*Excludes amount attributable to redeemable non-controlling interest in Contrail Aviation $131,400
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
MARCH 31, 201
7 AND 2016
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings power. Our goal is to build on Air T
’s core businesses, to expand into adjacent industries, and when appropriate, to acquire companies that we believe fit into the Air T family.
We currently operate wholly owned subsidiaries in three legacy industry segments:
|
•
|
overnight air cargo, comprised of our Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, which operates in the air express delivery services industry;
|
|
•
|
ground equipment sales, comprised of our Global Ground Support, LLC (“GGS”) subsidiary, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers; and
|
|
•
|
ground support services, comprised of our Global Aviation Services, LLC (“GAS”) subsidiary, which provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers.
|
During the fiscal years ended March 31, 2017 and 2016, we have organized or acquired businesses operating in three other segments. In October 2015, we formed a wholly owned equipment leasing subsidiary, Air T Global Leasing, LLC (“
ATGL”), which comprises our leasing segment. In November 2015, we acquired debt and equity interests in Delphax Technologies, Inc. (“Delphax”), a printing equipment manufacturer and maintenance provider, which comprises our printing equipment and maintenance segment. In July 2016, our majority owned subsidiary, Contrail Aviation Support, LLC (“Contrail Aviation”), acquired the principal assets of a business based in Verona, Wisconsin engaged in acquiring surplus commercial jet engines and components and supplying surplus and aftermarket commercial jet engine components. In October 2016, we acquired 100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”) to provide commercial aircraft storage, storage maintenance and aircraft disassembly/part-out services at facilities leased at the Pinal Air Park in Marana, Arizona. At March 31, 2017, Contrail Aviation and Jet Yard comprised the commercial jet engines and parts segment of the Company’s operations. This segment, formerly referred to as the commercial jet engines segment, was renamed to reflect its broader product and service offerings.
In March 2014, the Company formed a wholly-owned subsidiary, Space Age Insurance Company (“SAIC”), as a single parent hybrid captive insurance company to insure risks of the Company and its subsidiaries that were not previously insured by the vari
ous Company insurance programs. SAIC also underwrites third-party risks through certain reinsurance arrangements. SAIC is included in the Company’s consolidated financial statements.
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
– The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Contrail Aviation and Delphax. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
- Certain prior period amounts have been reclassified to conform with the current period presentation. Such reclassifications had no impact on previously reported levels of consolidated net income or equity.
Accounting Estimates
– The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported and disclosed. Actual results could differ from those estimates.
Concentration of Credit Risk
– The Company’s potential exposure to concentrations of credit risk consists of trade accounts and notes receivable, and bank deposits. Accounts receivable are normally due within 30 days and the Company performs periodic credit evaluations of its customers’ financial condition. Notes receivable payments are normally due monthly. The required allowance for doubtful accounts is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of past-due outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.
At various times throughout the year, the Company had deposits with banks in excess of amounts covered by federal depository insurance and investments in corporate notes that are not covered by insurance.
A majority of the Company
’s revenues are concentrated in the aviation industry and revenues can be materially affected by current economic conditions and the price of certain supplies such as fuel, the cost of which is passed through to the Company’s cargo customer. The Company has a customer concentration in its overnight air cargo segment which provides service to one major customer. The loss of a major customer would have a material impact on the Company’s results of operations. See Note 16 “Major Customer”.
Cash and Cash Equivalents
– Cash equivalents consist of liquid investments with maturities of three months or less when purchased.
Foreign Exchange
- Delphax, which is headquartered in the United States, has subsidiaries in Canada, France, and the United Kingdom. The functional currency of the Delphax’s Canadian subsidiary is the U.S. dollar, whereas the functional currency of Delphax’s subsidiaries in France and the United Kingdom is the Euro and Pound Sterling, respectively. The balance sheets of foreign operations with a functional currency of other than the U.S. dollar are translated to U.S. dollars using rates of exchange as of the applicable balance sheet date. The statements of income (loss) items of foreign operations are translated to U.S. dollar using average rates of exchange for the applicable period. The gains and losses resulting from translation of the financial statements of Delphax’s foreign operations are recorded within the accumulated other comprehensive income (loss) and non-controlling interests categories of the Company’s consolidated equity.
Goodwill
- Goodwill reflects the excess of the purchase consideration in business combinations over the estimated fair value of identifiable net assets acquired. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment.
Business Combinations
- The Company accounts for business combinations in accordance with FASB Codification Section 805 (“ASC 805”) Business Combinations. Consistent with ASC 805, the Company accounts for each business combination by applying the acquisition method. Under the acquisition method, the Company records the identifiable assets acquired and liabilities assumed at their respective fair values on the acquisition date. Goodwill is recognized for the excess of the purchase consideration over the fair value of identifiable net assets acquired. Included in purchase consideration is the estimated acquisition date fair value of any earn-out obligation incurred. For business combinations where non-controlling interests remain after the acquisition, assets (including goodwill) and liabilities of the acquired business are recorded at the full fair value and the portion of the acquisition date fair value attributable to non-controlling interests is recorded as a separate line item within the equity section or, as applicable to redeemable non-controlling interests, between the liabilities and equity sections of the Company’s consolidated balance sheet
.
The acquisition method permits the Company a period of time after the acquisition date during which the Company may adjust the provisional amounts recognized in a business combination. This period of time is referred to as the “measurement period”. The measurement period provides an acquirer with a reasonable time to obtain the information necessary to identify and measure the assets acquired and liabilities assumed. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports in its consolidated financial statements provisional amounts for the items for which the accounting is incomplete. Under accounting standards in effect as of the Company
’s acquisition of interests in Delphax, the Company had two alternatives available to account for subsequent adjustments to the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Under the first method, which will no longer be an available option beginning with the Company’s first fiscal 2017 quarter, the Company would retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained. Under the second method, which will be the only allowed method beginning with the Company’s first fiscal 2017 quarter, the Company is required to recognize adjustments to the provisional amounts, with a corresponding adjustment to goodwill, in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the Company would adjust its consolidated financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. The Company has adopted the second of the two above-described methods.
Income statement activity of an acquired business is reflected within the Company
’s consolidated statements of income (loss) commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.
Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs may include such items as finder
’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.
Changes in estimate of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as part of the acquisition but are rather recognized in directly in earnings.
The Company tests goodwill for impairment at least once annually.
An impairment test will also be carried out anytime events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit.
The Company is permitted to first assess qualitative factors to determine whether it is more likely than not (this is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value, including goodwill. In qualitatively evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances such as macroeconomic conditions, industry and market developments, cost factors, and the overall financial performance of the reporting unit. If, after assessing these events and circumstances, it is determined that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the quantitative goodwill impairment test are unnecessary. In the first step of the quantitative method, recoverability of goodwill is evaluated by estimating the fair value of the reporting unit
’s goodwill using multiple techniques, including a discounted cash flow model income approach and a market approach. The estimated fair value is then compared to the carrying value of the reporting unit. If the fair value of a reporting unit is less than its carrying value, a second step is performed to determine the amount of impairment loss, if any. The second step requires allocation of the reporting unit’s fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations. Any residual fair value is allocated to goodwill. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.
Intangible Assets
- Amortizable intangible assets consist of acquired patents, tradenames, customer relationships, and other finite-lived identifiable intangibles. Such intangibles are initially recorded at fair value and subsequently subject to amortization. Amortization is recorded using the straight-line method over the estimated useful lives of the assets. In accordance with the applicable accounting guidance, the Company evaluates the recoverability of amortizable intangible assets whenever events occur that indicate potential impairment. In doing so, the Company assesses whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the estimated fair value of the asset.
The estimated amortizable lives of the intangible assets are as follows:
|
|
Years
|
|
Software
|
|
|
3
|
|
Tradenames
|
|
|
5
|
|
Certification
|
|
|
5
|
|
Non-compete
|
|
|
5
|
|
Patents
|
|
|
9
|
|
Customer relationships
|
|
|
10
|
|
Attribution of net Income or Loss of Partially-Owned Consolidated Entities
- In the case of Delphax, we determined that the attribution of net income or loss should be based on consideration of all of Air T’s investments in Delphax and its subsidiary, Delphax Canada Technologies Canada Limited (“Delphax Canada”). Our investment in the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests.
We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax
’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67% /33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67% / 33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.
See Note 8, “Acquisitions—Acquisitions of Interests in Delphax,” for a description of our investments in Delphax and Delphax Canada and for the definitions of the capitalized terms used in this paragraph. The effect of interest expense arising under the Senior Subordinated Note and, since January 6, 2017, under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or losses to non-controlling interests because Delphax is a variable interest entity.
The above-described attribution methodology applies only to our investments in Delphax. We establish the appropriate attribution methodology on an entity-specific basis. In the case of Contrail
Aviation, we concluded that an attribution methodology based solely on equity ownership percentages was appropriate.
Marketable Securities
– In accordance with Accounting Standards Codification (“ASC”) 320,
Investments –
Debt and Equity Securities
, and based on our intentions regarding these instruments, we classify all of our marketable equity securities as available-for-sale. Marketable equity securities are reported at fair value, with all unrealized gains (losses) reflected net of tax in stockholders’ equity on our consolidated balance sheets, and as a line item in our consolidated statements of comprehensive income (loss). If we determine that an investment has other than a temporary decline in fair value, we recognize the investment loss in non-operating income, net in the accompanying consolidated statements of income (loss). We regularly evaluate our investments for impairment using both quantitative and qualitative criteria. For equity securities, we consider the length of time and magnitude of the amount of each security that is in an unrealized loss position. Other than our investment in Insignia Systems, Inc., all of our marketable securities investments are classified as current based on the nature of the investments and their availability for use in current operations.
Inventories
– Inventories related to the Company’s manufacturing and service operations are carried at the lower of cost (determined by use of the first in, first out method) or market. When finished goods units are leased to customers under operating leases, the units are transferred to Property and Equipment. Consistent with aviation industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.
Property and Equipment
– Property and equipment is stated initially at cost, or fair value if purchased as part of a business combination or, in the case of equipment under capital leases, the present value of future lease payments. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Equipment leased to customers is depreciated using an accelerated method. Useful lives range from three years for computer equipment, seven years for flight equipment and ten years for deicers and other equipment leased to customers.
The Company assesses long-lived assets for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of the
estimated undiscounted cash flows from those assets, the Company then will write-down the value of the assets by such excess.
Asset Retirement Obligation
- Under the terms of a lease for a manufacturing facility in Canada, Delphax is responsible for restoring the leased property to its original condition, normal wear and tear excepted. The Company’s accounting for the acquisition of Delphax reflects an estimated asset retirement obligation (“ARO”) liability for this matter of approximately $560,000. The ARO liability was determined using the present value of the estimated facility restoration costs. Determination of this estimated liability involves significant judgment. The liability is reflected on the accompanying March 31, 2017 and 2016 consolidated balance sheets within current liabilities. The liability will be periodically adjusted to reflect revisions to estimated future costs and the accretion of interest. The liability as reflected in the Company’s consolidated balance sheet will also change with movement in the U.S. dollar to Canadian dollar exchange rate. The balance at March 31, 2017 was left unchanged compared to the amount estimated for purchase accounting because there was no change of estimate between November 24, 2015 and March 31, 2017 and because the impact of interest accretion and exchange rate movement was deemed inconsequential.
Restricted Cash
— Restricted cash consists of cash held by SAIC as statutory capital reserves and cash collateral securing SAIC’s participation in certain reinsurance pools.
Revenue Recognition
– The Company recognizes revenue when it is earned. This occurs when services have been rendered or products are shipped to the customer in accordance with the terms of an agreement of sale, there is a fixed or determinable selling price, title and risk of loss have been transferred, and collectability is reasonably assured. Revenues from our Overnight Air Cargo segment are generally recognized as flight operation and maintenance services are provided or, in the case of certain pass-through costs for things like maintenance parts and fuel, as the Company incurs the related expenditure. Within the Company’s Ground Equipment Sales segment, revenue is generally recognized at the time the related equipment has been shipped to the customer and risk of loss has been transferred. In the case of certain contracts with the U.S. Government or related prime contractors, the Company applies contract accounting and uses either the percentage-of-completion or completed contract method, as appropriate. Revenues of our Ground Support Services segment are generally recognized as the contracted services are completed. Substantially all Printing Equipment and Maintenance segment revenues are recognized upon product shipment, which is generally when transfer to the customer of loss occurs. Service revenue is recognized upon completion of services. Similarly, Commercial Jet Engines and Parts segment revenues are recognized upon shipment of parts and transfer of loss or, as applicable, upon completion of services. Leasing revenues are recognized consistent with contract terms and are generally recognized on a straight-line basis due to the operating lease classification of the underlying leases.
Although infrequent, the Company does occasionally enter into customer arrangements that involve the delivery of multiple elements. For any such arrangements, the Company applies the applicable accounting guidance in order to identify the individual accounting elements and to determine the most appropriate revenue recognition model for such elements.
