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.

Consolidated Variable Interest Entity

Pursuant to a Securities Purchase Agreement dated as of

October 2, 2015 (

the "Securities Purchase Agreement") among the Company, Delphax Technologies, Inc. and its subsidiary, Delphax Technologies Canada Limited, on

November 24, 2015 (

the "Closing Date"), the Company purchased (i) at face value a

$2,500,000

principal amount Five-Year Senior Subordinated Promissory Note (the "Senior Subordinated Note") issued by Delphax Canada for a combination of cash and the surrender of outstanding principal of

$500,000

and accrued and unpaid interest thereunder, and cancellation of, a

-Day Senior Subordinated Note purchased at face value by the Company from Delphax Canada on

October 2, 2015

pursuant to the Securities Purchase Agreement and (ii) for

$1,050,000

in cash a total of

43,000

shares of Delphax's Series B Preferred Stock (the "Series B Preferred Stock") and a Stock Purchase Warrant (the "Warrant") to acquire an additional

95,600

shares of Series B Preferred Stock at a price of

$33.4728

per share (subject to adjustment for specified dilutive events).

Principal under the Senior Subordinated Note is due on

October 24, 2020

and bears interest at an annual rate of

8.5%.

Interest is to be paid in kind until, in the absence of specified events,

November 24, 2017.

Thereafter, interest is to be paid in cash. Interest in kind is to be paid monthly, while interest payable in cash is to be paid quarterly. The Senior Subordinated Note is guaranteed by Delphax and is secured by security interests granted by Delphax and Delphax Canada in their respective inventories, equipment, accounts receivable, cash, deposit accounts, contract rights and other specified property, as well as a pledge by Delphax of the outstanding capital stock of its subsidiaries, including Delphax Canada. Pursuant to the terms of a subordination agreement (the "Subordination Agreement") entered into on

October 2, 2015

by Delphax, Delphax Canada, the Company and the senior lender (the "Senior Lender") tha

t then provided a revolving credit facility under an agreement with Delphax and Delphax Canada (the "Delphax Senior Credit Agreement"), the Company's rights with respect to payment under and enforcement of the Senior Subordinated Note, and enforcement of its security interests were subordinated to the rights of the Senior Lender under the Delphax Senior Credit Agreement.

Each share of Series B Preferred Stock is convertible into

100

shares of common stock of Delphax, subject to anti-dilution adjustments, and has

liquidation preference over shares of common stock of Delphax.

dividends are required to be paid with respect to the shares of Series B Preferred Stock, except that ratable dividends (on an as-converted basis) are to be paid in the event that dividends are paid on the common stock of Delphax. Based on the number of shares of Delphax common stock outstanding and reserved for issuance under Delphax's employee stock option plans at the Closing Date, the number of shares of common stock underlying the Series B Preferred Stock purchased by the Company represent approximately

38%

of the shares of Delphax common stock that would be outstanding assuming conversion of Series B Preferred Stock held by the Company

Pursuant to the terms of the Series B Preferred Stock, for so long as amounts are owed to the Company under the Senior Subordinated Note or the Company continues to hold a specified number of the Series B Preferred Stock and interests in the Warrant sufficient to permit it to acquire up to

50%

of the number of shares of Series B Preferred Stock initially purchasable under the Warrant (or holds shares of Series B Preferred Stock acquired in connection with the exercise of the Warrant equal to

50%

of the number of shares of Series B Preferred Stock initially purchasable under the Warrant), then

● holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and exercise rights of removal and replacement) with respect to

three

-sevenths of the board of directors of Delphax, and after

June 1, 2016

the holders of the Series B Preferred Stock, voting as a separate class, would be entitled to elect (and to exercise rights of removal and replacement of) with respect to

four

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

● without the written consent or waiver of the Company, Delphax

may

not

enter into specified corporate transactions.

Pursuant to the provision described above, beginning on

November 24, 2015,

three

designees of the Company were elected to the board of directors of Delphax, which had a total of

seven

members following their election.

The Warrant expires on

November 24, 2021.

In the event that Delphax were to declare a cash dividend on its common stock, the Warrant provides that the holder of the Warrant would participate in the dividend as if the Warrant had been exercised in full and the shares of Series B Preferred Stock acquired upon exercise had been fully converted into Delphax common stock. The Warrant provides that, prior to any exercise of the Warrant, the holder of the Warrant must

first

make a good faith written tender offer to existing holders of Delphax common stock to purchase an aggregate amount of common stock equal to the number of shares of common stock issuable upon conversion of the Series B Preferred Stock that would be purchased upon such exercise of the Warrant. The Warrant requires that the per share purchase price to be offered in such tender offer would be equal to the then-current exercise price of the Warrant divided by the then-current conversion rate of the Series B Preferred Stock. To the extent that shares of common stock are purchased by the holder in the tender offer, the amount of shares of Series B Preferred Stock purchasable under the Warrant held by such holder is to be ratably reduced. The Warrant is to provide that it

may

be exercised for cash, by surrender of principal and interest under the Senior Subordinated Note equal to

0.95

times the aggregate exercise price or by surrender of a portion of the Warrant having a value equal to the aggregate exercise price based on the difference between the Warrant exercise price per share and an average market value, measured over a

-trading day period, of Delphax common stock that would be acquired upon conversion of

one

share of Series B Preferred Stock.

