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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Air T, Inc. (the “Company,” “Air T,” “we” or “us” or “our”) is a holding company with a portfolio of operating businesses and financial assets. Our goal is to prudently and strategically diversify Air T’s earnings power and compound the growth in its free cash flow per share over time.

We currently operate in four industry segments:

•Overnight air cargo, which operates in the air express delivery services industry;

•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;

•Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and;

•Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other is also comprised of insignificant businesses that do not pertain to other reportable segments.

On September 30, 2019, we completed the sale of 100% of the equity ownership in GAS, which previously constituted the ground support services segment. See Note 2, Discontinued Operations of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income and Adjusted EBITDA.

Forward Looking Statements

Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,” “anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

•Economic conditions in the Company’s markets;

•The risk that contracts with FedEx could be terminated or adversely modified;

•The risk that the number of aircraft operated for FedEx will be reduced;

•The risk that GGS customers will defer or reduce significant orders for deicing equipment;

•The impact of any terrorist activities on United States soil or abroad;

•The Company’s ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels;

•The Company's ability to meet debt service covenants and to refinance existing debt obligations;

•The risk of injury or other damage arising from accidents involving the Company’s overnight air cargo operations, equipment or parts sold and/or services provided;

•Market acceptance of the Company’s commercial and military equipment and services;

•Competition from other providers of similar equipment and services;

•Changes in government regulation and technology;

•Changes in the value of marketable securities held as investments;

•Mild winter weather conditions reducing the demand for deicing equipment;

•Market acceptance and operational success of the Company’s new aircraft asset management business and related new aircraft capital joint venture; and

•The length and severity of the COVID-19 pandemic.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations

Due to insignificance, the Company combined the previous printing and equipment segment into corporate and other. We have presented prior periods based on the current presentation.

Outlook

Fiscal 2021 vs. 2020

Consolidated revenue decreased by $61.7 million (26%) to $175.1 million for the fiscal year ended March 31, 2021 compared to the prior fiscal year. Following is a table detailing revenue (after elimination of intercompany transactions), in thousands:

Year ended March 31, Change

Revenues from the air cargo segment decreased by $9.0 million (12%) compared to the prior fiscal year, principally attributable to lower sales to maintenance customers outside of FedEx as a result of COVID-19 and lower admin fees from FedEx due to fewer operating aircraft (66 aircraft in fiscal 2021 compared to 69 aircraft in fiscal 2020). Pass-through costs under the dry-lease agreements with FedEx totaled $19.9 million and $23.7 million for the years ended March 31, 2021 and 2020, respectively.

The ground equipment sales segment contributed approximately $60.7 million and $59.2 million to the Company’s revenues for the fiscal periods ended March 31, 2021 and 2020, respectively, representing a $1.5 million (3%) increase in the current year. The increase was primarily driven by a higher volume of truck sales to the USAF. At March 31, 2021, the ground equipment sales segment’s order backlog was $10.3 million compared to $51.5 million at March 31, 2020.

The commercial jet engines and parts segment contributed $46.8 million of revenues in fiscal year ended March 31, 2021 compared to $101.3 million in the prior fiscal year which is a decrease of $54.5 million (54%). The decrease is primarily attributable to the fact that all the companies within this segment had lower engine and component sales and lease income due to the impact of COVID-19 on the aviation industry as a whole.

Following is a table detailing operating (loss) income by segment, net of intercompany during Fiscal 2021 and Fiscal 2020 (in thousands):

Year ended March 31, Change

Consolidated operating loss for the fiscal year ended March 31, 2021 was $9.2 million compared to consolidated operating income of $7.3 million in the prior fiscal year.

Operating income for the air cargo segment increased by $1.4 million in the current fiscal year, due primarily to having lower pilot and staff salaries as well as contract labor.

The ground equipment sales segment operating income increased by $1.6 million from $7.3 million in the prior year to $8.9 million in the current year. This increase was primarily attributable to the increased sales noted in the segment revenue discussion above as well as better operating margin as a result of having a more profitable mix of products sold.

Operating loss of the commercial jet engines and parts segment was $10.9 million compared to operating income of $8.3 million in the prior year. The change was primarily attributable to the decreased aircraft engines and component sales as well as reduced lease income due to COVID-19 at the companies within this segment as explained in the segment revenue discussion above. This segment's current year operating loss was also further increased due to inventory write-down of $6.4 million.

Following is a table detailing consolidated non-operating expenses, net of intercompany during Fiscal 2021 and Fiscal 2020 (in thousands):

Year Ended March 31, Change

Other-than-temporary impairment loss on investments $ — $ (2,305) $ 2,305

Gain on settlement of bankruptcy — 4,527 (4,527)

Loss from equity method investments (723) (910) 187

The Company had net non-operating expenses of $2.6 million for the year ended March 31, 2021, a decrease of $2.1 million from $4.7 million in the prior year. The decrease was primarily due to the prior-year's impairment loss on the investment of Insignia of $2.3 million that did not recur in the current-year as well as an increase of $4.0 million in other income, driven by $2.1 million of investment income and realized gain on sale of securities in the current-year. The decrease was partially offset by the prior-year's gain on settlement of bankruptcy proceedings related to Dephax Canada and UK of $4.5 million that did not recur in the current-year.

During the year ended March 31, 2021, the Company recorded $3.4 million of income tax benefit related to continuing operations, which yielded an effective rate of 28.8%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2021 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail Aviation Support, LLC, state income tax expense, the rate differential for the NOL carryback claim and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments and the generation of foreign tax credits through the NOL carryback claim that the Company expects to expire before they are fully utilized.

During the fiscal year ended March 31, 2020, the Company recorded $0.5 million of income tax benefit related to continuing operations at an effective tax rate of -20.7%. The primary factors contributing to the difference between the federal statutory rate of 21% and the Company’s effective tax rate for the fiscal year ended March 31, 2020 were the estimated benefit for the exclusion of income for the Company’s captive insurance company subsidiary under §831(b), the exclusion of the minority owned portion of pretax income of Contrail Aviation Support, LLC as well as state income tax expense, and changes in the valuation allowance. The change in the valuation allowance is primarily due to unrealized losses on investments, utilization of capital loss carryforwards, and attribute reduction incurred by Delphax related to cancellation of debt income and dissolution of its Canadian and UK subsidiaries.

Market Outlook

COVID-19 and its impact on the financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses implemented measures to attempt to limit the impact of COVID-19 but we still experienced a substantial number of disruptions, and a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. We currently expect that many of our businesses may continue to generate reduced operating cash flow and may operate at a loss during at least the first half of fiscal 2022. We expect that these impacts will continue to some extent. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations.

The outbreak of the COVID-19 virus in the United States and elsewhere created considerable instability and disruption in the U.S. and world economies. Uncertainty still surrounds COVID-19 and its potential effects, as well as the extent and effectiveness of any responses taken on a national and local level. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures and other restrictions on travel, congregation and business operations resulted in significant negative impacts in the United States and world economies and in relation to our business. The long-term impact of COVID-19 on the U.S. and world economies remains uncertain and the duration and scope of the world-wide economic downturn cannot currently be predicted. The extent to which our financial condition, results of operations and overall value will continue to be affected by the COVID-19 pandemic will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic, containment and the effectiveness of vaccine measures, among others.

Liquidity and Capital Resources

As of March 31, 2021, the Company held approximately $15.9 million in cash and cash equivalents and restricted cash, $4.7 million of which related to restricted cash collateralized for three Opportunity Zone fund investments. The Company also held $1.5 million in restricted investments held as statutory reserve of SAIC. The Company also has approximately $1.4 million of marketable securities.

As of March 31, 2021, the Company’s working capital amounted to $77.6 million, an increase of $46.9 million compared to March 31, 2020, primarily driven by a decrease in short-term borrowings of $37.0 million. See Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report for a summary of “Financing Arrangements” as of March 31, 2021.

The Company’s Credit Agreement with Minnesota Bank & Trust, a Minnesota state banking corporation (“MBT”) (the Air T debt in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) includes several covenants that are measured once a year at March 31, including but not limited to, a negative covenant requiring a debt service coverage ratio of 1.25. The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains an affirmative covenant relating to collateral valuation. As of March 31, 2021, the Company and AirCo 1 were in compliance with all financial covenants.

