Note 10 - Variable Interest Entities

9 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Variable Interest Entity Disclosure [Text Block]

10. 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

2,

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, particular weight was given to the Company’s current representation on Delphax’s board of directors and the provision which grants the Company control of such board beginning

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

2

for the fair values 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

December

31,

2016,

and

March

31,

2016:

	December 31, 2016			March 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	95,357		$	249,528
Accounts receivable, net		2,000,183			1,433,494
Inventories		2,014,783			4,642,298
Other current assets		491,331			1,034,067
Total current assets		4,601,654			7,359,387
Property and equipment		33,474			625,684
Intangible assets		-			1,109,112
Goodwill		-			275,408
Other Assets		-			26,020
Total assets	$	4,635,128		$	9,395,611
LIABILITIES
Current liabilities:
Accounts payable	$	2,577,816		$	1,684,802
Income tax payable		11,312			11,312
Accrued expenses		3,562,787			1,926,340
Short-term debt		1,163,577			1,859,300
Total current liabilities		7,315,492			5,481,754
Long-term debt		2,748,471			2,581,107
Other long-term liabilities		-			606,358
Total liabilities	$	10,063,963		$	8,669,219
Net assets	$	(5,428,835	)	$	726,392

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

$248,000

and

$76,000

as of

December

31,

2016,

and

March

31,

2016,

respectively, of accrued interest due to the Company from Delphax Canada under the Senior Subordinated Note. This debt and accrued interest was eliminated for purposes of the Company’s accompanying

December

31,

2016

and

March

31,

2016

consolidated balance sheets.

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

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, prior to intercompany eliminations, are included in the Company’s condensed consolidated statement of income (loss) for the

nine

months ended

December

31,

2016.

	For the Nine Months Ended December 31, 2016
	(Unaudited)
Operating revenues	$	7,648,724
Operating expenses:
Cost of sales		8,671,905
General and administrative		2,295,255
Research and development		858,480
Depreciation, amortization and impairment		1,713,322
		13,538,962
Operating loss		(5,890,238	)
Non-operating loss		103,966
Loss before income taxes		(5,786,272	)
Income taxes		-
Net loss	$	(5,786,272	)

As disclosed in the Company’s Form

10

-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 were no significant additions to inventory and severance reserves from

June

30,

2016

to

December

31,

2016.

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 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. During the quarters ended

September

30,

2016

and

December

31,

2016,

Delphax significantly curtailed its production activities.

Based on all currently available relevant information including, among other considerations, the assessment of the outside advisory firm, the Company believes that Delphax or

one

of its creditors

may

initiate a formal receivership filing, which

may

result in an operating liquidation of Delphax Canada, Delphax’s primary, and sole manufacturing, subsidiary. While the potential and precise timing of such events cannot be predicted, the Company believes that it

may

commence during the

first

half of the Company’s

2018

fiscal year.

The following presents information on Delphax’s amortizable intangible assets and goodwill at

December

31,

2016

and

March

31,

2016:

	December 31, 2016			March 31, 2016
	(Unaudited)
Tradenames	$	120,000		$	120,000
Patents		1,090,000			1,090,000
Goodwill		375,000			375,000
		1,585,000			1,585,000
Less accumulated amortization and impairment		(1,585,000	)		(200,480	)
Intangible assets and goodwill, net	$	-		$	1,384,520