9.	Variable Interest Entities

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

810

Consolidation

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

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

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

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

The following table sets forth the carrying values of Delphax

’s assets and liabilities as of

June 30, 2017

and

March 31, 2017:

	June 30, 2017			March 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	312,016		$	328,327
Accounts receivable, net		2,593,290			2,036,221
Inventories		1,563,494			1,941,729
Other current assets		831,321			1,145,274
Total current assets		5,300,121			5,451,551
Property and equipment		3,316			8,007
Total assets	$	5,303,437		$	5,459,558

LIABILITIES
Current liabilities:
Accounts payable	$	2,398,194		$	2,482,578
Income tax payable		11,312			11,312
Accrued expenses		3,581,391			3,627,162
Short-term debt		4,523,625			4,714,257
Total current liabilities		10,514,522			10,835,309
Long-term debt		-			-
Other long-term liabilities		-			-
Total liabilities	$	10,514,522		$	10,835,309


Net Assets	$	(5,211,085	)	$	(5,375,751	)

The short-term debt includes amounts due from Delphax to Air T, Inc. Those amounts have been eliminated in consolidation. As of

June 30, 2017,

the outstanding principal amount of the Senior Subordinated Note was approximately

$3,020,000

(

$2,889,000

as of

March 31, 2017)

and the outstanding borrowings under the Delphax Senior Credit Agreement

were

$1,541,000.

Short-term debt as reflected in the above table includes approximately

$520,000

and

$388,000

of accrued interest, due to the Company from Delphax Canada under the Senior Subordinated Note as of

June 30, 2017

and

March 31, 2017,

respectively. Short-term debt also includes approximately

$215,000

and

$112,000,

due to the Company from Delphax Canada under the Delphax Senior Credit Agreement as of

June 30, 2017

and

March 31, 2017

respectively.

The assets of Delphax can only be used to satisfy the obligations of Delphax.

Delphax

’s revenues and expenses are included in our consolidated financial statements beginning

November 24, 2015

through

June 30, 2017.

Revenues and expenses prior to the date of initial consolidation were excluded.

The following table sets forth the revenue and expenses of Delphax prior to intercompany eliminations that are included in the Company

’s condensed consolidated statement of income (loss) for the

three

months ended

June 30, 2017

and

2016.

Operating Revenues	$	3,131,381		$	3,210,088

Operating Expenses:
Cost of sales		1,501,056			6,601,734
General and administrative		505,945			1,352,152
Research and development		195,653			510,960
Depreciation, amortization and impairment		4,691			1,680,601
		2,207,345			10,145,447
Operating Income (Loss)		924,036			(6,935,359	)

Non-operating Expenses, net		(387,797	)		(20,940	)

Income (Loss) Before Income Taxes		536,239			(6,956,299	)

Income Taxes		-			-

Net Income (Loss)	$	536,239		$	(6,956,299	)

Non-operating expense, net, includes interest expense of approximately

$132,000

associated with the Senior Subordinated

Note and the Delphax Senior Credit Agreement for the quarter ended

June 30, 2017

and approximately

$55,000

associated with the Senior Subordinated Note for the fiscal quarter ended

June 30, 2016.

This interest expense was eliminated for purposes of net income (loss) presented in the Company’s accompanying consolidated statements of income (loss) and comprehensive income (loss) for the quarters ended

June 30, 2017

and

2016,

though the effect of intercompany interest under the Senior Subordinated note and the Delphax Senior Credit Agreement is reflected in the attribution of Delphax net income or losses attributed to non-controlling interests.

As disclosed in the Company

’s Form

-Q for the quarter ended

June 30, 2016,

Delphax was informed by its largest customer that the customer had decided to accelerate its plans for removing Delphax legacy printing systems from production and that Delphax should, as a consequence, expect the future volume of legacy product orders from the customer to decline markedly from prior forecasts. Furthermore, the future timeframe over which orders could be expected from this customer was being sharply curtailed. In addition to this specific customer communication, Delphax also experienced a broad-based decline in legacy product customer demand during the

first

quarter. Sales of Delphax’s new élan printer system also had

not

materialized to expectations.

The adverse business developments during the quarter ended

June 30, 2016

and the significantly deteriorated outlook for future orders of legacy and élan product caused the Company to reevaluate the recoverability of Delphax

’s assets, both tangible and intangible. Based on this reevaluation, which involved material estimation and subjectivity (including with respect to the recovery on assets in an operating liquidation), the Company concluded that a significant increase to inventory reserves was necessary. In addition, the Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company also recorded a partial impairment of Delphax related long-lived tangible assets. Furthermore, there was an assessment regarding whether, at

June 30, 2016,

future severance actions under existing Delphax employee benefit plans were both probable and estimable. This assessment led to the Company establishing an estimated accrual for future severance actions. The effects of these various adjustments, which aggregated to approximately

$5,610,000,

were reflected in the operating results of Delphax for the quarter ended

June 30, 2016.

There have been

significant additions to inventory and severance reserves from

June 30, 2016

June 30, 2017.

The Company concluded that Delphax related intangible assets, both amortizable assets and goodwill, should be fully impaired. The Company recorded goodwill of approximately

$375,000

in connection with its investment in Delphax. The Company estimated a subsequent impairment of this goodwill during the fiscal year ended

March 31, 2016

$100,000

and an additional impairment of

$275,000

during the quarter ended

June 30, 2016.

These impairment losses are reflected on the consolidated statement of income (loss) within the “depreciation, amortization and impairment” line item.

Intangible assets of Delphax had a net book value of approximately

$1.4

million as of

March 31, 2016.

During the quarter ended

June 30, 2016,

the Company recognized an impairment charge which resulted in the remaining net book of Delphax intangible assets being fully written off.

The Company estimated and recorded a tradename and patent impairment charge related to Delphax in the amount of approximately

$1,385,000

during the quarter ended

June 30, 2016.

An impairment charge in the amount of

$50,000

was recorded during the fiscal year

2016.

These impairment losses are reflected on the consolidated statement of income (loss) within the “depreciation, amortization and impairment” line item.

The above described adverse business developments drove significant negative operating results and led to severe liquidity constraints for Delphax. In addition to other measures intended to respond to developments, Delphax engaged an outside advisory firm to assist with operations, cost reductions and expense rationalization, and to provide an objective assessment and recommendations regarding Delphax

’s business outlook and alternative courses of action. During the quarter ended

June 30, 2016,

a number of Delphax employees were either severed or furloughed. For most of fiscal year

2017,

Delphax’s operations were maintained at a significantly curtailed level.

have 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, since

January 6, 2017,

under the Delphax Senior Credit Agreement, and other intercompany transactions, are reflected in the attribution of Delphax net income or losses attributed to non-controlling interests because Delphax is a variable interest entity.

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

quarter ended

June 30, 2017,

the attribution of Delphax net income to non-controlling interests was

3.4%

and, for the quarter ended

June 30, 2016,

the attribution of Delphax net loss to non-controlling interests was

33%.