AIR T INC - Quarter Report: 2018 December (Form 10-Q)

 

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		Three Months Ended December 31,								Nine Months Ended December 31,
		2018				2017				2018				2017
Operating Revenues:
Overnight air cargo		$	17,868,191			$	18,028,688			$	52,573,449			$	52,851,936
Ground equipment sales			16,278,359				12,911,101				35,501,936				34,376,866
Ground support services			8,136,466				8,643,267				25,658,143				26,557,666
Printing equipment and maintenance			104,980				905,860				543,748				5,340,163
Commercial jet engines and parts			20,990,088				3,930,510				58,953,054				21,781,095
Corporate and other			244,587				81,820				600,587				152,383
			63,622,671				44,501,246				173,830,917				141,060,109
Operating Expenses:
Overnight air cargo			16,292,144				15,538,554				46,816,294				46,020,254
Ground equipment sales			13,760,055				10,578,846				29,677,280				28,606,906
Ground support services			7,098,098				7,337,862				22,925,769				21,738,525
Printing equipment and maintenance			94,733				265,054				289,164				2,848,861
Commercial jet engines and parts			12,268,266				2,143,540				38,052,172				15,534,775
Research and development			-				-				-				195,653
General and administrative			10,373,194				7,252,381				28,028,050				21,114,626
Depreciation and amortization			2,253,291				768,660				5,554,904				1,522,998
Impairment			7,125				46,930				27,818				220,957
Gain on sale of property and equipment			10,802				17,739				10,802				16,648
			62,157,708				43,949,566				171,382,253				137,820,203
Operating Income			1,464,963				551,680				2,448,664				3,239,906
Non-operating Income (Expense):
Gain on sale of marketable securities			81,388				72,145				81,388				72,145
Foreign currency loss, net			(15,352	)			(11,797	)			(17,484	)			(260,903	)
Other-than-temporary impairment loss on investments			(2,000,000	)			(788,799	)			(2,000,000	)			(1,559,972	)
Other investment income (loss), net			(586,039	)			50,485				(623,623	)			123,286
Interest expense			(1,186,349	)			(538,459	)			(2,607,639	)			(1,010,177	)
Gain on asset retirement obligation			-				-				-				562,500
Unrealized gain (loss) on interest rate swap			-				(199,122	)			145,222				(199,122	)
Bargain purchase acquisition gain			-				-				1,983,776				501,880
Income from equity method investments			200,929				89,426				370,670				119,363
Other expense, net			(102,406	)			-				(74,720	)			-
			(3,607,829	)			(1,326,121	)			(2,742,410	)			(1,651,000	)
Income (Loss) Before Income Taxes			(2,142,866	)			(774,441	)			(293,746	)			1,588,906
Income Taxes (Benefit)			174,000				(60,000	)			168,000				595,000
Net Income (Loss)			(2,316,866	)			(714,441	)			(461,746	)			993,906
Net (Income) Loss Attributable to Non-controlling
Interests		$	(398,085	)		$	42,502			$	(745,697	)		$	(275,755	)
Net Income (Loss) Attributable to Air T, Inc. Stockholders		$	(2,714,951	)		$	(671,939	)		$	(1,207,443	)		$	718,151
Income (Loss) Per Share:
Basic		$	(1.34	)		$	(0.33	)		$	(0.59	)		$	0.35
Diluted		$	(1.34	)		$	(0.33	)		$	(0.59	)		$	0.35
Weighted Average Shares Outstanding:
Basic			2,028,194				2,042,789				2,038,523				2,042,789
Diluted			2,028,194				2,042,789				2,038,523				2,047,547

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		Three Months Ended December 31,								Nine Months Ended December 31,
		2018				2017				2018				2017
Net income (loss)		$	(2,316,866	)		$	(714,441	)		$	(461,746	)		$	993,906
Other comprehensive income (loss):
Foreign currency translation gain			120,476				22,067				200,346				255,433
Unrealized loss on interest rate swaps, net of tax of $48,575 and $39,920 respectively			(163,451	)			-				(134,327	)			-
Unrealized net loss on marketable securities, net of tax of ($21,000) and ($282,115) respectively			-				(258,739	)			-				(1,131,769	)
Reclassification of other-than-temporary impairment loss on investments, net of gains on sale of marketable securities, included in income (loss), net of tax of $0 and 277,622 respectively			-				716,654				-				1,210,205
Total Other Comprehensive Income (Loss)			(42,975	)			479,982				66,019				333,869
Total Comprehensive Income (Loss)			(2,359,841	)			(234,459	)			(395,727	)			1,327,775
Comprehensive Loss (Income) Attributable to Non-controlling Interests			(404,718	)			80,472				(777,446	)			(279,997	)
Comprehensive Income (Loss) Attributable to Air T, Inc. Stockholders		$	(2,764,559	)		$	(153,987	)		$	(1,173,173	)		$	1,047,778