The Contrail Credit Agreement (the Contrail debt in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum tangible net worth ("TNW") of $15 million.

On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with Old National Bank ("ONB"). The material changes within the Third Amendment were: (a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021; and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

Due primarily to the impact of COVID-19 on its business, as of March 31, 2021, Contrail was not in compliance with maintaining the minimum TNW of $15 million. As of the issuance date of this report, pursuant to the existing terms of the Contrail Credit Agreement, the Company and the non-controlling interest owner of Contrail made total capital contributions to Contrail in the amount of $1.4 million, which had the effect of curing this financial covenant non-compliance. Contrail and ONB are also in discussions to reduce the minimum TNW to $8 million, in exchange for certain amendments to its credit agreement, including renewing its revolving line of credit at a lower amount than the current agreement. However, there is no assurance that Contrail will be successful in reducing the minimum TNW financial covenant.

The obligations of Contrail under the Contrail Credit Agreement are guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with other lenders. In the possible absence of Contrail’s operation as a going concern, the Company believes it, along with the rest of its businesses, will continue to operate as a going concern, given the maximum guarantee of Contrail’s obligations of $1.6 million.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve ("the Fed"). The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020. The proceeds were used to pay down the Contrail Revolver. The loan proceeds are also to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines. The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement. The principal terms of the Contrail Main Street Loan are detailed in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

On December 11, 2020, AirCo 1 and Park State Bank ("PSB") entered into a loan in the aggregate amount of $6.2 million for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the Fed. The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020. The loan proceeds were used to pay off the AirCo 1 revolving line of credit with MBT. The principal terms of the Term Loan - PSB are detailed in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report.

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

In April 2020, the Company obtained loans under the Payroll Protection Program ("PPP loan"), as authorized by the CARES Act, of $8.2 million to help pay for payroll costs, mortgage interest, rent and utility costs. The Company has applied to MBT for forgiveness of the PPP Loan; however, forgiveness is not fully assured.

As mentioned in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report, in 2016, Contrail Aviation entered into an Operating Agreement with the Seller providing for the put and call options with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail Aviation and its current Chief Executive Officer. The Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail Aviation commencing on the fifth anniversary of the acquisition, which is on July 18, 2021. As of the date of issuance, neither the Seller nor Air T has indicated the intent to exercise its put and call options on July 18, 2021. If either side were to exercise its option, the Company anticipates that the price would approximate the fair value of the Redeemable Non-Controlling Interest, as determined on the transaction date, based on the methodology in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. The Company currently expects that it would fund any required payment from cash provided by operations.

The Company believes it is probable that the cash on hand (including that obtained from the PPP and other current financings), net cash provided by operations from its remaining operating segments, together with its current revolving lines of credit, as amended or replaced, will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.

Cash Flows

Following is a table of changes in cash flow from continuing operations for the respective years ended March 31, 2021 and 2020 (in thousands):

Year Ended March 31,

Net Cash Provided by (Used in) Investing Activities 2,516 (11,568) 14,084

Effect of foreign currency exchange rates (412) 260 (672)

Cash used in operating activities was $1.8 million in fiscal year 2021 compared to cash used in operating activities of $26.2 million in fiscal year 2020. During fiscal year 2020, the Company's purchase of engines and components received into inventory exceeded amounts spent in fiscal year 2021 by $23.7 million. Further, more cash was collected this year compared to the prior year as accounts receivable decreased by $6.6 million. The decrease in cash usage was offset by a decrease in net income of $11.6 million due to reduced operations as a result of COVID-19.

Cash provided by investing activities for fiscal year 2021 was $2.5 million compared to cash used in investing activities for the prior fiscal year of $11.6 million. This difference was primarily driven by a net decrease of $32.7 million in capital expenditures, partially offset by $22.5 million less proceeds from sale of assets on lease in fiscal year 2021 compared to fiscal year 2020.

Cash provided by financing activities for fiscal year 2021 was $19.2 million less compared to the prior fiscal year. This was primarily due to decreased net proceeds from lines of credit of $65.9 million, offset by increased net proceeds from term loans of $51.7 million.

Off-Balance Sheet Arrangements

The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company. The Company is not currently engaged in the use of any of these arrangements.

Impact of Inflation

The Company believes that inflation has not had a material effect on its manufacturing and commercial jet engine and parts operations, because increased costs to date have been passed on to customers. Under the terms of its overnight air cargo business contracts the major cost components of that segment's operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

Non-GAAP Financial Measures

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

Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates Adjusted EBITDA by removing the impact of specific items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes. When calculating Adjusted EBITDA, the Company does not add back depreciation expense for aircraft engines that are on lease, as the Company believes this expense matches with the corresponding revenue earned on engine leases. Depreciation expense for leased engines totaled $1.9 million and $4.4 million for the fiscal year ended March 31, 2021 and 2020.

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

The table below provides a reconciliation of operating income from continuing operations to Adjusted EBITDA for the fiscal year ended March 31, 2021 and 2020 (in thousands):

Twelve Months Ended

Operating (loss) income from continuing operations $ (9,175) $ 7,291

Asset impairment, restructuring or impairment charges 6,592 18

Gain on sale of property and equipment (10) (37)

Security issuance expenses 32 363

Included in the asset impairment, restructuring or impairment charges for the fiscal year ended March 31, 2021 was a write-down of $6.4 million on the commercial jet engines and parts segment's inventory. Of the total write-down, $0.5 million was driven by a management decision to monetize two engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds during the quarter ended September 30, 2020. The remaining write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2021, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

The table below provides Adjusted EBITDA by segment for the fiscal year ended March 31, 2021 and 2020 (in thousands):

Twelve Months Ended

Commercial Jet Engines and Parts (3,933) 8,718

Seasonality

The ground equipment sales segment business has historically been seasonal, with the revenues and operating income typically being higher in the second and third fiscal quarters as commercial deicers are typically delivered prior to the winter season. Other segments are typically not susceptible to material seasonal trends.

Critical Accounting Policies and Estimates.

The Company’s significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this report. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The Company believes that the following are its most critical accounting policies:

Inventories – Inventories are carried at the lower of cost or net realizable value. Within the Company’s commercial jet engines and parts segment, there are various estimates and judgments made in relief of inventory as parts are sold from established groups of parts from one engine or airframe purchase. The estimates and judgments made in relief of inventory are based on assumptions that are consistent with a market participant’s future expectations for the commercial aircraft, jet engines and parts industry and the economy in general and our expected intent for the inventory. These assumptions and estimates are complex and subjective in nature. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic could impact the assumptions and result in future losses to our inventory.

The Company periodically evaluates the carrying value of inventory. In these evaluations, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Any slow moving, obsolete or damaged inventory and inventory with costs exceeding net realizable value are evaluated for write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Valuation of Assets on Lease or Held for Lease - Engine assets on lease or held for lease are stated at cost, less accumulated depreciation. On a quarterly basis, we monitor the portfolio for events which may indicate that a particular asset may need to be evaluated for potential impairment. These events may include a decision to part-out or sell an asset, knowledge of specific damage to an asset, or supply/demand events which may impact the Company’s ability to lease an asset in the future. On an annual basis, even absent any such ‘triggering event’, we evaluate the assets in our portfolio to determine if their carrying amount may not be recoverable. If an asset is determined to be unrecoverable, the asset is written down to fair value. When evaluating for impairment, we test at the individual asset level (e.g., engine, airframe or aircraft), as each asset generates its own stream of cash flows, including lease rents and maintenance reserves.

The Company must make significant and subjective estimates in determining whether any impairment exists. Those estimates are as follows:

•Fair value – we determine fair value by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from airlines, engine manufacturers and MRO providers as well as specific market sales and repair cost data.

•Future cash flows – when evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model.

If the forecasted undiscounted cash flows and fair value of our long-lived assets decrease in the future, we may incur impairment charges.

