AIR T INC 10-K

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 41 Consolidated Statements of Income (Loss) for the Years Ended March 31, 2024 and 2023 42 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2024 and 2023 43 Consolidated Balance Sheets as of March 31, 2024 and 2023 44 Consolidated Statements of Cash Flows for the Years Ended March 31, 2024 and 2023 45 Consolidated Statements of Equity for the Years Ended March 31, 2024 and 2023 46 Notes to Consolidated Financial Statements 47 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders 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, 2024 and 2023, the related consolidated statements of income (loss), comprehensive income (loss), equity, and cash flows, for each of the two years in the period ended March 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2024, 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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Redeemable non-controlling interest – valuation of Contrail Aviation Support, LLC — Refer to Notes 1 and 4 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 $7.4 million as of March 31, 2024. 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 rate, 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 rate 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, including a redemption agreement entered into by Contrail Aviation Support, LLC subsequent to year-end. /s/ Deloitte & Touche LLP Minneapolis, Minnesota June 26, 2024 We have served as the Company's auditor since 2018. 41 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) Year Ended March 31, (In thousands, except per share data) 2024 2023 Operating Revenues: Overnight air cargo $ 115,546 $ 90,543 Ground equipment sales 37,168 48,485 Commercial jet engines and parts 125,535 101,737 Corporate and other 8,585 6,558 286,834 247,323 Operating Expenses: Overnight air cargo 97,690 79,720 Ground equipment sales 31,834 39,328 Commercial jet engines and parts 98,027 75,288 Corporate and Other 2,912 2,540 General and administrative 51,096 42,844 Depreciation and amortization 2,798 4,162 Inventory write-down 1,195 7,324 Impairment of long-lived assets — 516 Loss on sale of property and equipment 18 8 285,570 251,730 Operating Income (Loss) 1,264 ( 4,407 ) Non-operating (Expense) Income: Interest expense, net ( 6,916 ) ( 7,935 ) Income from equity method investments 1,689 1,460 Other 8 ( 471 ) ( 5,219 ) ( 6,946 ) Loss before income taxes ( 3,955 ) ( 11,353 ) Income Tax Expense 729 432 Net Loss ( 4,684 ) ( 11,785 ) Net Income Attributable to Non-controlling Interests ( 2,135 ) ( 510 ) Net Loss Attributable to Air T, Inc. Stockholders $ ( 6,819 ) $ ( 12,295 ) Loss per share (Note 21) Basic $ ( 2.42 ) $ ( 4.32 ) Diluted $ ( 2.42 ) $ ( 4.32 ) Weighted Average Shares Outstanding: Basic 2,816 2,847 Diluted 2,816 2,847 See notes to consolidated financial statements. 42 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended March 31, (In thousands) 2024 2023 Net Loss $ ( 4,684 ) $ ( 11,785 ) Other Comprehensive (Loss) Income: Foreign currency translation (loss) income ( 93 ) 4 Unrealized gain on interest rate swaps, net of tax of $ 0 and $ 332 20 998 Reclassification of interest rate swaps into earnings ( 823 ) 77 Total Other Comprehensive (Loss) Income ( 896 ) 1,079 Total Comprehensive Loss ( 5,580 ) ( 10,706 ) Comprehensive Income Attributable to Non-controlling Interests ( 2,135 ) ( 510 ) Comprehensive Loss Attributable to Air T, Inc. Stockholders $ ( 7,715 ) $ ( 11,216 ) See notes to consolidated financial statements. 43 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) March 31, 2024 March 31, 2023 ASSETS Current Assets: Cash and cash equivalents $ 7,100 $ 5,806 Restricted cash 743 1,284 Restricted investments 1,392 2,161 Accounts receivable, net of allowance for doubtful accounts of $ 1,420 and $ 1,160 22,911 27,218 Inventories, net 60,720 71,125 Employee retention credit receivable — 940 Prepaid expenses 2,351 2,501 Due from CAM for expense reimbursements 3,093 2,261 Other current assets 4,567 3,261 Total Current Assets 102,877 116,557 Assets on lease or held for lease, net of accumulated depreciation of $ 8 and $ 223 252 83 Property and equipment, net of accumulated depreciation of $ 7,705 and $ 6,624 20,861 21,439 Intangible assets, net of accumulated amortization of $ 5,119 and $ 4,191 10,978 12,103 Right-of-use assets 11,376 11,666 Equity method investments 16,653 13,230 Goodwill 10,540 10,563 Other assets 3,630 3,921 Total Assets 177,167 189,562 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 15,072 10,449 Income tax payable 139 304 Accrued expenses and other (Note 11) 15,511 13,133 Current portion of long-term debt 14,358 38,736 Short-term lease liability 1,761 1,664 Total Current Liabilities 46,841 64,286 Long-term debt 98,568 86,349 Deferred income tax liabilities, net 2,447 2,417 Long-term lease liability 10,515 10,771 Other non-current liabilities — 47 Total Liabilities 158,371 163,870 Redeemable non-controlling interest 12,976 12,710 Commitments and contingencies (Note 22) Equity: Air T, Inc. Stockholders' Equity: Preferred stock, $ 1.00 par value, 2,000,000 shares authorized — — Common stock, $ 0.25 par value; 4,000,000 shares authorized, 3,030,245 shares issued, 2,775,163 and 2,818,374 shares outstanding 758 757 Treasury stock, 256,850 at $ 19.31 and 208,121 shares at $ 19.62 ( 4,959 ) ( 4,083 ) Additional paid-in capital 859 728 Retained earnings 8,192 13,686 Accumulated other comprehensive (loss) income ( 80 ) 816 Total Air T, Inc. Stockholders' Equity 4,770 11,904 Non-controlling Interests 1,050 1,078 Total Equity 5,820 12,982 Total Liabilities and Equity $ 177,167 $ 189,562 See notes to consolidated financial statements. 44 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended March 31, (In thousands) 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 4,684 ) $ ( 11,785 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,798 4,162 Income from equity method of investments ( 1,689 ) ( 1,460 ) Inventory write-down 1,195 7,324 Impairment of long-lived assets — 516 Other 1,294 769 Change in operating assets and liabilities: Accounts receivable 4,047 ( 6,290 ) Inventories 9,103 10,163 Accounts payable 4,623 992 Accrued expenses 2,378 ( 893 ) Employee retention credit receivable 940 8,198 Other ( 2,827 ) 5,213 Total adjustments 18,264 17,383 Net cash provided by operating activities 17,178 16,909 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired — ( 2,498 ) Investment in unconsolidated entities ( 4,633 ) ( 3,064 ) Distribution from unconsolidated entities 3,192 683 Capital expenditures related to property & equipment ( 1,076 ) ( 1,178 ) Other 18 ( 111 ) Net cash used in investing activities ( 2,499 ) ( 6,168 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from lines of credit 124,249 139,329 Payments on lines of credit ( 141,956 ) ( 132,958 ) Proceeds from term loan 24,850 10,627 Payments on term loan ( 28,341 ) ( 27,850 ) Proceeds received from issuance of TruPs 8,780 — Other ( 1,492 ) ( 1,528 ) Net cash used in financing activities ( 13,910 ) ( 12,380 ) Effect of foreign currency exchange rates on cash and cash equivalents ( 16 ) 361 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH 753 ( 1,278 ) CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD 7,090 8,368 CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD 7,843 7,090 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Equipment leased or held for lease transferred to inventory 73 12,700 Equipment in inventory transferred to assets on lease 260 33 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Operating cash payments for operating leases 2,351 1,881 Cash paid during the year for interest 3,891 5,867 Cash paid during the year for income taxes $ 917 $ 1,026 See notes to consolidated financial statements. 45 AIR T, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY (In thousands) Common Stock Treasury Stock Shares Amount Share Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-controlling Interests* Total Equity Balance, March 31, 2022 3,023 $ 756 156 $ ( 3,002 ) $ 393 $ 26,729 $ ( 263 ) $ 1,104 $ 25,717 Net loss* — — — — — ( 12,295 ) — ( 26 ) ( 12,321 ) Repurchase of common stock — — 52 ( 1,081 ) — — — — ( 1,081 ) Exercise of stock options 4 1 — — 20 — — — 21 Stock compensation expense — — — — 315 — — — 315 Foreign currency translation income — — — — — — 4 — 4 Adjustment to fair value of redeemable non-controlling interest — — — — — ( 1,748 ) — — ( 1,748 ) Unrealized gain of interest rate swaps, net of tax — — — — — — 998 — 998 Reversal of Put option issued to co-investor in CAM (Note 22) — — — — — 1,000 — — 1,000 Reclassification of interest rate swaps into earnings — — — — — — 77 — 77 Balance, March 31, 2023 3,027 $ 757 208 $ ( 4,083 ) $ 728 $ 13,686 $ 816 $ 1,078 $ 12,982 (In thousands) Common Stock Treasury Stock Share Amount Share Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-controlling Interests* Total Equity Balance, March 31, 2023 3,027 $ 757 208 $ ( 4,083 ) $ 728 $ 13,686 $ 816 $ 1,078 $ 12,982 Net loss* — — — — — ( 6,819 ) — ( 28 ) ( 6,847 ) Repurchase of common stock — — 49 ( 876 ) — — — — ( 876 ) Exercise of stock options 3 1 — — 25 — — — 26 Stock compensation expense — — — — 106 — — — 106 Foreign currency translation loss — — — — — — ( 93 ) — ( 93 ) Adjustment to fair value of redeemable non-controlling interest — — — — — 1,325 — — 1,325 Unrealized gain on interest rate swaps — — — — — — 20 — 20 Reclassification of interest rate swaps into earnings — — — — — — ( 823 ) — ( 823 ) Balance, March 31, 2024 3,030 $ 758 257 $ ( 4,959 ) $ 859 $ 8,192 $ ( 80 ) $ 1,050 $ 5,820 * Excludes amount attributable to redeemable non-controlling interest in Contrail and Shanwick. See notes to consolidated financial statements. 