We evaluate gross versus net presentation on revenues from products or services purchased and resold in accordance with the revenue recognition criteria outlined in Codification section 605-45,
Principal Agent Considerations.
Operating Expenses Reimbursed by Customer
– The Company, under the terms of its overnight air cargo dry-lease service contracts, passes through to its air cargo customer certain cost components of its operations without markup. The cost of fuel, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer, at cost, and included in overnight air cargo revenue on the accompanying statements of income (loss). These pass-through costs totaled $23,379,000 and $24,632,000 for the years ended March 31, 2017 and 2016, respectively.
Stock Based Compensation
– The Company has maintained a stock option plan for the benefit of certain eligible employees and directors of the Company, though no further awards may be made under this plan.
The Company recognizes compensation expense on stock options based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company uses the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.
Warranty Reserves
– The Company warranties its ground equipment products for up to a three-year period from date of sale. The Company’s printing equipment and maintenance segment provides a limited short-term (typically 90 days) warranty on equipment and spare parts. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known.
Income Taxes
– Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
A valuation allowance against net deferred tax assets is recorded when it is more likely than not that such assets will not be fully realized. Tax credits are accounted for as a reduction of income taxes in the year in which the credit originates. All deferred income taxes are classified as
current and noncurrent in the consolidated balance sheets. The Company recognizes the benefit of a tax position taken on a tax return, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. An uncertain income tax position is not recognized if it has a less than a 50% likelihood of being sustained.
Research and Development Costs
– All research and development costs are expensed as incurred. The research and development costs for the fiscal year 2017 amounted approximately $1,042,000 compared to $778,000 for fiscal year 2016. All research and development expenses are incurred by our printing equipment and maintenance segment.
R
edeemable Non-
C
ontrolling
I
nterest
- As more fully described in Note 8 to the consolidated financial statements, the Company is party to a put/call option agreement concerning the non-controlling ownership interest held in the Company’s consolidated subsidiary, Contrail Aviation. The put/call option permits Contrail Aviation, at any time after the fifth anniversary of the Company’s acquisition of Contrail Aviation, to purchase the non-controlling interest from the holder of such interest. The agreement also permits the holder of the non-controlling interest to sell such interest to Contrail Aviation. Per the agreement, the price is to be agreed upon by the parties or, failing such agreement, to be determined pursuant to third-party appraisals in a process specified in the agreement. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. Based on this guidance, the Company has classified the Contrail Aviation non-controlling interest between the liabilities and equity sections of the accompanying March 31, 2017 consolidated balance sheet. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument subject to the guidance is not currently redeemable but it is probable that the equity instrument will become redeemable (for example, when the redemption depends solely on the passage of time), the guidance permits either of the following measurement methods: (a) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, or (b) recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The amount presented in temporary equity should be no less than the initial amount reported in temporary equity for the instrument. Because the Contrail Aviation equity instrument will become redeemable solely based on the passage of time, the Company determined that it is probable that the Contrail Aviation equity instrument will become redeemable. The Company has elected to apply the first of the two measurement options described above. An adjustment to the carrying amount of a non-controlling interest from the application of the above guidance does not impact net income or comprehensive income in the consolidated financial statements. Rather, such adjustments are treated as equity transactions.
Going Concern
- The Company applies Codification section 205-40
Presentation of Financial Statements – Going Concern
, which became effective for the Company’s fiscal year ended March 31, 2017. In connection with preparing its consolidated financial statements, Company management evaluates whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are available to be issued.
2.
|
EARNINGS PER COMMON SHARE
|
Basic earnings per share has been calculated by dividing net income
(loss) attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. The dilutive effect of options was excluded in fiscal 2017 given that there was a net loss attributable to Air T, Inc. stockholders. For the year ended March 31, 2016 all options to acquire shares of Air T, Inc. common stock were included in computing earnings per share because their effects were dilutive.
The computation of earnings per common share is as follows:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Air T, Inc.
|
|
|
|
|
|
|
|
|
Stockholders
|
|
$
|
(3,213,539
|
)
|
|
$
|
4,413,910
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.51
|
)
|
|
$
|
1.86
|
|
Diluted
|
|
$
|
(1.51
|
)
|
|
$
|
1.84
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,125,224
|
|
|
|
2,372,527
|
|
Diluted
|
|
|
2,125,224
|
|
|
|
2,396,824
|
|
3.
|
INVESTMENTS IN SECURITIES
|
Marketa
ble securities at March 31, 2017 consisted of investments in publicly traded companies with a fair value of $4,594,000, an aggregate cost basis of $4,331,000, gross unrealized gains aggregating $279,000 and gross unrealized losses aggregating $16,000. Marketable securities at March 31, 2016 consisted of investments with a fair market value of $9,656,000, an aggregate cost basis of $9,791,000, gross unrealized gains aggregating $422,000 and gross unrealized losses aggregating $557,000. Securities that had been in a continuous unrealized loss position for less than 12 months as of March 31, 2017 had an aggregate fair value and unrealized loss of $441,000 and $2,771,000, respectively ($5,903,000 and $163,000, respectively, at March 31, 2016). As of March 31, 2017, none of the Company’s investments in securities has been in a continuous loss for more than 12 months. Securities that had been in a continuous unrealized loss position for more than 12 months as of March 31, 2016 had an aggregate fair value and unrealized loss of $4,711,000 and $395,000, respectively). The Company realized gains of $576,000 and $50,000 from the sale of securities during the years ended March 31, 2017 and March 31, 2016, respectively.
At March 31, 2017, we held approximately 1.65 million shares of common stock of Insignia Systems, Inc. (“Insignia”), representing approximately 14% of the outstanding shares, which shares were acquired commencing in our fiscal year ended March 31, 2015. Any investment with a fair value of less than its cost basis is assessed for possible “other-than-temporary” impairment regularly and at each reporting date. Other-than-temporary impairments of available-for-sale marketable equity securities are recognized in the consolidated statement of income (loss). On the basis of its June 30, 2016 and March 31, 2017 assessments, the Company concluded that it had suffered an other-than-temporary impairment in its investment in the common stock of Insignia. Consistent with the applicable accounting guidance, the Company
’s cost basis in the Insignia investment was lowered from $4,711,000 to $3,604,000 at June 30, 2016 and then to $2,068,000 at March 31, 2017 to reflect an aggregate impairment charge of $2,643,000. On January 6, 2017, Insignia paid a special dividend of $0.70 per share to stockholders owning Insignia shares on that date. The receipt of such special dividend is included in the other investment income (loss) in the Company’s consolidated statements of income (loss) for the fiscal year ended March 31, 2017. During the fourth quarter of the 2017 fiscal year, we recognized an additional investment loss of approximately $112,000 principally due to an other-than-temporary decline in fair value of other investment securities that had been in a continuous loss position for more than 12 months.
Inventor
ies consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Ground support service parts
|
|
$
|
2,447,395
|
|
|
$
|
1,566,694
|
|
Ground equipment manufacturing:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
1,452,201
|
|
|
|
1,549,810
|
|
Work in process
|
|
|
832,635
|
|
|
|
408,213
|
|
Finished goods
|
|
|
10,001,193
|
|
|
|
4,328,812
|
|
Printing equipment and maintenance:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
3,325,142
|
|
|
|
3,319,939
|
|
Work in process
|
|
|
324,949
|
|
|
|
759,446
|
|
Finished goods
|
|
|
790,345
|
|
|
|
562,912
|
|
Commercial jet engines and parts
|
|
|
3,407,339
|
|
|
|
-
|
|
Total inventories
|
|
|
22,581,199
|
|
|
|
12,495,826
|
|
Reserves
|
|
|
(2,802,356
|
)
|
|
|
(221,722
|
)
|
|
|
|
|
|
|
|
|
|
Total, net of reserves
|
|
$
|
19,778,843
|
|
|
$
|
12,274,104
|
|
5.
|
PROPERTY AND EQUIPMENT
|
Property and equipm
ent consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture, fixtures and improvements
|
|
$
|
8,377,988
|
|
|
$
|
5,559,885
|
|
Construction in progress
|
|
|
1,335,333
|
|
|
|
-
|
|
Equipment leased to customers
|
|
|
272,622
|
|
|
|
2,898,639
|
|
|
|
|
9,985,943
|
|
|
|
8,458,524
|
|
Less accumulated depreciation
|
|
|
(4,661,455
|
)
|
|
|
(3,880,750
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,324,488
|
|
|
$
|
4,577,774
|
|
6.
|
INTANGIBLE ASSETS
AND GOODWILL
|
Amortizable i
ntangible assets consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
442,000
|
|
|
$
|
120,000
|
|
Customer relationships
|
|
|
751,000
|
|
|
|
-
|
|
Non-compete
|
|
|
69,700
|
|
|
|
-
|
|
Certification
|
|
|
47,000
|
|
|
|
-
|
|
Patents
|
|
|
1,090,000
|
|
|
|
1,090,000
|
|
Software
|
|
|
420,360
|
|
|
|
-
|
|
Other
|
|
|
22,242
|
|
|
|
-
|
|
|
|
|
2,842,302
|
|
|
|
1,210,000
|
|
Less accumulated amortization and impairment
|
|
|
(1,465,603
|
)
|
|
|
(100,888
|
)
|
Intangible assets, net
|
|
$
|
1,376,699
|
|
|
$
|
1,109,112
|
|
Amortizati
on expense was approximately $105,000 for the fiscal year 2017 compared to $51,000 for the prior fiscal year. Most of the net book value of the Company’s amortizable intangibles stems from the Company’s acquisitions of Contrail Aviation, D&D and Jet Yard (see Note 8). The Company’s consolidated statement of income (loss) for the year ended March 31, 2017 reflects a tradename and patent impairment charge in the amount of $1,110,000 compared to $50,000 for the prior fiscal year. These impairment charges were incurred by Delphax (see Note 8).
Annual future amortization expense for these intangible assets
for the five succeeding years is as follows:
Year ending March 31,
|
|
|
|
|
2018
|
|
$
|
350,146
|
|
2019
|
|
|
268,021
|
|
2020
|
|
|
162,840
|
|
2021
|
|
|
162,840
|
|
2022
|
|
|
101,422
|
|
Goodwill consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Goodwill, at original cost
|
|
$
|
4,793,013
|
|
|
$
|
375,408
|
|
|
|
|
4,793,013
|
|
|
|
375,408
|
|
Less accumulated impairment
|
|
|
(375,408
|
)
|
|
|
(100,000
|
)
|
Goodwill, net of impairment
|
|
$
|
4,417,605
|
|
|
$
|
275,408
|
|
The Company recorded goodwill of approximately $375,000 in connection with its investment in Delphax (Note
8). The Company estimated a subsequent impairment of this goodwill during the fiscal year ended March 31, 2016 of $100,000 and an additional impairment of $275,000 during the quarter ended June 30, 2016.
The Company undertook as of March 31, 2017 a qualitative assessment of goodwill associated with its acquisitions of Contrail Aviation and D&D and concluded that no impairment charge was warranted.
Accrued expenses consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and related items
|
|
$
|
5,398,877
|
|
|
$
|
3,288,169
|
|
Profit sharing
|
|
|
413,522
|
|
|
|
1,769,261
|
|
Health insurance
|
|
|
423,680
|
|
|
|
353,825
|
|
Warranty reserves
|
|
|
164,240
|
|
|
|
266,455
|
|
Asset retirement obligation
|
|
|
562,500
|
|
|
|
562,500
|
|
Claims reserve
|
|
|
308,528
|
|
|
|
-
|
|
Taxes
|
|
|
508,615
|
|
|
|
353,825
|
|
Other deposits
|
|
|
325,000
|
|
|
|
-
|
|
Other
|
|
|
567,853
|
|
|
|
248,839
|
|
Total
|
|
$
|
8,672,815
|
|
|
$
|
6,842,874
|
|
Product warranty reserve activity is as follows:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning Balance
|
|
$
|
266,455
|
|
|
$
|
231,803
|
|
Amounts charged to expense
|
|
|
(15,173
|
)
|
|
|
140,768
|
|
Actual warranty costs paid
|
|
|
(87,042
|
)
|
|
|
(166,916
|
)
|
Delphax acquisition
|
|
|
-
|
|
|
|
60,800
|
|
Ending Balance
|
|
$
|
164,240
|
|
|
$
|
266,455
|
|
Acquisitions of Interests in Delphax
Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the "Securities Purchase Agreement") among the Company, Delphax Technologies, Inc. and its subsidiary, Delphax Technologies Canada Limited ("Delphax Canada"), on November 24, 2015 (the "Closing Date"), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the "Senior Subordinated Note") issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest
thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax's Series B Preferred Stock (the "Series B Preferred Stock") and a Stock Purchase Warrant (the "Warrant") to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events).
Principal under the Senior Subordinated Note is due on October 24, 2020 and bears interest at an annual rate of 8.5%. Interest is to be paid in kind until, in the absence of specified events, November 24, 2017. Thereafter, interest is to be paid in cash.