Accounting for Redeemable Non-Controlling Interest. Policies related to redeemable non-controlling interest involve judgment and complexity, specifically on the classification of the non-controlling interest in the Company’s consolidated balance sheet. Further, there is significant judgment in determining whether an equity instrument is currently redeemable or not currently redeemable but probable that the equity instrument will become redeemable. Additionally, there are also significant estimates made in the valuation of the redeemable non-controlling interest. The fair value of the non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. Contrail’s market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

Page

AIR T, INC. CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 32

Consolidated Statements of Income for the Years Ended March 31, 2021 and 2020 34

Consolidated Statements of Equity for the Years Ended March 31, 2021 and 2020 38

Notes to Consolidated Financial Statements 39

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Air T, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the "Company") as of March 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the two years in the period ended March 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Redeemable non-controlling interest – valuation of Contrail Aviation Support, LLC — Refer to Notes 1 and 5 to the financial statements

Critical Audit Matter Description

The Company has a 79% controlling interest in Contrail Aviation Support, LLC and is party to an operating agreement with the owner of the remaining 21% ownership interest in Contrail Aviation Support, LLC, that contains certain future redemption features that are outside the control of the Company.

This arrangement is recorded and disclosed as a redeemable non-controlling interest at fair value of $6.6 million as of March 31, 2021. The Company adjusts the redeemable non-controlling interest each reporting period to the higher of the redemption value or carrying value, using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. The determination of fair value includes estimation uncertainty under both approaches.

The income approach requires significant management judgment with respect to forecasts of future revenue, operating margins, and capital expenditures, and the selection and use of an appropriate discount rate. The market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail Aviation Support, LLC. We identified the valuation of redeemable non-controlling interest in Contrail Aviation Support, LLC as a critical audit matter given the significant judgments and assumptions required by management to estimate the fair value of the redeemable non-controlling interest, as well as the fact that performing audit procedures required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the significant judgments and assumptions utilized in the valuation of the redeemable non-controlling interest in Contrail Aviation Support, LLC, included the following, among others:

•We evaluated the reasonableness of management’s forecasts of future revenue and operating margins by comparing the forecasts to:

◦Historical results of Contrail Aviation Support, LLC, and

◦Forecasted information included in industry reports.

•We considered the impact of industry and market conditions on management’s forecasts for Contrail Aviation Support, LLC.

•We involved our fair value specialists to assist in the evaluation of:

◦The valuation methodologies used by the Company to determine whether they were consistent with generally accepted valuation practices, and reasonably weighted.

◦The discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.

◦Earnings multiples, including testing the underlying source information and mathematical accuracy of the calculations, and evaluating the appropriateness of the Company’s selection of companies in its industry comparable groups.

•We performed sensitivity analyses with regard to forecasted revenue and the discount rate to evaluate the changes in the fair value of the redeemable non-controlling interest in Contrail Aviation Support, LLC, that would result from changes in those significant assumptions.

•We evaluated whether the business and valuation assumptions used were consistent with evidence obtained in other areas of the audit.

Inventories, net – valuation of inventories– Refer to Notes 1 and 6 to the financial statements

Critical Audit Matter Description

Inventories are carried at the lower of cost or net realizable value. In its periodic evaluation of the carrying value of these inventories, the Company is required to make estimates regarding the net realizable value, which includes the consideration of sales patterns and expected future demand. Changes in these assumptions could have a significant impact on the valuation of certain inventory held by the Company’s Commercial Jet Engines and Parts operating segment.

We identified the valuation of certain inventory held by the Company’s Commercial Jet Engines and Parts operating segment as a critical audit matter. Given the magnitude of the inventories at certain business units, coupled with the significant judgments necessary to project sales patterns and expected future demand, as well as changes in economic and market conditions brought on by COVID-19, auditing such estimates required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures and evaluating the results of those procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the sales patterns and expected future demand, used by management to determine the valuation of inventories, included the following, among others:

•We evaluated the reasonableness of the sales patterns and expected future demand, and related inputs used by management, by comparing the information to:

◦Historical results of those business units.

◦Forecasted sales based on recent quote and sales information for similar parts within the Company’s inventory.

◦Market data and forecasts with regard to the recovery of the airline industry from the impacts of COVID-19.

•We involved our fair value specialists to assist in the evaluation of:

◦The methodology used by, and the qualifications of, the Company’s third-party specialist.

◦The key assumptions underlying the valuation of a representative sample of inventories including recent quotes, number of vendors, number of components, and component condition.

•We held discussions with various members of management to understand the status of any plans to monetize certain inventories at less than carrying value to meet cash flow demands and evaluated whether the determination of net realizable value for those inventories reflects the status of management’s plans.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

June 25, 2021

We have served as the Company's auditor since 2018.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended March 31,

(In thousands, except per share data) 2021 2020

Operating Revenues:

Operating Expenses:

Depreciation and amortization 3,107 5,681

Write-down of inventory 6,405 —

Impairment of property and equipment 187 18

Gain on sale of property and equipment (10) (37)

Operating (Loss) Income from continuing operations (9,175) 7,291

Non-operating Income (Expense):

Other-than-temporary impairment loss on investments — (2,305)

Gain on settlement of bankruptcy — 4,527

Loss from equity method investments (723) (910)

(Loss) Income from continuing operations before income taxes (11,781) 2,624

Net (Loss) Income from continuing operations (8,394) 3,168

Loss from discontinued operations, net of tax — (114)

Gain on sale of discontinued operations, net of tax 4 8,179

Net Loss (Income) Attributable to Non-controlling Interests 1,113 (3,577)

Net (Loss) Income Attributable to Air T, Inc. Stockholders $ (7,277) $ 7,656

Loss from continuing operations per share (Note 22)

Income from discontinued operations per share (Note 22)

Basic $ — $ 2.89

Diluted $ — $ 2.88

(Loss) Income per share (Note 22)

Weighted Average Shares Outstanding:

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended March 31,

Other Comprehensive Income:

Foreign currency translation (loss) gain (409) 212

Reclassification of interest rate swaps into earnings (18) —

Total Other Comprehensive Loss (165) (317)

Total Comprehensive (Loss) Income (8,555) 10,916

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

Current Assets:

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Income tax payable 39 —

Current portion of long-term debt 5,639 42,684

Deferred income tax liabilities, net 595 579

Other non-current liabilities 1,732 1,402

Redeemable non-controlling interest 6,598 6,080

Commitments and contingencies (Note 23)

Equity:

Air T, Inc. Stockholders' Equity:

Preferred stock, $1.00 par value, 50,000 shares authorized — —

Additional paid-in capital — 2,636

Accumulated other comprehensive loss (684) (537)

Total Air T, Inc. Stockholders' Equity 13,725 24,006

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Loss from discontinued operations, net of income tax — 114

Gain on sale of discontinued operations, net of income tax (4) (8,179)

Net (loss) income from continuing operations (8,394) 3,168

Depreciation and amortization 3,107 5,712

Impairment of investment — 2,305

Profit from sale of assets on lease and held for lease (1,473) (5,277)

Gain on settlement of bankruptcy — (4,509)

Write-down of inventory 6,405 —

Change in operating assets and liabilities:

Net cash used in operating activities - continuing operations (1,823) (26,231)

Net cash provided by operating activities - discontinued operations 4 1,157

Net cash used in operating activities (1,819) (25,074)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of marketable securities (659) (626)

Sale of marketable securities 2,452 239

Proceeds from sale of assets on lease and held for lease 8,183 30,688

Acquisition of businesses, net of cash acquired (536) (500)

Investment in unconsolidated entities — (2,812)

Capital expenditures related to property & equipment (3,899) (2,439)

Net cash provided by investing activities - discontinued operations — 20,173

Net cash provided by investing activities 2,516 8,605

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from PPP loan 8,215 —

Net cash provided by financing activities - continuing operations 71 19,240

Effect of foreign currency exchange rates on cash and cash equivalents (412) 260

NET INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 356 3,031

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD 15,927 15,571

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

Non-cash capital expenditures related to property & equipment 31 —

Equipment in Inventory transferred to Assets on Lease — 501

Issuance of Debt - Trust Preferred Securities — 4,000

Issuance of warrant liability — 840

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Operating cash payments for operating leases 1,683 1,485

Cash paid during the year for interest 2,732 3,310

Cash paid during the year for income taxes 477 1,485

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands) Common Stock Treasury Stock

Issuance of Debt - Trust Preferred Securities (4,000) (4,000)

Issuance of Warrants (840) (840)

Adoption of ASC 842 - Leasing (41) (41)

Foreign currency translation gain 197 15 212

Adjustment to fair value of redeemable non-controlling interest 21 21

Unrealized loss of interest rate swaps, net of tax (529) (529)

(In thousands) Common Stock Treasury Stock

Foreign currency translation loss (409) (409)

Unrealized gain on interest rate swaps, net of tax 262 262

*Excludes amount attributable to redeemable non-controlling interest in Contrail Aviation.