46 AIR T, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2024 AND 2023 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, compounding its free-cash-flow per share over time. We currently operate in four industry segments: • Overnight air cargo, which operates in the air express delivery services industry; • Ground equipment sales, which manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers; • Commercial aircraft, engines and parts, which manages and leases aviation assets; supplies surplus and aftermarket commercial jet engine components; provides commercial aircraft disassembly/part-out services; commercial aircraft parts sales; procurement services and overhaul and repair services to airlines and; • Corporate and other, which acts as the capital allocator and resource for other consolidated businesses. Further, Corporate and other also comprises insignificant businesses and business interests. 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 (loss) and Adjusted EBITDA. 47 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, Shanwick and Delphax. All material 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. Future economic developments such as inflation and increased interest rates as well as further business issues such as supply chain issues present uncertainty and risk with respect to our financial condition and results of operations. The fluidity of this situation precludes any prediction as to the ultimate adverse impact of these issues on economic and market conditions and our businesses in particular, and, as a result, presents 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, 2024. 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 20 ). 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 (loss) and Adjusted EBITDA. 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 (loss) commencing with the date of acquisition. Amounts for pre-acquisition periods are excluded. 48 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 estimates 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. 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. 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 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 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 49 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, 2024 2023 Goodwill, at original cost $ 10,916 $ 10,939 Accumulated impairment ( 376 ) ( 376 ) Goodwill, net of impairment $ 10,540 $ 10,563 As of March 31, 2024, $ 4.2 million of the goodwill balance is attributable to the acquisition of Contrail in July 2016. $ 6.2 million of the goodwill balance is attributable to the acquisition of Shanwick in February 2022. $ 0.1 million of the goodwill balance is attributable to the acquisition of WASI in January 2023. The decrease from the prior fiscal year's balance of $ 10.6 million to the current fiscal year's balance of $ 10.5 million is attributable to foreign currency translation adjustments related to the goodwill balance at Shanwick. Based on the results of our annual assessment of qualitative factors conducted as of March 31, 2024, management determined that it was more likely than not that the fair value of our reporting units exceeded its carrying value, including goodwill. 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: 50 Years Purchased software 3 Internally developed software 10 - 15 In-place lease and other intangibles Over lease term Trade names 5 Certification 5 Non-compete 5 License 5 Patents 9 Customer relationships 10 - 15 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. In connection with the issuance of these 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. In total, 5.3 million Warrants were exercised and the remaining 3.1 million Warrants expired on August 30, 2021. On April 24, 2024, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Ascendiant Capital Markets, LLC (the “sales agent” or “Ascendiant”), pursuant to which it may sell and issue its TruPs having an aggregate offering price of up to $ 8.0 million from time to time. The Company has no obligation to sell any TruPs, and may at any time suspend offers under the ATM Agreement or terminate the ATM Agreement. 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 51 balance sheet. Further, as the redemption date and the redemption amount are both fixed, in accordance with ASC 825, we measured these TruPs at the present value of the amount to be paid at settlement, discounted by using the implicit rate at inception. 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, Contrail entered into an Operating Agreement (the “Operating Agreement”) with the Seller providing for the governance of and the terms of membership interests in Contrail. The Operating Agreement includes put and call options (“Contrail Put/Call Option”) with regard to the 21% non-controlling interest retained by the Seller. The Seller is the founder of Contrail and its current Chief Executive Officer. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was 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 interests as redeemable and classified them in temporary equity within its Consolidated Balance Sheets initially at their acquisition-date estimated redemption value or fair value. Per the Operating Agreement, Contrail's non-controlling interest is redeemable at fair value, which 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. Contrail's 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 (Loss). 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. As of March 31, 2024, the fair value of the Contrail's redeemable non-controlling interest was $ 7.4 million. See Note 22 , Commitments and Contingencies. 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 52 cargo revenue on the accompanying statements of income (loss). These pass-through costs totaled $ 36.4 million and $ 29.2 million for the years ended March 31, 2024 and 2023, respectively. Recently Adopted Accounting Pronouncements 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. In December 2022, the FASB issued ASU 2022-06- Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this Update deferred the implementation deadline of Topic 848 from December 31, 2022, to December 31, 2024. The Company completed the process of converting its material LIBOR-based contracts, hedging relationships, and other transactions to other reference rates as of September 30, 2023. Recently Issued Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07- Segment Reporting (Topic 848): Improvements to Reportable Segment Disclosures. The amendments in this Update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses utilized by the chief operating decision maker for a company along with details about who the chief operating decision maker is and their title. The Update additionally requires that all annual disclosures under Topic 280 be included in interim periods financial statements, clarifies when an entity can disclose multiple segment measures of profit or loss, and provides new segment disclosure requirements for entities with a single reportable segment. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 31, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures. In December 2023, the FASB issued ASU 2023-09- Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this Update require the addition of specific categories to be disclosed in the rate reconciliation if they meet a quantitative threshold, disclosure of disaggregated income taxes paid to federal, state, and foreign jurisdictions, and disclosure of income or loss from continuing operations disaggregated by federal, state, and foreign jurisdictions. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this amendment on its consolidated financial statements and disclosures. 53 2. ACQUISITIONS Worldwide Aviation Services, Inc. On January 31, 2023, the Company acquired Worldwide Aircraft Services, Inc. ("WASI"), a Kansas corporation that services the aircraft industry across the United States and internationally through the operation of a repair station which is located in Springfield, Missouri at the Branson National Airport. The acquisition was funded with cash and the loans described in Note 13 of this report. WASI is included within the Overnight air cargo segment. The acquisition date's fair value of the consideration is summarized in the table below (in thousands): January 31, 2023 Cash consideration $ 1,628 Seller's Note 1,370 Total consideration $ 2,998 The transaction was accounted for as a business combination in accordance with ASC Topic 805 "Business Combinations." Assets acquired and liabilities assumed were recorded in the accompanying consolidated balance sheet at their fair values as of January 31, 2023, with the excess of total consideration above fair value of net assets acquired recorded as goodwill. The following table outlines the consideration transferred and purchase price allocation at the respective fair values as of January 31, 2023 (in thousands): January 31, 2023 ASSETS Accounts receivable $ 1,037 Inventory 517 Other current assets 97 Property, plant and equipment, net 403 Intangible -Trade Name 342 Intangible - Non-competition Agreement 19 Intangible - Customer Relationships 683 Other assets 20 Total assets $ 3,118 LIABILITIES Accounts payable 61 Accrued expenses and deferred revenue 635 Total liabilities $ 696 Net assets acquired $ 2,422 Consideration paid 2,998 Less: Cash acquired ( 500 ) Less: Net assets acquired ( 2,422 ) Goodwill $ 76 As of March 31, 2023, the purchase price allocation is final. The following table sets forth the revenue and expenses of WASI that are included in the Company’s consolidated statement of income (loss) for the fiscal year ended March 31, 2023 (in thousands): Income Statement Post-Acquisition Revenue $ 929 Cost of Sales 676 Operating Expenses 425 Operating Loss ( 172 ) Non-operating expense ( 22 ) Net loss $ ( 194 ) Pro forma financial information is not presented as the results are not material to the Company’s consolidated financial statements. 