11.	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 Delphax 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

March 31, 2019

and

2018:

	March 31, 2019			March 31, 2018

ASSETS
Current assets:
Cash and cash equivalents	$	12,315		$	241,430
Accounts receivable, net		46,844			316,542
Other current assets		58,441			72,269
Total current assets		117,600			630,241
Other tax receivables-long-term		311,000			311,000
Total assets	$	428,600		$	941,241

LIABILITIES
Current liabilities:
Accounts payable	$	2,151,235		$	2,145,847
Income tax payable		-			11,312
Accrued expenses		3,157,707			3,244,514
Short-term debt		1,749,779			1,788,285
Total current liabilities		7,058,721			7,189,958
Total liabilities	$	7,058,721		$	7,189,958


Net assets	$	(6,630,121	)	$	(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

March 31, 2019,

the outstanding principal amount of the Senior Subordinated Note was approximately

$550,000

(

$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

$1,200,000

and

$888,000

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

March 31, 2019

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.

Upon petition by the Company, on

August 8, 2017

the Ontario Superior Court of Justice in Bankruptcy and Insolvency adjudged Delphax Canada to be bankrupt. As a result, Delphax Canada ceased to have capacity to deal with its property, which then vested in the trustee in bankruptcy of Delphax Canada subject to the rights of secured creditors. As of

March 31, 2019,

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

March 31, 2019

are eliminated in the presentation of the consolidated financial statements.

Delphax’s revenues and expenses are included in our consolidated financial statements herein. 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 Delphax 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 fiscal years ended

March 31, 2019

and

March 31, 2018

the attribution of Delphax losses to non-controlling interests was

33%

and

33%,

respectively.

The following table sets forth the revenue and expenses of Delphax that are included in the Company’s consolidated statements of income and comprehensive income for the years ended

March 31, 2019

and

2018:

	March 31, 2019			March 31, 2018


Operating revenues	$	-		$	5,835,266

Operating expenses:
Cost of sales		-			3,261,156
General and administrative		285,180			1,399,034
Research and development		-			195,653
Depreciation, amortization and impairment		-			8,007
		285,180			4,863,850
Operating (loss) income		(285,180	)		971,416

Non-operating expense, net		(218,203	)		(742,120	)

(Loss) Income before income taxes		(503,383	)		229,296

Income tax benefit		-			311,000

Net (loss) income	$	(503,383	)	$	540,296

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

$311,000

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

March 31, 2019

and approximately

$670,000

for the fiscal year ended

March 31, 2018.

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

March 31, 2019

and

2018,

though the effect of intercompany interest expense 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

BCCM Advisors holds equity interests in certain investment funds as of

March 31, 2019

and

March 31, 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, AO Partners II LP, Blue Clay Pan-Africa Portfolio Fund Ltd and Blue Clay Pan-Africa Fund 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

March 31, 2019

is valued at approximately

$464,000.

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