The Company believes it is probable that the cash on hand (including that obtained from the PPP), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced and other recent financings, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
COVID-19 Pandemic
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. Even though the Company undertook measures to attempt to limit the effect of the pandemic and its impact on the Company, the Company continued to experience a decrease in revenues during the third fiscal quarter and the month of January. The extent to which the COVID-19 pandemic continues to impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, including the effectiveness and rollout of vaccines and the direct and indirect economic effects of the pandemic and containment measures, among others.
Financial Instruments Designated for Trading
Except for short sales of equity securities, the Company accounts for all other financial instruments (including derivative instruments) designated for trading in accordance with ASC 815. All changes in the fair value of the financial instruments designed for trading are recognized in earnings as they occur. Further, all gains and losses on derivative instruments designated for trading are presented net on the condensed consolidated Statements of Income (Loss). The fair value of derivative instruments designated for trading in a gain position are recorded in Other Current Assets and the fair value of derivative instruments designed for trading in a loss position are recorded in Accrued Expenses and Other on the condensed consolidated Balance Sheets.

The Company accounts for short sales of equity securities in accordance with ASC 942 and ASC 860. The obligations incurred in short sales are reported in Accrued Expenses and Other on the condensed consolidated Balance Sheets. They are subsequently measured at fair value through the income statement at each reporting date with gains and losses on securities. Interest on the short positions are accrued periodically and reported as interest expense. The market value of the Company’s equity securities and cash held by the broker are used as collateral against any outstanding margin account borrowings for purposes of short selling equities. This collateral is recorded in Other Current Assets on the condensed consolidated Balance Sheets.

The Company reports all cash receipts and payments resulting from the purchases and sales of securities, loans, and other assets that are acquired specifically for resale as operating cash flows.
Recently Adopted Accounting Pronouncements
 
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables. The standard requires an entity to
estimate its lifetime “expected credit loss” for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The Company adopted this standard on April 1, 2020. As of December 31, 2020, the standard did not have a material impact on the Company's condensed consolidated financial statements and disclosures.

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 Company adopted this amendment on April 1, 2020. As of December 31, 2020, the amendment did not have a material impact on the Company's condensed consolidated financial statements and disclosures.

In October 2018, the FASB updated the Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities of the Accounting Standards Codification. The amendments in this update affect reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall. Indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The Company adopted this amendment on April 1, 2020. As of December 31, 2020, the amendment did not have a material impact on the Company's condensed consolidated financial statements and disclosures.

In December 2019, the FASB updated the Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes of the Accounting Standards Codification. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The amendments in this Update simplify the accounting for income taxes by removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income), among other changes. The Company early adopted this amendment as of April 1, 2020. The amendment resulted in an immaterial impact to its condensed consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements

In January 2020, the FASB updated the Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The Company is currently evaluating the impact of this amendment on its condensed consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04- Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Further, in accordance with the amendments in this Update, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of this ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this amendment on our contracts, hedging relationships, and other transactions affected by reference rate reform.
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2.    Revenue Recognition
Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less. As a result, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price, to expense costs incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations.
The following is a description of the Company’s performance obligations:

Type of RevenueNature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms
Product SalesThe Company generates revenue from sales of various distinct products such as parts, aircraft equipment, printing equipment, jet engines, airframes, and scrap metal to its customers. A performance obligation is created when the Company accepts an order from a customer to provide a specified product. Each product ordered by a customer represents a performance obligation.

The Company recognizes revenue when obligations under the terms of the contract are satisfied; generally, this occurs at a point-in-time upon shipment or when control is transferred to the customer. Transaction prices are based on contracted terms, which are at fixed amounts based on standalone selling prices. While the majority of the Company's contracts do not have variable consideration, for the limited number of contracts that do, the Company records revenue based on the standalone selling price less an estimate of variable consideration (such as rebates, discounts or prompt payment discounts). The Company estimates these amounts based on the expected incentive amount to be provided to customers and reduces revenue accordingly. Performance obligations are short-term in nature and customers are typically billed upon transfer of control. The Company records all shipping and handling fees billed to customers as revenue.

The terms and conditions of the customer purchase orders or contracts are dictated by either the Company’s standard terms and conditions or by a master service agreement or by the contract.
Support ServicesThe Company provides a variety of support services such as aircraft maintenance, printer maintenance, and short-term repair services to its customers. Additionally, the Company operates certain aircraft routes on behalf of FedEx. A performance obligation is created when the Company agrees to provide a particular service to a customer. For each service, the Company recognizes revenues over time as the customer simultaneously receives the benefits provided by the Company's performance. This revenue recognition can vary from when the Company has a right to invoice to the output or input method depending on the structure of the contract and management’s analysis.

For repair-type services, the Company records revenue over-time based on an input method of costs incurred to total estimated costs. The Company believes this is appropriate as the Company is performing labor hours and installing parts to enhance an asset that the customer controls. The vast majority of repair-services are short term in nature and are typically billed upon completion of the service.

Some of the Company’s contracts contain a promise to stand ready as the Company is obligated to perform certain maintenance or administrative services. For most of these contracts, the Company applies the 'as invoiced' practical expedient as the Company has a right to consideration from the customer in an amount that corresponds directly with the value of the entity's performance completed to date. A small number of contracts are accounted for as a series and recognized equal to the amount of consideration the Company is entitled to less an estimate of variable consideration (typically rebates). These services are typically ongoing and are generally billed on a monthly basis.
In addition to the above type of revenues, the Company also has Leasing Revenue, which is in scope under Topic 842 (Leases) and out of scope under Topic 606 and Other Revenues (Freight, Management Fees, etc.) which are immaterial for disclosure under Topic 606.
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The following table summarizes disaggregated revenues by type (in thousands):

Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
Product Sales
Air Cargo$4,970 $6,014 $15,013 $18,108 
Ground equipment sales20,365 15,640 47,935 40,132 
Commercial jet engines and parts16,471 35,463 23,450 59,851 
Corporate and other73 106 72 
Support Services
Air Cargo11,342 12,644 34,751 38,572 
Ground equipment sales109 161 193 370 
Commercial jet engines and parts1,191 797 3,771 3,804 
Corporate and other47 116 72 383 
Leasing Revenue
Air Cargo— — — — 
Ground equipment sales39 58 110 111 
Commercial jet engines and parts373 2,245 1,537 8,901 
Corporate and other36 36 178 117 
Other
Air Cargo10 48 25 91 
Ground equipment sales256 90 418 326 
Commercial jet engines and parts43 31 128 109 
Corporate and other494 (46)707 234 
Total$55,819 $73,300 $128,394 $171,181 

See Note 12 for the Company's disaggregated revenues by geographic region and Note 13 for the Company’s disaggregated revenues by segment. These notes disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Contract Balances and Costs

Contract liabilities relate to deferred income and advanced customer deposits with respect to product sales. The following table presents outstanding contract liabilities as of April 1, 2020 and December 31, 2020 and the amount of contract liabilities that were recognized as revenue during the nine-month period ended December 31, 2020 (in thousands):

Outstanding contract liabilitiesOutstanding contract liabilities as of April 1, 2020
Recognized as Revenue
As of December 31, 2020$1,661 
As of April 1, 20201,853 
For the nine months ended December 31, 2020785 


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3.    Discontinued Operations

On September 30, 2019, the Company completed the sale of 100% of the equity ownership in the Company’s wholly-owned subsidiary, Global Aviation Services, LLC ("GAS") to PrimeFlight Aviation Services, Inc., a Delaware corporation. The agreement included a purchase price of $21 million as well as an earn-out provision of $4 million if certain performance metrics were achieved by March 31, 2020. Those metrics were not achieved per the final settlement statement received during the second quarter ended September 30, 2020. The Company received approximately $20.5 million of total proceeds at closing after the initial net working capital adjustment. The Company recognized a pre-tax gain on the sale of GAS of approximately $10.8 million with a tax impact of $2.4 million for a net of tax gain of $8.4 million in the second quarter of 2019.

Summarized results of operations of GAS for the three and nine months ended December 31, 2020 and 2019 through the date of disposition are as follows (in thousands):


Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
Net sales$— $— $— $16,637 
Operating Income (Expense)— — (17,319)
Gain/(Loss) from discontinued operations before income taxes— — (682)
Income tax benefit— — — (612)
Gain/(Loss) from discontinued operations, net of tax$— $— $$(70)

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4.     Accrued Expenses


(in thousands)December 31, 2020March 31, 2020
Salaries, wages and related items$4,723 $3,616 
Profit sharing and bonus2,111 3,349 
Other5,134 6,059 
Total$11,968 $13,024 

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5.    Income Taxes

During the three-month period ended December 31, 2020, the Company recorded $0.3 million in income tax benefit at an effective tax rate ("ETR") of (22.0)%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for the Company's captive insurance company subsidiary ("SAIC") under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the three-month period ended December 31, 2019, the Company recorded $0.6 million in income tax benefit at an ETR of 51.5%. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2019 were the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the nine-month period ended December 31, 2020, the Company recorded $2.2 million in income tax benefit at an ETR of 45.9%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b) and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the nine-month period ended December 31, 2019, the Company recorded $0.1 million in income tax benefit which resulted in an effective tax rate of (2.2)%. The primary factors contributing to the difference between the federal statutory rate and the Company's effective tax rate for the nine-month period ended December 31, 2019 were related to the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.



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6.    Net Earnings Per Share
Basic earnings per share has been calculated by dividing net income (loss) attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. The computation of basic and diluted earnings per common share is as follows (in thousands, except for per share figures):

Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
Net income (loss) from continuing operations$1,763 $581 $(2,550)$2,450 
Net loss (income) from continuing operations attributable to non-controlling interests335 (789)884 (3,449)
Net income (loss) from continuing operations attributable to Air T, Inc. Stockholders2,098 (208)(1,666)(999)
Income (Loss) from continuing operations per share:
Basic$0.73 $(0.07)$(0.58)$(0.36)
Diluted$0.73 $(0.07)$(0.58)$(0.36)
Antidilutive shares excluded from computation of loss per share from continuing operations— 
Loss from discontinued operations, net of tax— — — (70)
(Loss) Gain on sale of discontinued operations, net of tax— (222)8,137 
(Loss) Income from discontinued operations attributable to Air T, Inc. stockholders— (222)8,067 
(Loss) Income from discontinued operations per share:
Basic$— $(0.07)$— $2.93 
Diluted$— $(0.07)$— $2.93 
Antidilutive shares excluded from computation of loss per share from discontinued operations— — — 
Income (Loss) per share:
Basic$0.73 $(0.14)$(0.58)$2.57 
Diluted$0.73 $(0.14)$(0.58)$2.57 
Antidilutive shares excluded from computation of loss per share— — 
Weighted Average Shares Outstanding:
Basic2,882 2,973 2,882 2,752 
Diluted2,887 2,973 2,882 2,756 

On June 10, 2019, the Company effected a three-for-two stock split of its common stock in the form of a 50% stock dividend to stockholders of record as of June 4, 2019. All share and earnings per share information have been retroactively adjusted to reflect the stock split and the incremental par value of the newly-issued shares was recorded with the offset to additional paid-in capital.

With respect to our December 31, 2020 Quarterly Report on Form 10-Q, the effect of the stock split was recognized retroactively in the stockholders’ equity accounts in the condensed consolidated Balance Sheets, and in all share data in the condensed consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.