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.

The following table sets forth the carrying values of Delphax

’s assets and liabilities as of

December 31, 2017

and

March 31, 2017:

	December 31, 2017			March 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	240,468		$	328,327
Accounts receivable, net		661,749			2,036,221
Inventories		169,048			1,941,729
Other current assets		508,980			1,145,274
Total current assets		1,580,245			5,451,551
Property and equipment		-			8,007
Total assets	$	1,580,245		$	5,459,558

LIABILITIES
Current liabilities:
Accounts payable	$	2,283,154		$	2,482,578
Income tax payable		11,312			11,312
Accrued expenses		3,099,812			3,627,162
Short-term debt		2,460,670			4,714,257
Total current liabilities		7,854,948			10,835,309

Net Assets	$	(6,274,703	)	$	(5,375,751	)

The short-term debt

is comprised of amounts due from Delphax to Air T, Inc. Those amounts have been eliminated in consolidation. As of

December 31, 2017,

the outstanding principal amount of the Senior Subordinated Note was approximately

$1,675,000

(

$2,500,000

as of

March 31, 2017)

and the outstanding borrowings under the Delphax Senior Credit Agreement were

(

$1,541,000

as of

March 31, 2017).

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

$786,000

and

$388,000

of accrued interest, due to the Company from Delphax Technologies, Inc. under the Senior Subordinated Note as of

December 31, 2017

and

March 31, 2017,

respectively. Short term debt as of

March 31, 2017

also includes approximately

$112,000

of accrued interest, due to the Company from Delphax Canada and Delphax Technologies, Inc. under the Delphax Senior Credit Agreement. As a result of the foreclosure completed by the Company on

August 10, 2017,

the amount secured by the Delphax Senior Credit Agreement was satisfied.

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

January 6, 2017,

the Company acquired all rights, and assumed all obligations, of

the Senior Lender under the Delphax Senior Credit Agreement with Delphax and Delphax Canada providing for a

$7.0

million revolving senior secured credit facility, subject to a borrowing base of North American accounts receivable and inventory, including obligations, if any, to fund future borrowings under the Delphax Senior Credit Agreement. In connection with this transaction, the Company paid to the Senior Lender an amount equal to the approximately

$1.26

million outstanding borrowing balance, plus accrued and unpaid interest and fees. Also in connection with this transaction, the Company, Delphax and Delphax Canada entered into an amendment to the Delphax Senior Credit Agreement to reduce the maximum amount of borrowings permitted to be outstanding under the Delphax Senior Credit Agreement from

$7.0

million to

$2.5

million, to revise the borrowing base to include in the borrowing base

100%

of purchase orders from customers for products up to

$500,000,

to provide that the interest rate on all borrowings outstanding until all loans under the Delphax Senior Credit Agreement are repaid in full will be a default rate equal to

2.5%

per month to be paid monthly, and to provide for the payment to the Company from Delphax Canada and Delphax of fees equal to

$25,000

upon execution of the amendment and of

$50,000

upon repayment in full of all loans under the Delphax Senior Credit Agreement. On

January 6, 2017,

the Company notified Delphax and Delphax Canada of certain “Events of Default” (as defined under the Delphax Senior Credit Agreement) existing under the Delphax Senior Credit Agreement and that the Company was reserving all rights to exercise remedies under the Delphax Senior Credit Agreement and that

delay in exercising any such remedy is to be construed as a waiver of any of its remedies. Also, on

January 6, 2017,

the Company and Delphax Canada entered into a Forbearance and Amendment Agreement dated as of

January 6, 2017,

which amended the Senior Subordinated Note to increase the default rate of interest from an annual rate of

10.5%

to an annual rate of

18%,

to be in effect until all amounts under the Senior Subordinated Note are paid in full, and which provides that so long as

Event of Default (as defined in the Senior Subordinated Note) occurs under the Senior Subordinated Note, other than Events of Default that existed as of

January 6, 2017,

the Company agreed to forbear from exercising its remedies under the Senior Subordinated Note until

May 31, 2017

and further provided for the payment by Delphax Canada to the Company of a forbearance fee equal to approximately

$141,000.

Notwithstanding the existence of events of default, during the

first

six

calendar months of

2017,

the Company permitted additional borrowings under the Delphax Senior Credit Agreement to, among other things, fund a final production run by Delphax Canada of consumable products for its legacy printing systems, which production run was primarily completed over that period. Delphax Canada was Delphax's sole manufacturing subsidiary.

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

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.

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

value 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.