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31,2021AND2020

We currently operate in four industry segments:

•Overnight air cargo, which operates in the air express delivery services industry;

•Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers;

Discontinued Operations

On September 30, 2019, the Company completed the sale of Global Aviation Services, LLC ("GAS"). The results of operations of GAS are reported as discontinued operations in the consolidated statements of operations for the fiscal years ended March 31, 2021 and 2020. Refer to Footnote 2 - "Discontinued Operations" for additional information.

Unless otherwise indicated, the disclosures accompanying the consolidated financial statements reflect the Company's continuing operations.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as well as its non-wholly owned subsidiaries, Contrail Aviation and Delphax. All intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the prior period amounts to conform to the current presentation.

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 of assets and liabilities and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

COVID-19 and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition and results of operations. Each of our businesses implemented measures to attempt to limit the impact of COVID-19 but we still experienced a number of disruptions, and we experienced and continue to experience a reduction in demand for commercial aircraft, jet engines and parts compared to historical periods. We currently expect that many of our businesses may continue to generate reduced operating cash flow and may operate at a loss during at least the first half of fiscal 2022 and potentially even longer. We expect that these impacts will continue to some extent if the outbreak persists. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and our results of operations. The Company believes the estimates and assumptions underlying the Company’s consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021, however; uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19.

Segments - The Company has four reportable operating segments: overnight air cargo, ground equipment sales, commercial jet engine and parts and corporate and other. The Company assesses the performance of these segments on an individual basis (see Note 21).

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information by business segment for purposes of allocating resources and evaluating financial performance. Each business segment has separate management teams and infrastructures that offer different products and services. We evaluate the performance of our business segments based on operating income.

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.

Business Combinations – The Company accounts for business combinations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 sheets.

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 commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded.

Acquisition-related costs are costs the Company incurs to affect a business combination. Those costs may include such items as finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees, and general administrative costs. The Company accounts for such acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.

Changes in estimate of the fair value of earn-out obligations subsequent to the acquisition date are not accounted for as part of the acquisition, rather, they are recognized directly in earnings.

Cash and Cash Equivalents – Cash equivalents consist of liquid investments with maturities of three months or less when purchased.

Financial Instruments Designated for Trading – Except for short sales of equity securities, the Company accounts for all other financial instruments (including derivative instruments) designated for trading in accordance with ASC 815. All changes in the fair value of the financial instruments designated for trading are recognized in earnings as they occur. Further, all gains and losses on derivative instruments designated for trading are presented net on the consolidated Statements of Income (Loss). The fair value of derivative instruments designated for trading in a gain position are recorded in Other Current Assets and the fair value of derivative instruments designated for trading in a loss position are recorded in Accrued Expenses and Other on the consolidated Balance Sheets.

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

The Company reports all cash receipts and payments resulting from the purchases and sales of securities, loans, and other assets that are acquired specifically for resale as operating cash flows.

Inventories – Inventories are carried at the lower of cost or net realizable value. When finished goods units are leased to customers under operating leases, the units are transferred to Assets on Lease or Held For Lease. The classification of cash flows associated with the purchase and sale of finished goods is based on the activity that is likely to be the predominant source or use of cash flows for the items. 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.

write-downs. These estimates could vary significantly from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

In accordance with industry practice, all inventories are classified as a current asset including portions with long production cycles, some of which may not be realized within one year.

Investments under the Equity Method – The Company utilizes the equity method to account for investments when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when an investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. The Company applies the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock. For investments that have a different fiscal year-end, if the difference is not more than three months, the Company elects a 3-month lag to record the change in the investment.

The Company assesses the carrying value of its investments whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount of the investment to the estimated future undiscounted cash flows of the investment, which take into account current, and expectations for future, market conditions and the Company’s intent with respect to holding or disposing of the investment. Changes in economic and operating conditions, including those occurring as a result of the impact of the COVID-19 pandemic, that occur subsequent to a current impairment analysis and the Company’s ultimate use of the investment could impact the assumptions and result in future impairment losses to the investments. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through quoted prices in active markets or various valuation techniques, including internally developed discounted cash flow models or comparable market transactions.

Goodwill - The Company evaluates goodwill on an annual basis or anytime events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

The Company is permitted to first assess qualitative factors to determine whether it is more likely than not (that 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 there may be an impairment, then a quantitative analysis is performed. 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. The Company will recognize an impairment charge for the amount by which the carrying value of the reporting unit exceeds its fair value, if any.

Goodwill consisted of the following (in thousands):

Year Ended March 31,

Goodwill, at original cost $ 4,603 $ 4,603

Less accumulated impairment (376) (376)

Goodwill, net of impairment $ 4,227 $ 4,227

As of March 31, 2021, the entire $4.2 million goodwill balance is attributable to the acquisition of Contrail Aviation and included within the Commercial Jet Engines and Parts segment. We performed our annual impairment assessment for goodwill of the Contrail reporting unit at March 31, 2021. In the fiscal year 2021, COVID-19 greatly impacted the macroeconomic conditions and the outlook of the airline industry. Due to this, the Company performed a quantitative analysis using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The forecasts and assumptions are based on our annual and long-term business plans. Contrail’s market approach requires management to make significant assumptions related to market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.

Based on the results of our annual quantitative assessment conducted as of March 31, 2021, the fair value of our Contrail reporting unit exceeded its carrying value, and management concluded that no impairment charge was warranted.

Intangible Assets – Amortizable intangible assets consist of acquired patents, tradenames, customer relationships, and other finite-lived identifiable intangibles. Such intangibles are initially recorded at fair value and subsequently subject to amortization. Amortization is recorded using the straight-line method over the estimated useful lives of the assets. In accordance with the applicable accounting guidance, the Company evaluates the recoverability of amortizable intangible assets whenever events occur that indicate potential impairment. In doing so, the Company assesses whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the carrying amount is more than the recoverable amount, an impairment charge must be recognized based on the estimated fair value of the asset.

The estimated amortizable lives of the intangible assets are as follows:

Years

Software 3

Trade names 5

Certification 5

Non-compete 5

License 5

Patents 9

Customer relationship 10

Property and Equipment and Assets on Lease or Held for Lease – Property and equipment is stated initially at cost, or fair value if purchased as part of a business combination. Depreciation and amortization are provided on a straight-line basis over the asset’s useful life. Equipment leased to customers is depreciated using the straight line 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 thirty 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. If assets are not actively being leased (i.e. held for lease), then they are not being depreciated. Major overhauls which improve functionality or extend original useful life are capitalized and depreciated over the engine assets' useful life to a residual value. 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 adjusts its estimates annually for these older generation assets, including updating estimates of an engine’s or aircraft’s remaining operating life. The Company believes this methodology accurately reflects the typical holding period for the assets and, that the residual value assumption, which is dependent on the Company's eventual plan for the engine assets (i.e. whole asset sale, part-out, etc.), reasonably approximates the selling price of the assets.

When engine assets are committed for sales, the assets are transferred to Inventory. The classification of cash flows associated with the purchase and sale of engine assets is based on the activity that is likely to be the predominant source or use of cash flows for the items.

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. When evaluating the future cash flows that an asset will generate, we make assumptions regarding the lease market for specific engine models, including estimates of market lease rates and future demand. These assumptions are based upon lease rates that we are obtaining in the current market as well as our expectation of future demand for the specific engine/aircraft model. We determine fair value of the assets by reference to independent appraisals, quoted market prices (e.g., an offer to purchase) and other factors such as current data from manufacturers as well as specific market sales. 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.

