AIR T INC

Following is a table detailing non-operating income (expense) during the year ended March 31, 2026 compared to the same twelve months in the prior fiscal year (in thousands):

The Company had a net non-operating income of $97.2 million for the fiscal year ended March 31, 2026 compared to a net non-operating loss of $6.9 million in the prior fiscal year. The increase in non-operating income was driven by the $111.2 million gain on bargain purchase of Rex during fiscal 2026, a $3.4 million decrease in operating results allocated to the Company from its equity method investments and an increase in interest expense of $3.7 million driven by additional borrowings on the AAM 24-1 promissory notes and the ATA 25.1 term note entered into during fiscal 2026. Refer to Note 10 and Note 13, respectively, of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K.

The gain on bargain purchase recognized in connection with the Rex Acquisition is a non-cash accounting gain recognized under ASC 805 because the acquisition-date fair value of the net assets acquired exceeded the consideration transferred. The gain does not represent cash generated by Rex or operating income from Rex’s business. For the fiscal year ended March 31, 2026, the Company reported an operating loss of $11.2 million, including a $14.2 million operating loss from the regional airline segment for the period from December 18, 2025 through March 31, 2026. The $111.2 million bargain purchase gain increased non-operating income and was the primary reason the Company reported earnings before income taxes of $86.0 million and net income of $78.0 million. Without this non-cash accounting gain, the Company would have reported a loss before income taxes of approximately $25.2 million for fiscal 2026. The gain also materially contributed to the increase in the Company’s stockholders’ equity from a deficit of $3.2 million at March 31, 2025 to $79.8 million at March 31, 2026.

Income Taxes

During the year ended March 31, 2026, the Company recorded $1.4 million of income tax expense, which yielded an effective rate of 1.6%. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company’s effective tax rate for the fiscal year ended March 31, 2026 was the bargain purchase gain from the acquisition of Rex and changes in valuation allowance. The net change in the valuation allowance was $10.9 million for the year ended March 31, 2026. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. The change in the Company’s valuation allowance is primarily due to the realizability of the domestic deferred tax assets, the unrealized losses on investments, the foreign tax credits generated by the operations in the Company’s Puerto Rico branch that is expected to expire before being fully utilized, the change in full valuation allowances associated with the Delphax entities, and the establishment of a full valuation allowance from on the deferred tax assets of Rex.

During the fiscal year ended March 31, 2025, the Company recorded $0.4 million of income tax expense at an effective tax rate of (8.5)%. The primary factors contributing to the difference between the federal statutory rate of 21.0% and the Company’s effective tax rate for the fiscal year ended March 31, 2025 were the foreign rate differentials and changes in valuation allowance. The net change in the valuation allowance was $1.1 million for the year ended March 31, 2025. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. The change in the Company’s valuation allowance is primarily due to the realizability of the domestic deferred tax assets, the unrealized losses on investments, the foreign tax credits generated by the operations in the Company’s Puerto Rico branch that is expected to expire before being fully utilized, and the change in full valuation allowances associated with the Delphax entities.

Market Outlook

Future economic developments such as inflation, along with evolving trade policies, the potential for new or increased tariffs, and impact from geopolitical events present uncertainty and risk with respect to our financial condition and results of operations. We expect that issues caused by economic and business uncertainty will continue to some extent. 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, present material uncertainty and risk with respect to us and our results of operations.

Liquidity and Capital Resources

As of March 31, 2026, the Company held approximately $25.3 million in cash and cash equivalents and restricted cash, of which, $4.8 million is reserved as collateral under the terms of certain merchant facilities. The Company has an aggregate of approximately $57.3 million in available funds under its lines of credit as of March 31, 2026.