Interest in kind is to be paid monthly, while interest payable in cash is to be paid quarterly. The Senior Subordinated Note is guaranteed by Delphax and is secured by security interests granted by Delphax and Delphax Canada in their respective inventories, equipment, accounts receivable, cash, deposit accounts, contract rights and other specified property, as well as a pledge by Delphax of the outstanding capital stock of its subsidiaries, including Delphax Canada. Pursuant to the terms of a subordination agreement (the "Subordination Agreement") entered into on October 2, 2015 by Delphax, Delphax Canada, the Company and the senior lender (the "Senior Lender") that provides a revolving credit facility under an agreement with Delphax and Delphax Canada (the "Delphax Senior Credit Agreement"), the Company's rights with respect to payment under and enforcement of the Senior Subordinated Note, and enforcement of its security interests are subordinated to the rights of the Senior Lender under the Delphax Senior Credit Agreement
.
Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax's employee stock option plans at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company and approximately 31% of the outstanding shares of common stock assuming conversion of the Series B Preferred Stock and the issuance of all the shares of Delphax common stock reserved for issuance under Delphax's employee stock option plans.
Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Series B Preferred Stock and interests in the Warrant sufficient to permit it to acquire up to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock acquired in connection with the exercise of the Warrant equal to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant), then
● holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and exercise rights of removal and replacement with respect to) three-sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and to exercise rights of removal and replacement with respect to) four-sevenths of the members of the board of directors of Delphax; and
● without the written consent or waiver of the Company, Delphax may not enter into specified corporate transactions.
Pursuant to the provision described above, beginning on November 24, 2015, three designees of the Company were elected to the board of directors of Delphax, which had a total of seven members following their election.
The Warrant expires on November 24, 2021.
In the event that Delphax were to declare a cash dividend on its common stock, the Warrant provides that the holder of the Warrant would participate in the dividend as if the Warrant had been exercised in full and the shares of Series B Preferred Stock acquired upon exercise had been fully converted into Delphax common stock. The Warrant provides that, prior to any exercise of the Warrant, the holder of the Warrant must first make a good faith written tender offer to existing holders of Delphax common stock to purchase an aggregate amount of common stock equal to the number of shares of common stock issuable upon conversion of the Series B Preferred Stock that would be purchased upon such exercise of the Warrant. The Warrant requires that the per share purchase price to be offered in such tender offer would be equal to the then-current exercise price of the Warrant divided by the then-current conversion rate of the Series B Preferred Stock. To the extent that shares of common stock are purchased by the holder in the tender offer, the amount of shares of Series B Preferred Stock purchasable under the Warrant held by such holder is to be ratably reduced. The Warrant is to provide that it may be exercised for cash, by surrender of principal and interest under the Senior Subordinated Note equal to 0.95 times the aggregate exercise price or by surrender of a portion of the Warrant having a value equal to the aggregate exercise price based on the difference between the Warrant exercise price per share and an average market value, measured over a 20-trading day period, of Delphax common stock that would be acquired upon conversion of one share of Series B Preferred Stock.
As a result of the above transactions, the Company determined that it had obtained control over Delphax and it included Delphax in its consolidated financial statements beginning on November 24, 2015.
See Note 9.
The
following table summarizes the fair values of consolidated Delphax assets and liabilities as of the Closing Date:
|
|
November 24, 2015
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
586,061
|
|
Accounts receivable
|
|
|
1,740,210
|
|
Inventories
|
|
|
3,972,802
|
|
Other current assets
|
|
|
693,590
|
|
Property and equipment
|
|
|
722,714
|
|
Intangible assets - trade name
|
|
|
120,000
|
|
Intangible assets - patents
|
|
|
1,090,000
|
|
Goodwill
|
|
|
375,408
|
|
Total assets
|
|
$
|
9,300,785
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Accounts payable
|
|
$
|
1,663,199
|
|
Accrued expenses
|
|
|
1,949,522
|
|
Income tax payable
|
|
|
11,312
|
|
Debt
|
|
|
3,313,317
|
|
Other long-term liabilities
|
|
|
650,500
|
|
Total liabilities
|
|
$
|
7,587,850
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
1,712,935
|
|
The Company determined that it was reasonable to use the price which it paid for its equity interest as the basis for estimating the total fair value of Delphax
’s equity as of November 24, 2015 acquisition date. The effect of the Company’s equity and debt investments of $1,050,000 and $2,500,000, respectively, are not reflected in the above table. As such, the amounts presented reflect the fair values of Delphax’s assets and liabilities immediately prior to the Company’s investments. The net assets amount presented above is the estimated acquisition date fair value of the non-controlling interests in Delphax.
Delphax
’s debt immediately prior to the acquisition included approximately $508,000 due under the 90-Day Senior Subordinated Note. The goodwill is not tax deductible for income tax purposes.
The Company has finalized its Delphax acquisition accounting.
Direct costs relating to the above transactions of $110,000 were expensed as incurred during the year ended March 31, 2016, and are included in the general and administrative expenses in the consolidated statements of income and comprehensive income.
Pro forma financial information is not presented as the results are not material to the Company
’s consolidated financial statements.
On January 6, 2017, the Company acquired all rights, and assumed all obligations, of a third-party lender under the Delphax Senior Credit Agreement with Delphax and Delphax Canada providing for a $7.0 million revolving senior secured credit facility, subj
ect to a borrowing base of North American accounts receivable and inventory, including obligations, if any, to fund future borrowings under the Delphax Senior Credit Agreement. In connection with this transaction, the Company paid to such third-party senior lender an amount equal to the approximately $1.26 million outstanding borrowing balance, plus accrued and unpaid interest and fees. Also in connection with this transaction, the Company, Delphax and Delphax Canada entered into an amendment to the Delphax Senior Credit Agreement to reduce the maximum amount of borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million, to revise the borrowing base to include in the borrowing base 100% of purchase orders from customers for products up to $500,000, to provide that the interest rate on all borrowings outstanding until all loans under the Delphax Senior Credit Agreement are repaid in full will be a default rate equal to 2.5% per month to be paid monthly, and to provide for the payment to the Company from Delphax Canada and Delphax of fees equal to $25,000 upon execution of the amendment and of $50,000 upon repayment in full of all loans under the Delphax Senior Credit Agreement. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain “Events of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax Senior Credit Agreement and that the Company was reserving all rights to exercise remedies under the Delphax Senior Credit Agreement and that no delay in exercising any such remedy is to be construed as a waiver of any of its remedies. Also, on January 6, 2017, the Company and Delphax Canada entered into a Forbearance and Amendment Agreement dated as of January 6, 2017, which amended the Senior Subordinated Note to increase the default rate of interest from an annual rate of 10.5% to an annual rate of 18%, to be in effect until all amounts under the Senior Subordinated Note are paid in full, and which provides that so long as no Event of Default (as defined in the Senior Subordinated Note) occurs under the Senior Subordinated Note, other than Events of Default that existed as of January 6, 2017, the Company agreed to forbear from exercising its remedies under the Senior Subordinated Note until May 31, 2017 and further provided for the payment by Delphax Canada to the Company of a forbearance fee equal to approximately $141,000. At March 31, 2017, Delphax Canada was not in compliance with financial covenants under the Delphax Senior Credit Agreement. Notwithstanding the existence of these events of default, the Company permitted additional borrowings under the Delphax Senior Credit Agreement to, among other things, fund a final production run by Delphax Canada of consumable products for its legacy printing systems, which production run was primarily completed over the first six months of calendar 2017. Delphax Canada is Delphax's sole manufacturing subsidiary.
Events of default under the Delphax Senior Credit Agreement persisted. On July 13, 2017, the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On August 10, 2017, the Company foreclosed on all personal p
roperty and rights to undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured creditors and shareholder on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result, the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
The intercompany balances under the Delphax Senior Credit Agreement and Senior Subordinated Note as of March 31, 2017 are eliminated in the presentation of the consolidated financial statements. The effect
of interest expense arising under the Senior Subordinated Note and, since January 6, 2017 under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or loss attributed to non-controlling interests because Delphax is a variable interest entity.
As further discussed in Note 9, the Company recognized significant expenses in the June 30, 2016 quarter associated with Delphax employee benefit costs and write-downs of Delphax inventories, long-lived tangible and intangible assets, and goodwill. The Company concluded that the charges were necessary to reflect changes in market conditions and business outlook during the June 30, 2016 quarter and were not associated with conditions that existed as of the Delphax Closing Date. As such, these adjustments were not accounted for as “measurement period” adjustments in the accompanying consolidated financial statements.
Acquisition of Interests in Contrail
Aviation
On July 18, 2016 (the “Contrail Closing Date”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”) between Contrail Aviation Support, LLC (“Contrail Aviation”), a subsidiary of the Company, Contrail Aviation Support, Inc. (the “Seller” or “Contrail”) and Joseph Kuhn, the sole shareholder of the Seller, Contrail Aviation completed the purchase of all of the assets owned, used or usable by the Seller, other than cash, equity in the Seller
’s IC-DISC subsidiary and certain other specified excluded assets. Pursuant to the Asset Purchase Agreement, Contrail Aviation also assumed certain liabilities of the Seller. Prior to this acquisition, the Seller, based in Verona, Wisconsin, engaged in the business of acquiring surplus commercial jet engines and components and supplying surplus and aftermarket commercial jet engine components. In connection with the acquisition, Contrail Aviation offered employment to all of the Seller’s employees and Mr. Kuhn was appointed Chief Executive Officer of Contrail Aviation.
The acquisition consideration consisted of (i) $4,033,368 in cash, (ii) equity membership units in Contrail Aviation representing 21% of the total equity membership units in Contrail Aviation, and (iii) and contingent additional deferred consideration payments which are more fully described below.
In addition to the net assets of the seller, beginning equity of Contrail included cash of approximately $904,000.
Pursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent additional deferred consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate (collectively, the “Earnout Payments” and each, an “Earnout Payment”), calculated as follows:
(i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with respect to such Earnout Period;
(ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an amount equal to the product of (x) the EBITDA generated with respect to such Earnout Period minus $1,500,000, and (y) two (2);
(iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,000,000;
(iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and
(v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv), above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal to the difference between $3,000,000 and the aggregate Earnout Payments already received or payable pursuant to clauses (i) through (iv), above.
As used in the Asset Purchase Agreement, “
Earnout Period” means each of the first five twelve-full-calendar-month periods following the closing of the acquisition. The Company has estimated its liability with respect to the Earnout Payment to be $2,900,000, which amount is included in the “Other non-current liabilities” in the consolidated balance sheet at March 31, 2017. As a result of the EBITDA of Contrail Aviation being approximately $2.1 million for the first Earnout Period, the Earnout Payment with respect to that Earnout Period is $1,000,000, which amount is payable in October 2017.
On the Contrail Closing Date, Contrail Aviation and the Seller entered into an Operating Agreement (the “Operating Agreement”) providing for the governance of and the terms of membership interests in Contrail Aviation and including put and call options (“Put/Call Option”) permitting, at any time after the fifth anniversary of the Contrail Closing Date, Contrail Aviation at its election to purchase from the Seller, and permitting the Seller at its election to require Contrail Aviation to purchase from the Seller, all of the Seller
’s equity membership interests in Contrail Aviation at a price to be agreed upon, or failing such an agreement to be determined pursuant to third-party appraisals in a process specified in the Operating Agreement.
The following t
able summarizes the fair values of assets acquired and liabilities assumed by Contrail Aviation as of the Contrail Closing Date:
|
|
July 18, 2016
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
Accounts receivable
|
|
$
|
1,357,499
|
|
Inventories
|
|
|
2,118,475
|
|
Prepaid expenses
|
|
|
30,121
|
|
Property and equipment
|
|
|
33,095
|
|
Intangible assets - non-compete
|
|
|
69,700
|
|
Intangible assets - tradename
|
|
|
322,000
|
|
Intangible assets - certification
|
|
|
47,000
|
|
Intangible assets - customer relationship
|
|
|
451,000
|
|
Goodwill
|
|
|
4,227,205
|
|
Total assets
|
|
$
|
8,656,095
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
Accounts payable
|
|
$
|
366,575
|
|
Accrued expenses
|
|
|
43,652
|
|
Earnout liability
|
|
|
2,900,000
|
|
Total liabilities
|
|
$
|
3,310,227
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
5,345,868
|
|
The Company
’s purchase accounting reflects the estimated net fair value of the Seller’s assets acquired and liabilities assumed as of the Contrail Closing Date. Purchase accounting also reflects the Company’s current estimate that the Earnout Payments will be due at the above-specified maximum level. The Contrail Closing Date balance sheet information disclosed above reflects the present value of such estimated Earnout Payments.
The Company has finalized its Contrail Aviation acquisition accounting.