Accounting for Debt - Trust Preferred Securities and Warrant Liability – On June 10, 2019, the Company issued an aggregate of 1.6 million TruPs in the amount of $4.0 million in a non-cash transaction. These TruPs are mandatorily redeemable preferred security obligations of the Company. In accordance with ASC 480, the Company presented mandatorily redeemable preferred securities that do not contain a conversion option as a liability on the balance sheet. In connection with the issuance of the TruPs, the Company also issued an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in stated value of TruPs). A warrant for mandatorily redeemable shares conditionally obligates the issuer to ultimately transfer assets—the obligation is conditioned only on the warrant's being exercised because the shares will be redeemed. Thus, warrants for mandatorily redeemable shares are liabilities under ASC 480. Accordingly, the Warrants are recorded within "Other non-current liabilities" on our consolidated balance sheets. As of March 31, 2021, the Warrants are recorded at fair value. Fair value measurement was based on quoted price for a similar asset or liability as observed on the NASDAQ Global Market. The liability is classified as Level 2 in the hierarchy. See Note 5.

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 non-current 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.

Accounting for Redeemable Non-Controlling Interest – In 2016, in connection with the Company's acquisition of Contrail Aviation, Contrail Aviation entered into an Operating Agreement (the “Operating Agreement”) with the Seller providing for the governance of and the terms of membership interests in Contrail Aviation. The Operating Agreement includes put and call options (“Put/Call Option”) with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail Aviation and its current Chief Executive Officer. The Put/Call Option permits the Seller to require Contrail Aviation to purchase all of the Seller’s equity membership interests in Contrail Aviation commencing on the fifth anniversary of the acquisition, which is on July 18, 2021. 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.

As a result of this feature, the Company recorded the non-controlling interest as redeemable and classified it in temporary equity within its Consolidated Balance Sheets initially at its acquisition-date fair value. The non-controlling interest is adjusted each reporting period for income (or loss) attributable to the non-controlling interest as well as any applicable distributions made. A measurement period adjustment, if any, is then made to adjust the non-controlling interest to the higher of the redemption value (fair value) or carrying value each reporting period. These fair value adjustments are recognized through retained earnings and are not reflected in the Company's Consolidated Statements of Income. When calculating earnings per share attributable to the Company, the Company adjusts net income attributable to the Company for the measurement period adjustment to the extent the redemption value exceeds the fair value of the non-controlling interest on a cumulative basis. The fair value of the non-controlling interest is determined using a combination of the income approach, utilizing a discounted cash flow analysis, and the market approach, utilizing the guideline public company method. Contrail's discounted cash flow analysis requires significant management judgment with respect to forecasts of revenue, operating margins, capital expenditures, and the selection and use of an appropriate discount rate. The forecasts and assumptions are based on our annual and long-term business plans. Contrail’s market approach requires management to make significant assumptions related to market multiples of earnings derived from comparable publicly-traded companies with similar operating characteristics as Contrail.

As of March 31, 2021, the fair value of the redeemable non-controlling interest is $6.6 million. The net change in the redemption value compared to March 31, 2020 is an increase of $0.5 million. The increase was driven by $2.9 million related to the net change in fair value during the fiscal year ended March 31, 2021, which is reflected on our consolidated statements of equity, partially offset by net loss attributable to and distributions made to the non-controlling interest. See Note 5. The fair value increase is primarily attributable to the value associated with Contrail's potential investment in an aircraft asset management joint venture, which subsequently closed on May 5, 2021. See Note 24.

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.We evaluate gross versus net presentation on revenues from products or services purchased and resold in accordance with the revenue recognition criteria outlined in ASC 606-10, Principal Agent Considerations.

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. These pass-through costs totaled $19.9 million and $23.7 million for the years ended March 31, 2021 and 2020, respectively.

Liquidity – The Company’s Credit Agreement with MBT (the Air T debt in Note 13) includes several covenants that are measured once a year at March 31, including, but not limited to, a financial covenant requiring a debt service coverage ratio of 1.25. The AirCo 1 Credit Agreement (the AirCo 1 debt in Note 13) contains an affirmative covenant relating to collateral valuation. As of March 31, 2021, the Company and AirCo 1 were in compliance with all financial covenants.

The Contrail Credit Agreement (the Contrail debt in Note 13) contains affirmative and negative covenants, including covenants that restrict the ability of Contrail and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Contrail Credit Agreement also contains quarterly financial covenants applicable to Contrail and its subsidiaries, including a minimum debt service coverage ratio of 1.25 to 1.0 and a minimum TNW of $15 million.

quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

On November 24, 2020, Contrail and ONB entered into Supplement #8 to Master Loan Agreement and related documentation for a loan in the aggregate amount of $43.6 million for which ONB served as lender pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve. The Contrail Main Street Loan was approved by the Fed and completed by December 8, 2020. The proceeds were used to pay down the Contrail Revolver. The loan proceeds are also to be used as working capital to support the operations of Contrail in the ordinary course of business, which includes the acquisition from time to time of aircraft and engines. The indebtedness incurred is subject to the terms and provisions of the Master Loan Agreement. The principal terms of the Contrail Main Street Loan are detailed in Note 13.

On December 11, 2020, AirCo 1 and PSB entered into a loan in the aggregate amount of $6.2 million for which PSB served as lender pursuant to the Main Street Priority Loan Facility as established by the Fed. The AirCo 1 Main Street Loan was approved by the Fed and completed by December 22, 2020. The loan proceeds were used to pay off the AirCo 1 revolving line of credit with MBT. The principal terms of the Term Loan - PSB are detailed in Note 13.

Recently AdoptedAccounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income, including trade receivables. The standard requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The Company adopted this standard on April 1, 2020. As of March 31, 2021, the standard did not have a material impact on the Company's consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step Two from the goodwill impairment test. Step Two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under this standard, an entity will recognize an impairment charge for the amount by which the carrying value of a reporting unit exceeds its fair value. The Company adopted this amendment on April 1, 2020. As of March 31, 2021, the amendment did not have a material impact on the Company's consolidated financial statements and disclosures.

In October 2018, the FASB updated the Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities of the Accounting Standards Codification. The amendments in this update affect reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall. Indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The Company adopted this amendment on April 1, 2020. As of March 31, 2021, the amendment did not have a material impact on the Company's consolidated financial statements and disclosures.

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

Recently Issued Accounting Pronouncements

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

In March 2020, the FASB issued ASU 2020-04- Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Further, in accordance with the amendments in this Update, an entity may make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020. The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of this ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact of this amendment on our contracts, hedging relationships, and other transactions affected by reference rate reform.

2. DISCONTINUED OPERATIONS

On September 30, 2019, the Company completed the sale of 100% of the equity ownership in the Company’s wholly-owned subsidiary, GAS to PrimeFlight Aviation Services, Inc., a Delaware corporation. The agreement included a purchase price of $21 million as well as an earn-out provision of $4 million if certain performance metrics were achieved by March 31, 2020. Those metrics were not achieved per the final settlement statement received during the second quarter ended September 30, 2020. The Company received approximately $20.5 million of total proceeds at closing after the initial net working capital adjustment. The Company recognized a pre-tax gain on the sale of GAS of approximately $10.5 million with a tax impact of $2.3 million for a net of tax gain of $8.2 million.

Summarized results of operations of GAS for the year ended March 31, 2021 and 2020 through the date of disposition are as follows (in thousands):

Year ended March 31,

Operating Income (Expense) 4 (17,319)

Gain/(Loss) from discontinued operations before income taxes 4 (682)

Income tax benefit — (568)

Income/(Loss) from discontinued operations, net of tax $ 4 $ (114)

The following table presents capital expenditures, depreciation and amortization and other significant operating non-cash items of our discontinued operations for fiscal 2021 and 2020 (in thousands):

Fiscal year

Capital expenditures — 82

Depreciation and amortization — 165

Goodwill and asset impairments — 405

3. MAJOR CUSTOMER

Approximately 37% and 30% of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2021 and 2020, respectively. Approximately 35% and 16% of the Company’s consolidated accounts receivable at March 31, 2021 and 2020, respectively, were due from FedEx Corporation.