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		December 31, 2018				March 31, 2018
ASSETS
Current Assets:
Cash and cash equivalents (Delphax $58,511 and $241,430)*		$	2,729,249			$	4,803,238
Marketable securities			2,457,609				290,449
Restricted cash			907,488				269,659
Restricted investments			135,291				1,235,405
Accounts receivable, less allowance for doubtful accounts of $739,607 and $801,000 (Delphax $293,044 and $317,000)*			17,881,122				15,157,855
Costs and estimated earnings in excess of billings on uncompleted projects			-				2,012,121
Income tax receivable			1,940,955				1,557,180
Inventories, net			39,585,915				34,231,005
Other current assets			4,298,164				658,630
Prepaid expenses (Delphax $58,516 and $72,269)*			1,680,419				1,455,566
Total Current Assets			71,616,212				61,671,108
Investments in securities			356,013				1,026,920
Assets on lease, net of accumulated depreciation of $4,932,576 and $1,625,237			26,920,552				15,664,606
Property and equipment, net of accumulated depreciation of $5,356,017 and $4,722,016			4,904,741				4,608,565
Cash surrender value of life insurance policies, net of policy loans			562,430				2,356,507
Other tax receivables-long-term (Delphax $311,000 and $311,000)*			311,000				311,000
Investments in funds			278,709				324,854
Equity method investments			5,666,430				5,032,268
Other assets			598,006				420,981
Intangible assets, net of accumulated amortization of $2,081,004 and $1,788,598			1,271,688				1,312,472
Goodwill			4,417,605				4,417,605
Total Assets		$	116,903,386			$	97,146,886
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Delphax $2,163,424 and $2,145,847)*		$	10,960,852			$	10,181,143
Income tax payable (Delphax $0 and $11,312)*			23,000				23,000
Accrued expenses (Delphax $3,127,229 and $3,244,514)*			12,151,574				11,743,973
Current portion of long-term debt			33,437,246				9,229,690
Total Current Liabilities			56,572,672				31,177,806
Long-term debt			33,361,871				38,855,260
Deferred tax liabilities			641,080				92,000
Other non-current liabilities			1,012,234				785,797
Total Liabilities			91,587,857				70,910,863
Redeemable non-controlling interest			2,998,161				1,992,939
Commitments and contingencies (Note 17)
Equity:
Air T, Inc. Stockholders' Equity:
Preferred stock, $1.00 par value, 50,000 shares authorized			-				-
Common stock, $.25 par value; 4,000,000 shares authorized, 2,024,331 and 2,043,607 shares issued and outstanding			506,084				510,901
Additional paid-in capital			4,195,484				4,171,869
Retained earnings			18,694,300				20,695,981
Accumulated other comprehensive loss			(120,284	)			(260,900	)
Total Air T, Inc. Stockholders' Equity			23,275,584				25,117,851
Non-controlling Interests			(958,216	)			(874,767	)
Total Equity			22,317,368				24,243,084
Total Liabilities and Equity		$	116,903,386			$	97,146,886