The Put/Call Option specifies a fair value strike price as of the exercise date. As such, the Company assigned no value to the Put/Call Option for purposes of purchase accounting. Because the Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller
’s equity membership interests in Contrail Aviation, the Company has presented this redeemable non-controlling interest in Contrail Aviation between the liabilities and equity sections of the accompanying March 31, 2017 consolidated balance sheet. The Company estimates that the fair value of Contrail Aviation did not change by more than an inconsequential amount between July 18, 2016 and March 31, 2017. Therefore, other than allocation of the Seller’s proportionate share of Contrail Aviation’s net earnings for the period since acquisition, the Company has not adjusted the redeemable non-controlling interest balance from the Contrail Closing Date amount.
Pro forma financial information is not presented as the results are not material to the Company
’s consolidated financial statements.
Amortization expense associated with the acquired intangible
assets totaled approximately $93,000 for the period from July 18, 2017 through March 31, 2017.
Other Acquisitions
On October 3, 2016, a newly formed subsidiary of the Company, Global Aviation Partners LLC, acquired 100% of the outstanding equity interest
s of Jet Yard, from the holder thereof. The cash purchase price was $15,000 and there are no contractual provisions, such as an earn-out, which could result in an increase to this price. Jet Yard is registered to operate a repair station under Part 145 of the regulations of the Federal Aviation Administration and its principal asset on the acquisition date was a contract with Pinal County, Arizona to lease approximately 48.5 acres of land at the Pinal Air Park in Marana, Arizona. Jet Yard was organized in 2014, entered into the lease in June 2016 and had maintained de minimus operations from formation through the acquisition date. The lease expires in May 2046 with an option to renew for an additional 30-year period (though the lease to a 2.6 acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The lease provides for an initial annual rent of $27,000, which rental rate escalates based on a schedule in annual increments during the first seven years of the lease (at which time the annual rental rate would be $152,000), and increases by an additional five percent for each three-year period thereafter. Because the rental expense will be accounted for on a straight-line basis over the term of the lease, the rental expense in the initial years will exceed the corresponding cash payments. The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable, which includes, as the initial phase, the construction of a demolition pad to be completed by March 2017 and, as the final and most significant phase, the construction of an aircraft maintenance hangar large enough to house a Boeing B777-300 by the first quarter of 2021. The construction of the demolition pad required by March 31, 2017 under the lease has not been completed and Jet Yard and Pinal County are in discussions with respect to improvements on the leased premises.
The acquired Jet Yard business is included in the Company
’s commercial jet engine segment. The Company has finalized its Jet Yard acquisition accounting.
Pursuant
to an Asset Purchase Agreement signed on October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D which was in the business of marketing, selling and providing aviation repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount paid at closing in connection with this acquisition was $400,000. Additionally, $100,000 was due within 30 days after closing and an additional $100,000 is payable in equal monthly installments of $16,667 commencing on November 1, 2016. Earn-out payments of up to $100,000 may also be payable based on specified performance for the twelve-month period ending September 30, 2017. For purposes of purchase accounting, the Company estimated that the above-mentioned earn-out will be paid in full. Therefore, the Company estimates the total purchase consideration at approximately $700,000. The Company allocated the purchase consideration to identifiable tangible and intangible assets. No liabilities were assumed in the acquisition. The estimated fair value of identifiable tangible and intangibles assets was approximately $200,000 and $300,000, respectively. The $200,000 excess of the purchase consideration over the estimated fair value of identifiable assets was recorded as goodwill. The basis of the acquired assets will be “stepped up” for income tax purposes. As such, no deferred taxes were recognized in purchase accounting.
Amortization expense associated with the acquired intangible a
ssets was approximately $13,000 from October 31, 2016 through March 31, 2017.
The acquired D&D business is operated by GAS and included in the Company
’s ground support services segment. The Company has finalized its D&D acquisition accounting.
Pro forma financial information is not presented for the above acquisitions as the results are not material to the Company
’s consolidated financial statements.
9.
|
VARIABLE INTEREST ENTITIES
|
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810
-
Consolidation
, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
|
●
|
the power to direct the activities that most significantly impact the economic performance of the VIE; and
|
|
●
|
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
|
As described in Note 8
, the Company acquired Delphax Series B Preferred Stock, loaned funds to Delphax, and acquired the Warrant. In accordance with ASC 810, the Company evaluated whether Delphax was a VIE as of November 24, 2015. Based principally on the fact that the Company granted Delphax subordinated financial support, the Company determined that Delphax was a VIE on that date. Therefore, it was necessary for the Company to assess whether it held any “variable interests”, as defined in ASC 810, in Delphax. The Company concluded that its investments in Delphax’s equity and debt, and its investment in the Warrant, each constituted a variable interest. Based on its determination that it held variable interests in a VIE, the Company was required to assess whether it was Delphax’s “primary beneficiary”, as defined in ASC 810.
After considering all relevant facts and circumstances, the Company concluded that it became the primary beneficiary of Delphax on November 24, 2015. While various factors informed the Company
’s determination, the Company assigned considerable weight to both 1) the shortness of time until June 1, 2016 when the Company would become entitled to elect four-sevenths of the members of the board of directors of Delphax and 2) the anticipated financial significance of Delphax’s activities in the periods subsequent to June 1, 2016. Since the Company became Delphax’s primary beneficiary on November 24, 2015, the Company consolidated Delphax in its consolidated financial statements beginning on that date.
Refer to
Note 8 for the fair value of the assets and liabilities of Delphax on the acquisition date.
The following table sets forth the carrying values of Delphax
’s assets and liabilities as of March 31, 2017 and 2016:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
328,327
|
|
|
$
|
249,528
|
|
Accounts receivable, net
|
|
|
2,036,221
|
|
|
|
1,433,494
|
|
Inventories, net
|
|
|
1,941,729
|
|
|
|
4,642,298
|
|
Other current assets
|
|
|
1,145,274
|
|
|
|
1,034,067
|
|
Total current assets
|
|
|
5,451,551
|
|
|
|
7,359,387
|
|
Property and equipment, net
|
|
|
8,007
|
|
|
|
625,684
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
1,109,112
|
|
Goodwill
|
|
|
-
|
|
|
|
275,408
|
|
Other assets
|
|
|
-
|
|
|
|
26,020
|
|
Total assets
|
|
$
|
5,459,558
|
|
|
$
|
9,395,611
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,482,578
|
|
|
$
|
1,684,802
|
|
Income tax payable
|
|
|
11,312
|
|
|
|
11,312
|
|
Accrued expenses
|
|
|
3,627,162
|
|
|
|
1,926,340
|
|
Short-term debt
|
|
|
4,714,257
|
|
|
|
4,435,572
|
|
Total current liabilities
|
|
|
10,835,309
|
|
|
|
8,058,026
|
|
Long-term debt
|
|
|
-
|
|
|
|
4,835
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
606,358
|
|
Total liabilities
|
|
$
|
10,835,309
|
|
|
$
|
8,669,219
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
(5,375,751
|
)
|
|
$
|
726,392
|
|
The short-term debt include amounts due from Delphax to Air T, Inc. Those amounts have been eliminated in consolidation. As of March 31, 2017, the outstanding principal amount of the Senior Subordinated Note was approximately $2,889,000 ($2,576,000 as of
March 31, 2016) and the outstanding borrowings under the Delphax Senior Credit Agreement was $1,873,000. Short-term debt as reflected in the above table includes approximately $388,000 and $76,000 of accrued interest, due to the Company from Delphax Canada under the Senior Subordinated Note for the fiscal year 2017 and 2016 respectively. Short-term debt also includes approximately $112,000, due to the Company from Delphax Canada under the Delphax Senior Credit Agreement for the fiscal year 2017.
The assets of Delphax can only be used to satisfy the obligations of Delphax. Furthermore, Delphax
’s creditors do not have recourse to the assets of Air T, Inc. or its subsidiaries.
Delphax
’s revenues and expenses are included in our consolidated financial statements beginning November 24, 2015 through March 31, 2017. Revenues and expenses prior to the date of initial consolidation are excluded.
The following table sets forth the revenue and expenses of Delphax that are included in the Company
’s consolidated statements of income (loss) and comprehensive income (loss) for the years ended March 31, 2017 and 2016:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
9,809,997
|
|
|
$
|
3,954,797
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
10,090,073
|
|
|
|
3,611,024
|
|
General and administrative
|
|
|
2,876,132
|
|
|
|
1,218,564
|
|
Research and development
|
|
|
1,042,496
|
|
|
|
777,942
|
|
Depreciation, amortization and impairment
|
|
|
1,738,819
|
|
|
|
313,893
|
|
|
|
|
15,747,520
|
|
|
|
5,921,423
|
|
Operating loss
|
|
|
(5,937,523
|
)
|
|
|
(1,966,626
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net
|
|
|
(361,098
|
)
|
|
|
(21,111
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6,298,621
|
)
|
|
|
(1,987,737
|
)
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,298,621
|
)
|
|
$
|
(1,987,737
|
)
|
Non-operating expense, net, includes intercompany interest expense of approximately $424,000 associated with the Senior Subordinated Note and the Delphax Senior Credit Agreement for the fiscal year ended March 31, 2017 and approximately $76,000 for the fiscal year ended March 31, 2016. This interest expense was eliminated for purposes of net income (loss) presented in the Company
’s accompanying consolidated statements of income (loss) and comprehensive income (loss) for the years ended March 31, 2017 and 2016, though the effect of intercompany interest expense under the Senior Subordinated Note and the Delphax Senior Credit Agreement is reflected in the attribution of Delphax net income or losses attributed to non-controlling interests.
As disclosed in the Company
’s Form 10-Q for the quarter ended June 30, 2016, Delphax was informed by its largest customer that the customer had decided to accelerate its plans for removing Delphax legacy printing systems from production and that Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be expected from this customer was being sharply curtailed. In addition to this specific customer communication, Delphax also experienced a broad-based decline in legacy product customer demand during the first quarter. Sales of Delphax’s new élan printer system also had not materialized to expectations.
The adverse business developments during the quarter ended June 30, 2016 and the significantly deteriorated outlook for future orders of legacy and élan product caused the Company to reevaluate the recoverability of Delphax
’s assets, both tangible and intangible. Based on this reevaluation, which involved material estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company also recorded a partial impairment of Delphax related long-lived tangible assets. Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under existing Delphax employee benefit plans were both probable and estimable. This assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these various adjustments, which aggregated to approximately $5,610,000, were reflected in the operating results of Delphax for the quarter ended June 30, 2016. There were no significant additions to inventory and severance reserves from June 30, 2016 to March 31, 2017.
The
Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company recorded goodwill of approximately $375,000 in connection with its investment in Delphax. The Company estimated a subsequent impairment of this goodwill during the fiscal year ended March 31, 2016 of $100,000 and an additional impairment of $275,000 during the quarter ended June 30, 2016. These impairment losses are reflected on the consolidated statement of income (loss) within the “depreciation, amortization and impairment” line item.
Intangible assets of Delphax had a net book value of approximately $1.4 million as of March 31, 2016. During the quarter ended June 30, 2016, the Company recognized an impairment charge which resulted in the remaining net book of Delphax intangible assets being fully written off.
The Company estimated and recorded a tradename and patent impairment charge related to Delphax in the amount of approximately $1,385,000 during the quarter ended June 30, 2016. An impairment charge in the amount of $50,000 was recorded during the fiscal year 2016. These impairment losses are reflected on the consolidated statement of income (loss) within the “depreciation, amortization and impairment” line item.
The above described adverse business developments drove significant negative operating results and led to severe liquidity constraints for Delphax. In addition to other measures intended to respond to developments, Delphax engaged an outside advisory firm to assist with operations, cost reductions and expense rationalization, and to provide an objective assessment and recommendations regarding Delphax
’s business outlook and alternative courses of action. During the quarter ended June 30, 2016, a number of Delphax employees were either severed or furloughed. For most of fiscal year 2017, Delphax’s operations have been maintained at a significantly curtailed level.
We determined that the attribution of Delphax net income or loss should be based on consideration of all of Air T
’s investments in Delphax and Delphax Canada. As disclosed in Note 8, the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests.
We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax
’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67%/33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67%/33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.
The effect of interest expense arising under the Senior Subordinated Note and, since January 6, 2017, under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net losses attributed to non-controlling interests because Delphax is a VIE.
As a result of the application of the above-described attribution methodology, for the fiscal years ended March 31, 2017 and 2016, the attribution of Delphax losses to non-controlling interests was 30% and 33%, respectively.
10.
|
FINANCING ARRANGEMENTS
|
As of March 31, 2017, the Company had a senior secured revolving credit facility of $25.0 million (the “Revolving Credit Facility”). The Revolving Credit Facility includes a sublimit for issuances of letters of credit of up to $500,000. Under the Revolving Credit Facility, at March 31, 2017, each of the Company, MAC,
CSA, GGS, GAS, Jet Yard, and ATGL was permitted to make borrowings. Borrowings under the Revolving Credit Facility bear interest (payable monthly) at an annual rate of one-month LIBOR plus an incremental amount ranging from 1.50% to 2.00% based on a consolidated leverage ratio. In addition, a commitment fee accrues with respect to the unused amount of the Revolving Credit Facility at an annual rate of 0.15%. The Company includes commitment fee expense within the interest expense and other line item of the accompanying consolidated statements of income (loss). Amounts applied to repay borrowings under the Revolving Credit Facility may be reborrowed, subject to the terms of the facility. Pursuant to an August 29, 2017 amendment to the agreement governing the Revolving Credit Facility, the maturity of the Revolving Credit Facility was extended to April 1, 2019. See Note 24 for a discussion of this and other amendments to the agreement governing the Revolving Credit Facility entered into after March 31, 2017.