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7.    Investments in Securities and Derivative Instruments
As part of the Company’s interest rate risk management strategy, the Company, from time to time, uses derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings (Air T Term Note A and Term Note D). To meet these objectives, the Company entered into interest rate swaps with notional amounts consistent with the outstanding debt to provide a fixed rate of 4.56% and 5.09%, respectively, on Term Notes A and D. The swaps mature in January 2028. As of August 1, 2018, these swap contracts are designated as effective cash flow hedging instruments in accordance with ASC 815. The effective portion of changes in the fair value on these instruments is recorded in other comprehensive income and is reclassified into the condensed consolidated statement of income as interest expense in the same period in which the underlying hedged transaction affects earnings. The interest rate swaps are considered Level 2 fair value measurements. As of December 31, 2020 and March 31, 2020, the fair value of the interest-rate swap contracts was a liability of $0.8 million and $0.9 million, respectively, which is included within other non-current liabilities in the condensed consolidated balance sheets. During the three and nine months ended December 31, 2020, the Company recorded a gain of approximately $71.0 thousand and $0.1 million, net of tax, in the condensed consolidated statement of comprehensive income (loss) for changes in the fair value of the instruments.
The Company may, from time to time, employ trading strategies designed to profit from market anomalies and opportunities it identifies. Management uses derivative financial instruments to execute those strategies, which may include options, and futures contracts. These derivative instruments are priced using publicly quoted market prices and are considered Level 1 fair value measurements. During the three months ended December 31, 2020, related to these derivative instruments, the Company had a gross gain aggregating to $0.1 million and a gross loss aggregating to $1.6 thousand, respectively. During the nine months ended December 31, 2020, related to these derivative instruments, the Company had a gross gain aggregating to $0.8 million and a gross loss aggregating to $23.7 thousand, respectively.
The following table presents these derivative instruments at fair value in the condensed consolidated balance sheets as of December 31, 2020 and March 31, 2020 (in thousands):
(In thousands)December 31, 2020March 31, 2020
Assets:
Exchange-traded options & futures
Other current assets$76 $
Total assets76 
Liabilities:
Exchange-traded options & futures
Accrued Expenses and other36 
Total liabilities$$36 

The Company also invests in exchange-traded marketable securities and accounts for that activity in accordance with ASC 321, Investments- Equity Securities. Marketable equity securities are carried at fair value, with changes in fair market value included in the determination of net income. The fair market value of marketable equity securities is determined based on quoted market prices in active markets. During the three months ended December 31, 2020, the Company had a gross unrealized gain aggregating to $0.8 million and a gross unrealized loss aggregating to $0.3 million. During the nine months ended December 31, 2020, the Company had a gross unrealized gain aggregating to $1.6 million and a gross unrealized loss aggregating to $1.1 million. These unrealized gains and losses are included in Other Income (Loss) on the condensed consolidated Statement of Income.

The market value of the Company’s equity securities and cash held by the broker are periodically used as collateral against any outstanding margin account borrowings. As of December 31, 2020 and 2019, the Company had outstanding borrowings of $0.7 million and $0.4 million under its margin account, respectively, which is reflected in accrued expenses and other on the condensed consolidated balance sheets. As of December 31, 2020 and 2019, the Company had cash margin balances related to exchange-traded equity securities and securities sold short of $1.3 million and $0.3 million, respectively, which is reflected in other current assets on the condensed consolidated balance sheets. The interest rate on margin account borrowings was 9.5% as of December 31, 2020.

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8.    Equity Method Investments
The Company’s investment in Insignia Systems, Inc. (“Insignia”) is accounted for under the equity method of accounting. The Company has elected a three-month lag upon adoption of the equity method. On December 31, 2020, Insignia effected a seven-for-one reverse stock split of its outstanding common stock. As such, as of December 31, 2020, the number of Insignia's shares owned by the Company was adjusted to 0.5 million, representing approximately 28% of the outstanding shares. The Company recorded approximately $0.2 million and $1.0 million as its share of Insignia’s net loss for the three and nine months ended September 30, 2020 along with a basis difference adjustment of approximately $24.0 thousand and $72.0 thousand, respectively. The Company's net investment basis in Insignia is $0.2 million as of December 31, 2020.
On November 8, 2019, the Company made an investment of $2.8 million to purchase a 19.90% ownership stake in Cadillac Casting, Inc. ("CCI"), subsequently reduced to a 18.98% ownership stake as of September 30, 2020. The Company accounts for this investment under the equity method of accounting. Due to the differing fiscal year-ends, the Company has elected a three-month lag to record the CCI investment at cost, with a basis difference of $0.3 million. The Company recorded a gain of $0.6 million and $0.3 million as its share of CCI's net income for the three and nine months ended September 30, 2020, along with a basis difference adjustment of $12.0 thousand and $37.0 thousand, respectively. The Company's net investment basis in CCI is $3.5 million as of December 31, 2020.
Summarized unaudited financial information for the Company's equity method investees for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands):

Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Revenue$27,327 $25,325 $61,402 $85,546 
Gross Profit3,231 1,071 5,196 4,688 
Operating income (loss)891 (2,374)(3,496)(5,746)
Net income (loss)2,242 (2,556)(2,075)(6,528)
Net income (loss) attributable to Air T, Inc. stockholders$355 $(285)$(705)$(749)

9.    Inventories
Inventories consisted of the following (in thousands):
December 31,
2020
March 31,
2020
Ground equipment manufacturing:
Raw materials$6,356 $4,192 
Work in process2,564 2,731 
Finished goods1,809 1,725 
Corporate and Other:
Raw materials558 464 
Finished goods890 910 
Commercial jet engines and parts56,405 51,084 
Total inventories$68,582 $61,106 
Reserves(911)(483)
Total inventories, net of reserves$67,671 $60,623 