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		Nine Months Ended December 31,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(461,746	)		$	993,906
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of marketable securities			(28,060	)			(72,145	)
Loss on sale of property and equipment			15,671				16,648
Profit from sale of assets on lease			(946,185	)			-
Change in inventory reserves			(367,022	)			(69,222	)
Change in accounts receivable reserves			(61,823	)			(2,731	)
Depreciation and  amortization			5,554,904				1,522,998
Impairment			27,818				220,957
Change in cash surrender value of life insurance			(102,710	)			(118,254	)
Gain on asset retirement obligation			-				(562,500	)
Gain on bargain purchase, net of tax			(1,983,777	)			(501,880	)
Deferred income taxes			-				(102,566	)
Change in warranty reserve			156,253				53,092
Other-than-temporary impairment loss on investments			2,000,000				1,559,972
Unrealized loss on marketable securities			854,874				-
Unrealized (gain) loss on interest rate swap			(145,222	)			199,122
Change in operating assets and liabilities:
Accounts receivable			(718,690	)			3,011,203
Costs and estimated earnings in excess of billings and uncompleted projects			2,012,121				-
Notes receivable and other non-trade receivables			(3,638,929	)			1,053,846
Inventories			(75,059	)			4,223,445
Prepaid expense and other assets			(742,050	)			145,640
Accounts payable			(506,587	)			(2,294,265	)
Accrued expenses			147,160				(538,232	)
Income taxes payable/receivable			(72,775	)			(603,843	)
Non-current liabilities			356,541				165,039
Total adjustments			1,736,453				7,306,324
Net cash provided by operating activities			1,274,707				8,300,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities			(2,013,921	)			(1,007,071	)
Proceeds from sale of marketable securities			836,510				537,826
Acquisition of businesses, net of cash acquired			(3,375,700	)			(2,900,000	)
Cash used for equity method investments			(263,492	)			-
Investment in reinsurance entity			(2,000,000	)			-
Capital expenditures related to property & equipment			(1,010,330	)			(1,655,551	)
Capital expenditures related to assets on lease			(19,149,515	)			(13,591,693	)
Proceeds from sale of property and equipment			50,602				1,861
Proceeds from sale of assets on lease			4,180,208				-
Net cash used in investing activities			(22,745,638	)			(18,614,628	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit			86,519,612				86,949,125
Payments on lines of credit			(83,566,277	)			(88,817,034	)
Proceeds from term loan			22,539,000				20,841,000
Payments on term loan			(6,787,210	)			(2,436,225	)
Debt issuance costs			(150,142	)			(156,115	)
Proceeds from loan against cash surrender value of life insurance policies			1,896,788				-
Distribution to non-controlling member			(65,672	)			(1,100,000	)
Contribution from non-controlling member			210,000				252,000
Payments for repurchase of stock			(693,136	)			-
Proceeds from exercise of stock options			17,762				-
Net cash provided by financing activities			19,920,725				15,532,751
Effect of foreign currency exchange rates on cash and cash equivalents			114,046				3,370
NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH			(1,436,160	)			5,221,723
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD			5,072,897				3,653,734
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD		$	3,636,737			$	8,875,457
SUPPLEMENTAL DISCLOSURE OF INVESTING ACTIVITIES:
Non-cash capital expenditures related to property & equipment		$	8,675			$	-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	2,084,085			$	690,859
Income taxes			490,181				1,457,518

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		Equity
		Air T, Inc. Stockholders' Equity
																		Accumulated
		Common Stock								Additional								Other
										Paid-In				Retained				Comprehensive				Non-controlling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Interests				Equity
Balance, March 31, 2017			2,042,789			$	510,696			$	4,205,536			$	18,461,347			$	(212,047	)		$	(803,138	)		$	22,162,394
Net income			-				-				-				968,389				-				18,239				986,628
Loss on marketable securities, net of tax			-				-				-				-				(94,997	)			-				(94,997	)
Foreign currency translation gain (loss)			-				-				-				-				135,634				(845	)			134,789
Redeemable non-controlling interest			-				-				(25,000	)			-				-				-				(25,000	)
Balance, June 30, 2017			2,042,789			$	510,696			$	4,180,536			$	19,429,736			$	(171,410	)		$	(785,744	)		$	23,163,814
Net income (loss)*			-				-				-				421,701				-				(18,556	)			403,145
Loss on marketable securities, net of tax			-				-				-				-				(284,483	)			-				(284,483	)
Foreign currency translation gain			-				-				-				-				74,694				23,883				98,577
Redeemable non-controlling interest			-				-				(8,550	)			-				-				-				(8,550	)
Balance, September 30, 2017			2,042,789				510,696				4,171,986				19,851,437				(381,199	)			(780,417	)			23,372,503
Net income (loss)*			-				-				-				(671,939	)			-				16,514				(655,425	)
Gain on marketable securities, net of tax			-				-				-				-				415,441				-				415,441
Foreign currency translation gain (loss)			-				-				-				-				40,863				(18,796	)			22,067
Redeemable non-controlling interest			-				-				(8,550	)			-				-				-				(8,550	)
Reclassification due to the Tax Cuts and Jobs Act			-				-				-				(42,475	)			42,475				-				-
Balance, December 31, 2017			2,042,789			$	510,696			$	4,163,436			$	19,137,023			$	117,580			$	(782,699	)		$	23,146,036

