NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31,
2018
AND
2017
Air T, Inc. (the “Company,” “Air T,” “we” or “us”) is a decentralized holding company with ownership interests in a broad set of operating and financial assets that are designed to expand, strengthen and diversify our cash earnings power. Our goal is to build on Air T’s core businesses.
We currently operate wholly-owned subsidiaries in three legacy industry segments:
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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;
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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
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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.
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In the past three years, we have organized or acquired businesses operating in four other segments. The additional segments include:
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Air T Global Leasing, LLC (“ATGL”), our wholly-owned leasing subsidiary, comprises our leasing segment.
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Delphax Technologies, Inc. (“Delphax”) and our newly-formed subsidiary Delphax Solutions, Inc., comprise our printing equipment and maintenance segment.
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Majority-owned Contrail Aviation Support, LLC (“Contrail Aviation”), and Jet Yard, LLC (“Jet Yard”), AirCo, LLC and AirCo Services, LLC (collectively, “AirCo”) compromise our commercial jet engine and parts segment.
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Results of BCCM Advisors, LLC (“BCCM”), an investment management firm acquired recently, are included within the Corporate segment.
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1.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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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.
Investments under the
E
quity
M
ethod
– The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock.
In applying the equity method, the Company records the investment at cost and subsequently increases or decreases the carrying amount of the investment by our proportionate share of the net earnings or losses. The Company records dividends or other equity distributions as reductions in the carrying value of the investment. In the event that net losses of the investee reduce the carrying amount to zero, additional net losses may be recorded if other investments in the investee are at-risk, even if the Company has not committed to provide financial support to the investee. Such additional equity method losses, if any, are based upon the change in the Company’s claim on the investee’s book value.
For investments that have a different fiscal year-end, if the difference is not more than three months, the Company uses the investment’s most recent financial statements to record the change in the investment.
Accounting Estimates
– The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported and disclosed. Actual results could differ from those estimates.
Concentration of Credit Risk
– The Company’s potential exposure to concentrations of credit risk consists of trade accounts and notes receivable, and bank deposits. Accounts receivable are normally due within 30 days and the Company performs periodic credit evaluations of its customers’ financial condition. Notes receivable payments are normally due monthly. The required allowance for doubtful accounts is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of past-due outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the industries in which the Company is operating, 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
E
xchange
- Delphax, which is headquartered in the United States, has subsidiaries in Canada, France, and the United Kingdom. The functional currency of the Delphax’s Canadian subsidiary is the U.S. dollar, whereas the functional currency of Delphax’s subsidiaries in France and the United Kingdom is the Euro and Pound Sterling, respectively. Delphax Solutions is headquartered in Canada. The functional currency of Delphax Solutions is the Canadian dollar. The balance sheets of foreign operations with a functional currency of other than the U.S. dollar are translated to U.S. dollars using rates of exchange as of the applicable balance sheet date. The statements of income (loss) items of foreign operations are translated to U.S. dollar using average rates of exchange for the applicable period. The gains and losses resulting from translation of the financial statements of Delphax’s foreign operations are recorded within the accumulated other comprehensive income (loss) and non-controlling interests categories of the Company’s consolidated equity.
Variable Interest Entities
– In accordance with the applicable accounting guidance for the consolidation of variable interest entities, the Company analyzes its variable interests to determine if an entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews to determine if we must consolidate a variable interest entity as its primary beneficiary.
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. Accordingly, the Company is required to recognize adjustments to the provisional amounts, with a corresponding adjustment to goodwill, in the reporting period in which the adjustments to the provisional amounts are determined. Thus, the Company would adjust its consolidated financial statements as needed, including recognizing in its current-period earnings the full effect of changes in depreciation, amortization, or other income effects, by line item, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date.
Income statement activity of an acquired business is reflected within the Company’s consolidated statements of income (loss) commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.
Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs may include such items as finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.
Changes in estimate of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as part of the acquisition rather they are recognized directly in earnings.
The Company tests goodwill for impairment at least once annually. An impairment test will also be carried out anytime events or changes in circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit.
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:
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Years
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Software
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3
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Tradenames
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5
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Certification
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5
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Non-compete
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5
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License
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5
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Patents
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9
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Customer relationships
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10
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Attribution of
N
et
I
ncome or
L
oss of
P
artially-
O
wned
C
onsolidated
E
ntities
– In the case of Delphax, we determined that the attribution of net income or loss should be based on consideration of all of Air T’s investments in Delphax and it subsidiary, Delphax Canada Technologies Limited (“Delphax Canada”). Our investment in the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67%/33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67%/33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses. See Note 8, “Acquisitions—Acquisitions of Interests in Delphax,” for a description of our investments in Delphax and Delphax Canada and for the definitions of the capitalized terms used in this paragraph. The effect of interest expense arising under the Senior Subordinated Note and, since January 6, 2017, under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or losses attributed to non-controlling interests because Delphax is a variable interest entity.
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. As of March 31, 2018, other than our investment in Oxbridge Re Holdings Limited, all of our marketable securities investments are classified as current based on the nature of the investments and their availability for use in current operations.
Inventories
– Inventories related to the Company’s manufacturing and service operations are carried at the lower of cost (determined by use of the first in, first out method) or net realizable value. When finished goods units are leased to customers under operating leases, the units are transferred to Property and Equipment. Consistent with aviation industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.
Property and Equipment
– Property and equipment is stated initially at cost, or fair value if purchased as part of a business combination or, in the case of equipment under capital leases, the present value of future lease payments. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Equipment leased to customers is depreciated using an accelerated method. Useful lives range from three years for computer equipment, seven years for flight equipment, ten years for deicers and other equipment leased to customers and 30 years for buildings.
Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. Certain costs incurred in connection with the acquisition of engine assets are capitalized as part of the cost of such assets. Major overhauls which improve functionality or extend original useful life are capitalized and depreciated over the estimated remaining useful life of the equipment. The Company depreciates the engines on a straight-line basis over the assets useful life from the acquisition date to a residual value. The Company believes this methodology accurately reflects the typical holding period for the assets and, that the residual value assumption reasonably approximates the selling price of the assets.
The Company assesses long-lived assets for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of the estimated undiscounted cash flows from those assets, the Company then will write-down the value of the assets by the excess of carrying value over fair value.
Asset Retirement Obligation
– Under the terms of a lease for a manufacturing facility in Canada, Delphax is responsible for restoring the leased property to its original condition, normal wear and tear excepted. The Company’s accounting for the acquisition of Delphax reflects an estimated asset retirement obligation (“ARO”) liability for this matter of approximately $560,000. The ARO liability was determined using the present value of the estimated facility restoration costs. Determination of this estimated liability involves significant judgment. The liability is reflected on the accompanying March 31, 2017 consolidated balance sheet within current liabilities. The liability was effectively extinguished during the quarter ended September 30, 2017 which resulted in a gain of approximately $563,000 being recorded on the consolidated statement of income.
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 maintenance parts and fuel, as the Company incurs the related expenditure. Within the Company’s Ground Equipment Sales segment, revenue is generally recognized at the time the related equipment has been shipped to the customer and risk of loss has been transferred. In the case of certain contracts with the U.S. Government or related prime contractors, the Company applies contract accounting and uses either the percentage-of-completion or completed contract method, as appropriate. Revenues of our Ground Support Services segment are generally recognized as the contracted services are completed. Substantially all Printing Equipment and Maintenance segment revenues are recognized upon product shipment, which is generally when transfer to the customer of loss occurs. Service revenue is recognized upon completion of services. Similarly, Commercial Jet Engines and Parts segment revenues are recognized upon shipment of parts and transfer of loss or, as applicable, upon completion of services. Leasing revenues are recognized consistent with contract terms and are generally recognized on a straight-line basis due to the operating lease classification of the underlying leases. Management fee revenues are recognized when earned based on the services provided as outlined in the Investment Management Agreements between BCCM Advisors, Inc. and the investment funds that it manages.
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 $23,380,000 and $23,379,000 for the years ended March 31, 2018 and 2017, respectively.
Stock Based Compensation
– The Company has maintained a stock option plan for the benefit of certain eligible employees and directors of the Company, though no further awards may be made under this plan. The Company recognizes compensation expense on stock options based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company uses the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense.
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 noncurrent in the consolidated balance sheets. The Company recognizes the benefit of a tax position taken on a tax return, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. An uncertain income tax position is not recognized if it has a less than a 50% likelihood of being sustained.
The Tax Cuts and Jobs Act (TCJA) was signed into law by the President on Friday December 22, 2017. The TCJA includes the reduction in the corporate tax rate from a top rate of 35% to a flat rate of 21%, changes in business deductions, and many international provisions. The drop in the corporate rate is effective for tax years beginning after December 31, 2017. IRC Section 15 indicates that “if any rate of tax imposed…changes, and if the taxable year includes the effective date of the change…, then tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year, and the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.” (§15(a)). As the Company is a fiscal year taxpayer, it will receive a partial benefit for the drop in the federal corporate tax rate for their fiscal year ended March 31, 2018. The weighted average federal tax rate computed in accordance with IRC Section 15 is 30.79% for the current fiscal year.
The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally the 21% federal corporate tax rate. The net impact from this revaluing resulted in a tax expense recognized in the current fiscal year of $158,000. Additionally, the reduced corporate rate led to a reduction of Delphax’ gross deferred tax asset by $2,139,000. This reduction was fully offset by the change in valuation allowance, so the net tax expense was $0 related to Delphax.
The TCJA also repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the extent not utilized refundable for tax years beginning after December 31, 2017. As a result, Delphax will be able to receive a refund of its minimum tax credit carryforward of $311,000 beginning in their fiscal year ended September 30, 2019. Previously, a valuation allowance was established against the minimum tax credit carryforward. As a result of the TCJA relating to the refundability of the minimum tax credit carryforward, an income tax benefit was recognized by the Company during the current fiscal year and a long-term income tax receivable was established.
Income taxes have been provided using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Research and Development Costs
– All research and development costs are expensed as incurred. The research and development costs for the fiscal year 2018 amounted approximately $196,000 compared to $1,042,000 for fiscal year 2017. All research and development expenses are incurred by our printing equipment and maintenance segment.
Accounting for
R
edeemable
N
on-
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, 2018 and 2017 consolidated balance sheets. If an equity instrument subject to the guidance is currently redeemable, the instrument is adjusted to its maximum redemption amount at the balance sheet date. If the equity instrument 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
– 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606
)
to supersede existing revenue recognition guidance. During 2016, the FASB issued additional ASU's to further amend the new revenue recognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and about assets recognized for costs incurred to obtain or fulfill a contract.
The new revenue recognition standards are effective for annual reporting periods beginning after December 15, 2017 with earlier adoption permitted for reporting periods beginning after December 15, 2016. Topic 606 may be adopted using either a full retrospective approach, under which all years included in the financial statements will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for open contract performance at that time.
The Company's adoption efforts have included the identification of revenue within the scope of the standard, the evaluation of customer contracts in conjunction with new guidance and an assessment of the qualitative and quantitative impacts of the new standard on its financial statements. The evaluation included the application of each of the five steps identified in the Topic 606 revenue recognition model.