4. 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.

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

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

The conclusion of the bankruptcy proceedings also resulted in the dissolution of Delphax Canada. In addition, on June 11, 2019, the Company also fully dissolved Delphax UK. As such, the only Delphax entity that remains in existence as of March 31, 2021 is Delphax France. The Company extinguished the assets and liabilities of Delphax Canada and Delphax UK during the quarter ended June 30, 2019 and recognized a gain on dissolution of entities of $4.5 million.

Delphax had total assets and liabilities with carrying values of $8.0 thousand and $0.5 million, as of March 31, 2021 and $11.0 thousand and $0.5 million, as of March 31, 2020.

Delphax’s components of net income (loss) are included in our consolidated statements of income and comprehensive income herein. For the fiscal years ended March 31, 2021 and 2020, Delphax did not recognize any revenue, respectively. For the fiscal year ended March 31, 2021, Delphax recorded net loss and operating loss of $48.0 thousand. For the fiscal year ended March 31, 2020, Delphax recorded net income of $6.1 million, broken out between an operating loss of $0.2 million and non-operating income of $6.3 million, the majority of which was the result of the gain on dissolution of entities of $4.5 million.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures and reports financial assets and liabilities at fair value. 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).

Assets Measured and Recorded at Fair Value on a Recurring Basis

The following consolidated balance sheet items are measured at fair value on a recurring basis (in thousands):

Fair Value Measurements at March 31,

Marketable securities (Level 1) $ 2,914 $ 3,240

Interest rate swaps (Level 2) $ 593 $ 914

Debt - Trust Preferred Securities (Level 2) $ 14,289 12,877

Warrants Liability (Level 2) $ 414 485

Redeemable non-controlling interest (Level 3) $ 6,598 $ 6,080

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. See Note 9.

The fair value of the Debt - Trust Preferred Securities was based on quoted prices as observed on the NASDAQ Global Market. The fair value of the Warrants was derived from quoted prices for a similar asset or liability as observed on the NASDAQ Global Market. Both of these items are classified as Level 2 in the hierarchy.

The fair value of the redeemable non-controlling interest is based on a combination of market approach and income approach 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 (in thousands):

Redeemable Non-ControllingInterest

Contribution from non-controlling member —

Distribution to non-controlling member (1,244)

Net loss attributable to non-controlling interests (1,095)

Fair value adjustment 2,857

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable approximate their fair values at March 31, 2021 and 2020.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company determines fair value of engine assets on lease or held for lease by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors such as current data from manufacturers as well as specific market sales. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. The Company used Level 2 inputs to measure write-downs of engine assets on lease or held for lease. As of March 31, 2021, as a result of our year-end valuation, we did not identify any impairment on our engine assets on lease or held for lease.

6. INVENTORIES

Inventories consisted of the following (in thousands):

Year Ended March 31,

Ground equipment manufacturing:

Corporate and Other:

A write-down of $6.4 million was recorded on the inventory of the commercial jet engines and parts segment during the fiscal year ended March 31, 2021. Of the total write-down, $0.5 million was driven by a management decision to monetize two engines by sale to a third party, in which the net carrying values exceeded the estimated proceeds during the quarter ended September 30, 2020. The remaining write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2021, where we compared its cost to its net realizable value and considered factors such as physical condition, sales patterns and expected future demand to estimate the amount necessary to write down any slow moving, obsolete or damaged inventory.

7. ASSETS ON LEASE

The Company leases equipment to third parties, primarily through Contrail which leases engines to aviation customers with lease terms between 1 and 3 years under operating lease agreements. For the assets currently on lease, there are no options for the lessees to purchase the assets at the end of the leases. The Company depreciates the engines on a straight-line basis over the assets' useful life from the acquisition date to a residual value. Depreciation expense relating to engines on lease was $1.9 million and $4.4 million for the fiscal years ended March 31, 2021 and 2020, respectively.

Future minimum rental payments to be received do not include contingent rentals that may be received under certain leases because amounts are based on usage. Contingent rent earned totaled approximately $4.9 thousand and $3.7 million for the fiscal years ended March 31, 2021 and 2020, respectively. As of March 31, 2021, future minimum rental payments to be received under non-cancelable leases are as follows (in thousands):

Year ended March 31,

Thereafter —

As of March 31, 2021, Contrail has one engine on lease that is due a return-to-condition compensation ("engine compensation") upon the lease termination in December 2022. The engine compensation is determined as the sum of $3.6 million, plus a variable component calculated based on various escalation factors, including usage of flight hours and consumption of material, labor and utility. The Company estimated the engine compensation as of March 31, 2021 to be $4.1 million, which was recorded within "Other Assets" on our consolidated balance sheets. $3.6 million of the engine compensation is fixed, and thus is included within the $4.3 million of future rental payments to be received during the fiscal year ended March 31, 2023.

8. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

Year Ended March 31,

Furniture, fixtures and equipment $ 4,852 $ 5,243

Less accumulated depreciation (4,510) (4,319)

Property and equipment, net $ 8,519 $ 5,272

9. INVESTMENTS IN SECURITIES AND DERIVATIVE INSTRUMENTS

As part of the Company’s interest rate risk management strategy, the Company, from time to time, uses derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings (Air T Term Note A and Term Note D). To meet these objectives, the Company entered into interest rate swaps with notional amounts consistent with the outstanding debt to provide a fixed rate of 4.56% and 5.09%, respectively, on Term Notes A and D. The swaps mature in January 2028. As of August 1, 2018, these swap contracts are designated as effective cash flow hedging instruments in accordance with ASC 815. The effective portion of changes in the fair value on these instruments is recorded in other comprehensive income and is reclassified into the consolidated statement of income as interest expense in the same period in which the underlying hedged transaction affects earnings. The interest rate swaps are considered Level 2 fair value measurements. As of March 31, 2021 and March 31, 2020, the fair value of the interest-rate swap contracts was a liability of $0.6 million and $0.9 million, respectively, which is included within Other Non-Current Liabilities in the consolidated balance sheets. During the twelve months ended March 31, 2021 and 2020, the Company recorded a loss of approximately $0.3 million and a gain of $0.5 million, net of tax, respectively, in the consolidated statement of comprehensive income (loss) for changes in the fair value of the instruments.

The Company may, from time to time, employ trading strategies designed to profit from market anomalies and opportunities it identifies. Management uses derivative financial instruments to execute those strategies, which may include options, and futures contracts. These derivative instruments are priced using publicly quoted market prices and are considered Level 1 fair value measurements. During the fiscal year ended March 31, 2021, related to these derivative instruments, the Company had a gross gain aggregating to $0.8 million and a gross loss aggregating to $23.7 thousand. During the fiscal year ended March 31, 2020, related to these derivative instruments, the Company had a gross gain aggregating to $1.7 thousand and a gross loss aggregating to $0.3 million.

The Company also invests in exchange-traded marketable securities and accounts for that activity in accordance with ASC 321, Investments- Equity Securities. Marketable equity securities are carried at fair value, with changes in fair market value included in the determination of net income. The fair market value of marketable equity securities is determined based on quoted market prices in active markets. During the fiscal year ended March 31, 2021, the Company had a gross unrealized gain aggregating to $1.2 million and a gross unrealized loss aggregating to $1.2 million. During the fiscal year ended March 31, 2020, the Company had a gross unrealized gain aggregating to $8.4 thousand and a gross unrealized loss aggregating to $0.5 million. These unrealized gains and losses are included in Other Income (Loss) on the consolidated Statement of Income.

The market value of the Company’s equity securities and cash held by the broker are periodically used as collateral against any outstanding margin account borrowings. As of March 31, 2021 and 2020, the Company had outstanding borrowings of $0 and $0.4 million under its margin account, respectively, which is reflected in accrued expenses and other on the consolidated balance sheets. As of March 31, 2021 and 2020, the Company had cash margin balances related to exchange-traded equity securities and securities sold short of $0.9 million and $1.3 million, respectively, which is reflected in other current assets on the consolidated balance sheets. The interest rate on margin account borrowings was 9.4% as of March 31, 2021.