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10.     Leases
The Company has operating leases for the use of real estate, machinery, and office equipment. The majority of our leases have a lease term of 2 to 5 years; however, we have certain leases with longer terms of up to 30 years. Many of our leases include options to extend the lease for an additional period.
The lease term for all of the Company’s leases includes the non-cancellable period of the lease, plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor that is considered likely to be exercised.
Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments. Variable payments are typically operating costs associated with the underlying asset and are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Our leases do not contain residual value guarantees.
The Company has elected to combine lease and non-lease components as a single component and not to recognize leases on the balance sheet with an initial term of one year or less.
The interest rate implicit in lease contracts is typically not readily determinable, and as such the Company utilizes the incremental borrowing rate to calculate lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The components of lease cost for the three and nine months ended December 31, 2020 and 2019 are as follows (in thousands):
Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
Operating lease cost$547 $569 $1,599 $1,489 
Short-term lease cost50 63 251 318 
Variable lease cost241 97 532 304 
Total lease cost$838 $729 $2,382 $2,111 

Amounts reported in the consolidated balance sheets for leases where we are the lessee as of the quarter ended December 31, 2020 and March 31, 2020 were as follows (in thousands):
December 31, 2020March 31, 2020
Operating leases
Operating lease right-of-use assets$7,895 $8,116 
Operating lease liabilities8,533 8,647 
Weighted-average remaining lease term
Operating leases13 years, 10 months14 years, 4 months
Weighted-average discount rate
Operating leases4.3 %4.5 %
Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the quarter ended December 31, 2020 are as follows (in thousands):
Operating Leases
2021 (excluding the nine months ended December 31, 2020)$444 
20221,634 
20231,455 
20241,086 
2025761 
2026546 
Thereafter5,852 
Total undiscounted lease payments$11,778 
Less: Interest(2,719)
Less: Discount(526)
Total lease liabilities$8,533 



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11.    Financing Arrangements
Borrowings of the Company and its subsidiaries are summarized below at December 31, 2020 and March 31, 2020, respectively.
On April 13, 2020, the Company entered into a loan with MBT in a principal amount of $8.2 million pursuant to a PPP Loan under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note (“Note”). The Note provides for customary events of default including, among other things, cross-defaults on any other loan with MBT. The PPP Loan may be accelerated upon the occurrence of an event of default.

The PPP Loan is unsecured and guaranteed by the United States Small Business Administration ("SBA"). The Company will apply to MBT for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the 24-week period beginning on April 13, 2020, calculated in accordance with the terms of the CARES Act. The PPP Loan bears interest at a fixed annual rate of one percent (1%). Once the forgiveness determination is made, the Company will be required to make repayments plus interest on any unforgiven amount. As of December 31, 2020, the Company has used the funds received from the PPP loan on eligible expenses as outlined in the CARES Act.
On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with ONB. The material changes within the Third Amendment are: (a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021; and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve. The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020. The loan proceeds are to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines. The proceeds will also be used to pay down the Contrail Revolver. The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement.

The principal terms of the Term Note G are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing November 24, 2021; (b) 15% principal payments plus 15% of the amount of capitalized interest are due on November 24, 2023 and 2024, with the remainder due on the loan maturity date – November 24, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains affirmative covenants as to cash flow coverage and tangible net worth. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of Contrail.

On December 11, 2020, AirCo 1 and PSB entered into a loan in the aggregate amount of $6.2 million for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve. The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020. The loan proceeds were used to pay off the AirCo 1 revolving line of credit with MBT.

The principal terms of the Term Loan - PSB are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing December 11, 2021; (b) 15% principal payments (including any capitalized interest accrued thereon) are due on December 11, 2023, and 2024, with the remainder due on the loan maturity date – December 11, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains an affirmative covenant relating to collateral valuation. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of AirCo 1 and a pledge of AirCo’s membership interest in AirCo 1.

The following table provides certain information about the current financing arrangements of the Company's and its subsidiaries as of December 31, 2020:
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(In Thousands)December 31,
2020
March 31,
2020
Maturity DateInterest RateUnused commitments
Air T Debt
  Revolver - MBT$9,074 $— August 31, 2021
Greater of 2.5% or Prime - 1%
$7,926 
  Supplemental Revolver- MBT— 9,550 June 30, 2020
Greater of 1-month LIBOR + 1.25% and 3%
  Term Note A - MBT7,000 7,750 January 1, 2028
1-month LIBOR + 2%
  Term Note B - MBT3,500 3,875 January 1, 20284.50%
  Term Note D - MBT1,489 1,540 January 1, 2028
1-month LIBOR + 2%
Term Note E - MBT5,308 — June 25, 2025
Greater of LIBOR + 1.5% or 2.5%
Debt - Trust Preferred Securities12,878 12,877 June 7, 20498.00%
PPP Loan8,215 — December 24, 202211.00%
Total47,464 35,592 
AirCo 1 Debt
Revolver - MBT— 8,335 August 31, 20212
Greater of 6.50% or Prime + 2%
Term Loan - PSB6,200 — December 11, 2025
1-month LIBOR + 3%
Total6,200 8,335 
Contrail Debt
Revolver - ONB23,243 21,284 September 5, 2021
1-month LIBOR + 3.45%
16,757 
Term Loan A - ONB3,508 6,285 January 26, 2021
1-month LIBOR + 3.75%
Term Loan E - ONB4,597 6,320 December 1, 2022
1-month LIBOR + 3.75%
Term Loan F - ONB— 8,358 May 1, 2025
1-month LIBOR + 3.75%
Term Loan G - ONB43,598 — November 24, 2025
1-month LIBOR + 3%
Total74,946 42,247 
Delphax Solutions Debt
Canadian Emergency Business Account Loan31 — December 31, 20255.00%
Total31 — 
Total Debt128,641 86,174 
Less: Unamortized Debt Issuance Costs(1,234)(354)
Total Debt, net$127,407 $85,820 

1 Pursuant to The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, the SBA extended the deferral period for loan payments to either (1) the date that SBA remits the borrower’s loan forgiveness amount to MBT or (2) if Air T does not apply for loan forgiveness, 10 months after the end of Air T’s loan forgiveness covered period, calculated as 24-week period beginning on April 13, 2020. SBA does not require a formal modification to the original promissory note agreement.
2 The AirCo 1 Revolver was paid off and closed as of 12/31/2020.
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At December 31, 2020, our contractual financing obligations, including payments due by period, are as follows (in thousands):

