9.	Variable Interest Entities (As R estated)

A variable interest entity ("VIE") is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support, or (ii) has equity investors who lack the characteristics of a controlling financial interest. Under ASC

810,

an entity that holds a variable interest in a VIE and meets certain requirements would be considered to be the primary beneficiary of the VIE and required to consolidate the VIE in its consolidated financial statements. In order to be considered the primary beneficiary of a VIE, an entity must hold a variable interest in the VIE and have both:

●

the power to direct the activities that most significantly impact the economic performance of the VIE; and

●

the right to receive benefits from, or the obligation to absorb losses of, the VIE that could be potentially significant to the VIE.

As described in Note

the Company acquired Delphax Series B Preferred Stock, loaned funds to Delphax, and acquired the Warrant. In accordance with ASC

810,

the Company evaluated whether Delphax was a VIE as of

November 24, 2015.

Based principally on the fact that the Company granted Delphax subordinated financial support, the Company determined that Delphax was a VIE on that date. Therefore, it was necessary for the Company to assess whether it held any “variable interests”, as defined in ASC

810,

in Delphax. The Company concluded that its investments in Delphax

’s equity and debt, and its investment in the Warrant, each constituted a variable interest. Based on its determination that it held variable interests in a VIE, the Company was required to assess whether it was Delphax’s “primary beneficiary”, as defined in ASC

810.

After considering all relevant facts and circumstances, the Company concluded that it became the primary beneficiary of Delphax on

November 24, 2015.

While various factors informed the Company

’s determination, the Company assigned considerable weight to both

) the shortness of time until

June 1, 2016

when the Company would become entitled to elect

four

-sevenths of the members of the board of directors of Delphax and

) the anticipated financial significance of Delphax’s activities in the periods subsequent to

June 1, 2016.

Since the Company became Delphax’s primary beneficiary on

November 24, 2015,

the Company consolidated Delphax in its consolidated financial statements beginning on that date.

Refer to Note

for the provisional fair value of the assets and liabilities of Delphax on the acquisition date.

The following table sets forth the carrying values of assets and liabilities of

Delphax as of

December 31, 2015:

	December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	276,000
Accounts receivable, net		1,838,000
Inventories		4,869,000
Other current assets		612,000
Total current assets		7,595,000
Property and equipment		391,000
Other Assets		29,000
Total assets	$	8,015,000

LIABILITIES
Current liabilities:
Accounts payable	$	1,197,000
Income tax payable		170,000
Accrued expenses		1,982,000
Short-term debt		208,000
Total current liabilities		3,557,000
Long-term debt		2,511,000
Other long-term liabilities		49,000
Total liabilities	$	6,117,000

Net Assets	$	1,898,000

Long-term debt as reflected in the above table includes

$2,500,000

due to the Company from Delphax Canada under the Senior Subordinated Note. This debt was eliminated for purposes of the Company

’s accompanying

December 31, 2015

condensed consolidated balance sheet.

The assets of Delphax and its subsidiaries can only be used to satisfy the obligations of Delphax and subsidiaries. Furthermore, the creditors of Delphax and its subsidiaries do

not

have recourse to the assets of Air T, Inc. or its subsidiaries.

Revenue and Expenses of Delphax

. Delphax’s revenues and expenses are included in the Company’s consolidated financial statements beginning

November 24, 2015.

Revenues and expenses prior to the date of initial consolidation are excluded. The following table sets forth the revenue and expenses of Delphax that are included in the Company’s consolidated statements of income for the

three

and

nine

months ended

December 31, 2015.

	Three and Nine Months Ended December 31, 2015
	(Unaudited)

Operating Revenues	$	1,035,000

Operating Expenses:
Cost of sales		1,376,000
General and administrative		309,000
Research and development		216,000
Depreciation and amortization		17,000
		1,918,000
Operating Loss		(883,000	)

Non-operating Income		36,000

Loss Before Income Taxes		(847,000	)

Income Taxes		-

Net Loss	$	(847,000	)

We determined that the attribution of Delphax net income or loss should be based on consideration of all of Air T

’s investments in Delphax and Delphax Canada. As disclosed in Note

the Warrant provides that in the event that dividends are paid on the common stock of Delphax, the holder of the Warrant is entitled to participate in such dividends on a ratable basis as if the Warrant had been fully exercised and the shares of Series B Preferred Stock acquired upon such exercise had been converted into shares of Delphax common stock. This provision would have entitled Air T, Inc. to approximately

67%

of any Delphax dividends paid, with the remaining

33%

paid to the non-controlling interests. We concluded that this was a substantive distribution right which should be considered in the attribution of Delphax net income or loss to non-controlling interests.

We furthermore concluded that our investment in the debt of Delphax should be considered in attribution. Specifically, Delphax

’s net losses are attributed

first

to our Series B Preferred Stock and Warrant investments and to the non-controlling interest (

67%

/33%

) until such amounts are reduced to zero. Additional losses are then fully attributed to our debt investments until they too are reduced to zero. This sequencing reflects the relative priority of debt to equity. Any further losses are then attributed to Air T and the non-controlling interests based on the initial

67%

33%

share. Delphax net income is attributed using a backwards-tracing approach with respect to previous losses. The effect of interest expense arising under the Senior Subordinated Note and of other intercompany transactions are reflected in the attribution of Delphax net income or

losses to non-controlling interests because Delphax is a VIE.

As a result of the application of the above-described attribution methodology, for the

three

and

nine

months ended

December 31, 2015,

the attribution of Delphax losses to non-controlling interests was

33%.