The new standard will be effective for the Company’s annual and interim periods beginning April 1, 2018. The Company will use the modified retrospective transition method. Results for reporting periods beginning after April 1, 2018 will be presented according to ASU 2014-09 while prior period amounts will not be adjusted and will continue to be reported in accordance with the Company’s historic accounting policies. The main area impacted by ASU 2014-09 includes the recognition of revenue with the Company’s Ground Equipment Sales segment transitioning from percentage of completion to point in time. The Company calculated the transition adjustments and concluded that there would be an immaterial impact due to the adoption of ASC 606. Beginning in the first quarter of fiscal 2019, the Company plans to provide expanded recognition disclosures based on the new qualitative and quantitative disclosure requirements of the standard.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
. This standard amends existing guidance to simplify the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendment in ASU 2015-11 is for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendment should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company has adopted ASU 2015-11 and concluded that the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes (Topic 740)
. This standard eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Under this new guidance, entities will be required to classify all deferred tax assets and liabilities as noncurrent. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 with earlier adoption permitted. We adopted this amendment with the quarter ended June 30, 2017 on a prospective basis.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, that amends the guidance on the classification and measurement of financial instruments (Subtopic 825-10). ASU 2016-01 becomes effective in fiscal years beginning after December 15, 2017, including interim periods therein. ASU 2016-01 removes equity securities from the scope of Accounting Standards Codification (“ASC”) Topic 320 and creates ASC Topic 321,
Investments – Equity Securities
. Under the new guidance, all equity securities with readily determinable fair values are measured at fair value on the statement of financial position, with changes in fair value recorded through earnings. The update eliminates the option to record changes in the fair value of equity securities through other comprehensive income. The Company is evaluating the impact of the adoption of the standard on its consolidated financial statements. The Company currently has investments in available for sale securities and the fair value changes of such securities are, other than in the case of possible other-than-temporary impairments, currently reflected in other comprehensive income. Provided that the Company continues to hold available for sale securities after adoption of the amended guidance, earnings are likely to become more volatile.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as either sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The Company is evaluating the impact of the adoption of the standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07,
Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
, which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. ASU 2016-07 is effective for annual reporting periods beginning after December 15, 2016 and earlier adoption is permitted. We adopted this amendment for the year ended March 31, 2018 in connection with the Company’s investment in Insignia Systems, Inc. as discussed in Note 4.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which addresses several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and earlier adoption is permitted. The new standard requires that an entity recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under the previous standard, excess tax benefits are recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement. This accounting guidance became effective for the Company beginning with the June 30, 2017 quarter but had no impact on the consolidated financial statements for the year ended March 31, 2018.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables. The standard requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the impact of the adoption of the standard on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. ASU 2016-15 clarifies how cash receipts and cash payments in certain transactions are presented and classified in the statement of cash flows. The effective date of this update is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The update requires retrospective application to all periods presented but may be applied prospectively if retrospective application is impracticable. The Company is currently evaluating the impact of the adoption of the standard on its consolidated financial statements and disclosures.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU 2016-18 requires that the statement of cash flows explain the changes in the combined total of restricted and unrestricted cash balance. Amounts generally described as restricted cash or restricted cash equivalents will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on the statement of cash flows. Further, the ASU requires a reconciliation of balances from the statement of cash flows to the balance sheet in situations in which the balance sheet includes more than one-line item of cash, cash equivalents, and restricted cash. Companies will also be disclosing the nature of the restrictions. ASU 2016-18 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the standard on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business (Topic 805)
. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for fiscal years that begin after December 15, 2017 and is to be applied prospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step Two from the goodwill impairment test. Step Two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, an entity will recognize an impairment charge for the amount by which the carrying value of a reporting unit exceeds its fair value. The standard is effective for any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. This update is effective for all entities for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. The Company has not yet concluded how the new standard will impact the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 –
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, which provides guidance on hedge accounting for both financial and commodity risks. The provisions in this standard create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. The standard is effective for public companies for fiscal years beginning after December 15, 2018. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2018, the FASB released guidance relating to the reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application to each period (or periods) in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings is approximately $42,000 and was recorded as of December 31, 2017.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
2.
|
EARNINGS PER COMMON SHARE
|
Basic earnings per share has been calculated by dividing net income (loss) attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. The dilutive effect of options was excluded in fiscal 2017 given that there was a net loss attributable to Air T, Inc. stockholders.
The computation of earnings per common share is as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Air T, Inc.
|
|
|
|
|
|
|
|
|
Stockholders
|
|
$
|
2,277,109
|
|
|
$
|
(3,213,539
|
)
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.11
|
|
|
$
|
(1.51
|
)
|
Diluted
|
|
$
|
1.11
|
|
|
$
|
(1.51
|
)
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,042,806
|
|
|
|
2,125,224
|
|
Diluted
|
|
|
2,047,685
|
|
|
|
2,125,224
|
|
3.
|
INVESTMENTS IN SECURITIES
|
Marketable securities at March 31, 2018 consisted of investments in publicly traded companies with a fair value of $7,861,000, an aggregate net cost basis of $6,463,000, gross unrealized gains aggregating $1,467,000 and gross unrealized losses aggregating $69,000. Marketable securities at March 31, 2017 consisted of investments with a fair market value of $4,594,000, an aggregate cost basis of $4,331,000, gross unrealized gains aggregating $279,000 and gross unrealized losses aggregating $16,000. Securities that had been in a continuous unrealized loss position for less than 12 months as of March 31, 2018 had an aggregate fair value and unrealized loss of $1,063,000 and $69,000, respectively ($441,000 and $16,000, respectively, at March 31, 2017). As of March 31, 2018, and 2017, none of the Company’s investments in securities have been in a continuous loss for more than 12 months. The Company realized gains of $93,000 and $576,000 from the sale of securities during the years ended March 31, 2018 and March 31, 2017, respectively.
At March 31, 2017, the Company held approximately 1.65 million shares of common stock of Insignia Systems, Inc. (NASDAQ: ISIG) (“Insignia”). On the basis of its June 30, 2016 and March 31, 2017 assessments, the Company concluded that it had suffered an other-than-temporary impairment in its investment in the common stock of Insignia totaling $2,643,000. On January 6, 2017, Insignia paid a special dividend of $0.70 per share to stockholders owning Insignia shares on that date. The receipt of such special dividend is included in the other investment income (loss) in the Company’s consolidated statements of income (loss) for the fiscal year ended March 31, 2017.
On the basis of its June 30, 2017 assessments, the Company concluded that it had suffered an “other-than-temporary” impairment in its investment in the common stock of Insignia totaling $771,000. The Company’s cost basis in the Insignia investment was lowered to $1,724,000 at June 30, 2017 to reflect the impairment charge.
On January 16, 2018, the Company purchased approximately 1,133,000 shares of Insignia. After this purchase, the Company owned approximately 26% of Insignia’s total common stock and thus, Insignia became an equity method investment. See discussion in Note 4.
At March 31, 2018, the Company held 456,206 shares of common stock of Oxbridge Re Holdings Limited (NASDAQ: OXBR) (“Oxbridge”). On the basis of its December 31, 2017 “other-than-temporary” impairment assessment, the Company concluded that it had suffered an other-than-temporary impairment in its investment in the common stock of Oxbridge. The Company’s cost basis in its Oxbridge investment was lowered from $1,516,000 to $727,000 at December 31, 2017 which represents an other-than temporary impairment of $789,000.
4.
|
EQUITY METHOD INVESTMENTS
|
On June 7, 2017, the Company’s SAIC subsidiary invested $500,000 for a 40% interest in TFS Partners LLC (“TFS Partners”), a single-purpose investment entity organized by SAIC and other investors for the purpose of making an investment in a limited liability company, The Fence Store LLC (“Fence Store LLC”), organized for the purpose of acquiring substantially all of the assets of The Fence Store, Inc. (“Fence Store Inc.”). TFS Partners acquired a 60% interest in Fence Store LLC, which has completed the purchase of substantially all of the assets of Fence Store Inc. Prior to this transaction, Fence Store Inc. operated a business under the tradename “Town and Country Fence”, selling and installing residential and commercial fencing in the greater Twin Cities, Minnesota area. Fence Store LLC intends to continue this business. The total value of the Company’s investment in TFS Partners was $433,000 at March 31, 2018.
On January 16, 2018, the Company purchased approximately 1,133,000 shares of Insignia at a price of $1.25 per share for a total cost of approximately $1.4 million. After this purchase, the Company owned approximately 26% of Insignia’s total common stock and the Company adopted the equity method of accounting. Insignia Systems, Inc. markets in-store advertising products, programs and services to retailers and consumer packaged goods manufacturers. Subsequent to January 16, 2018, the Company purchased additional shares for a total cost of approximately $385,000. The Company adopted the equity method to account for this investment because of its ability to exercise significant influence, but not control, over the operating and financial policies of Insignia. Air T has elected a three-month lag upon adoption of the equity method and thus will report its investment in Insignia at cost as of March 31, 2018. At March 31, 2018, the Company held approximately 3.4 million shares of Insignia’s common stock representing approximately 28% of the outstanding shares for a total net investment basis of $4,599,000. No basis difference adjustments or allocation of earnings or loss from Insignia will be recorded as of March 31, 2018. Previous Accumulated Other Comprehensive Income of $722,000 was relieved into earnings as of the date equity method accounting was triggered, January 16, 2018.
Inventories consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Ground support service parts
|
|
$
|
2,518,942
|
|
|
$
|
2,447,395
|
|
Ground equipment manufacturing:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
3,314,676
|
|
|
|
1,452,201
|
|
Work in process
|
|
|
20,089
|
|
|
|
832,635
|
|
Finished goods
|
|
|
1,768,897
|
|
|
|
10,001,193
|
|
Printing equipment and maintenance:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
1,161,410
|
|
|
|
3,325,142
|
|
Work in process
|
|
|
-
|
|
|
|
324,949
|
|
Finished goods
|
|
|
553,847
|
|
|
|
790,345
|
|
Commercial jet engines and parts
|
|
|
25,452,022
|
|
|
|
3,407,339
|
|
Total inventories
|
|
|
34,789,883
|
|
|
|
22,581,199
|
|
Reserves
|
|
|
(558,878
|
)
|
|
|
(2,802,356
|
)
|
|
|
|
|
|
|
|
|
|
Total, net of reserves
|
|
$
|
34,231,005
|
|
|
$
|
19,778,843
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Furniture, fixtures and improvements
|
|
$
|
7,696,590
|
|
|
$
|
8,377,988
|
|
Building
|
|
|
1,633,992
|
|
|
|
1,335,333
|
|
Equipment leased to customers
|
|
|
17,289,842
|
|
|
|
272,622
|
|
|
|
|
26,620,424
|
|
|
|
9,985,943
|
|
Less accumulated depreciation
|
|
|
(6,347,253
|
)
|
|
|
(4,661,455
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
20,273,171
|
|
|
$
|
5,324,488
|
|
7.
|
INTANGIBLE ASSETS AND GOODWILL
|
Amortizable intangible assets consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
$
|
442,000
|
|
|
$
|
442,000
|
|
Customer relationships
|
|
|
751,000
|
|
|
|
751,000
|
|
Non-compete
|
|
|
69,700
|
|
|
|
69,700
|
|
Certification
|
|
|
47,000
|
|
|
|
47,000
|
|
License
|
|
|
250,000
|
|
|
|
-
|
|
Patents
|
|
|
1,090,000
|
|
|
|
1,090,000
|
|
Software
|
|
|
429,128
|
|
|
|
420,360
|
|
Other
|
|
|
22,242
|
|
|
|
22,242
|
|
|
|
|
3,101,070
|
|
|
|
2,842,302
|
|
Less accumulated amortization and impairment
|
|
|
(1,788,598
|
)
|
|
|
(1,465,603
|
)
|
Intangible assets, net
|
|
$
|
1,312,472
|
|
|
$
|
1,376,699
|
|
Amortization expense was approximately $323,000 for the fiscal year 2018 compared to $105,000 for the prior fiscal year. Most of the net book value of the Company’s amortizable intangibles stems from the Company’s acquisitions of Contrail Aviation, D&D and Jet Yard (see Note 8). The Company’s consolidated statement of income (loss) for the year ended March 31, 2017 reflects a tradename and patent impairment charge in the amount of $1,110,000. These impairment charges in the prior year were incurred by Delphax (see Note 9).
Annual future amortization expense for these intangible assets for the five succeeding years is as follows:
Year ending March 31,
|
|
|
|
|
2019
|
|
$
|
351,715
|
|
2020
|
|
|
214,129
|
|
2021
|
|
|
152,568
|
|
2022
|
|
|
125,573
|
|
2023
|
|
|
115,578
|
|
Thereafter
|
|
|
352,909
|
|
|
|
$
|
1,312,472
|
|
Goodwill consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Goodwill, at original cost
|
|
$
|
4,793,013
|
|
|
$
|
4,793,013
|
|
|
|
|
|
|
|
|
|
|
Less accumulated impairment
|
|
|
(375,408
|
)
|
|
|
(375,408
|
)
|
Goodwill, net of impairment
|
|
$
|
4,417,605
|
|
|
$
|
4,417,605
|
|
The Company recorded goodwill of approximately $375,000 in connection with its investment in Delphax (Note 8). The Company estimated an impairment of $275,000 in connection with its investment in Delphax during the quarter ended June 30, 2016 which reduced the goodwill balance to $0 (there was an impairment of $100,000 recorded during the year ended March 31, 2016).
Certain business acquisitions have resulted in the recording of goodwill, which is not amortized. As of March 31, 2018, the Company had approximately $4.4 million of goodwill, $4.2 million of which is related to the acquisition of Contrail Aviation Support, Inc. (“Contrail”). We performed our annual impairment assessment for goodwill of the Contrail reporting unit. In conducting a quantitative assessment, the Company analyzes a variety of events or factors that may influence the fair value of the Contrail reporting unit including, but not limited to: changes in the carrying amount of the reporting unit; actual and projected revenue and operating margin; relevant market data for both the Company and its peer companies; industry outlooks; macroeconomic conditions; liquidity; changes in key personnel; and the Company's competitive position. Significant judgment is used to evaluate the totality of these events and factors to make the determination of whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.
In 2018, the Company elected to bypass the qualitative assessment and perform a quantitative analysis using an income approach and market approaches, to evaluate goodwill. The discounted cash flow method under (income approach) uses the reporting unit's projections of estimated operating results and cash flows that are discounted using a market participant discount rate based on a weighted-average cost of capital. The financial projections reflect management's best estimate of economic and market conditions over the projected period including forecasted revenue growth, operating margins, tax rate, capital expenditures, depreciation and amortization and changes in working capital requirements. Other assumptions include discount rate and terminal growth rate. The estimated fair value of the reporting unit is compared to their respective carrying values. A market approach estimates fair value by applying guideline company market multiples to the reporting unit's applicable financial metrics. The multiples are derived from comparable publicly traded and transacted/acquired companies with similar operating and investment characteristics of the reporting units.