Due byAmount
December 31, 2021$42,388 
December 31, 20229,383 
December 31, 20239,037 
December 31, 20249,037 
December 31, 202541,764 
Thereafter17,032 
128,641 
Less: Unamortized Debt Issuance Costs(1,234)
$127,407 

On June 10, 2019, the Company completed a transaction with all holders of the Company’s Common Stock to receive a special, pro-rata distribution of three securities as enumerated below:

A dividend of one additional share for every two shares already held (a 50% stock dividend, or the equivalent of a 3-for-2 stock split). See Footnote 6 for discussion.
The Company issued and distributed to existing common stockholders an aggregate of 1.6 million trust preferred capital security ("TruPs") shares (aggregate $4.0 million stated value) and an aggregate of 8.4 million warrants ("Warrants") (representing warrants to purchase $21.0 million in stated value of TruPs).

On January 14, 2020, Air T effected a one-for-ten reverse split of its TruPs. As a result of the reverse split, the stated value of the TruPs will be $25.00 per share. Further, each Warrant conferred upon its holder the right to purchase one-tenth of a share of TruPs for $2.40, representing a 4% discount to the new stated value of $2.50 for one-tenth of a share. As of December 31, 2020, 3.6 million Warrants have been exercised. As a result, the amount outstanding on the Company's Debt - Trust Preferred Securities is $12.9 million as of December 31, 2020.

At December 31, 2020, the Company had Warrants outstanding and exercisable to purchase 4.8 million shares of its TruPs at an exercise price of $2.40 per one-tenth of a share. On January 11, 2021, the Company announced the extension of the expiration date of the Warrants. The Warrants, previously scheduled to expire on January 15, 2021, are extended and now will expire on August 30, 2021 or earlier upon redemption or liquidation.

Fair Value Measurement
as of December 31, 2020
Warrant liability (Level 2)$485 

As of December 31, 2020, the Warrants are recorded within "Other non-current liabilities" on our condensed consolidated balance sheets. Fair value measurement was based on market activity and trading volume as observed on the NASDAQ Global Market. The liability is classified as Level 2 in the hierarchy (Level 2 is defined as quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability).

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12.    Geographical information
Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and held outside the United States are summarized in the following table as of December 31, 2020 and March 31, 2020 (in thousands):

December 31, 2020March 31, 2020
United States$7,727 $19,086 
Foreign10,086 14,131 
Total tangible long-lived assets, net$17,813 $33,217 

The Company's tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent engines and aircraft on lease at December 31, 2020. The net book value located within each individual country at December 31, 2020 and March 31, 2020 is listed below (in thousands):

December 31, 2020March 31, 2020
Spain$10,013 $— 
Netherlands— 4,778 
Estonia— 7,408 
Mexico— 1,845 
Other73 100 
Total tangible long-lived assets, net$10,086 $14,131 

Total revenue from continuing operations, in and outside the United States is summarized in the following table for the nine months ended December 31, 2020 and December 31, 2019 (in thousands):

December 31, 2020December 31, 2019
United States$113,563 $127,115 
Foreign14,831 44,066 
Total revenue$128,394 $171,181 

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13.    Segment Information
The Company has four business segments: overnight air cargo, ground equipment sales, commercial jet engine and parts segment and corporate and other. Segment data is summarized as follows (in thousands):

(In Thousands)Three Months Ended
December 31,
Nine Months Ended
December 31,
2020201920202019
Operating Revenues by Segment:
Overnight Air Cargo$16,322 $18,706 $49,789 $56,771 
Ground Equipment Sales:
Domestic13,680 13,505 40,486 36,466 
International7,089 2,444 8,170 4,473 
Total Ground Equipment Sales20,769 15,949 48,656 40,939 
Commercial Jet Engines and Parts:
Domestic15,851 19,651 22,476 33,941 
International2,227 18,885 6,410 38,724 
Total Commercial Jet Engines and Parts18,078 38,536 28,886 72,665 
Corporate and other:
Domestic548 32 811 609 
International102 77 252 197 
Total Corporate and other650 109 1,063 806 
Total$55,819 $73,300 $128,394 $171,181 
Operating Income (Loss):
Overnight Air Cargo490 638 1,617 909 
Ground Equipment Sales4,229 1,644 7,369 4,212 
Commercial Jet Engines and Parts(1,598)3,440 (4,776)6,411 
Corporate and other(2,053)(2,002)(7,091)(6,347)
Total$1,068 $3,720 $(2,881)$5,185 
Capital Expenditures:
Overnight Air Cargo85 140 228 196 
Ground Equipment Sales834 115 844 
Commercial Jet Engines and Parts1,656 16,595 3,166 34,251 
Corporate and other213 30 285 
Total$1,747 $17,782 $3,539 $35,576 
Depreciation and Amortization:
Overnight Air Cargo17 18 52 55 
Ground Equipment Sales38 75 152 177 
Commercial Jet Engines and Parts754 753 2,114 3,946 
Corporate and other77 129 326 432 
Total$886 $975 $2,644 $4,610 

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14. 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 condensed consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
the power to direct the activities that most significantly impact the economic performance of the VIE; and
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.

The Company concluded that its investments in Delphax’s equity and debt, and its investment in the Delphax warrant, each constituted a variable interest. In addition, the Company concluded that it became the primary beneficiary of Delphax on November 24, 2015. The Company consolidated Delphax in its condensed consolidated financial statements beginning on that date. Delphax is included within our Corporate and other segment.

Upon petition by the Company, on August 8, 2017 the Ontario Superior Court of Justice in Bankruptcy and Insolvency adjudged Delphax Canada to be bankrupt. As a result, Delphax Canada ceased to have capacity to deal with its property, which then vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured creditors. As of June 30, 2019, the bankruptcy proceedings were finalized in accordance with Canadian law and, therefore, Delphax Canada was legally discharged of its liabilities.