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		Equity
		Air T, Inc. Stockholders' Equity
																		Accumulated
		Common Stock								Additional								Other
										Paid-In				Retained				Comprehensive				Non-controlling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Interests*				Equity
Balance, March 31, 2018			2,043,607			$	510,901			$	4,171,869			$	20,695,981			$	(260,900	)		$	(874,767	)		$	24,243,084
Net income (loss)*			-				-				-				2,828,694				-				(46,259	)			2,782,435
Adoption of ASU 2016-01			-				-				-				(106,341	)			106,341				-				-
Foreign currency translation gain			-				-				-				-				30,508				17,152				47,660
Balance, June 30, 2018			2,043,607				510,901				4,171,869				23,418,334				(124,051	)			(903,874	)			27,073,179
Net income (loss)*			-				-				-				(1,321,185	)			-				(42,190	)			(1,363,375	)
Exercise of stock options			1,682				421				17,341				-				-				-				17,762
Repurchase of common stock			(675	)			(170	)			(1,377	)			(21,212	)			-				-				(22,759	)
Foreign currency translation gain			-				-				-				-				24,250				7,964				32,214
Unrealized gain on interest rate swaps, net of tax			-				-				-				-				29,124				-				29,124
Balance, September 30, 2018			2,044,614				511,152				4,187,833				22,075,937				(70,677	)			(938,100	)			25,766,145
Net loss*			-				-				-				(2,714,951	)			-				(26,749	)			(2,741,700	)
Repurchase of common stock			(20,283	)			(5,068	)			1,377				(666,686	)			-				-				(670,377	)
Equity-based compensation			-				-				6,274				-				-				-				6,274
Foreign currency translation gain			-				-				-				-				113,843				6,633				120,476
Unrealized loss on interest rate swaps, net of tax			-				-				-				-				(163,450	)			-				(163,450	)
Balance, December 31, 2018			2,024,331			$	506,084			$	4,195,484			$	18,694,300			$	(120,284	)		$	(958,216	)		$	22,317,368

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1.	Financial Statement Presentation

 

The condensed consolidated financial statements of Air T, Inc. (“Air T”, the “Company”, “we”, “us” or “our”) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results for the periods presented have been made.

 

It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2018. The results of operations for the periods ended December 31 are not necessarily indicative of the operating results for the full year.

 

Certain reclassifications have been made to the prior period amounts to conform to the current presentation.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, and created Topic 606 (ASC 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in GAAP and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.

 

Effective April 1, 2018, the Company adopted the standard using the modified retrospective transition method. Results for reporting periods beginning after April 1, 2018 are presented according to ASU 2014-09 while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historic accounting policies. The Company applied the standard to all open contracts at the date of the initial application. 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 for its government contracts which is included in the product sales revenue stream. Additionally, certain repair service revenues which were previously recorded at a point-in-time upon completion of service are now recognized over-time. Due to the short-term nature of these contracts, over-time recognition does not result in a material difference from point-in-time recognition. The Company calculated the transition adjustment based on the open contracts at April 1, 2018 and concluded that there was an immaterial impact due to the adoption of ASC 606 and thus has not recorded an adjustment.

 

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 became 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. Transitional guidance provided that entities with unrealized gains or losses on available for sale (“AFS”) equity securities were required to reclassify those amounts to beginning retained earnings in the year of adoption. The Company adopted the guidance within ASU 2016-01 as of April 1, 2018. As a result, the Company reclassified the beginning amount of accumulated other comprehensive income related to AFS securities to accumulated deficit and all changes in fair values of these securities are reflected in the Company’s consolidated statement of income (loss) for the period.