As of March 31, 2026, the Company’s working capital amounted to $64.5 million, an increase of $33.6 million compared to March 31, 2025, primarily driven by a $38.6 million increase in inventory, a $14.4 million increase in cash and cash equivalents, and a $16.0 million increase in accounts receivable, partially offset by a $33.0 million increase in accrued expenses and other current liabilities and a $19.2 million increase in accounts payable. The increases in accounts receivable, accounts payable, and accrued expenses and other current liabilities are substantially a result of the acquisition of Rex. The increase in inventory was primarily attributable to the Rex acquisition and purchases of engines and airframes by the commercial aircraft, engines and parts segment, and the increase in cash and cash equivalents was primarily driven by proceeds from debt.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, in connection with the acquisition of Royal on May 15, 2025, the Alerus Loan Parties under the Revolving Credit Agreement with Alerus entered into Amendment No. 4 to Credit Agreement and Consent and Term Loan C with Alerus in the amount of $1.1 million. The purpose of the Amendment and Term Note was to provide a term loan to finance the full purchase price of the acquisition, to add Royal as a part of the Alerus Loan Parties to the Alerus credit agreement, as amended and to memorialize Alerus’ consent to the Royal acquisition. The new term loan matures May 15, 2030 and bears interest at the greater of five (5.0%) percent or the CME one-month term SOFR rate plus 2.25%. Monthly payments on Term Note C commenced June 15, 2025 and are equal to $12.5 thousand plus accrued interest. The term loan is secured by the terms of the Security Agreement dated as of August 29, 2024.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, on May 30, 2025, the Company, along with its wholly owned subsidiary AAM 24-1 (the "Issuer"), entered into new transaction documents with the Institutional Investors that replaced the Second NPA transaction documents. Pursuant to the Third NPA with the Institutional Investors, the Issuer agreed to issue and sell a Multiple Advance Senior Secured Note in an aggregate principal amount of up to $100.0 million (the “Multiple Advance Note”). For purposes of clarity and the avoidance of doubt, as of the closing date, the Institutional Investors advanced an additional $10.0 million to the Issuer and, as of March 31, 2026, have collectively advanced under the Multiple Advance Note to the Issuer the aggregate amount of $40.0 million. Provided no default or event of default of the Issuer exists, and subject to satisfaction of all requirements for any closing as set forth in the Third NPA, the Investors are obligated to advance to the Issuer an additional aggregate $60.0 million in $10.0 million increments, each on or within fifteen days of the following dates:

The Multiple Advance Note bears annual interest at a 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, pursuant to the terms of the Multiple Advance Note. The maturity date of the Multiple Advance Note is May 31, 2035. The Multiple Advance Note contains standard and customary events of default including, but not limited to, failure to make payments when due under the Multiple Advance Note, failure to comply with certain covenants contained in the Multiple Advance Note, or bankruptcy or insolvency of, or certain monetary judgments against the Issuer or the Company. The prior notes were cancelled and replaced by the Multiple Advance Note. Funds advanced under the Multiple Advance Note may be reinvested for a period of six years from the date of closing.

The Issuer may prepay all or a portion of the outstanding principal and accrued but unpaid interest at any time, provided that (i) if the Issuer prepays all or any portion of the Multiple Advance Note within one year from the Issue Date, the Issuer is required to pay the Investors a prepayment premium equal to two percent (2.0%) of the amount being prepaid, and (ii) if the Issuer prepays all or any portion of the Multiple Advance Note after the first anniversary of the Issue Date but on or prior to the second anniversary of the Issue Date, the Issuer is required to pay the Investors a prepayment premium equal to one percent (1.0%) of the amount being prepaid. If the Issuer elects to prepay a portion of the outstanding principal and accrued but unpaid interest, then in no event can such prepayment be for an amount less than $1.0 million.