The conclusion of the bankruptcy proceedings also resulted in the dissolution of Delphax Canada. In addition, on June 11, 2019, the Company also fully dissolved Delphax UK. As such, the only Delphax entity that remains in existence as of March 31, 2020 is Delphax France. The Company extinguished the assets and liabilities of Delphax Canada and Delphax UK during the quarter ended June 30, 2019 and recognized a gain on dissolution of entities of $4.5 million.

Delphax had total assets and liabilities with carrying values of $9.0 thousand and $0.5 million, as of December 31, 2020 and $11.0 thousand and $0.5 million, as of March 31, 2020.

Delphax’s components of net income (loss) are included in our condensed consolidated statements of income and comprehensive income herein. For the three months ended December 31, 2020 and December 31, 2019, Delphax did not recognize any revenue, respectively. For the three months ended December 31, 2020, Delphax recorded a net loss of $8.0 thousand, broken out between an operating loss of $2.0 thousand and non-operating loss of $6.0 thousand. For the three months ended December 31, 2019, Delphax recorded net loss and operating loss of $57.0 thousand.

For the nine months ended December 31, 2020 and December 31, 2019, Delphax did not recognize any revenue, respectively. For the nine months ended December 31, 2020, Delphax recorded net loss and operating loss of $40.0 thousand. For the nine months ended December 31, 2019, Delphax recorded net income of $6.1 million, broken out between an operating loss of $0.2 million and non-operating income of $6.2 million, the majority of which was the result of the gain on dissolution of entities of $4.5 million.
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15.    Commitments and Contingencies
Contrail Aviation entered into an Operating Agreement (the “Operating Agreement”) in connection with the acquisition of Contrail Aviation in 1996 providing for the governance of and the terms of membership interests in Contrail Aviation and including put and call options with the Seller of Contrail (“Put/Call Option”). The Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail Aviation commencing on the fifth anniversary of the acquisition, which is on July 18, 2021. The Company has presented this redeemable non-controlling interest in Contrail Aviation between the liabilities and equity sections of the accompanying condensed consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The fair value of the redeemable non-controlling interest is $5.6 million as of December 31, 2020. The change in the redemption value compared to March 31, 2020 is a net decrease of $0.5 million. The decrease was driven by $1.9 million of net loss attributable to and distributions made to the non-controlling interest as of December 31, 2020, partially offset by a $1.4 million increase related to the net change in fair value during the nine months ended December 31, 2020, which is reflected on our condensed consolidated statements of equity. The offsetting increase is primarily attributable to the value associated with Contrail's potential investment in an aircraft asset management joint venture, as announced publicly in our 8-K dated December 23, 2020.

16.     Subsequent Events
On January 11, 2021, the Company announced that the Warrants to purchase its TruPs have been extended through August 30, 2021. The Warrants were scheduled to expire on January 15, 2021.


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Item 2.    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 holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth in its free cash flow per share over time.
We currently operate in four industry segments:
Overnight air cargo, which operates in the air express delivery services industry;
Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;
Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and,
Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other also comprises of insignificant businesses that do not pertain to other reportable segments.
On September 30, 2019, we completed the sale of 100% of the equity ownership in the Company's wholly-owned subsidiary, Global Aviation Services, LLC.
Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income and Adjusted EBITDA. 
Results of Operations

Outlook
The outbreak of COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses remain open. However, as a result of measures taken to limit the impact of COVID-19, self-quarantines or actual viral health issues, we initially experienced a substantial number of disruptions, and have experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. Furthermore, while operating expenses at our businesses have decreased, we expect that many of our businesses will generate substantially reduced operating cash flows. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially lasts even longer. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations.

Third Quarter Fiscal 2021 Compared to Third Quarter Fiscal 2020
Consolidated revenue decreased by $17.5 million or 24% to $55.8 million for the three-month period ended December 31, 2020 compared to the same quarter in the prior fiscal year.
Following is a table detailing revenue by segment, net of intercompany during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended
December 31,
Change
20202019
Overnight Air Cargo$16,322 $18,706 $(2,384)(13)%
Ground Equipment Sales20,769 15,949 4,820 30 %
Commercial Jet Engines and Parts18,078 38,536 (20,458)(53)%
Corporate and Other650 109 541 496 %
$55,819 $73,300 $(17,481)(24)%

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Revenues from the air cargo segment for the three-month period ended December 31, 2020 decreased by $2.4 million (13%) compared to the third quarter of the prior fiscal year. The decrease was principally attributable to lower maintenance revenue as a result of fewer operating aircraft due to COVID-19.
The ground equipment sales segment contributed approximately $20.8 million and $15.9 million to the Company’s revenues for the three-month periods ended December 31, 2020 and 2019 respectively, representing a $4.8 million (30%) increase in the current quarter. The increase was primarily driven by a higher volume of truck sales to the U.S. Air Force. At December 31, 2020, the ground equipment sales segment’s order backlog was $17.3 million compared to $29.1 million at December 31, 2019.
The commercial jet engines and parts segment contributed $18.1 million of revenues in the quarter ended December 31, 2020 compared to $38.5 million in the comparable prior year quarter which is a decrease of $20.5 million (53%). The decrease is primarily attributable to the fact that all the companies within this segment had lower engine and component sales and lease income due to the impact of COVID-19.