Based on the results of our annual quantitative assessment conducted as of March 31, 2018, the fair value of our Contrail reporting unit exceeded its carrying value by approximately 38%, and management concluded that no impairment charge was warranted.
Accrued expenses consisted of the following:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and related items
|
|
$
|
6,431,517
|
|
|
$
|
5,398,877
|
|
Profit sharing and bonus
|
|
|
1,201,440
|
|
|
|
413,522
|
|
Earnout liabilities, current portion
|
|
|
1,500,000
|
|
|
|
-
|
|
Health insurance
|
|
|
370,806
|
|
|
|
423,680
|
|
Warranty reserves
|
|
|
109,490
|
|
|
|
164,240
|
|
Asset retirement obligation
|
|
|
-
|
|
|
|
562,500
|
|
Claims reserve
|
|
|
446,529
|
|
|
|
308,528
|
|
Customer discounts
|
|
|
263,957
|
|
|
|
-
|
|
Taxes
|
|
|
157,739
|
|
|
|
508,615
|
|
Other deposits
|
|
|
590,000
|
|
|
|
325,000
|
|
Other
|
|
|
672,495
|
|
|
|
567,853
|
|
Total
|
|
$
|
11,743,973
|
|
|
$
|
8,672,815
|
|
Product warranty reserve activity is as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning Balance
|
|
$
|
164,240
|
|
|
$
|
266,455
|
|
Amounts charged to expense
|
|
|
122,686
|
|
|
|
(15,173
|
)
|
Actual warranty costs paid
|
|
|
(177,436
|
)
|
|
|
(87,042
|
)
|
Ending Balance
|
|
$
|
109,490
|
|
|
$
|
164,240
|
|
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 was paid in October 2017. The remaining liability of $1,955,000, which includes a current portion of $1,500,000 and a non-current portion of $455,000, is included in the “Accrued expenses” and “Other non-current liabilities”, respectively, in the consolidated balance sheet at March 31, 2018.
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 table 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 consolidated balance sheets. For the fiscal year ended March 31, 2018, the redeemable non-controlling interest balance was increased by the Seller’s proportionate share of Contrail Aviation’s net earnings. The redeemable non-controlling interest balance was also increased by a portion of the estimated change in Contrail Aviation’s fair value during the 2018 fiscal year and the additional capital contribution of $252,000 made by the non-controlling member in the third quarter (the Company funded an additional $948,000 as well to maintain the current ownership percentages). The total increase in the redeemable non-controlling interest balance was approximately $549,000 from March 31, 2017 to March 31, 2018.
Acquisition of AirCo Assets
On May 2, 2017 and June 1, 2017, our newly formed subsidiaries, AirCo, LLC and AirCo Services, LLC (collectively, “AirCo”) acquired the inventory and principal business assets, and assumed specified liabilities, of Aircraft Instrument and Radio Company, Incorporated, and Aircraft Instrument and Radio Services, Inc. (collectively, the “AirCo Sellers”). The acquired business, which is based in Wichita, Kansas, distributes and sells airplane and aviation parts and maintains a license under Part 145 of the regulations of the Federal Aviation Administration. The consideration paid for the acquired business was $2,400,000.
The following table summarizes the fair values of assets acquired and liabilities assumed by AirCo as of June 1, 2017, the date of the completion of the acquisition (the “AirCo Closing Date”):
|
|
May 2, 2017
|
|
|
|
|
|
|
Assets acquired and liabilities assumed at fair value:
|
|
|
|
|
Accounts receivables
|
|
$
|
748,936
|
|
Inventories
|
|
|
3,100,000
|
|
Property and equipment
|
|
|
26,748
|
|
Accounts payable
|
|
|
(313,117
|
)
|
Accrued expenses
|
|
|
(382,687
|
)
|
Net assets acquired
|
|
$
|
3,179,880
|
|
|
|
|
|
|
Net assets acquired
|
|
|
3,179,880
|
|
Consideration paid
|
|
|
2,400,000
|
|
Bargain purchase gain
|
|
$
|
779,880
|
|
The Company’s purchase price accounting reflects the estimated net fair value of the AirCo Sellers assets acquired and liabilities assumed as of the AirCo Closing Date. The Company’s initial accounting for this acquisition is incomplete as of the date of these consolidated financial statements. Therefore, as permitted by applicable accounting guidance, the foregoing amounts are provisional.
The transaction resulted in a bargain purchase because AirCo was a non-marketed transaction and in financial distress at the time of the acquisition. The inventory was not being marketed appropriately and as a result, the company was unable to realize market prices for the parts. The tax impact related to the bargain purchase gain was to record a deferred tax liability and tax expense against the bargain purchase gain of approximately $278,000. The resulting net bargain purchase gain after taxes was approximately $502,000.
Pro forma financial information is not presented as the results are not material to the Company’s consolidated financial statements.
Other Acquisitions
On October 3, 2016, a newly formed subsidiary of the Company, Stratus Aero Partners LLC, acquired 100% of the outstanding equity interests of Jet Yard, LLC (“Jet Yard”) from the holder thereof. The cash purchase price was $15,000 and there are no contractual provisions, such as an earn-out, which could result in an increase to this price. Jet Yard is registered to operate a repair station under Part 145 of the regulations of the Federal Aviation Administration and its principal asset on the acquisition date was a contract with Pinal County, Arizona to lease approximately 48.5 acres of land at the Pinal Air Park in Marana, Arizona. Jet Yard was organized in 2014, entered into the lease in June 2016 and had maintained de minimus operations from formation through the acquisition date. The lease expires in May 2046 with an option to renew for an additional 30-year period (though the lease to a 2.6 acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The lease provides for an initial annual rent of $27,000, which rental rate escalates based on a schedule in annual increments during the first seven years of the lease (at which time the annual rental rate would be $152,000) and increases by an additional five percent for each three-year period thereafter. Because the rental expense will be accounted for on a straight-line basis over the term of the lease, the rental expense in the initial years will exceed the corresponding cash payments. The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable, which includes, as the initial phase, the construction of a demolition pad to be completed by March 2017 and, as the final and most significant phase, the construction of an aircraft maintenance hangar large enough to house a Boeing B777-300 by the first quarter of 2021. The construction of the demolition pad required by March 31, 2017 under the lease has not been completed and Jet Yard and Pinal County are in discussions with respect to improvements on the leased premises. As of the date of issuance, the Company was informed that the Pinal County is working on the rezoning of Pinal Airpark, which prevents any tenant from construction on the Airpark.
The acquired Jet Yard business is included in the Company’s commercial jet engine segment.
Pursuant to an Asset Purchase Agreement signed on October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D which was in the business of marketing, selling and providing aviation repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount paid at closing in connection with this acquisition was $400,000. Additionally, $100,000 was due within 30 days after closing and an additional $100,000 is payable in equal monthly installments of $16,667 commencing on November 1, 2016. Earn-out payments of up to $100,000 may also be payable based on specified performance for the twelve-month period ending September 30, 2017. For purposes of purchase accounting, the Company estimated that the above-mentioned earn-out will be paid in full. Therefore, the Company estimates the total purchase consideration at approximately $700,000. The Company allocated the purchase consideration to identifiable tangible and intangible assets. No liabilities were assumed in the acquisition. The estimated fair value of identifiable tangible and intangibles assets was approximately $200,000 and $300,000, respectively. The $200,000 excess of the purchase consideration over the estimated fair value of identifiable assets was recorded as goodwill. The basis of the acquired assets will be “stepped up” for income tax purposes. As such, no deferred taxes were recognized in purchase accounting.
The acquired D&D business is operated by GAS and included in the Company’s ground support services segment. The Company has finalized its D&D acquisition accounting. Based on actual revenue earned by D&D through September 30, 2017, the earnout payment with respect to the purchase agreement was $100,000, which amount was paid in October 2017.
On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company, completed the acquisition of Blue Clay Capital Management, LLC (“Blue Clay Capital”), an investment management firm based in Minneapolis, Minnesota. In connection with the transaction, BCCM acquired the assets of, and assumed certain liabilities of, Blue Clay Capital in return for payment to Blue Clay Capital of $1.00, subject to adjustment for Blue Clay Capital’s net working capital as of the closing date. The fair value of the assets acquired and liabilities assumed in connection with the transaction are provisional. Gary S. Kohler, a director of the Company, was the sole owner of Blue Clay Capital. In connection with the transaction, (i) BCCM replaced Blue Clay Capital as the managing general partner of certain investment funds managed by Blue Clay Capital (Blue Clay Capital Partners, LP, Blue Clay Capital Partners CO I, LP, Blue Clay Capital Partners CO III, LP and Blue Clay Capital SMid-Cap LO, LP); (ii) Mr. Kohler entered into an employment agreement with BCCM to serve as its Chief Investment Officer in return for an annual salary of $50,000 plus variable compensation based on the management and incentive fees to be paid to the subsidiary by certain of these investment funds and eligibility to participate in discretionary annual bonuses; and (iii) David Woodis, President of Blue Clay Capital, entered into an employment agreement with BCCM to serve as its Chief Operating Officer and Chief Financial Officer in return for an annual salary of $125,000 plus revenue sharing and eligibility to participate in discretionary annual bonuses.
In connection with the Blue Clay Capital acquisition, a Partnership Interest Conversion and General Partner Admittance Agreement (“Conversion Agreement”) was entered into effective December 31, 2017 between Blue Clay Capital, BCCM, BCCM Advisors, LLC (“BCCM Advisors”), a wholly-owned subsidiary of BCCM, and various Blue Clay Capital investment funds. Per the Conversion Agreement, Blue Clay Capital sold to BCCM Advisors, and BCCM Advisors purchased from Blue Clay, the general partnership interests in certain investment funds previously managed by Blue Clay Capital (as specified above) for a purchase price equal to, with respect to each general partnership, of (i) one percent (1%) of the aggregate capital accounts of each fund as valued on December 31, 2017 and (ii) $100,000 (or $10,000 in the case of Blue Clay Capital SMid-Cap LO, LP). Upon acquisition of each of the general partnership interests, BCCM Advisors was admitted as the general partner of each fund. Blue Clay Capital retained the incentive allocations associated with Blue Clay Capital Partners CO I, LP and Blue Clay Capital Partners CO III. BCCM Advisors will receive all future incentive allocations accruing as of January 1, 2018 and thereafter associated with Blue Clay Capital Partners, LP which is the onshore feeder fund to the Blue Clay Capital Master Fund Ltd. Management determined that the price paid of $227,000 for the combined general partnership interests approximates the fair value of those interests. The portion of the purchase price paid for the general partnership interest in Blue Clay Capital Partners, LP is allocated as an equity interest in the Blue Clay Capital Master Fund, Ltd.
Additionally, effective December 31, 2017, BCCM Advisors entered into an Investment Management Agreement in which it agreed to manage the investments of the following funds: Blue Clay Capital Master Fund Ltd., Blue Clay Capital Fund Ltd. and Blue Clay Capital Partners LP. In connection with the effective date of the Investment Management Agreement, BCCM Advisors became the Incentive Allocation Shareholder of the Blue Clay Capital Master Fund Ltd.
Pro forma financial information is not presented for the above acquisitions as the results are not material to the Company’s consolidated financial statements.
10.
|
VARIABLE INTEREST ENTITIES
|
A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC 810 -
Consolidation
, an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:
|
●
|
the power to direct the activities that most significantly impact the economic performance of the VIE; and
|
|
●
|
the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.
|
Consolidated Variable Interest Entity
Pursuant to a Securities Purchase Agreement dated as of October 2, 2015 (the "Securities Purchase Agreement") among the Company, Delphax Technologies, Inc. and its subsidiary, Delphax Technologies Canada Limited, on November 24, 2015 (the "Closing Date"), the Company purchased (i) at face value a $2,500,000 principal amount Five-Year Senior Subordinated Promissory Note (the "Senior Subordinated Note") issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of $500,000 and accrued and unpaid interest thereunder, and cancellation of, a 90-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on October 2, 2015 pursuant to the Securities Purchase Agreement and (ii) for $1,050,000 in cash a total of 43,000 shares of Delphax's Series B Preferred Stock (the "Series B Preferred Stock") and a Stock Purchase Warrant (the "Warrant") to acquire an additional 95,600 shares of Series B Preferred Stock at a price of $33.4728 per share (subject to adjustment for specified dilutive events).
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 then provided a revolving credit facility under an agreement with Delphax and Delphax Canada (the "Delphax Senior Credit Agreement"), the Company's rights with respect to payment under and enforcement of the Senior Subordinated Note, and enforcement of its security interests were subordinated to the rights of the Senior Lender under the Delphax Senior Credit Agreement.
Each share of Series B Preferred Stock is convertible into 100 shares of common stock of Delphax, subject to anti-dilution adjustments, and has no liquidation preference over shares of common stock of Delphax. No dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax's employee stock option plans at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represent approximately 38% of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company.
Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Series B Preferred Stock and interests in the Warrant sufficient to permit it to acquire up to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock acquired in connection with the exercise of the Warrant equal to 50% of the number of shares of Series B Preferred Stock initially purchasable under the Warrant), then
● holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and exercise rights of removal and replacement) with respect to three-sevenths of the board of directors of Delphax, and after June 1, 2016 the holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and to exercise rights of removal and replacement of) with respect to four-sevenths of the members of the board of directors of Delphax; and
● 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.
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.
The following table sets forth the carrying values of Delphax’s assets and liabilities as of March 31, 2018 and 2017:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
241,430
|
|
|
$
|
328,327
|
|
Accounts receivable, net
|
|
|
316,542
|
|
|
|
2,036,221
|
|
Inventories, net
|
|
|
-
|
|
|
|
1,941,729
|
|
Other current assets
|
|
|
72,269
|
|
|
|
1,145,274
|
|
Total current assets
|
|
|
630,241
|
|
|
|
5,451,551
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
8,007
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
Other tax receivables-long-term
|
|
|
311,000
|
|
|
|
-
|
|
Total assets
|
|
$
|
941,241
|
|
|
$
|
5,459,558
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,145,847
|
|
|
$
|
2,482,578
|
|
Income tax payable
|
|
|
11,312
|
|
|
|
11,312
|
|
Accrued expenses
|
|
|
3,244,514
|
|
|
|
3,627,162
|
|
Short-term debt
|
|
|
1,788,285
|
|
|
|
4,714,257
|
|
Total current liabilities
|
|
|
7,189,958
|
|
|
|
10,835,309
|
|
Long-term debt
|
|
|
-
|
|
|
|
-
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
7,189,958
|
|
|
$
|
10,835,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
(6,248,717
|
)
|
|
$
|
(5,375,751
|
)
|
The short-term debt is comprised of amounts due from Delphax to Air T, Inc. Those amounts have been eliminated in consolidation. As of March 31, 2018, the outstanding principal amount of the Senior Subordinated Note was approximately $900,000 ($2,500,000 as of March 31, 2017) and the outstanding borrowings under the Delphax Senior Credit Agreement were $0 ($1,541,000 as of March 31, 2017). Short-term debt as reflected in the above table includes approximately $888,000 and $388,000 of accrued interest, due to the Company from Delphax Technologies, Inc. under the Senior Subordinated Note as of March 31, 2018 and March 31, 2017, respectively. Short term debt as of March 31, 2017 also includes approximately $112,000 of accrued interest, due to the Company from Delphax Canada and Delphax Technologies, Inc. under the Delphax Senior Credit Agreement. As a result of the foreclosure completed by the Company on August 10, 2017, the amount secured by the Delphax Senior Credit Agreement was satisfied.
The assets of Delphax can only be used to satisfy the obligations of Delphax. Furthermore, Delphax’s creditors do not have recourse to the assets of Air T, Inc. or its subsidiaries.
On January 6, 2017, the Company acquired all rights, and assumed all obligations, of the Senior Lender under the Delphax Senior Credit Agreement with Delphax and Delphax Canada providing for a $7.0 million revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable 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 the Senior Lender an amount equal to the approximately $1.26 million outstanding borrowing balance, plus accrued and unpaid interest and fees. Also in connection with this transaction, the Company, Delphax and Delphax Canada entered into an amendment to the Delphax Senior Credit Agreement to reduce the maximum amount of borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from $7.0 million to $2.5 million, to revise the borrowing base to include in the borrowing base 100% of purchase orders from customers for products up to $500,000, to provide that the interest rate on all borrowings outstanding until all loans under the Delphax Senior Credit Agreement are repaid in full will be a default rate equal to 2.5% per month to be paid monthly, and to provide for the payment to the Company from Delphax Canada and Delphax of fees equal to $25,000 upon execution of the amendment and of $50,000 upon repayment in full of all loans under the Delphax Senior Credit Agreement. On January 6, 2017, the Company notified Delphax and Delphax Canada of certain “Events of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax Senior Credit Agreement and that the Company was reserving all rights to exercise remedies under the Delphax Senior Credit Agreement and that no delay in exercising any such remedy is to be construed as a waiver of any of its remedies. Also, on January 6, 2017, the Company and Delphax Canada entered into a Forbearance and Amendment Agreement dated as of January 6, 2017, which amended the Senior Subordinated Note to increase the default rate of interest from an annual rate of 10.5% to an annual rate of 18%, to be in effect until all amounts under the Senior Subordinated Note are paid in full, and which provides that so long as no Event of Default (as defined in the Senior Subordinated Note) occurs under the Senior Subordinated Note, other than Events of Default that existed as of January 6, 2017, the Company agreed to forbear from exercising its remedies under the Senior Subordinated Note until May 31, 2017 and further provided for the payment by Delphax Canada to the Company of a forbearance fee equal to approximately $141,000. Notwithstanding the existence of events of default, during the first six calendar months of 2017, the Company permitted additional borrowings under the Delphax Senior Credit Agreement to, among other things, fund a final production run by Delphax Canada of consumable products for its legacy printing systems, which production run was primarily completed over that period. Delphax Canada was Delphax's sole manufacturing subsidiary.
During the quarter ended June 30, 2016, Delphax was informed by its largest customer that the customer had decided to accelerate its plans for removing Delphax legacy printing systems from production and that Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be expected from this customer was being sharply curtailed. In addition to this specific customer communication, Delphax also experienced a broad-based decline in legacy product customer demand during the first quarter. Sales of Delphax’s new elan
®
printer system also had not materialized to expectations.
The adverse business developments during the quarter ended June 30, 2016 and the significantly deteriorated outlook for future orders of legacy and elan
®
product caused the Company to reevaluate the recoverability of Delphax’s assets, both tangible and intangible. Based on this reevaluation, which involved material estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company also recorded a partial impairment of Delphax related long-lived tangible assets. Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under existing Delphax employee benefit plans were both probable and estimable. This assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these various adjustments, which aggregated to approximately $5,610,000, were reflected in the operating results of Delphax for the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017.
The Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company recorded goodwill of approximately $375,000 in connection with its investment in Delphax. The Company estimated a subsequent impairment of this goodwill during the fiscal year ended March 31, 2016 of $100,000 and an additional impairment of $275,000 during the quarter ended June 30, 2016. These impairment losses are reflected on the consolidated statement of income (loss) for the year ended March 31, 2017 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 value of Delphax intangible assets being fully written off. The Company estimated and recorded a tradename and patent impairment charge related to Delphax in the amount of approximately $1,385,000 during the quarter ended June 30, 2016. An impairment charge in the amount of $50,000 was recorded during the fiscal year 2016. These impairment losses are reflected on the consolidated statement of income (loss) within the “depreciation, amortization and impairment” line item.
The above described adverse business developments drove significant negative operating results and led to severe liquidity constraints for Delphax. In addition to other measures intended to respond to developments, Delphax engaged an outside advisory firm to assist with operations, cost reductions and expense rationalization, and to provide an objective assessment and recommendations regarding Delphax’s business outlook and alternative courses of action. During the quarter ended June 30, 2016, a number of Delphax employees were either severed or furloughed. For most of fiscal year 2017, Delphax’s operations were maintained at a significantly curtailed level.
In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of final production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on July 13, 2017, the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On August 10, 2017, the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured creditors and shareholders on July 26, 2017. The outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement on July 26, 2017 was approximately $1,510,000. The Company also submitted an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking that Delphax Canada be adjudged bankrupt. On August 8, 2017, the Ontario Court issued an order adjudging Delphax Canada to be bankrupt. The recipients of the foreclosure notice did not object to the foreclosure or redeem. As a result, the foreclosure was completed on August 10, 2017, and the Company accepted the personal property and rights to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.
With it being adjudged bankrupt on August 8, 2017, Delphax Canada ceased to have capacity to deal with its property. The property of Delphax Canada vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured creditors. The Company’s rights under Delphax Senior Credit Agreement permitted it to foreclose upon the personal property and rights of undertakings of Delphax Canada. Since the Company foreclosed on Delphax Canada’s assets within very close time proximity to the commencement of bankruptcy proceedings and because the bankruptcy and foreclosure were undertaken in contemplation of one another, the Company treated these as one single financial reporting event. In accordance with applicable accounting guidance, the Company considered whether Delphax Canada was still a business post-bankruptcy and foreclosure of the assets by the Company and concluded that Delphax Canada no longer constituted a business as it is defined by accounting principles generally accepted in the United States of America and, accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is legally released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of March 31, 2018, the bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax Canada was still the primary obligor of its liabilities.
The intercompany balances under the Delphax Senior Subordinated Note as of March 31, 2018 are eliminated in the presentation of the consolidated financial statements. The effect of interest expense arising under the Senior Subordinated Note and, from January 6, 2017 to August 10, 2017, under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or loss to non-controlling interests because Delphax is a variable interest entity.
Delphax’s revenues and expenses are included in our consolidated financial statements beginning November 24, 2015 through March 31, 2018. Revenues and expenses prior to the date of initial consolidation were excluded. We have determined that the attribution of Delphax net income or loss should be based on consideration of all of Air T’s investments in Delphax and Delphax Canada. The Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately 67% of any Delphax dividends paid, with the remaining 33% paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests. We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax’s net losses are attributed first to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (67%/33%) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial 67%/33% share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses.
As a result of the application of the above-described attribution methodology, for the fiscal years ended March 31, 2018 and 2017, the attribution of Delphax losses to non-controlling interests was 33% and 30%, respectively.
The following table sets forth the revenue and expenses of Delphax that are included in the Company’s consolidated statements of income (loss) and comprehensive income (loss) for the years ended March 31, 2018 and 2017:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
5,835,266
|
|
|
$
|
9,809,997
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,261,156
|
|
|
|
10,090,073
|
|
General and administrative
|
|
|
1,399,034
|
|
|
|
2,876,132
|
|
Research and development
|
|
|
195,653
|
|
|
|
1,042,496
|
|
Depreciation, amortization and impairment
|
|
|
8,007
|
|
|
|
1,738,819
|
|
|
|
|
4,863,850
|
|
|
|
15,747,520
|
|
Operating income (loss)
|
|
|
971,416
|
|
|
|
(5,937,523
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net
|
|
|
(742,120
|
)
|
|
|
(361,098
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
229,296
|
|
|
|
(6,298,621
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
311,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
540,296
|
|
|
$
|
(6,298,621
|
)
|
Non-operating expense, net, includes intercompany interest expense of approximately $670,000 associated with the Senior Subordinated Note and the Delphax Senior Credit Agreement for the fiscal year ended March 31, 2018 and approximately $425,000 for the fiscal year ended March 31, 2017. This interest expense was eliminated for purposes of net income (loss) presented in the Company’s accompanying consolidated statements of income (loss) and comprehensive income (loss) for the years ended March 31, 2018 and 2017, though the effect of intercompany interest expense under the Senior Subordinated Note and the Delphax Senior Credit Agreement is reflected in the attribution of Delphax net income or losses attributed to non-controlling interests.
Unconsolidated Variable Interest Entities and Other Entities
As discussed in Note 2, BCCM Advisors holds equity interests in certain investment funds as of March 31, 2018. The Company determined that the equity interest it holds as the general partner in the following funds are variable interests based on the applicable GAAP guidance: Blue Clay Capital Partners CO I LP, Blue Clay Capital Partners CO III LP, Blue Clay Capital SMid-Cap LO LP and AO Partners II LP. However, the Company further determined that these funds should not be consolidated as BCCM Advisors is not the primary beneficiary of these variable interest entities. The Company determined that its equity interest in the Blue Clay Capital Master Fund Ltd. is not a variable interest and should not be consolidated based on the applicable GAAP guidance. The Company’s total investment within these investment funds at March 31, 2018 is valued at approximately $325,000. The Company’s exposure to loss is limited to its initial investment.
11.
|
FINANCING ARRANGEMENTS
|
On December 21, 2017, the Company refinanced its previously existing financing arrangement with Branch Banking and Trust Company (“BB&T) by entering into a Credit Agreement (“MBT Credit Agreement”) with Minnesota Bank & Trust (“MBT”), pursuant to which MBT extended to the Company an aggregate of $26,900,000 in financing in the form of a floating-rate, $10,000,000 revolving credit facility, and three term loans in the amounts of $10,000,000 (“Term Loan A”), $5,000,000 (“Term Loan B”) and $1,900,000 (“Term Loan C”), respectively. The interest rate on the $10,000,000 revolving note floats at a rate equal to the prime rate plus one percent (1%); the interest rate on Term Note A floats at the month LIBOR rate plus two percent (2%); the interest rate on Term Note B is fixed at four and one-half percent (4.50%); and, the interest on Term Note C floats at a rate equal to prime minus one percent (1%), subject to a floor of three and one quarter percent (3.25%). In connection with the financing, the Company entered into a swap agreement to fix the interest rate on Term Note A at four and 56/100ths percent (4.56%). The revolving note is due on November 30, 2019, Term Loan A and Term Loan B mature in ten years from the date of issuance, and Term Loan C matures on January 1, 2019. The loans are guaranteed by certain subsidiaries of the Company, secured by a first lien on all personal property of the Company and the guaranteeing subsidiaries. The Company applied a portion of the proceeds from the financing to pay off the obligations of the Company and certain of its subsidiaries under its Prior Revolving Credit Facility (as defined below) with BB&T.