54 3. MAJOR CUSTOMER Approximately 36 % of the Company’s consolidated revenues were derived from services performed for FedEx Corporation in fiscal 2024 and 2023. Approximately 21 % and 16 % of the Company’s consolidated accounts receivable at March 31, 2024 and 2023, respectively, were due from FedEx Corporation. Approximately 10 % and 9 % of the Company’s consolidated revenues were derived from services performed for American Airlines Corporation in fiscal 2024 and 2023, respectively. Approximately 24 % and 26 % of the Company’s consolidated accounts receivable at March 31, 2024 and 2023, respectively, were due from American Airlines Corporation. 55 4. 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, 2024 2023 Marketable securities (including restricted investments) (Level 1) $ 1,923 $ 2,161 Interest rate swaps (Level 2) 1,909 2,420 Contrail's redeemable non-controlling interest (Level 3) $ 7,437 $ 7,972 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 Contrail's redeemable non-controlling interest is based on a combination of market approach and income approach and is classified as Level 3 in the hierarchy. See Note 22 . The fair value measurements which use significant observable inputs (Level 3), changed due to the following (in thousands): Contrail's Redeemable Non-Controlling Interest Beginning Balance as of April 1, 2023 $ 7,972 Contribution from non-controlling member — Distribution to non-controlling member ( 245 ) Net income attributable to non-controlling interests 1,035 Fair value adjustment - Contrail (Note 22) ( 1,325 ) Ending Balance as of March 31, 2024 $ 7,437 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, 2024 and 2023. 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 in the fiscal quarter in which 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, 2024, as a result of our year-end valuation, we did not identify any impairment on our engine assets on lease or held for lease. 56 5. INVENTORIES Inventories consisted of the following (in thousands): Year Ended March 31, 2024 2023 Overnight air cargo: Finished goods $ 893 $ 546 Ground equipment manufacturing: Raw materials 5,171 4,589 Work in process 5,244 153 Finished goods 2,770 6,976 Corporate and other: Raw materials 1,003 794 Finished goods 724 726 Commercial jet engines and parts: Whole engines available for sale or tear-down — 10,141 Parts 49,522 50,813 Total inventories 65,327 74,738 Reserves ( 4,607 ) ( 3,613 ) Total inventories, net of reserves $ 60,720 $ 71,125 A write-down of $ 1.2 million was recorded on the inventory of the commercial jet engines and parts segment during the fiscal year ended March 31, 2024. The write-down was attributable to our evaluation of the carrying value of inventory as of March 31, 2024, 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. 57 6. LESSOR ARRANGEMENTS Office leases The Company, through its wholly owned subsidiary, Wolfe Lake, leases offices to third parties with lease terms between 5 and 29 years under operating lease agreements. For the offices currently on lease, there are no options for the lessees to purchase the spaces at the end of the leases. Our contractual obligations for offices currently on lease can include termination and renewal options. We utilize the reasonably certain threshold criteria in determining which options our customers will exercise. The Company depreciates the assets on a straight-line basis over the assets' useful life. Depreciation expense relating to office leases was $ 0.3 million for the fiscal years ended March 31, 2024 and 2023, respectively. We recognized rental and other revenues related to operating lease payments of $ 1.6 million and $ 1.4 million, respectively, of which variable lease payments were $ 0.7 million and $ 0.6 million during the fiscal years ended March 31, 2024 and 2023, respectively. Future minimum rental payments to be received do not include variable lease payments that may be received under certain leases because amounts are based on usage. The following table sets forth the undiscounted cash flows for future minimum base rents to be received from customers for office leases in effect as of March 31, 2024: Year ended March 31, 2025 $ 975 2026 927 2027 901 2028 761 2029 663 Thereafter 3,157 Total $ 7,384 58 7. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands): Year Ended March 31, 2024 2023 Furniture, fixtures and equipment $ 7,060 $ 6,547 Leasehold improvements 7,656 7,666 Building 13,850 13,850 28,566 28,063 Accumulated depreciation ( 7,705 ) ( 6,624 ) Property and equipment, net $ 20,861 $ 21,439 59 8. INTANGIBLES Intangibles consisted of the following (in thousands): Year Ended March 31, 2024 2023 Purchased software $ 582 $ 544 Internally developed software 3,657 3,672 In-place lease and other intangibles 1,094 1,094 Customer relationships 8,009 8,050 Patents 1,112 1,112 Other 1,502 1,782 15,956 16,254 Accumulated amortization ( 5,119 ) ( 4,191 ) 10,837 12,063 In-process software 141 40 Intangible assets, total $ 10,978 $ 12,103 Based on the intangible assets recorded at March 31, 2024 and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows: (In thousands) Amortization 2025 $ 1,187 2026 1,104 2027 1,029 2028 971 2029 964 Thereafter 5,582 $ 10,837 60 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 Air T - 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. On August 31, 2021, Air T and MBT refinanced Term Note A and fixed its interest rate at 3.42 %. As a result of this refinancing, the Company determined that the interest rate swap on Term Note A was no longer an effective hedge. The Company will amortize the fair value of the interest-rate swap contract included in accumulated other comprehensive income (loss) associated with Term Note A at the time of de-designation into earnings over the remainder of its term. In addition, any changes in the fair value of Term Note A's swap after August 31, 2021 are recognized directly into earnings. The remaining swap contract associated with Term Note D is designated as an effective cash flow hedging instrument in accordance with ASC 815. On January 7, 2022, Contrail completed an interest rate swap transaction with Old National Bank ("ONB") with respect to the $ 43.6 million loan made to Contrail in November 2020 pursuant to the Main Street Priority Loan Facility as established by the U.S. Federal Reserve ("Contrail - Term Note G"). The purpose of the floating-to-fixed interest rate swap transaction was to effectively fix the loan interest rate at 4.68 %. As of February 24, 2022, this swap contract has been designated as a cash flow hedging instrument and qualified as an effective hedge in accordance with ASC 815. During the period between January 7, 2022 and February 24, 2022, the Company recorded a loss of approximately $ 0.1 million in the consolidated statement of income (loss) due to the changes in the fair value of the instrument prior to the designation and qualification of this instrument as an effective hedge. After it was deemed an effective hedge, the Company recorded changes in the fair value of the instrument in the consolidated statement of comprehensive income (loss). On March 30, 2023, Contrail made a prepayment of $ 6.7 million on Contrail - Term Note G. As a result of this prepayment, the Company determined that the interest rate swap on Contrail - Term Note G was no longer an effective hedge. The Company will amortize the fair value of the interest-rate swap contract included in accumulated other comprehensive income (loss) associated with Contrail - Term Note G at the time of de-designation into earnings over the remainder of its term. In addition, any changes in the fair value of Contrail - Term Note G's swap after March 30, 2023 are recognized directly into earnings. For the swaps related to Air T Term Note D and Contrail - Term Note G (prior to March 30, 2023), the effective portion of changes in the fair value on these instruments is recorded in other comprehensive income (loss) and is reclassified into the consolidated statement of income (loss) as interest expense in the same period in which the underlying hedged transactions affect earnings. The interest rate swaps are considered Level 2 fair value measurements. As of March 31, 2024 and March 31, 2023, the fair value of the interest-rate swap contracts was an asset of $ 1.9 million and $ 2.4 million, respectively, which is included within other assets in the consolidated balance sheets. During the years ended March 31, 2024 and 2023, the Company recorded a gain of approximately $ 20.0 thousand and $ 1.0 million, net of tax, respectively, in the consolidated statement of comprehensive income (loss) for changes in the fair value of the instruments. We estimate that $ 0.8 million of net unrealized gains related to the interest rate swaps included in accumulated other comprehensive (loss) income will be reclassified into earnings within the next twelve months. 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, 2024, the Company recorded $ 0.2 million gain and $ 0.4 million loss related to these derivative instruments. During the fiscal year ended March 31, 2023, the Company recorded no gain and $ 0.3 million loss related to these derivative instruments. These gains and losses are included within Corporate and other's operating expenses in the consolidated statement of income (loss). 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 (loss). 