 

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 adopted the guidance within ASU 2016-15 as of April 1, 2018. In addition, the Company elected the cumulative-earnings approach to account for distributions received from equity method investments. Under this approach, distributions are presumed to be returns on investment and classified as operating cash inflows. However, if the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed the entity’s cumulative equity in earnings, such excess is a return of capital and should be classified as cash inflows from investing activities. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

 

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 also must disclose the nature of the restrictions. ASU 2016-18 became effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company adopted the guidance within ASU 2016-18 as of April 1, 2018. The impact of ASU 2016-18 on the Company’s financial statements was as follows: (1) changes in restricted cash balances are no longer shown in the statements of cash flows as previously presented in investing activities, as these balances are now included in the beginning and ending cash balances in the statements of cash flows; and (2) included within Note 4 is a reconciliation between cash balances presented on the balance sheets with the amounts presented in the statements of cash flows. The Company continued to hold restricted cash as of December 31, 2018.

 

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 Company adopted the guidance within ASU 2017-01 as of April 1, 2018. The adoption of this standard did not have a material impact on the Company’s 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. The Company adopted the guidance within ASU 2017-01 as of April 1, 2018. The adoption of this standard did not have a material impact on the Company’s 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 became effective for public companies for fiscal years beginning after December 15, 2018. The Company adopted the guidance early as permitted and designated both interest rate swaps as effective hedging arrangements as of August 1, 2018. As a result, all changes in the fair value of the derivatives subsequent to August 1, 2018 are now reflected in the accumulated other comprehensive loss.

 

In February 2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The amendments clarify certain aspects of the guidance issued in ASU 2016-01, including the measurement of equity securities without a readily determinable fair value, forward contracts and purchased options and presentation of certain fair value option liabilities. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018. The Company adopted the new standards as of December 31, 2018. Adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) as amended by multiple standards updates. The new standard provides that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.

 

The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. Topic 842 permits two transition methods: (1) a modified retrospective transition method requiring retrospective adjustment of each comparative presented with an adjusting entry at the beginning of the earliest comparative period presented and (2) a modified retrospective approach with no restatement of prior periods and an adjusting entry as of the effective date. Under both transition methods, entities may elect certain transition practical expedients that would be required to be applied to all leases. We expect to elect the package of three practical expedients to permit an entity to a) not reassess whether expired or existing contracts contain leases, b) not reassess lease classification for existing or expired leases and c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard.

 

 

The Company will adopt the standard in the fiscal year beginning April 1, 2019 and expects to adopt using the modified retrospective transition method that does not require retrospective adjustment of the comparative periods. The Company has engaged third party advisors to assist with the implementation. The Company is currently in the process of reviewing existing leases to determine the impact of the adoption of the standard on its consolidated financial statements. We expect to complete the project during the fourth quarter. The Company does not expect the standard to have a material effect on its statement of operations or statement of cash flows.

 

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. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. 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 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 August 2018, the FASB amended the Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement Topic of the Accounting Standards Codification. The amendment is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendment includes different transition requirements based on the disclosure topic. Changes to disclosure requirements for unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other required disclosure changes should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the update and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating but has not yet concluded how the new standard will impact the consolidated financial statements.

 

In August 2018, the FASB amended the Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract Topic of the Accounting Standards Codification. The amendment is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in the update is permitted, including adoption in any interim period, for all entities. The amendments in the update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating but has not yet concluded how the new standard will impact the consolidated financial statements.

 

In October 2018, the FASB updated the Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities of the Accounting Standards Codification. The amendments in this update affect reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall. Indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating but has not yet concluded how the new standard will impact the consolidated financial statements.

 

 

 

2.	Revenue Recognition

 

Substantially all of the Company’s revenue is derived from contracts with an initial expected duration of one year or less, as a result, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price, to expense costs incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations.

 

The following is a description of the Company’s performance obligations.

 