10. EQUITY METHOD INVESTMENTS

The Company’s investment in Insignia is accounted for under the equity method of accounting. The Company has elected a three-month lag upon adoption of the equity method. On December 31, 2020, Insignia effected a seven-for-one reverse stock split of its outstanding common stock. As such, as of March 31, 2021, the number of Insignia's shares owned by the Company was adjusted to 0.5 million, representing approximately 28% of the outstanding shares. For the fiscal years ended March 31, 2021 and 2020, the Company recorded approximately $1.2 million and $1.5 million as its share of Insignia’s net loss for the twelve months ended December 31, 2020 and 2019, respectively, along with a basis difference adjustment of approximately $96.1 thousand. In addition to the current year's loss attribution, the previous impairments taken in prior fiscal years have accelerated the Company's net investment basis in Insignia to be zero as of March 31, 2021.

On November 8, 2019, the Company made an investment of $2.8 million to purchase a 19.90% ownership stake in CCI, subsequently reduced to a 18.98% ownership stake as of September 30, 2020. The Company accounts for this investment under the equity method of accounting. Due to the differing fiscal year-ends, the Company has elected a three-month lag to record the CCI investment at cost, with a basis difference of $0.3 million. For the fiscal year ended March 31, 2021, the Company recorded a gain of $0.4 million as its share of CCI's net income for the twelve months ended December 31, 2020, along with a basis difference adjustment of $49.9 thousand. The Company's net investment basis in CCI is $3.8 million as of March 31, 2021.

Summarized audited financial information for the Company's equity method investees for the twelve months ended December 31, 2020 and December 31, 2019 are as follows (in thousands):

Twelve Months EndedDecember 31, 2020 Twelve Months Ended December 31, 2019

Net loss attributable to Air T, Inc. stockholders $ (760) $ (887)

11. ACCRUED EXPENSES

Year ended March 31,

Salaries, wages and related items $ 5,427 $ 3,616

12. LEASE ARRANGEMENTS

The Company has operating leases for the use of real estate, machinery, and office equipment. The majority of our leases have a lease term of 2 to 5 years; however, we have certain leases with longer terms of up to 30 years. Many of our leases include options to extend the lease for an additional period.

The lease term for all of the Company’s leases includes the non-cancellable period of the lease, plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor that is considered likely to be exercised.

Payments due under the lease contracts include fixed payments plus, for some of our leases, variable payments. Variable payments are typically operating costs associated with the underlying asset and are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Our leases do not contain residual value guarantees.

The Company has elected to combine lease and non-lease components as a single component and not to recognize leases on the balance sheet with an initial term of one year or less.

The interest rate implicit in lease contracts is typically not readily determinable, and as such the Company utilizes the incremental borrowing rate to calculate lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

The components of lease cost for the twelve months ended March 31, 2021 and 2020 are as follows (in thousands):

Twelve Months Ended March 31, 2021 Twelve Months Ended March 31, 2020

Amounts reported in the consolidated balance sheets for leases where we are the lessee as of the years ended March 31, 2021 and 2020 were as follows (in thousands):

Operating leases

Operating lease ROU assets $ 7,757 $ 8,116

Weighted-average remaining lease term

Operating leases 13 years, 9 months 14 years, 4 months

Weighted-average discount rate

Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the year ended March 31, 2021 are as follows (in thousands):

Operating Leases

Total undiscounted lease payments 12,428

Less: Interest (3,439)

Less: Discount (544)

Total lease liabilities $ 8,445

13. FINANCING ARRANGEMENTS

Borrowings of the Company and its subsidiaries are summarized below at March 31, 2021 and March 31, 2020, respectively.

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

The PPP Loan is unsecured and guaranteed by the United States Small Business Administration ("SBA"). The Company has applied to MBT for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company during the 24-week period beginning on April 13, 2020, calculated in accordance with the terms of the CARES Act. The PPP Loan bears interest at a fixed annual rate of one percent (1%). Once the forgiveness determination is made, the Company will be required to make repayments plus interest on any unforgiven amount. As of March 31, 2021, the Company has used the funds received from the PPP loan on eligible expenses as outlined in the CARES Act.

On September 25, 2020, Contrail entered into a Third Amendment to Supplement #2 to Master Loan Agreement dated June 24, 2019 with ONB. The material changes within the Third Amendment are: (a) to extend the date for compliance with the provision where Contrail is required to pay down the total outstanding principal balance of its revolver to zero for at least thirty consecutive days to September 5, 2021; and (b) to extend the date for compliance with the required quarterly debt service coverage ratio covenant such that Contrail shall commence compliance with the covenant commencing on March 31, 2022 and on the last day of each fiscal quarter thereafter.

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

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

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

The principal terms of the Term Loan - PSB are: (a) interest on the loan accrues at a floating rate of 3-month LIBOR plus 3.00% and interest is payable commencing December 11, 2021; (b) 15% principal payments (including any capitalized interest accrued thereon) are due on December 11, 2023, and 2024, with the remainder due on the loan maturity date – December 11, 2025; (c) the loan is not guaranteed; and, (d) a 2% origination fee was paid on funding of the loan. The loan contains an affirmative covenant relating to collateral valuation. The terms of the loan provide for customary events of default, including, among others, those relating to a failure to make payment, breaches of representations and covenants, and the occurrence of certain events. The loan is secured by a security interest in the assets of AirCo 1 and a pledge of AirCo’s membership interest in AirCo 1.

The following table provides certain information about the current financing arrangements of the Company's and its subsidiaries as of March 31, 2021 and 2020:

March 31, 2021 March 31, 2020 Maturity Date Interest Rate Unused commitments

Air T Debt

Revolver - MBT $ — $ — 8/31/21 Greater of 2.5% or Prime - 1% $ 17,000

AirCo 1 Debt

Contrail Debt

Delphax Solutions Debt

Canadian Emergency Business Account Loan 32 — 12/31/25 5%

Less: Unamortized Debt Issuance Costs (1,141) (354)

Fiscal 2021's weighted average interest rate on short term borrowings outstanding was 0.0% due to the fact that all short-term borrowings outstanding as of March 31, 2021 have zero balances. The weighted average interest rate on short term borrowings outstanding as of March 31, 2020 was 3.7%.

The Air T revolving credit facility and the Contrail revolving credit facility contain affirmative and negative covenants, including covenants that restrict the ability of the Company 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 obligations of Contrail under the Contrail Credit Agreement with ONB are secured by a first-priority security interest in substantially all of the assets of Contrail. The obligations of Contrail under the Contrail Credit Agreement are also guaranteed by the Company, up to a maximum of $1.6 million, plus costs of collection. The Company is not liable for any other assets or liabilities of Contrail and there are no cross-default provisions with respect to Contrail’s debt in any of the Company’s debt agreements with MBT.

1 Pursuant to The Paycheck Protection Flexibility Act of 2020, P.L. 116-142, the SBA extended the deferral period for loan payments to either (1) the date that SBA remits the borrower’s loan forgiveness amount to MBT or (2) if Air T did not apply for loan forgiveness, 10 months after the end of Air T’s loan forgiveness covered period, which is December 24, 2022. SBA does not require a formal modification to the original promissory note agreement.

2 The AirCo 1 Revolver was paid off and closed as of December 31, 2020.

At March 31, 2021, our contractual financing obligations, including payments due by period, are as follows (in thousands):

Fiscal year ended Amount

Less: Unamortized Debt Issuance Costs (1,141)

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.

Fair Value of Debts - As of March 31, 2021 and 2020, the carrying amounts reported in the consolidated balance sheets for the Company’s debt instruments approximate the fair values. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debts.

Interest Expense, net - The components of net interest expense during the years ended March 31, 2021 and March 31, 2020 are as follows (in thousands):

Amortization of deferred financing costs 288 237

Interest income (16) (3)

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

•A dividend of one additional share for every two shares already held (a 50% stock dividend, or the equivalent of a 3-for-2 stock split). See Note 22.

•The Company issued and distributed to existing common shareholders, via a non-cash transaction from equity, an aggregate of 1.6 million trust preferred capital security shares (aggregate $4.0 million stated value) and an aggregate of 8.4 million warrants (representing warrants to purchase $21.0 million in stated value of TruPs).