On December 21, 2017, the Company entered into an interest rate swap pursuant to an International Swap Dealer’s Association, Inc. Master Agreement with MBT. The effective date of the swap was January 1, 2018 and the termination date of the swap agreement is January 1, 2028. As of January 1, 2018, the notional amount was $10,000,000, which amount adjusts each month consistent with the amortization schedule of Term Note A. The purpose of the swap is to fix the interest rate on the Company’s $10,000,000 Term Note A at four and 56/100ths percent (4.56%), thereby mitigating the interest rate risk inherent in Term Note A. The fair value of the interest rate swap as of March 31, 2018 was a liability of approximately $8,500. The interest rate swap was not designated as a hedging instrument. The change in the fair value of the swap from the trade date to March 31, 2018 is recorded in the consolidated statements of income (loss).
On February 15, 2018, the Company entered into certain financing documents with MBT pursuant to which MBT extended a new $1,680,000 real estate loan (“Term Note D”) to the Company and amended the $1,900,000 term loan evidenced by Term Note C to reduce the principal amount of Term Note C to $1,000,000 and to adjust the amortization schedules set forth therein to reflect the reduced principal balance. The interest rate on Term Note D floats at a rate equal to the one-month LIBOR rate plus 2%. In connection with the financing, the Company entered into a swap agreement to fix the interest rate on Term Note D at five and 9/100
th
percent (5.09%). The principal balance of Term Note D is payable in equal monthly installments of $5,600 each commencing on March 1, 2018 and continuing until January 1, 2028 at which time the entire principal balance of Term Note D will be due and payable in full. Term Note D is secured by a first mortgage on the real property of the Company located at 5930 Balsom Ridge Road, Denver, NC 28037. The interest rate on Term Note C will continue to float at a rate equal to prime minus 1% subject to a floor of 3.25%. The maturity date of Term Note C continues to be January 1, 2019. The monthly installments of principal under Term Note C have been reduced from $158,333.33 a month to $90,909 per month to reflect the reduced principal balance. In addition, both Term Note C and Term Note D, along with all other financing extended by MBT to the Company, have been guaranteed by certain subsidiaries of the Company, and are secured by a first lien on all personal property of the Company and the guaranteeing subsidiaries.
On February 20, 2018, the Company entered into an interest rate swap pursuant to an International Swap Dealer’s Association, Inc. Master Agreement with MBT. The effective date of the swap was February 20, 2018 and the termination date of the swap agreement is January 1, 2028. As of February 20, 2018, the notional amount was $1,680,000, which amount adjusts each month consistent with the amortization schedule of Term Note D. The purpose of the swap is to fix the interest rate on the Company’s $1,680,000 Term Note D five and 9/100
th
percent (5.09%), thereby mitigating the interest rate risk inherent in Term Note D. The fair value of the interest rate swap as of March 31, 2018 was a liability of approximately $58,000. The interest rate swap was not designated as a hedging instrument. The change in the fair value of the swap from the trade date to March 31, 2018 is recorded in the consolidated statements of income (loss).
The MBT agreements contain affirmative and negative covenants, including covenants providing compliance certificates and borrowing base certificates, notices of events of default or other events deemed to have a material adverse effect on the Company, as defined in the credit agreement, and limitations on certain types of additional debt and certain types of investments. The MBT Credit Agreement also contains financial covenants applicable to the Company and the obligation subsidiaries, including the maintenance of a Debt Service Coverage Ratio of 1.25 to 1.00 and an Asset Coverage Ratio of 1.50 to 1.00.
The MBT agreements contain events of default, as defined therein, including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, cross-default to other debt, bankruptcy and other insolvency events, actual or asserted invalidity of loan documentation, or material adverse changes in the Company’s or the guaranteeing subsidiaries’ financial condition. At March 31, 2018, the Company and the subsidiaries were in compliance with all applicable covenants under this credit facility.
Prior to December 21, 2017, the Company had a senior secured revolving credit facility of $25.0 million with BB&T with a maturity date of April 1, 2019 (the “Prior Revolving Credit Facility”). Initially, borrowings under the Prior Revolving Credit Facility bore interest (payable monthly) at an annual rate of one-month LIBOR plus an incremental amount ranging from 1.50% to 2.00% based on a consolidated leverage ratio. In addition, a commitment fee accrued with respect to the unused amount of the Prior Revolving Credit Facility at an annual rate of 0.15%. The Company included the commitment fee expense within the interest expense and other line item of the accompanying consolidated statements of income (loss). Amounts applied to repay borrowings under the Prior Revolving Credit Facility could be reborrowed, subject to the terms of the facility.
On May 2, 2017, the Company and certain of its subsidiaries entered into an amendment to the agreement governing the Prior Revolving Credit Facility to establish a separate $2.4 million term loan facility under that agreement. Each of the Company and such subsidiaries were obligors with respect to the term loan, which matured on May 1, 2018, with equal $200,000 installments of principal due monthly, commencing June 1, 2017. Interest on the term loan was payable monthly at a per annum rate equal to 25 basis points above the interest rate applicable to the Prior Revolving Credit Facility. The proceeds of the term loan were used to fund the acquisition of the AirCo business. The term loan was secured by the existing collateral securing borrowings under the Prior Revolving Credit Facility, including such acquired assets.
Effective as of June 28, 2017, the Company and certain of its subsidiaries agreed to amend the Prior Revolving Credit Facility to provide that the interest rates on the revolving loans and the above-referenced term loan under the Prior Revolving Credit Facility were each increased by an additional 0.25% per annum from the date of the amendment until the second business day after delivery of a compliance certificate for the quarter ended March 31, 2017 or any subsequent fiscal quarter end showing compliance with the financial covenants required under the Prior Revolving Credit Facility, other than with respect to covenants as to which compliance had been waived. The compliance certificate for the quarter ended June 30, 2017, was so delivered on October 26, 2017 and accordingly, the additional 0.25% per annum additional interest ceased to accrue commencing on October 26, 2017.
The Prior Revolving Credit Facility contained a number of affirmative and negative covenants as well as financial covenants. Revisions to the terms of the Prior Revolving Credit Facility and waiver of compliance with certain covenants by the lender occurred pursuant to a number of amendments to the facility.
On October 31, 2016, the Company and its subsidiaries, MAC, GGS, CSA, GAS, ATGL, Jet Yard and Stratus Aero Partners, LLC, entered into a loan agreement dated as of October 31, 2016, (the “Construction Loan Agreement”) with the Prior Revolving Credit Facility lender to borrow up to $1,480,000 to finance the acquisition and development of the Company’s new corporate headquarters facility located in Denver, North Carolina. Under the Construction Loan Agreement, the Company was permitted to make monthly drawings to fund construction costs until October 2017. Borrowings under the Construction Loan Agreement bore interest at the same rate charged under the Revolving Credit Facility. Monthly interest payments began in November 2016. Monthly principal payments (based on a 25-year amortization schedule) commenced in November 2017, with the final payment of the remaining principal balance due in October 2026. Borrowings under the Construction Loan Agreement were secured by a mortgage on the new headquarters facility and a collateral assignment of the Company’s rights in life insurance policies with respect to certain former executives, as well as the same collateral securing borrowings under the Revolving Credit Facility. The Construction Loan included the same covenants as in the Prior Revolving Credit Facility.
All of the obligations of the Company and its subsidiaries under the Prior Revolving Credit Facility including the Construction Loan Agreement referenced above were repaid in full with proceeds of the MBT Credit Agreement, and the Prior Revolving Credit Facility was terminated effective as of December 21, 2017.
In connection with and upon consummation of the Contrail Aviation acquisition in July 2016, Contrail Aviation entered into a Credit Agreement (the “Contrail Credit Agreement”) with a bank lender. The Contrail Credit Agreement provided for revolving credit borrowings by Contrail Aviation in an amount up to the lesser of $12,000,000 or a borrowing base. The borrowing base was computed monthly and was equal to the sum of 75% of the value of eligible inventory (up to a maximum of $9,000,000) and 80% of outstanding eligible accounts receivable. The borrowing base at March 31, 2017 was $3.2 million, and the outstanding principal balance of borrowings under the Contrail Credit Agreement were $0 as of that date. Borrowings under the Contrail Credit Agreement bore interest at a rate equal to one-month LIBOR plus 2.80% and matured in January 2018. The obligations of Contrail Aviation under the Contrail Credit Agreement were required to be guaranteed by each of its subsidiaries (if any), and were (and the guaranty obligations of any such subsidiary guarantors were required to be) secured by a first-priority security interest in substantially all of the assets of Contrail Aviation and any such subsidiary guarantors, as applicable (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, real property, and proceeds of the foregoing). The obligations of Contrail Aviation under the Contrail Credit Agreement were also guaranteed by the Company, with such guaranty limited in amount to a maximum of $1,600,000, plus interest on such amount at the rate of interest in effect under the Contrail Credit Agreement, plus costs of collection.
The Contrail Credit Agreement contained affirmative and negative covenants, including covenants that restricted the ability of Contrail Aviation and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contained financial covenants applicable to Contrail Aviation and its subsidiaries, including a minimum debt service coverage ratio of 1.75 to 1.0, a maximum ratio of total liabilities to tangible net worth of 2.5 to 1.0, and a $10,000 limitation on annual operating lease payments. At March 31, 2017, Contrail Aviation was in compliance with its bank covenants.
On May 5, 2017, Contrail Aviation entered into a Business Loan Agreement with Old National Bank (“ONB Loan Agreement”). The ONB Loan Agreement provides for revolving credit borrowings by Contrail in an amount up to $15,000,000 and replaces the Contrail Credit Agreement entered into with BMO Harris Bank N.A on July 18, 2016. Borrowings under the Loan Agreement bear interest at an annual rate equal to one-month LIBOR plus 3.00%.
On March 7, 2018, Contrail Aviation entered into a new Business Loan Agreement (the “Amended ONB Loan Agreement”) with Old National Bank (“ONB”). The Amended ONB Loan Agreement and related Promissory Note replace the ONB Loan Agreement dated May 5, 2017. The Amended ONB Loan Agreement provides for revolving credit borrowings by Contrail Aviation in an amount up to $20,000,000 with a maturity date of May 5, 2019. Borrowings under the Loan Agreement bear interest at a variable rate equal to the one-month LIBOR plus 3.00%. At March 31, 2018, $14,826,000 of aggregate borrowings were outstanding under the loan agreement and $5,174,000 was available for borrowing.
On January 31, 2018, Contrail Aviation executed an additional Business Loan Agreement with Old National Bank (“Additional ONB Loan Agreement”). The Additional ONB Loan Agreement provides for borrowings by Contrail Aviation in an amount equal to $9,920,000 and is in addition to the revolving credit facility described above. Borrowings under the Additional ONB Loan Agreement will bear interest at an annual rate equal to 1-month LIBOR plus 3.75% and matures on January 26, 2021. Pursuant to the Additional ONB Loan Agreement, Contrail Aviation is required to make quarterly payments equal to $250,000, plus an additional “excess cash flow payment” equal to seventy percent (70%) of the gross lease income of the Collateral minus $250,000. At March 31, 2018, the outstanding balance on the Additional Loan Agreement was $9,920,000.
The obligations of Contrail Aviation under the Amended ONB Loan Agreement and the Additional ONB Loan Agreement are secured by a first-priority security interest in certain assets of Contrail and are also guaranteed by the Company, with such guaranty limited in amount to a maximum of $1,600,000 plus interest on such amount at the rate of interest in effect under the Loan Agreement, plus costs of collection.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain affirmative and negative covenants, including covenants that restrict Contrail’s ability to make acquisitions or investments, make certain changes to its capital structure, and engage in any business substantially different than it presently conducts. The agreements also contain financial covenants applicable to Contrail, including maintenance of a Cash Flow Coverage Ratio of 2.0 to 1.0, a Tangible Net Worth of not less than $3,500,000, and a Debt Service Coverage Ratio of 1.1 to 1.0, as such terms are defined in the agreements.
The Amended ONB Loan Agreement and the Additional ONB Loan Agreement contain Events of Default, as defined, including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, if both Contrail’s current chief executive officer and chief financial officer cease to oversee day-to-day operations of Contrail, cross-default to other debt, bankruptcy and other insolvency events, actual or asserted invalidity of loan documentation, or material adverse changes in Contrail’s financial condition. At March 31, 2018, Contrail was in compliance with these covenants.
On October 27, 2017 AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a loan in the amount of $3,441,000 from MBT in order to finance, in part, the purchase of a 737-800 airframe for the purpose of disassembling the plane and selling it for parts. The loan is due March 26, 2019. The plane will be disassembled by Jet Yard, LLC, an affiliate, and the parts will be placed on consignment with AirCo, LLC, which will market them to third parties.. AirCo 1, LLC is a special purpose entity formed for the purpose of this transaction. At March 31, 2018, the outstanding balance on this loan was approximately $2,360,000 which is reported net of deferred financing costs of $44,500 on the consolidated balance sheet.