Type of Revenue	Nature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms
Product Sales	The Company generates revenue from sales of various distinct products such as parts, aircraft equipment, printing equipment, jet engines, airframes, and scrap metal to its customers. A performance obligation is created when the Company accepts an order from a customer to provide a specified product. Each product ordered by a customer represents a performance obligation. The Company recognizes revenue when obligations under the terms of the contract are satisfied; generally, this occurs at a point-in-time upon shipment or when control is transferred to the customer. Transaction prices are based on contracted terms, which are at fixed amounts based on standalone selling prices. While the majority of the Company's contracts do not have variable consideration, for the limited number of contracts that do, the Company records revenue based on the standalone selling price less an estimate of variable consideration (such as rebates, discounts or prompt payment discounts). The Company estimates these amounts based on the expected incentive amount to be provided to customers and reduces revenue accordingly. Performance obligations are short-term in nature and customers are typically billed upon transfer of control. The Company records all shipping and handling fees billed to customers as revenue. The terms and conditions of the customer purchase orders or contracts are dictated by either the Company’s standard terms and conditions or by a master service agreement or by the contract.
Support Services	The Company provides a variety of support services such as aircraft maintenance, printer maintenance, and short-term repair services to its customers. Additionally, the Company operates certain aircraft routes on behalf of FedEx. A performance obligation is created when the Company agrees to provide a particular service to a customer. For each service, the Company recognizes revenues over time as the customer simultaneously receives the benefits provided by the Company's performance. This revenue recognition can vary from when the Company has a right to invoice to the output or input method depending on the structure of the contract and management’s analysis. For repair-type services, the Company records revenue over-time based on an input method of costs incurred to total estimated costs. The Company believes this is appropriate as the Company is enhancing an asset that the customer controls as repair work, such as labor hours are incurred, and parts installed, is being performed. The vast majority of repair-services are short term in nature and are typically billed upon completion of the service.   Some of the Company’s contracts contain a promise to stand ready as the Company is obligated to perform certain maintenance or administrative services. For most of these contracts, the Company applies the 'as invoiced' practical expedient as the Company has a right to consideration from the customer in an amount that corresponds directly with the value of the entity's performance completed to date. A small number of contracts are accounted for as a series and recognized equal to the amount of consideration the Company is entitled to less an estimate of variable consideration (typically rebates). These services are typically ongoing and are generally billed on a monthly basis.

 

 

In addition to the above type of revenues, the Company also has Leasing Revenue, which is in scope under Topic 840 (Leases) and out of scope under Topic 606 and Other Revenues (Freight, Management Fees, etc.) which are immaterial for disclosure under Topic 606. In the current quarter, the Company also generated revenue from sale of assets on lease. Proceeds from this sale has been reflected within the cash flows from investing activities on the Company’s consolidated statements of cash flows.

 

The following table summarizes disaggregated revenues by type:

 

 

The following table summarizes total revenues by segment:

 

 

See Note 15 for the Company's disaggregated revenues by geographic region and Note 16 for the Company’s disaggregated revenues by segment. These notes disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

 

Contract Balances and Costs

 

The Company does not have material contract assets, liabilities or costs associated with arrangements with its customers at December 31, 2018.

 

3.	Business Combinations

 

Acquisition of AirCo Assets

 

On May 2, 2017 and May 31, 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 May 2, 2017, the date of the completion of the acquisition (the “AirCo Closing Date”):

 

 

 

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 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 record 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 condensed consolidated financial statements.

 

Acquisition of Worthington Aviation Parts, Inc.

 

On May 4, 2018, Air T, Inc. completed the acquisition (the “Transaction”) of substantially all of the assets and assumed certain liabilities of Worthington Aviation Parts, Inc. (“Worthington”), pursuant to the Asset Purchase Agreement (the “Purchase Agreement”), dated as of April 6, 2018, by and among the Company, Worthington, and Churchill Industries, Inc., as guarantor of Worthington’s obligations as disclosed in the Purchase Agreement.

 

Worthington is primarily engaged in the business of operating, distributing and selling airplane and aviation parts along with repair services. The Company agreed to acquire the assets and liabilities in exchange for payment to Worthington of $50,000 as earnest money upon execution of the Agreement and a cash payment of $3,300,000 upon closing. Total consideration is summarized in the table below:

 

 

 

The Transaction was accounted for as a business combination in accordance with ASC Topic 805 "Business Combinations." Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their estimated fair values as of May 4, 2018, with the excess of fair value of net assets acquired recorded as a bargain purchase gain. A bargain purchase gain has been recognized by the Company due to Worthington being sold in a distressed sale, resulting in the fair value of net assets acquired exceeding consideration paid. The most significant asset acquired was Worthington’s inventory. The following table outlines the consideration transferred and purchase price allocation at the respective estimated fair values as of May 4, 2018:

 

 

 

As of December 31, 2018, the purchase price allocation is considered preliminary. The Company’s initial accounting for this acquisition is incomplete as of the date of this report. Therefore, as permitted by applicable accounting guidance, the foregoing amounts are provisional. All relevant facts and circumstances are still being considered by management prior to finalization of the purchase price allocation.