The various equity interests that were assigned by the Company to the Issuer on or about the closing date of the original financings continue to serve as collateral for the repayment of the Multiple Advance Note as does all of the issued and outstanding capital stock of the Issuer owned by the Company, and the 320,000 Trust Preferred Securities, held by the Issuer. As of March 31, 2026, the Issuer was in compliance with all applicable covenants under the Multiple Advance Note, and an additional $20.0 million was advanced under the facility in $10.0 million increments in October 2025 and March 2026.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, on September 3, 2025, the Alerus Loan Parties under the Revolving Credit Agreement with Alerus entered into Amendment No. 5 to Credit Agreement, the Amended and Restated Revolving Credit Note, and the Amended and Restated Term Note A. Pursuant to Amendment No. 5 to Credit Agreement, the Overline Note provisions and note were eliminated. Pursuant to the Amended and Restated Revolving Credit Note, the revolving credit commitment to make revolving credit loans and to issue letters of credit was increased to an aggregate principal amount not to exceed $20.0 million. The interest rate on the Revolving Credit Note was decreased to the greater of 5.00% or 1-month SOFR plus 1.90%. The maturity date was extended to August 28, 2027. The financial covenants are to be measured semi-annually at December and March of each year and the Alerus Loan Parties are to deliver quarterly financial statements to Alerus. Pursuant to the Amended and Restated Term Note A, Term Note A was amended and restated by the Alerus Loan Parties in the principal amount of $9.2 million. The maturity date remains August 15, 2029. The Term Note A interest rate was revised to 1-month SOFR plus 2.00%. As of December 31, 2025, the Company was in compliance with all covenants applicable under the Revolving Credit Agreement, the Amended and Restated Revolving Credit Note, and the Amended and Restated Term Note A.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, on November 24, 2025, the Company's wholly-owned subsidiary ATA 22.1 entered into a $6.0 million term loan with Alerus. The loan proceeds were used to repay amounts due on the $3.5 million term loan from Bridgewater Bank. The new term loan is due on or before November 24, 2032 and has an interest rate of the greater of 5.00% or 1-month SOFR plus 1.90%. Interest on the outstanding principal amount of the loan is due on the 15th day of each month and annual principal payments are due on September 30th of each year, commencing September 2026. The loan may be prepaid at any time without penalty. The loan is secured by all the assets and membership interests of ATA 22.1 and 200,000 shares of TruPs owned by ATA 22.1, as well as an investment account of Air T. Events of default of the loan are enumerated in the loan agreement, including, among other events, the failure to pay an amount due timely or a change of control transaction. The covenants include: (i) affirmative covenants such as notice, reporting and financial statement delivery requirements, inspection rights, compliance with environmental laws, performance of contracts and a liquidity requirement of not less than $0.4 million; and, (ii) negative covenants such as a limitation on debt and liens, merger or change of control and limitations on investments, dispositions, sales/leasebacks, restricted payments, prepayments or amendments of debt and transactions with affiliates and restrictive agreements. As of March 31, 2026, ATA 22.1 and the Company were in compliance with all financial and non-financial covenants applicable under the term loan.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, on November 24, 2025, Contrail entered into a Master Loan Agreement and Supplement No. 1 to Master Loan Agreement (collectively the “Master Loan Agreement”) with Alerus. The agreement provides for a $15.0 million revolving loan facility that is evidenced by a Promissory Note Revolving Note dated November 24, 2025 in the principal amount of $15.0 million. The funds are to be used for the purchases of engines and working capital needs. The revolving loan carries interest at the rate of 1-month SOFR plus 3.11% and the loan requires payments of interest only until maturity at November 24, 2027. There is no penalty on prepayment and the loan includes a 30-day resting period requirement if Contrail’s debt service coverage ratio exceeds 1.25 to 1.00. The loan contains normal and customary default provisions and is secured by a security interest in all of Contrail’s assets. In addition, the loan is secured by a payment guaranty of Air T, in an aggregate amount not to exceed $2.0 million plus collection and collateral recovery costs. The Master Loan Agreement contains additional terms regarding the transaction, including affirmative covenants such as a requirement related to the delivery of annual audited and quarterly unaudited financial statements of Contrail and Air T; the right to inspect, examine and appraise collateral; insurance requirements as well as negative covenants such as making restricted payments other than permitted redemptions, indebtedness, mergers and acquisitions, investments, lines of business and transactions with affiliates as well as change of control restrictions. As of March 31, 2026, Contrail and the Company were in compliance with all financial and non-financial covenants applicable under the Master Loan Agreement.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, on December 15, 2025, the Company and its wholly-owned subsidiary Air T Acquisition 25.1, LLC ("ATA 25.1"), entered into a Note Purchase Agreement (the “Agreement”) with two Institutional Investors (the "Investors"), which Investors had previously entered into the Third Note Purchase Agreement with the Company. Pursuant to the Agreement, ATA 25.1 issued to the Investors a 11.5% Senior Secured Note due December 15, 2031 in the aggregate principal amount of $40.0 million (the “Investor Note”). The loan proceeds were made immediately available to ATA 25.1’s wholly-owned subsidiary Air T Lending 25.1, LLC, (“ATL 25.1”) and used to provide financing to Rex pursuant to the Syndicated Loan Note Subscription Agreement – Project Mustang dated December 17, 2025 between and among ATL 25.1, Rex and additional parties (the “New Cap Note Facility”). The New Cap Note Facility provides a A$50.0 million line of credit, matures on December 15, 2030, and bears interest at 12.0% per annum. Interest on the New Cap Note Facility must be paid equally between cash and capitalization (i.e., paid-in-kind through the issuance of additional debt), during the initial period, as defined in the Intercreditor Deed (i.e., the period commencing on December 17, 2025 and ending on the earlier of the date the applicable availability period in the New Facility Agreement (as defined below) has ended and the facilities under such loan agreement are fully drawn). Interest under the New Cap Note Facility is first payable on December 31, 2025, and such interest is payable quarterly thereafter. The New Cap Note Facility further permits the Rex Companies to incur other unsecured financial indebtedness up to an aggregate limit of A$10.0 million. Interest on the Investor Note accrues at the rate of 11.5% per annum on the basis of a 30/360-day year (and actual days elapsed) and is payable quarterly in arrears. The Investor Note matures on December 15, 2031 and may not be prepaid, in whole or in part, prior to June 15, 2027 unless the prepayment premium specified therein has been paid. The Investor Note is secured by a pledge of all equity interests of ATA 25.1 and is guaranteed by the Company, which guarantee generally covers 25% of principal and interest due under the Investor Note and related documents. The Agreement includes customary covenants and events of default and restricts, among other things, change of control transactions, dividends and other restricted payments by ATA 25.1. In connection with the Investor Note, the Company, ATA 25.1, Air T Rex Acquisition, Inc., a wholly-owned subsidiary of ATA 25.1 ("Air T Rex"), and the Investors entered into a Contingent Payment Agreement that provides the Investors with the right to receive up to A$8.0 million (the "Maximum Contingent Payment Amount") of contingent payments after the Investor Note has been repaid in full, based on the gross revenues of Air T Rex and its direct and indirect subsidiaries on a consolidated basis. Upon full repayment of the Investor Note, ATA 25.1 shall pay the Investors contingent payments equal to 0.5% of the aggregate gross revenue of Air T Rex and its direct and indirect subsidiaries for each fiscal year beginning with the year the Investor Note has been repaid in full and continuing until the Investors have received an aggregate of the Maximum Contingent Payment Amount. Each annual payment is capped at A$2.0 million, with any excess above the cap treated as a rollover amount that carries forward to subsequent years until the Maximum Contingent Payment amount is reached. The Company determined the fair value of the Contingent Payment Agreement using a Monte Carlo simulation to estimate the potential contingent payments. As of March 31, 2026, the carrying value of the Contingent Payment Agreement was $1.3 million.