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, 2024, the Company had a gross unrealized gain aggregating to $ 1.6 million and a gross unrealized loss aggregating to $ 2.1 million. During the fiscal year ended March 31, 2023, the Company had a gross unrealized gain aggregating to $ 0.5 million and a gross unrealized loss aggregating to $ 0.9 million. These unrealized gains and losses are included within Other income (loss) in the consolidated statement of income (loss). The calculation of net unrealized gains and losses recognized during the period related to equity securities still held at the end of the period is as follows (in thousands): Year Ended March 31, 2024 2023 Net unrealized losses recognized during the period on equity securities $ ( 453 ) $ ( 389 ) Less: Net gains recognized during the period on equity securities sold during the period 20 — Net unrealized losses recognized during the reporting period on equity securities still held at the reporting date $ ( 473 ) $ ( 389 ) 61 10. EQUITY METHOD INVESTMENTS The Company’s investment in Lendway, formerly 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 August 2, 2023, Insignia reincorporated in the state of Delaware as Lendway, Inc. Subsequent to reincorporation, Lendway sold its legacy business on August 4, 2023 to pivot the business towards specialty agricultural finance. As of March 31, 2024, the number of Lendway's shares owned by the Company was 0.5 million, representing approximately 28 % of the outstanding shares. During the fiscal year ended March 31, 2024, the Company's share of Lendway's net income for the twelve months ended December 31, 2023 was $ 0.7 million. As of March 31, 2024, the Company's net investment basis in Lendway is $ 2.3 million. The Company's 20.1 % investment in CCI is accounted for 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, 2024, the Company recorded income of $ 1.1 million as its share of CCI's net income for the twelve months ended December 31, 2023, along with a basis difference adjustment of $ 50.0 thousand. The Company's net investment basis in CCI is $ 3.7 million as of March 31, 2024. Summarized audited financial information for the Company's equity method investees for the twelve months ended December 31, 2023 and December 31, 2022 are as follows (in thousands): Twelve Months Ended December 31, 2023 Twelve Months Ended December 31, 2022 Revenue $ 161,297 $ 146,399 Gross Profit 18,329 20,668 Operating income 6,643 16,631 Net income 7,849 14,256 Net income attributable to Air T, Inc. stockholders $ 1,750 $ 2,473 62 11. ACCRUED EXPENSES Year ended March 31, (In thousands) 2024 2023 Salaries, wages and related items $ 5,296 $ 4,748 Profit sharing and bonus 2,335 1,672 Other deposits 1,403 2,560 Deferred income 2,956 2,440 Other 3,521 1,713 Total $ 15,511 $ 13,133 63 12. LESSEE 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 fiscal years ended March 31, 2024 and 2023 are as follows (in thousands): Twelve Months Ended March 31, 2024 Twelve Months Ended March 31, 2023 Operating lease cost $ 2,587 $ 2,078 Short-term lease cost 873 730 Variable lease cost 828 625 Total lease cost $ 4,288 $ 3,433 Amounts reported in the consolidated balance sheets for leases where we are the lessee as of March 31, 2024 and 2023 were as follows (in thousands): March 31, 2024 March 31, 2023 Operating leases Operating lease ROU assets $ 11,376 $ 11,666 Operating lease liabilities $ 12,276 $ 12,435 Weighted-average remaining lease term Operating leases 12 years, 1 month 12 years, 10 months Weighted-average discount rate Operating leases 5.09 % 4.95 % Maturities of lease liabilities under non-cancellable leases where we are the lessee as of the fiscal year ended March 31, 2024 are as follows (in thousands): Operating Leases 2025 $ 2,336 2026 2,122 2027 1,974 2028 1,433 2029 748 Thereafter 8,227 Total undiscounted lease payments 16,840 Interest ( 3,707 ) Discount ( 857 ) Total lease liabilities $ 12,276 64 13. FINANCING ARRANGEMENTS Borrowings of the Company and its subsidiaries are summarized below at March 31, 2024 and March 31, 2023, respectively. Effective May 26, 2023, Contrail entered into the Fourth Amendment to Master Loan Agreement and the Amended and Restated Promissory Note Term Note G with ONB. The purpose of the amended documents was to replace the one-month LIBOR based interest rate with a one-month SOFR-based rate. All other material terms of the obligations remain the same. The principal amount of the loan was $ 38.2 million on the effective date of the amended documents and the applicable interest rate is now the one-month SOFR based rate, as defined in the loan agreement, plus 3.11 %. Effective May 26, 2023, Contrail entered into the First Amendment to Supplement #8 to Master Loan Agreement, the Fifth Amendment to Supplement #2 to the Master Loan Agreement and the Fourth Amended and Restated Promissory Note Revolving Note with ONB. The purpose of the amended documents was to replace the LIBOR based interest rate with a one-month SOFR based rate. All other material terms of the obligation remain the same. The maximum principal amount of the revolving note remains at $ 25.0 million and the applicable interest rate is now the one-month SOFR-based rate, as defined in the loan agreement, plus 3.56 %. On May 26, 2023, AirCo 1 executed an Amendment to Main Street Priority Loan Facility Term Loan Agreement with PSB. The Amendment replaces the three-month LIBOR benchmark applicable to the loan with a three-month SOFR based rate, which is defined as the three-month SOFR rate plus 3.26 %. The principal amount of the loan was $ 6.4 million on the effective date of the amended agreement. The interest rate is to be determined on the 11th day of each month on the amounts that remain outstanding, commencing June 11, 2023. On June 23, 2023, the Company and MBT entered into amendments to the Credit Agreement with MBT and related promissory note. The amendments extended the maturity date of the credit facility to August 31, 2024 and include the following changes: 1. A $ 2.0 million seasonal increase in the maximum amount available under the facility. The maximum amount of the facility will now increase to $ 19.0 million between May 1 and November 30 of each year and will decrease to $ 17.0 million between December 1 and April 30 of each year; 2. The reference rate for the interest rate payable on the revolving facility will change from Prime to SOFR, plus a spread. The exact spread over SOFR will change every September 30 and March 31 based on the Company calculated funded debt leverage ratio (defined as total debt divided by EBITDA). Depending on the result of the calculation, the interest rate spread applicable to the facility will range between 2.25 % and 3.25 %; 3. The unused commitment fee on the revolving credit facility will increase from 0.11 % to 0.15 %; and, 4. The covenant restricting the Company’s use of funds for “Other Investments” was revised to limit the Company to $ 5.0 million of “Other Investments” per year. On February 22, 2024 the Company, along with AAM 24-1, LLC, entered into a Note Purchase Agreement with Honeywell pursuant to which AAM 24-1 agreed to issue and sell 8.5 % senior secured notes in the aggregate principal amount of $ 15.0 million for an aggregate purchase price of $ 14.9 million. The notes bear an annual interest rate of 8.5 % which is computed on the basis of a 30/360-day year and actual days elapsed and is payable semi-annually in arrears. The maturity date of the notes is February 22, 2031. A continuing first priority lien and security interest in and to all of the Company’s right, title and interest in all of the capital stock of AAM 24-1 was created in favor of Honeywell, as collateral for the repayment of the notes. In addition, 160,000 newly-issued shares of TruPs held by AAM 24-1 are also separately pledged to Honeywell. On March 28, 2024, Contrail entered into Supplement #10 to the Master Loan Agreement with Old National Bank dated June 24, 2019 and Term Loan I. Term Loan I is a multiple advance term loan in the principal amount of $ 10.0 million and is secured by a first lien on three engines and other identified collateral recently purchased by Contrail. The loan requires Contrail to disassemble the collateral and place it in Contrail's inventory. The loan bears a monthly variable interest rate at the 30 Day Term SOFR + 3.11 %. The loan requires 18 monthly payments of interest until the loan maturity date of September 20, 2025. Principal reduction payments are due monthly in an amount equal to 100% of the amount of the gross sales proceeds collected that are derived from any of the engines or other specific collateral listed in the security agreement sold during the prior month. In addition to the first lien noted above, the loan is also secured by the current $ 2.0 million limited guarantees of the Company and Joe Kuhn. The loan may be prepaid without penalty and includes a quarterly rolling cash flow coverage ratio covenant, a tangible net worth covenant and monthly sales reporting. The loan was fully drawn at closing and the funds were used to prepay the principal balance on Contrail’s existing Main Street Loan (Term Loan G) by $ 10.0 million. The Revolver - MBT has no outstanding balance as of March 31, 2024 and matures on August 31, 2024. We are currently seeking to refinance the Revolver - MBT prior to its maturity date; 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. The following table provides certain information about the current financing arrangements of the Company's and its subsidiaries as of March 31, 2024 and 2023: (In Thousands) March 31, 2024 March 31, 2023 Maturity Date Interest Rate Unused commitments as of March 31, 2024 Air T Debt Revolver - MBT $ — $ 8,742 8/31/2024 SOFR + range of 2.25 % - 3.25 % $ 17,000 Term Note A - MBT 6,955 7,762 8/31/2031 3.42 % Term Note B - MBT 2,456 2,740 8/31/2031 3.42 % Term Note D - MBT 1,271 1,338 1/1/2028 1-month LIBOR + 2.00 % Term Note E - MBT — 800 6/25/2025 Greater of LIBOR + 1.50 % or 2.50 % Term Note F - MBT 783 983 1/31/2028 Greater of 6.00 % or Prime + 1.00 % Debt - Trust Preferred Securities 34,214 25,598 6/7/2049 8.00 % Total 45,679 47,963 AirCo 1 Debt Term Loan - Park State Bank ("PSB") 5,434 6,393 12/11/2025 3-month SOFR + 3.26 % Total 5,434 6,393 Jet Yard Debt Term Loan - MBT 1,749 1,844 8/31/2031 4.14 % Total 1,749 1,844 Contrail Debt Revolver - ONB 3,476 12,441 11/24/2025 1-month SOFR + 3.56 % 21,524 Term Loan G - ONB 14,918 38,180 11/24/2025 1-month SOFR + 3.11 % Term Note I - ONB 10,000 — 9/28/2025 1-month SOFR + 3.11 % Total 28,394 50,621 Delphax Solutions Debt Canadian Emergency Business Account Loan — 30 12/31/2025 5.00 % Total — 30 Wolfe Lake Debt Term Loan - Bridgewater 9,327 9,586 12/2/2031 3.65 % Total 9,327 9,586 Air T Acquisition 22.1 Term Loan - Bridgewater 4,000 4,500 2/8/2027 4.00 % Term Loan A - ING 1,946 2,610 2/1/2027 3.50 % Term Loan B - ING 1,081 1,088 5/1/2027 4.00 % Total 7,027 8,198 WASI Debt Promissory Note - Seller's Note 849 1,279 1/1/2026 6.00 % Total 849 1,279 AAM 24-1 Debt Promissory Notes - Honeywell 15,000 — 2/22/2031 8.50 % Total 15,000 — Total Debt 113,459 125,914 Unamortized Premiums and Debt Issuance Costs ( 533 ) ( 829 ) Total Debt, net $ 112,926 $ 125,085 Fiscal 2024's weighted average interest rate on short term borrowings outstanding was 8.88 % . The weighted average interest rate on short term borrowings outstanding as of March 31, 2023 was 7.77 %. The Company's Credit Agreement with MBT 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. On June 24, 2024, we obtained a waiver letter from MBT that waives two outstanding events of default. This Letter provides a one-time waiver for defaults resulting from our inability to meet the debt service coverage ratio as of March 31, 2024 and our failure to submit unaudited financial statements within 45 days following the quarter ending on that date. Based on the Letter, we are no longer in default of the Company's Credit Agreement with MBT. The Promissory Notes - Honeywell also contain affirmative and negative covenants, including covenants on the utilization of loan proceeds, TruPs dividends, distributions from AAM 24-1's investments and other reporting requirements. 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. At March 31, 2024, our contractual financing obligations, including payments due by period, are as follows (in thousands): Fiscal year ended Amount 2025 $ 14,358 2026 26,229 2027 5,535 2028 4,009 2029 1,738 Thereafter 61,590 113,459 Unamortized Premiums and Debt Issuance Costs ( 533 ) $ 112,926 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, 2024 and 2023, 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, 2024 and March 31, 2023 are as follows (in thousands): March 31, 2024 March 31, 2023 Contractual interest $ 6,684 $ 7,932 Amortization of deferred financing costs 324 331 Interest income ( 92 ) ( 328 ) Total $ 6,916 $ 7,935 65 14. RELATED PARTY MATTERS Contrail 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, 2023 through March 31, 2024. This lease expires on July 17, 2026. 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 $ 51.5 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, along with his affiliates (other than the Company), successors and assignees, are the majority shareholders of CCI. As of March 31, 2024, Mr. Swenson and his affiliates (other than the Company), successors and assignees owned 70.1 % of ownership interests in CCI. Under the VIE model, Mr. Swenson and his affiliates (other than the Company), successors and assignees are the primary beneficiaries 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. Air T Acquisition 22.1's term loan with Bridgewater is secured by a first lien on all of the assets of the subsidiary, a pledge of $ 5.0 million, 8.0 % TruPs, and a personal guaranty of the Company’s Chairman, President and Chief Executive Officer Nick Swenson. Air T engages Fox Lake Capital, LLC ("FLC") to perform certain consulting and brokerage services for the Company. Dan Philp, an employee of Air T, is the CEO of FLC. During the fiscal year ended March 31, 2024, the Company has paid approximately $ 0.5 million to FLC to compensate for services rendered. 66 15. EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS Air T, Inc. maintains two stock option plans for the benefit of certain eligible employees and directors. The first Air T stock option plan is the 2012 Stock Option Plan. The second Air T stock option plan is the 2020 Omnibus Stock and Incentive Plan. 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. plans 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. Air T's 2012 Stock Option Plan No options were granted under Air T, Inc.’s 2012 Stock Option Plan during the fiscal years ended March 31, 2024 and 2023. No stock-based compensation expense with respect to this plan was recognized for the year ended March 31, 2024 and 2023, respectively. At March 31, 2024, there was no unrecognized compensation expense related to the Air T's 2012 stock options. In Fiscal 2024, 3,750 options were exercised under the Air T's 2012 Stock Option Plan at $ 7.04 per share, which was disclosed within our consolidated statement of equity. No unexpired options remain outstanding under this plan as of March 31, 2024 and the Plan terminated in 2022. Options activity during the fiscal years ended March 31, 2023 and 2024 is summarized below (in thousands, except for shares): Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Life (Years) Aggregate Intrinsic Value Outstanding at March 31, 2022 11,250 $ 6.61 1.07 $ 182,000 Granted — — Exercised ( 3,750 ) 5.75 Forfeited — — Repurchased — — Outstanding at March 31, 2023 7,500 7.04 0.40 135,000 Granted Exercised ( 3,750 ) 7.04 Forfeited ( 3,750 ) 7.04 Repurchased Outstanding at March 31, 2024 — — 0.00 — Exercisable at March 31, 2024 — $ — 0.00 $ — Air T's 2020 Omnibus Stock and Incentive Plan On December 29, 2020, the Company’s Board of Directors unanimously approved the 2020 Omnibus Stock and Incentive Plan (the "Plan"), which was subsequently approved by the Company's stockholders at the August 18, 2021 Annual Meeting of Stockholders. The total number of shares authorized under the Plan is 420,000 . Among other instruments, the Plan permits the Company to grant stock option awards. Through March 31, 2024, options to purchase up to 326,000 shares have been granted under the Plan. The options vest annually over a period of ten years based on a specified service condition ("vested awards") and expire ten years after vesting. However, the ability to exercise vested awards, occurring at the conclusion of each annual vesting period, is contingent upon the Company's stock price meeting predetermined milestones outlined in the options agreements (the "market condition"). If the market condition is not fulfilled at the annual vesting period on June 30 of every year, the vested awards may not be exercisable at any subsequent point. On the preceding two vesting dates, June 30, 2023 and June 30, 2022, a total of 65,200 shares satisfied the service condition; however, they did not meet the market condition to become exercisable. Therefore, as of March 31, 2024, the remaining number of unvested options is 260,800 shares. The Company used the Black-Scholes option pricing model to value stock options granted under the Air T's 2020 Omnibus Stock and Incentive Plan and determined the grant date's fair value was $ 1.3 million. The key assumptions used in the Plan's Black-Scholes option pricing model are as follows: Risk-free interest rate 0.94 % Expected dividend yield — Expected term 10 years Expected volatility 44.29 % We do not anticipate significant forfeitures and elected to account for forfeitures as they occur. During fiscal years ended March 31, 2024 and 2023, total compensation cost recognized under the Plan was $ 0.1 million and $ 0.3 million, respectively. The unrecognized compensation cost related to nonvested awards is $ 0.5 million, which is expected to be recognized over a weighted average period of 7.25 years. 67 16. REVENUE RECOGNITION Performance Obligations Substantially all of the Company’s non-lease revenue is derived from contracts with an initial expected duration of one year or less. As a result, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price, to expense costs incurred to obtain a contract, and to not disclose the value of unsatisfied performance obligations. The following is a description of the Company’s performance obligations as of March 31, 2024: Type of Revenue Nature, Timing of Satisfaction of Performance Obligations, and Significant Payment Terms Product Sales The Company generates revenue from sales of various distinct products such as parts, aircraft equipment, printing equipment, jet engines, airframes, and scrap metal to its customers. A performance obligation is created when the Company accepts an order from a customer to provide a specified product. Each product ordered by a customer represents a performance obligation. The Company recognizes revenue when obligations under the terms of the contract are satisfied; generally, this occurs at a point-in-time upon shipment or when control is transferred to the customer. Transaction prices are based on contracted terms, which are at fixed amounts based on standalone selling prices. While the majority of the Company's contracts do not have variable consideration, for the limited number of contracts that do, the Company records revenue based on the standalone selling price less an estimate of variable consideration (such as rebates, discounts or prompt payment discounts). The Company