Borrowings under the Revolving Credit Facility, together with hedging obligations, if any, owing to the lender under the Revolving Credit Facility or any affiliate of such lender, are secured by a first-priority security interest in substantially all assets of the Company and the other borrowers (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing), but excluding interests in real property.
The agreement governing the Revolving Credit Facility contains affirmative and negative covenants, including covenants that restrict the ability of the Company and the other borrowers to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of their business, enter into certain operating leases, and make
certain capital expenditures. The credit agreement governing the Revolving Credit Facility also contains financial covenants, including a minimum consolidated tangible net worth of $18.0 million plus, on a cumulative basis and commencing with the fiscal year ended March 31, 2017, 50% of consolidated net income for the fiscal year then ended, a minimum consolidated fixed charge coverage ratio of 1.35 to 1.0, a minimum consolidated asset coverage ratio of 1.50 to 1.0 for the quarter ended March 31, 2017 and 1.75 to 1.0 thereafter (though the consolidated asset coverage ratio is not to be tested under the agreement governing the Revolving Credit Facility for the quarters ending June 30, 2017, September 30, 2017 and December 31, 2017), a maximum consolidated leverage ratio of 3.5 to 1.0, and a covenant limiting the aggregate amount of assets the Company and its subsidiaries lease, or hold for leasing, to others to no more than $5,000,000 at any time. The Company was not in compliance with the maximum consolidated leverage ratio covenant as of the March 31, 2017, December 31, 2016 and September 30, 2016 measurement dates and has agreed that the covenant will not be tested at the June 30, 2017 measurement date. The lender has waived compliance with this covenant as of these measurement dates. The agreement governing the Revolving Credit Facility contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, certain changes of control of the Company, termination of, or modification to materially reduce the scope of the services required to be provided under, certain agreements with FedEx, and the occurrence of a material adverse effect upon the Company and the other borrowers as a whole. The Company is exposed to changes in interest rates on its prior line of credit and its current revolving credit facility. If the LIBOR interest rate had been increased by one percentage point, based on the weighted average balance outstanding for the year, the change in annual interest expense would have been negligible. A total of $17,908,000 in borrowings were outstanding under the credit facility on March 31, 2017.
At March 31, 2017, the annual interest rate applicable to borrowings under the Revolving Credit Facility was
one-month “LIBOR” rate plus 200 basis points. The one-month LIBOR rate at March 31, 2017 was approximately 0.98%. Except as indicated above, the Company was in compliance with all covenants under this credit facility at March 31, 2017.
In connection with and upon consummation of the Contrail Aviation acquisition in July 2016, Contrail Aviation entered into a Credit Agreement (the “Contrail Credit Agreement”) with a bank lender. The Contrail Credit Agreement provided for revolving credit borrowings by Contrail Aviation in an amount up to the lesser of $12,000,000 or a borrowing base. The borrowing base was computed monthly and was equal to the sum of 75% of the value of eligible inventory (up to a maximum of $9,000,000) and 80% of outstanding eligible accounts receivable. The borrowing base at March 31, 2017 was $
3.2 million, and the outstanding principal balance of borrowings under the Contrail Credit Agreement were $0 as of that date. Borrowings under the Contrail Credit Agreement bore interest at a rate equal to one-month LIBOR plus 2.80%, and mature in January 2018. The obligations of Contrail Aviation under the Contrail Credit Agreement were required to be guaranteed by each of its subsidiaries (if any), and were (and the guaranty obligations of any such subsidiary guarantors were required to be) secured by a first-priority security interest in substantially all of the assets of Contrail Aviation and any such subsidiary guarantors, as applicable (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, real property, and proceeds of the foregoing). The obligations of Contrail Aviation under the Contrail Credit Agreement were also guaranteed by the Company, with such guaranty limited in amount to a maximum of $1,600,000, plus interest on such amount at the rate of interest in effect under the Contrail Credit Agreement, plus costs of collection.
The Contrail Credit Agreement contained affirmative and negative covenants, including covenants that restricted the ability of Contrail Aviation and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contained financial covenants applicable to Contrail Aviation and its subsidiaries, including a minimum debt service coverage ratio of 1.75 to 1.0, a maximum ratio of total liabilities to tangible net worth of 2.5 to 1.0, and a $10,000 limitation on annual operating lease payments. At March 31, 2017, Contrail Aviation was in compliance with its bank covenants.
Delphax, through its Canadian subsidiary, Delphax Canada, maintains a debt facility pursuant to a Senior Credit Agreement (the “Delphax Senior Credit Agreement”). The obligations of Delphax Canada under the Delphax Senior Credit Agreement are guaranteed by Delphax. Prior to January 6, 2017, the Delphax Senior Credit Agreement provided for a $7.0 million revolving senior secured credit facility from a third-party lender (the “Senior Lender”), with the amount available for borrowing being subject to a borrowing base of North American accounts receivable and inventory. Borrowings under the Delphax Senior Credit Agreement are secured by substantially all of Delphax
’s North American assets. The Delphax Senior Credit Agreement expires in November 2018 and includes certain financial covenants. The Delphax Senior Credit Agreement initially provided for interest based upon the prime rate plus a margin and an additional margin applicable during the pendency of a default. On September 1, 2016, the Senior Lender gave Delphax Canada notice of such default, applied the default interest margin, and communicated that it would be reducing the eligible inventory advance rate under the Delphax Senior Credit Agreement by 0.5% per week for each week commencing September 9, 2016. Delphax Canada was permitted by the Senior Lender to continue to make borrowings under the Delphax Senior Credit Agreement notwithstanding the existence of such default.
The intercompany balance under the Delphax Senior Credit Agreement as of March 31, 2017, as well as the intercompany payment and receipt of fees and interest accruing after January 6, 2017, are eliminated in the presentation of the consolidated financial statements.
Pursuant to an Assignment and Acceptance Agreement dated January 6, 2017 between the Senior Lender and the Company, on January 6, 2017 the Company acquired all rights, and assumed all obligations, of the Senior Lender under the Delphax Senior Credit Agreement, including obligations, if any, to fund future borrowings under the Delphax Senior Credit Agreement. In connection with this transaction, the Company paid to the Senior Lender an amount equal to approximately $1.26 million for the outstanding borrowing balance, plus accrued and unpaid interest and fees. Also in connection with this transaction, the Company, Delphax and Delphax Canada entered into an amendment to the Delphax Senior Credit Agreement to reduce the maximum amount of borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million, to revise the borrowing base to include in the borrowing base 100% of purchase orders from customers for products up to $500,000, to provide that the interest rate on all borrowings outstanding until all loans under the Delphax Senior Credit Agreement are repaid in full will be a default rate equal to 2.5% per month to be paid monthly, and to provide for the payment to the Company from Delphax Canada and Delphax of fees equal to $25,000 upon execution of the amendment and of $50,000 upon repayment in full of all loans under the Delphax Senior Credit Agreement. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain “Events of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Senior Credit Agreement and that the Company was reserving all rights to exercise remedies under the Delphax Senior Credit Agreement and that no delay in exercising any such remedy is to be construed as a waiver of any of its remedies. Notwithstanding such notice, the Company continued to permit borrowings by Delphax Canada under the D
elphax Senior Credit Agreement.
As of March 31, 2017, Delphax had aggregat
e borrowings of approximately $1,873,000 outstanding under the Delphax Senior Credit Agreement. At March 31, 2017, Delphax Canada was not in compliance with financial covenants under the Delphax Senior Credit Agreement. Due to Delphax Canada’s noncompliance with financial covenants, at March 31, 2017 the Company had the contractual right to cease permitting borrowings under the Delphax Senior Credit Agreement and to declare all amounts outstanding due and payable immediately.
Notwithstanding the existence of these events of default, the Company permitted additional borrowings under the
Delphax Senior Credit Agreement to, among other things, fund a final production run by Delphax Canada of consumable products for its legacy printing systems, which production run was primarily completed over the first six months of calendar 2017. Delphax Canada is Delphax's sole manufacturing subsidiary.
Events of default under the
Delphax Senior Credit Agreement persisted. On July 13, 2017, the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured creditors and shareholder on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result, the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
On October 31, 2016, the Company and its subsidiaries,
MAC, GGS, CSA, GAS, ATGL, Jet Yard and Stratus Aero entered into a Loan Agreement dated as of October 31, 2016, (the “Construction Loan Agreement”) with the lender to borrow up to $1,480,000 to finance the acquisition and development of the Company’s new corporate headquarters facility to be located in Denver, North Carolina. Under the Construction Loan Agreement, the Company may make monthly drawings to fund construction costs until October 2017. Borrowings under the Construction Loan Agreement bear interest at the same rate charged under the Revolving Credit Facility. Monthly interest payments began in November 2016. Monthly principal payments (based on a 25-year amortization schedule) are to commence in November 2017, with the final payment of the remaining principal balance due in October 2026. Borrowings under the Construction Loan Agreement are secured by a mortgage on the new headquarters facility and a collateral assignment of the Company’s rights in life insurance policies with respect to certain former executives, as well as the same collateral securing borrowings under the Revolving Credit Facility. At March 31, 2017, outstanding borrowings under the Construction Loan were $562,000.
Estimated repayments/maturities of long-term debt as of March 31, 2017 are as follows: approximately $25,000 in fiscal year 2018, approximately $17,968,000 in fiscal year 2019, approximately $60,000 in each of the fiscal years 2020-2022, and approximately $295,000 cumulatively thereafter.
The Company has operating lease commitments for office equipment and its office and maintenance facilities.
The Company leases property used for its corporate offices from a company controlled by certain of the Company’s former officers and directors. The lease for this facility provides for monthly rent of $14,862 and expires on January 31, 2018, though the lease may be renewed by us for three additional two-year option periods through January 31, 2024. The Company relocated its corporate offices to an owned facility in July 2017 and does not expect to renew this lease.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located in Kinston, North Carolina under an agreement that extends through January 2023, with the option to extend the lease for four additional five-year periods thereafter. The Company has calculated rent expense under the current lease term.
GGS leases its production facility under an agreement that extends through August 2019.
GAS leases several maintenance facilities across the country and an administrative office in Eagan, Minnesota. Most of the leases are on one year agreements with renewal clauses, but some of these are multi-year leases extending out as far as
March 2021.
Delphax
Canada leased its production facility in Mississauga, Ontario under an agreement extending through August 2018. Annual rents remaining under the agreement were CDN $384,000 (approximately $288,000 using the March 31, 2017 exchange rate) per year. In addition, Delphax Canada was obligated to pay as additional rent the related operating expenses of the landlord. Under the terms of the lease, Delphax Canada is also subject to a facility restoration obligation. This lease has been terminated effective upon removal of the property foreclosed upon by Air T, see Note 9 and Note 24.
Delphax has office space in the United Kingdom under an operating lease that extends through January 201
8. The annual lease payment for this facility is £62,400 (approximately $78,000 using the March 31, 2017 exchange rate). In addition to the contracted lease amount, the lease payments include a pro rata portion of the operating expenses incurred by the landlord.
A newly organized subsidiary of Air T leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease commenced on August 1,
2017 and terminates on July 31, 2020. Annual rent under the lease escalates annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000 (CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T.
Contrail Aviation leases a 21,000 square foot facility in Verona, Wisconsin. The lease for this facility expires on July 17, 2021, though Contrail Aviation has the option to renew the lease on the same terms for an additional five-year period. The lease provides for monthly rent of approximately $13,000
(see Note 23).
Jet Yard leases approximately 48.5 acres of land under a lease agreement with Pinal County, Arizona. The lease expires in May 2046 with an option to renew for an additional 30-year period (though the lease to a 2.6 acre parcel of the leased premises may be terminated by Pinal County upon 90 days
’ notice). The lease provides for an initial annual rent of $27,000, which rental rate escalates based on a schedule in annual increments during the first seven years of the lease (at which time the annual rental rate would be $152,000), and increases by an additional five percent for each three-year period thereafter. The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable, which includes, as the initial phase, the construction of a demolition pad to be completed by March 2017 and, as the final and most significant phase, the construction of an aircraft maintenance hangar large enough to house a Boeing B777-300 by the first quarter of 2021. The construction of the demolition pad specified under the lease has not been completed, and Jet Yard and Pinal County are in discussions with respect to improvements on the leased premises.
