Variable Interest Entity

3 Months Ended

May 31, 2022

Variable Interest Entity [Abstract]

Variable Interest Entity

(21) Variable Interest Entity

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.

On September 1, 2015, Voxx acquired a majority voting interest in substantially all of the assets and certain specified liabilities of EyeLock, Inc. and EyeLock Corporation, a market leader of iris-based identity authentication solutions, through a newly formed entity, EyeLock LLC. The Company issued EyeLock LLC a promissory note for the purposes of repaying protective advances and funding working capital requirements of the entity. On August 29, 2021, this promissory note was amended and restated to allow EyeLock LLC to borrow up to $68,200. Through March 1, 2019, interest on the outstanding principal of the loan accrued at 10%. From March 1, 2019 forward, interest accrues at 2.5%. The amended and restated promissory note is due on December 31, 2022. The outstanding principal balance of this promissory note is convertible at the sole option of Voxx into units of EyeLock LLC. If Voxx chooses not to convert into equity, the outstanding loan principal of the amended and restated promissory note will be repaid at a multiple of 1.50 based on the repayment date. The agreement includes customary events of default and is collateralized by all of the property of EyeLock LLC.

We determined that we hold a variable interest in EyeLock LLC as a result of:

•our majority voting interest and ownership of substantially all of the assets and certain liabilities of the entity; and

•the loan agreement with EyeLock LLC, which has a total outstanding balance of $66,613 as of May 31, 2022.

We concluded that we became the primary beneficiary of EyeLock LLC on September 1, 2015 in conjunction with the acquisition. This was the first date on which we had the power to direct the activities that most significantly impact the economic performance of the entity because we acquired a majority interest in substantially all of the assets and certain liabilities of EyeLock, Inc. and EyeLock Corporation on this date, as well as obtained a majority voting interest as a result of this transaction. Although we are considered to have control over EyeLock LLC under ASC 810, due to our majority ownership interest, the assets of EyeLock LLC can only be used to satisfy the obligations of EyeLock LLC. As a result of our majority ownership interest in the entity and our primary beneficiary conclusion, we consolidated EyeLock LLC within our consolidated financial statements beginning on September 1, 2015.

On April 29, 2021, EyeLock LLC entered into a three-year exclusive distribution agreement (the “Agreement”) with GalvanEyes LLC (“GalvanEyes”), a Florida LLC managed by Beat Kahli, the largest holder of Voxx's Class A Common Shares. The Agreement provides that GalvanEyes will be the exclusive distributor of EyeLock products in the European Union, Switzerland, Puerto Rico, Malaysia, and Singapore, with the exception of any existing customer relationships prior to the Agreement date. GalvanEyes has also been granted exclusive distribution rights in the United States for the residential real estate market and specific U.S. Government agencies, and non-exclusive distribution rights in all other territories and verticals with the Company’s consent. The Agreement also includes a put/call arrangement, whereby GalvanEyes has the right to put the exclusivity back to EyeLock after the initial two-year period for a 20.0% interest in EyeLock. In turn, EyeLock has the ability to call the exclusivity during the term of the Agreement, based on the occurrence of certain events, which would result in a 20.0% equity interest given to GalvanEyes. Under the Agreement, in addition to paying for any products purchased, GalvanEyes has agreed to pay EyeLock $10,000 in the form of an annual fee, over a two-year period, of up to $5,000 per year, with payments on a quarterly basis beginning on September 1, 2021. Any gross profit generated on the sale of EyeLock LLC products by GalvanEyes will be deducted from the annual fee. The value of the put/call arrangement was not significant at May 31, 2022. On May 31, 2022, the Company received a payment in the amount of $1,241 for the quarterly installment payment due from GalvanEyes for the three months ended May 31, 2022. The Company has also recorded a corresponding liability on the accompanying Consolidated Balance Sheets, representing a prepayment made by GalvanEyes of a 20.0% interest in EyeLock upon exercise of the put option. The balance of the liability at May 31, 2022 is $3,692.

Assets and Liabilities of EyeLock LLC

The following table sets forth the carrying values of assets and liabilities of EyeLock LLC that were included on our Consolidated Balance Sheets as of May 31, 2022 and February 28, 2022:

	May 31, 2022			February 28, 2022
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	—		$	25
Accounts receivable, net		50			47
Inventory, net		2,179			2,028
Prepaid expenses and other current assets		196			245
Total current assets		2,425			2,345
Property, plant and equipment, net		32			39
Intangible assets, net		1,989			2,057
Other assets		59			59
Total assets	$	4,505		$	4,500
Liabilities and Partners' Deficit
Current liabilities:
Accounts payable	$	1,051		$	1,023
Interest payable to VOXX		13,528			13,099
Accrued expenses and other current liabilities		665			766
Due to VOXX		66,613			66,390
Total current liabilities		81,857			81,278
Prepaid ownership interest in EyeLock LLC due to GalvanEyes LLC		3,692			2,451
Other long-term liabilities		1,200			1,200
Total liabilities		86,749			84,929
Commitments and contingencies
Partners' deficit:
Capital		41,416			41,416
Retained losses		(123,660	)		(121,845	)
Total partners' deficit		(82,244	)		(80,429	)
Total liabilities and partners' deficit	$	4,505		$	4,500

Revenues and Expenses of EyeLock LLC

The following table sets forth the revenues and expenses of EyeLock LLC that were included in our Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended May 31, 2022 and 2021:

	For the three months ended May 31,
	2022			2021
Net sales	$	103		$	205
Cost of sales		78			163
Gross profit		25			42
Operating expenses:
Selling		165			163
General and administrative		373			344
Engineering and technical support		869			1,487
Total operating expenses		1,407			1,994
Operating loss		(1,382	)		(1,952	)
Other expense:
Interest and bank charges		(433	)		(401	)
Total other expense, net		(433	)		(401	)
Loss before income taxes		(1,815	)		(2,353	)
Income tax expense		—			—
Net loss	$	(1,815	)	$	(2,353	)