estimates these amounts based on the expected incentive amount to be provided to customers and reduces revenue accordingly. Performance obligations are short-term in nature and customers are typically billed upon transfer of control. The Company records all shipping and handling fees billed to customers as revenue. The terms and conditions of the customer purchase orders or contracts are dictated by either the Company’s standard terms and conditions or by a master service agreement or by the contract. Support Services The Company provides a variety of support services such as aircraft maintenance, printer maintenance, and short-term repair services to its customers. Additionally, the Company operates certain aircraft routes on behalf of FedEx. A performance obligation is created when the Company agrees to provide a particular service to a customer. For each service, the Company recognizes revenues over time as the customer simultaneously receives the benefits provided by the Company's performance. This revenue recognition can vary from when the Company has a right to invoice to the output or input method depending on the structure of the contract and management’s analysis. For repair-type services, the Company records revenue over-time based on an input method of costs incurred to total estimated costs. The Company believes this is appropriate as the Company is performing labor hours and installing parts to enhance an asset that the customer controls. The vast majority of repair-services are short term in nature and are typically billed upon completion of the service. Some of the Company’s contracts contain a promise to stand ready as the Company is obligated to perform certain maintenance or administrative services. For most of these contracts, the Company applies the 'as invoiced' practical expedient as the Company has a right to consideration from the customer in an amount that corresponds directly with the value of the entity's performance completed to date. A small number of contracts are accounted for as a series and recognized equal to the amount of consideration the Company is entitled to less an estimate of variable consideration (typically rebates). These services are typically ongoing and are generally billed on a monthly basis. 68 The following table summarizes disaggregated revenues by type (in thousands): Year Ended March 31, 2024 Year Ended March 31, 2023 Product Sales Overnight air cargo $ 39,302 $ 29,493 Ground equipment sales 36,127 47,100 Commercial jet engines and parts 114,049 89,700 Corporate and other 1,123 266 Support Services Overnight air cargo 76,107 60,857 Ground equipment sales 533 587 Commercial jet engines and parts 10,727 9,539 Corporate and other 5,411 4,328 Leasing Revenue Overnight air cargo — — Ground equipment sales 49 154 Commercial jet engines and parts 64 2,365 Corporate and other 1,624 1,582 Other Overnight air cargo 137 193 Ground equipment sales 459 644 Commercial jet engines and parts 695 133 Corporate and other 427 382 Total $ 286,834 $ 247,323 See Note 19 for the Company's disaggregated revenues by geographic region and Note 20 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, our unconditional right to receive consideration in advance of performance with respect to subscription revenue and advanced customer deposits with respect to product sales. The following table presents outstanding contract liabilities as of April 1, 2023 and March 31, 2024 and the amount of contract liabilities that were recognized as revenue during the year ended March 31, 2024 (in thousands): Outstanding Contract Liabilities Outstanding Contract Liabilities Recognized as Revenue As of March 31, 2024 $ 4,359 As of April 1, 2023 $ 5,000 For the Year ended March 31, 2024 $ ( 4,519 ) 69 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 fiscal years ended March 31, 2024 and 2023 was approximately $ 0.9 million and $ 0.7 million, respectively, and was recorded in the consolidated statements of income (loss). The Company, in each of the past three years, has paid a discretionary profit sharing bonus in which all employees have participated. Profit sharing expense in fiscal 2024 and 2023 was approximately $ 2.2 million and $ 2.4 million, respectively, and was recorded in general and administrative expenses in the consolidated statements of income (loss). 70 18. INCOME TAXES Loss from continuing operations before income taxes as shown in the Consolidated Statements of Income (Loss) consists of the following: Year Ended March 31, 2024 2023 Domestic $ ( 3,468 ) $ ( 10,566 ) Foreign ( 487 ) ( 787 ) Total $ ( 3,955 ) $ ( 11,353 ) Income tax expense (benefit) attributable to pretax loss from continuing operations consists of (in thousands): Year Ended March 31, 2024 2023 Current: Federal $ 23 $ 46 State ( 226 ) 150 Foreign 902 845 Total current 699 1,041 Deferred: Federal 126 29 State ( 13 ) ( 442 ) Foreign ( 83 ) ( 196 ) Total deferred 30 ( 609 ) Total $ 729 $ 432 Income tax expense attributable to pretax loss from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 21.0 % to pretax loss from continuing operations as follows (in thousands): Year Ended March 31, 2024 2023 Expected Federal income tax benefit U.S. statutory rate $ ( 831 ) 21.0 % $ ( 2,384 ) 21.0 % Foreign rate differential 399 - 10.1 % ( 25 ) 0.2 % State income taxes, net of federal benefit ( 125 ) 3.2 % ( 558 ) 4.9 % Micro-captive insurance benefit ( 306 ) 7.7 % ( 274 ) 2.4 % Change in valuation allowance 1,909 - 48.3 % 3,149 - 27.7 % Income attributable to minority interest - Contrail ( 217 ) 5.5 % 190 - 1.7 % Other differences, net ( 100 ) 2.5 % 334 - 2.9 % Income tax expense $ 729 - 18.5 % $ 432 - 3.8 % The Company did not record any liabilities for uncertain tax positions for the fiscal years ended March 31, 2024 and March 31, 2023. The Tax Cuts and Jobs Act (the "Tax Act") provides for a territorial tax system, that includes the global intangible low-taxed income (“GILTI”) provision beginning in 2018. The GILTI provisions require us to include in our U.S. income tax return certain current year foreign subsidiary earnings net of foreign tax credits, subject to limitation. We elected to account for the GILTI tax in the period in which it is incurred. There was no GILTI inclusion for the fiscal years ended March 31, 2024 and March 31, 2023. The Company (exclusive of Delphax which has a full valuation allowance) has federal gross operating losses of $ 8.4 million and state gross operating losses of $ 13.7 million, and foreign gross operating losses of $ 8.2 million at March 31, 2024. These net operating losses will begin to expire in tax year 2031. The Company has foreign tax credits of $ 0.7 million that will begin to expire in tax year 2029. Deferred tax assets and liabilities were comprised of the following (in thousands): Year Ended March 31, 2024 2023 Net operating loss & attribute carryforwards $ 9,414 $ 5,968 Unrealized losses on investments 1,055 1,740 Inventory reserve 1,041 851 Accrued vacation 449 421 Foreign tax credit 650 391 Investment in partnerships — 1,723 Lease liabilities 2,913 3,000 Other deferred tax assets 792 374 Total deferred tax assets 16,314 14,468 Property and equipment ( 1,735 ) ( 1,804 ) Right-of-use assets ( 2,703 ) ( 2,815 ) Capital gain deferment ( 1,763 ) ( 1,799 ) Foreign intangible assets ( 2,089 ) ( 2,159 ) Other deferred tax liabilities ( 498 ) ( 301 ) Total deferred tax liabilities ( 8,788 ) ( 8,878 ) Net deferred tax assets 7,526 5,590 Less valuation allowance ( 9,973 ) ( 8,007 ) Net deferred tax liabilities $ ( 2,447 ) $ ( 2,417 ) The Company is not asserting indefinite reinvestment with regards to foreign earnings in the Netherlands. The Company has not recorded deferred taxes associated with these undistributed earnings as the impact of any future distribution will not have a material tax impact. The Company continues to assert that it will permanently reinvest all other foreign earnings, including basis differences of all the Company's foreign subsidiaries. As a result of its permanent reinvestment assertion, the Company has not recorded deferred taxes related to its foreign subsidiaries under the indefinite exception. The Company has not determined the deferred tax liability associated with these undistributed earnings and basis differences, as such determination is not practicable. Valuation Allowance Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended March 31, 2024. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of March 31, 2024, a valuation allowance of $ 10.0 million (inclusive of the Delphax entities’ valuation allowances that were discussed above) has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. The Organization for Economic Co-operation and Development ("OECD") has introduced a framework to implement a global minimum tax. Several jurisdictions in which the Company operates have enacted laws effective January 1, 2024, consistent with the OECD's framework. While details around the global minimum tax in each jurisdiction are uncertain, the Company does not anticipate being subject to the global minimum tax in the upcoming fiscal year. Delphax Effective on November 24, 2015, Air T, Inc. purchased interests in Delphax. With an equity investment level by the Company of approximately 67 %, Delphax is required to continue filing a separate United States corporate tax return. Delphax maintains a September 30 fiscal year end, and the returns for the fiscal years ended September 30, 2023 have not been filed. The gross deferred tax balances related to Delphax includes federal and state loss carryforwards of $ 8.5 million and $ 1.7 million, respectively. The net operating losses expire in varying amounts beginning in the tax year 2027. The provisions of ASC 740 require an assessment of both positive and negative evidence when determining whether it is more-likely-than-not that deferred tax assets will be recovered. In accounting for Delphax's tax attributes, the Company has established a full valuation allowance of $ 1.8 million at March 31, 2024, and $ 1.9 million at March 31, 2023. The cumulative tax losses incurred by Delphax in recent years was the primary basis for the Company’s determination that a full valuation allowance should be established against Delphax’s net deferred tax assets. 