At March 31, 2017
, future minimum annual lease payments (foreign currency amounts translated using applicable March 31, 2017 exchange rates) under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
Year ended March 31,
|
|
|
|
|
2018
|
|
$
|
3,256,000
|
|
2019
|
|
|
2,076,000
|
|
2020
|
|
|
1,453,000
|
|
2021
|
|
|
842,000
|
|
2022
|
|
|
725,000
|
|
Thereafter
|
|
|
5,103,000
|
|
Total minimum lease payments
|
|
$
|
13,455,000
|
|
The Company
’s rent expense excluding Delphax for operating leases totaled approximately
$3,872,000 and $3,038,000 for fiscal 2017 and 2016, respectively, and includes amounts to related parties of $289,000
and $178,000
in fiscal 2017 and 2016, respectively. Delphax’s rent expense for the fiscal year ended March 31, 2017 was approximately $391,000 compared to $226,000 from November 24, 2015 through March 31, 2016.
12.
|
EQUIPMENT LEASED TO CUSTOMERS
|
The Company leases equipment to thi
rd parties. Delphax leased a printer to a third party under an operating lease agreement entered into in June 2015. The lease was assigned to ATGL during the quarter ended June 30, 2016. As of March 31, 2017, minimum future rentals under non-cancelable operating leases are as follow:
Year ended March 31,
|
|
|
|
|
2018
|
|
$
|
131,160
|
|
2019
|
|
|
131,160
|
|
2020
|
|
|
131,160
|
|
2021
|
|
|
131,160
|
|
2022
|
|
|
21,860
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
546,500
|
|
13.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company measures and reports financial assets and liabilities at fair value, on a recurring basis. Fair value measurement is classified and disclosed in one of the following three categories:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level
2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following consolidated balance sheet items are measured at fair value:
|
|
Fair Value Measurements at March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (Level 1)
|
|
$
|
4,593,667
|
|
|
$
|
9,655,915
|
|
Acquisition contingent consideration obligations (Level 3)
|
|
$
|
3,023,031
|
|
|
$
|
-
|
|
Redeemable Non-Controlling Interest (Level 3)
|
|
$
|
1,443,901
|
|
|
$
|
-
|
|
There was no significant change in the estimated fair value between initial recognition and March 31,
2017 for the acquisition contingent consideration obligations and the redeemable non-controlling interest.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable
, notes receivable and accounts payable approximate their fair value at March 31, 2017 and 2016.
14.
|
AIR T, INC. STOCKHOLDERS’ EQUITY
|
The authorized capital structure of
Air T, Inc. includes 4,000,000 shares of common stock, with a par value of $0.25 per share. In May 2014, the Company’s Board of Directors adopted a policy to discontinue the payment of a regularly scheduled annual cash dividend.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 shares of the Company
’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period.
In addition to common stock, the Company may issue up to 50,000 shares of $1.00 par value preferred stock, in one or more series, on such terms and with such rights, preferences and limitations as determined by the Board of Directors.
A total of 5,000 shares of preferred stock are authorized for issuance as Series A Junior Participating Preferred Stock and 5,000 shares of preferred stock are authorized for issuance as Series B Junior Participating Preferred Stock, of which 3,000 shares had been reserved for issuance pursuant to the Company’s former Rights Agreement, described below.
On December 14, 2014, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock
of the Company. The Rights were governed by a Rights Agreement (the “Rights Agreement”) dated as of December 15, 2014. On September 26, 2016, a special committee of independent members of the Company’s Board of Directors, under authority delegated to such committee by the Board of Directors of the Company, resolved to amend the Rights Agreement to accelerate the expiration of the Rights (as defined in the Rights Agreement) from 5:00 p.m., Eastern time, on December 26, 2017 to 5:00 p.m., Eastern time, on September 26, 2016. Thereafter, on September 26, 2016, the Company entered into an amendment to the Rights Agreement to accelerate the expiration of the Rights from 5:00 p.m., Eastern time, on December 26, 2017 to 5:00 p.m., Eastern time, on September 26, 2016 (the “Final Expiration Time”). As a result of such amendment, the Rights Agreement was effectively terminated on September 26, 2016 and all of the Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired at the Final Expiration Time.
On July 1, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Sardar Biglari, Biglari Capital Corp. and The Lion Fund II, L.P. (collectively, the “Biglari Group”), pursuant to which the Company purchased 329,738 shares of common stock, par value $0.25 (the “Common Stock”), of the Company for $24.01 per share (the “Per Share Purchase Price”), resulting in an aggregate purchase price of $7,917,009. The Per Share Purchase Price was equal, and determined by reference, to the volume-weighted average price of the Common Stock for the thirty (30) trading days preceding the date of the Securities Purchase Agreement.
Pursuant to the terms of the Securities Purchase Agreement, for a period of four years following the date of the Securities Purchase Agreement, each member of the Biglari Group agreed to customary standstill restrictions (including customary provisions regarding matters submitted to shareholders and other governance matters), and the parties to the Securities Purchase Agreement agreed to abide by customary non-disparagement provisions in connection with the parties
’ relationship with the Company.
The Common Stock was retired upon repurchase. The accompanying consolidated statement of equity for the
year ended March 31, 2017 reflects the resultant respective reductions in common stock, additional paid-in capital, and retained earnings.
15.
|
EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
|
Pursuant to equity compensation plans last approved by
Air T, Inc. stockholders in 2005, the Company has granted options to purchase up to a total of 256,000 shares of common stock to key employees, officers and non-employee directors with exercise prices at 100% of the fair market value on the date of grant. As of March 31, 2016, no further awards may be granted under the plans, and options to acquire a total of 40,000 shares remained outstanding. The employee options generally vested one-third per year beginning with the first anniversary from the date of grant. The non-employee director options generally vested one year from the date of grant.
There was no
compensation expense related to Air T, Inc. stock options for the years ended March 31, 2017 and 2016. As of March 31, 2017, there was no unrecognized compensation expense, related to the stock options.
There were no stock options granted during the years ended March 31, 2017 and March 31, 2016.
As of March 31, 2017, 36,000 shares of Air T stock
options expired. In order to remove the deferred tax asset related to these stock options, a decrease of $63,000 was recorded through additional paid in capital.
In addition, Delphax maintains a number of stock option plans. These plans were in place at the time of the Company
’s acquisition of interests in Delphax. Subsequent to the acquisition, Delphax granted 1.2 million non-qualified options to purchase shares of its common stock to certain of its employees at an exercise price of $0.33 per share.
Option activity
, which only reflects the activity of Air T, Inc., is summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2015
|
|
|
46,000
|
|
|
$
|
8.68
|
|
|
|
2.87
|
|
|
$
|
732,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(6,000
|
)
|
|
|
8.29
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
40,000
|
|
|
$
|
8.74
|
|
|
|
2.09
|
|
|
$
|
617,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(30,000
|
)
|
|
|
8.29
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
10,000
|
|
|
$
|
10.08
|
|
|
|
6.15
|
|
|
$
|
101,000
|
|
Exercisable at March 31, 2017
|
|
|
10,000
|
|
|
$
|
10.08
|
|
|
|
6.15
|
|
|
$
|
101,000
|
|
Approximately
47% and 46% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2017 and 2016, respectively. Approximately 15% and 24% of the Company’s consolidated accounts receivable at March 31, 2017 and 2016, respectively, were due from FedEx Corporation.
The components of income tax expense were as follows:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,124,000
|
|
|
$
|
1,817,000
|
|
State
|
|
|
128,000
|
|
|
|
316,000
|
|
Foreign
|
|
|
132,000
|
|
|
|
171,000
|
|
Total current
|
|
|
1,384,000
|
|
|
|
2,304,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(592,000
|
)
|
|
|
152,000
|
|
State
|
|
|
(67,000
|
)
|
|
|
(61,000
|
)
|
Total deferred
|
|
|
(659,000
|
)
|
|
|
91,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
725,000
|
|
|
$
|
2,395,000
|
|
Income tax expense was different from the amount computed by applying the statutory federal income tax rate of 34% as shown in the following table:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected Federal income tax expense
U.S. statutory rate
|
|
$
|
(1,434,000
|
)
|
|
|
34.0
|
%
|
|
$
|
2,092,000
|
|
|
|
34.0
|
%
|
State income taxes, net
of Federal benefit
|
|
|
40,000
|
|
|
|
-0.9
|
%
|
|
|
169,000
|
|
|
|
2.7
|
%
|
Permanent differences, other
|
|
|
156,000
|
|
|
|
-3.7
|
%
|
|
|
47,000
|
|
|
|
0.8
|
%
|
Dividend received deduction
|
|
|
(302,000
|
)
|
|
|
7.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Section 831(b) benefit
|
|
|
(281,000
|
)
|
|
|
6.7
|
%
|
|
|
(316,000
|
)
|
|
|
-5.1
|
%
|
Change in valuation allowance
|
|
|
3,868,000
|
|
|
|
-91.8
|
%
|
|
|
557,000
|
|
|
|
9.0
|
%
|
Domestic production activities deductions
|
|
|
(64,000
|
)
|
|
|
1.5
|
%
|
|
|
(193,000
|
)
|
|
|
-3.1
|
%
|
Income attributable to minority interest - Contrail Aviation
|
|
|
(45,000
|
)
|
|
|
1.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred benefit for outside basis difference recorded on Delphax CFC's
|
|
|
(1,015,000
|
)
|
|
|
24.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred state income taxes, net of Federal benefit for Delphax
|
|
|
(102,000
|
)
|
|
|
2.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other differences, net
|
|
|
(96,000
|
)
|
|
|
2.3
|
%
|
|
|
39,000
|
|
|
|
0.6
|
%
|
Income tax expense
|
|
$
|
725,000
|
|
|
|
-17.1
|
%
|
|
$
|
2,395,000
|
|
|
|
38.9
|
%
|
Delphax, which generated
losses for the periods ended March 31, 2017 and March 31, 2016 is not included in Air T, Inc.’s consolidated tax return, accounts for $3,212,000 and $557,000 of the above valuation allowance effect for each period, respectively.
Deferred tax assets and liabilities consisted of the following as of
March 31:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Inventory reserves
|
|
$
|
785,000
|
|
|
$
|
504,000
|
|
Accrued vacation
|
|
|
475,000
|
|
|
|
439,000
|
|
Stock option compensation
|
|
|
108,000
|
|
|
|
141,000
|
|
Property and equipment
|
|
|
169,000
|
|
|
|
-
|
|
Warranty reserve
|
|
|
39,000
|
|
|
|
74,000
|
|
Accounts and notes receivable reserve
|
|
|
290,000
|
|
|
|
181,000
|
|
Employee severance reserve
|
|
|
460,000
|
|
|
|
-
|
|
Net operating loss carryforwards
|
|
|
6,461,000
|
|
|
|
5,353,000
|
|
Federal/Canadian tax credits
|
|
|
4,648,000
|
|
|
|
4,784,000
|
|
263A inventory capitalization
|
|
|
10,000
|
|
|
|
60,000
|
|
Unrealized gains/losses and outside basis difference for CFC's
|
|
|
1,995,000
|
|
|
|
-
|
|
Intangibles
|
|
|
43,000
|
|
|
|
-
|
|
Other
|
|
|
78,000
|
|
|
|
112,000
|
|
Total deferred tax assets
|
|
|
15,561,000
|
|
|
|
11,648,000
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(35,000
|
)
|
|
|
(52,000
|
)
|
Prepaid expenses
|
|
|
(505,000
|
)
|
|
|
(563,000
|
)
|
Property and equipment
|
|
|
-
|
|
|
|
(70,000
|
)
|
Intangibles
|
|
|
-
|
|
|
|
(388,000
|
)
|
Gain on marketable securities (OCI)
|
|
|
(94,000
|
)
|
|
|
-
|
|
Outside basis difference
|
|
|
(34,000
|
)
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
(668,000
|
)
|
|
|
(1,073,000
|
)
|
Net deferred tax asset (liability)
|
|
$
|
14,893,000
|
|
|
$
|
10,575,000
|
|
Less valuation allowance
|
|
|
(14,698,000
|
)
|
|
|
(10,830,000
|
)
|
Net deferred tax asset (liability) after valuation allowance
|
|
$
|
195,000
|
|
|
$
|
(255,000
|
)
|
The deferred tax items are reported on a net current and non-current basis in the accompanying fiscal 2017 and 2016 consolidated balance sheets according to the classification of the underlying asset and liability.
The Company accounts for uncertain tax positions in accordance with accounting principles generally accepted in the United States of America. The Company has analyzed filing positions in all of the federal, state and international jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The periods subject to examination for the Company
’s federal return are the fiscal 2013 through 2015 tax years. The periods subject to examination for the Company’s state returns are generally the fiscal 2012 through 2015 tax years. As of March 31, 2017 and 2016, the Company did not have any unrecognized tax benefits. The Company does not believe there will be any material changes in unrecognized tax positions over the next twelve months.
It is the Company
’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 31, 2017 and 2016, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended March 31, 2017 and 2016.
As described in Note 8, effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately 38%, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has three foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is no longer subject to examinations by income tax authorities for tax years before 2012.
