13.	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.

The Company concluded that its investments in Delphax’s equity and debt, and its investment in the Warrant, each constituted a variable interest. In addition, the Company concluded that it became the primary beneficiary of Delphax 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

September 30, 2018

and

March 31, 2018:

	September 30, 2018			March 31, 2018

ASSETS
Current assets:
Cash and cash equivalents	$	314,481		$	241,430
Accounts receivable, net		40,844			316,542
Other current assets		58,754			72,269
Total current assets		414,079			630,241
Other tax receivables-long-term		311,000			311,000
Total assets	$	725,079		$	941,241

LIABILITIES
Current liabilities:
Accounts payable	$	2,146,938		$	2,145,847
Income tax payable		11,312			11,312
Accrued expenses		3,234,808			3,244,514
Short-term debt		1,772,660			1,788,285
Total current liabilities		7,165,718			7,189,958
Long-term debt		-			-
Other long-term liabilities		-			-
Total liabilities	$	7,165,718		$	7,189,958


Net Assets	$	(6,440,639	)	$	(6,248,717	)

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

September 30, 2018,

the outstanding principal amount of the Senior Subordinated Note was approximately

$725,000

(

$900,000

as of

March 31, 2018)

and there were

borrowings under the Delphax Senior Credit Agreement. Short-term debt as reflected in the above table includes approximately

$1,048,000

and

$888,000

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

September 30, 2018

and

March 31, 2018.

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. Furthermore, Delphax’s creditors do

not

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

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.

In light of continuing events of default under the Delphax Senior Credit Agreement and the conclusion of final 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 shareholders 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 it 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

September 30, 2018,

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

September 30, 2018

are eliminated in the presentation of the consolidated financial statements.

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

November 24, 2015

through

September 30, 2018.

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 quarters ended

September 30, 2018

and

September 30, 2017

the attribution of Delphax losses to non-controlling interests was

33%

and

0%,

respectively.

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

six

months ended

September 30, 2018

and

2017.

	2018			2017
	(Unaudited)			(Unaudited)

Operating Revenues	$	-		$	4,434,303

Operating Expenses:
Cost of sales		-			2,583,807
General and administrative		222,244			1,001,896
Research and development		-			195,653
Depreciation, amortization and impairment		-			8,007
		222,244			3,789,363

Operating Income (Loss)		(222,244	)		644,940

Non-operating Expenses, net		(45,782	)		(188,000	)

Income (Loss) Before Income Taxes		(268,026	)		456,940

Income Taxes		-			-

Net Income (Loss)	$	(268,026	)	$	456,940

Non-operating income (expense), net, includes interest expense of approximately

$159,000

associated with the Senior Subordinated Note for the quarter ended

September 30, 2018

and approximately

$440,000

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

September 30, 2017.

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

three

months ended

September 30, 2018

and

2017,

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 Entities

As discussed in Note

BCCM Advisors holds equity interests in certain investment funds as of

March 31, 2018

and

September 30, 2018.

The Company determined that the equity interests 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, Blue Clay Capital SMid-Cap LO LP and AO Partners II 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

September 30, 2018

is valued at approximately

$343,000.

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

As discussed in Note

the Company has an investment in Oxbridge RE NS in the amount of

$2,000,000.

The Company determined that this investment represents a variable interest based on the applicable GAAP guidance. However, the Company further determined that the Company should

not

consolidate Oxbridge RE NS as the Company is

not

the primary beneficiary of the variable interest entity. The Company’s exposure to loss is limited to its initial investment.