The loan contains affirmative and negative covenants and is secured by a security interest in all of AirCo 1, LLC’s assets, a collateral assignment of the purchase agreement for the plane, assignments of the disassembly contract and the consignment agreement, and bailee agreements with Jet Yard, LLC and AirCo, LLC. AirCo, LLC is a wholly-owned subsidiary of Stratus Aero Partners LLC.
On February 22, 2018, AirCo 1, LLC, a wholly-owned subsidiary of AirCo, LLC, closed a revolving loan in the maximum amount of $5,000,000 (“ Revolving Loan Agreement”) from MBT to finance, in part, the ongoing purchase of decommissioned narrow body airframes including but not limited to Boeing 737 NG and A320 family aircraft by AirCo 1, LLC for the purpose of disassembling the airframes and selling them for parts. The airframes will be disassembled by Jet Yard, LLC, and the parts would be placed on consignment with AirCo, LLC, which will market them to third parties. Borrowings under the Revolving Loan Agreement will bear interest at a fixed rate of 7.50% per year with interest payments due on the first day of each month commencing on April 1, 2018. The entire remaining principal balance of this Revolving Loan Agreement and any accrued, unpaid interest shall be due and payable on February 21, 2019. At March 31, 2018, the outstanding balance on this loan was approximately $4,950,000 which is reported net of deferred financing costs of $50,000 on the consolidated balance sheet.
While AirCo 1, LLC was originally formed with the intention of being a special purpose entity for the purchase of a specific Boeing 737-800 airframe in October 2017, AirCo 1, LLC will no longer be a special purpose entity and will be involved in the ongoing purchase of narrow body airframes including but not limited to Being 737 NG and A320 family aircraft for purposes of disassembling them and selling them for parts. The revolving line of credit described above will be available to finance the purchase of additional decommissioned airframes to be disassembled and sold as parts by consignment to AirCo, LLC.
The loan contains affirmative and negative covenants and is secured by security interests in all of AirCo 1, LLC’s assets, a collateral assignment of the purchase agreements for the Boeing 737 airframes, assignments of the disassembly contracts and the consignment agreements, and bailee agreements with Jet Yard, LLC and AirCo, LLC. The loan is also secured by a pledge by AirCo, LLC of all of the membership interests of AirCo 1, LLC.
The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements.
At March 31, 2018, our contractual financing obligations, including payments due by period, are as follows:
Fiscal year ended
|
|
Amount
|
|
2019
|
|
$
|
9,324,278
|
|
2020
|
|
|
16,888,073
|
|
2021
|
|
|
10,640,086
|
|
2022
|
|
|
1,567,200
|
|
2023
|
|
|
1,567,200
|
|
Thereafter
|
|
|
8,463,400
|
|
|
|
|
48,450,237
|
|
Less: Unamortized Debt Issuance Costs
|
|
|
(365,288
|
)
|
|
|
$
|
48,084,950
|
|
The Company has operating lease commitments for office equipment and some of its office and maintenance facilities.
The Company previously leased property used for its corporate offices from a company controlled by certain of the Company’s former officers and directors. The lease for this facility provided for monthly rent of $14,862 and expired on January 31, 2018. The Company relocated its corporate offices to an owned facility in July 2017 and did not renew this lease.
The Company also leases approximately 1,950 square feet of office space and approximately 4,800 square feet of hangar space at the Ford Airport in Iron Mountain, Michigan. CSA’s operations are headquartered at these facilities which are leased from a third party under an annually renewable agreement.
The Company leases approximately 53,000 square feet of a 66,000 square foot aircraft maintenance facility located in Kinston, North Carolina under an agreement that extends through January 2023, with the option to extend the lease for four additional five-year periods thereafter. The Company has calculated rent expense under the current lease term. The rental rate under the lease increases by increments for each of the five-year renewal periods.
GGS leases a 112,500 square foot production facility in Olathe, Kansas. The facility is leased from a third party under a lease agreement, which expires in August 2019.
GAS leases several maintenance facilities across the country and an administrative office in Eagan, Minnesota. Most of the leases are on one-year agreements with renewal clauses, but some of these are multi-year leases extending out as far as March 2021.
As of March 31, 2018, the Company leased maintenance and office space from third parties at a variety of other locations, at prevailing market terms. The table of aircraft presented in Part I Item 1 of this Form 10-K lists the aircraft operated by the Company’s subsidiaries and the form of ownership.
Contrail Aviation leases a 21,000 square foot facility in Verona, Wisconsin. The lease for this facility expires on July 17, 2021, though Contrail Aviation has the option to renew the lease on the same terms for an additional five-year period. The lease provides for monthly rent of approximately $13,000 (see Note 24).
Jet Yard leases approximately 48.5 acres of land from Pinal County at the Pinal Air Park in Marana, Arizona. The lease expires in May 2046, though Jet Yard has an option to renew the lease for an additional 30-year period (though the lease to a 2.6-acre parcel of the leased premises may be terminated by Pinal County upon 90 days’ notice). The lease agreement permits Pinal County to terminate the lease if Jet Yard fails to make substantial progress toward the construction of facilities on the leased premises in phases in accordance with a specified timetable. The construction of a demolition pad required by March 31, 2017 under the lease has not been completed and Jet Yard and Pinal County are in discussions with respect to improvements on the leased premises.
Delphax’s Canadian subsidiary leased a 76,734 square foot manufacturing facility in Mississauga, Ontario under a lease which has been terminated effective upon removal of the property foreclosed upon by Air T.
Delphax Solutions leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease expires on July 31, 2020 and the subsidiary’s obligations under the lease have been guaranteed by Air T. The lease commenced on August 1, 2017 and terminates on July 31, 2020. Annual rent under the lease escalates annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000 (CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T.
AirCo leases a 20,000 square-foot facility from the shareholder of the AirCo Seller which expires on May 1, 2018, though AirCo may prior thereto terminate the lease on 90-days’ notice and may renew the lease for up to four successive one-year terms. Total rent cost for fiscal 2018 is approximately $121,000. The Company renewed the lease for another term through May 1, 2019.
At March 31, 2018, future minimum annual lease payments (foreign currency amounts translated using applicable March 31, 2018 exchange rates) under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
Year ended March 31,
|
|
|
|
|
2019
|
|
$
|
3,007,000
|
|
2020
|
|
|
2,262,000
|
|
2021
|
|
|
1,400,000
|
|
2022
|
|
|
1,078,000
|
|
2023
|
|
|
885,000
|
|
Thereafter
|
|
|
5,381,000
|
|
Total minimum lease payments
|
|
$
|
14,013,000
|
|
The Company’s rent expense excluding Delphax for operating leases totaled approximately $4,520,000 and $3,872,000 for fiscal 2018 and 2017, respectively, and includes amounts to related parties of $337,000 and $289,000 in fiscal 2018 and 2017, respectively. Delphax’s rent expense totaled $95,000 and $391,000 for fiscal 2018 and 2017 respectively.
13.
|
EQUIPMENT LEASED TO CUSTOMERS
|
The Company leases equipment to third parties. ATGL leases a printer to a third party under an operating lease agreement. Contrail Aviation leases engines to third parties under operating lease agreements as well.
As of March 31, 2018, minimum future rentals under non-cancelable operating leases are as follow:
Year ended March 31,
|
|
|
|
|
2019
|
|
$
|
2,547,888
|
|
2020
|
|
|
1,392,588
|
|
2021
|
|
|
732,588
|
|
2022
|
|
|
83,288
|
|
2023
|
|
|
66,547
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
4,822,899
|
|
14.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company measures and reports financial assets and liabilities at fair value, on a recurring basis. Fair value measurement is classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following consolidated balance sheet items are measured at fair value:
|
|
Fair Value Measurements at March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (Level 1)
|
|
$
|
2,552,774
|
|
|
$
|
4,593,667
|
|
Interest rate swaps (Level 2)
|
|
$
|
66,706
|
|
|
$
|
-
|
|
Acquisition contingent consideration obligations (Level 3)
|
|
$
|
1,955,987
|
|
|
$
|
3,023,031
|
|
Redeemable Non-Controlling Interest (Level 3)
|
|
$
|
1,992,939
|
|
|
$
|
1,443,901
|
|
The fair values of our interest rate swaps are based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. Since these inputs are observable in active markets over the terms that the instruments are held, the derivatives are classified as Level 2 in the hierarchy.
The fair value of the acquisition contingent consideration obligations is based on a discounted cash flow analysis using projected EBITDA over the earn-out period and is classified as Level 3 in the hierarchy.
The fair value of the redeemable non-controlling interest is based on a market approach using a book value multiple and is classified as Level 3 in the hierarchy.
The fair value measurements which use significant observable inputs (Level 3), changed due to the following:
|
|
Acquisition
Contingent
Consideration
Obligations
|
|
|
Redeemable Non-Controlling
Interest
|
|
Beginning Balance
|
|
$
|
3,023,031
|
|
|
$
|
1,443,901
|
|
Payment of contingent consideration
|
|
|
(1,100,000
|
)
|
|
|
-
|
|
Capital contribution by non-controlling member
|
|
|
-
|
|
|
|
252,000
|
|
Net income attributable to non-controlling interests
|
|
|
-
|
|
|
|
254,938
|
|
Fair value adjustment
|
|
|
-
|
|
|
|
42,100
|
|
Interest accrued on contingent consideration
|
|
|
32,956
|
|
|
|
-
|
|
|
|
$
|
1,955,987
|
|
|
$
|
1,992,939
|
|
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair value at March 31, 2018 and 2017.
15.
|
AIR T, INC. STOCKHOLDERS’ EQUITY
|
The authorized capital structure of Air T, Inc. includes 4,000,000 shares of common stock, with a par value of $0.25 per share. In May 2014, the Company’s Board of Directors adopted a policy to discontinue the payment of a regularly scheduled annual cash dividend.
On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period.
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 repurchased from the Biglari Group was retired upon repurchase. The accompanying consolidated statement of equity for the year ended March 31, 2017 reflects the resultant respective reductions in common stock, additional paid-in capital, and retained earnings.
16.
|
EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS
|
Pursuant to equity compensation plans last approved by Air T, Inc. stockholders in 2005, the Company has 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, 2018 and 2017. As of March 31, 2018, there was no unrecognized compensation expense, related to the stock options. There were no stock options granted during the years ended March 31, 2018 and March 31, 2017.
As of March 31, 2017, 36,000 shares of Air T stock options expired, of which 6,000 expired in fiscal year ended March 31, 2016 and 30,000 expired in fiscal year ended March 31, 2017. In order to remove the deferred tax asset related to these stock options, a decrease of $63,000 was recorded through additional paid in capital.
818 shares were exercised in fiscal year ended March 31, 2018 at weighted average exercise price per share of $10.56. The number of outstanding options at March 31, 2018 was 9,182.
In addition, Delphax maintains a number of stock option plans. These plans were in place at the time of the Company’s acquisition of interests in Delphax. Subsequent to the acquisition, Delphax granted 1.2 million non-qualified options to purchase shares of its common stock to certain of its employees at an exercise price of $0.33 per share.
Option activity, which only reflects the activity of Air T, Inc., is summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
40,000
|
|
|
$
|
8.74
|
|
|
|
2.09
|
|
|
$
|
617,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(30,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
10,000
|
|
|
|
10.08
|
|
|
|
6.15
|
|
|
|
101,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(818
|
)
|
|
|
10.56
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Repurchased
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
9,182
|
|
|
$
|
10.03
|
|
|
|
5.13
|
|
|
$
|
140,193
|
|
Exercisable at March 31, 2018
|
|
|
9,182
|
|
|
$
|
10.03
|
|
|
|
5.13
|
|
|
$
|
140,193
|
|
Approximately 38% and 47% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2018 and 2017, respectively. Approximately 15% and 15% of the Company’s consolidated accounts receivable at March 31, 2018 and 2017, respectively, were due from FedEx Corporation.