In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of fina

l production run by Delphax Canada of consumable products for Delphax’s legacy printing systems, on

July 13, 2017,

the Company delivered a demand for payment and Notice of Intention to Enforce Security to Delphax Canada. On

August 10, 2017,

the Company foreclosed on all personal property and rights to undertakings of Delphax Canada. The Company foreclosed as a secured creditor with respect to amounts owed to it by Delphax Canada under the Delphax Senior Credit Agreement. The Company provided notice of its intent to foreclose to Delphax Canada and its secured creditors and shareholder on

July 26, 2017.

The outstanding amount owed to the Company by Delphax Canada under the Delphax Senior Credit Agreement on

July 26, 2017

was approximately

$1,510,000.

The Company also submitted an application to the Ontario Superior Court of Justice in Bankruptcy and Insolvency (the "Ontario Court") seeking that Delphax Canada be adjudged bankrupt. On

August 8, 2017,

the Ontario Court issued an order adjudging Delphax Canada to be bankrupt. The recipients of the foreclosure notice did

not

object to the foreclosure or redeem. As a result, the foreclosure was completed on

August 10, 2017,

and the Company accepted the personal property and rights to undertakings of Delphax Canada in satisfaction of the amount secured by the Delphax Senior Credit Agreement.

With its being adjudged bankrupt on

August 8, 2017,

Delphax Canada ceased to have capacity to deal with its property. The property of Delphax Canada vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured creditors. The Company

’s rights under Delphax Senior Credit Agreement permitted it to foreclose upon the personal property and rights of undertakings of Delphax Canada. Since the Company foreclosed on Delphax Canada’s assets within very close time proximity to the commencement of bankruptcy proceedings and because the bankruptcy and foreclosure were undertaken in contemplation of

one

another, the Company treated these as

one

single financial reporting event. In accordance with applicable accounting guidance, the Company considered whether Delphax Canada was still a business post-bankruptcy and foreclosure of the assets by the Company and concluded that Delphax Canada

longer constituted a business as it is defined by accounting principles generally accepted in the United States of America and, accordingly, derecognition of Delphax Canada’s liabilities will occur when Delphax Canada is legally released as the primary obligor with respect to the liabilities in the bankruptcy proceedings. As of

December 31, 2017,

the bankruptcy proceedings were ongoing in accordance with Canadian law and, therefore, Delphax Canada was still the primary obligor of its liabilities.

The intercompany balances under the Delphax Senior

Subordinated Note as of

December 31, 2017

are eliminated in the presentation of the condensed consolidated financial statements. The effect of interest expense arising under the Senior Subordinated Note and, from

January 6, 2017

August 10, 2017,

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

Delphax

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

November 24, 2015

through

December 31, 2017.

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

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

, for the

nine

months ended

December 31, 2017,

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

3.19%

and for the

nine

months ended

December 31, 2016,

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

33%.

The following table sets forth the revenue and expenses of Delphax

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

nine

months ended

December 31, 2017

and

2016.

	Nine Months Ended December 31,
	2017			2016
	(Unaudited)			(Unaudited)

Operating Revenues	$	5,324,763		$	7,648,724

Operating Expenses:
Cost of sales		2,860,159			8,671,905
General and administrative		1,213,885			2,295,255
Research and development		195,653			858,480
Depreciation, amortization and impairment		8,007			1,713,322
		4,277,704			13,538,962
Operating Income (Loss)		1,047,059			(5,890,238	)

Non-operating Income (Expense), net		(540,076	)		103,966

Income (Loss) Before Income Taxes		506,983			(5,786,272	)

Income Taxes		-			-

Net Income (Loss)	$	506,983		$	(5,786,272	)

Non-operating

income (expense), net, includes interest expense of approximately

$567,000

associated with the Senior Subordinated Note and the Delphax Senior Credit Agreement for the

nine

months ended

December 31, 2017

and approximately

$172,000

associated with the Senior Subordinated Note for the

nine

months ended

December 31, 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

nine

months ended

December 31, 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.

Unconsolidated Variable Interest Entities and Other Entitie

As discussed in Note

BCCM Advisors holds equity interests in certain investment funds as of

December 31, 2017.

The Company determined that the equity interest

it holds as the general partner in the following funds are variable interests based on the applicable GAAP guidance: Blue Clay Capital Partners CO I LP, Blue Clay Capital Partners CO III LP and Blue Clay Capital SMid-Cap LO LP. However, the Company further determined that these funds should

not

be consolidated as BCCM Advisors is

not

the primary beneficiary of these variable interest entities. The Company determined that its equity interest in the Blue Clay Capital Master Fund Ltd. is

not

a variable interest and should

not

be consolidated based on the applicable GAAP guidance. The Company’s total investment within these investment funds at

December 31, 2017

is valued at

$227,000,

consistent with the purchase price of the general partnership and equity interests disclosed in Note

The Company’s exposure to loss is limited to its initial investment.