 

The transaction resulted in a bargain purchase gain because Worthington needed access to additional capital to maintain its operations. The seller engaged in a formal bidding process and determined Air T was the best option for Worthington. The tax impact related to the bargain purchase gain was to record a deferred tax liability and record tax expense against the bargain purchase gain of approximately $589,000.  The resulting net bargain purchase gain after taxes was approximately $1,983,000. Total transaction costs incurred in connection with this acquisition were approximately $83,000.

 

The following table sets forth the revenue and expenses of Worthington, prior to intercompany eliminations, that are included in the Company’s condensed consolidated statement of income (loss) for the nine months ended December 31, 2018:

 

 

 

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the three and nine-month periods ended December 31, 2018 and 2017 present consolidated information of the Company as if the acquisition of Worthington had occurred as of April 1, 2017:

 

 

 

 

The unaudited pro forma consolidated results for the three and nine-month periods were prepared using the acquisition method of accounting and are based on the historical financial information of Worthington and the Company. The historical financial information has been adjusted to give effect to pro forma adjustments that are: (i) directly attributable to the acquisition, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The pro forma nine months ended December 31, 2018 exclude the bargain purchase gain recognized in connection with the acquisition as that gain is included in the pro-forma nine months ended December 31, 2017. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had it completed these acquisitions on April 1, 2017.

 

Other Acquisitions and Business Investments

 

On December 15, 2017, BCCM, Inc. (“BCCM”), a newly-formed, wholly-owned subsidiary of the Company, completed the acquisition of Blue Clay Capital Management, LLC (“Blue Clay Capital”). In connection with the transaction, BCCM acquired the assets of, and assumed certain liabilities of Blue Clay Capital. Blue Clay Capital, BCCM, BCCM Advisors, LLC (“BCCM Advisors”), a wholly-owned subsidiary of BCCM purchased the general partnership interests in certain investment funds previously managed by Blue Clay Capital for a purchase price equal to $227,000. Upon acquisition of each of the general partnership interests, BCCM Advisors was admitted as the general partner of each fund.

 

On July 31, 2018, the Company purchased 100% of the outstanding common units of Ambry Hill Technologies, LLC. (“AHT”) for $50,000. AHT offers the aviation business community technology to help manage high volumes of request for quotes for aircraft part purchases. Subsequent to the acquisition, AHT is accounted for as a wholly-owned subsidiary of the Company.

 

Pro forma financial information is not presented for the above acquisitions as the results are not material to the Company’s consolidated financial statements.

 

 

 

4.	Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the Consolidated Statement of Cash Flows:

 

 

 

5.	Cash Surrender Value of Life Insurance

 

The Company is the beneficiary of corporate-owned life insurance policies on certain former employees with a net cash surrender value of approximately $562,000 and $2,357,000 at December 31, 2018 and March 31, 2018, respectively.

 

In September 2018, the Company received proceeds of $1.9 million through loans against the cash value of its life insurance policies. The loan balance is recorded net against the cash surrender value of life insurance in the accompanying condensed consolidated balance sheet at December 31, 2018.

 

 

6.	Income Taxes

 

During the nine-month period ended December 31, 2018, the Company recorded $168,000 in income tax expense at an effective rate of (57.2%).  The Company records income taxes using an estimated annual effective tax rate for interim reporting. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the nine-month period ended December 31, 2018 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under Section 831(b), the presentation of the tax impact of the bargain purchase gain, and the exclusion from the tax provision of the minority owned portion of the pretax income of Contrail Aviation Support, LLC as well as an increase in the valuation allowance, a portion of which is recorded as a discrete item not included in the estimated annual effective tax rate.  The increase in the valuation allowance is primarily due to unrealized losses on investments as well as losses incurred by Delphax Solutions, Inc. During the nine-month period ended December 31, 2017, the Company recorded $595,000 in income tax expense at an effective tax rate of 37.45%. The primary factors contributing to the difference between the federal statutory rate and the Company’s effective tax rate for the nine-month period ended December 31, 2017 were the change in the valuation allowance relating to the other than temporary impairment of available for sale securities included in the pretax activity in the period, the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under Section 831(b), the federal domestic production activities deduction, the change in the valuation allowance related to the activity of Delphax, and state income tax expense.  As a result of tax reform, the rate was also impacted by the recognition of the minimum tax credit carryforward and the expense relating to the revaluing of the deferred tax asset and liability balances to the new federal statutory rate.