71 19. GEOGRAPHICAL INFORMATION Total tangible long-lived assets, net of accumulated depreciation, located in the United States, the Company's country of domicile, and similar tangible long-lived assets, net of accumulated depreciation, held outside the United States are summarized in the following table as of March 31, 2024 and March 31, 2023 (in thousands): March 31, 2024 March 31, 2023 United States $ 20,807 $ 21,433 Foreign 306 89 Total tangible long-lived assets, net $ 21,113 $ 21,522 The Company’s tangible long-lived assets, net of accumulated depreciation, held outside of the United States represent primarily assets on lease at March 31, 2024. The net book value located within each individual country at March 31, 2024 is listed below (in thousands): Country March 31, 2024 March 31, 2023 Thailand $ 252 $ — Other 54 89 Total tangible long-lived assets, net $ 306 $ 89 Total revenue, located in the United States, and outside the United States is summarized in the following table as of March 31, 2024 and March 31, 2023 (in thousands): March 31, 2024 March 31, 2023 United States $ 246,626 $ 199,572 Foreign 40,208 47,751 Total revenue $ 286,834 $ 247,323 72 20. SEGMENT INFORMATION The Company has four reportable segments: overnight air cargo, ground equipment sales, commercial jet engine and parts, and corporate and other. Segment data is summarized as follows (in thousands): (In Thousands) Year Ended March 31, 2024 2023 Operating Revenues: Overnight Air Cargo: Domestic $ 114,809 $ 90,370 International 737 173 Total Overnight Air Cargo 115,546 90,543 Ground Equipment Sales: Domestic 32,677 38,652 International 4,491 9,833 Total Ground Equipment Sales 37,168 48,485 Commercial Jet Engines and Parts: Domestic 95,210 67,599 International 30,325 34,138 Total Commercial Jet Engines and Parts 125,535 101,737 Corporate and Other: Domestic 3,930 2,952 International 4,655 3,606 Total Corporate and Other 8,585 6,558 Total 286,834 247,323 Operating Income (Loss): Overnight Air Cargo 6,765 4,047 Ground Equipment Sales ( 1,553 ) 3,141 Commercial Jet Engines and Parts 4,169 ( 957 ) Corporate and Other ( 8,117 ) ( 10,638 ) Total 1,264 ( 4,407 ) Capital Expenditures: Overnight Air Cargo 535 307 Ground Equipment Sales 131 35 Commercial Jet Engines and Parts 238 572 Corporate and Other 172 293 Total 1,076 1,207 Depreciation and Amortization: Overnight Air Cargo 366 115 Ground Equipment Sales 144 164 Commercial Jet Engines and Parts 756 2,382 Corporate and Other 1,532 1,501 Total $ 2,798 $ 4,162 The table below provides a reconciliation of operating income (loss) to Adjusted EBITDA for the fiscal years ended March 31, 2024 and 2023 (in thousands): Fiscal year 2024 Fiscal year 2023 Operating income (loss) from continuing operations 1,264 ( 4,407 ) Depreciation and amortization (excluding leased engines depreciation) 2,798 2,525 Asset impairment, restructuring or impairment charges 1,195 7,840 Loss on sale of property and equipment 18 8 TruPs issuance expenses 347 63 Adjusted EBITDA $ 5,622 $ 6,029 73 21. EARNINGS PER COMMON SHARE Basic earnings per share has been calculated by dividing net income (loss) attributable to Air T, Inc. stockholders by the weighted average number of common shares outstanding during each period. For purposes of calculating diluted earnings per share, shares issuable under stock options were considered potential common shares and were included in the weighted average common shares unless they were anti-dilutive. The computation of earnings per common share is as follows (in thousands, except per share data): Year Ended March 31, 2024 2023 Net Loss $ ( 4,684 ) $ ( 11,785 ) Net income attributable to non-controlling interests ( 2,135 ) ( 510 ) Net loss attributable to Air T, Inc. Stockholders ( 6,819 ) ( 12,295 ) Loss per share: Basic $ ( 2.42 ) $ ( 4.32 ) Diluted $ ( 2.42 ) $ ( 4.32 ) Antidilutive shares excluded from computation of loss per share — 5 Weighted Average Shares Outstanding: Basic 2,816 2,847 Diluted 2,816 2,847 22. COMMITMENTS AND CONTINGENCIES Contrail Put/Call Option Contrail entered into an Operating Agreement in connection with the acquisition of Contrail providing for the governance of and the terms of membership interests in Contrail and including put and call options with the Seller of Contrail. The Contrail Put/Call Option permits the Seller to require Contrail to purchase all of the Seller’s equity membership interests in Contrail commencing on the fifth anniversary of the acquisition, which was on July 18, 2021. The Company has presented this redeemable non-controlling interest in Contrail between the liabilities and equity sections of the accompanying consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Contrail RNCI is a Level 3 fair value measurement that is valued at $ 7.4 million as of March 31, 2024. The change in the redemption value compared to March 31, 2023 is a decrease of $ 0.5 million. The decrease was driven by $ 1.3 million of the net change in fair value and $ 0.2 million of distributions, offset by $ 1.0 million of net income attributable to the non-controlling interest. After March 31, 2024 and before the financial statements were issued, Contrail redeemed 16 % of the 21 % of the Seller's interest for consideration consisting of a promissory note and an earnout. Immediately following the redemption transaction, the Put/Call Option in the Operating Agreement was amended so that the remaining 5 % interest in Contrail will be redeemable based on an amount other than fair value. Refer to Note 2 5 , Subsequent Events, for additional details on the transaction. Contrail Asset Management, LLC and CJVII, LLC On May 5, 2021, the Company formed an aircraft asset management business called Contrail Asset Management, LLC (“CAM”), and an aircraft capital joint venture called CJVII, LLC (“CJVII”). The venture focuses on acquiring commercial aircraft and jet engines for leasing, trading and disassembly. The joint venture, CJVII, was formed as a series LLC ("CJVII Series"). It consists of several individual series that target investments in current generation narrow-body aircraft and engines, building on Contrail’s origination and asset management expertise. CAM was formed to serve two separate and distinct functions: 1) to direct the sourcing, acquisition and management of aircraft assets owned by CJVII Series as governed by the Management Agreement between CJVII and CAM (“Asset Management Function”), and 2) to directly invest into CJVII Series alongside other institutional investment partners (“Investment Function”). CAM has two classes of equity interests: 1) common interests and 2) investor interests. Neither interest votes as the entity is operated by a Board of Directors. The common interests of CAM relate to its Asset Management Function. The investor interests of CAM relate to the Company’s and MRC's investments through CAM into CJVII (the Investment Function) and 74 ultimately into the individual CJVII Series. With regard to CAM’s common interests, the Company currently owns 90 % of the economic common interests in CAM, and MRC owns the remaining 10 %. MRC invested $ 1.0 million directly into CAM in exchange for 10 % of the common interests. For the Asset Management Function, CAM receives origination fees, management fees, consignment fees (where applicable) and a carried interest from the direct investors into each CJVII Series. Such fee income and carried interest will be distributed to the Company and MRC in proportion to their respective common interests. For its Investment Function, CAM’s initial commitment to CJVII was approximately $ 51.0 million. The Company and MRC have commitments to CAM in the respective amounts of $ 7.0 million and $ 44.0 million. These represent the investor interests of CAM, separate and distinct from the common interests. Any investment returns on CAM’s investor interests are shared pro-rata between the Company and MRC for each individual investment at the CJVII Series. As of March 31, 2023, Air T fulfilled its Investment Function initial commitment to CAM. Per its Operating Agreement, CAM is comprised of only two Series: the Onshore and the Offshore Series. Participation in each is determined solely based on whether a potential investment at the CJVII Series is a domestic (Onshore) or international (Offshore) investment. As of March 31, 2024, for its Investment Function, the Company has contributed $ 10.6 million to CAM’s Offshore Series and $ 1.0 million to CAM’s Onshore Series. The Company determined that CAM is a variable interest entity and that the Company is not the primary beneficiary. This is primarily the result of the Company's conclusion that it does not control CAM’s Board of Directors, which has the power to direct the activities that most significantly impact the economic performance of CAM. Accordingly, the Company does not consolidate CAM and has determined to account for this investment using equity method accounting. As of March 31, 2024, the Company's net investment basis in CAM is $ 7.4 million. In connection with the formation of CAM, MRC has a fixed price put option of $ 1.0 million to sell its common equity in CAM to Air T at each of the first three ( 3 ) anniversary dates. At the later of (a) five ( 5 ) years after execution of the agreement and (b) distributions to MRC per the waterfall equal to their capital contributions, Air T has a call option and MRC has a put option on the MRC common interests in CAM. If either party exercises the option, the exercise price will be fair market value if Air T pays in cash at closing or 112.5 % of fair market value if Air T opts to pay in three ( 3 ) equal annual installments after exercise. The Company previously recognized $ 1.0 million within “ Other non-current liabilities ” with an offset to equity as of March 31, 2022. We subsequently reviewed this accounting treatment and determined that there was no loss contingency that existed under ASC 450 as we did not expect the $ 1.0 million put option to be exercised in the money to MRC. As such, as of March 31, 2023, the Company reversed the $ 1.0 million previously recorded. This matter was not material to our consolidated financial statements for any quarterly or annual periods. With respect to the secondary put and call option, as it is priced at fair value, the Company also determined that there is no potential loss or gain upon exercise that would need to be recognized. Shanwick Put/Call Option In February 2022, in connection with the Company's acquisition of GdW, a consolidated subsidiary of Shanwick, the Company entered into a shareholder agreement with the 30 % non-controlling interest owners of Shanwick, providing for the governance of and the terms of membership interests in Shanwick. The shareholder agreement includes the Shanwick Put/Call Option with regard to the 30 % non-controlling interest. The non-controlling interest holders are the executive management of the underlying business. The Shanwick Put/Call Option grants the Company an option to purchase the 30 % interest at the call option price that equals to the average EBIT over the 3 Financial Years prior to the exercise of the Call Option multiplied by 8. In addition, the Shanwick Put/Call Option also grants the non-controlling interest owners an option to require Air T to purchase from them their respective ownership interests at the Put Option price, that is equal to the average EBIT over the 3 Financial Years prior to the exercise of the Put Option multiplied by 7.5. The Call Option and the Put Option may be exercised at any time from the fifth anniversary of the shareholder agreement and then only at the end of each fiscal year of Air T. The Company has presented this redeemable non-controlling interest in Shanwick between the liabilities and equity sections of the accompanying consolidated balance sheets. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the estimated redemption value at the end of each reporting period. As the Shanwick RNCI will be redeemed at established multiples of EBIT, it is considered redeemable at other than fair value. Changes in its estimated redemption value are recorded on our consolidated statements of operations within non-controlling interests. The Shanwick RNCI's estimated redemption value is $ 5.5 million as of March 31, 2024, which was comprised of the following (in thousands): 75 Shanwick's Redeemable Non-Controlling Interest Beginning Balance as of April 1, 2023 $ 4,738 Contribution from non-controlling members — Distribution to non-controlling members ( 326 ) Net income attributable to non-controlling interests 419 Redemption value adjustments 709 Ending Balance as of March 31, 2024 $ 5,540 23. GUARANTEES Financial Guarantees Our financial guarantees consist of debt obligations of certain CJVII Series. Expiration dates vary through 2028, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the series to fulfill its obligation covered by the guarantee. We are entitled to recover from amounts paid by us under the guarantees by other unrelated institutional investment partners ("CJVII Series investors"), up to their pro rata ownership of the CJVII Series. The maximum potential payments for financial guarantees was $ 13.6 million as of March 31, 2023. In February 2024, the Company was released of its obligations from these financial guarantees. As a result, the maximum potential payments for financial guarantees was $ 0 as of March 31, 2024. Financial guarantees and indemnifications are recorded at fair value at their inception. Subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. Nonfinancial Guarantees From time to time, we may issue guarantees or indemnifications to third parties assuring performance of lease agreements pertaining to aircraft assets owned by certain CJVII Series ("nonfinancial guarantees"). Air T's performance under these guarantees would be triggered by failure of the series to perform in accordance with the terms stated in the lease agreements. Nonfinancial guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable that we will be required to perform under a guarantee or indemnity, the amount of probable payment will be recorded. The maximum potential payments for nonfinancial guarantees may vary over time given changing circumstances related to the underlying asset. The maximum potential payments for nonfinancial guarantees were $ 10.1 million and $ 4.0 million at March 31, 2024 and March 31, 2023, respectively. The carrying value of recorded liabilities related to nonfinancial guarantees was $ 0 at both March 31, 2024 and March 31, 2023. 24. SHARES REPURCHASE On May 14, 2014, the Company announced that its Board of Directors had authorized a program to repurchase up to 750,000 (retrospectively adjusted to 1,125,000 after the stock split on June 10, 2019) shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions, in compliance with SEC Rule 10b-18, over an indefinite period. During the year ended March 31, 2024, the Company repurchased 48,729 shares at an aggregate cost of $ 0.9 million, in which all were recorded as treasury shares. The Company has a total of 256,850 treasury shares as of March 31, 2024. On August 16, 2022, President Biden signed the Inflation Reduction Act ("IRA") into law. The IRA enacted a 15% corporate minimum tax rate (subject to certain thresholds being met) that was applicable to the Company beginning Fiscal 2024, a 1% excise tax on share repurchases made after December 31, 2022 (subject to certain thresholds being met), and created and extended certain tax-related energy incentives. The Company does not currently expect that the tax-related provisions of the IRA will have a material impact on its consolidated financial statements. As a result of the IRA's enactment into law, the Company is now subject to a 1% excise tax on share repurchases, effective for share repurchases made after December 31, 2022. This excise tax may be reduced for the value of certain share issuances. The excise tax incurred in connection with the Company's stock repurchases during Fiscal 2024 was no t material. 76 25. SUBSEQUENT EVENTS Contrail RNCI Redemption On May 30, 2024, Contrail entered into a Membership Interest Redemption and Earnout Agreement (the “Redemption Agreement”) with the Seller. Pursuant to the Redemption Agreement, Contrail agreed to purchase and redeem from the Seller, 16 % of its 21 % interest in Contrail, with the earnout period being retroactive to April 1, 2024. The purchase price for the redeemed interest is $ 4.6 million in the form of a secured, subordinated promissory note, plus an earnout amount. Interest accrues on the principal amount at an annual rate equal to the 10 year Treasury bond yield, adjusted on each anniversary date of the note, plus 3.75 %, compounded monthly. The promissory note consists of a 12 month interest only period commencing on May 1, 2024, followed by a three year amortization period for the remaining balance of the note. Under the Redemption Agreement, the Seller is also entitled to an annual earnout payment equal to 9.14 % of Contrail’s adjusted EBITDA over $ 7.0 million in each fiscal year beginning March 31, 2025 and through March 31, 2029. Pursuant to the Redemption Agreement, Contrail is required to calculate earnout payments annually within 30 days following completion of the annual audits of the Company and Contrail and payment of any amount due is required following satisfaction of a procedure to address any objections to the calculated amount. Similar to payments under the note, earnout payments are subordinated and subject to the payment in full of all then outstanding senior debt and no earnout payment may be made if such payment causes or would cause a loan default or if a loan default exists. In such case, any earnout payments would be deferred until Contrail is no longer reasonably at risk of a loan default or has been authorized by the lender to resume payments. Any deferred earnout payment will accrue interest at a rate equal to the note rate. In connection with the Redemption Agreement, the parties agreed to certain technical amendments to the First Amended and Restated Operating Agreement of Contrail and entered into a new Put and Call Agreement with respect to the remaining 5 % interest in Contrail held by the Seller. Pursuant to the new Put and Call Agreement, commencing April 1, 2026 and at any time thereafter, either Contrail or the Seller has the option to elect by written notice to purchase or sell all of the remaining 5 % interest in Contrail held by the Seller. The purchase price for the 5 % interest is equal to 5 % of the Contrail Equity Value, which is defined as an amount equal to nine times the average Adjusted EBITDA of Contrail’s most recent three completed fiscal years at the time an option notice is delivered. The purchase price for the 5 % interest is to be paid in equal quarterly installments over a three-year period, together with interest at the then current ten-year Treasury bond yield plus 2.5 %, adjusted annually. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None