Delphax maintains a September 30 fiscal year. As of September 30, 2016, Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of $6.3 million and $13.2 million, respectively. As of that date, they had estimated foreign res
earch and development credit carryforwards of $4.3 million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year 2023. Domestic alternative minimum tax credits of approximately $311,000 are available to offset future income tax with no expiration date. The Company does not believe its investment in Delphax by Air T resulted in an ownership change for purposes of Section 382. Should there be an ownership change for purposes of Section 382 or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards will be significantly limited. In the event of bankruptcy proceedings involving Delphax or Delphax Canada, any remaining tax attributes, including net operating losses and credit carryforwards in each respective jurisdiction will be lost. The Company has recorded an outside basis difference in the stock of these entities of $2.9 million which is the estimated loss that will be recognized in the United States upon their liquidation. See further information regarding Delphax Canada developments in Notes 8, 10, and 24.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets will be recovered. In accounting for the Delphax tax attributes, the Company has established a full valuation allowance of 14.0 million at March 31, 2017 and 10.8 million at March 31, 2016. The cumulative losses incurred by Delphax in recent years was the primary basis for the Company
’s determination that a full valuation allowance should be established against Delphax’s net deferred tax assets.
The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(E) defined contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are
immediately eligible to participate in the Plans. The Company’s contribution to the Plans for the years ended March 31, 2017 and 2016 was approximately $529,000 and $376,000, respectively, and was recorded in the consolidated statements of income (loss).
The Company, in each of the past
three years, has paid a discretionary profit sharing bonus in which all employees have participated. Profit sharing expense in fiscal 2017 and 2016 was approximately $390,000 and $1,748,000, respectively, and was recorded in general and administrative expenses in the consolidated statements of income (loss).
In addition, Delphax has a defined contribution salary deferral plan covering substantially all U.S. employees under Section 401(k) of the Internal Revenue Code. The plan allows eligible employees to make contributions up to the maximum amount provided under the Code. De
lphax contributes an amount equal to 50% of the participants’ before-tax contributions up to 6% of base salary. The employer contribution vests after the employee has completed three years of eligible service. There was no contribution made by Delphax during the fiscal year 2017 compared to $15,000 period from November 24, 2015 through March 31, 2016. Delphax has canceled its 401(k) program earlier in the fiscal year 2017.
Delphax also has a defined contribution plan covering substantially all Canadian employees. Canadian employees contribute 2% of gross salary to the plan, and Delphax makes a contribution to the plan of 3% or 4% of gross salary depending on employee classification. The employer contribution vests over two years.
The contribution made by Delphax during the fiscal year 2017 was $78,000 compared to $41,000 during the period from November 24, 2015 through March 31, 2016.
19.
|
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
30,493
|
|
|
$
|
38,523
|
|
|
$
|
35,769
|
|
|
$
|
43,687
|
|
Operating Income (Loss)
|
|
|
(7,073
|
)
|
|
|
1,022
|
|
|
$
|
1,639
|
|
|
|
1,311
|
|
Net Income (Loss) Attributable to Air T, Inc Stockholders
|
|
|
(5,751
|
)
|
|
|
1,084
|
|
|
|
1,220
|
|
|
|
233
|
|
Basic Earnings (Loss) per share
|
|
|
(2.42
|
)
|
|
|
0.53
|
|
|
|
0.60
|
|
|
|
0.11
|
|
Diluted Earnings (Loss) per share
|
|
|
(2.42
|
)
|
|
|
0.53
|
|
|
|
0.60
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
22,359
|
|
|
$
|
44,654
|
|
|
$
|
46,619
|
|
|
$
|
34,581
|
|
Operating Income (Loss)
|
|
|
(1,049
|
)
|
|
|
5,505
|
|
|
|
3,890
|
|
|
|
(2,314
|
)
|
Net Income (Loss) Attributable to Air T, Inc Stockholders
|
|
|
(736
|
)
|
|
|
3,794
|
|
|
|
2,726
|
|
|
|
(1,370
|
)
|
Basic Earnings (Loss) per share
|
|
|
(0.31
|
)
|
|
|
1.60
|
|
|
|
1.15
|
|
|
|
(0.57
|
)
|
Diluted Earnings (Loss) per share
|
|
|
(0.31
|
)
|
|
|
1.58
|
|
|
|
1.14
|
|
|
|
(0.57
|
)
|
During the quarter ended June 30, 2016, Delphax was informed by its largest customer that the customer had decided to accelerate its plans for removing Delphax legacy printing systems from production and that Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be expected from this customer was being sharply curtailed. In addition to this specific customer communication, Delphax also experienced a broad-based decline in legacy product customer demand during the quarter. Sales of Delphax
’s new élan printer system also did not materialize to expectations in the quarter.
The adverse business developments during the quarter ended June 30, 2016 and the significantly deteriorated outlook for future orders of legacy and élan product caused the Company to reevaluate the recoverability of Delphax
’s assets, both tangible and intangible. Based on this reevaluation, which involved material estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. This impairment totaled approximately $1,385,000 during the quarter ended June 30, 2016. The Company also recorded a partial impairment of Delphax related long-lived tangible assets, totaling approximately $249,000 during the quarter ended June 30, 2016. These impairment losses are reflected on the consolidated statements of income (loss) within the “depreciation, amortization and impairment” line item. Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under existing Delphax employee benefit plans were both probable and estimable. This assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these various adjustments discussed above, which aggregated to approximately $5,610,000, are reflected in the operating results of Delphax for the quarter ended June 30, 2016.
In addition, results for the quarter ended June 30, 2016 included a non-operating charge of approximately $1,502,000 related to the Company
’s investment in marketable securities of Insignia Systems, Inc. (“Insignia”). While the Company does not intend to liquidate its securities holdings in Insignia within twelve months, the Company recognized an impairment loss on the investment during the quarter ended June 30, 2016 due in part to the magnitude of the loss position in the investment, which increased sharply during the quarter, and the fact that the investment had been in a continuous loss position for well over one year.
20.
|
GEOGRAPHICAL INFORMATION
|
Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and similar tangible long-lived assets, net of accumulated depreciation, held outside the United States are summarized in the followi
ng table as of March 31, 2017 and March 31, 2016:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States, the Company
’s country of domicile
|
|
$
|
5,323,471
|
|
|
$
|
4,544,050
|
|
Foreign
|
|
|
1,017
|
|
|
|
33,724
|
|
Total property and equipment, net
|
|
$
|
5,324,488
|
|
|
$
|
4,577,774
|
|
Total revenue, located in the United States, the Company
’s Country of domicile, and outside the United States is summarized in the following table as of March 31, 2017 and March 31, 2016:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States, the Company
’s country of domicile
|
|
$
|
135,257,659
|
|
|
$
|
141,010,279
|
|
Foreign
|
|
|
13,214,000
|
|
|
|
7,201,659
|
|
Total revenue
|
|
$
|
148,471,659
|
|
|
$
|
148,211,938
|
|
The Company has six
business segments. The overnight air cargo segment, composed of the Company’s Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, operates in the air express delivery services industry. The ground equipment sales segment, composed of the Company’s Global Ground Support, LLC (“GGS”) subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the U.S. military and industrial customers. The ground support services segment, composed of the Company’s Global Aviation Services, LLC (“GAS”) subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers. The printing equipment and maintenance segment is composed of Delphax and its subsidiaries, which was consolidated for financial accounting purposes beginning November 24, 2015. Delphax designs, manufactures and sells advanced digital print production equipment, maintenance contracts, spare parts, supplies and consumable items for these systems. The equipment is sold through Delphax and its subsidiaries located in the United Kingdom and France. A significant portion of Delphax’s net sales is related to service and support provided after the sale. Delphax has a significant presence in the check production marketplace in North America, Europe, Latin America, Asia and the Middle East. In July 2016, the Company’s majority owned subsidiary, Contrail Aviation Support, LLC (“Contrail Aviation”), acquired the principal assets of a business based in Verona, Wisconsin engaged in acquiring surplus commercial jet engines or components and supplying surplus and aftermarket commercial jet engine component. In October 2016, the Company, through a wholly owned subsidiary, acquired 100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”) to provide commercial aircraft storage, storage maintenance and aircraft disassembly/part-out services at facilities leased at the Pinal Air Park in Marana, Arizona. At March 31, 2017, Contrail Aviation and Jet Yard comprised the commercial jet engines and parts segment of the Company’s operations. This segment, formerly referred to as the commercial jet engines segment, was renamed to reflect its broader product and service offerings. The Company’s leasing segment, comprised of the Company’s Air T Global Leasing, LLC subsidiary, provides funding for equipment leasing transactions, which may include transactions for the leasing of equipment manufactured by GGS and Delphax and transactions initiated by third parties unrelated to equipment manufactured by the Company or any of its subsidiaries. Air T Global Leasing, LLC commenced operations during the quarter ended December 31, 2015.
Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income.
For the fiscal year ended March 31, 2017, the premiums paid to SAIC by the Company were allocated among the operating segments based on segment revenue and certain identified corporate expense were allocated to the segments based on the relative benefit of those expenses to each segment.
Segment data is summarized as follows:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
69,558,334
|
|
|
$
|
68,226,891
|
|
Ground Equipment Sales:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
26,922,009
|
|
|
|
45,417,216
|
|
International
|
|
|
4,284,000
|
|
|
|
6,000,000
|
|
Total Ground Equipment Sales
|
|
|
31,206,009
|
|
|
|
51,417,216
|
|
Ground Support Services
|
|
|
30,453,246
|
|
|
|
24,834,616
|
|
Printing Equipment and Maintenance
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
5,653,997
|
|
|
|
2,753,138
|
|
International
|
|
|
4,156,000
|
|
|
|
1,201,659
|
|
Total Printing Equipment and Maintenance
|
|
|
9,809,997
|
|
|
|
3,954,797
|
|
Commercial Jet Engines and Parts:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
2,688,902
|
|
|
|
-
|
|
International
|
|
|
4,774,000
|
|
|
|
-
|
|
Total Commercial Jet Engines
|
|
|
7,462,902
|
|
|
|
-
|
|
Leasing
|
|
|
537,719
|
|
|
|
19,816
|
|
Corporate
|
|
|
1,136,311
|
|
|
|
1,068,240
|
|
Intercompany
|
|
|
(1,692,859
|
)
|
|
|
(1,309,638
|
)
|
Total
|
|
$
|
148,471,659
|
|
|
$
|
148,211,938
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
2,723,933
|
|
|
$
|
3,283,495
|
|
Ground Equipment Sales
|
|
|
2,378,812
|
|
|
|
6,486,846
|
|
Ground Support Services
|
|
|
(500,712
|
)
|
|
|
(1,035,929
|
)
|
Printing Equipment and Maintenance
|
|
|
(5,937,522
|
)
|
|
|
(1,966,626
|
)
|
Commercial Jet Engines and Parts
|
|
|
534,762
|
|
|
|
-
|
|
Leasing
|
|
|
422,913
|
|
|
|
2,192
|
|
Corporate
|
|
|
(2,787,760
|
)
|
|
|
(647,888
|
)
|
Intercompany
|
|
|
64,801
|
|
|
|
(90,427
|
)
|
Total
|
|
$
|
(3,100,773
|
)
|
|
$
|
6,031,663
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
95,270
|
|
|
$
|
92,707
|
|
Ground Equipment Sales
|
|
|
21,766
|
|
|
|
341,124
|
|
Ground Support Services
|
|
|
465,718
|
|
|
|
520,243
|
|
Printing Equipment and Maintenance
|
|
|
9,927
|
|
|
|
16,438
|
|
Commercial Jet Engines and Parts
|
|
|
60,104
|
|
|
|
-
|
|
Leasing
|
|
|
3,070,037
|
|
|
|
241,398
|
|
Corporate
|
|
|
1,690,109
|
|
|
|
275,559
|
|
Intercompany
|
|
|
(3,066,500
|
)
|
|
|
(241,398
|
)
|
Total
|
|
$
|
2,346,431
|
|
|
$
|
1,246,071
|
|
|
|
|
|
|
|
|
|
|
Depreciation, Amortization and Impairment:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
124,793
|
|
|
$
|
138,639
|
|
Ground Equipment Sales
|
|
|
597,240
|
|
|
|
518,013
|
|
Ground Support Services
|
|
|
383,963
|
|
|
|
224,878
|
|
Printing Equipment and Maintenance
|
|
|
1,738,819
|
|
|
|
313,893
|
|
Commercial Jet Engines and Parts
|
|
|
109,807
|
|
|
|
-
|
|
Leasing
|
|
|
247,323
|
|
|
|
8,724
|
|
Corporate
|
|
|
174,510
|
|
|
|
53,060
|
|
Intercompany
|
|
|
(194,610
|
)
|
|
|
-
|
|
Total
|
|
$
|
3,181,845
|
|
|
$
|
1,257,207
|
|
The elimination of intercompany revenues is related to the sale of two élan printers by Delphax to ATGL during the
fiscal year 2017, along with the premiums paid to SAIC, and the elimination of intercompany operating income for such period reflects the margins on the sales of those assets, elimination of excess depreciation and amortization related to the margin on those assets, and the premiums paid to SAIC.