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, in December 2025, as part of the Company's acquisition of Rex, the Company assumed approximately A$107.8 million in liabilities associated with the Commonwealth Facility Agreement originally dated November 11, 2024, with the Commonwealth of Australia, as represented by the Department of Infrastructure, Transport, Regional Development, Communications, Sport and the Arts (the “Commonwealth”).

As mentioned in Note 13 of Notes to Consolidated Financial Statements included under Part II, Item 8 of this Report on Form 10-K, in December 2025, Rex and the Commonwealth entered into (i) an amendment and restatement of the Commonwealth Facility Agreement originally dated November 11, 2024 (the “Commonwealth Term Loan”), and (ii) a new facility agreement (the “New Facility Agreement” and, together with the Commonwealth Term Loan, the “Commonwealth Facilities”). The Commonwealth Term Loan is for an initial term of 30 years and permits extension of the termination date by up to an additional 20 years (in 2 10‑year increments) subject to specified conditions and required mandatory prepayments from Excess Cash Flow in accordance with the Intercreditor Deed. The Commonwealth Term Loan does not bear interest, provided that if Rex fails to maintain compliance with certain ‘Rex Regional Commitments’ (and a resulting event of default occurs), interest shall accrue on the outstanding principal at a rate of 2.00% per annum during the period of such non-compliance. The fair value of the Commonwealth Term Loan on the date of the Rex acquisition was approximately $22.2 million, estimated using a DCF approach, consistent with market practice and applicable accounting standards to estimate the fair value based on the absence of observable market inputs.