The components of income tax expense (benefit) were as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(133,000
|
)
|
|
$
|
1,124,000
|
|
State
|
|
|
183,000
|
|
|
|
128,000
|
|
Foreign
|
|
|
156,000
|
|
|
|
132,000
|
|
Total current
|
|
|
206,000
|
|
|
|
1,384,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(14,000
|
)
|
|
|
(592,000
|
)
|
State
|
|
|
3,000
|
|
|
|
(67,000
|
)
|
Total deferred
|
|
|
(11,000
|
)
|
|
|
(659,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
195,000
|
|
|
$
|
725,000
|
|
Income tax expense was different from the amount computed by applying the statutory federal income tax rate of 30.8% and 34% for fiscal years ended March 31, 2018 and March 31, 2017 each respectively as shown in the following table:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected Federal income tax expense U.S. statutory rate
|
|
$
|
818,000
|
|
|
|
30.8
|
%
|
|
$
|
(1,434,000
|
)
|
|
|
34.0
|
%
|
State income taxes, net of Federal benefit
|
|
|
129,000
|
|
|
|
4.9
|
%
|
|
|
40,000
|
|
|
|
-0.9
|
%
|
Permanent differences, other
|
|
|
21,000
|
|
|
|
0.8
|
%
|
|
|
156,000
|
|
|
|
-3.7
|
%
|
Dividend received deduction
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(302,000
|
)
|
|
|
7.2
|
%
|
Section 831(b) benefit
|
|
|
(320,000
|
)
|
|
|
-12.1
|
%
|
|
|
(281,000
|
)
|
|
|
6.7
|
%
|
Change in valuation allowance
|
|
|
(1,116,000
|
)
|
|
|
-42.1
|
%
|
|
|
3,868,000
|
|
|
|
-91.8
|
%
|
Domestic production activities deductions
|
|
|
(15,000
|
)
|
|
|
-0.6
|
%
|
|
|
(64,000
|
)
|
|
|
1.5
|
%
|
Income attributable to minority interest - Contrail Aviation
|
|
|
(79,000
|
)
|
|
|
-3.0
|
%
|
|
|
(45,000
|
)
|
|
|
1.1
|
%
|
Bargain purchase gain
|
|
|
(155,000
|
)
|
|
|
-5.8
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Tax rate change applied to deferreds
|
|
|
2,297,000
|
|
|
|
86.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred benefit for outside basis difference recorded on Delphax CFC's
|
|
|
(811,000
|
)
|
|
|
-30.6
|
%
|
|
|
(1,015,000
|
)
|
|
|
24.1
|
%
|
Deferred benefit for increase in Canadian tax credits for Dephax
|
|
|
(149,000
|
)
|
|
|
-5.6
|
%
|
|
|
|
|
|
|
|
|
Recognition of AMT credit as tax receivable
|
|
|
(311,000
|
)
|
|
|
-11.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred state income taxes, net of Federal benefit for Delphax
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(102,000
|
)
|
|
|
2.4
|
%
|
Other differences, net
|
|
|
(114,000
|
)
|
|
|
-4.3
|
%
|
|
|
(96,000
|
)
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
195,000
|
|
|
|
7.3
|
%
|
|
$
|
725,000
|
|
|
|
-17.1
|
%
|
Delphax, which generated a loss for the period ended March 31, 2018 and March 31, 2017 is not included in Air T, Inc.’s consolidated tax return and accounts for $973,000 and $3,212,000 of the above valuation allowance effect for each year, respectively. Changes in unrealized losses related to available-for-sale securities accounted for the remaining valuation allowance effect for each year. Deferred tax assets and liabilities consisted of the following as of March 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
50,000
|
|
|
$
|
785,000
|
|
Accrued vacation
|
|
|
343,000
|
|
|
|
475,000
|
|
Stock option compensation
|
|
|
67,000
|
|
|
|
108,000
|
|
Property and equipment
|
|
|
264,000
|
|
|
|
169,000
|
|
Warranty reserve
|
|
|
25,000
|
|
|
|
39,000
|
|
Accounts and notes receivable reserve
|
|
|
103,000
|
|
|
|
290,000
|
|
Employee severance reserve
|
|
|
549,000
|
|
|
|
460,000
|
|
Net operating loss carryforwards
|
|
|
6,083,000
|
|
|
|
6,461,000
|
|
Federal/Canadian tax credits
|
|
|
4,486,000
|
|
|
|
4,648,000
|
|
263A inventory capitalization
|
|
|
-
|
|
|
|
10,000
|
|
Unrealized gains/losses and outside basis difference for CFC's
|
|
|
2,324,000
|
|
|
|
1,995,000
|
|
Intangibles
|
|
|
25,000
|
|
|
|
43,000
|
|
Outside basis difference
|
|
|
|
|
|
|
-
|
|
Other
|
|
|
69,000
|
|
|
|
78,000
|
|
Total deferred tax assets
|
|
|
14,388,000
|
|
|
|
15,561,000
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(11,000
|
)
|
|
|
(35,000
|
)
|
Prepaid expenses
|
|
|
(337,000
|
)
|
|
|
(505,000
|
)
|
263A inventory capitalization
|
|
|
(28,000
|
)
|
|
|
-
|
|
Bargain purchase gain
|
|
|
(179,000
|
)
|
|
|
-
|
|
Gain on marketable securities (OCI)
|
|
|
(72,000
|
)
|
|
|
(94,000
|
)
|
Outside basis difference
|
|
|
(270,000
|
)
|
|
|
(34,000
|
)
|
Total deferred tax liabilities
|
|
|
(897,000
|
)
|
|
|
(668,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
13,491,000
|
|
|
$
|
14,893,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(13,583,000
|
)
|
|
|
(14,698,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(92,000
|
)
|
|
$
|
195,000
|
|
The Company accounts for uncertain tax positions in accordance with accounting principles generally accepted in the United States of America. The Company has analyzed filing positions in all of the federal, state and international jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The years subject to examination for the Company’s federal return are the fiscal 2014 through 2016 tax years. The years subject to examination for the Company’s state returns are generally the fiscal 2013 through 2016 tax years. As of March 31, 2018 and 2017, the Company did not have any unrecognized tax benefits. The Company does not believe there will be any material changes in unrecognized tax positions over the next twelve months.
It is the Company’s policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 31, 2018 and 2017, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended March 31, 2018 and 2017.
As described in Note 10, effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately 38%, Delphax is required to continue filing a separate United States corporate tax return. Furthermore, Delphax has three foreign subsidiaries located in Canada, France, and the United Kingdom which file tax returns in those jurisdictions. With few exceptions, Delphax is no longer subject to examinations by income tax authorities for tax years before 2013.
Delphax maintains a September 30 fiscal year. As of September 30, 2016, Delphax and its subsidiaries had estimated foreign and domestic tax loss carryforwards of $9.7 million and $14.5 million, respectively. As of that date, they had estimated foreign research and development credit carryforwards of $4.5 million, which are available to offset future income tax. The credits and net operating losses expire in varying amounts beginning in the year 2023. As previously noted, the TCJA repealed the corporate alternative minimum tax and made any minimum tax credit carryforwards to the extent not utilized refundable for tax years beginning after December 31, 2017. As a result, Delphax will be able to receive a refund of its minimum tax credit carryforward of $311,000 beginning in their fiscal year ended September 30, 2019. Previously, a valuation allowance was established against the minimum tax credit carryforward. As a result of the TCJA relating to the refundability of the minimum tax credit carryforward, an income tax benefit was recognized by the Company during the current period and a long-term income tax receivable was established. Should there be an ownership change for purposes of Section 382 or any equivalent foreign tax rules, the utilization of the previously mentioned carryforwards may be significantly limited. Furthermore, Delphax is currently undergoing bankruptcy proceedings with their Canadian entity (see Note 10) and intends to liquidate both the United Kingdom and French entities too. The Company anticipates those proceedings will be completed within the next fiscal year. Upon completion, any remaining tax attributes, including net operating losses and credit carryforwards in each respective jurisdiction will be lost. The Company has recorded an outside basis difference in the stock of these entities of $2.3 million which is the estimated loss that will be recognized in the United States upon their liquidation. See additional information regarding Delphax Canada in Note 10. The returns for the fiscal year ended September 30, 2017 have not yet been filed.
The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets will be recovered. In accounting for the Delphax tax attributes, the Company has established a full valuation allowance of $13.0 million at March 31, 2018 and $14.0 million at March 31, 2017. The cumulative losses incurred by Delphax in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established against Delphax’s net deferred tax assets.
The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(E) defined contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are immediately eligible to participate in the Plans. The Company’s contribution to the Plans for the years ended March 31, 2018 and 2017 was approximately $559,000 and $529,000, respectively, and was recorded in the consolidated statements of income (loss).
The Company, in each of the past three years, has paid a discretionary profit sharing bonus in which all employees have participated. Profit sharing expense in fiscal 2018 and 2017 was approximately $1,188,000 and $390,000, respectively, and was recorded in general and administrative expenses in the consolidated statements of income (loss). The profit sharing expense in fiscal 2018 included approximately $602,000 related to Air T, and approximately $536,000 related to Contrail.
Delphax had a defined contribution plan covering substantially all Canadian employees. Canadian employees contribute 2% of gross salary to the plan, and Delphax makes a contribution to the plan of 3% or 4% of gross salary depending on employee classification. The employer contribution vests over two years. The contribution made by Delphax during fiscal 2018 and 2017 was $0 and $78,000 respectively.
20.
|
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
(in thousands, except per share data)
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
47,697
|
|
|
$
|
48,861
|
|
|
$
|
44,501
|
|
|
$
|
53,460
|
|
Operating Income
|
|
|
2,213
|
|
|
|
476
|
|
|
|
552
|
|
|
|
1,005
|
|
Net Income (Loss) Attributable to Air T, Inc Stockholders
|
|
|
968
|
|
|
|
422
|
|
|
|
(672
|
)
|
|
|
1,559
|
|
Basic Earnings (Loss) per share
|
|
|
0.47
|
|
|
|
0.21
|
|
|
|
(0.33
|
)
|
|
|
0.76
|
|
Diluted Earnings (Loss) per share
|
|
|
0.47
|
|
|
|
0.21
|
|
|
|
(0.33
|
)
|
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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 elan
®
product caused the Company to reevaluate the recoverability of Delphax’s assets, both tangible and intangible. Based on this reevaluation, which involved material estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. This impairment totaled approximately $1,385,000 during the quarter ended June 30, 2016. The Company also recorded a partial impairment of Delphax related long-lived tangible assets, totaling approximately $249,000 during the quarter ended June 30, 2016. These impairment losses are reflected on the consolidated statements of income (loss) within the “depreciation, amortization and impairment” line item. Furthermore, there was an assessment regarding whether, at June 30, 2016, future severance actions under existing Delphax employee benefit plans were both probable and estimable. This assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these various adjustments discussed above, which aggregated to approximately $5,610,000, are reflected in the operating results of Delphax for the quarter ended June 30, 2016 and the fiscal year ended March 31, 2017.
In addition, results for the quarter ended June 30, 2016 included a non-operating charge of approximately $1,502,000 related to the Company’s investment in marketable securities of Insignia due in part to the magnitude of the loss position in the investment, which increased sharply during the quarter, and the fact that the investment had been in a continuous loss position for well over one year.
21.
