9.	Variable Interest Entities (As Restated)

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 be entitled to elect

four

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

) the anticipated financials 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 Delphax

’s assets and liabilities as of

June 30, 2016

and

March 31, 2016:

	June 30, 2016			March 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	495,668		$	249,528
Accounts receivable, net		1,460,541			1,433,494
Inventories		2,834,609			4,642,298
Other current assets		665,481			1,034,067
Total current assets		5,456,299			7,359,387
Property and equipment		66,605			625,684
Intangible assets		-			1,109,112
Goodwill		-			275,408
Other Assets		-			26,020
Total assets	$	5,522,904		$	9,395,611

LIABILITIES
Current liabilities:
Accounts payable	$	2,672,207		$	1,684,802
Income tax payable		11,312			11,312
Accrued expenses		4,409,633			1,926,340
Short-term debt		2,177,827			1,859,300
Total current liabilities		9,270,979			5,481,754
Long-term debt		2,632,027			2,581,107
Other long-term liabilities		-			606,358
Total liabilities	$	11,903,006		$	8,669,219


Net Assets	$	(6,380,102	)	$	726,392

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

$132,000

and

$76,000

as of

June 30, 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

June 30, 2016

and

March 31, 2016

consolidated balance sheets.

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

’s creditors do

not

have recourse to the assets of Air T, Inc. or its other 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 prior to intercompany eliminations that are included in the Company’s condensed consolidated statement of income (loss) for the

three

months ended

June 30, 2016.

	For the Three Months Ended June 30, 2016
	(Unaudited)

Operating Revenues	$	3,210,088

Operating Expenses:
Cost of sales		6,601,734
General and administrative		1,352,152
Research and development		510,960
Depreciation, amortization and impairment		1,680,601
		10,145,447
Operating Loss		(6,935,359	)

Non-operating Loss		(20,940	)

Loss Before Income Taxes		(6,956,299	)

Income Taxes		-

Net Loss	$	(6,956,299	)

During 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 quarter. Sales of Delphax

’s new élan printer system also did

not

materialize to expectations in the quarter.

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.

Based on consideration of all relevant information

available at the time of the Original Filing, including the assessment of the outside advisory firm and in light of its expected lack of profitability and current debt load, Delphax anticipates cooperating with senior and subordinated secured lenders to permit such lenders to initiate a formal receivership filing to commence an operating liquidation of Delphax Canada, Delphax’s primary, and sole manufacturing, subsidiary. Under the terms of the subordination agreement between the Company and the senior lender under the Senior Credit Agreement, until all indebtedness under the Senior Credit Agreement has been paid in full, the Company is restricted from initiating such a process. Such a process, if in fact commenced, would likely commence during the

third

fourth

quarter of calendar

2016

and play out over a period of approximately

days, though such periods could be materially longer under certain circumstances.

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. This impairment totaled approximately

$1,385,000

during the quarter ended

June 30, 2016.

The Company also recorded a partial impairment of Delphax related long-lived tangible assets, totaling approximately

$249,000

during the quarter ended

June 30, 2016.

These impairment losses are reflected on the condensed consolidated statement of loss within the “depreciation, amortization and impairment” line item. 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 discussed above, which aggregated to approximately

$5,610,000,

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

June 30, 2016.

Due to the significant judgment involved in estimating the fair value of amortizable/depreciable assets and goodwill, the Company considers these to be Level

fair value measurements.

The following presents information on Delphax

’s intangible assets and goodwill at

June 30, 2016

and

March 31, 2016:

	June 30, 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

The Company provisionally recorded goodwill of approximately

$375,000

in connection with its investment in Delphax (Note

). 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.

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

months ended

June 30, 2016,

the attribution of Delphax losses to non-controlling interests was

32%.