The New Facility Agreement bears interest at 12.0% per annum (which rate shall increase by 2.00% per annum if the Rex Companies fail to maintain compliance with certain “Rex Regional Commitments” regarding flight service levels and route profitability). The interest rate applicable to the New Facility Agreement is subject to adjustment from time to time in accordance with the Intercreditor Deed to match the interest rate applicable to the New Cap Note Facility. The New Facility Agreement matures on December 17, 2032 and provides for differing availability periods: (i) a three-year availability period for the A$40.0 million facility for engine care and maintenance; and (ii) a two-year availability period for the A$20.0 million business operations facility.

The Commonwealth Facilities are secured by general security deeds and certain real property and aircraft‑related security and, among other things: (i) include a financial covenant requiring the Rex Companies to maintain a minimum cash balance of A$5.0 million at all times until the New Cap Note Facility is fully drawn, (ii) require application of Excess Cash Flow as mandatory prepayments pursuant to the Intercreditor Deed, (iii) under the New Facility Agreement, provide for mandatory prepayments from asset sale proceeds, insurance proceeds not applied to repair or replacement, and Excess Cash Flow, (iv) restrict the sale or disposal of assets outside the ordinary course of business, subject to a basket for disposals where the market value or consideration does not exceed A$1.0 million in any financial year; and (v) under the Commonwealth Term Loan, requires mandatory prepayments from Excess Cash Flow in accordance with the Intercreditor Deed. As of March 31, 2026, the Rex Companies were in compliance with all financial and non-financial covenants applicable under the Commonwealth Facilities, including the Rex Regional Commitments and minimum cash balance requirements.

The Company believes that it has sufficient cash on hand and available liquidity, to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued.

Cash Flows

Following is a table of changes in cash flow for the fiscal years ended March 31, 2026 and 2025 (in thousands):

Net cash used in operating activities for the fiscal year ended March 31, 2026 was $25.0 million compared to net cash provided by operating activities of $23.5 million in the prior fiscal year. The decrease of $48.5 million was primarily driven by a $44.7 million unfavorable change in inventory activity during the fiscal year ended March 31, 2026 compared to the inventory activity during the prior fiscal year and by the $11.2 million operating loss for the fiscal year ended March 31, 2026 compared to operating income of $1.9 million in the prior year period. Partially offsetting these changes was a $13.6 million favorable change in accounts payable. The increase in inventory was primarily driven by sales in excess of inventory purchases in the prior year period versus increased expansion of inventory in the current year period, while the increase in accounts payable was primarily due to the timing of payments at year end.

Net cash used in investing activities for the fiscal year ended March 31, 2026 was $21.8 million compared to $20.2 million in the prior year period. The cash used in investing activities in the current year period was primarily driven by investments in unconsolidated entities of $15.2 million, capital expenditures of $16.5 million primarily driven by purchases of engines and rotable assets at Rex, proceeds of $19.9 million from the sale of the two Airbus Model A321-111 aircraft, and loan advances of $1.5 million to Bloomia and another unrelated entity. Cash used in investing activities in the prior year period was primarily driven by investments in unconsolidated entities of $7.0 million and capital expenditures of $14.6 million related to the purchase of the two aircraft that were sold in the current year period.

Net cash provided by financing activities for the fiscal year ended March 31, 2026 was $65.4 million compared to net cash used in financing activities of $4.8 million in the prior year period. The increase was primarily due to a $51.4 million increase and $19.7 million decrease in proceeds and payments, respectively, on the Company's term loans.

Off-Balance Sheet Arrangements

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

Systems and Network Security

Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including hacking, viruses, malicious software, break-ins, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of client information or other interruption to our business operations. As techniques used to obtain unauthorized access to sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against these attacks. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us or other participants, or the communication infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees, and engage third-party experts and consultants. Cybersecurity breaches would not only harm our reputation and business, but also could materially decrease our revenue and net income.

Supply Chain and Inflation

In fiscal 2026, we faced sourcing challenges that impacted our ability to procure raw materials and certain commodities, which resulted in delays and increased costs. These disruptions were driven by supply chain market constraints and macroeconomic conditions, including inflation and labor market shortages. High inflation increased material and component prices, labor rates and supplier costs, and put pressure on our margins. Current geopolitical conditions, including conflicts and other causes of strained intercountry relations, as well as sanctions and other trade restrictive activities, are contributing to these supply chain issues. 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.