|
GEOGRAPHICAL INFORMATION
|
Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and similar tangible long-lived assets, net of accumulated depreciation, held outside the United States are summarized in the following table as of March 31, 2018 and March 31, 2017:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
United States, the Company’s country of domicile
|
|
$
|
5,209,831
|
|
|
$
|
5,323,471
|
|
Foreign
|
|
|
15,063,340
|
|
|
|
1,017
|
|
Total property and equipment, net
|
|
$
|
20,273,171
|
|
|
$
|
5,324,488
|
|
The Company's tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent engines on lease at March 31, 2018. The net book value located within each individual country at March 31, 2018 is listed below:
Mexico
|
|
$
|
4,352,257
|
|
Netherlands
|
|
|
7,084,947
|
|
Romania
|
|
|
3,626,136
|
|
|
|
$
|
15,063,340
|
|
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, 2018 and March 31, 2017:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
United States, the Company’s country of domicile
|
|
$
|
175,727,524
|
|
|
$
|
135,257,659
|
|
Foreign
|
|
|
18,791,821
|
|
|
|
13,214,000
|
|
Total revenue
|
|
$
|
194,519,345
|
|
|
$
|
148,471,659
|
|
The Company has seven business segments: overnight air cargo, ground equipment sales, ground support services, commercial jet engine and parts segment, printing equipment and maintenance, leasing and corporate. Segment data is summarized as follows:
|
|
Year Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Operating Revenues:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
72,845,353
|
|
|
$
|
69,558,334
|
|
Ground Equipment Sales:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
47,394,193
|
|
|
|
26,922,009
|
|
International
|
|
|
2,641,842
|
|
|
|
4,284,000
|
|
Total Ground Equipment Sales
|
|
|
50,036,035
|
|
|
|
31,206,009
|
|
Ground Support Services
|
|
|
35,710,005
|
|
|
|
30,453,246
|
|
Printing Equipment and Maintenance
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
3,675,193
|
|
|
|
5,653,997
|
|
International
|
|
|
2,711,689
|
|
|
|
4,156,000
|
|
Total Printing Equipment and Maintenance
|
|
|
6,386,882
|
|
|
|
9,809,997
|
|
Commercial Jet Engines and Parts:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
25,324,231
|
|
|
|
2,688,902
|
|
International
|
|
|
13,438,290
|
|
|
|
4,774,000
|
|
Total Commercial Jet Engines
|
|
|
38,762,521
|
|
|
|
7,462,902
|
|
Leasing
|
|
|
137,316
|
|
|
|
537,719
|
|
Corporate
|
|
|
2,520,521
|
|
|
|
1,136,311
|
|
Intercompany
|
|
|
(11,879,288
|
)
|
|
|
(1,692,859
|
)
|
Total
|
|
$
|
194,519,345
|
|
|
$
|
148,471,659
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
4,127,322
|
|
|
$
|
2,723,933
|
|
Ground Equipment Sales
|
|
|
3,840,907
|
|
|
|
2,378,812
|
|
Ground Support Services
|
|
|
(179,152
|
)
|
|
|
(500,712
|
)
|
Printing Equipment and Maintenance
|
|
|
(749,846
|
)
|
|
|
(5,937,522
|
)
|
Commercial Jet Engines and Parts
|
|
|
2,003,111
|
|
|
|
534,762
|
|
Leasing
|
|
|
6,079
|
|
|
|
422,913
|
|
Corporate
|
|
|
(3,541,853
|
)
|
|
|
(2,787,760
|
)
|
Intercompany
|
|
|
(1,261,045
|
)
|
|
|
64,801
|
|
Total
|
|
$
|
4,245,523
|
|
|
$
|
(3,100,773
|
)
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
40,668
|
|
|
$
|
95,270
|
|
Ground Equipment Sales
|
|
|
219,592
|
|
|
|
21,766
|
|
Ground Support Services
|
|
|
363,420
|
|
|
|
465,718
|
|
Printing Equipment and Maintenance
|
|
|
181,895
|
|
|
|
9,927
|
|
Commercial Jet Engines and Parts
|
|
|
18,305,930
|
|
|
|
60,104
|
|
Leasing
|
|
|
-
|
|
|
|
3,070,037
|
|
Corporate
|
|
|
1,104,089
|
|
|
|
1,690,109
|
|
Intercompany
|
|
|
-
|
|
|
|
(3,066,500
|
)
|
Total
|
|
$
|
20,215,594
|
|
|
$
|
2,346,431
|
|
|
|
|
|
|
|
|
|
|
Depreciation, Amortization and Impairment:
|
|
|
|
|
|
|
|
|
Overnight Air Cargo
|
|
$
|
110,810
|
|
|
$
|
124,793
|
|
Ground Equipment Sales
|
|
|
433,184
|
|
|
|
597,240
|
|
Ground Support Services
|
|
|
471,776
|
|
|
|
383,963
|
|
Printing Equipment and Maintenance
|
|
|
13,135
|
|
|
|
1,738,819
|
|
Commercial Jet Engines and Parts
|
|
|
1,174,764
|
|
|
|
109,807
|
|
Leasing
|
|
|
59,244
|
|
|
|
247,323
|
|
Corporate
|
|
|
421,243
|
|
|
|
174,510
|
|
Intercompany
|
|
|
(5,298
|
)
|
|
|
(194,610
|
)
|
Total
|
|
$
|
2,678,858
|
|
|
$
|
3,181,845
|
|
During fiscal year 2017, the elimination of intercompany revenues is related to the sale of two elan
®
printers by Delphax to ATGL, along with the premiums paid to SAIC, and the elimination of intercompany operating income for such period reflects the margins on the sales of those assets, elimination of excess depreciation and amortization related to the margin on those assets, and the premiums paid to SAIC.
During fiscal year 2018, the elimination of intercompany revenues is primarily related to the sale of aircrafts from Contrail Aviation to AirCo along with the premiums paid to SAIC. The elimination of intercompany operating income for such period reflects the margins on the sales of those assets.
23.
|
COMMITMENTS AND CONTINGENCIES
|
The Company is involved in various other legal actions and claims arising in the ordinary course of business. Management believes that these matters, if adversely decided, would not have a material adverse effect on the Company's results of operations or financial position.
In July 2016, pursuant to the Asset Purchase Agreement, Contrail Aviation agreed to pay as contingent additional deferred consideration up to a maximum of $1,500,000 per year and $3,000,000 in the aggregate (collectively, the “Earnout Payments” and each, an “Earnout Payment”), calculated as follows:
(i) if Contrail Aviation generates EBITDA (as defined in the Asset Purchase Agreement) in any Earnout Period (as defined below) less than $1,500,000, no Earnout Payment will be payable with respect to such Earnout Period;
(ii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $1,500,000, but less than $2,000,000, the Earnout Payment for each such Earnout Period will be an amount equal to the product of (x) the EBITDA generated with respect to such Earnout Period minus $1,500,000, and (y) two (2);
(iii) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $2,000,000, but less than $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,000,000;
(iv) if Contrail Aviation generates EBITDA in any Earnout Period equal to or in excess of $4,000,000, the Earnout Payment for each such Earnout Period will be equal to $1,500,000; and
(v) if, following the fifth Earnout Period, Contrail Aviation has generated EBITDA equal to or in excess of $15,000,000 in the aggregate during all Earnout Periods, but the Seller has received or is owed less than $3,000,000 in aggregate Earnout Payments pursuant to clauses (i) through (iv), above, Contrail Aviation will make an additional Earnout Payment to the Seller in an amount equal to the difference between $3,000,000 and the aggregate Earnout Payments already received or payable pursuant to clauses (i) through (iv), above.
As used in the Asset Purchase Agreement, “Earnout Period” means each of the first five twelve-full-calendar-month periods following the closing of the acquisition. The Company has estimated its liability with respect to the Earnout Payment of $2,900,000, which amount is included in the “Other non-current liabilities” in the consolidated balance sheet at March 31, 2017. As a result of the EBITDA of Contrail Aviation being approximately $2.1 million for the first Earnout Period, the Earnout Payment with respect to that Earnout Period is $1,000,000, which was paid in October 2017. The remaining liability of $1,955,000, which includes a current portion of $1,500,000 and a non-current portion of $455,000, is included in the “Accrued expenses” and “Other non-current liabilities”, respectively, in the consolidated balance sheet at March 31, 2018.
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.
On October 31, 2016, GAS acquired, effective as of October 1, 2016, substantially all of the assets of D&D GSE Support, Inc. (“D&D”) which was in the business of marketing, selling and providing aviation repair, equipment, parts, and maintenance sales services and products at the Fort Lauderdale airport. The total amount paid at closing in connection with this acquisition was $400,000, with an additional $100,000 paid 30 days after closing and an additional $100,000 payable in equal monthly installments of $16,667 commencing on November 1, 2016. Based on actual revenue earned by D&D through September 30, 2017, the earnout payment with respect to the purchase agreement was $100,000, which amount was paid in October 2017.
As discussed in Note 11, the obligations of Contrail Aviation under the Amended ONB Loan Agreement and the Additional ONB Loan Agreement are secured by a first-priority security interest in certain assets of Contrail and are also guaranteed by the Company, with such guaranty limited in amount to a maximum of $1,600,000 plus interest on such amount at the rate of interest in effect under the Loan Agreement, plus costs of collection.
Delphax Solutions leases 12,206 square feet of space in a building located in Mississauga, Ontario. The lease commenced on August 1, 2017 and terminates on July 31, 2020. Annual rent under the lease escalates annually, with annual rent of approximately $94,600 (CDN) for the first year and approximately $97,000 (CDN) in the third year. The subsidiary’s obligations under the lease have been guaranteed by Air T. The lease of production facilities in Mississauga, Ontario by Delphax Canada has been terminated effective upon removal of the property foreclosed upon by Air T.
The Company currently expects that none of Delphax Canada’s unsecured creditors will receive payment in connection with the ongoing bankruptcy proceedings. This is because the Company’s priority claims under the Delphax Senior Credit Agreement permitted it to foreclose upon all of Delphax Canada’s personal property and rights of undertakings. Unsecured creditors of Delphax Canada may attempt to advance claims against the Company, whether as direct claims or alleging successor liability in light of the foreclosure. The Company does not believe that any such claims will be successfully advanced and therefore expects no significant adverse effect on the Company’s financial position or results of operations as a result of such possible claims.
The Company has various operating lease commitments for office equipment and its office and maintenance facilities. See Note 11.
24.
|
RELATED PARTY MATTERS
|
Since 1979 the Company has leased the Little Mountain Airport in Maiden, North Carolina from a corporation whose stock is owned in part by former officers and directors of the Company and an estate of which certain former directors are beneficiaries. The facility consists of approximately 68 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square feet of office space. The operations of Air T, MAC and ATGL were headquartered at this facility. The lease for this facility provided for monthly rent of $14,862 and expired on January 31, 2018. Operations conducted at this facility were relocated to a newly constructed, owned facility on July 31, 2017.
During the fiscal year ended March 31, 2016, the Company’s leasing subsidiary acquired interests in two equipment leases originated by Vantage Financial, LLC (“Vantage”) for aggregate payments to Vantage of approximately $401,250. The interests in the acquired leases entitle the Company’s leasing subsidiary to receive lease payments from the third parties leasing the equipment for a specified period. Pursuant to the agreements between the Company’s leasing subsidiary and Vantage, Vantage’s fees for servicing the equipment leases for the leasing subsidiary (approximately $1,000) were included in the acquisition payments. William R. Foudray, a director of the Company, is the Executive Vice President and a co-founder of Vantage. The amounts paid by the Company’s leasing subsidiary to Vantage to acquire these lease assets represent approximately 1% of Vantage’s outstanding lease assets at March 31, 2017 and March 31, 2018 and the servicing income represents less than 1% of Vantage’s annual revenues.
Contrail Aviation leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn Properties, LLC, a corporation whose stock is owned equally by Mr. Joseph Kuhn, Chief Executive Officer of Contrail Aviation, and Ms. Miriam Kuhn, Chief Financial Officer of Contrail Aviation. The facility consists of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental payments of $158,738 for the fiscal year ended March 31, 2018 and $111,189 during the period from July 18, 2016 through March 31, 2017 to Cohen Kuhn Properties, LLC pursuant to such lease. The lease for this facility expires on June 30, 2021, though the Company has the option to renew the lease for a period of five years on the same terms. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance. The Company believes that the terms of such leases are no less favorable to the Company than would be available from an independent third party.
On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company, completed the previously announced acquisition of Blue Clay Capital Management, LLC (“Blue Clay Capital”), an investment management firm based in Minneapolis, Minnesota. In connection with the transaction, BCCM acquired the assets of, and assumed certain liabilities of, Blue Clay Capital in return for payment to Blue Clay Capital of $1.00, subject to adjustment for Blue Clay Capital’s net working capital as of the closing date. Gary S. Kohler, a director of the Company, was the sole owner of Blue Clay Capital. Mr. Kohler entered into an employment agreement with BCCM to serve as its Chief Investment Officer in return for an annual salary of $50,000 plus variable compensation based on the management and incentive fees to be paid to the subsidiary by certain of these investment funds and eligibility to participate in discretionary annual bonuses. Effective December 27, 2017, Blue Clay Capital Master Fund Ltd., one of the investment funds managed by Blue Clay Capital prior to the conversion to BCCM Advisors on December 31, 2017, sold approximately 52,000 shares of the Company’s stock.
Management performs an evaluation of events that occur after a balance sheet date but before financial statements are issued or available to be issued for potential recognition or disclosure of such events in its financial statements. The Company evaluated subsequent events through the date that these consolidated financial statements were issued.
On April 6, 2018, the Company entered into an Asset Purchase Agreement with Worthington Aviation Parts, Inc., a Minnesota Corporation (“Worthington”), primarily engaged in the business of operating, distributing and selling airplane and aviation parts along with repair services, and Churchill Industries, Inc., a Minnesota corporation, as guarantor of Worthington’s obligations as disclosed in the Agreement, to acquire substantially all the assets of, and assume certain liabilities of Worthington in return for payment to Worthington of $50,000 as earnest money upon execution of the Agreement and a payment of $3,400,000 upon closing of the Agreement, subject to adjustment for Worthington’s net working capital as of the closing date. In connection with Amendment No. 2 to the Asset Purchase Agreement, dated May 2, 2018, the cash purchase price was reduced by $100,000 to $3,300,000. On May 4, 2018, the Company completed the acquisition.
On May 25, 2018, the Company’s wholly-owned subsidiaries Worthington Acquisition, LLC, Worthington Aviation, LLC and Worthington MRO, LLC, as Borrowers, completed a loan transaction with MBT pursuant to which Borrowers obtained from MBT a new revolving loan in the amount of up to $1,500,000 (the “Revolving Loan”) and new term loan in the amount of $3,400,000 (the “Term Loan” and together with the Revolving Loan, the “Loans”). The entire loan proceeds were disbursed by MBT on May 25, 2018 and were used to reduce amounts previously advanced on the Company’s line of credit financing with MBT. Until the Term Loan is paid in full and certain other conditions met, the Company guaranteed up to $3,000,000 of the Loans. The guaranty is thereafter reduced to $1,500,000. The interest rate on Term Loan floats at a rate equal to the one-month LIBOR rate plus 2.5% and the interest rate on the Revolving Loan floats at a rate equal to the one-month LIBOR rate plus 2.0%. The Loans mature on November 30, 2019, at which time the entire unpaid balance of the Loans will be due and payable in full. In addition, the loan agreement contains affirmative and negative covenants and the loans are secured by a first lien on all of the assets of the Borrowers and a pledge of certain assets held by Stratus Aero Partners, LLC, a subsidiary of the Company.