22.
|
COMMITMENTS AND CONTINGENCIES
|
The Company is involved in various
other legal actions and claims arising in the ordinary course of business. Management believes that these matters, if adversely decided, would not have a material adverse effect on the Company's results of operations or financial position.
In July 2016, p
ursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent additional deferred consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate (collectively, the “Earnout Payments” and each, an “Earnout Payment”), calculated as follows:
(i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with respect to such Earnout Period;
(ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an amount equal to the product of (x) the EBITDA generated with respect to such Earnout Period minus $1,500,000, and (y) two (2);
(iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,000,000;
(iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and
(v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv), above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal to the difference between $3,000,000 and the aggregate Earnout Payments already received or payable pursuant to clauses (i) through (iv), above.
As used in the Asset Purchase Agreement, “Earnout Period” means each of the first five twelve-full-calendar-month periods following the closing of the acquisition.
The company has estimated its liability with respect to the Earnout Payment of $2,900,000, which amount is included in the “Other non-current liabilities” in the consolidated balance sheet at March 31, 2017. As a result of the EBITDA of Contrail Aviation being approximately $2.1 million for the first Earnout Period, the Earnout Payment with respect to that Earnout Period is $1,000,000, which amount is payable in October 2017.
On the Contrail Closing Date, Contrail Aviation and the Seller entered into an Operating Agreement (the “Operating Agreement”) providing for the governance of and the terms of membership interests in Contrail Aviation and including put and call options (“Put/Call Option”) permitting, at any time after the fifth anniversary of the Contrail Closing Date, Contrail Aviation at its election to purchase from the Seller, and permitting the Seller at its election to require Contrail Aviation to purchase from the Seller, all of the Seller
’s equity membership interests in Contrail Aviation at a price to be agreed upon, or failing such an agreement to be determined pursuant to third-party appraisals in a process specified in the Operating Agreement.
O
n October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D GSE Support, Inc. (“D&D”) which was in the business of marketing, selling and providing aviation repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount paid at closing in connection with this acquisition was $400,000, with an additional $100,000 paid 30 days after closing and an additional $100,000 payable in equal monthly installments of $16,667 commencing on November 1, 2016. Earn-out payments of up to $100,000 may also be payable based on specified performance for the twelve-month period ending September 30, 2017.
In June 2016, the Company acquired land and entered into an agreement to construct a new corporate headquarters facility in Denver, North Carolina for an aggregate amount of approximately $1.9 million.
Construction was completed and the Company relocated its corporate offices to this facility in July 2017. This facility will replace the Company’s current headquarters which is leased from an entity owned by certain former officers and directors at an annual rental payment of approximately $178,000.
There are currently no other commitments for significant capital expenditures.
23.
|
RELATED PARTY MATTERS
|
Since 1979 the Company has leased the Little Mountain Airport in Maiden, North Carolina from a corporation whose stock is owned in part by former officers and directors of the Company and an estate of which certain former directors are beneficiaries. The facility consists of approximately 68 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square feet of office space. The operations of Air T, MAC and ATGL are headquartered at this facility. The lease for this facility provides for monthly rent of $14,862 and expires on January 31, 2018, though the lease may be renewed by us for three additional two-year option periods through January 31, 2024.
The Company does not intend to renew the lease to this facility as operations conducted at this facility were relocated to a newly constructed, owned facility on July 31, 2017. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance.
During the
fiscal year ended March 31, 2016, the Company’s leasing subsidiary has acquired interests in two equipment leases originated by Vantage Financial, LLC (“Vantage”) for aggregate payments to Vantage of approximately $401,250. The interests in the acquired leases entitle the Company’s leasing subsidiary to receive lease payments from the third parties leasing the equipment for a specified period. Pursuant to the agreements between the Company’s leasing subsidiary and Vantage, Vantage’s fees for servicing the equipment leases for the leasing subsidiary (approximately $1,000) were included in the acquisition payments. William R. Foudray, a director of the Company, is the Executive Vice President and a co-founder of Vantage. The amounts paid by the Company’s leasing subsidiary to Vantage to acquire these lease assets represent approximately 1% of Vantage’s outstanding lease assets at March 31, 2017 and the servicing income represents less than 1% of Vantage’s annual revenues.
Contrail A
viation leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn Properties, LLC, a corporation whose stock is owned equally by Mr. Joseph Kuhn, Chief Executive Officer of Contrail Aviation, and Mrs. Miriam Kuhn, Chief Financial Officer of Contrail Aviation. The facility consists of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental payments of $111,189 to Cohen Kuhn Properties, LLC pursuant to such lease during the period from July 18, 2016 through March 31, 2017. The lease for this facility expires on June 30, 2021, though the Company has the option to renew the lease for a period of five years on the same terms. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance. The Company believes that the terms of such leases are no less favorable to the Company than would be available from an independent third party.
Management
performs an evaluation of events that occur after a balance sheet date but before financial statements are issued or available to be issued for potential recognition or disclosure of such events in its financial statements. The Company evaluated subsequent events through the date that these consolidated financial statements were issued.
On May 2, 2017 and May 31, 2017, newly formed subsidiaries, AirCo, LLC and AirCo Services, LLC (collectively, “AirCo”), acquired the inventory and principal business assets, and assumed specified liabilities, of Aircraft Instrument and Radio Company, Incorporated, and Aircraft Instrument and Radio Services, Inc. The acquired business, which is based in Wichita, Kansas, distributes and sells airplane and aviation parts and maintains a license under Part 145 of the regulations of the Federal Aviation Administration. The consideration paid for the acquired assets was approximately $2,400,000.
Following the acquisition, AirCo is included in the commercial jet engines and parts segment of the Company’s operations.
On May 2, 2017, the Company and certain of its subsidiaries entered into an amendment to the agreement governing the
Company’s $25.0 million Revolving Credit Facility to establish a separate $2,400,000 term loan facility under that agreement (the “Term Loan”). Each of the Company and such subsidiaries are obligors with respect to the Term Loan, which matures on May 1, 2018, with equal $200,000 installments of principal due monthly, commencing June 1, 2017. Interest on the Term Loan is payable monthly at a per annum rate equal to 25 basis points above the interest rate applicable to the Revolving Credit Facility. The proceeds of the Term Loan were used to fund the acquisition of the AirCo business. The Term Loan is secured by the existing collateral securing borrowings under the Revolving Credit Facility, including such acquired assets. The amendment also provided that the consolidated asset coverage ratio covenant will not be measured for the fiscal quarters ending June 30, 2017, September 30, 2017 and December 31, 2017.
On May 5, 2017, Contrail Aviation entered into a loan agreement (the “Contrail Loan Agreement”) with a bank lender to replace the Contrail Credit Agreement described
in Note 10. The Contrail Loan Agreement provides for revolving credit borrowings by Contrail Aviation in an amount up to $15,000,000, with the available borrowing amount not limited by a borrowing base, though the Contrail Loan Agreement provides that the lender is not obligated to advance loans under the Contrail Loan Agreement if there occurs a material adverse change in Contrail Aviation’s or the Company’s financial condition or in the value of any collateral securing the loans made thereunder and an annual appraisal of inventory is required. Borrowings under the Contrail Loan Agreement bear interest at an annual rate equal to one-month LIBOR plus 3.00%.
The obligations of Contrail Aviation under the Contrail Loan Agreement are secured by a first-priority security interest in substantially all of the assets of Contrail Aviation and are also guaranteed by
the Company, with such guaranty limited in amount to a maximum of $1,600,000, plus interest on such amount at the rate of interest in effect under the Contrail Loan Agreement, plus costs of collection. The Contrail Loan Agreement contains affirmative and negative covenants, including covenants that restrict Contrail Aviation’s ability to make acquisitions or investments, make certain changes to its capital structure, and engage in any business substantially different that it presently conducts. The Contrail Loan Agreement also contains financial covenants applicable to Contrail Aviation, including maintenance of a Cash Flow Coverage Ratio of 2.0 to 1.0, a Tangible Net Worth of not less than $3,500,000, and a Debt Service Coverage Ratio of 1.1 to 1.0, as such terms are defined in the Contrail Loan Agreement.
The Contrail Loan Agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, if both Contrail Aviation
’s current chief executive officer and chief financial officer cease to oversee day-to-day operations of Contrail Aviation, cross-default to other debt, bankruptcy and other insolvency events, actual or asserted invalidity of loan documentation, or material adverse changes in Contrail Aviation’s financial condition. The Contrail Loan Agreement provides that all loan proceeds are to be used solely for Contrail Aviation’s business operations, unless specifically consented to the contrary by lender in writing.
On June 7, 2017, the Company
’s SAIC subsidiary invested $500,000 for a 40% interest in TFS Partners LLC (“TFS Partners”), a single-purpose investment entity organized by SAIC and other investors for the purpose of making an investment in a limited liability company, The Fence Store LLC (“Fence Store LLC”), organized for the purpose of acquiring substantially all of the assets of The Fence Store, Inc. (“Fence Store Inc.”). TFS Partners acquired a 60% interest in Fence Store LLC, which has completed the purchase of substantially all of the assets of Fence Store Inc. Prior to this transaction, Fence Store Inc. operated a business under the tradename “Town and Country Fence”, selling and installing residential and commercial fencing in the greater Twin Cities, Minnesota area. Fence Store LLC intends to continue this business.
Pursuant to a Fifth Amendment and Waiver Agreement effective as of June 28, 2017 among Air T, MAC, GGS, CSA, GAS, ATGL, Stratus Aero Partners LLC, Jet Yard, AirCo and the lender under the Revolving Credit Facility, the agreement governing the Revolving Credit Facility was amended to provide that the interest rates on the revolving loans made under the Revolving Credit Facility and on the Term Loan would each be increased by an additional 0.25% per annum from the date of the amendment until the second business day after delivery of a compliance certificate for the quarter ending March 31, 2017 or any subsequent fiscal quarter end showing compliance with the financial covenants required under the Revolving Credit Facility. Pursuant to the amendment, the lender waived compliance with the maximum consolidated leverage ratio covenant under the Revolving Credit Facility at the March 31, 2017 measurement date and agreed that such covenant will not be tested at the June 30, 2017 measurement date
.
Pursuant to a 2017 Amendment to Security Agreement and Consent and Waiver effective as of August
3, 2017 among the Company, certain of its subsidiaries and the lender under the Revolving Credit Facility, the lender agreed to waive the default under the agreement governing the Revolving Credit Facility arising from the failure of the Company to deliver to such lender audited consolidated financial statements for the fiscal year ended March 31, 2017 within 120 days after the end of such fiscal year and the requirement that a subsidiary newly organized in Ontario, Canada (the “Ontario Subsidiary”) join the agreement governing the Revolving Credit Facility as a borrower, to consent to Air T guarantying obligations of the Ontario Subsidiary under a lease for facilities in Ontario and to amend the security agreement securing obligations under the Revolving Credit Facility to, among other things, require a pledge of only 65% of the outstanding equity of foreign subsidiaries.
On August 29, 2017, the Company and certain of its subsidiaries entered into a Sixth Amendment and Waiver Agreement effective as of August 29, 2017 (the “Sixth Amendment”) with the lender under the Revolving Credit Facility. The Sixth Amendment amended the agreement governing the Revolving Credit facility to extend the maturity of the Revolving Credit Facility from April 1, 2018 to April 1, 2019, to adjust the definition of “Consolidated EBITDA” to exclude from the calculation of Consolidated EBITDA, during the period from January 1, 2016 through June 30, 2017, any unrealized gains or losses attributable to the ownership of equity interests in Insignia Systems, Inc., and to waive the default arising under the agreement governing the Revolving Credit Facility from the failure of the Company to deliver (i) consolidated financial statements for the fiscal quarter that ended June 30, 2017 within the time period required under such agreement and (ii) the covenant compliance certificates for the fiscal quarters that ended March 31, 2017 and June 30, 2017 within the time periods required under such agreement.
Pursuant to a
Seventh Amendment and Waiver Agreement effective as of October 6, 2017 (the “Seventh Amendment”) among Air T, MAC, GGS, CSA, GAS, ATGL, Stratus Aero Partners LLC, Jet Yard, AirCo and the lender under the Revolving Credit Facility, the lender waived the requirement that a newly formed limited purpose subsidiary of the Company join the agreement governing the Revolving Credit Facility as a borrower and, in connection with the restatement of the Company’s consolidated financial statements for certain periods within the fiscal year ended March 31, 2017, the lender also waived compliance with the minimum tangible net worth covenant under the Revolving Credit Facility at the December 31, 2016 and March 31, 2017 measurement dates.
In light of persisting events of default under the Delphax Senior Credit Agreement, on July
13, 2017, the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured creditors and shareholder on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result, the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
A newly organized subsidiary of Air T leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease commenced on August 1,
2017 and terminates on July 31, 2020. Annual rent under the lease escalates annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000 (CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T.
The lease of production facilities in Mississauga, Ontario
by Delphax Canada has been terminated effective upon removal of the property foreclosed upon by Air T.