Following is a table detailing operating income (loss) by segment during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended December 31, 2020Change
20202019
Overnight Air Cargo$490 $638 $(148)
Ground Equipment Sales4,229 1,644 2,585 
Commercial Jet Engines and Parts(1,598)3,440 (5,038)
Corporate and Other(2,053)(2,002)(51)
$1,068 $3,720 $(2,652)

Consolidated operating income for the quarter ended December 31, 2020 was $1.1 million, a decrease of $2.7 million from operating income of $3.7 million in the comparable quarter of the prior year.
The ground equipment sales segment operating income for the quarter ended December 31, 2020 increased by $2.6 million from the prior year comparable quarter to $4.2 million. This increase was primarily attributable to the increased sales noted in the segment revenue discussion above as well as better operating margin.
The commercial jet engines and parts segment generated an operating loss of $1.6 million in the current-year quarter compared to an operating income of $3.4 million in the prior-year quarter. The change was primarily attributable to the decreased aircraft engines and component sales as well as lease income due to COVID-19 at the companies within this segment as explained in the segment revenue discussion above.
Following is a table detailing non-operating income (loss) during the three months ended December 31, 2020 compared to the same quarter in the prior fiscal year (in thousands):

Three Months Ended
December 31,
Change
20202019
Other-than-temporary impairment loss on investments$— $(1,095)$1,095 
Interest expense(1,172)(1,227)55 
Gain (Loss) from equity method investments510 (282)792 
Other1,039 81 958 
$377 $(2,523)$2,900 
The Company had a net non-operating income of $0.4 million for the quarter ended December 31, 2020, compared to a non-operating loss of $2.5 million in the prior-year quarter. The non-operating loss from Q3 2020 was principally driven by an impairment loss in the investment of Insignia of $1.1 million that did not recur in Q3 2021. In addition, the current year-quarter also included approximately $0.7 million of investment income compared to only $17.0 thousand in the prior year-quarter.
During the three-month period ended December 31, 2020, the Company recorded $0.3 million in income tax benefit at an effective tax rate ("ETR") of (22.0)%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The
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primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for the Company's captive insurance company subsidiary ("SAIC") under Section 831(b) and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the three-month period ended December 31, 2019, the Company recorded $0.6 million in income tax benefit at an ETR of 51.5%. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three-month period ended December 31, 2019 were the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

First nine Months of Fiscal 2021 Compared to First nine Months of Fiscal 2020
Following is a table detailing revenue by segment (in thousands):
Nine Months Ended
December 31,
Change
20202019
Overnight Air Cargo$49,789 $56,771 $(6,982)(12)%
Ground Equipment Sales48,656 40,939 7,717 19 %
Commercial Jet Engines and Parts28,886 72,665 (43,779)(60)%
Corporate and Other1,063 806 257 32 %
$128,394 $171,181 $(42,787)(25)%

Revenues from the air cargo segment for the nine months ended December 31, 2020 decreased by $7.0 million (12%) compared to the nine months ended December 31, 2019. The decrease was principally attributable to lower maintenance revenue as a result of fewer operating aircraft due to COVID-19.
The ground equipment sales segment contributed approximately $48.7 million and $40.9 million to the Company’s revenues for the nine-month periods ended December 31, 2020 and 2019 respectively, representing a $7.7 million (19%) increase in the current nine-month period. The increase was driven by strong sales of catering trucks during Q1 2021 and the higher volume of truck sales to the U.S. Air Force in Q3 2021.
The commercial jet engines and parts segment contributed $28.9 million of revenues in the nine months ended December 31, 2020 compared to $72.7 million in the comparable prior year nine months. The decrease is primarily attributable to the fact that all the companies within this segment had lower aircraft engines and component sales and lease income due to the impact of COVID-19 during the first three fiscal quarters in the current fiscal year.

Following is a table detailing operating income (loss) by segment during the nine months ended December 31, 2020 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended
December 31,
Change
20202019
Overnight Air Cargo$1,617 $909 $708 
Ground Equipment Sales7,369 4,212 3,157 
Commercial Jet Engines and Parts(4,776)6,411 (11,187)
Corporate and Other(7,091)(6,347)(744)
$(2,881)$5,185 $(8,066)

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Consolidated operating loss for the nine months ended December 31, 2020 was $2.9 million compared to an operating income of $5.2 million for the comparable nine months of the prior year.
Operating income for the air cargo segment for the nine months ended December 31, 2020 increased by $0.7 million versus the prior year comparable period due primarily to more efficient labor utilization and broad-based operational improvements led by a new management team.
The ground equipment sales segment operating income increased by $3.2 million to $7.4 million in the nine-month period ended December 31, 2020 versus the prior year comparable period. This increase was primarily attributable to the improved operating leverage achieved during the year as a result of favorable pricing and larger production runs.
The commercial jet engines and parts segment generated an operating loss of $4.8 million in the current-year nine month period compared to an operating income of $6.4 million in the prior-year nine-month period. The change was primarily attributable to the decreased aircraft engines and component sales as well as lease income due to COVID-19 at the companies within this segment as explained in the segment revenue discussion above.
Following is a table detailing non-operating income (loss) during the nine months ended December 31, 2020 compared to the same nine months in the prior fiscal year (in thousands):

Nine Months Ended
December 31,
Change
20202019
Other-than-temporary impairment loss on investments$— $(2,305)$2,305 
Interest expense(3,413)(4,298)885 
Gain on settlement of bankruptcy— 4,527 (4,527)
Gain (Loss) from equity method investments(546)(636)90 
Other2,125 (75)2,200 
$(1,834)$(2,787)$953 
The Company had a net non-operating loss of $1.8 million for the nine months ended December 31, 2020 compared to a net non-operating loss of $2.8 million in the prior-year nine-month period. The difference was principally due to the prior-year's gain on settlement of bankruptcy proceedings related to Dephax Canada and UK of $4.5 million that did not recur in the current-year. The difference was offset by the prior-year's impairment loss on the investment of Insignia of $2.3 million as well as an increase of $2.2 million in other income, driven by $1.8 million of investment income and realized gain on sale of securities in the current-year.
During the nine-month period ended December 31, 2020, the Company recorded $2.2 million in income tax benefit at an ETR of 45.9%. The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine-month period ended December 31, 2020 were the tax rate differential for carryback tax losses at a rate higher than the statutory tax rate, the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.