On January 14, 2020, Air T effected a one-for-ten reverse split of its TruPs. As a result of the reverse split, the stated value of the TruPs currently is $25.00 per share. Further, each Warrant conferred upon its holder the right to purchase one-tenth of a share of TruPs for $2.40, representing a 4% discount to the new stated value of $2.50 for one-tenth of a share.

As of March 31, 2021, approximately 4.1 million Warrants have been exercised. As a result, the amount outstanding on the Company's Debt - Trust Preferred Securities is $14.3 million as of March 31, 2021.

At March 31, 2021, the Company had Warrants outstanding and exercisable to purchase approximately 4.3 million shares of its TruPs at an exercise price of $2.40 per one-tenth of a share. The Warrants will expire on August 30, 2021 or earlier upon redemption or liquidation.

14. RELATED PARTY MATTERS

Contrail Aviation Support, LLC leases its corporate and operating facilities at Verona, Wisconsin from Cohen Kuhn Properties, LLC, a limited liability company whose membership interests are owned by Mr. Joseph Kuhn, Contrail's Chief Executive Officer and Mrs. Miriam Cohen-Kuhn, Contrail's Chief Financial Officer, equally. The facility consists of approximately 21,000 square feet of warehouse and office space. The Company paid aggregate rental payments of approximately $0.2 million to Cohen Kuhn Properties, LLC pursuant to such lease during the period from April 1, 2020 through March 31, 2021. The lease for this facility originally was to expire on June 30, 2021, however; in April 2021, the Company executed the option to renew the lease for an additional period of 5 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.

Gary S. Kohler, a director of the Company, entered into an employment agreement with Blue Clay Capital Management, a wholly-owned subsidiary of the Company, in the Corporate and other segment, to serve as its Chief Investment Officer in return for an annual salary of $50.0 thousand 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.

Nick Swenson, CEO of the Company, is also the majority shareholder of CCI. As of March 31, 2021, Mr. Swenson owned 66.7% of ownership interests in CCI. Under the VIE model, Mr. Swenson is the primary beneficiary of CCI due to the high extent of his ownership relative to other shareholders of CCI,and the lack of shared power between Mr. Swenson and the Company ("the related party group") to direct the activities of CCI that most significantly impact CCI’s economic performance.

15. EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS

Air T, Inc. maintains a stock option plan for the benefit of certain eligible employees and directors. In addition, Delphax maintains a number of stock option plans. Compensation expense is recognized over the requisite service period for stock options which are expected to vest based on their grant-date fair values. The Company uses the Black-Scholes option pricing model to value stock options granted under the Air T, Inc. plan and the Delphax plans. 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.

No options were granted under Air T, Inc.’s stock option plan during the fiscal years ended March 31, 2021 and 2020. No stock-based compensation expense with respect to this plan was recognized for the year ended March 31, 2021 and 2020, respectively. At March 31, 2021, there was no unrecognized compensation expense related to the Air T Inc. stock options.

There was no activity during the fiscal years ended March 31, 2021 and 2020 under the Delphax option plans. Option activity during the fiscal years ended March 31, 2020 (retrospectively adjusted to account for the stock split on June 10, 2019) and 2021 is summarized below:

Granted — —

Exercised — —

Forfeited — —

Repurchased — —

Granted — —

Exercised — —

Forfeited — —

Repurchased — —

16. REVENUE RECOGNITION

Performance Obligations

The following is a description of the Company’s performance obligations as of March 31, 2021:

In addition to the above type of revenues, the Company also has Leasing Revenue, which is in scope under Topic 842 (Leases) and out of scope under Topic 606 and Other Revenues (Freight, Management Fees, etc.) which are immaterial for disclosure under Topic 606. In the current fiscal year, the Company also generated revenue from the sale of assets on lease or held for lease.

The following table summarizes disaggregated revenues by type (in thousands):

Year Ended

Product Sales

Support Services

Commercial jet engines and parts 4,743 3,675

Leasing Revenue

Air Cargo — —

Other

Commercial jet engines and parts 254 187

See Note 20 for the Company's disaggregated revenues by geographic region and Note 21 for the Company’s disaggregated revenues by segment. These notes disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

Contract Balances and Costs

Contract liabilities relate to deferred revenue and advanced customer deposits with respect to product sales. The following table presents outstanding contract liabilities as of April 1, 2020 and March 31, 2021 and the amount of contract liabilities that were recognized as revenue during the year ended March 31, 2021 (in thousands):

17. EMPLOYEE BENEFITS

The Company has a 401(k) defined contribution plan covering domestic employees and an 1165(e) defined contribution plan covering Puerto Rico based employees (“Plans”). All employees of the Company are immediately eligible to participate in the Plans. The Company’s contribution to the Plans for the years ended March 31, 2021 and 2020 was approximately $0.5 million and $0.6 million, respectively, and was recorded in the consolidated statements of income.

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 2021 and 2020 was approximately $1.5 million and $3.5 million, respectively, and was recorded in general and administrative expenses in the consolidated statements of income.

18. INCOME TAXES

Income tax expense (benefit) attributable to (loss) income from continuing operations consists of (in thousands):

Year Ended March 31,

Current:

Foreign 39 —

Deferred:

Income tax expense attributable to (loss) income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 21% to pretax (loss) income from continuing operations as follows (in thousands):

Year Ended March 31,

State income taxes, net of federal benefit (271) 2.3 % (519) -19.8 %

Nontaxable cancellation of debt income — 0.0 % (1,331) -50.7 %

Micro-captive insurance benefit (217) 1.8 % (172) -6.6 %

Income attributable to minority interest - Contrail 247 -2.1 % (325) -12.4 %

Write-off Delphax tax attributes — 0.0 % 9,353 356.4 %

Acquired Net Operating Loss ("NOL") carrybacks; CARES Act — 0.0 % (363) -13.8 %

NOL Carryback - Rate Differential (1,468) 12.5 % — 0.0 %

The Company did not record any liabilities for uncertain tax positions for the fiscal years ended March 31, 2021 and March 31, 2020.

During the fiscal period ended March 31, 2020, the Company sold GAS. See Note 2. The tax benefit related to this entity allocated to discontinued operations for March 31, 2020 was $0.6 million. In addition, a gain on the sale of discontinued operations was recognized, resulting in a net of tax gain of $8.2 million.

The Company has state gross operating losses of $6.4 million at March 31, 2021. These net operating losses will begin to expire in tax year 2030. The Company has foreign tax credits of $0.5 million that will begin to expire in tax year 2026.

DSI and Delphax (collectively known as the “Delphax entities”) are not included in Air T’s consolidated tax return. During the year ended March 31, 2021, DSI and Delphax accounted for $0.3 million and $(0.1) million, respectively, of fiscal year 2021's valuation allowance effect. During the year ended March 31, 2020, each entity, respectively, accounted for $0.2 million and $(8.9) million of the fiscal year 2020's valuation allowance effect. The valuation allowance release in March 31, 2020 relates to attribute reduction for cancellation of debt income and dissolution of the Canadian and UK subsidiaries (See Note 4). Impairment on investments and changes in unrealized losses related to available-for-sale securities and foreign tax credits accounted for the remaining valuation allowance effect for each year.

In March of 2020, the CARES Act was enacted and made significant changes to federal tax laws, including certain changes that were retroactive to the March 31, 2020 tax year. Changes in tax laws are accounted for in the period of enactment and the retroactive effects are recognized in these financial statements. Of the changes impactful to the Company, the CARES act permits favorable treatment of deductible interest expense as well as the ability to carryback tax losses incurred in the March 31, 2021 fiscal year up to 5 years and recoup previously paid federal income taxes; under which the Company was subject to a higher federal tax rate. The benefit of the recoupment of these taxes are included in these consolidated financial statements and the Company expects to receive a refund of $3.4 million.

Deferred tax assets and liabilities were comprised of the following (in thousands):

Net operating loss & attribute carryforwards $ 4,094 $ 3,524

Unrealized losses on investments 1,504 1,693

AIRT US Equity

AIRT · 10-K · period ended 2021-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

AIRT US Equity☆

AIRT · 10-K · period ended 2021-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

AIRT US Equity