During the nine-month period ended December 31, 2019, the Company recorded $0.1 million in income tax benefit which resulted in an effective tax rate of (2.2)%. The primary factors contributing to the difference between the federal statutory rate and the Company's effective tax rate for the nine-month period ended December 31, 2019 were related to the change in valuation allowance related to Delphax, the estimated benefit for the exclusion of income for SAIC under Section 831(b), the estimated deduction for foreign derived intangible income, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are fully described in Note 1 to the condensed consolidated financial statements and in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020. The preparation of the Company’s condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. There were no significant changes to the Company’s critical accounting policies and estimates during the three-months ended December 31, 2020.
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Seasonality
The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being lower in the first and fourth fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments have typically not experienced material seasonal trends.
Liquidity and Capital Resources
As of December 31, 2020, the Company held approximately $48.8 million in cash and cash equivalents and restricted cash, $5.3 million of which related to restricted cash collateralized for the three Opportunity Zone fund investments. The Company also held $0.7 million in restricted investments held as statutory reserve of SAIC. The Company has approximately $5.4 million of marketable securities and an aggregate of $24.7 million in available funds under its lines of credit as of December 31, 2020.
As of December 31, 2020, the Company’s working capital amounted to $84.0 million, an increase of $53.3 million compared to March 31, 2020. 

The Contrail Credit Agreement contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth of $15 million.
On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with ONB. The material changes within the Third Amendment are: (a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021; and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve. The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020. The loan proceeds are to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines. The proceeds will also be used to pay down the Contrail Revolver. The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement.

The principal terms of the Contrail Main Street Loan are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing November 24, 2021; (b) 15% principal payments plus 15% of the amount of capitalized interest are due on November 24, 2023 and 2024, with the remainder due on the loan maturity date – November 24, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains affirmative covenants as to cash flow coverage and tangible net worth. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of Contrail.

On December 11, 2020, AirCo 1 and PSB entered into a loan in the aggregate amount of $6.2 million for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the Fed. The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020. The loan proceeds were used to pay off the AirCo 1 revolving line of credit with MBT.

The principal terms of the AirCo 1 Main Street Loan are: (a) interest on the loan accrues at a floating rate of LIBOR plus 3.00% and interest is payable commencing December 11, 2021; (b) 15% principal payments (including any capitalized interest accrued thereon) are due on December 11, 2023, and 2024, with the remainder due on the loan maturity date – December 11, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains an affirmative covenant relating to collateral valuation. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of AirCo 1 and a pledge of AirCo’s membership interest in AirCo 1.

The revolving line of credit at Air T with MBT has a due date or expires within the next twelve months. We are currently seeking to refinance this obligation prior to August 31, 2021; however, there is no assurance that we will be able to execute this refinancing or, if we are able to refinance this obligation, that the terms of such refinancing would be as favorable as the terms of our existing credit facility.

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In April 2020, the Company obtained loans under the PPP, as authorized by the CARES Act, of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs. The Company will apply to MBT for forgiveness of the PPP Loan, however, forgiveness is not fully assured. The Company believes it is probable that the cash on hand (including that obtained from the PPP and other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.
Cash Flows
Following is a table of changes in cash flow for the nine months ended December 31, 2020 and 2019 (in thousands):

Nine Months Ended December 31,
20202019
Net Cash Used in Operating Activities(6,657)(9,691)
Net Cash Used in Investing Activities(308)(7,398)
Net Cash Provided by Financing Activities40,383 26,164 
Effect of foreign currency exchange rates on cash and cash equivalents(164)(10)
Net Increase in Cash and Cash Equivalents and Restricted Cash33,254 9,065 

Net cash used in operating activities was $6.7 million for the nine-month period ended December 31, 2020 compared to the net cash used in operating activities of $9.7 million in the prior year nine-month period. During the nine months ended December 31, 2019, the Company purchased $7.0 million more engines and received them into inventory compared to the current-year period. The cash usage was offset by $5.1 million due to a decrease in net income in the current year because of reduced operations as a result of COVID-19.
Net cash used in investing activities for the nine-month period ended December 31, 2020 was $0.3 million compared to net cash used in investing activities of $7.4 million in the the prior-year period. Cash was used in the prior-year period primarily to purchase engines on lease and to invest in unconsolidated entities. The cash usage was partially offset by proceeds from sale of engines on lease and the sale of GAS.
Net cash provided by financing activities for the nine-month period ended December 31, 2020 was $40.4 million compared to net cash provided by financing activities of $26.2 million in the prior-year period. The increase was primarily driven by higher net cash proceeds from term loans.
Impact of Inflation
The Company believes that inflation has not had a material effect on its operations, because increased costs to date have generally been passed on to customers. Under the terms of its overnight air cargo business contracts the major cost components of this business’ operations, consist principally of fuel, and certain other direct operating costs, and certain maintenance costs that are reimbursed by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

Non-GAAP Financial Measures

The Company uses adjusted earnings before taxes, interest, and depreciation and amortization ("Adjusted EBITDA"), a non-GAAP financial measure as defined by the SEC, to evaluate the Company's financial performance. This performance measure is not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. When calculating Adjusted EBITDA, the Company does not add back depreciation expense for aircraft engines that are on lease, as the Company believes this expense matches with the corresponding revenue earned on engine leases. Depreciation expense for leased engines totaled $0.6 million for the three months ended
31





December 31, 2020 and 2019. Depreciation expense for leased engines totaled $1.7 million and $3.6 million for the nine months ended December 31, 2020 and 2019, respectively.

Management believes that Adjusted EBITDA is a useful measure of the Company's performance because it provides investors additional information about the Company's operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EBITDA is not intended to replace or be an alternative to operating income from continuing operations, the most directly comparable amounts reported under GAAP.

The tables below provide a reconciliation of operating income from continuing operations to Adjusted EBITDA and Adjusted EBITDA by segment for the three and nine months ended December 31, 2020 and 2019 (in thousands):


Three months endedNine months ended
12/31/2020